HSBC warns of growing risk aversion as profit drops
Tuesday, 5 August 2014 01:02
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LONDON (Reuters): Europe’s largest bank HSBC warned that regulators’ zeal to punish wrongdoing was putting its staff off taking reasonable business risks, as it reported a 12% drop in first-half profit.
HSBC Chairman Douglas Flint on Monday called on international regulators to clarify what they expected of bank staff after recent record sanctions for misconduct, including a $9 billion U.S. fine against France’s BNP Paribas, had left them fearful of retribution.
“There’s a creeping concern that staff are clearly very focused on the penalties for getting things wrong and are building risk-aversion into the way they think,” Flint told reporters on a conference call.
“We’ve got to avoid getting to the state where there’s a zero risk tolerance.”
Flint said rules that were too harsh could hurt lending in areas such as wealth management or commercial banking where products can be complicated. Industry sources have warned of unintended consequences from the regulatory clamp down, including the threat that lending will be cut to people or businesses in poorer countries.
Since the action against BNP Paribas for breaching U.S. sanctions, international banks have become hyper vigilant about following new rules, including recent moves by Washington and Brussels to freeze some Russian state-controlled firms out of western capital markets.
HSBC was fined a record $1.9 billion in 2012 for breaching U.S. sanctions on money laundering in Mexico and since then has pulled out of business areas and countries, including Panama, to cut the risk of future problems.
The bank said it is spending about $800 million a year more than in 2011 on compliance across its operations in 74 countries.
HSBC and its rivals still face the risk of future fines and legal costs from ongoing investigations, including a global probe into alleged manipulation in the foreign exchange markets.
Under new UK rules, the bank also has to separate its UK retail operations from its riskier investment banking arm and on Monday it warned of a substantial one-off cost to do that.
Chief Executive Stuart Gulliver said the split would also cost hundreds of millions of pounds each year, without giving a precise figure.
Lost revenues from closing businesses and a slowdown in investment banking pushed HBSC to a 12% drop in pretax profits in the six months to the end of June to $12.3 billion, just below an average forecast of $12.5 billion from 15 analysts polled by the company.
Overall, revenue dropped 9% to $31.2 billion, including disposals.
Replacing lost revenues is one of the biggest challenges for HSBC. Gulliver said they should pick up strongly about six months after interest rates in major markets rise. HSBC expects UK rates to start rising in the fourth quarter of this year and in the first half of 2015 in the United States.
Gulliver is in the second phase of a turnaround plan for HSBC that began in 2011, aiming to make the bank simpler, more efficient and able to deliver better returns and dividends for shareholders.
The strategy has helped boost the bank’s defences against future losses with its common core tier one equity ratio, a key measure of financial strength, rising to 11.2% from 10.8% at the end of last year and well above the regulatory minimum of 7%.
