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HSBC profits hit by provisions

HSBC today announced third quarter pre-tax profits of $3.5bn. On the face of it, this may look like a healthy figure, but it in fact represents a 51% decrease on the figure it posted for the same period last year and a drop in ROE from 13.2% to 5.8%. The reason: provisions for regulatory fines.

 

The bill for PPI mis-selling continues to spiral for UK banks as they struggle to quantify just how much they will need to satisfy the slew of claims headed their way and HSBC is not immune. Last week, RBS announced that it was setting aside a further £400m ($650m) and this came hot of the heels of Lloyds Banking Group’s decision to increase its provision by £1bn ($1.6bn). HSBC announced today that it is setting aside a further £220m ($350m) as the total bill for mis-selling claims in the UK exceeded £10bn. This now takes HSBC’s total provision to £1.1bn ($1.75bn), but the bad news is that this is not really the bad news.

 

Of far greater concern to the bank’s management and shareholders is the lingering concern over the fine it faces from US authorities for its perceived role in not preventing money laundering activities, most notably by Mexican drug cartels. Almost four months have passed since the scandal was made public, but HSBC continues to sweat on just how much it will have to cough up in fines.

 

The bank today announced that it was adding $800m to the provision pot for the fine, taking the total set aside for the issue to $1.5bn. This is a tremendous amount of money, but things could get worse for HSBC with CEO Stuart Gulliver stating that the “final amount of financial penalties could be higher, possibly significantly higher, than the amount accrued.”

 

US officials have suggested that a settlement with the bank could be finalised within the coming weeks, but until then investors and employees alike must wait nervously.

 

There was some good news in the company’s Q3 announcement as it said it had achieved annualized cost savings of $3.1bn, leaving it well on target to meet its goal of $3.5bn by the end of 2013.

 

The markets however remain concerned by the uncertainty over the fine to be handed down by US authorities and shares fell 1% to 618p this morning. If Gulliver’s worst fears are confirmed in the coming weeks, we may perhaps see a sharper drop.

For more information of HSBC, check out our company profile here

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