HSBC's unfortunate issue in the first quarter

HSBC's first quarter results are out this morning. Ostensibly, they're pretty good: pre-tax profits are up 79%, "'progress" is being made "against the strategic plan" and the return on equity in global banking and markets (HSBC's investment bank) went from 6.3% in the first quarter of 2020 to 12.1% in the past three months.

Scratch the surface though, and there are a few curious anomalies.

As anyone who's been following HSBC's new strategy will know, it's all about Asia. Senior staff in global banking and markets are being moved to Asia, potentially at considerable cost, as the bank shifts resources to Hong Kong. And yet, in the first quarter of 2021 the Asian investment bank faltered and the UK investment bank thrived. 

Across Asia as a whole, pre-tax profits at HSBC's global banking and markets business were down 11% year-on-year in the first quarter; in Hong specifically they were down 23%. By comparison, in the global banking and markets (GB&M) business of the non-ringfenced UK bank, a $325m loss in the first quarter of 2020 became a $351m profit in the first quarter of this year. 

What went wrong at the investment bank in Asia? HSBC isn't saying exactly, but globally the FX business - which last year accounted for 35% of GB&M revenues in Q1, shrunk by 29% year-on-year in the first quarter, due to what HSBC described as challenging comparable figures from 2020. There were also losses relating to 'the effect of widening credit spreads on portfolio hedges.'

By comparison, HSBC's investment bankers shone, much like investment bankers everywhere. Revenues in capital markets and advisory rose more than 100%. HSBC's unloved equities sales and trading division also did pretty well, with a 61% increase in revenues. There was no mention of losses relating to Archegos.  

HSBC's Asian issues are unlikely to dissuade CEO Noel Quinn from continuing to move resources there. Compensation spending at HSBC's investment bank in Hong Kong was up 20% year-on-year in the first three months of this year, potentially due to the arrival of expensive staff from elsewhere. While this wasn't the main cause of falling profits in HK, it probably didn't help.

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