HSBC Bank Canada Second Quarter 2023 Results

VANCOUVER, British Columbia–(BUSINESS WIRE)–#Banks—Linda Seymour, President and Chief Executive Officer of HSBC Bank Canada¹, said:

“Performance remained robust in the second quarter of 2023 continuing the trends that we saw in the first quarter of the year. Profit before tax was 53% higher than in the second quarter of 2022 – with three of our four business segments seeing improved revenues and profits – largely due to increased net interest income from improved margins and loan growth, as well as lower expected credit losses compared to a significant write off in the prior year. This was partly offset by an increase in operating expenses, primarily related to the agreed sale² of the bank.

“The Canadian economy, and our clients, have remained resilient in the face of significant challenges posed by inflation, interest rates and labour related disruptions to trade flows. Thank you to our teams for remaining focused on supporting our clients through these continuing economic headwinds.”

Highlights³ financial performance (2Q23 vs 2Q22)

• Profit before income tax expense was $302m, up $104m or 53%. All business segments were profitable with increases in profit before tax expense and total operating income across three of our four business segments.
• Total operating income remains strong at $681m, up $82m or 14%, largely due to improved net interest margins with continued growth in lending, higher trading income and increased client activity in cards. While challenging market conditions drove a modest decrease in net fee income.
• Change in expected credit losses (‘ECL’) was a charge of $13m primarily driven by new defaults in non-performing loans and the impact of rising interest rates on the mortgage portfolio, partly offset by a release in performing loans due to a relative improvement in forward-looking macro-economic variables.
• Total operating expenses were up by $47m or 15% mainly due to costs related to the agreed sale² of HSBC Bank Canada, partly offset by lower investment spend in 2023.

Highlights³ financial performance (H1 23 vs H1 22)

• Profit before income tax expense was $611m, up $121m or 25% with operating income, up $189m or 16%, and a lower charge in ECL. Total operating expenses were up $93m or 15%.
• All business segments were profitable with increases in profit before tax expense and total operating income across three of our four business segments.
• Total assets were $121.1bn, down $7.2bn or 5.6%, from 31 December 2022.
• Common equity tier 1 capital ratio⁴ of 12.8%, up 120 bps from 31 December 2022.
• Return on average common equity⁵ of 16.0%, up 270 bps from 31 December 2022.

1. HSBC Bank Canada and its subsidiary undertakings (together ‘the bank’, ‘we’, ‘our’) is an indirectly wholly-owned subsidiary of HSBC Holdings plc (‘HSBC Holdings’). Throughout the document, HSBC Holdings is defined as the ‘HSBC Group’ or the ‘Group’.
2. On 29 November 2022, HSBC Group announced an agreement to sell its 100% equity stake in HSBC Bank Canada to Royal Bank of Canada (‘RBC’). For further information, refer to the ‘Agreed sale of HSBC Bank Canada’ section of this document.
3. For the quarter and half-year ended 30 June 2023 compared with the same periods in the prior year (unless otherwise stated). The abbreviations ‘$m’ and ‘$bn’ represent millions and billions of Canadian dollars, respectively.
4. Capital ratios and risk weighted assets are calculated using the Office of the Superintendent of Financial Institutions Canada’s (‘OSFI’) Capital Adequacy Requirements (‘CAR’) guideline, and the Leverage ratio is calculated using OSFI’s Leverage Requirements (‘LR’) guideline. The CAR and LR guidelines are based on the Basel III guidelines.
5. In evaluating our performance, we use supplementary financial measures which have been calculated from International Financial Reporting Standards (‘IFRS’) figures. For further information on these financial measures refer to the ‘Use of supplementary financial measures’ section of this document.

 Analysis of consolidated financial results for the second quarter ended 30 June 2023¹

Net interest income was $442m for the quarter, an increase of $73m or 20%, and $894m for the half-year, an increase of $188m or 27%. This was due to the impact of the central bank rate increases over the past year and average loans and advances to customers increasing compared to the second quarter of 2022, partly offset by changes in deposit mix.

Net fee income was $194m for the quarter, a slight decrease of $2m or 1% as challenging market conditions resulted in lower fees on investment funds under management in Wealth and Personal Banking. Lower volumes in remittances and guarantees also contributed to the decrease. These decreases were partly offset by increased activity in cards and increased transactions in account services resulting in an increase in net fee income.

For the half-year, net fee income was $383m, a decrease of $10m or 2.5% driven by the same factors as in the quarter, coupled with lower underwriting fees in Global Banking offset by higher credit facility fees from higher volumes of bankers’ acceptances in Commercial Banking.

Net income from financial instruments held for trading was $40m for the quarter, an increase of $16m or 67%, and $67m for the half-year, an increase of $16m or 31%. The increase was mainly from a favourable change in cash flow hedge instruments and higher income from trading activities compared to the adverse movement in the value of a loan syndication facility in the prior year. Net interest income from trading activities increased due to the higher interest rate environment. These increases were partly offset by lower favourable movements in credit and funding fair valuation adjustments compared to the prior year.

The change in ECL for the quarter resulted in a charge of $13m primarily driven by new defaults in non-performing loans and the impact of rising interest rates on the mortgage portfolio, partly offset by a release in performing loans due to a relative improvement in forward-looking macro-economic variables. This compares to a charge in 2022 of $82m primarily driven by the write-off of a material stage 3 loan, coupled with a charge in performing loans driven by an adverse shift in forward-looking macro-economic variables at that time.

ECL for the half-year resulted in a charge of $15m compared to a charge of $40m in 2022. The charge for the half-year was driven by the same factors in the quarter. In 2022, the ECL was driven by a significant charge for a material stage 3 loan, partly offset by a release in performing loans during the first quarter of 2022 for COVID-19 related allowances.

Total operating expenses were $366m for quarter, an increase of $47m or 15%, and $732m for the half-year, an increase of $93m or 15%. The increase for both the quarter and half-year was mainly due to costs relating to the agreed sale² of HSBC Bank Canada which includes the re-assessment of the useful life and impairment of intangible assets. Higher staff-related costs, also contributed to the increase. This was partly offset by lower investment spend in 2023.

Income tax expense: the effective tax rate for the second quarter of 2023 was 28.0%. The statutory tax rate was 27.8% which incorporates the additional tax on banks and life insurance groups announced in April 2022. Compared to the statutory rate, there has been a nominal increase in tax liabilities. The effective tax rate for the second quarter of 2022 was 26.7%.

1. For the quarter and half-year ended 30 June 2023 compared with the same periods in the prior year (unless otherwise stated).
2. On 29 November 2022, HSBC Group announced an agreement to sell its 100% equity stake in HSBC Bank Canada to Royal Bank of Canada (‘RBC’). For further information, refer to the ‘Agreed sale of HSBC Bank Canada’ section of this document.

Dividends

Dividends declared in the second quarter 2023

During the second quarter of 2023, the bank declared regular quarterly dividends of $19m on all series of outstanding HSBC Bank Canada Class 1 preferred shares and paid such dividends in accordance with their terms. No dividends were declared or paid on HSBC Bank Canada common shares during the second quarter of 2023.

Dividends declared in the third quarter 2023

On 27 July 2023, the bank declared regular quarterly dividends for the third quarter of 2023 on all series of outstanding HSBC Bank Canada Class 1 preferred shares, to be paid in accordance with their terms in the usual manner on 30 September 2023 or the first business day thereafter to the shareholder of record on 15 September 2023.

As the quarterly dividends on preferred shares for the third quarter of 2023 were declared after 30 June 2023, the amounts have not been included in the balance sheet as a liability. At this time, no dividends have been declared on HSBC Bank Canada common shares during the third quarter.

Business performance in the second quarter ended 30 June 2023¹

Commercial Banking (‘CMB’)

Profit before income tax expense for the quarter was $195m, an increase of $79m or 68% and $402m for the half-year, an increase of $69m or 21% as charges in expected credit losses decreased compared to the prior year and operating income increased.

Total operating income for the quarter was $311m, an increase of $18m or 6.1% and $621m for the half-year, an increase of $48m or 8.4%. CMB has maintained positive momentum in 2023 with average loan balances increasing by $3.4bn or 10% and average deposit balances increasing by $2.0bn or 7.7% compared to the first half of 2022. Net interest income improved due to the impact of the central bank rate increases over the past year and higher average loan volumes. Non-interest income has similarly improved with higher volumes of bankers’ acceptances and increased activity in corporate credit cards.

Wealth and Personal Banking (‘WPB’)

We had record² profit before income tax expense for the quarter and half-year. Profit before income tax expense for the quarter was $111m, an increase of $46m or 71% and $209m for the half-year, an increase of $84m or 67%. The increase was driven by higher operating income, partly offset by an unfavourable change in expected credit losses and higher operating expenses.

Total operating income for the quarter was $295m, an increase of $63m or 27%. Total operating income for the half-year was $576m, an increase of $127m or 28%. The increase was driven by improved margins as a result of the central bank rate increases over the past year, growth in average deposit balances and higher income from our online brokerage business, partly offset by lower investment funds under management and changes in product mix.

Global Banking (‘GB’)

Profit before income tax expense for the quarter was $36m, an increase of $21m or 140% and $75m for the half-year, an increase of $37m or 97% as a result of higher operating income and a favourable change in ECL.

Total operating income for the quarter was $49m, an increase of $10m or 26% and $109m for the half-year, an increase of $23m or 27%. Results from transaction banking activities remain strong, due mainly to higher spreads and higher income from trading activities compared to the adverse movement in the value of a loan syndication facility in the prior year. These increases were partly offset by lower revenues from capital markets reflecting, in part, slower client activity levels and challenging market conditions.

Markets and Securities Services (‘MSS’)

Profit before income tax expense for the quarter was $8m, a decrease of $10m or 56% and $17m for the half-year, a decrease of $14m or 45% mainly due to lower operating income.

Total operating income for the quarter was $20m, a decrease of $11m or 35% and $42m for the half-year, a decrease of $15m or 26%. The decrease was driven mainly from fixed income trading, partly offset by higher net interest income driven by the central bank rate increases over the past year.

Corporate Centre³

Profit before income tax expense for the quarter was a loss of $48m, compared to a loss of $16m in the prior year. Profit before income tax for the half-year was a loss of $92m, compared to a loss of $37m for the same period in the prior year. This was mainly due to increased costs relating to the agreed sale⁴ of HSBC Bank Canada which includes the re-assessment of the useful life and impairment of intangible assets. This was partly offset by lower investment spend in 2023 and higher non-interest income.

1. For the quarter and half-year ended 30 June 2023 compared with the same periods in the prior year (unless otherwise stated).
2. Record for the first quarter since inception of WPB as a single global business in 2011.
3. Corporate Centre is not an operating segment of the bank. The numbers included above provides a reconciliation between operating segments and the entity results.
4. On 29 November 2022, HSBC Group announced an agreement to sell its 100% equity stake in HSBC Bank Canada to Royal Bank of Canada (‘RBC’). For further information, refer to the ‘Agreed sale of HSBC Bank Canada’ section of this document.

In evaluating our performance, we use supplementary financial measures which have been calculated from International Financial Reporting Standards (‘IFRS’) figures. Following is a glossary of the relevant measures used throughout this document but not presented within the consolidated financial statements. The following supplementary financial measures include average balances and annualized income statement figures, as noted, are used throughout this document.

Return on average common shareholder’s equity is calculated as annualized profit attributable to the common shareholder for the period divided by average¹ common equity.

Return on average risk-weighted assets is calculated as the annualized profit before income tax expense divided by the average¹ risk-weighted assets.

Cost efficiency ratio is calculated as total operating expenses as a percentage of total operating income.

Operating leverage ratio is calculated as the difference between the rates of change for operating income and operating expenses.

Net interest margin is net interest income expressed as an annualized percentage of average¹ interest earning assets.

Change in expected credit losses to average gross loans and advances and acceptances is calculated as the annualized change in expected credit losses² as a percentage of average¹ gross loans and advances to customers and customers’ liabilities under acceptances.

Change in expected credit losses on stage 3 loans and advances and acceptances to average gross loans and advances and acceptances is calculated as the annualized change in expected credit losses² on stage 3 assets as a percentage of average¹ gross loans and advances to customers and customers’ liabilities under acceptances.

Total stage 3 allowance for expected credit losses to gross stage 3 loans and advances and acceptances is calculated as the total allowance for expected credit losses² relating to stage 3 loans and advances to customers and customers’ liabilities under acceptances as a percentage of stage 3 loans and advances to customers and customers’ liabilities under acceptances.

Net write-offs as a percentage of average customer advances and acceptances is calculated as annualized net write-offs as a percentage of average¹ net customer advances and customers’ liabilities under acceptances.

Ratio of customer advances to customer accounts is calculated as loans and advances to customers as a percentage of customer accounts.

1. The net interest margin is calculated using daily average balances. All other financial measures use average balances that are calculated using quarter-end balances.
2. Change in expected credit losses relates primarily to loans, acceptances and commitments.

 

HSBC Bank Canada		Consolidated income statement (unaudited)
(Figures in $m, except where otherwise stated) Financial performance and position
		Quarter ended				Half-year ended
		30 Jun 2023		30 Jun 2022		30 Jun 2023		30 Jun 2022
Financial performance for the period
Total operating income		681		599		1,358		1,169
Profit before income tax expense		302		198		611		490
Profit attributable to the common shareholder		198		133		403		336
Change in expected credit losses and other credit impairment charges – (charge)		(13)		(82)		(15)		(40)
Operating expenses		(366)		(319)		(732)		(639)
Basic and diluted earnings per common share ($)		0.37		0.24		0.74		0.61
Financial ratios %1
Return on average common shareholder’s equity		15.3		11.2		16.0		13.3
Return on average risk-weighted assets		2.7		1.9		2.8		2.4
Cost efficiency ratio		53.7		53.3		53.9		54.7
Operating leverage ratio2		n/a		12.3		1.6		9.0
Net interest margin		1.62		1.37		1.64		1.32
Change in expected credit losses to average gross loans and advances and acceptances		0.07		0.43		0.04		0.11
Change in expected credit losses on stage 3 loans and advances and acceptances to average gross loans and advances and acceptances		0.21		0.35		0.12		0.18
Total stage 3 allowance for expected credit losses to gross stage 3 loans and advances and acceptances		29.9		27.9		29.9		27.9
Net write-offs as a percentage of average loans and advances and acceptances		—		0.67		0.02		0.35

Financial and capital measures
		At
		30 Jun 2023		31 Dec 2022
Financial position at period end
Total assets		121,146		128,302
Loans and advances to customers		73,956		74,862
Customer accounts		79,141		82,253
Ratio of customer advances to customer accounts (%)1		93.4		91.0
Common shareholder’s equity		5,207		4,818
Capital, leverage and liquidity measures
Common equity tier 1 capital ratio (%)3		12.8		11.6
Tier 1 ratio (%)3		15.3		14.1
Total capital ratio (%)3		17.6		16.4
Leverage ratio (%)3		5.2		4.7
Risk-weighted assets ($m)3		44,519		44,656
Liquidity coverage ratio (%)4		161		164

Refer to the ‘Use of supplementary financial measures’ section of this document for a glossary of the measures used. n/a is shown where the ratio has resulted in a negative ratio. Capital ratios and risk weighted assets are calculated using the Office of the Superintendent of Financial Institutions Canada’s (‘OSFI’) Capital Adequacy Requirements (‘CAR’) guideline, and the Leverage ratio is calculated using OSFI’s Leverage Requirements (‘LR’) guideline. The CAR and LR guidelines are based on the Basel III guidelines. The Liquidity coverage ratio is calculated using OSFI’s Liquidity Adequacy Requirements (‘LAR’) guideline, which incorporates the Basel liquidity standards. The LCR in this table has been calculated using averages of the three month-end figures in the quarter.

HSBC Bank Canada	Consolidated income statement (unaudited)
(Figures in $m, except per share amounts)		Quarter ended				Half-year ended
		30 Jun 2023		30 Jun 2022		30 Jun 2023		30 Jun 2022
Interest income		1,291		630		2,547		1,101
Interest expense		(849)		(261)		(1,653)		(395)
Net interest income		442		369		894		706
Fee income		225		224		446		446
Fee expense		(31)		(28)		(63)		(53)
Net fee income		194		196		383		393
Net income from financial instruments held for trading		40		24		67		51
Changes in fair value of other financial instruments mandatorily measured at fair value through profit and loss		—		(1)		—		(1)
Gains less losses from financial investments		—		—		2		2
Other operating income		5		11		12		18
Total operating income		681		599		1,358		1,169
Change in expected credit losses and other credit impairment charges – (charge)		(13)		(82)		(15)		(40)
Net operating income		668		517		1,343		1,129
Employee compensation and benefits		(174)		(152)		(331)		(303)
General and administrative expenses		(144)		(138)		(294)		(280)
Depreciation and impairment of property, plant and equipment		(14)		(16)		(28)		(31)
Amortization and impairment of intangible assets		(34)		(13)		(79)		(25)
Total operating expenses		(366)		(319)		(732)		(639)
Profit before income tax expense		302		198		611		490
Income tax expense		(84)		(53)		(170)		(131)
Profit for the period		218		145		441		359
Profit attributable to the common shareholder		198		133		403		336
Profit attributable to the preferred shareholder		20		12		38		23
Profit attributable to shareholder		218		145		441		359
Average number of common shares outstanding (000’s)		548,668		548,668		548,668		548,668
Basic and diluted earnings per common share ($)		0.37		0.24		0.74		0.61

 

HSBC Bank Canada	Consolidated balance sheet (unaudited)
		At
(Figures in $m)		30 Jun 2023		31 Dec 2022
ASSETS
Cash and balances at central bank		4,682		6,326
Items in the course of collection from other banks		10		9
Trading assets		3,006		4,296
Other financial assets mandatorily measured at fair value through profit or loss		20		18
Derivatives		5,892		6,220
Loans and advances to banks		338		344
Loans and advances to customers		73,956		74,862
Reverse repurchase agreements – non-trading		4,303		6,003
Financial investments		23,050		23,400
Other assets		1,787		2,591
Prepayments and accrued income		326		351
Customers’ liability under acceptances		3,176		3,147
Current tax assets		113		172
Property, plant and equipment		342		332
Goodwill and intangible assets		81		160
Deferred tax assets		64		71
Total assets		121,146		128,302
LIABILITIES AND EQUITY
Liabilities
Deposits by banks		523		712
Customer accounts		79,141		82,253
Repurchase agreements – non-trading		4,789		4,435
Items in the course of transmission to other banks		233		227
Trading liabilities		2,517		3,732
Derivatives		6,424		6,575
Debt securities in issue		12,068		15,735
Other liabilities		3,615		3,577
Acceptances		3,181		3,156
Accruals and deferred income		972		713
Retirement benefit liabilities		209		203
Subordinated liabilities		1,011		1,011
Provisions		40		54
Current tax liabilities		115		—
Deferred tax liability		1		1
Total liabilities		114,839		122,384
Equity
Common shares		1,125		1,125
Preferred shares		1,100		1,100
Other reserves		(797)		(786)
Retained earnings		4,879		4,479
Total shareholder’s equity		6,307		5,918
Total liabilities and equity		121,146		128,302

Contacts

Media enquiries:

Sharon Wilks
647-388-1202
[email protected]

Caroline Creighton
416-868-8282
[email protected]

Investor relations enquiries:
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