HSBC first quarter profit halves as revenue slumps and loan losses rise

Bad debts this year could swell to between $7bn and $11bn, ‘depending on sensitivity analysis’, the lender said

HSBC has approached workers union with a proposal to cut more than a third of its Paris-based investment banking and markets team before 2022. AFP

HSBC, Europe’s largest bank, warned of a further decline in earnings and a rise in loan losses as the lender set aside $3 billion (Dh11bn) for bad debts after its first quarter profit almost halved amid the coronavirus outbreak.

The bank‘s reported profit before tax slumped 48 per cent to $3.2bn, lower than the average analyst forecast of $3.7bn compiled by the bank. Higher than expected loan losses and lower revenue dragged down the quarterly profitability, the bank said in a statement on Tuesday.

Reported revenue declined 5 per cent to $13.7bn, partly impacted by adverse valuation adjustments in its global banking and markets business.

HSBC said it expects “materially lower profitability” in 2020 and will focus on reducing operating expenses to mitigate a fall in revenue.

Expected credit losses rose by a hefty $2.3bn to $3bn at the end of March due to the impact of the coronavirus pandemic and weakening oil prices. A significant charge related to a corporate exposure in Singapore inflated impairment allowances, the lender said without naming the company.

Loan losses this year could swell to between $7bn and $11bn, “depending on sensitivity analysis”, it noted.

"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,” Noel Quinn, group chief executive of HSBC, said. “The resultant increase in expected credit losses in the first quarter contributed to a material fall in reported profit before tax.”

Lenders across the world are facing a decline in profitability as revenue shrinks amid historically low interest rates and expected loan losses rise as the pandemic disrupts the global economy.

JPMorgan Chase, America's largest bank, last week reported a 69 per cent drop in first quarter profit, as it set aside $8.3bn for loan loss provisions. Bank of America, Wells Fargo and Citigroup have also posted their highest provisions in decades as non-performing debt continues to rise.

The lockdowns across the world to curtail the coronavirus outbreak has pushed the global economy into the worst recession since the Great Depression of the 1930s. The International Monetary Fund earlier this month projected a 3 per cent contraction in global output for 2020, noting the global economic outlook this year is worse than the 2008 global economic crisis.

A sharp drop in oil prices has compounded economic woes. Brent, the benchmark for two-thirds of the world's oil, has slumped 77 per cent since the beginning of this year. West Texas Intermediate, the benchmark for US crude, on Tuesday slumped 13.07 per cent to trade at $11.11 per barrel for June delivery, reviving fears that it could plunge below sub-zero levels seen last week with its May contracts.

The pandemic has infected more than 3 million people globally and fatalities have topped 211,000 as of Tuesday. More than 894,000 people have recovered, according to Johns Hopkins University, which is tracking the spread of the disease. The rate of the spread of the outbreak, however, is slowing and countries in Asia and Europe and some states in the US have gradually starting opening up their economies.

"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," Noel Quinn, group chief executive of HSBC, said

HSBC said it will continue to assess the impact of the pandemic and review its financial performance and business plan accordingly.

“We will assess the appropriateness of our medium-term financial targets during that period and will review our dividend policy at, or ahead of, our year-end results for 2020.”

The Asia-focused bank, on the direction of financial regulators in the UK, scrapped its dividend plans, which pushed its shares in Hong Kong to an 11-year low this month.

HSBC has also paused a vast majority of 35,000 redundancies as part of its global transformation, which included cost cuts and the combining and closure of some businesses.

“We continue to press forward with the other areas of our transformation with the aim of delivering a stronger and leaner business that is better equipped to help our customers prosper in the recovery still to come," the bank said.