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As anticipated, HSBC (LSE:HSBA) reported a pre-tax profit of $3.5 billion for the 3rd quarter, down an entire $3.7 billion year on year from the 3rd quarter of 2011. Whilst a $3.5 billion quarterly profit is nothing to sneeze at, the bank is still paying for its past sins, both in the costs of continuing operational transformation and continuing assessment of fines by US regulatory agencies.
As we reported early this morning, the bank set aside an additional $800 million in reserves during the quarter as it has reassessed the potential total remunerations that will be due to the US agencies. But, let’s be clear, it’s not the agencies that are costing HSBC. It is HSBC’s involvement in high level money-laundering schemes that may have caused breaches in US security. (The US is quite capable of doing that on their own. They don’t need HSBC’s help.) There is some indication that criminal charges, as well as civil charges, may yet be filed.
HSBC’s share price dropped 8.60 pence by early afternoon to 617.50, having opened at 626.10, followed by an immediate plunge to just under 610.00. Under the “What a tangled web we weave” category, when the largest bank on the FTSE drops 16.00 points within 30 minutes, it’s like Michael Phelps and his competitors leaping off the starting blocks only to find that they have all jumped into a wave pool. When HSBC shares drop significantly, you can almost bet that the rest of the banks will suffer from from the waves, and that the race results (the FTSE 100 index) will suffer as well.
In addition to the set-aside for the potential US fines, the total of which should be announced before the end of the calendar year, the bank also put an extra $353 million aside against costs of “miss-selling” PPI in the UK. (The quotes around “miss-selling” are because it is the euphemism in current use for a more accurate term, like “scam.”)
Nothing was mentioned in the report about the potential fallout from illegal lending activities in Malaysia, which ADVFN reported.
Be that as it may, the pre-tax profit reduction, a whopping 51%, also reduced ROE from 13.2% to 5.8%. On the transformation side of things, CEO Stuart Gulliver reports that the bank has effected $3.1 billion in annualized cost savings, which is on track for meeting it overall strategy in that area.
It’s going to be a rough go for HSBC for awhile. The bank still has more than a year to complete its strategic recovery plan. Investors would probably be wise to keep the big picture in focus on HSBC. When you have two broken legs, a paper cut isn’t that big of a concern. To you and I a few billion here and a few billion there might put a major dent in our bank account and net worth, but HSBC is equipped, perhaps more than most banks, to handle a crisis of this proportion and still conduct business as usual. If not, you can almost bet that they have some other kind of scheme up these sleeve to steal money from the innocent and loan it to the corrupt — kind of like Robin Hood in reverse.
