HSBC profits eroded by deluge of regulatory conduct fines

HSBC’s lacklustre trading performance was overshadowed by the continuing scandal over the activities of its Swiss private bank in helping clients avoid tax

HSBC shares tumbled yesterday after the scandal-racked bank announced a 17 per cent fall in profits.

The shares settled down 28p at 577.2p, a fall of 4.6 per cent. Barclays, Lloyds and Royal Bank of Scotland rubbed salt into HSBC’s wounds by recording share price rises ahead of their own results.

The bank made $18.7bn (£12.1bn) in profit before tax in 2014, against $22.6bn the previous year. The majority of the slide – more than $3bn – was as a consequence of regulatory fines and customer redress payments, on both sides of the Atlantic.

However, HSBC has also struggled with a higher cost base and a rotten final quarter of 2014, which its chief executive, Stuart Gulliver, argued had “masked some of the progress made over the preceding three quarters”.

He said: “Many of the challenging aspects of the fourth quarter results were common to the industry as a whole.”

HSBC’s lacklustre trading performance was overshadowed by the continuing scandal over the activities of its Swiss private bank in helping clients avoid tax. Further fuel to that fire was added after it emerged that Mr Gulliver had an account there through a Panama-based company.

But it is the disappointing financial results that will be high on the minds of investors, as the company does the rounds of its big shareholders over the coming weeks.

Investors will have been further spooked by the bank lowering its goals going forward, particularly the targeted return on equity of 12 per cent to 15 per cent set in 2011, when Mr Gulliver took charge. It has now been reduced to an aspiration of “more than 10 per cent”.

Mr Gulliver said this reflected higher demands for capital from regulators, a zero interest rate environment and rising costs.

Despite Mr Gulliver’s claims of an industry-wide slow down in the fourth quarter, Investec analyst Ian Gordon described the bank’s reported profits as “very weak” at $1.7bn. Investec had forecast $3.9bn.

Mr Gordon warned in a note following the results’ release that there may yet be more pain to come: “Against such lowered expectations, we still see scope for material disappointment, notably in [the] Global Banking & Markets [division].”

Revenues at that unit, Mr Gordon noted, fell 29 per cent against the third quarter, or 23 per cent against the fourth quarter of 2013, to $3.3bn.

Despite the ongoing scandal, Mr Flint said it would be “inappropriate” for Mr Gulliver’s pay to be docked because he was not in charge of the bank at the time when the Swiss private bank was allegedly facilitating tax evasion. His total remuneration package came in at £7.6m, barely down on the previous year’s £8m, even in the face of the disappointing earnings performance and fines. It included a base of £1.25m and a “fixed allowance” of £1.7m, new for 2014. The practice of paying these allowances is widely seen as being an attempt by banks to circumvent the European Unions’s cap on bankers’ bonuses.

HSBC also revealed that 209 of its top staff were paid at least £1m. Of these, 97 are in the UK. The bank’s chairman, Douglas Flint, was paid £2.53m, up from £2.43m in 2013. The rise was largely due to a sharp increase in personal “allowances” triggered by an increase in the valuation of his company vehicle, which is no longer judged as a “pool car” for taxation purposes.