HSBC sets aside $2 billion in apology for compliance lapses

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.”

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