Adjustments to the fair value of its own debt put a serious dent in the third quarter profits of banking giant HSBC, while the final size of the money laundering fine in the US is casting an enormous shadow over the group.
Reported profit before tax of $3,481m in the third quarter was about half the $7,155m on the corresponding period of 2011, with the group taking a paper-based $5.8bn hit relating to adverse movements on the fair value of its own debt - effectively an increase in the amount it would cost HSBC to go into the market and buy back its own debt,
Underlying profit before tax of $5,043m was up 125% on the third quarter return of $2,239m of last year, but a bit below the $5.2bn the market had been expecting.
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Reported revenue of $14,566m was down 27% on the $19,947m racked up a year earlier, while underlying revenue rose 20% to $16,127m from $13,449m the year before. The underlying revenue figure was in line with market expectations.
"The increase in underlying profit was driven by revenue growth in Global Banking and Markets, mainly in Rates and Credit as conditions in the Eurozone stabilised relative to 3Q11 [third quarter of 2011], and in Commercial Banking, where net interest income rose, reflecting higher average lending and deposit balances. We continued to grow in a majority of our priority markets. In addition, loan impairment charges reduced significantly compared with 3Q11, mainly in North America," revealed HSBC Group Chief Executive, Stuart Gulliver.
The group made an additional provision of $800m in the third quarter relating to the US anti-money laundering, Bank Secrecy Act and Office of Foreign Assets Control investigations, bringing the year-to-date total up to $1.5bn. Gulliver admitted that the final amount of the financial penalties could be "possibly significantly higher" once the investigations have been completed. The group also set aside a further $357m during the quarter in respect of payment protection insurance (PPI) mis-selling claims.
Diluted earnings per share tumbled to 13 cents from 31 cents in the preceding quarter and 28 cents a year earlier. The quarterly dividend has been left at nine cents.
HSBC said its trading performance in October was satisfactory.
Despite a drag on global growth caused by the lack of a sustained recovery in the West, the bank forecasts that emerging markets will grow by close to 5% in 2012 and over 5% in 2013, while it believes that China's economy remains on course for a "soft landing," and that growth will recover in 2013.
The group also expects to see recovery in Latin America next year but believes the Eurozone is at risk of contracting both this year and next. The prospects for growth in the UK remain subdued as they are in part influenced by the situation in the Eurozone and weak consumer confidence, although the labour market has proved to be resilient, the bank said.
In the US, the latest round of quantitative easing is likely to boost demand in the short term, although structural problems persist, the bank noted. Although recent data has offered encouragement, the pace of US economic growth remains weak compared with previous recoveries.
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