Shadow of scandal hangs over HSBC results

HSBC took the total cost of compensating customers mis-sold insurance by the British banking industry close to an estimated £10bn, as its half-year results were overshadowed by $2bn (£1.3bn) of provisions.

Europe’s biggest bank also admitted revelations of weak anti-money laundering controls are “shameful and embarrassing” and set aside $700m (£445m) to pay penalties, after it was slammed by the United States Senate for a “pervasively polluted” culture which allowed clients to shift funds from dangerous and secretive countries, particularly Mexico.

“What happened in Mexico and the US is shameful, it’s embarrassing, it’s very painful for all of us in the firm,” said chief executive Stuart Gulliver. “We need to execute on the compliance changes and then prove ourselves worthy and rebuild this over a number of years. There are no quick and easy fixes.”

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He admitted the $700m charge could be “significantly higher”.

“The firm clearly lost its way in this regard and it’s right that we apologise,” said Mr Gulliver. “Colleagues internally have been aware that this is the backdrop of why we had to change the firm.”

The bank, which owns Leeds-based First Direct, was also forced to increase its compensation pool for customers mis-sold payment protection insurance (PPI) by $537m (£341.6m) in the three months to June, booking $1bn (£640m) of PPI provisions during the half and bringing its total charge to $1.7bn (£1.1bn).

Lloyds last week increased the amount set aside for PPI claims to £4.3bn. Together, HSBC, Lloyds, Barclays, Royal Bank of Scotland and Santander have set aside £8.8bn, and RBS looks set to increase this on Friday. Consumer body Which? estimates PPI compensation will cost banks £10bn.

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HSBC took a $237m (£150m) hit for mis-selling complex financial products known as interest-rate swaps to small businesses.

The bank reported underlying profits of $10.6bn (£6.7bn) in the first six months of the year, down three per cent on a year earlier, as it was knocked by the provisions.

In the UK the provisions drove HSBC to total losses of $1.6bn (£1bn), compared with profits of $1.1bn a year earlier.

Its retail banking division, which is tied up with its wealth management arm, grew mortgage balances strongly. Its share of new mortgage lending remained at 11 per cent.

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HSBC said it is managing to lend conservatively, with a loan to value ratio of 56 per cent.

First Direct played a growing part, with its market share of new mortgages increasing from 3.5 per cent to 3.9 per cent. That equated to £2.8bn of new lending during the half, up from £2.3bn a year earlier. A spokeswoman for the internet and phone-based bank said its total share of the UK mortgage market is now 1.5 per cent.

She added First Direct’s contribution to HSBC UK’s performance increased by 15 per cent, but did not quantify the lender’s profits.

“In terms of bad debt we continue along the same path as last year with the number of customers that we are seeing coming through with financial difficulties are record low numbers,” she said. “We’ve had a strong start to the financial year in the ongoing challenging conditions.”

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First Direct, headed by chief executive Mark Mullen, employs about 2,400 in Yorkshire.

The bank remains downbeat on the outlook for Europe and other Western economies, and expects the eurozone economy to contract in 2012. Mr Gulliver said the United States would achieve “sub-par” growth this year and next. China’s economy should have a “soft landing”.

Which? chief executive Peter Vicary-Smith said: “These latest figures from the banks show that PPI is now on course to become the biggest consumer financial scandal of all time.”

Returns belief boosts shares

Mr Gulliver reiterated his belief HSBC can hit its return on equity target of 12 to 15 per cent by the end 2013, boosting its shares.

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Despite the hefty provisions, shares in the bank closed up 2.3 per cent or 12p at 543.1p.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said: “HSBC has added to the emerging theme of the banking updates so far – strong headline performance partially offset by corporate contrition.”

Investec analyst Ian Gordon said the statutory results – an 11 per cent increase in pre-tax profits to $12.7bn - were “reasonable but not as good as Barclays”.

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