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

HSBC warned Monday that China’s property market has “potential for a further deterioration” as it reported profits that fell short of expectations, partly because of a $500 million charge to cover potential losses on commercial real estate loans.

Third quarter pre-tax profit at Europe’s biggest bank more than doubled to $7.7 billion. Revenue rose 40% year-on-year to $16.2 billion as the lender reported higher interest income.

The results, however, fell shy of expectations from analysts, who had projected about $8.1 billion in pre-tax profit and revenue of $16.3 billion.

HSBC has benefited from the higher costs of borrowing in recent months. In the third quarter, “there was good broad-based growth across all businesses and geographies, supported by the interest rate environment,” CEO Noel Quinn said in a statement.

But the UK-based bank also warned of ongoing risks that could affect its lending business, flagging an exposure to China that caused a hit to another Asia-focused lender, Standard Chartered, last week.

In the third quarter, HSBC (HSBC) said it had adjusted its expected credit losses — the money it sets aside for defaults on loans — to include a charge of $500 million related to commercial real estate in mainland China.

The charge was “related to heightened economic uncertainty, inflation and rising interest rates, as well as from ongoing developments” in the sector, according to the bank.

This year, China’s property crisis has once again become a sore point for investors as developers continue to bleed cash and fight a protracted sales slump.

HSBC said it expected Chinese government support to lead to a gradual improvement in sales in parts of the market, such as housing, but it continued to see risks from “sustained stress in the mainland China commercial real estate market.”

“We continue to closely monitor, and seek to proactively manage, the potential implications of the prolonged recovery of the real estate sector and the overall Chinese economic outlook for our customers and our business,” HSBC added.

“There is potential for a further deterioration in credit conditions during the last three months of the year given the continued uncertainty around liquidity support.”

On an analyst call Monday, Quinn said while the industry could bear some further losses, “I think the market itself has bottomed.”

“Now we’re in a period of readjustment for the new norm,” he added. “I don’t see a big swing back … I see it as fine tuning from this low base.”

The conditions have put similar pressure on Standard Chartered, which last Thursday also reported a $186 million credit impairment charge related to commercial real estate in mainland China.

HSBC has fared better, with its latest results showing strength overall, Jefferies analysts wrote in a note Monday.

In a sign of renewed confidence, HSBC said Monday it would conduct another share buyback of up to $3 billion, following similar announcements in recent months. It also announced another interim dividend of 10 cents per share, its third so far this year.

HSBC shares were little changed in London following its results, while its stock listed in Hong Kong closed down 1.5%.