HSBC slashed its first-quarter profit in half on Tuesday after reserves for bad loans surged fivefold, prompting Europe’s largest bank to deliver a stark warning on the deep and lasting impact of coronavirus on the financial sector.
Loan provisions jumped 417 per cent to $3bn — on track to hit the highest annual level since the financial crisis — as the lender prepared for a run of potential bankruptcies and defaults caused by global lockdown measures to control the pandemic.
Executives cautioned this was just the beginning, with provisions set to total $7bn-$11bn by the end of the year, causing “materially lower profitability” in 2020. The bank has responded by suspending its dividend, reducing expenses and slashing the bonus pool by a third.
“We are anticipating deep, severe recession events in western Europe and the US in the second quarter,” chief financial officer Ewen Stevenson told the Financial Times on Tuesday. The scale of loan losses depends on the “path of the economic impact and the shape of the recovery”, both of which are still unknown.
The bleak numbers and outlook underline the challenges facing Noel Quinn, who was named chief executive only last month. The crisis has already forced him to delay what he has described as one of the “deepest restructurings” in HSBC’s 155-year history. This saw it strengthen its focus on the lender’s pivot to Asia — where it makes the majority of its earnings — and shrink less profitable operations in Europe and the US.
The bank is “seeing some encouraging signs of recovery in Asia . . . but as the rest of the world enters its crisis, China will not be immune from the impact of falling global demand”, Mr Quinn said. “The outlook for world economies in 2020 has substantially worsened in the past two months.”
HSBC shares dropped 0.75 per cent on Tuesday morning. Group pre-tax profit plunged 48 per cent to $3.2bn, around a third lower than analysts had expected, while bottom-line net income fell even further, dropping 57 per cent to $1.8bn from the same period last year.
A large chunk of the loan losses were blamed on a single “corporate exposure in Singapore”, which the bank said was “the primary driver” of a $700m increase in expected loan losses in the region.
The FT has previously reported that HSBC has the biggest known exposure to Singapore oil trader Hin Leong at $600m, which has filed for bankruptcy and is currently under police investigation for fraud. Mr Quinn declined to comment on the company.
“Loan losses are larger-than-expected but HSBC usually errs on the side of conservatism,” said Ronit Ghose, an analyst at Citigroup. “Business performance and a strong capital level is reassuring” he added, referring to the bank’s core CET1 ratio of 14.6 per cent, among the strongest of any of the world’s largest lenders.
Still, HSBC’s huge increase in provisions was more severe than its American rivals, with the six largest US lenders increasing first-quarter loan provisions by a combined $25.4bn — a year-on-year rise of 350 per cent.
At Credit Suisse, the measure rocketed 600 per cent last week, while Italy’s UniCredit set aside an additional €900m for the first quarter. On Tuesday UBS increased provisions by a factor of 268 (1,240%) — albeit from a low base in 2019 — and Santander posted an additional €1.6bn of Covid-19 related reserves.
HSBC had previously said it wanted to cut annual costs by $4.5bn and shed $100bn of assets adjusted for risk by the end of 2022, with the aim of reducing headcount from 235,000 to 200,000 over three years. But as a result of the global health crisis, HSBC has put its job cut programme on hold until at least the end of the year.
Overall revenue fell 5 per cent, and analysts at Numis cautioned lower global interest rates could trim $3bn from net interest income over the full year. Operating expenses were $400m lower than the same period last year, at $7.9bn.
Still, there were some reasons for optimism. Strong performances were recorded by Hong Kong retail and the investment bank, where markets revenues jumped by a quarter as clients traded more fixed-income, rates and currency products in volatile markets.
Last month, pressure from the Bank of England forced HSBC to cancel its dividend for the first time in 74 years. The move provoked the fury of its large retail investor base in Asia, which is threatening a legal challenge. It also reignited a debate among top bank executives over whether the lender should move its domicile to Hong Kong.
“We clearly regret the decision we had to take, particularly the impact on our retail investors in Hong Kong, but we had some pretty clear and direct requests from the BoE to make that decision,” said Mr Quinn.
The Financial Times is making key coronavirus coverage free to read to help everyone stay informed. Find the latest here.