HSBC was stung by China’s economic slowdown after a “messy” quarter including a $3bn (£2.4bn) writedown sent its share price tumbling by 8pc in one of the worst falls in the bank’s history.
China’s crippling economic woes prompted the Asia-focused lender to slash the value of its investment in Bank of Communications (BoCom), one of China’s “Big Five”.
The devaluation of the Argentine peso in December because hyperinflation in the country also shaved $500m from profits.
This contributed to an 80pc fall in fourth-quarter profits to $1bn, marring an annual record as gains for the entire year rose to $30.3bn.
Citigroup analyst Andrew Coombs said the final quarter was “messy” due to the one-off impairments, with the share price fall wiping £10bn from the bank’s value.
HSBC chief executive Noel Quinn said the China hit was a “technical accounting issue” and did not reflect sentiment towards China.
“We’re a committed investor in China,” he said.
The UK-based banking giant has held a 19pc stake in BoCom since 2004.
Its position has been seen as strategically important for HSBC but has raised questions among analysts about its value.
China’s economic downturn has already led to a significant slump in property investment across the country, which has led to a slowdown in growth.
Mr Quinn, 63, said he believed China’s property market had fallen as far as it could, and predicted a “gradual” recovery.
He backed the approach of regulators and authorities in Beijing to introduce reforms aimed at restimulating consumer demand.
“You can get a sustained recovery by driving the demand side of the consumption market in China, rather than temporary stimulus purely on the supply side,” he said.
China’s sluggish macro environment has led to a reevaluation of banks exposed to the Asian giant.
HSBC’s Asian rival Standard Chartered recently wrote down the value of its stake in China Bohai Bank by nearly £600m.
BoCom is listed in Hong Kong and HSBC’s stake is worth $11.6bn based on the share price.
However, accounting rules mean HSBC values the stake $10bn higher at $21.2bn on its books.
HSBC’s profit tailwinds included a $1.6bn provisional gain from the takeover of SVB UK, which HSBC rescued last year.
Despite the patchy figures, shareholders have been rewarded with the highest full-year dividend since 2008 and three share buybacks worth $7bn.
HSBC’s shares fell 8.3pc in response to Wednesday’s update, with the drop in keeping with some of the bank’s worst single-day falls.
In April 2020 – at the height of the pandemic – it sank 9.5pc, while it fell 19pc in March 2009 during the banking crisis. HSBC also dropped by 13.5pc after 9/11.
HSBC is Europe’s largest lender by size and makes most of its money in Asia, leading to a careful balancing act between the demands of East and West.
BoCom is part of China’s five largest domestic banks, making it strategically important for the Chinese state.
HSBC invested $1.75bn in BoCom in 2004 and now owns a 19pc investment.
“It’s really difficult to break into the Chinese banking market,” said a bank analyst. “The total market share of all foreign banks is no more than a few percent. It’s almost completely dominated by domestic banks.
“If they ever wanted to tap into that market they could try and do it organically but it would be really difficult. It keeps their optionality.”
Western banks quit China in the wake of the financial crisis, with UBS, Bank of America, NatWest, Goldman Sachs, and Citigroup all leaving.
After the mass exodus, one Chinese regulator warned Western banks of the difficulty of re-entering China.
“If they want to return one day, they may have to pay a higher price, a market price, for those stakes,” he said.
Unlike rivals, HSBC has stayed put, giving it a vital foothold in the Chinese market.
HSBC’s ownership of BoCom was a “statement of intent,” the analyst said.
“They have talked a lot about pivoting to Asia and it taps into that. There’s a political angle too because if you were to sell that stake it is almost saying to counterparties in China that you don’t feel good about the Chinese banking market.
“I can’t imagine selling this stake would win them brownie points from the Chinese or Hong Kong Government.”
Mr Quinn on Wednesday said he had no plans to offload the investment, echoing the HSBC party line since the bank bought the stake.
“The status on that stake does not change because of the valuation adjustment we’ve just processed,” he said.
“20 years ago it was very hard for foreign institutions to own a large stake in a financial services organisation in China so we took a stake in BoCom and it gave us access to the profit pool of mainland China’s banking market.
“That stake has served us extremely well. It’s been a very important strategic relationship, and it remains an important strategic relationship.”