HSBC ‘short-term correction’ to dividend policy as new rules loom

HSBC Bank Malta’s decision to scale back its dividend payout ratio from 65 to 55 per cent has been taken in view of anticipated regulatory changes that will require banks to hold increased Tier I capital, chief executive officer Alan Richards told The Times Business.

Mr Richards said that even after the “short-term correction”, the ratio was still well above the industry average.

The bank last week announced interim profits before tax had increased by 21.4 per cent, up €7.4 million, to €42.2 million, compared with €34.8 million in the same period in 2009. Around 10,400 shareholders will share an interim ordinary dividend payment of €15 million.

“The minimum statutory requirement for Tier I capital is four per cent and we are currently at 7.6 per cent,” Mr Richards explained. “We think the regulators will settle for around eight per cent, so by trimming the dividend payout ratio slightly, we will increase our retained earnings which go towards Tier I. Over a period of time, our Tier I capital will grow as a consequence. We are anticipating likely changes and it makes sense to do so.”

Mr Richards emphasised the board’s overall objective was to ensure returns to all shareholders were maximised.

“We still have a very healthy dividend payout ratio which, at 55 per cent, is well above the industry average. The underlying philosophy is for us to continue to give maximised returns to our shareholders. There is a short-term correction as we need to build Tier I capital to reflect the changes in the regulatory environment,” he said.

HSBC Bank Malta’s parent company emerged from the recent EU-wide stress test conducted by the UK’s Financial Services Authority and the Committee of European Banking Supervisors with a Tier I capital ratio at 10.2 per cent, significantly above the target range. With overall group Tier I capital at £122 billion, Europe’s largest bank holds more Tier I than any other in the world.

Mr Richards explained there were no separate results for the Malta operation which nonetheless carried out regular internal stress tests of its own with the Central Bank and the Malta Financial Services Authority – as did other local banks – as part of ongoing corporate governance.

Asked how he would describe the health of HSBC Bank Malta plc, Mr Richards said: “We are very strongly capitalised. The overall capital minimum requirement from the regulator currently is eight per cent and we are well over 10. One of the reasons we have been so well positioned within this crisis is that we have always placed a strong emphasis on capital and liquidity and that absolutely has not changed.”

Mr Richards yet again reiterated there was still more fall-out from the international crisis and the nature of risk was changing.

He said banks now faced challenges revolving around the consequences in the economy as governments raise taxes and implement austerity programmes with a possible impact on economic growth.

“Our concern is that while Malta is performing very well in the short term, there are a few clouds on the horizon,” Mr Richards cautioned. “Malta has a dependency on the wider eurozone and the growth story in Europe is something that is a little unclear at this point.”

Meanwhile, HSBC Group was on Monday lauded for leading the banking industry’s rebound with a 121 per cent pre-tax profit rise to $11.1 billion for the first six months of the year. The group’s bad debts fell to the lowest levels since the financial crisis began: it showed profitability in every region except the US, where losses reached $80 million as it continued to run down the book. HSBC has remained profitable since the crisis began three years ago.