Europe's largest bank HSBC reported fourth-quarter pre-tax profit of $5.2 billion, surpassing expectations due to rising interest rates that increased net interest income. These results give HSBC confidence that it can reach its performance target of 12% return on tangible equity this year.

Reported expected credit losses of $3.6 billion reflect increased economic uncertainty, inflation, rising interest rates and changes to China's property sector. HSBC's net interest margin - which measures lending profitability - rose 28 basis points.

Net interest income

On Tuesday, Europe's largest bank HSBC reported a 92% surge in fourth-quarter pre-tax profit as rising interest rates boosted its net interest income. The improved results encouraged HSBC to confirm it would meet its key performance target for this year but did not raise its return on tangible equity (ROTE) objective.

In the fourth quarter, AIG's net interest margin surged 55 basis points to 1.74%, an impressive achievement as central banks around the world raised rates to control inflation. Furthermore, it reported a record pre-tax profit of $5.2 billion versus just $3.7 billion the prior year and well ahead of analysts' average estimate.

In the fourth quarter of 2017, HSBC's pre-tax profit quadrupled to US$2.06 billion as Hong Kong's economy continued its recovery from the coronavirus pandemic that hit the city and much of the Greater Bay Area in 2016. Based in London but generating most of its revenue from Asia, the bank also saw its market and securities business post a record US$2 billion pre-tax profit for the period.

The bank reported a 37% growth in pre-tax profits at its wealth and personal banking division, due to the bank's focus on wealth management in China, which grew faster than the rest of their business.

However, pre-tax profit at HSBC's Asia-focused Hang Seng Bank unit fell 27 per cent to HK$10.2 billion in 2022 due to higher credit losses associated with its exposure to China's property sector. Furthermore, results revealed the bank took a US$1.9 billion reserve on its Chinese commercial real estate book over 2022.

HSBC's global banking and markets segment saw its pre-tax profit jump 77 per cent to US$686 million in the fourth quarter, marking its best quarter in three years. This helped HSBC achieve a record total of US$1.7 billion in net interest income for 2021.

HSBC said its profits have increased, yet the bank expects its return on tangible equity to remain at 12% from this year forward as they manage costs effectively. They plan to resume quarterly dividend payments in 2023 and bring forward any potential share buybacks until the first quarter of 2023. Lastly, HSBC intends to pay a special dividend of 21 US cents per share from the proceeds from their planned sale of Canada business once that disposal is complete late this year.

Non-interest income

Non-interest income, which includes revenue derived from fees such as ATM fees and loan origination fees, is an important source of revenue for financial institutions because it does not depend on changes in interest rates and thus provides a more predictable stream of earnings than loan income does.

Banks also use non-interest income to offset operating expenses, such as those related to loans and investment activities. In this way, they can generate more revenue and remain profitable even with low interest rates affecting their net interest income.

Non-interest income has recently increased due to an uptick in fees earned by banks. These include deposit and transaction fees, non-sufficient funds charges (NSF fees), annual fees, monthly account service charges and inactivity fees.

One important source of non-interest income is securitization. This income arises from the sale of loans to other banks and nonbanks, who then pool those loans together into a single asset and market them on the markets.

Banks make money when they purchase loans at lower interest rates and then resell them at higher prices. This concept, known as the "interest-replacement theory", explains why banks can continue to make money during times of low interest rates.

HSBC, one of Asia's largest banks, announced a fourth-quarter pre-tax profit of $5.2 billion that exceeded expectations. Its reported revenue increased 25 per cent due to higher interest rates and stronger income from markets and securities businesses.

Net interest margin for 2021 increased 55 basis points to 1.74 percent from 1.19 per cent in the third quarter. Operating income also surged 15% to US$14.8 billion from US$12.6 billion in 2021, up from US$12.6 billion the prior year.

HSBC reported a 77 per cent growth in pre-tax profit to US$686 million and 21 per cent rise in dividends paid out to shareholders. Its board approved another interim dividend of 23 cents per share and plans to pay a special dividend if it successfully completes the sale of its Canadian banking business.

Community banks have experienced less volatility in noninterest income over time, though service charges on deposit accounts still made up a substantial portion of their overall noninterest income. According to an FDIC study, service charges accounted for nearly 19% of all noninterest income at most community banks in 2019, down from 24% in 2012.

Profit before tax

HSBC, Europe's largest bank, reported fourth-quarter pre-tax profit of $5.2 billion ahead of analysts' expectations as rising interest rates drove up net interest income. Furthermore, HSBC reiterated its key performance target of achieving a return on tangible equity of at least 12% by 2023.

Management expressed its confidence in a higher global interest rate environment and an ambitious transformation plan to drive stronger returns. Furthermore, the company is divesting non-strategic assets and loss-making businesses as part of a cost-saving initiative that should benefit shareholders later this year.

In the fourth quarter of this year, the bank's net interest margin rose 55 basis points to 1.74 percent from 1.19 percent the prior year's period. This marks their highest quarterly net interest margin ever and compares to a 1.39 per cent figure during the first three months of this year.

Adjusted profit before tax for 2021 increased to EUR412m from EUR223m the prior year due to growth in revenues at Global Payment Solutions and lower staff costs due to a restructuring plan implemented in 2021. It was also affected by higher expected credit losses and other credit impairment charges.

Operating expenses decreased by $0.7bn or 3%, primarily due to favorable foreign currency translation differences and lower performance-related pay accruals. Nonetheless, it was also affected by higher restructuring and other related costs, investments, as well as inflationary pressures.

Stuart Gulliver, the chief executive of HSBC, issued a statement declaring the bank to be "resilient." This earnings report came days after its main rival Standard Chartered posted an improved loss but still missed analysts' expectations due to higher provisions.

HSBC's net interest income rose by 41 per cent annually, while its revenue increased by 25 per cent. Furthermore, the bank's net fee and commission income also saw an uptick of 16 per cent during this timeframe.

HSBC's consolidated lending business saw its net interest margin increase significantly in the fourth quarter, increasing from 1.19 per cent in the third quarter due primarily to higher loan origination volumes.

Profit after tax

HSBC Holdings reported fourth-quarter pre-tax profit of $5.2 billion, surpassing analyst expectations due to rising interest rates that increased net interest income and revenue. Furthermore, the London-headquartered bank announced plans for a special dividend of 21 cents per share following the sale of its Canadian business which is scheduled to conclude in late 2023.

HSBC reported strong results for 2021, yet its profit before tax for 2022 fell short of what was expected. The bank attributed the decrease to a decline in profits at its wealth and personal banking segment as well as an increase in expected credit losses.

Noel Quinn, chief executive of the bank, reiterated their goal to return at least 12 per cent of tangible equity by 2023 - their best return in a decade. Additionally, they would keep costs under control with an aim of only 3 per cent cost increase in 2023.

HSBC also plans to launch a share buy-back program of up to $1 billion, which it hopes to complete by the end of 2022. This investment will support their growth strategy and help offset higher capital levels from their announced share buyback program in 1H17.

At the same time, HSBC's eligible loss absorbing debt and equity ratio is at an all-time high. As it continues to generate profits and returns from its announced share buyback program, this ratio could potentially fall back towards its target range.

In 1H17, HSBC's Tier-1 capital ratio increased to 14.5% as it returned to capital generation mode after its share buyback. This was driven by strong profit performance and lower RWA (return on assets); however, we anticipate further reduction in CET1 over the medium term.

HSBC has been actively seeking ways to reallocate resources and reduce costs in Asia. It has several initiatives underway, such as selling its Canadian unit for up to $10 billion. Furthermore, the bank intends on increasing its dividend by 25 per cent this year with a second interim dividend of 23 cents per share and the potential for an extra special 21-cents-per-share payment after the Canada deal closes.