HSBC’s profits fell short of expectations in the third quarter after the bank set aside $1.8bn for misconduct settlements and compensation for customers, including a potential fine for rigging currency markets.
The provision and a jump in HSBC’s everyday compliance costs show the impact of regulators’ increasing efforts to clamp down on bad behaviour in the global banking industry that contributed to the financial crisis.
HSBC said yesterday it had spent $700mn more this year on compliance and risk than a year ago, and that level of expense looked set to stay, meaning it would miss one of its main cost targets.
“The cost base of a global bank like ourselves is higher than it was before, because ... it includes a significantly higher compliance and regulatory cost than historically the banks had invested in,” chief executive Stuart Gulliver said.
“It reflects the fact that standards, foreign policy etc, all evolve in a world that is a lot less certain than it was 10, 15 years ago.”
HSBC’s third-quarter underlying earnings fell 12% from a year ago to $4.4bn, after operating expenses jumped 15% on the year.
That included a $378mn provision for the forex investigation, $589mn to compensate British customers who were mis-sold payment protection insurance products and a $550mn settlement in the US for mis-selling mortgage-backed securities.
Gulliver said the bank was likely to miss a target set out 18 months ago to get costs down to about 55% of revenues by 2016. He said it was more likely to be in the high 50s or near 60%. It was 62.5% so far this year.
HSBC added 1,400 more compliance staff in the third quarter and now had 24,800 staff in risk and compliance, or one in 10 of its employees.
HSBC said its forex investigation provision covered “detailed” talks with Britain’s financial regulator about alleged manipulation in the $5.3tn-a-day forex market.
The talks were in relation to systems and controls in one part of its spot forex business in London, it said. Last month HSBC fired two traders in London, sources said.
It is one of six banks in talks with the regulator to pay about £1.5bn ($2.4bn) in a coordinated settlement, sources have said.
HSBC said the increase in its provision to compensate British customers for payment protection insurance mis-selling — which takes its bill for this to almost $4bn — was due to a “very significant step up” in claims made by claims management companies in August and September.
The bank’s adjusted third-quarter revenues were flat at $15.6bn, aided by a rise in income at its investment bank, corporate bank and an increase in lending, notably in corporate loans in Hong Kong and Britain, its two “home” markets.
Gulliver said protests in Hong Kong did not change HSBC’s view on its business there. “This does not for us represent any moment of reconsideration of our commitment to Hong Kong.”
Unlike Asian-focused rival Standard Chartered, which reported a surge in its bad debts in the third quarter, largely due to weak commodity markets, HSBC’s loan impairment charges more than halved to $760mn compared to the same period a year ago.
Audi
Audi’s profitability slipped during the third quarter as spending on plants and models outweighed gains from record sales of luxury car sales. Q3 operating profit was up 5.5% to €1.16bn.
Audi, part of the Volkswagen group, is spending over €1bn ($1.3bn) on new plants in Mexico and Brazil, and may for the first time build more cars outside Germany than within its home country in 2014.
Volkswagen’s flagship division and source of about 40% of its profits, Audi overtook Mercedes-Benz in 2011 to become the world’s second biggest premium automaker behind BMW.
Profit as a proportion of sales at Audi eased to 9.2% in the third quarter, from 9.4% a year ago, the car maker said yesterday.
Audi also raised its revenue guidance, predicting a “moderate” increase in revenue which totalled €49.9bn last year. The brand had previously forecast a “slight” gain in 2014 revenue.
Europe’s luxury car makers avoided the worst of the downturn in their home region, thanks in part to strong demand from the US and emerging markets.
Still, some €22bn of planned spending on models, plants and technology through 2018 means Audi’s operating margin may return to its 8-10% target range from 10.1% in 2013 and 11% in 2012, Audi said.
While quarterly sales were up 7.2% to 429,295 cars on demand for sport utility vehicles (SUV) such as the Q5 and higher-priced models including the A6 saloon, Audi has seen its overall 2014 sales lead over Mercedes shrink to 103,494 cars after nine months, from 118,110 a year ago.
Some of Audi’s models have peaked and the brand has pushed planned overhauls of its top-selling A4 model and the Q7 SUV into 2015.
After running over 90 extra shifts at its two main Germany-based assembly plants this year, Audi in September raised its delivery target to over 1.7mn autos from a record 1.58mn in 2013, relying on demand from China and Europe where it leads the premium segment.
Ryanair
Ryanair raised its annual profit forecast almost 20% yesterday thanks to a surge in winter bookings as the budget airline pioneer said improvements to its much criticised customer service were paying off.
The Irish airline built its business on the back of low fares combined with austere service but shifted strategy when it became apparent that its growth had stalled as customers were tiring of its charmless approach.
Since a pledge last year by outspoken chief executive Michael O’Leary to stop “unnecessarily pissing people off,” Ryanair has slashed penalty charges, overhauled its web site, tripled its marketing budget and launched business class fares.
That has helped the airline to boost ticket fares by 5% in the six months to September and is set to help it sell 2mn more seats than originally planned in the six months to March, O’Leary said.
Ryanair, Europe’s largest airline by passenger numbers, forecast its profit after tax would be between €750mn and €770mn in the year to March 2015.
That was up from a previous forecast of €620mn to €650mn and well ahead of an average forecast of €694mn ($867mn) in a company poll of analysts.
In addition to improved service, Ryanair plans to use its sheer scale to gain market share during the traditionally weak winter season.
The airline bumped up its forecast for winter passenger growth by 2.2mn, to increase its full-year passenger numbers to 89mn, up 8.5% on last year.
It will cut fares by up to 5% in the last three months of the year and by up to 10% in the three months to March to build momentum on new routes.
A new business class fare unveiled over the summer, which gives passengers a number of perks for an extra €50, should help boost winter demand and make the business less dependent on summer holidaymakers, O’Leary said.
Fleet expansion is focused on high frequency flights to primary airports used by business travellers rather than the cheaper regional airports that dominated Ryanair’s network in the past.
Profit after tax for the six months to September, the first half of Ryanair’s financial year, was up 32% to €795mn, just below an average forecast of €799mn in a company poll.
A significant factor in the improvement was a change of policy to sell more tickets earlier, a policy which has reduced the number of empty seats on planes and increased last minute fares, O’Leary said.
The airline said it had attempted to lock in recent falls in the price of oil, hedging 90% of its fuel needs for the year to March 2016 at around $93 per barrel and would try to extend that further in the coming months.
Holcim
Switzerland’s Holcim has received more than 60 bids for assets it must sell to win regulatory approval for a merger with Lafarge, the cement company said as it reported third-quarter results that missed expectations.
Sales and profit were hurt by a weaker than expected recovery in Europe, illustrating the need for the planned merger with Lafarge to increase their pair’s access to faster-growing emerging markets where infrastructure spending is on the rise.
The mooted merger will create the world’s top cement group with $44bn in annual sales, helping to reduce costs and better cope with the overcapacity and sluggish demand that have dogged the sector since the 2008 economic crisis.
To steer the deal past antitrust regulators, the pair have drawn up a list of assets they plan to sell, representing about 12% of combined sales.
Holcim’s chief financial officer Thomas Aebischer told reporters that the company had received more than 60 bids by the October 20th deadline to submit non-binding offers.
He said the two groups want to finish the due diligence process by the end of November or the start of December, with the aim of reaching agreement with the winning bidder or bidders by the end of this year or the start of next year.
“We prefer only one bidder, the one with the highest bid,” Aebischer told reporters, adding that offers had come from a mixture of sector rivals and private equity players, without identifying any interested parties.
German rival HeidelbergCement said yesterday that it does not intend to bid, preferring to concentrate on cutting debt and advancing its own growth projects. Mexico’s Cemex has also ruled out a bid.
Several private equity groupings have been formed to pursue a deal for the assets, which could be valued at anywhere between €4bn ($5bn) and €7bn, according to sources familiar with the matter.
Holcim was giving details on the progress of the sales process as it reported a 2.1% fall in third-quarter revenue to 5.18bn Swiss francs ($5.4bn), falling short of the average forecast of 5.27bn francs in a Reuters poll.
Adverse foreign-exchange moves, including a fall in emerging market currencies against the Swiss franc, have also weighed on results this year and wiped 1.05bn francs off revenue in the first nine months.
Net income attributable to shareholders fell 4.7% to 447mn francs in the third quarter, also shy of the poll estimate for 459mn francs.
Sky Deutschland
German pay-TV company Sky Deutschland reported its first quarterly net profit since 2007 yesterday as it prepares to be absorbed into a European media giant being formed by Britain’s BSkyB.
Sky Deutschland, currently controlled by Rupert Murdoch’s entertainment group 21st Century Fox, booked a net profit of €12.3mn ($15.4mn) in the three months to September 30, the first quarter of its fiscal year.
Chief executive Brian Sullivan warned that Sky Deutschland will have some loss-making quarters before posting annual net profit. “The reality is that we will go in and out of net income for the next quarters before posting annual net profit,” Sullivan told reporters in a conference call.
Sky Deutschland is in the process of being combined with other parts of Murdoch’s European pay-TV empire in Britain and Italy.
BSkyB, itself 39% owned by Fox, agreed in June to pay $9bn for Rupert Murdoch’s 57% stake in Sky Deutschland and all of Sky Italia to create a media powerhouse with 20mn customers.
BSkyB has made a €6.75-offer for Sky Deutschland which is to expire at midnight German time (2300 GMT) yesterday.
BSkyB has said it will acquire at least 68.8% of Sky Deutschland shares based on the 21st Century Fox stake and other commitments it has received.
Sky Deutschland’s net subscriber numbers increased by 96,000 during the first quarter of the 2014/15 fiscal year.
Like its British counterpart, Sky Deutschland has been using sports rights to help build its business.
The broadcaster said it set a new record for live viewing of domestic Bundesliga soccer after the German national team won the World Cup. In the first weekend of matches, played in August, more than 4mn viewers tuned in to the live matches, which Sky said was its best season opening ever.
Westpac Bank
Australian banking giant Westpac yesterday posted a 12% jump in full-year net profit to A$7.56bn (US$6.60bn), driven by growth in lending volumes and customer deposits.
The result in the 12 months to September 30 compared to A$6.82bn the previous year, with chief executive Gail Kelly hailing it as “high quality” at a time of slower global growth.
Cash earnings — the measure more closely watched by analysts, which strips out volatile items — were up eight% at A$7.63bn, slightly above expectations.
The result follows a bumper annual net profit last week for ANZ Bank, up 15% to A$7.3bn, although National Australia Bank’s yearly profit shrunk 1.1% to A$5.3bn due to hefty UK write-downs.
With the nation’s biggest lender, Commonwealth Bank, posting a 13% jump in full-year net profit to a record A$8.63bn in August, their collective profits soared to some A$28bn for 2014, despite a slowing economy.
Revenue jumped 7% on the previous year to A$19.94bn.
The company announced a final dividend of 92¢, taking its annual payout to shareholders to A$1.82 per share, joining the other big banks in boosting rewards for investors.
Investors though were disappointed, with the share price sliding 0.66% to close at A$34.55.
Westpac, the country’s oldest bank and second largest by market capitalisation, said all divisions performed well over the year.
PostNL
Dutch mail company PostNL reported increased profit and revenue in the third quarter as price hikes, cost cutting and growth in its parcels business compensated for falling volume in its core Dutch mail business.
PostNL said underlying cash operating income doubled to €34mn ($42.5mn) from the year before, on revenue of €988mn, up from €969mn a year earlier. It stuck to its second-quarter guidance that it would earn full-year profit of between €260mn and €290mn.
“Our addressed mail volumes in Mail in the Netherlands declined by 11.1%. Reduction of our cost level remains necessary to compensate for the ongoing volume decline in Mail in the Netherlands,” said PostNL chief executive Hema Verhagen in a statement yesterday.