World's tiniest violin

HSBC is looking for sympathy after reporting a $12.3 billion profit

August 4, 2014
August 4, 2014

It’s hard to feel sorry for a company that just reported a $12.3 billion profit, but that seems to be what HSBC is going for in its latest earnings report. The British banking giant narrowly missed analyst expectations for its first-half results, reporting a 12% drop in pre-tax profit for the period.

Chairman Douglas Flint (pictured above) said the group’s results would have been better if not for the need to “invest significant time and resources” in meeting the “heightened and evolving expectations of our regulators.” Rulemakers are putting “unprecedented” pressure on the bank, which is distracting its staff from customer-facing work, he added. The bank, which employs 256,000 workers, has “extremely limited space capacity” to deal with the “increasingly fragmented, often extra-territorial, still evolving” rules, Flint said.

A bank of HSBC’s vast size and scope is indeed subject to a dizzying array of national, regional, and international regulations, which are not always coherent or complementary. And to a certain extent it’s Flint’s job to push back on costly regulation on behalf of shareholders. Banks are in the business of managing risk, he said, and regulators are imposing unrealistic expectations on financial firms, which leads to a “growing danger of disproportionate risk aversion creeping into decision-making.”

Cue the sad trombone. In the eyes of some, HSBC—which, remember, just made $12.3 billion dollars in six months—may protest too much. The bank has been hit with a $1.9 billion fine for breaking US anti-money-laundering rules, most notably by managing transfers for Mexican drug cartels. To date it has paid $2.7 billion in restitution for more than one million mis-sold insurance policies in Britain, with around $760 million still set aside for future claims. The bank is also under investigation in just about every rate-rigging case out there, from Libor to foreign-exchange, gold, silver and other benchmarks. In total, HSBC is sitting on $3.3 billion in provisions for unspecified future legal problems and “customer remediation” costs.

The section detailing the bank’s outstanding “legal proceedings and regulatory matters” runs to 10 pages in its latest financial report, up from eight in its half-year update a year ago. These are the headings from the litigation rundown, to give you a feel for the scope of HSBC’s many legal entanglements:

  • Securities litigation
  • Bernard L. Madoff Investment Securities LLC
  • US mortgage-related investigations
  • US mortgage securitisation activity and litigation
  • Anti-money laundering and sanctions-related
  • Tax and broker-dealer investigations
  • London interbank offered rates, European interbank offered rates and other benchmark interest rate investigations and litigation
  • Foreign exchange rate investigations and litigation
  • Gold and silver fix-related litigation
  • Credit default swap regulatory investigation and litigation
  • Economic plans: HSBC Bank Brasil S.A.

Flint’s spiky comments about regulatory overreach are at the top the bank’s earnings report, and similar sentiments featured prominently during conference calls this morning. But readers who dive into the depths of HSBC’s novel-length financial report—the legal laundry list starts on page 259 (pdf)—may find less cause to feel sorry for the bank’s bosses.

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