3 Things to Know Following HSBC Holding’s Announcement of $2.5bn Share Buyback

HSBC Holdings (LSE: HSBA) announced a $2.5 billion share buyback plan on Wednesday. The plan has caused a stir among investors with HSBC stock rising to 500p before the market opened on Wednesday, up 4%.

The buyback comes with a lot of unknowns for the company and isn’t an indication of higher profits.

A few things to know following the announcement are:

1.     Pre-tax Profits Are Down 14% in First Half of 2016

The company’s buyback plans are not due to higher profits. The company’s pre-tax profits fell 14% over the first half of the year to $9.7 billion. The dip in profits is a staggering $3.9 billion. The company’s second quarter earnings paint a bleaker picture with pre-tax profits falling to $3.1 billion, down from $6.1 billion over the previous quarter.

2.     Dividends Remain Safe for Now

The company’s dividend is secure as the company maintains surplus capital. The company’s Common Equity Tier 1 ratio increased from 11.9% to 12.1% during the first half of the year. The bank is also selling its Brazilian operations which is expected to increase the ratio to 12.8%.

The expected payout is near 7.5%, or $0.49 per share. Forecasts point to a $0.59 earnings per share leaving little remaining profits for expansion.

Chairman of HSBC, Douglas Flint stated the plan is “sustaining the annual dividend… at its current level for the foreseeable future.”

3.     Brexit is Far From Over for HSBC

Flint stated that the bank and businesses in the UK are entering a “new era” after Brexit. The chairman states that the future will be complex and time consuming and that new trade deals will take time to emerge.

The company is headquartered in the UK, but the company’s pre-tax profit comes primarily from Asia accounting for a staggering 83.5% of the company’s pre-tax profit last year.

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Daniel Simmons