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HSBC sees credit losses surging to highest level in a decade

Higher provisions include 'significant charge' to corporate exposure in Singapore

HONG KONG -- HSBC Holdings warned that its provisions for loan losses in 2020 could surge to the highest level in a decade due to the coronavirus pandemic, after it reported on Tuesday that first-quarter profit tumbled 48%.

The London-based bank said it sees its expected credit loss for the year in the range of $7 billion to $11 billion if a prolonged recession were to occur. That compares with a $2.8 billion charge for all of 2019 and a $7.5 billion average for 2020 based on brokerage-firm estimates compiled by the bank.

Signs are already there, with Singapore oil trader Hin Leong filing for bankruptcy protection this month. HSBC is the company's largest creditor.

HSBC said the coronavirus outbreak has forced it to review its medium-term financial targets with Chief Executive Noel Quinn, who took over the position full time on March 18. It has already put on hold a plan unveiled in February to eliminate 35,000 jobs over three years.

The bank also has suspended its dividend for the first time in 74 years under pressure from the U.K. financial regulator, drawing the ire of retail investors in Hong Kong, who hold a third of the bank's shares.

Quinn said in a media call on Tuesday that a decision on dividends will be taken only before the full-year results, although the bank has already begun implementing parts of the February plan to scale back from the U.S. and Europe by unwinding its loan books and expanding in Asia.

HSBC took a $3 billion charge in the first quarter, the biggest in almost nine years, with the pandemic causing a sharp deterioration in creditworthiness of borrowers worldwide. That has had a knock-on effect on lenders -- the six largest U.S. banks have raised provisions by 350% in the first quarter to prepare for expected loan losses.

The estimated credit loss provision is "larger than expected," Citigroup analyst Ronit Ghose said. "But HSBC usually errs on the side of conservatism."

HSBC, which is estimated to have $600 million in outstanding loans to Hin Leong, said a "significant charge" to a corporate exposure in Singapore was the primary driver of the $700 million increase in charges at its Asian commercial banking business. HSBC did not name the Singapore company.

The oil trader, which was caught off guard by the recent plunge in oil prices and wrong-way bets on the commodity, owes banks $4 billion, and a company presentation to creditors put the expected loan recovery at just 18 cents on the dollar.

Expected credit loss provisions nudged up by $14 million in the first quarter from the previous three months in Hong Kong, HSBC's primary market, but climbed in other geographies. The rest of Asia saw an $804 million increase, while Europe and North America, two regions from which the bank wants to scale back to free up capital to expand in Asia, had a $1 billion surge.

The provisions slashed the lender's first-quarter reported pretax profit to $3.23 billion in the three months ending March 31. That compares with $6.21 billion in the same period a year earlier and the $3.67 billion consensus estimate of analysts.

The bank, which draws 95% of its profit from Asia, said its profit after tax declined 49% to $2.51 billion.

"The economic impact of the COVID-19 pandemic on our customers has been the main driver of the change in our financial performance since the turn of the year," Quinn, who took over as CEO full time on March 18, said in a statement.

"The resultant increase in expected credit losses in the first quarter contributed to a material fall in reported profit before tax compared with the same period last year," he said.

The lender expects to offset some of the impact from higher provisions and lower customer activity during the year by cutting operating expenses. It expects mid-to-high single-digit percentage growth in assets in 2020.

Revenues were stagnant at all business lines except in its markets unit, where volatile markets boosted revenue by 25%.

HSBC's shares declined 1% in London in early trading on Tuesday. Its Hong Kong-listed shares closed 1% higher, trimming losses for the year to 34%. That compares with a 13% decline for the benchmark Hang Seng Index and a 49% slump for Standard Chartered.

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