HSBC profits plunge as bank braces for COVID loan losses
HONG KONG – HSBC Holdings on Monday reported a sharp drop in profits as its allowance for loan losses returned to its highest level in nine years due to the coronavirus pandemic.
Net income for the three months ended June 30 fell 87.7% to $ 617 million from $ 5.03 billion a year earlier. On a pretax basis, the bank generated gains of $ 1.09 billion, well below analysts’ expectations of $ 2.5 billion.
HSBC, which makes the vast majority of its profits in Asia, has been caught in the crosshairs of mounting tensions between the United States and China. Managing Director Noel Quinn acknowledged the risks for the bank, which expressed support for Beijing’s National Security Law for Hong Kong even before its text was published.
“HSBC must operate in a difficult geopolitical environment,” Quinn said in a statement Monday. “The current tensions between China and the United States inevitably create difficult circumstances for an organization with HSBC’s footprint.”
In response to Beijing’s decision to impose a national security law on Hong Kong, the United States has threatened sanctions against Chinese and Hong Kong officials involved in undermining the autonomy of the former British colony. The security law itself, however, prohibits those in Hong Kong from participating in foreign sanctions.
The crossfire has “potential ramifications” for HSBC, the bank said, although Quinn added that geopolitical tensions had not impacted results in the first half of the year.
Indeed, the bank has stepped up its wealth management activities in mainland China in recent weeks. He said last month that he hired 100 people to provide mobile advice from branches in Guangzhou and Shanghai. On Monday, officials said the squad would grow to 2,000 to 3,000 within four years.
HSBC shares extended their morning losses, closing down 4.4% at $ 33.40 while the Hang Seng index itself fell 0.6%.
The bank set aside $ 3.83 billion for loan losses in the quarter, against a forecast of $ 2.7 billion in provisions. The London-based bank expects loan loss provisions for the year to reach $ 8 billion to $ 13 billion. This would be the highest sum in a decade and is based on a forecast of $ 7 billion to $ 11 billion in April. The bank has set aside $ 2.8 billion for all of 2019.
Citigroup analysts led by Ronit Ghose said the increase in provisions would likely lead many banks to lower their annual profit forecasts for HSBC. “The uncertainty over loan losses remains,” they said.
HSBC’s earnings report came days after little rival Standard Chartered also warned of the risks of escalating tensions between Beijing and Washington. StanChart earnings fell 33% in the first half of the year due to increased credit impairment charges. The bank is also cutting a “small number” of jobs.
HSBC said revenue fell across all businesses except its markets unit, where volatile trading increased revenue by 55% in the second quarter. Rivals on Wall Street also had a good trading quarter, with the pandemic resulting in frenzied market conditions and sweeping central bank interventions.
Quinn said, “We also need to see how COVID develops over the next quarter or two to determine the sustainability of this revenue and cost position.”
The lender’s Asian business remained resilient while other markets suffered, the bank said. Profit before tax in Asia in the first half was $ 7.37 billion from $ 9.78 billion last year. However, profits fell in North America and Latin America while losses widened in Europe, from $ 520 million to over $ 3 billion.
In Hong Kong, HSBC’s largest market, provisions for credit losses for the quarter reached $ 383 million from $ 34 million a year earlier. The city is on track to match or surpass its longest-ever recession after declining output for a fourth consecutive quarter during the April-June period. Few people expect a turnaround amid a new wave of coronavirus infections and the revocation of U.S. trade privileges.
The bank said it would consider further cost cuts. Quinn in June relaunched plans to cut 35,000 jobs over three years that had been put on hold at the start of the pandemic.
The cuts, to be made over three years, will be the heaviest in the bank’s American and European operations. They are part of a plan to cut $ 4.5 billion in costs and $ 100 billion in risk-weighted assets by the end of 2022.
“We intend to accelerate the implementation of the plans we announced in February,” Quinn said. “At the same time, our operating environment has changed considerably since the start of the year. So we will also look at what additional actions we need to take.
The bank has already cut both performance pay and discretionary spending, which, along with its ongoing cost reduction initiatives, helped reduce operating expenses in the quarter by 4%.
Six of the largest U.S. banks set aside a total of $ 61 billion in the first half of 2020 for future loan losses. Consulting firm Accenture estimates that loan loss provisions for 100 of the largest Western banks will reach $ 880 billion between 2020 and 2022 in a severe scenario.
“Our performance in the second half of the year will continue to be influenced by the trajectory and economic impact of the COVID-19 outbreak,” Quinn said. “Geopolitical uncertainty could also take a heavy toll on our customers, especially those affected by heightened tensions between the United States and China and between the United Kingdom and China, and the future of trade relations between the United States and China. UK and the EU. “