By Alun John and Lawrence White
HONG KONG/LONDON (Reuters) – HSBC Holdings PLC on Tuesday abandoned its long-term profitability target, and unveiled a revised strategy focused mainly on wealth management in Asia after the COVID-19 shock saw its annual profits drop sharply.
Citing the low interest rate environment and tough market conditions, HSBC ditched its goal of achieving a return on tangible equity of 10 to 12%, and said instead it will aim for 10% over the medium term.
The moves by Europe’s biggest bank underlined the tough outlook for the banking sector as low interest rates worldwide take their toll, even as a global markets rally boosted the prospects for the wealth management business.
The margin pressure and mounting losses in Europe have forced HSBC to redouble its focus on Asia which provided a dominant share of the bank’s profits in 2020.
“The big structural shift that’s gone on since we set out the plan last February has really been the shift in interest rates down toward zero in most markets that we do business in,” Ewen Stevenson, HSBC’s group chief financial officer, told Reuters.
“If interest rates were 100 basis points higher today across the board it would improve our returns by 3 percentage points.”
The bank said it would pay a dividend of $0.15 a share in cash, the first payout announced since October 2019, after the Bank of England blocked all big lenders from paying dividends or buying back shares in 2020 to conserve capital.
However, it said it would stop the previous practice of paying a quarterly dividend, and target a payout ratio of between 40% and 55% of reported earnings per ordinary share from 2022 onwards, well below the level in recent years.
HSBC also said it will make hefty cuts to some of its back office functions such as technology and operations, without specifying the number of jobs affected. The lender cut 11,000 jobs in 2020 and had signalled it would make further reductions.
The announcement came as HSBC reported profit before tax of $8.78 billion for 2020, down 34% from a year earlier but just above the $8.33 billion average of analysts’ estimates compiled by the bank.
HSBC’s Hong Kong shares were up 0.55% by 0750 GMT, lagging the benchmark Hang Seng index as investors considered the bank’s dividend cut and modest strategic ambitions.
Investors were resigned to HSBC’s more modest ambitions and growth target.
“It’s hard to have high ambitions in this climate, or at least dangerous to declare them if they exist,” said Hugh Young, managing director at Aberdeen Standard, the bank’s 9th-largest shareholder.
ASIA FOCUS, SHRINKING ELSEWHERE
HSBC said that its growth in Asia for the next five years will be driven by around $6 billion of additional investment in its wealth management and international wholesale business.
“Everyone realises how big an economic opportunity China and India are but HSBC is starting to realise no-one has the opportunity to serve that wealth creation like they do,” said Dan Lane, a senior analyst at UK digital broker Freetrade.
“The prospect doesn’t come cheap but it looks like the company is finally ready to pump cash into getting even more East Asian customers on board.”
Profit from the bank’s wealth management and personal banking division in Asia was $5 billion in 2020, but its cash cow Hong Kong accounted for almost all of this, despite its controversial decision to assist Hong Kong police with investigations into pro-democracy activists.
Elsewhere in the world, HSBC said it is in talks with a potential buyer for its troubled France retail banking unit, which it has been trying to dispose for over a year, but no deal has been confirmed.
It said it expected to make a loss on the sale given the business’ underlying performance.
The bank also said it is “exploring organic and inorganic options” for its U.S. retail banking franchise, suggesting it is trying to sell the unit where it has already closed 80 branches in the last year.
Reuters, and others, have reported the bank is trying withdraw from U.S. retail banking.
HSBC’s Mexico operations made a loss of $187 million in 2020, as many of its branches remained closed due to the pandemic, but chief executive Noel Quinn told Reuters he is confident about the prospects for a business the bank has in the past considered selling.
“We’re confident that (HSBC’s Mexico business) will be successful again post-COVID, and it is a business at scale,” Quinn said.
(Reporting by Alun John and Lawrence White; editing by Shri Navaratnam)
UK jobless rate hits 5.1% as Sunak readies more job support
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s jobless rate rose to 5.1% in the last three months of 2020, its highest in nearly five years but still lower than it would have been without a huge coronavirus jobs support scheme that finance minister Rishi Sunak looks set to extend next week.
Separate data from the Office for National Statistics showed that the number of employees on company payrolls in January rose by 83,000 from December, the second monthly increase and its biggest since January 2015.
The jobless rate – the highest since the first three months of 2016 – was in line with the median forecast in a Reuters poll of economists.
Unemployment has been suppressed by the government’s Job Retention Scheme which is supporting about one in five employees.
The programme is Britain’s most expensive COVID economic support measure and will cost an estimated 70 billion pounds ($98 billion) by its scheduled expiry date of April 30.
But figures based on tax data show the number of employees on business payrolls has still fallen by 726,000 since February 2020 – equivalent to just over 2% of the workforce – with the majority of job losses suffered by workers aged under 25.
The Bank of England has said it thinks the unemployment rate will jump to almost 8% in mid-2021 after the furlough scheme ends.
Sunak is expected to announce an extension of his jobs support, at least for sectors hardest hit by the government’s lockdowns, in a March 3 budget statement.
“At the Budget next week I will set out the next stage of our Plan for Jobs, and the support we’ll provide through the remainder of the pandemic and our recovery,” Sunak said after Tuesday’s data.
Prime Minister Boris Johnson announced his plan for easing England’s lockdown on Monday that would keep some businesses shut until the summer but allow a gradual, earlier reopening for others.
“The outlook for the UK economy is getting clearer and with continued support from the Treasury, it is likely the Bank of England’s peak unemployment forecast of 7.75% will prove too pessimistic,” Jon Hudson, a fund manager at Premier Miton, said.
Samuel Tombs, at consultancy Pantheon Macroeconomics, said he thought the jobless rate would hit 6% in the summer.
The ONS said the number of job vacancies in the three months to January was 26% lower than a year ago, a less severe fall than last summer when vacancies were down by nearly 60%, although the pace of improvement slowed in the past few months.
Pay growth was the strongest since 2008. Total pay including bonuses rose by 4.7% in the October-December period compared with the same three months of 2019.
The pick-up in pay growth in part reflects how the brunt of job losses has fallen on people working in lower-paid jobs in areas such as hospitality, and the ONS said pay growth was likely to be below 3% if this effect is stripped out.
Britain went into a new COVID lockdown on Jan. 5 due to a rapidly rising death toll that has passed 120,000, the highest in Europe.
($1 = 0.7108 pounds)
(Reporting by William Schomberg and David Milliken; Editing by Kate Holton)
Damage to United Boeing 777 engine consistent with metal fatigue – NTSB
By David Shepardson and Jamie Freed
WASHINGTON (Reuters) – Damage to a fan blade on an engine that failed on a United Airlines Boeing 777 flight is consistent with metal fatigue, based on a preliminary assessment, the chairman of the U.S. air accident investigator said on Monday.
The Pratt & Whitney PW4000 engine failed on Saturday with a “loud bang” four minutes after takeoff from Denver, National Transportation Safety Board (NTSB) Chairman Robert Sumwalt told reporters following an initial analysis of the flight data recorder and cockpit voice recorder.
There was minor damage to the aircraft body but no structural damage, he said.
He said it remained unclear whether the incident is consistent with an engine failure on a different Hawaii-bound United flight in February 2018 that was attributed to a fatigue fracture in a fan blade.
“What is important that we really truly understand the facts, circumstances and conditions around this particular event before we can compare it to any other event,” Sumwalt said.
The engine that failed on the 26-year-old Boeing Co 777 and shed parts over a Denver suburb was a PW4000 used on 128 planes, or less than 10% of the global fleet of more than 1,600 delivered 777 widebody jets.
In another incident on Japan Airlines (JAL) 777 with a PW4000 engine in December 2020, Japan’s Transport Safety Board reported it found two damaged fan blades, one with a metal fatigue crack. An investigation is ongoing.
The focus is more on engine maker Pratt and analysts expect little financial impact on Boeing, but the PW4000 issues are a fresh headache for the planemaker as it recovers from the far more serious 737 MAX crisis. Boeing’s flagship narrowbody jet was grounded for nearly two years after two deadly crashes.
The United engine’s fan blade will be examined on Tuesday after being flown to a Pratt laboratory where it will examined under supervision of NTSB investigators.
The U.S. Federal Aviation Administration (FAA) said on Monday it had already been evaluating whether to adjust fan blade inspections in the wake of the December incident in Japan after reviewing maintenance records and conducting a metallurgical examination of the fan blade fragment.
Boeing recommended that airlines suspend the use of the planes while the FAA identified an appropriate inspection protocol, and Japan imposed a temporary suspension on flights.
Pratt & Whitney, owned by Raytheon Technologies Corp., has recommended airlines increase inspections in a plan that is being reviewed by the FAA, sources with knowledge of the matter said. Pratt did not respond immediately to a request for comment.
The FAA has said it plans to issue an emergency airworthiness directive soon that will require stepped-up inspections of the fan blades for fatigue.
“United Airlines has grounded all of the affected airplanes with these engines, and I understand the FAA is also working very quickly as well as Pratt & Whitney has reiterated or revised a service bulletin,” Sumwalt said. “It looks like action is being taken.”
In March 2019, after the 2018 United engine failure attributed to fan blade fatigue, the FAA ordered inspections every 6,500 cycles. A cycle is one take-off and landing.
South Korea’s transport ministry said on Tuesday it had told its airlines to inspect the fan blades every 1,000 cycles following guidance from Pratt after the United incident.
Sumwalt said the United incident was not considered an uncontained engine failure because the containment ring contained the parts as they were flying out.
NTSB will look into why the engine cowling separated from the plane and also why there was a fire despite indications fuel to the engine had been turned off, Sumwalt added.
Industry sources said that although the engine is made by Pratt, the cowling, or casing, is manufactured by Boeing. Boeing referred questions on the part to the NTSB.
Nearly half of the global fleet of PW4000-equipped Boeing 777 jets operated by airlines including United, JAL, ANA Holdings, Korean Air and Asiana Airlines had already been grounded amid a plunge in travel demand due to the coronavirus pandemic.
(Reporting by David Shepardson in Washington and Jamie Freed in Sydney; additional reporting by Tracy Rucinski in Chicago, Joyce Lee in Seoul and Tim Hepher in Paris; Editing by Kim Coghill and Gerry Doyle)
Oil prices jump more than $1 as U.S. output slow to restart
By Jessica Jaganathan
SINGAPORE (Reuters) – Oil prices jumped by more than $1 on Tuesday, underpinned by optimism over COVID-19 vaccine rollouts and lower output as U.S. supplies were slow to return after a deep freeze in Texas shut in crude production last week.
Shale oil producers in the southern United States could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output that shut down because of cold weather, as frozen pipes and power supply interruptions slow their recovery, sources said.
Brent crude was up $1.08, or 1.7%, at $66.32 a barrel by 0437 GMT, after earlier hitting a high of $66.79. U.S. crude rose 92 cents, or 1.5%, to $62.62 a barrel, having reached a session high of $63. Both benchmarks have risen more than 2% on Tuesday after climbing nearly 4% in the previous session.
“The positive momentum continues in the oil complex, with investors unabashedly predisposed to a bullish view,” said Stephen Innes, chief global markets strategist at Axi in a note.
Goldman Sachs Commodities Research raised its Brent crude oil price forecasts by $10 for the second and third quarters of 2021, citing lower expected inventories, higher marginal costs to restart upstream activity and speculative inflows.
The Wall Street bank expects Brent prices to reach $70 per barrel in the second quarter from the $60 it predicted previously and $75 in the third quarter from $65 earlier.
Morgan Stanley expects Brent crude prices to climb to $70 per barrel in the third quarter on “signs of a much improved market” including prospects of a pick-up in demand.
“It is hard not to be bullish with oil prices now that the deep freeze disruption practically guarantees the summer pickup in crude demand will erase whatever supply glut is left,” said Edward Moya, senior market analyst at OANDA in New York.
“The global oil demand is looking a lot better now that the Pfizer vaccine shows positive results after one dose, the U.K. sees the end of the pandemic ‘in sight’, and as hospitalizations and deaths continue to decline after peaking in early January.”
Stockpiles of U.S. crude oil and refined products likely declined last week, a preliminary Reuters poll showed on Monday, due to the disruption in Texas.
(Reporting by Jessica Jaganathan; editing by Richard Pullin & Shri Navaratnam)
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