OREANDA-NEWS. HSBC Holdings plc's (AA-/F1+/Stable) reported pre-tax profit of USD6.1bn in 3Q15 was overall sound, in Fitch Ratings' view, despite being supported by a non-recurring USD1.1bn fair-value gain on own debt. Adjusted for this and other non-recurring items, pre-tax profit was USD5.5bn, or 14% lower than in 3Q14.

Headwinds in the quarter came from a drop in insurance-related income due stock market corrections predominantly in Hong Kong and China, lower fee income on UK overdrafts, reduced profit in the US run-off portfolio and weak performance in the Global Banking and Markets division's (GB&M) rates and credit businesses. FX income in 3Q15 did not benefit from similarly strong client flows as in 3Q14, but most other client-facing GB&M activities, including equities, capital financing and balance-sheet management held up well.

HSBC's target of achieving revenue growth that is faster than cost growth will remain a significant challenge well into 2016. The increase in adjusted revenue in 9M15 (1.5%) lagged further behind the rise in adjusted costs (5.6%), resulting in the gap, known as jaws in the banking industry, widening to -4.1%. from -2.9% in 1H15. The group benefits from reliable revenues from transaction banking, which grew by 3% to USD8.4bn for the first nine months accounting for 18% of the group total.

The group's capitalisation has been shored up by the release of risk-weighted assets (RWAs) of USD82bn in 9M15, USD50bn of which was in GB&M. Retained earnings net of dividends generated 17bp of RWAs in 3Q15 compared with 23bp in 2Q and 24bp in 1Q as per Fitch's calculations. Consequently, HSBC's regulatory end-point common equity Tier 1 ratio was 11.8% at end-September 2015, Fitch Core Capital (FCC) ratio at 12.6% and the group's leverage ratio at 5.0%, compared with 11.1%, 11.7% and 4.8%, respectively, at end-2014.

Loan impairments have remained low at USD638m, or 24bp of loans, at end-September 2015 (annualised) with no material deterioration reported in its China exposure. Fitch estimates HSBC's exposure to China at USD173bn, or a reasonable 1.2x Fitch core capital, based on its Hong Kong subsidiary's regulatory disclosure at end-June 2015. This mainland China exposure comprises claims on banks (26%), central government (26%), borrowers residing in China (25%), foreign borrowers for use inside China (10%), local governments (7%) and others (5%). The significant difference between Fitch's estimate of the bank's China exposure and HSBC's reported mainland assets of USD96bn, of which USD53bn were on-shore loans, is Fitch's inclusion of cross-border activities and off-balance sheet items.

Asia contributed a strong 66% to 9M15 profit due to the USD1.4bn non-recurring gains on the sale of HSBC's stake in China's Industrial Bank booked in 2Q. Europe's share was 19% while North America and the Middle East contributed 6% each and Latin-America 3%. The two home markets UK and Hong Kong contributed 14% and 41%, respectively, in 9M15. UK's adjusted pre-tax profit improved to USD778m in 3Q15 compared with USD377m in 2Q15, mainly due to lower income in the retail and wealth management division and higher regulatory and compliance costs.