HSBC underlined the benefit of higher interest rates as it lifted profits in the third quarter but by less than the market expected, while flagging a rise in operating expenses.

The banking giant hiked pre-tax profits by $4.5 billion for the third quarter to $7.7bn, as earnings were boosted by the flurry of rate rises imposed by the Bank of England to curb inflation in recent months. HSBC declared it had seen “good broad-based growth across all businesses and geographies”.

However,  shares fell by 2.3% as profits fell short of market expectations and the bank warned of a further rise in operating costs, which could increase by up to 5% over 2023.

The bank also made further provision for losses related to its exposure to the debt-laden commercial real estate market in China.

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But it cheered investors with a third share buyback of the year, with the latest worth up to $3bn. It would take the total amount paid out by the bank in share buybacks to up to $7bn for the year.

The fresh buyback helped soften a rise in operating expenses, which at $8bn were $2bn or 2% higher than in the third quarter of 2022. The bank attributed the rise in costs primarily to higher technology costs, the impact of rising inflation, and an increase in performance-related pay accrual. These increases were partly offset by lower restructuring and other related costs, following the completion of a cost-saving programme at the end of 2022.

The bank is targeting a 4% rise in costs this year, 1% higher than previously guided because of increased technology and operations expenditure, not counting costs associated with its acquisition of the UK business of Silicon Valley Bank earlier this year. It said a further cost rise of 1% is possible as it considers a potential increase in performance-related pay for the fourth quarter.

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The results from HSBC closed the autumn reporting season by the UK’s major banks which has offered evidence that the boost lenders have received from hikes in interest rates in recent months may have peaked. On Friday, state-backed NatWest Group downgraded its guidance for margins for the remainder of 2023 as it said customers were increasingly shifting balances to interest-bearing savings accounts, to take advantage of higher interest rates.

Lloyds Banking Group’s reported net interest margin - broadly the difference between the interest it charges on loans and what it pays in interest to savers – fell in the third quarter to 3.08% from 3.14%, though it held its guidance on NIM for the year at 3.1%. Barclays warned its NIM would probably decline in the fourth quarter.

HSBC reported a NIM of 1.7% for the third quarter which it said was 19 basis points higher on the same period of 2022, but down by two basis points on the second quarter of this year. The latter came amid an increase in customers migrating deposits to term products, particularly in Asia.

The bank noted that it continues to monitor risks related to its exposure to the commercial real estate sector in mainland China. It booked an impairment charge of $0.5bn in the third quarter to cover losses, causing profits to come in below expectations, though chief executive Noel Quinn was quoted by Reuters as telling reporters that the “major correction (in China’s property market) is over”.

On Thursday, Standard Chartered increased its provision for losses arising in the Chinese property market, causing it to miss profit expectation in the three months to September.

Russ Mould, investment director at AJ Bell, said: “A larger than expected share buyback seems to be doing a lot of the heavy lifting for HSBC today – making up for some less than positive details in its third quarter results.

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“What may sober up any investors drunk on a $3bn handout is the higher-than-expected cost growth now expected for 2023. Management had made keeping a tight rein on any outgoings a key part of their strategy, so to fall down on this point does some damage to their credibility.

“Given part of the bloated costs relates to higher performance-related pay, HSBC could be exposed to some political or even regulatory blowback.

“For now, HSBC, whose horizons go far beyond the UK, is seen in a much better light by the market than its rivals and it is notable to see it sticking with its return on equity targets for 2023 and 2024.

“Certainly, there was nothing in these results to prompt the kind of loss of faith experienced by its other foreign-focused rival Standard Chartered after its own third-quarter update.

“And given the difficulties faced by the Chinese economy in 2023, a key market for HSBC, its level of performance has been impressive. To sustain this, CEO Noel Quinn’s observation that China’s commercial property market has bottomed out will have to prove accurate.”

Mr Quinn said: “We have had three consecutive quarters of strong financial performance and are on track to achieve our mid-teens return on tangible equity target for 2023.

“There was good broad-based growth across all businesses and geographies, supported by the interest rate environment.

“Our wealth business also gained further traction, attracting $34bn (£28bn) of net new invested assets in the quarter and growing wealth balances by 12% compared with last year."

He added: “We are pleased to again reward our shareholders. We have now announced three share buy-backs in 2023 totalling up to $7bn (£5.8bn), as well as three quarterly dividends which total 0.30 US dollars per share.

“This underlines the substantial distribution capacity that we have, even as we continue to invest in growth."

Shares closed down 13.7p at 587.3p.