HSBC profits plunge 96% as loan-loss provisions jump on coronavirus

Europe’s largest bank warns of impact of US-China friction as crisis hits loans

Stephen Morris in London and Primrose Riordan in Hong Kong

HSBC has been caught in the middle of tensions between the US and China © Reuters

HSBC unveiled an almost seven-fold jump in reserves for bad loans and a precipitous drop in second-quarter profit, as Europe’s largest lender laid bare the damage inflicted by the coronavirus crisis.

The bank, which is also caught in the crosshairs of escalating tensions between the US and China, said on Monday that provisions for potential loan losses surged to $3.8bn in the quarter, about $1bn more than analysts had expected.

The move means HSBC so far has set aside $6.9bn for souring loans in 2020 and the bank raised its forecast for provisions for the full year to between $8bn and $13bn, reflecting “the deterioration in consensus economic forecasts”.

The bank also said it planned to “accelerate” its 35,000 job-cuts programme announced earlier this year and may consider further restructuring measures to trim costs. 

Chief financial officer Ewen Stevenson told the Financial Times the bank was expecting a “much sharper” V-shaped recession, with any recovery pushed further out into 2021.

He said the deepening pessimism was driven “by the path of Covid, whether we can see the path to an effective vaccine, the outlook for Brexit . . . big events that we expect to have clarity on in the next six months, which will have a meaningful impact”.

HSBC’s sharp increase in provisions echoed those of European peers. Last week Santander boosted reserves to €7bn, Barclays to £3.7bn and Lloyds to £3.8bn. The six-largest US lenders collectively provisioned $61bn in the first half, levels last seen after the 2008 financial crisis.

As a result, HSBC’s second-quarter net income was almost wiped out, plunging 96 per cent to $192m, far below the $1.3bn expected by analysts. Revenue fell 4 per cent to $13bn largely due to a decline in retail banking income, which was partially offset by a surge in trading at the investment bank.

“We realise that the revenue scenario we now face post-Covid is more challenged, so we will look at what we announced in February and what other [strategic] actions we may need to take in response,” chief executive Noel Quinn told the FT.

The stock fell 6.5 per cent in London following the earnings announcement, to its lowest level since 2009. The shares have dropped 42 per cent this year as the bank has battled Covid-19, ultra-low interest rates and a confrontation between China and the west over Hong Kong, its most important market.

The results reflect a “bleak outlook” for the company, said RBC analyst Benjamin Toms. The share price fall is “partially driven by renewed friction between the US and China after [President Donald] Trump announced a plan to ban TikTok” over security concerns about the video app. 
While based in London, HSBC makes the vast majority of its earnings in Asia. For the past five years it has been reducing investment in the US and Europe and redeploying assets to mainland China.

The bank on Monday pointed to the risk of being caught between the two powers after Beijing introduced a controversial national security law in Hong Kong. Washington has responded to the legislation — which HSBC publicly backed, breaking with its longstanding policy of neutrality — by threatening sanctions against Chinese and Hong Kong government officials.

Hong Kong’s national security law makes it illegal to co-operate with foreign sanctions regimes, a potential complication that creates “additional risks for the group”.

“Disagreements over trade, technology, human rights and the status of Hong Kong could result in people, sanctions, regulatory, reputational and market risks for the group,” the bank said in its earnings release. 

Line chart of Share price (pence) showing HSBC flirts with lowest level since spring 1996

“HSBC has to operate in a difficult geopolitical environment. Current tensions between China and the US inevitably create challenging situations for an organisation with HSBC’s footprint,” Mr Quinn said. 

Mr Quinn said it would obey the controversial national security law and Mr Stevenson pointed out that despite being caught in the crossfire, the bank has posted three quarters of consecutive revenue growth in mainland China. Deposits also grew in Hong Kong in the quarter.

“It’s very hard to point to any meaningful impact at the moment on the business,” said Mr Stevenson. “We are very pleased with the resilience of Asia for us more generally.”
Still, the deteriorating economic outlook is a serious challenge for Mr Quinn, who was named chief executive earlier this year with a mandate to speed up a revamp of the bank.

HSBC said uncertainties due to the coronavirus pandemic could also “adversely affect” its dividend policy, which it will not re-evaluate until the end of the year.

Pressure from the Bank of England forced HSBC to cancel its dividend for the first time in 74 years. The move angered its large retail investor base in Asia and reignited a debate among executives over whether the lender should move its domicile to Hong Kong.

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