HSBC apologises, sets aside $2.47 billion more for compliance redress

HSBC Holdings, the British bank accused of helping drug lords in Mexico launder money, has apologised to investors for compliance failings and set aside US$2 billion ($2.47 billion) more to cover the costs of fines and redress.

The lender made a US$1.3 billion provision in the first half to compensate British clients wrongly sold payment-protection insurance and derivatives, London-based HSBC said as it posted an 8.3 per cent drop in net income.

It also made a US$700 million provision for US fines after a Senate committee found the bank gave terrorists, drug cartels and criminals access to the US financial system.

That sum may increase, chief executive Stuart Gulliver said.

"Regulatory and compliance events in the first six months of the year overshadowed financial performance," chairman Douglas Flint said.

"HSBC has made mistakes in the past, and for them I am very sorry."

HSBC is trying to estimate the costs of four scandals to hit the bank in the past year: the mis-selling of loan insurance as well as derivatives to individual customers, allegations that traders tried to rig Libor, and a Senate report that found the bank worked with firms linked to terrorism and hid transactions that bypassed sanctions against Iran.

Enforcement action "is completely at the discretion of the Department of Justice", Gulliver said.

The provision is "a best estimate based on the information we have today. The actual number could be materially higher".

"People have looked through the disappointment," said Nick Ziegelasch, who helps manage £2 billion at Killik & Co, including HSBC shares. "The underlying business, especially in Asia, is still doing pretty well."

Net income fell to US$8.44 billion from $9.2 billion a year earlier, missing the US$9.1 billion median prediction of 10 analysts surveyed by Bloomberg.

So-called underlying revenue, which excludes gains on disposals, movements in the valuation of HSBC's own debt, as well as currency movements, rose 4 per cent to US$34.8 billion, the lender said.

"The key area of weakness remains top line income growth, which at 4 per cent on an underlying basis remains too low," said Gary Greenwood, an analyst at Shore Capital in Liverpool, who rates the stock a hold.

"Excluding the additional customer redress and law enforcement provisions, underlying cost performance is improving."

Gulliver, who became chief executive in January 2011, is seeking to cut costs by US$2.5 billion to US$3.5 billion and revive profit by selling assets to focus on emerging economies in which the bank has a greater market share.

He has overseen 36 asset sales and closures so far, including the disposal of its US credit card unit to Capital One Financial.

Gulliver said he is "about 60 to 70 per cent" through the disposals programme and expects to deliver at the "upper end" of his cost-cut target.

Costs as a proportion of revenue were unchanged at 57.5 per cent, more than Gulliver's 48 per cent to 52 per cent target.

Barclays and Lloyds Banking Group have set aside a total of £5.6 billion to compensate clients sold payment protection insurance they didn't need.

Barclays last month paid a record £290 million in fines for manipulating the London interbank offered rate.

HSBC set aside an additional US$1 billion to compensate customers who were mis-sold payment protection insurance and US$240 million for those sold interest rate swaps that later lost them money.

In the case of payment-protection insurance, British regulators have found some customer clients were forced to buy, or didn't know they had bought, insurance to cover repayments on credit cards or mortgages they were taking out.

The bank had already made a US$717 million provision for so-called payment protection insurance compensation through the end of 2011.

Lloyds, Britain's biggest mortgage lender, increased provisions for customer redress by £700 million in the second quarter, bringing the total set aside £4.3 billion.

- Bloomberg

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