Profits at HSBC nearly halved and the bank increased its provisions for bad loans for the first quarter by more than 400 per cent due to the coronavirus crisis, as it delivered a stark warning on future performance. The London-based lender on Tuesday reported pre-tax profit of $3.2bn for the quarter, down 48 per cent on the same period last year.
Return on tangible equity, a key measure of profitability, fell to 4.2 per cent in the period, from 10.6 per cent in the first quarter last year. “Should the Covid-19 outbreak continue to cause disruption to economic activity globally through 2020, there could be further adverse impacts on our income,” HSBC said.
The bank said it had set aside $3bn to cover bad loans, an increase of 417 per cent from $585m in the same period last year. It blamed “corporate exposure in Singapore” that it did not detail but said this “was the primary driver” of a $700m increase in expected loan losses in Asia. HSBC has the biggest known exposure to scandal-hit Singapore oil trader Hin Leong at $600m.
The pandemic has also hit HSBC’s 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 and, while Italy’s UniCredit set aside an additional €900m, a far greater increase from the same period last year.
Some executives and investors have expressed concern that the virus outbreak could delay or derail HSBC’s long-awaited strategic revamp, unveiled in February. Noel Quinn, chief executive, described it as one of the “deepest restructurings” in HSBC’s 155-year history, which saw it double down on the bank’s pivot to Asia and shrink less profitable operations in Europe and the US.
Though based in London, HSBC generates more than four-fifths of its profits from Asia, in particular Hong Kong. The bank 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 temporarily delayed parts of this cost-cutting programme.
On Tuesday, the bank said its operating expenses were $400mn lower than the same period last year at $7.9bn, but this “included favourable foreign currency translation differences of $0.2bn”.
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 Asia retail investor base, who are threatening a legal challenge. It also reignited a debate among top bank executives over whether it should redomicile to Hong Kong.
Christopher Cheung, a Hong Kong lawmaker representing the financial services sector, told the Financial Times that “HSBC has lost the trust of Hong Kongers’ hearts”, even though he did not think the legal challenge would be successful. The bank — which has said it would not make any quarterly or interim dividend payments until the end of the year — warned that if the crisis were to become protracted it could have an “adverse effect” on future dividends.
HSBC had been looking to bounce back in early 2020 following a pre-tax loss of $3.9bn for the fourth quarter of 2019, after taking a $7.3bn writedown on the value of its investment and commercial banks in Europe.