HSBC profits slump 14% after Madoff legal hit

HSBC has seen its quarterly profits drop 14% after a “disappointing” 1.1 billion US dollar (£827 million) hit from a lawsuit relating to the Bernard Madoff investment fraud.

The London-headquartered banking giant reported pre-tax profits of 7.3 billion US dollars (£5.5 billion) for the third quarter, down from 8.5 billion US dollars (£6.4 billion) a year earlier.

It said the fall in profits came after operating costs surged by nearly a quarter (24%) to 10.1 billion US dollars (£7.6 billion) due largely to mammoth legal provisions of 1.4 billion US dollars (£1.05 billion), the bulk of which was related to the Madoff lawsuit.

HSBC revealed on Monday it would set aside 1.1 billion US dollars (£827 million) following a court ruling related to a long-running lawsuit brought by investors who lost money in the Madoff investment scandal dating back more than 15 years.

The FTSE 100 listed lender also said operating costs were sent rising by one-off provisions including 300 million US dollars (£225 million) for a French investigation into dividend withholding tax treatment of “certain historical trading activities”, as well as 200 million US dollars (£150 million) for redundancy and other costs relating to an ongoing restructuring.

Finance director Pam Kaur said the charges for historical litigation and investigations were “very disappointing”.

She added there may eventually be some “variation” around the Madoff legal costs, but that the provision had been calculated with support from internal and external advisers.

The provision came after the bank lost part of an appeal in a Luxembourg court ruling last Friday.

It follows a case brought by Herald Fund SPC, which in 2009 sued HSBC Securities Services Luxembourg (HSSL), claiming losses of cash and securities linked to Madoff’s Ponzi scheme, which was one of the largest financial scandals in history.

HSSL now plans to pursue a second appeal before the Luxembourg Court of Appeal to contest the amount it may be required to pay.

Madoff, who died in prison in 2021, admitted in 2009 to defrauding thousands of investors of around 65 billion US dollars (£48.8 billion).

Despite the blow to profits, shares in HSBC lifted 3% in morning trading on Tuesday as it upgraded its outlook for some key performance measures, including higher-than-previously expected net interest income, as third quarter revenues of 17.8 billion US dollars (£13.4 billion) beat estimates.

Group chief executive Georges Elhedery said the bank remained “fully focused on helping our customers navigate new economic realities”.

He said: “We are becoming a simple, more agile, focused bank, built on our core strengths.

“The intent with which we are executing our strategy is reflected in our performance this quarter, despite taking legal provisions related to historical matters.”

The firm said it had little direct exposure to the private credit market in the US, which is causing concerns in the global banking sector after the recent collapse of two US firms – auto parts company First Brands and car dealer and lender Tricolor.

But Ms Kaur said her “biggest concern” was the knock-on impact of the private finance sector issues on other firms that might have exposure, which the bank is currently assessing.

She said the group was reviewing its exposure to smaller banks and hedge funds that have large credit businesses and is “monitoring the situation very carefully”.

The US firm collapses have raised concerns that the global private debt markets have been too active at lending at high interest rates, with fears that this could result in further firms going bust, leading to worries over a repeat of the sub-prime lending woes that sparked the 2008 financial crisis.

HSBC set aside one billion US dollars (£750 million) for debts expected to turn sour in its third-quarter figures, including commercial property loans in the UK and Hong Kong.