HSBC sets aside $2 billion in apology for compliance lapses

July 30, 2012 06:13 AM

July 30 (Bloomberg) -- HSBC Holdings Plc, the British bank accused of helping drug lords in Mexico to launder money, apologized to investors for compliance failings and set aside $2 billion more to cover the costs of fines and redress.

The lender made a $1.3 billion provision in the first half to compensate British clients wrongly sold payment-protection insurance and derivatives, London-based HSBC said in a statement today as it posted an 8.3 percent drop in net income. It also made a $700 million provision for U.S. fines after a Senate committee found the bank gave terrorists, drug cartels and criminals access to the U.S. financial system. That sum may increase, Chief Executive Officer Stuart Gulliver said.

“Regulatory and compliance events in the first six months of the year overshadowed financial performance,” Chairman Douglas Flint said in a statement today. “HSBC has made mistakes in the past, and for them I am very sorry.”

HSBC is trying to estimate the costs of four scandals to hit the bank in the past year: the mis-selling of loan insurance as well as derivatives to individual customers; allegations that traders tried to rig Libor; and a Senate report that found the bank worked with firms linked to terrorism and hid transactions that bypassed sanctions against Iran.

Enforcement action “is completely at the discretion of the Department of Justice,” Gulliver told reporters today. The provision is “a best estimate based on the information we have today. The actual number could be materially higher.”

Net Falls

HSBC rose 2.4 percent to 543.6 pence at 3:17 p.m., lagging the 2.8 percent gain in the Bloomberg Europe Banks and Financial Services Index.

“People have looked through the disappointment,” said Nick Ziegelasch, who helps manage 2 billion pounds at Killik & Co., including HSBC shares. “The underlying business, especially in Asia, is still doing pretty well.”

Net income fell to $8.44 billion from $9.2 billion a year earlier, missing the $9.1 billion median prediction of 10 analysts surveyed by Bloomberg. So-called underlying revenue, which excludes gains on disposals, movements in the valuation of HSBC’s own debt, as well as currency movements, rose 4 percent to $34.8 billion, the lender said today.

“The key area of weakness remains top line income growth, which at 4 percent on an underlying basis remains too low,” said Gary Greenwood, an analyst at Shore Capital in Liverpool, who rates the stock a hold. “Excluding the additional customer redress and law enforcement provisions, underlying cost performance is improving.”

Cost Cuts

Gulliver, who became CEO in January 2011, is seeking to cut costs by $2.5 billion to $3.5 billion and revive profit by selling assets to focus on emerging economies in which the bank has a greater market share. He has overseen 36 asset sales and closures so far, including the disposal of its U.S. credit card unit to Capital One Financial Corp. Gulliver said today he is “about 60 to 70 percent” through the disposals program and expects to deliver at the “upper end” of his cost-cut target.

Costs as a proportion of revenue were unchanged at 57.5 percent, more than Gulliver’s 48 percent to 52 percent target.

Barclays Plc and Lloyds Banking Group Plc have set aside a total of 5.6 billion pounds ($8.8 billion) to compensate clients sold payment protection insurance they didn’t need. Barclays last month paid a record 290 million pounds in fines for manipulating the London interbank offered rate.

Swaps, PPI

HSBC set aside an additional $1 billion to compensate customers who were mis-sold payment protection insurance and $240 million for those sold interest rate swaps that later lost them money. In the case of payment-protection insurance, British regulators have found some customer clients were forced to buy, or didn’t know they had purchased, insurance to cover repayments on credit cards or mortgages they were taking out.

The bank had already made a $717 million provision for so- called payment protection insurance compensation through the end of 2011. Lloyds Banking Group Plc, Britain’s biggest mortgage lender, increased provisions for customer redress by 700 million pounds in the second quarter, bringing the total it’s set aside to 4.3 billion pounds.

“We’ve seen a higher level of incoming claims than we had anticipated when we started looking at this issue around this time last year, and that level of incoming claims has remained at a high level when we would have expected it to start tailing off,” HSBC Finance Director Iain Mackay told analysts today.

European Outlook

Pretax profit in Asia excluding Hong Kong rose 17 percent to $4.37 billion. In Europe, the bank swung into a loss of $667 million compared with a profit of $2.15 billion. HSBC said the economic outlook in the region will be “subdued.”

“Our assumption is that European leaders will take the necessary measures to preserve the euro but, even so, we expect the euro zone’s economy to contract this year,” Gulliver, 53, said in the statement.

Pretax profit at HSBC’s investment bank, overseen by Samir Assaf, increased to $5.05 billion from $4.81 billion. Revenue at the investment bank rose 6.6 percent to $10.35 billion. By contrast, Wall Street’s five biggest banks, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., posted the lowest first-half revenue since 2008 in the first half of 2012 as trading and deal-making dried up.

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