LONDON (Alliance News) - HSBC Holdings PLC Monday reported a rise in third-quarter pretax profit, despite a jump in operating expenses due to more than a billion pounds' worth of charges and provisions for matters including UK customer redress and UK regulators' investigations into alleged manipulation of the foreign exchange market.
In a statement, HSBC, which is the largest London-listed bank by market capitalisation, said it made a USD4.61 billion pretax profit in the quarter ended September 30, compared with USD4.53 billion in the corresponding period last year. Revenue, which refers to operating income before loan impairment charges, rose to USD15.78 billion from USD15.08 billion, while loan impairment charges and other credit risk provisions, fell to USD760 million from USD1.59 billion.
However, operating expenses increased to USD11.09 billion from, USD9.58 billion, as it set aside USD701 million in provisions for UK customer redress, including a further USD589 million for possible mis-selling in previous years of payment protection insurance policies.
HSBC said the further charge for PPI, a type of insurance that was meant to cover policyholders' debt repayments if they couldn't work, was due to claims management companies driving up claims.
The bank also took a charge of USD378 million relating to the "estimated liability" in connection with the ongoing foreign exchange investigation by the UK Financial Conduct Authority, following similar moves by US and UK peers.
"Discussions are ongoing with the UK FCA regarding a proposed resolution of their foreign exchange investigation with respect to HSBC Bank PLC's systems and controls relating to one part of its spot FX trading business in London. Although there can be no certainty that a resolution will be agreed, if one is reached, the resolution is likely to involve the payment of a significant financial penalty," HSBC said in a statement.
In a conference call with journalists, HSBC made clear that the USD378 million foreign exchange charge relates only to its interactions with the FCA.
"We continue to cooperate fully with regulatory and law enforcement authorities in the UK and other jurisdictions," HSBC said.
In France, HSBC Private Bank (Suisse) SA has been summoned to to appear before the French magistrates for "possible commencement of a criminal investigation" in connection with the inquiry by French magistrates regarding whether HSBC Private Bank (Suisse) SA acted appropriately in relation to customers who had French tax reporting requirements. HSBC said that it is possible that any fines, penalties or other terms imposed on the outcome of the hearing could be significant.
HSBC also booked a USD550 million charge under a September settlement with the US Federal Housing Finance Agency over the sale of residential mortgage-backed securities in the years leading up to the financial crisis.
HSBC's operating expenses have also been driven up by risk and compliance costs, as authorities and regulators around the world work to prevent a repeat of the financial crisis of 2007-2009. The bank's expenses include the costs of preparing for the stress tests on its financial strength across its operating areas, stricter compliance standards and higher wages in Asia and Latin America.
"Despite the rising regulatory expectations, I am confident that our business model remains sustainable and that we can deliver further value for our shareholders while meeting our obligations and protecting the future of HSBC," Chief Executive Stuart Gulliver said in a statement, adding that the bank is committed to making further savings by streamlining its processes and procedures.
On an underlying basis, which adjusts for effect of foreign currency translation, the fair value of the bank's long-term debt due to credit spread, and acquisitions and disposals, HSBC said pretax profit fell to USD4.41 billion, from USD5.00 billion.
Underlying revenue was flat at USD15.58 billion, despite a USD271 million impairment on HSBC's investment in Industrial Bank and USD213 million of provisions arising from the ongoing review of compliance with the Consumer Credit Act in the UK, as well as adverse fair value movements on non-qualifying hedges of USD19 million compared with "favourable movements" of USD168 million in the corresponding quarter last year.
Those items were partly offset by a "less adverse" debit valuation adjustment on derivative contracts of USD123 million, compared with USD151 million in the corresponding quarter last year, and a gain of USD91 million on the sale of US real estate accounts in the US run-off portfolio in retail banking and wealth management, compared with a USD3 million gain in the corresponding quarter last year.
Excluding those items, revenue increased by USD500 million, HSBC said, citing growth in its global banking and markets division, as well as in commercial banking.
In global banking and markets, higher revenue was driven by an 18% increase in markets as foreign exchange and equities both benefitted from increased client activity.
HSBC said the increase in commercial banking was driven by its home markets of Hong Kong and the UK, though revenue was lower in retail banking and wealth management due to the continued run-off of its US consumer and mortgage lending portfolio and in its global private banking division due to the repositioning of the business.
HSBC said performance in October was in line with the trends in the first nine months of the year.
The banking group paid a third interim dividend of USD0.10 per share, bringing the total for the first nine months of the year to USD0.30, equal to that paid for the same period last year.
HSBC shares were down 0.3 pence at 639.20 pence on Monday.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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HSBC Holdings (HSBA)