HSBC halved its first-quarter profit on Tuesday after bad debt reserves quintupled, prompting Europe’s biggest bank to issue a stark warning about the deep and lasting impact of the coronavirus on the financial sector.
Loan provisions jumped 417% to $3 billion – on track to hit the highest annual level since the financial crisis – as the lender braced for a string of potential bankruptcies and defaults caused by the global lockdown measures to control the pandemic.
Executives warned that this was just the beginning, with provisions set at a total of $7 billion to $11 billion by the end of the year, leading to “significantly lower profitability” in 2020. The bank said reacted by suspending its dividend, cutting expenses and reducing the bonus pool. by a third party.
“We expect deep and severe recessionary events in Western Europe and the United States in the second quarter,” chief financial officer Ewen Stevenson told the Financial Times on Tuesday. The extent of loan losses depends on the “path of economic impact and shape of the recovery”, which are still unknown.
The gloomy numbers and outlook underscore the challenges facing Noel Quinn, who was only named chief executive last month. The crisis has already forced him to delay what he described as one of the “deepest restructurings” in HSBC’s 155-year history. This has seen it strengthen its focus on the lender’s pivot to Asia – where it makes the majority of its revenue – and scale back less profitable operations in Europe and the United States.
The bank “sees encouraging signs of recovery in Asia. . . but as the rest of the world enters its crisis, China will not be immune to the impact of lower global demand,” Quinn said. “The outlook for global economies in 2020 has deteriorated significantly over the past two months.”
HSBC shares fell 0.75% on Tuesday morning. The group’s pre-tax profit plunged 48% to $3.2 billion, about a third less than analysts expected, while net profit fell further, falling 57% to $1.8 billion dollars compared to the same period last year.
Much of the loan losses were blamed on a single “corporate exposure to Singapore”, which the bank said was “the main driver” of a $700 million rise in expected loan losses in the region. .
The FT previously reported that HSBC has the largest known exposure to Singaporean oil trader Hin Leong at $600m, which has filed for bankruptcy and is currently under police investigation for fraud. Mr. Quinn declined to comment on the company.
“Loan losses are bigger than expected, but HSBC generally errs on the side of conservatism,” said Citigroup analyst Ronit Ghose. “The business performance and a strong level of capital are reassuring,” he added, referring to the bank’s core CET1 ratio of 14.6%, among the strongest of any of the world’s largest lenders.
Yet HSBC’s huge increase in provisions was more severe than that of its US rivals, with the six largest US lenders increasing loan provisions in the first quarter by a combined $25.4 billion, an increase of 350% year-on-year.
At Credit Suisse, the metric soared 600% last week, while Italy’s UniCredit set aside another 900 million euros for the first quarter. On Tuesday, UBS increased provisions by 268x (1,240%) – albeit from a low base in 2019 – and Santander posted an additional 1.6 billion euros in Covid-19 related reserves.
HSBC had previously said it wanted to cut annual costs by $4.5 billion and shed $100 billion in risk-adjusted assets by the end of 2022, with the aim of cutting staff from 235,000 to 200. 000 over three years. But due to the global health crisis, HSBC has put its job cuts program on hold until at least the end of the year.
Overall revenue fell 5% and Numis analysts warned that lower global interest rates could shave $3 billion off net interest income for the full year. Operating expenses were $400 million lower than the same period last year, at $7.9 billion.
Still, there were some reasons for optimism. Strong performance was recorded by retail and investment banking in Hong Kong, where market revenues jumped by a quarter as clients traded more fixed income, rates and currencies across volatile markets.
Last month, pressure from the Bank of England forced HSBC to cancel its dividend for the first time in 74 years. The move has drawn fury from its large retail investor base in Asia, which is threatening legal challenges. It has also reignited a debate among senior bank executives over whether the lender should move its home to Hong Kong.
“We clearly regret the decision we had to make, particularly the impact on our retail investors in Hong Kong, but we have received quite clear and direct requests from the BoE to make this decision,” Quinn said.
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