HSBC Holdings has today reported a 14% decline in third-quarter pretax profit, hurt by a $1.1 billion charge after losing part of an appeal in a lawsuit tied to Bernard Madoff's Ponzi scheme, history's biggest-ever such fraud.
But the bank also upgraded its income forecast for the year, reflecting the view that rate cuts in key markets such as Hong Kong and Britain will be slower than initially thought.
It now expects to make $43 billion in net interest income in 2025, up from a forecast of around $42 billion in June.
"The intent with which we are executing our strategy is reflected in our performance this quarter, despite taking legal provisions related to historical matters," chief executive Georges Elhedery said in a statement.
HSBC posted a pretax profit of $7.3 billion for the third quarter. Before the surprise news of the provision, expectations were for a pretax profit of $7.66 billion, according to a consensus estimate from analysts compiled by the bank.
In addition to the Madoff provision, the bank also logged an additional $300m in legal charges relating to historical trading activities in HSBC Bank plc.
The bank also lifted its return on equity target to the mid-teens or better, from an earlier estimate of mid-teens.
That said, the results show how Elhedery's drive to improve profit continues to be hampered by major litigation, ongoing restructuring, and property sector-related charges.
HSBC has booked $5 billion in writedowns on its China bank holding over the last few quarters and losses from deteriorating Hong Kong commercial real estate loans have climbed.
The worsening commercial real estate market in Hong Kong has prompted HSBC to upgrade its credit loss model, it said in the statement.
In the first nine months of this year, it logged an increase of $900m in charges for non-performing loans compared to the same period last year, with two-thirds of that amount arising from exposure to Hong Kong property.
The losses reflected "higher allowances for new defaulted exposures, the impact of an over-supply of non-residential properties that has put continued downward pressure on rental and capital values", HSBC said.
A career HSBC insider, Elhedery has shaken up the bank since assuming the chief executive role a year ago by reorganising operating divisions along East-West lines, shedding sub-scale investment banking units and slashing the ranks of senior managers.
As well as announcing exits from 11 underperforming markets and businesses so far this year, Elhedery has signalled a willingness to invest where he thinks the bank can further grow.
HSBC, which has a market value of $226 billion, announced in October it has offered $13.6 billion to buy out other shareholders in its majority-owned Hang Seng Bank, a Hong Kong lender hit hard by its local property exposure.
It has decided to pause share buybacks for about three quarters to build up the capital required for the deal.
The bank said it would pay an interim dividend of 10 cents a share - its third payment in 2025 following a total of 20 cents announced earlier.
HSBC to take $1.1 billion hit after Luxembourg court ruling in Madoff case
HSBC Holdings said yesterday it would book a $1.1 billion provision in its third-quarter results after losing part of an appeal in a long-running lawsuit tied to Bernard Madoff's Ponzi scheme, history's biggest ever such fraud.
HSBC acted as a service provider to several funds that invested with Bernard L. Madoff Investment Securities. Herald Fund SPC sued HSBC's Luxembourg unit in 2009 seeking restitution of assets it said were lost in the fraud.
Last Friday, the Luxembourg Court of Cassation rejected an appeal by HSBC's unit over the restitution of securities claimed by Herald, although it accepted its appeal on a separate cash restitution claim, the bank said.
Herald had alleged that HSBC failed in its duties as a custodian to protect it from the fraud, previous court documents from the case show.
HSBC now plans to lodge a second appeal with the Luxembourg Court of Appeal and, if unsuccessful, the bank said it would contest the amount to be paid.
It added that the eventual financial impact could differ significantly from its current estimate.
Europe's largest bank by assets said in July that Herald, which is in liquidation, was seeking the restitution of securities and cash worth $2.5 billion plus interest or damages of $5.6 billion plus interest.
The bank estimated that the provision would have an impact of around 15 basis points (or 0.15 of a percentage point) on its common equity tier 1 capital ratio, meaning little lasting impact on the key measure of financial strength, which stands at 14.6%.
That would come on top of a 125 basis points impact arising from its $13.6 billion deal to take its majority-owned Hong Kong unit Hang Seng Bank private.
The charge could weigh on sentiment slightly but the impact should be limited as HSBC has already suspended share buybacks for the next three quarters due to the acquisition of Hang Seng Bank, said Lorraine Tan, director of equity research (Asia) for Morningstar.
Madoff's fraud was estimated as much as $64.8 billion, making it the biggest-ever Ponzi scheme, a kind of fraud whereby old investors are paid off with funds from newer ones while the organiser siphons off some of the money for themselves.
It went undiscovered for years until Madoff confessed to his sons in December 2008, one day after his firm's Christmas party. Madoff eventually pleaded guilty to 11 criminal counts. He died aged 82 in April 2021 while serving a 150-year prison sentence.
HSBC in 2012 settled with Kalix Fund for an undisclosed amount, also over losses the fund had suffered during the collapse of Madoff's financial empire. The fund had sued the bank for $35.6m.
