More bad news for bank stocks

Stories about suspicious transactions may be overblown, but HSBC has plenty of other problems to worry about. Matthew Partridge reports

Claims that some of the world’s largest banks “moved large sums of allegedly illicit funds over nearly two decades”, despite “red flags” about the origins of the money, caused shares in the sector to fall on Monday, say David Pegg and Julia Kollewe in The Guardian. Barclays, HSBC and Standard Chartered were among those hit by the leak of thousands of documents showing $2trn (£1.55trn) of “potentially corrupt transactions” between 1997 and 2017 that passed through the US financial system. 

For HSBC investors in particular, these headlines may feel unpleasantly familiar. Eight years ago, the bank was fined nearly $2bn, and forced to agree a deferred prosecution agreement by the US Department of Justice, for “providing banking services to drug cartels and other criminals”, says Katherine Griffiths in The Times. Its Swiss subsidiary was also hit by claims in 2007 that it had been helping clients to dodge taxes. The latest allegations could lead to a “flurry of legal claims” against it from the victims of the fraudsters whom it supposedly helped move money. 

An overreaction

Calm down, says Liam Proud on Breakingviews. While it’s true that banks “could improve their systems for spotting money laundering”, the behaviour is “less scandalous than some of the headlines make it sound”. This is because the allegations are based on “suspicious activity reports” (SARs) that the banks must file with the authorities every time they think that criminal activity could be going on. Anti-money laundering systems “catch many legitimate transactions”: one estimate is that 90% of SARs turn out to be false positives. So it’s standard practice for banks to report – rather than block – them.

This report looks like the least of HSBC investors’ worries, agree Margot Patrick and Frances Yoon in The Wall Street Journal. A bigger concern is that HSBC could be put on an “unreliable entities” list in China that “would threaten the bank’s growth plans in retail banking and in the country’s securities markets”. China’s Ministry of Commerce has said such entities could “face limits on investment and staff in China”. While no companies have been put on this list yet, China’s state-owned media have named HSBC as a possible candidate.

Any action by China against HSBC would be particularly damaging given that HSBC “has invested heavily in the mainland”, says Lex in the Financial Times. China also contributes $1.5bn worth of pre-tax profits, at a time when HSBC’s earnings in the rest of the world have fallen. Having alienated Europe and America, by publicly supporting Beijing’s new security legislation in Hong Kong, the loss of Chinese support would leave it “friendless”. It’s therefore no surprise that its shares “are trading at levels last seen in the 1990s”, a demonstration of why businesses that have become “political shuttlecocks” are “not worthwhile investments”.

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Robin Geffen: dividend cuts aren't all down to Covid
Stockmarkets

Robin Geffen: dividend cuts aren't all down to Covid

The seeds of recent dividend cuts and cancellations were sowed many years ago, says veteran investor Robin Geffen.
25 Oct 2020
Dividend payments will take a long time to recover
Income investing

Dividend payments will take a long time to recover

Companies are gradually resuming dividend payouts, but we can expect only a modest rebound in 2021, says Cris Sholto Heaton.
25 Oct 2020
“Big Finance” comes out of its decade-long slump as bankers bounce back
Stockmarkets

“Big Finance” comes out of its decade-long slump as bankers bounce back

The financial sector was hammered by the crisis of 2008. Now, bankers are rediscovering their swagger, says Matthew Lynn.
25 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Last chance to secure a Bounce Back loan for your small business
Small business

Last chance to secure a Bounce Back loan for your small business

The government’s Bounce Back loan scheme will only run for another six weeks. Act now if you need to take advantage of it.
16 Oct 2020