HSBC Holdings Plc, the British bank accused of laundering money for Mexican drug lords, apologized to investors for compliance failings as it set aside $2 billion more to cover the costs of regulatory fines and lawsuits.
The lender made a $1.3 billion provision in the first half to compensate British clients wrongly sold payment-protection insurance and derivatives, HSBC said in a statement today as it posted an 8.3 percent drop in net income. It also made a $700 million provision for U.S. fines after a Senate committee found the bank gave terrorists, drug cartels and criminals access to the U.S. financial system, a sum Chief Executive Officer Stuart Gulliver said may increase.
“Regulatory and compliance events in the first six months of the year overshadowed financial performance,” Chairman Douglas Flint said in a statement today. “HSBC has made mistakes in the past, and for them I am very sorry.”
HSBC, like its British competitors Barclays Plc and Lloyds Banking Group Plc, has been ordered by regulators to compensate clients sold interest-rate swaps that cost them money and insurance on mortgages and credit cards they didn’t require.
The lender apologized on July 23 to U.S. Senators for anti- money after the bank was accused of giving terrorists, drug cartels and criminals access to the U.S. financial system.
HSBC is also one of more than a dozen named in probes into the manipulation of the London interbank offered rate, for which competitor Barclays was fined a record 290 million pounds ($456 million) last month.
Net income fell to $8.44 billion from $9.2 billion a year earlier, missing the $9.1 billion median prediction of 10 analysts surveyed by Bloomberg. Total operating income rose 3.2 percent to $43.7 billion.
HSBC rose as much as 1.3 percent and was up 0.4 percent at 533 pence at 533 pence at 11:10 a.m., lagging the 1.9 percent gain in the Bloomberg Europe Banks and Financial Services Index.
The bank’s European unit had a pretax loss of $667 million compared with a profit of $2.15 billion in the year-earlier period. HSBC said the economic outlook in the region will be “subdued.”
“Our assumption is that European leaders will take the necessary measures to preserve the euro but, even so, we expect the euro zone’s economy to contract this year,” Gulliver, 53, said in the statement.
Pretax profit at HSBC’s investment bank, overseen by Samir Assaf, increased to $5.05 billion from $4.81 billion. Wall Street’s five biggest banks, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., posted the lowest first-half revenue since 2008 in the first half of 2012 as trading and deal-making dried up.
HSBC set aside an additional $1 billion to compensate customers who were mis-sold payment protection insurance and $240 million for those wrongly sold interest rate swaps, Gulliver told reporters on a call today.
The bank had already made a $717 million provision for PPI compensation through the end of 2011. Lloyds increased provisions for customer redress by 700 million pounds in the second quarter, bringing the total it’s set aside to 4.3 billion pounds.
Gulliver has overseen more than 28 asset sales since he became CEO in 2011 to focus on emerging economies in which the bank has a greater market share, while targeting $3.5 billion of cost savings by the end of next year. The bank in May doubled its target for generating additional revenue from greater co- operation among its four businesses, including corporate and investment banking, to $2 billion.
Costs as a proportion of revenue were unchanged at 57.5 percent, more than Gulliver’s 48 percent to 52 percent target.
“Excluding the additional customer redress and law enforcement provisions, underlying cost performance is improving,” said Gary Greenwood, an analyst at Shore Capital in Liverpool who rates the stock a hold. “The key area of weakness remains top line income growth, which at 4 percent on an underlying basis remains too low.”
HSBC is the third of U.K.’s biggest lenders to report first-half earnings. Barclays, Britain’s second largest bank by assets, last week posted a 13 percent rise in pretax profit to 4.23 billion pounds. Lloyds, the country’s largest mortgage lender, posted an unexpected loss of 641 million pounds after setting aside more money to compensate clients mis-sold loan insurance.