HSBC Sets Aside Additional £1.2 Billion in Provisions

on Nov 5, 2012
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Today (05.11) HSBC Holdings (LON:HSBA) released their Interim Management Statement for the third-quarter of this year showing that year-on-year profit before tax (PBT) went down by $3.7 billion (£2.31 billion) to $3.5 billion (£2.19 billion). Underlying PBT, estimated by stripping out a negative $1.7 billion (£1.06 billion) impact from the improved value of the bank’s own debt and a small gain on disposals during the quarter, amounted to $5 billion (£3.13 billion), up 125 percent on Q3 2011. Loan impairment charges plunged to $1.7 billion (£1.06 billion) from $3.9 billion (£2.44 billion) for the same period last year.

The cost-income ratio rose to almost 71 percent in the third quarter, compared with 50 percent in 2011. On an underlying basis there was a small improvement from 66 percent to 64 percent.
The bank added an additional provision of $800 million (£500 million) in relation to the ongoing US anti-money laundering, Bank Secrecy Act and Office of Foreign Assets Control investigations. Stuart Gulliver, chief executive at HSBC, warned that the current total amount of $1.5 billion (£939 million) set aside for the issue might be below what the bank receives in fines:

“We are actively engaged in discussions with US authorities to try to reach a resolution, but there is not yet an agreement. The US authorities have substantial discretion in deciding exactly how to resolve this matter. Indeed, the final amount of the financial penalties could be higher, possibly significantly higher, than the amount accrued.”
Another $353 million (£221 million) were set aside for compensation for UK customers who have been mis-sold payment protection insurance (PPIs). The total amount of UK PPI provisions HSBC has allocated so far is $1.8 billion (£1.13 billion).

Shares in the bank dropped to a session low of £6.0908 before regaining some ground to £6.184 at 2.30 PM GMT.
**Money-Laundering Fines in the US**
!m[The Bank Prepares For Costs Related to US Money Laundering Investigation and Compensation for Mis-Sold PPIs](/uploads/story/723/thumbs/pic1_inline.png)In July a US senate report slammed HSBC for letting some of its clients shift potentially illicit funds from countries such as Iran, Mexico, Saudi Arabia, Syria and the Cayman Islands. The bank warned it might be facing criminal or civil charges and said the issue was “shameful and embarrassing”. The report claimed that HSBC’s Mexican operations had moved $7 billion (£4.38 billion) into the bank’s US unit between 2007 and 2008 – more than any other Mexican bank.

In 2008, Leopoldo Barroso, head of anti-money laundering at the Mexican arm of HSBC, told the banking group’s chief compliance officer there were allegations that as much as 70 percent of laundered proceeds in Mexico went through the bank. Mr Barroso warned his London colleagues that “it was only a matter of time before the bank faced criminal sanctions”.

“There’s a whole series of things that came from probably a decade in the 2000 to 2008-09 period that have surfaced now that the industry needs to sort out, remediate, and make sure doesn’t happen again.” said Mr Gulliver. “It will take a chunk of time to clean the system and then it will take a little bit longer than that for trust to be restored more fully,”
As a response to the allegations the bank has sacked a number of employees, clawed back payments from others and has hired scores of compliance officers. According to authorities these actions might prove insufficient as HSBC has been cited twice in the past 10 years by US bank regulators for deficient anti-money laundering policies and has been ordered to take corrective action.

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