HSBC takes $500 million hit on Chinese real estate and warns of risk of ‘further deterioration'

HSBC warned on Monday that China's real estate market could deteriorate further, as its profits fell short of the expectations. This was partly due to a $500-million charge for potential losses in commercial real estate lending.

The third quarter profit before tax at Europe's largest bank has more than doubled, reaching $7.7 billion. Revenue grew 40% on an annual basis to $16.2 billion, as the lender reported increased interest income.

Analysts had predicted a pre-tax profit of $8.1 billion and revenues of $16.3 billion.

HSBC has benefited from the higher borrowing costs in recent months. Noel Quinn, CEO of HSBC, said that the rate environment supported a good growth in the third quarter across all business and geographical areas.

The UK-based lender also warned about ongoing risks which could affect its lending activities, pointing out an exposure to China, which caused a blow to another Asia-focused bank, Standard Chartered last week.

HSBC (HSBC), in its third-quarter report, said that it had revised the amount it set aside for credit losses – the money it sets aside to cover defaults on loans – to include a $500 million charge related to commercial property in mainland China.

According to the bank, the charge was "related to increased economic uncertainty, rising interest rates and inflation, as well" as ongoing developments in the sector.

China's real estate crisis is once again a source of concern for investors this year as developers continue to lose money and battle a prolonged sales slump.

HSBC expects Chinese government support will lead to a gradual increase in sales, particularly in housing. However, it continues to be concerned about the risks of'sustained pressure in the mainland China real estate market.

HSBC said: 'We will continue to monitor closely and manage proactively the potential consequences of the prolonged recovery in the real estate sector, as well as the outlook of the Chinese economy, for our customers and business.'

There is a risk that credit conditions could worsen in the final three months of the calendar year, given the uncertainty surrounding liquidity support.

Quinn, on a Monday analyst call, said that while the market could still see some losses, she believes the bottom has been reached.

He added, 'Now we are in a readjustment period for the new normal'. I don't think there will be a huge swing back. Instead, it's a fine tuning of the system from this low starting point.

Standard Chartered also reported a $186 million credit impairment related to commercial real property in mainland China on Thursday.

Jefferies analysts said in a Monday note that HSBC's latest results showed strength across the board.

In a show of renewed confidence and following similar announcements made in recent months, HSBC announced Monday that it would be conducting another share purchase of up to 3 billion dollars. It also announced a new interim dividend of 10c per share. This is the third one this year.

HSBC's shares in London were barely affected by its results. However, its Hong Kong stock closed 1.5% lower.