HSBC’s profits better than expected as compliance spending kicks in

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HSBC reported a better than expected 32 per cent rise in pre-tax profit for the third quarter, thanks to reduced costs from fines and settlements with regulators as heavy spending on compliance by Europe’s biggest bank begins to take effect.

HSBC said costs from regulatory punishments fell $1.4bn (£907m) from the third quarter of last year, showing progress on reforming its conduct at a time when the Government is keen to move on from the financial crisis to a more accommodative stance towards the industry.

Recent quarterly earnings reports for the bank have been marred by provisions for regulatory investigations, including allegations that HSBC and other banks rigged foreign exchange markets worldwide and that HSBC helped Swiss clients evade taxes.

The lender, which owns Leeds-based First Direct, said in a filing to the Hong Kong stock exchange its total spending on regulatory programmes and compliance rose to $2.2bn in the first nine months of the year, up 33 per cent from the same period last year.

Quarterly pretax profit was $6.1bn, up from $4.6bn in the same period a year ago, it said. That was more than the consensus estimate of $5.2bn, based on the average of analysts’ forecasts compiled by the bank.

Underlying revenues, though, fell 4 per cent to $15.1bn compared with the same quarter last year, hit by plunging stock markets and slowing economic growth in Asia.

“HSBC management have done a very good job of trying to correct its internal problems, but these results show no bank can improve revenues if the global economy is against it,” said Jim Antos, analyst at Mizuho Securities Asia in Hong Kong.

The earnings update gave investors a first chance to check on progress on the 10 goals HSBC’s management set itself in June, including reducing risk-weighted assets by 25 per cent, selling operations in Turkey and Brazil and cutting $4.5-5bn in costs.

HSBC said it was nearly 30 per cent of the way towards completing the reduction in its assets, and achieved $400m in overall cost savings versus the second quarter of this year.

Perhaps the most-watched of the ten goals by investors is the bank’s strategic review into whether it should move its headquarters out of Britain, with Hong Kong seen as the most likely destination.

HSBC said it had made progress on this but the decision could slip beyond the year-end deadline originally set, echoing comments made by chief executive Stuart Gulliver in October.

Richard Hunter, analyst at Hargreaves Lansdown, said: “Reshaping a banking behemoth such as this was never going to happen overnight, but there are further signs of progress at HSBC.

“The rundown of reducing risk-weighted assets is accelerating, regulatory fines and impairments are well under control for the period, whilst general cost cutting measures have contributed to a traditionally strong capital cushion. “Meanwhile, the dividend yield of 5.9 per cent is particularly punchy given the current interest rate environment and there are encouraging profit numbers year on year.

“Credit quality has not suffered despite the challenges within China and wider Asia, where the bank remains a core player.

“Less positively, those difficulties in Asia have had an inevitably negative effect on revenues in both retail and the investment bank, currency headwinds have reduced net interest margins and the ongoing costs of investment into risk and compliance programmes remain a drag.

“In terms of the share price, the whole Asian experience has been detrimental for HSBC of late. The shares are down 19 per cent over the last year, as compared to a 2 per cent dip for the wider FTSE-100 and have fallen 12 per cent in the last three months alone.

“Even so, and as evidenced by today’s update, the longer term prospects remain intact, as does the market consensus of the shares as a buy.”