HONG KONG -- HSBC Holdings reported a steep drop in profits on Monday as its provision for loan losses returned to the highest level in nine years due to the coronavirus pandemic.
Net profit for the three months ended June 30 fell 87.7% to $617 million from $5.03 billion a year earlier. On a pretax basis, the bank generated gains of $1.09 billion, falling well short of analyst expectations of $2.5 billion.
HSBC, which makes the vast majority of its earnings in Asia, has been caught in the crosshairs of mounting U.S.-China tensions. Chief Executive Noel Quinn acknowledged the risks faced by the bank, which expressed support for Beijing's national security law for Hong Kong even before its text was published.
"HSBC has to operate in a difficult geopolitical environment," Quinn said in a statement on Monday. "Current tensions between China and the U.S. inevitably create challenging situations for an organization with HSBC's footprint."
In reaction to Beijing's move to impose a national security law in Hong Kong, the U.S. has threatened sanctions against Chinese and Hong Kong officials involved in undermining the autonomy of the former British colony. The security law itself however bars those in Hong Kong from participating in foreign sanctions.
This crossfire has "potential ramifications" for HSBC, the bank said though Quinn added that geopolitical tensions did not have a bottom-line impact in the first half.
Indeed, the bank has been bulking up its wealth management business in mainland China in recent weeks. It said last month that it had hired 100 staff to provide mobile advice out of branches in Guangzhou and Shanghai. On Monday, officials said this team would grow to 2,000 to 3,000 within four years.
HSBC shares extended morning losses, closing down 4.4% at $33.40 while the Hang Seng Index itself dipped 0.6%.
The bank set aside $3.83 billion for loan losses in the quarter versus expectations of $2.7 billion of provisions. The London headquartered bank expects provisions for loan losses for the year to reach $8 billion to $13 billion. That would be the highest sum in a decade and builds on a forecast of $7 billion to $11 billion in April. The bank set aside $2.8 billion for all of 2019.
Citigroup analysts led by Ronit Ghose said the increased provisions will likely lead many banks to trim their annual profit forecasts for HSBC. "Loan loss uncertainty remains," they said.
HSBC's earnings report came days after smaller rival Standard Chartered also warned of risks from escalating tensions between Beijing and Washington. StanChart's profits declined 33% in the first half of the year as credit impairment charges rose. The bank is also cutting a "small number" of jobs.
HSBC said revenue fell across all businesses except its markets unit, where volatile trading boosted revenue by 55% in the second quarter. Wall Street rivals also had a strong quarter for trading as the pandemic led to frenzied market conditions and radical interventions from central banks.
Said Quinn, "We also have to see how COVID develops over the quarter or next two quarters to determine how enduring this revenue and cost position is going to be."
The lender's Asian business remained resilient while other markets suffered, the bank said. Profit before tax in Asia in the first half stood at $7.37 billion compared with $9.78 billion last year. However profits slumped in North America and Latin America while losses widened in Europe from $520 million to over $3 billion.
In Hong Kong, HSBC's biggest market, credit loss provisions for the quarter reached $383 million from $34 million a year earlier. The city is on track to match or top its longest recession on record after output dropped for a fourth straight quarter in the April-June period. Few expect a turnaround amid a new wave of coronavirus infections and the revocation of U.S. trade privileges.
The bank said it would look at additional cost cuts. Quinn in June revived plans to cut 35,000 jobs over three years that were put on hold in the early days of the pandemic.
The cuts, to be made over three years, will be heaviest in the bank's U.S. and European operations. They are part of a plan to slash $4.5 billion in costs and $100 billion of risk-weighted assets by the end of 2022.
"We intend to accelerate implementation of the plans we announced in February," Quinn said. "At the same time, our operating environment has changed significantly since the start of the year. We will also therefore look at what additional actions we need to take."
The bank has already reduced both performance-related pay and discretionary spending, which along with its ongoing cost-saving initiatives helped reduce operating expenses in the quarter by 4%.
Six of the largest U.S. banks set aside a total of $61 billion in the first half of 2020 for future loan losses. Consultancy Accenture estimates loan loss provisions for 100 of the largest Western banks will top $880 billion between 2020 to 2022 in a severe scenario.
"Our performance in the second half of the year will continue to be influenced by the path and economic impact of the COVID-19 outbreak," Quinn said. "Geopolitical uncertainty could also weigh heavily on our clients, particularly those impacted by heightened U.S.-China and U.K.-China tensions, and the future of U.K.-EU trade relations."