HSBC's Cost Problem Is a Downer for Investors

(Bloomberg Opinion) -- HSBC Holdings Plc investors should strap in for a bumpy ride.

With costs rising in the first half, the London-based lender may find tamping down expenses a challenge as it moves ahead with its pivot to Asia and a focus on China's Pearl River Delta. The brewing trade war that has swept across the bank's largest markets in the region will test new Chief Executive Officer John Flint's goal of delivering revenue gains that outpace cost increases – what analysts refer to as positive jaws – this year.

HSBC posted a second-quarter adjusted revenue gain of 2 percent Monday but adjusted costs for the first half spiked 8 percent, taking jaws to a negative 5.6 percent. Given Flint's three-year strategy to invest as much as $17 billion on expansion in Asia and improve the bank's technology, higher expenses shouldn't come as any surprise, but it's the extent of the increase that's alarming.

Investors are slow to forgive a runaway cost train. Stock in Standard Charterted Plc wobbled last week after it revealed higher costs in the second quarter despite a 34 percent gain in first-half-pretax profit.

With U.S. President Donald Trump's trade war escalating, HSBC's decision to prioritize its Asia push looks like bad timing.

Shares in Hong Kong and China are tumbling, which won't help the portfolios of many of HSBC's wealth management clients. Revenue in Hong Kong – HSBC's top market – slumped 12 percent in the second quarter from the first, showing how an over-dependence on the city could hurt. (Another pending hit: declining property prices.)

To date, HSBC's international presence has helped it escape the woes faced by some of its mainland-focused peers.

It's not as if the lender's ramp-up in Asia isn't working. In the six months through June, the region contributed almost 88 percent of profit, from 74.5 percent a year ago. It's also a necessary, and defensive, move longer term. The U.K. is on shaky ground with Brexit and Hong Kong plans to introduce online-only banks later this year, meaning HSBC must enhance its digital strategy to stay on top.

But for investors, higher costs mean any return to the days of progressive dividends are a way off. HSBC on Monday announced a second-quarter interim dividend of 10 cents a share, sticking to Flint's strategy of maintaining rather than lifting payouts.

With no new buyback plan in the wings (HSBC unveiled a $2 billion share repurchase plan in the first quarter), those mainland investors who see the bank as a dividend play, increasingly buying the stock through the trading pipe between China and Hong Kong, will be sorely disappointed.

Global money managers, hoping for a spike in revenue rather than costs, won't be far behind.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.