HSBC pays high price for its past violations

HSBC Middle East, the bank’s regional operation, reported a 9.5 per cent fall in pre-tax profits to $1.35bn compared with a year earlier. Delores Johnson / The National

HSBC's profits fell last year as fines and penalties to atone for past bad behaviour caught up with the global lending giant.

In the Middle East, the bank also reported a substantial drop in income as a result of write-downs and poor performance at its investment unit.

The biggest bank in Europe by market capitalisation, HSBC’s full-year net income fell 5.5 per cent to US$20.6 billion (Dh75.66bn).

The decline follows $1.9bn of penalties after the bank was targeted in a major money-laundering probe in the United States and made settlements for customer redress in the United Kingdom after a misselling scandal. The profits missed analysts’ estimates of $23.4bn.

“During 2012, the banking sector, including HSBC, faced continuing and in many ways unprecedented challenges,” said Douglas Flint, the group chairman. “Banking has been given a huge wake-up call and we are determined to play our part in restoring its reputation and there by regaining society’s trust.”

Mr Flint waived his bonus for the year, although HSBC’s chief executive Stuart Gulliver will receive annual incentives and long-term benefits of £4.95 million (Dh27.35m). Mr Gulliver’s total pay packet fell from £8m to £7.4m for 2012.

HSBC Middle East reported a 9.5 per cent fall in pre-tax profits to $1.35bn compared with a year earlier, after a substantial fall in income at its investment banking unit and a $85m investment loss on an unnamed subsidiary.

The bank had been kept busy during the year with several acquisitions and exits, said Simon Cooper, HSBC Middle East’s chief executive.

“Against this background, we delivered $1.4bn of profit in the Mena region. Although this was slightly down on 2011, as a business, we’re in a strong position and I’m confident at the opportunities for growth in 2013,” he said.

“During the year, we exited and restructured a number of different businesses in the region. In addition, we’re advanced in a programme of derisking in all of our businesses, we’ve improved the quality of our assets and achieved $70 million of sustainable cost saves.”

Said the bank: “During 2012, we focused on simplifying our operations in the Middle East and North Africa by disposing of non-strategic businesses and continuing to improve our organisational efficiency while investing in strategic acquisitions.”

HSBC sold its regional private equity business in December, exited operations in Pakistan and shrank the size of HSBC Amanah, its Islamic banking unit.

During the year, the bank acquired Lloyds Banking Group’s retail and commercial banking operations in the UAE, and merged HSBC’s Omani operations with Oman International Bank.

Lending increased by 8.5 per cent to $28bn as levels of bad debts sank. “In the Middle East and North Africa, renegotiated loan balances decreased, partly due to the repayment of a significant loan in the UAE,” HSBC said.

The bank’s fee income decreased by 4 per cent as its investment banking and securities services divisions cut fees amid lacklustre deal activity.

The bank was the region’s biggest bond underwriter last year, taking a 26 per cent share of the market for new issuances in the Arabian Gulf and 42 per cent of new sukuk sales.

The bank raised its dividend by 10 per cent to a total payout of $8.3bn. However, HSBC’s London-listed shares fell 2.1 per cent to 712.80 British pence each in noon trading.

The sell-off was likely the result of lack of clarity over the bank’s use of capital, as the bank bolstered its capital ratios, said one London-based analyst.

Although the bank had set aside large sums of capital to deal with any future fines – such as the Libor rate-fixing scandal, over which HSBC is involved in discussions with multiple regulators – analysts said that HSBC was well-positioned for any future penalties.

“They’re random nowadays,” the analyst said. But as one of the few banks big enough to absorb fines from regulators, “you’d still want to own HSBC [shares].”