Today I am looking at why HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) may be deemed a risk too far for many share seekers.
Here are two numbers that I think help make the case.
1.6 billion
HSBC is not alone in being dragged over the coals by regulators for a variety of operational misdemeanours. But the scale of the bank’s previous wrongdoings were laid bare this week when it announced it has set aside $1.6bn in order to settle cases with lawmakers and compensate customers for product mis-selling.
During its latest interim statement the bank said that it had drawn up a $378m provision for the Financial Conduct Authority’s (FCA’s) probe into the manipulation of currency markets, while it has also had to swallow a $550m charge to settle a case with the Federal Housing Finance Agency in the US for the wrongful sale of mortgage-backed securities.
In addition, the company has also had to put $701m to one side to cover customer redress in the UK, with $589m of this prompted by an leap in the number of payment protection insurance (PPI) related claims.
The final bill for this issue alone is set to remain a mystery due to questions over the extent of claims still in the pipeline, a situation exacerbated by the FCA’s decree back in August that 2.5 million cases be reassessed by Britain’s banks.
On top of this, HSBC also announced this week that it could face a criminal investigation in France over whether its unit in Switzerland had helped customers across the English Channel avoid paying tax. With the firm also facing accusations of fixing the silver price in the States, HSBC could continue to see the financial fallout of previous misconduct continue to creep higher.
29.4 billion
Although HSBC has undertaken a vast cost-stripping exercise across the business, including a revamping of many back office operations, the effect of a tightening regulatory backdrop continues to hobble the firm’s efficiency drive.
Indeed, ‘The World’s Local Bank‘ saw total operating expenses rise 5% during January-September, to $29.4bn, caused by the firm’s need to beef up its compliance departments.
As a result of these pressures, HSBC has elected to tear up plans to drive its cost efficiency ratio to around 55% by 2016, and now expects this to ring in at around the high-55 marker at least by this time. The ratio rose to 62.5% for January-September from 56.6% during the corresponding period last year.
Should troublesome economic conditions in key emerging markets continue to dent revenues, the effect of a rising expense column could continue to significantly hamper profits at the bank.