HSBC falls short on pre-tax profits

HSBC, Europe’s largest lender, announced on July 30 that its pre-tax profits had missed expectations, dropping by 26% to $15.8B in the first half of this year. The bank’s pre-tax profit dropped 29% to $6.33B compared to a year ago, mostly due to bad debts in China. 

George Elhedery, HSBC Group’s CEO, attributed the less-than-expected performance to “structural challenges” causing uncertainties in the world’s economy. He also linked the poor performance to market volatility due to “fiscal vulnerabilities” and “broad-based tariffs.” Elhedery said the challenges complicated the outlook on interest rates and inflation. Everbright Securities International strategist, Kenny Ng Lai-yin, also said HSBC over-relied on net interest income. He pointed out that this made it vulnerable to declines in interest rates compared to rivals like Standard Chartered.  

The bank also blamed the 10% rise in operating expenses due to restructuring and tech investments for the drop in profits, both quarterly and yearly. However, it pointed out that it was well-positioned to manage tariff uncertainties despite an expected hit on its tangible equity returns. HSBC stated that the direct impact of tariffs on its revenue streams was expected to be relatively low. At the end of Q2, the bank’s revenue stood at $16.5B, slightly lower than the forecasted $16.67B.

Elhedery targets up to $300M in cost savings

HSBC disclosed that its CEO planned to generate up to $300 million in cost savings in 2025, and up to $1.5 billion by the end of next year. The bank spent $475 million on restructuring and other costs in Q2, in addition to the $141 million charge in Q1. It expects to incur severance and upfront costs of up to $1.8 billion in 2026.

The lender reported a $2.1 billion hit from its investment in the Bank of Communications (BoCom), amid mounting unpaid Chinese loans. It also expects credit losses to increase by at least $900 million from last year’s $1.9 billion. The bank partly attributes this rise in credit losses to its exposure to the declining real estate sector in Hong Kong. An analyst from the Citi Group also pointed out that Hong Kong’s slow property market could continue to weigh on HSBC’s asset quality. Small property developers were already facing financial difficulties, and property prices were continuously declining. 

“In the first half, we continued to execute our strategy with discipline and each of our four businesses sustained momentum in their earnings with each growing revenue … This gives us confidence in our ability to deliver our targets.”

–George Elhedery, CEO at HSBC 

HSBC disclosed that it expected double-digit percentage annual growth in income and other fees over the medium term. It further revealed that it planned to lay off a few employees in its Germany office to meet this target. The layoffs are also part of the bank’s strategy to cut back on its investment banking operations outside the Middle East and Asia. 

HSBC plans to split operations

The bank announced splitting its operations to create four separate divisions in the Eastern and Western markets. According to the bank, this reorganization aligned with Elhedery’s push to save the company $300 million in 2025. HSBC also announced that it would stop its M&A business and part of its equities operations in the Americas and Europe. 

Elhedery also said the bank needed to ensure that its Asian shareholders supported its new strategic direction. However, Senior Analyst at Morningstar Michael Makdad explained that the bank sought to simplify the intensive cost-cutting by making moderate overhauls to its overall business model. Makdad added that HSBC’s immediate challenge was finding a replacement for its Chairman, Mark Tucker, who is expected to step down in September. 

The bank’s CEO unleashed sweeping restructuring changes after he took over last year, pointing out that the bank was reviewing its operations in Sri Lanka and Australia. The planned reviews came as HSBC sold off its Bangladesh retail business. However, these developments had little effect on the bank’s institutional and corporate banking businesses.

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