HSBC Takes Out Huge Loan Loss Provision, First Quarter Profit Plunges

HSBC Holdings plc (HSBC) saw its first quarter profits tumble by almost half as the global coronavirus pandemic triggered a mountain of credit losses.

The London-based, Asia-focused bank posted a pre-tax profit of $3.2 billion, while revenue fell by 5% to $13.7 billion.

HSBC also noted its results were hurt by “a significant charge related to a corporate exposure in Singapore,” although it did not name the Singapore entity. (However, HSBC is one of the largest creditors of Singapore oil trader Hin Leong Trading, which has been placed under court-appointed supervision to restructure billions of dollars in debt due to collapsing oil prices).

Europe’s largest bank set aside $3 billion in loan loss provisions in the first quarter -- its highest quarterly figure since the eurozone debt crisis nine years ago -- and warned it may have to write off up to $11 billion in bad loans for the full year (up from $2.76 billion for all of last year)

“The economic impact of the Covid-19 pandemic on our customers has been the main driver of the change in our financial performance since the turn of the year,” said HSBC’s Chief Executive Officer Noel Quinn. “The resultant increase in expected credit losses in the first quarter contributed to a material fall in reported profit before tax compared with the same period last year.”

HSBC further warned that as a result of the pandemic its performance will remain under pressure.

“The outlook for world economies in 2020 has substantially worsened in the past two months. The impact and duration of the Covid-19 crisis will likely lead to higher [expected credit losses] and put pressure on revenue due to lower customer activity levels and reduced global interest rates,” the bank said.

These factors will lead to “materially lower” profitability in 2020 compared to last year.

“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,” added Quinn.

HSBC Chief Financial Officer Ewen Stevenson said the full-year loan loss provision estimate is “very much premised on views on how long and how severe the economic impact is of Covid-19, and really the shape of the recovery that we see.”

Stevenson noted that although China and Hong Kong may have reached a point of recovery, western Europe, U.K. and U.S. may see the pandemic worsen in the second quarter. “But then there’s a very wide spectrum of what happens [after] that including the risk of what’s called ‘the second wave’ in some countries.”

Stevenson further noted that the pandemic has created a kind of crisis that not even the Bank of England’s annual stress tests could have anticipated.

“We’re now seeing, for example, unprecedented levels of government support and intervention into the global economy, which wasn’t imagined in the [annual cyclical scenario] scenario,” he explained.

Hugh Young, managing director at Aberdeen Asset Management Asia, one of HSBC’s 20 biggest stockholders, said he thinks “the management team are doing okay in the circumstances.”

HSBC also said it will review its decision to suspend dividends in the fourth quarter. Like many large banks, HSBC was compelled by U.K. regulators to refrain from paying out dividends during the crisis. Analysts at Barclays think HSBC’S current $0.51 dividend level could be “permanently rebased” in 2021.

However, the bank also said that it will delay or pause earlier announced plans to cut 35,000 jobs in order to avoid disruption and to give staff more time to find work elsewhere. Still, Quinn has already fired several senior bankers and reshuffled others.

“I take the well-being of our people extremely seriously,” Quinn said Tuesday. “We have therefore paused the vast majority of redundancies related to the transformation we announced in February to reduce the uncertainty they are facing at this difficult time.”

But Simon French, chief economist at Panmure Gordon of London, said the pause in job cuts will be a mixed blessing.

"This is probably the best bit of news in the whole results for employees," he said. "But while it's good news for employees it isn't necessarily good news for shareholders and a return to higher profitability."