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Last updated: November 5, 2012 6:40 pm
HSBC is bracing for a settlement with US regulators that could top $2bn, according to analyst estimates, as the UK bank seeks to draw a line under months of uncertainty over the penalties it faces from its involvement in alleged money laundering and other rule breaches.
But investors appear sanguine about the financial impact of the affair. “The final number could be $2bn or even $3bn, but it wouldn’t hurt the fundamental financials of the bank,” said one leading banks analyst, pointing to HSBC’s $166bn equity buffer and recovering underlying performance.
HSBC on Monday added $1.1bn to its provisions to cover US fines and UK compensation to those who have been mis-sold payment protection insurance, dragging down profits for the third quarter of the year.
UK PPI provisioning increased by $353m, taking HSBC’s total charge so far to $1.8bn and the total across Britain’s big banks to more than £11bn.
But the bulk of the provisions comprised an $800m top-up to set aside a total of $1.5bn to pay for the anticipated fine from US authorities for a range of breaches, including a failure to prevent the laundering of Mexican drug money.
HSBC warned that the final fine could be much larger. “The US authorities have substantial discretion in deciding exactly how to resolve this matter. Indeed, the final amount of the financial penalties could be higher, possibly significantly higher, than the amount accrued,” Stuart Gulliver, chief executive, said.
US officials have suggested that a settlement with the bank could be finalised within the coming weeks.
The additional provisioning came as HSBC announced pre-tax profit for the three months to the end of September down 51 per cent to $3.5bn, taking return on equity down from 13.2 per cent to 5.8 per cent.
However, on an underlying basis – stripping out a negative $1.7bn impact from the improved value of the bank’s own debt and a small gain on disposals during the quarter – profits more than doubled from $2.2bn to $5bn.
Loan impairment charges fell sharply – to $1.7bn from $3.9bn a year earlier.
The closely watched cost-income ratio, a key measure of Mr Gulliver’s mission to improve the efficiency of the traditionally lumbering bank, rose to almost 71 per cent in the third quarter, compared with less than 50 per cent a year earlier, reflecting the provisioning. But analysts put the “clean” number, stripping out all exceptionals, at 56 per cent.
HSBC said it had now made annualised cost savings of $3.1bn, which it said should help the bank exceed its targeted savings range of $2.5bn to $3.5bn by the end of next year.
Core tier one capital – the key measure of financial strength – was 11.7 per cent as at end-September, up from 11.3 per cent at the midyear point. The bank maintained its 9 cent a share quarterly dividend.
HSBC shares fell 1 per cent to 618p in London.
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