Real Estate

Opening Quote: HSBC — Donald J who?  

Has Mark Tucker, chairman of Asia-facing bank HSBC, “muted” the tweets of @realDonaldTrump, president of Asia-baiting yanks aka USA? Despite the leader of the free world’s declaration of a trade war on China and several other countries, in another demonstration of his less-than-cerebral negotiating “skills”, Mr Tucker is unperturbed. In the bank’s half-year results earlier this morning, he appeared quite unconcerned by the impact of protectionist tariffs: 

“We remain cautiously optimistic for global growth in the remainder of the year. In particular, the fundamentals of Asia remain strong despite rising concerns around the future of international trade and protectionism.”

No exclamation marks. No capital letters. No appending of the word “sad” with or without an exclamation mark. No spelling mistakes. 

This suggests confidence in the turnround plan of his new chief executive John Flint, which is based on a “pivot to Asia” and investing in the higher growth opportunities that exist there, to boost return on equity. 

In the short term, though, this comes at a price: higher adjusted operating expenses, as HSBC invests in its retail and investment banking operations. These expenses came in at $16.4bn in the first six months of the year, 8 per cent higher than the same period in 2017. As a result, adjusted pre-tax profit in the period was down about 2 per cent to $12.1bn.

Taking the second quarter alone, HSBC generated about $6bn in reported pre-tax profit, just below the level analysts had forecast. Its adjusted revenue was $27.5bn, 2 per cent higher than a year ago. 

Mr Flint’s Asia-led growth plan is focused on strengthening operations in Hong Kong and the Pearl river delta in southern China, and expanding its insurance and wealth management businesses. That will require a $15bn-$17bn investment, with most of the money needed for new technology and digitisation.

Hence the higher expenses in the first half, and the dip in profit, as Mr Flint explained: 

“Our investment in the first half included hiring more front-line staff in our strongest businesses and expanding our digital capabilities in core markets, both of which will improve the service we offer customers . . . Our first-half reported and adjusted operating expenses rose as a consequence, which contributed to a drop in adjusted profit before tax.” 

Return on average shareholder equity fell to 8.7 per cent from 8.8 per cent a year ago. Mr Flint has set out a target of hitting a return on tangible equity above 11 per cent for the first time in a decade.

HSBC did not announce any more share buybacks, but this was largely expected. In May, the bank said it would launch a $2bn share buyback after similar announcements in 2016. Today, Mr Flint simply reaffirmed a second interim dividend of $0.10 per ordinary share, keeping the full dividend unchanged.

Shares in the bank were up 1.5 per cent at HK$73.40 in midday Asia trading.

One pivot to growth that is not happening this morning is the purchase of serviced office provider IWG by Guy Hand’s private equity group Terra Firma. Or, indeed, anyone else. IWG, formerly known as Regus, has decided that none of its potential bidders is proposing an acceptable deal.

In other words, the price wasn’t right. Or, in these precise words, none of the three private equity groups that had seemed interested was “currently capable of delivering an executable transaction at a recommendable price”.

Terra Firma, TDR Capital and Starwood Capital had all made approaches to IWG, the company revealed in May, months after it had fended off an all-cash offer from Brookfield Asset Management and private equity group Onex that valued it at more than £2.5bn.

On Monday, Terra Firma, TDR and Starwood confirmed they would abandon their bids rather than try to navigate a buyout without board support. All must now walk away for at least six months, unless there is a significant change in the circumstances.

They may not be overly disappointed. IWG has been expanding aggressively to stave off competition from flexible office rival WeWork, and in June counted the cost: issuing its second profit warning in eight months. This morning, it reported that its first-half pre-tax profit had fallen to £54m, down from £81m in the same period a year earlier, despite a 7 per cent rise in revenues to £1.2bn.

Today’s Small Talk column by Kate Burgess examines the prospects for small cyber security companies:

David Williams, chairman of the Aim tiddler Shearwater that was Aurum Mining, firmly believes “there’s gold in them thar hills”. But he does not mean in the crags and crevices of Spain, where Aurum used to prospect for gold and tungsten. Nor even the hills of Dahlonega, Georgia, which Mark Twain’s catchphrase supposedly referred to in 1849. Mr Williams thinks his next millions will be made in cyber security. 

That is why two years ago Mr Williams — who made a name building up Breedon, the £1.4bn quarry business — began selling off the mining assets and reshaping lossmaking Aurum Mining into an acquisitive cyber security group.

Read the rest of the column here

FT Opening Quote, with commentary by Matthew Vincent, is your early Square Mile briefing. You can receive it by email at 8am every morning by signing up here.


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