HSBC: Ping An break-up call creates dividend dilemma

HSBC beat forecasts with first-half profits on Monday. But a single word still dogs the Asia-focused lender like a guilty conscience: dividends. Ping An, the biggest institutional shareholder, has mooted a break-up. As a result, retail investors have rarely held so much power.

Reported profit after tax of $9.2bn in the six months to June was stronger than expected, thanks to higher interest income and currency trading gains. Operating expenses fell. HSBC raised its near-term return on tangible equity goal to at least 12 per cent from next year.

Some retail investors in Hong Kong may feel a demerger of HSBC’s Asia business via a Hong Kong listing would serve their interests better. The unit produced nearly two-thirds of HSBC’s pre-tax profit last year. Private shareholders still resent HSBC’s dividend cancellation following pressure from the Bank of England during the pandemic.

That discontent adds weight to Ping An Insurance Company’s call for chief executive Noel Quinn and the rest of the board to consider options including a spin-off.

A compelling argument can be made against a demerger. HSBC’s Asia business on its own would lack one of the group’s biggest strengths, cross-border revenues from European clients. However, that matters little to many Hong Kong retail investors. They are as interested in the reliability of dividend income as well as its quantum.

Quinn needs retail investors behind him to sustain a share price rise of 15 per cent in the past year. That leaves the stock just below tangible book value, an 80 per cent premium to peer Standard Chartered, according to S&P data.

Ominously, credit loss provisions are rising with a $1.1bn charge for expected losses in the first half. As a result, the common equity tier 1 ratio, has fallen 2.2 percentage points from six months ago to 13.6 per cent.

That is one reason HSBC will restore quarterly dividends next year at a lower level than in the past. The bank may have to escalate dividend promises if Ping An escalates its demands.