More than £5bn was wiped off HSBC’s stock market value Monday after Britain’s biggest bank reported lower than expected profits and warned of the risk of investigations by regulators around the world.
The 4.5% fall in the shares dragged down Standard Chartered, which is due to report its results next week, and hit sentiment in the FTSE 100 index of leading shares, which was on track to close at a 15-year high before HSBC reported 2014 profits of $18.7bn (£12.2bn), a fall of 17%.
Stuart Gulliver, HSBC’s chief executive, admitted the results were disappointing. The bank, which is embroiled in a scandal about the tax avoiding strategies of its Swiss banking arm, said profits fell because of weakness in the investment banking arm and $3.7bn (£2.4bn) in regulatory fines and other conduct issues, such as compensation for mis-selling payment protection insurance.
“Profits disappointed, although a tough fourth quarter masked some of the progress made over the preceding three quarters,” said Gulliver, who embarked on a strategy hinged on “courageous integrity” when he took the helm in 2011.
Along with the weaker than expected performance, Gulliver’s decision to reduce his targets for returns to shareholders and the rising costs of running the bank also hit the shares. He faced questions for the first time since the Guardian and other publications published leaked details of 100,000 bank accounts at its Swiss banking arm dating from 2005 to 2007 and Gulliver’s own banking arrangements through the Swiss bank and a Panama operation.
“For all the recent media furore around potential conduct issues, it is the ‘underlying’ performance which, we believe, should be the greatest cause of investor concern – right across revenues, costs and impairments,” said Ian Gordon, banks analyst at Investec.
Gulliver said it was no coincidence that the activities of its Swiss arm coincided with money laundering through HSBC’s Mexican operation in the mid-2000s, for which the US has fined the bank £1bn. He said HSBC had grown too large and that its management lost control of the business during the financial crisis. The bank had 35,000 employees when he joined in 1980, and by 2007 the number had grown to 330,000. “We diluted the culture while management were concentrating on trying to get through the financial crisis,” he said.
He insisted, however, that the bank was not too big after selling off 77 businesses since he took charge in 2011. “We will need to continue simplifying the firm and I don’t rule out that we might make more disposals. But I don’t think the firm is too big to manage. You can see the validity of the business on the revenue side, even if the cost of running [a big bank] has clearly gone up,” he said.
HSBC was among the institutions fined by regulators last year for rigging foreign exchange markets, and in its annual report published alongside its results it said it had taken a further provision of $550m for on-going investigations.
The bank listed a string of investigations, including ones into the Swiss affair by tax authorities in Belgium, France, Argentina, Switzerland, India and elsewhere. It warned more could follow and that “in light of the recent media attention regarding these matters, it is possible that other tax administration, regulatory or law enforcement authorities will also initiate or enlarge similar investigations or regulatory proceedings”.
The bank also said its US arm, HSBC Bank USA, had received a subpoena from the US regulator, the commodities and futures trading commission, about its precious metals trading operations.
Douglas Flint, HSBC’s chairman, said the bank had doubled the number of compliance staff since 2011, but that “there is more work still to do to strengthen the group’s compliance capability”.
Flint warned about geopolitical risks, the crisis in the eurozone and the impact of the UK’s position in the EU. The Conservative party has promised a referendum on EU membership it forms the next government after the general election in May.
“One economic uncertainty stands out for a major financial institution headquartered in the UK, that of continuing UK membership of the EU. Today, we publish a major research study which concludes that working to complete the single market in services and reforming the EU to make it more competitive are far less risky than going it alone, given the importance of EU markets to British trade,” Flint said.
The bank said Sir Simon Robertson, the former Goldman Sachs banker, had agreed to stay on the board for another year as deputy chairman instead of leaving as his nine-year tenure – a typical timeframe as a non-executive – had been reached.
Robertson, who chairs the bank’s remuneration committee, said: “The number and volume of regulatory changes that have been and are being proposed in connection with remuneration are, in the Committee’s view, excessive and are hindering our ability to communicate with any certainty to our current employees and potential employees the remuneration policies and structures that would apply to them.”
This article was written by Jill Treanor and Sean Farrell, for theguardian.com on Monday 23rd February 2015 19.39 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010