HSBC Holdings PLC said that it’s likely to face criminal charges from a U.S. investigation into money laundering and that the cost of a settlement may “significantly” exceed the $1.5 billion that the bank has set aside.
The lender made an additional $800 million provision in the third quarter to cover a potential settlement, adding to the $700 million that it had already earmarked. HSBC also put aside $357 million in the period to compensate British clients wrongly sold payment-protection insurance on loans as it posted an increase in pretax profit that missed analysts’ estimates.
“The final amount of the financial penalties could be higher, possibly significantly higher,” HSBC said in a statement Monday. “The resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges.”
CEO Stuart T. Gulliver’s attempts to reduce costs at the bank are being hobbled by the U.S. probes and compensation claims from British clients. A Senate committee said in July that failures in HSBC money-laundering controls allowed terrorists and drug cartels access to the U.S. financial system. Standard Chartered PLC, which, like HSBC, makes most of its profit in Asia, paid $340 million in August to settle a regulator’s claim that it broke Iranian sanctions rules.
“The size of the provision is a shock,” said Simon Maughan, a financial industry strategist at Olivetree Securities Ltd. in London. “There was a huge fuss made about Standard Chartered’s fine, but this far exceeds that.”
HSBC fell by 1.3 percent in London trading to $9.87, the steepest decline in more than five weeks. The stock has climbed by 26 percent this year for a market value of about $182 billion.
Underlying pretax profit, which excludes acquisitions and disposals as well as accounting losses on the fair value of the lender’s own debt, rose to $5.04 billion in the third quarter from $2.24 billion a year earlier, missing the $5.6 billion median estimate of eight analysts surveyed by Bloomberg. Underlying income was $16.1 billion.
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. That included selling the bank’s upstate New York branch network.
Costs as a proportion of revenue, excluding the fair value of HSBC’s own debt, decreased to 64 percent, from 66 percent, in the year earlier, as revenue from continuing operations increased. That’s still higher than Gulliver’s target range of 48 percent to 52 percent.
“Today’s cost performance is very disappointing,” Maughan said. “It raises a question mark about how rapidly these efficiencies can be made by Gulliver and his team.”
HSBC has cut about 21,000 workers in the last nine months, Finance Director Iain J. Mackay said on the conference call, cutting total employment to about 266,700 workers. Gulliver said the bank may eliminate more jobs.
“We are going to continue to manage the cost base of the firm very tightly, and we are probably likely to see the head count reduce further from where we are at this moment in time,” Gulliver said.
HSBC has been in talks with U.S. regulators over allegations that it laundered funds of sanctioned nations, including Iran and Sudan. The probes prompted Standard & Poor’s to question whether the lender, Europe’s largest by market value, is too big to be managed effectively.
A settlement of $1.5 billion would be the biggest reached in the U.S. over such allegations, topping the $619 million in penalties paid in June by ING Groep NV, the biggest Dutch financial services company.
The provision “is based on the discussions we’ve had with the various departments of the U.S. government” since June, Gulliver told reporters on the call. He said it was up to the United States on when the matter would be settled, and declined to comment further.
The provision for PPI brings to $2.1 billion the amount HSBC has set aside after regulators ordered banks to compensate clients who were forced to buy, or didn’t know they had bought insurance to cover their repayments on mortgages, credit cards and other loans. Of that, HSBC had paid out $1 billion in claims by the end of the third quarter.