One of the world’s largest banks, HSBC, reported a huge jump in its pre-tax profits for 2023. The London-headquartered financial institution earned $30.3 billion before taxes last year, up nearly 80% from $17.1 billion in 2022. This significant rise was largely fueled by higher global interest rates.
Central banks across major economies, including the United States, United Kingdom and Europe, have been raising interest rates over the past year and a half in an effort to curb rising inflation. As a result, commercial banks like HSBC have benefited greatly. When interest rates go up, banks are able to charge higher rates on loans to consumers and businesses. At the same time, they pay less interest to depositors.
This difference between what banks earn from loans and pay out on deposits is known as the “net interest margin”. For HSBC, the sizable increase in net interest margin was the primary driver of both higher revenues and profits in 2023. The bank’s chief executive Noel Quinn acknowledged that the record profit performance allowed HSBC to reward shareholders with its best full-year dividend since 2008.
However, HSBC’s profits did not reach the levels that analysts had predicted, coming in lower than the estimated $34.1 billion. This was partly due to economic slowdown concerns in China, where the bank generates a major portion of earnings. The value of HSBC’s investment stake in the Bank of Communications also took a $3 billion hit. China is grappling with falling home prices and other challenges dragging down growth.
Still, HSBC’s profit surge last year far outstripped European rival NatWest, which earlier reported its strongest annual earnings since the global financial crisis in 2007. Looking ahead, interest rates are expected to start rising more gradually. This could limit further profit expansions at HSBC and other banks benefiting from higher central bank policy rates. Investors will watch how the lenders adapt their business models accordingly.
In summary, while external headwinds remain, HSBC’s blockbuster profits for 2023 demonstrated the financial boon that higher interest rates have provided to large banks so far. Time will tell how long this rate-driven profitability can last as monetary policies normalize worldwide. HSBC’s pre-tax profits jumped nearly 80% to $30.3 billion in 2023, mainly driven by higher interest rates increasing what the bank earns from loans. However, the profits fell short of estimates due to economic concerns in China, where HSBC makes much of its income. Looking ahead, interest rates are projected to rise more gradually, posing challenges for the bank’s profit growth.
