HSBC reported a 17% fall in annual pretax profit and cut its profitability target, saying allegations its Swiss business had helped customers to dodge taxes had brought shame on the bank.
Results from Europe’s biggest bank yesterday reflected the cost of past misconduct and of protecting itself against the impact of further scandals. HSBC said allegations about its Geneva-based arm, raided last week by Swiss officials and now the subject of a UK inquiry, had badly damaged its image.
“A number of us, myself included, think the practices of the private bank back in the past are a source of shame and reputational damage to HSBC. I think shame would be reasonable noun to use,” chief executive Stuart Gulliver told reporters.
Gulliver was himself thrust into the centre of the scandal on Sunday when Britain’s Guardian newspaper said he had sheltered millions of pounds in HSBC’s Swiss private bank via a Panamanian company.
HSBC confirmed that Gulliver has a Swiss bank account and while there is no suggestion he broke any rules, the revelations come at a sensitive time. HSBC’s chairman Douglas Flint is due to appear before British lawmakers on Wednesday to answer questions about the bank’s alleged complicity in tax evasion.
Gulliver is among the highest paid bank executives in Europe with a pay packet last year amounting to £7.6mn ($11.7mn). This is down from £8mn in 2013 after his bonus was cut to reflect the bank’s failure to stamp out misconduct.
HSBC’s pretax profit of $18.7bn for 2014 was down from $22.6bn the year before and below the average analyst forecast of $21bn, after a $3.7bn bill for provisions, fines and settlements arising from a range of misdeeds, including attempted manipulation of foreign exchange markets.
With the US Department of Justice yet to finish its forex probe, HSBC added an extra $550mn to cover future forex-related fines and warned it could face a $500mn bill to compensate US customers sold debt protection products.
Gulliver, appointed CEO in 2011, has sold or closed 77 businesses and axed over 50,000 jobs to try and simplify HSBC’s sprawling business and boost earnings after higher capital requirements imposed since the financial crisis make it more difficult for large banks to make a profit.
Gulliver said the job was far from done, but rejected some calls from regulators or investors for breaking up big banks such as itself or JPMorgan.
“We’re still on a journey to simplify the firm ... and I don’t rule out that we might make more disposals.
“But I don’t think the firm is too big to manage. You can see the validity of the business on the revenue side, even if the cost of running (a big bank) has clearly gone up,” he said.
HSBC has increased the amount of capital it holds to absorb potential losses by over 60% since before the crisis. Gulliver said the bank intended to increase its core capital to between 12-13% from 10.9% currently, to give it enough reserves to deal with regulators’ demands
The bank cut its target for return on equity to more than 10% in the next 3-5 years from 12-15%, originally set in 2011. This measure of profitability fell to 7.3% in 2014 from 9.2% in 2013.
Gulliver said the bank needed to improve profitability in Latin America, Turkey and the US, and in areas of its commercial and investment bank.
Before the financial crisis returns in excess of 10% were the norm for large banks.
Group revenues were stable and the bank’s commercial banking division generated record profits but its global banking and markets division, which includes HSBC’s investment bank, reported a 38% drop in profits due to lower revenues and higher costs.
Underlying operating expenses were $37.9bn in 2014, up 6.1% from 2013, showing the struggle Gulliver is having to lower costs in the face of tougher regulation and the need for more compliance staff. That continues to depress returns.
It paid or set aside $3.4bn on items such as the forex fine and compensation for UK customers mis-sold insurance products.
