HSBC Holdings revealed a stock buy-back worth $2.5 billion for 2016 in the midst of a worldwide economic downturn whilst investments and lending are less attractive.
The banks management announced that it intends to undertake additional stock repurchases while maintaining dividends at their present levels during the near future. HSBC shares increased 3.5 percent in London although there are doubts regarding company’s growth and capacity to pay dividends following a decline in 2nd quarter net profit by 40 percent or $2.61 billion.
HSBC, the biggest bank in Europe, chose to do away with its program for achieving the desired return on equity (ROE) of more than 10 percent by the end of 2017. The ROE at the end of June was pegged at 7.4 percent.
HSBC executives stated on Wednesday it will not be possible to achieve its targeted earnings on equity of 10 percent by the end of next year. It’s return on equity is used as a primary measure of profitability.
The bank’s shares in London traded higher after the repurchase softened the 29 percent decline in pre-tax profits from January to June of the current year which did however meet expectations of analysts.
Chief executive officer Richard Buxton of Mutual Globe Investors explained that the target of reaching an ROE of 10 percent is neither positive nor rational as interest rates in the United States are not increasing.
Stuart Gulliver, chief executive officer of HSBC, is replacing half of the equity released after the sale of its unit in Brazil. This offset concerns regarding profitability as pre-tax income went down 45 percent to $3.61 billion one year ago.
The US Federal reserve has approved HSBC’s US unit’s request to return considerable capital to the parent firm in 2017 so that it can bring about another buyback.
According to some analysts, the buyback shows the robust capital position of HSBC and reassures investors of the company’s capacity to sustain the dividend of 51 cents. Revenue for the 2nd quarter declined 15 percent ($14.5 billion) which topped the average forecast of $13.6 billion. Meanwhile, operating costs reached $10.4 billion more than analysts’ projections of $9.2 billion.
The cost of bad credit was estimated at around $1.2 billion which is over estimates of $1.1 billion. HSBC encountered higher costs arising from liabilities in oil, gas, mining, and metal industries.
HSBC management is planning to reduce yearly expenditures by around $5 billion including job reductions of 25,000 positions within the next two years.