Sky-high stakes, yet HSBC is taking risks with US justice

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HSBC’s directors should have spent less time pondering a move to Hong Kong and more time ensuring the bank will still have a business in the US in a few years’ time.

It is astonishing that, four years after HSBC paid a thumping £1.2bn fine for allowing Mexican drug lords, among others, to launder money, the bank still hasn’t put its house in order.

The official US monitor, who has spent two years policing the deferred prosecution agreement (DPA) that accompanied the financial penalty, has “significant concerns” about the pace of reform and HSBC’s ability to meet the five-year deadline to combat financial crime competently.

That is shocking, given what is at stake. As HSBC’s annual reports puts it, breach of the DPA could have “a material adverse effect on our business”. You bet. Sanctions could include loss of banking licences and restrictions on clearing dollar transactions, either of which would be brutal for an organisation that pitches itself as a facilitator of global trade.

HSBC’s chairman, Douglas Flint, looking on the bright side, says nobody should have expected an official thumbs-up after only two years, which is why the DPA extends over half a decade in the first place. And 2016 will be “a very important year”, he says, as HSBC installs new technology to identity suspicious transactions.

Well, OK, half-time is only just approaching. But a dutiful parent receiving a school report detailing “significant concerns” about progress in a core subject would be reading the riot act at this point. Shareholders should insist that future bonuses for the £7m-a-year chief executive, Stuart Gulliver, depend on meeting the DPA targets. HSBC cannot afford another run-in with the US Department of Justice.

In the circumstances, you can understand why HSBC’s shares trade at a level first seen as long ago as 1997. Nine pages of a 37-page summary of “highlights” from 2015 were consumed by “legal proceedings and regulatory matters”. These now include a role in the US Securities and Exchange Commission’s investigation into banks’ hiring of “princelings”, or the offspring of Asian government officials.

As for actual highlights, they were in short supply. Revenues were virtually flat. Underlying pre-tax profits fell 7% to $20.4bn (£14.5bn). Impaired loans rose 17%. Return on equity was an unsatisfactory 7.2%.

HSBC remains a global financial powerhouse and the balance sheet is strong, but the next worry is a dividend that was covered only 1.3 times by lower earnings. The 8% yield sends an unmistakable message: the market thinks HSBC’s empire is covered in fog.

Powered by Guardian.co.ukThis article was written by Nils Pratley, for theguardian.com on Monday 22nd February 2016 15.08 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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