HSBC Q1 profit halves on higher bad loan provisions, including a 'Singapore corporate exposure'

HSBC cited credit losses from clients hit by the economic slowdown as a major cause of the profit plunge.
HSBC cited credit losses from clients hit by the economic slowdown as a major cause of the profit plunge.PHOTO: REUTERS

HONG KONG (REUTERS) - HSBC Holdings on Tuesday (April 28) warned of more earnings pain ahead after first-quarter profit nearly halved as it set aside a hefty US$3 billion (S$4.25 billion) in bad loan provisions due to the coronavirus pandemic.

Europe’s biggest bank said the outbreak would mean sustained pressure on its revenues as customer activity declined and lower interest rates squeezed margins, while noting increased fraudulent activity could lead to “potentially significant” credit losses.

The bleak outlook, shared by many lenders reporting earnings this season, underscored the scale of the problems facing the sector as it grapples with corporate borrowers in crisis, plunging stock and oil prices, as well as low interest rates.

HSBC’s new chief executive officer Noel Quinn faces additional hurdles as plans to cut costs through layoffs - part of a wider restructuring unveiled in February - have been put on hold due to the pandemic.

The bank increased its expected credit impairment charges for January-March by USUS$2.4 billion to US$3 billion - its highest quarterly level in nine years - and said total provisions for the year could range from US$7 billion to US$11 billion.

“No one really knows how the coronavirus will develop over the next three to six months and what scenarios will play out. It’s most important for us to be prepared for all scenarios - the optimistic and the less optimistic,” Quinn told Reuters.

“Only time will tell where in that range we will fall.”

Profit before tax for the quarter tumbled 48 per cent to US$3.2 billion, below an average analyst forecast of US$3.7 billion compiled by the bank. Revenue dropped 5 per cent to US$13.7 billion.

The results were also hit by the slide in oil prices as well as “a significant charge related to a corporate exposure in Singapore”, it said.

HSBC did not name the company, but the lender is among leading creditors to Singapore oil trader Hin Leong Trading (Pte) Ltd, which is reportedly under court-appointed supervision to restructure billions of dollars in debt following the collapse in the price of oil.

According to media reports, HSBC has the biggest exposure at about US$600 million to Hin Leong, which is under investigation by the Singapore police after its founder Lim Oon Kuin admitted to hiding about USUS$800 million in losses racked up in futures trading.

HSBC’s shares in London fell 1.4 per cent on Tuesday morning, after its Hong Kong-listed shares earlier rose 0.4 per cent, lagging a climb of more than 1 per cent in the benchmark Hang Seng Index.

“I think the management team are doing OK in the circumstances, said Hugh Young, managing director at Aberdeen Asset Management Asia, one of HSBC’s 20 biggest shareholders.

 

GLOBAL RECESSION IMPACT

The London-headquartered bank, which generates the bulk of its profits in Asia, said it plans to reduce its operating costs to mitigate the fall in revenue which is set to lead to “materially lower” profitability in 2020 than last year.

In February, HSBC laid out plans to cut 35,000 jobs. While many of those redundancies have been paused to avoid disruption and leaving staff unable to find work elsewhere, Quinn has cut some top level jobs and reshuffled others as he tries to prune HSBC’s complicated management structure.

The bank reiterated, however, that it will press ahead with plans to shift capital from underperforming businesses and reduce other costs.

HSBC’s sharply higher loan loss provisions follows similar moves by US lenders this month. The top four US banks set aside US$14.2 billion in loan loss provisions, with sales and trading revenue from investment banking the only silver lining as frenzied markets worldwide drove up commissions.

Rival UBS was one of those benefitting most from that silver lining, and on Tuesday it posted a 40 per cent increase in profits as ultra-rich clients shuffled portfolios to cope with the virus outbreak.