HSBC Holdings Plc's first-half profit beat analysts' estimates, buoyed by income from Asia and securities trading, and the bank agreed to sell its Brazilian operations for about $1 billion more than expected.
Pretax profit rose 10% to $13.6 billion from a year earlier, driven by a 19% jump in Asian earnings, the London-based lender said Monday. That surpassed the $12.5 billion average estimate of 16 analysts compiled by the company. Banco Bradesco SA agreed to buy HSBC's Brazilian unit for $5.2 billion in cash.
The results give a boost to Chief Executive Officer Stuart Gulliver's strategy to shift investment to Asia, the bank's best-performing region, while cutting unprofitable divisions. In June, Europe's largest bank unveiled a three-year plan to cut businesses to lower headcount by some 50,000 and reduce annual costs by up to $5 billion. Gulliver has also been able to boost the lender's key capital ratio.
"HSBC has, just for once, confounded its many critics today with a solid set of second-quarter results alongside a welcome $5.2 billion sale of its Brazilian business," said Ian Gordon, an analyst at Investec Plc, who rates HSBC a buy. "Capital progression is excellent."
HSBC shares rose 0.8% to 584.2 pence at 12:46 p.m. in London after increasing as much as 1.7 % in earlier trading. They have decreased about 4 % this year.
Pretax profit in Asia rose to $9.4 billion from $7.9 billion a year earlier, with the region accounting for 69% of the bank's first-half earnings. Europe's share of profit fell to 16% from 18%, while North America accounted for about 5%, down from 7%.
While HSBC's first-half revenue rose to $32.9 billion from $31.2 billion, net operating income in Asia jumped 16% to $14.1 billion, more than three times the growth in Europe.
"Although equity flows into emerging markets retreated, equity volumes in Hong Kong and mainland China expanded markedly," Chairman Douglas Flint said in the statement. "As a result, HSBC's Wealth Management revenues in Hong Kong from equities, mutual funds and asset management increased significantly."
Gulliver cautioned Asian performance will "undoubtedly" worsen in the second half as Chinese growth slows and the Shanghai Composite Index posted its biggest monthly loss in six years in July. Wealth management revenue will decline as sales of exchange-traded funds fall and the investment bank will see "more muted activity" among major clients, Gulliver said.
HSBC was in talks to sell the Brazilian unit for about $3.2 billion to $4 billion, people with direct knowledge of the matter said in June. Itau Unibanco Holding SA and Banco Santander Brasil SA had also offered to buy the business.
"The bank's results have surprised to the upside, while the price achieved for the sale of its Brazilian business has exceeded forecast," said Keith Bowman, an analyst at Hargreaves Lansdown Plc in London. "On the downside, provisions in relation to ongoing foreign exchange trading investigations have been increased."
Rising costs tied to misconduct continue to overshadow Gulliver's efforts. The company set aside $1.3 billion to cover a probe into currency rigging in the first half.
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HSBC said it has hired more than 2,200 compliance staff so far this year, helping to increase operating expenses by 7 % to $17.6 billion. HSBC has been criticized by U.S. officials for resisting the work of monitors installed inside the bank after it was fined $1.9 billion for providing banking to money launderers and sanctions-dodgers in 2012.
Since taking over in 2011, Gulliver, 56, has announced more than 87,000 job cuts and exited about 78 businesses to shore up earnings. HSBC said it plans to maintain a "modest corporate banking presence" in Brazil after the sale, which is expected to be complete in the second quarter of 2016.
Costs as a proportion of revenue, called the cost-income ratio, was little changed in the first half at 58.2%. Return on equity, a measure of profitability, was 10.6%, above a target of 10%.
The rest of the year will be "heavily cost focused" as the bank seeks to grow revenue faster than costs, known in banking as "positive jaws," Finance Director Iain Mackay said on a call with analysts on Monday.
Risk-weighted assets dropped $50 billion in the first half, helped by asset sales at the investment bank and a $1.4 billion gain from a partial sale in China's Industrial Bank Co.
Gulliver said about half of the $180 billion to $230 billion of risk-weighted assets it plans to redeploy under its new strategy will be invested in Asia and the rest in Europe, the Middle East and Latin America.
British banks are under pressure to raise capital buffers ahead of a second round of stress tests later this year, with the regulator focusing on emerging-markets exposure. HSBC reported a common equity Tier 1 capital ratio, a measure of financial strength, of 11.6% at the end of June, up from 11.3 % a year earlier.
"The group's cost-income ratio is already impressive, especially given the increased regulatory and compliance burdens of the past few years," said Sandy Chen, an analyst at Cenkos Securities Plc with a buy rating on the stock. "We've said this before; for such a big ship -- with a $2.6 trillion balance sheet -- there is still a decent amount of streamlining going on."
At the investment bank, first-half pretax profit fell 5.5% to $4.75 billion, hurt by $794 million of legal costs, largely related to the currency-rigging scandal. Revenue from the foreign-exchange unit, the biggest driver of HSBC's markets business, climbed 25% to $1.67 billion from a year ago, while equities jumped 75% to $1.10 billion.
HSBC is also looking at relocating from London to help lower its tax burden. U.K. Chancellor of the Exchequer George Osborne has already responded to pressure from banks threatening to leave by cutting a levy on their balance sheets over six years and then limiting it to domestic assets.
The bank said Monday that it plans to conclude the review on whether to move its headquarters by the end of the year.
"Work is proceeding on all of our actions, in particular those aimed at reducing risk-weighted assets, cutting costs and turning around or disposing of underperforming parts of the business," Gulliver said in the statement.
HSBC kept its dividend at 20 cents per share in the first half.