HSBC has this morning announced a 48% drop in it profits over the last quarter compared to last year and warned investors the ongoing crisis could have an “adverse effect”, on future dividends. The bank, which generates most of its profits in Asia, also increased provisions for bad loans by over 400%. $3 billion has been set aside compared to $585 million a year ago.
Pre-tax profit for the period slid to $3.2 billion, almost half that generated a year earlier. Return on tangible equity, considered an important measure of profitability for banks, also dropped to 4.2% from 10.6% over the first three months of 2019. The bank additionally warned:
“Should the Covid-19 outbreak continue to cause disruption to economic activity globally through 2020, there could be further adverse impacts on our income.”
Undetailed “corporate exposure in Singapore” was pinpointed as a reason for the huge leap in bad loan provisions. The bank is known to be the most exposed of its peers to Singaporean oil trader Hin Leong, who recently revealed $800 million of losses and is attempting to restructure a debt pile of almost $4 billion. HSBC’s exposure is to the tune of $600 million.
HSBC is far from the only bank to multiply bad loan provisions. The six largest lenders from the USA have upped their combined provisions by 350% year-on-year and Credit Suisse by an incredible 600%.
HSBC’s strategic restructuring, announced in February, could also be significantly delayed. Plans to cut annual costs by $4.5 billion, in large part by reducing staff numbers to 200,000 from 235,000 over three years has been delayed. The bank has stated this is due to a responsibility to staff to not make them redundant in the midst of a global health crisis.
The bank also plans to sell off $100 billion of risk-adjusted assets by the end of 2022 and to further shrink operations in Europe and the USA in favour of focusing on Asia, where around 80% of the company’s profits are generated. Hong Kong is by far the bank’s most profitable territory.
Despite the delays to cost cutting plans, the bank has confirmed that operating expenses were down $400 million on the same period last year to a total of $7.9 billion, including $200 million attributed to “favourable foreign currency translation differences”.
HSBC last month cancelled its planned dividend after pressure from Bank of England regulator, the Prudential Regulatory Authority – a move that has angered the large numbers of Hong Kong-based retail investors that hold the bank’s stock. A legal challenge has been threatened and Hong Kong lawmaker Christopher Chueng told the Financial Times that, while he doesn’t expect that to be successful, the fallout means “HSBC has lost the trust of Hong Kongers’ hearts”.
That disenchantment will not be eased by the warning a protracted extension to the current crisis is also expected to hit dividends beyond 2020.
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