HSBC's CEO Sets Aside $2 Billion for "Shameful and Embarrassing" Banking Activity after Mixed Earnings Report
HSBC Holdings (NYSE: HBC) beat estimates despite setting aside $2 billion to cover regulatory fines and lawsuits in connection with accusations stemming from laundering money for Mexican drug lords.
The breakdown for the lender's missteps includes a $1.3 billion provision to compensate British clients for the selling of protection insurance and derivatives. HSBC also set aside $700 million for fines levied by U.S. Senate Banking Committee for their role in providing money to terrorists and drug cartels allowing them access to U.S. financial systems.
HSBC announced the bank had a pretax gain profit of 11percent in the first half of the year; the increase was attributed to a $4.3 billion gain for asset sales. The pretax profit was $12.7 billion, up from $11.5 billion the prior year.
For the six months ending June 30, operating income was 3 percent higher to $43.7 billion up from $42.3 billion for the same period last year.
Net income fell to $8.44 billion from $9.2 billion last year. Underlying costs rose $1.9 billion in large part from higher taxes paid and increase in wages.
Chief Executive Officer Stuart Gulliver stated that fines may increase for their complicity in the money laundering scheme. HSBC apologized to the Senate Committee on July 23.
"Regulatory and compliance events in the first six months of the year overshadowed financial performance. And that has added further to public concern and distrust of the banking industry," HSBC Chairman Douglas Flint said in a statement.
To further exacerbate shareholders, HSBC has also been named in the LIBOR manipulation probe. Barclays (NYSE: BCS), a chief rival of HSBC, was fined $456 million last month. The bank believes it is too early to predict the impact of the allegations on HSBC. As of yet Gulliver has taken no action against the traders involved in the investigations.
Since Gulliver took over in 2010, the lender's emphasis was to cut overhead and build a leaner, more nimble entity. The goal was to make a 12-15 percent return on equity by 2013 and chop cost as a proportion of equity to 52 percent. However, the bank so far has only reached 57.5 percent and a return on equity of 10.5 percent.
Gulliver has sold off 36 less profitable businesses in less lucrative countries since 2011. The bank faces stiff headwinds as wages increase in both South America and Asia.
Shares of HSBC were traded up 1.2 percent this morning, but lagged the banking index's 2 percent rise.
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