HSBC profits fall nearly 30% due to war in Ukraine and fears of default | HSBC

HSBC’s profits fell nearly 30% in the first quarter on fears of a surge in inflation-linked defaults and what it called the “devastating consequences” of war in Ukraine.

The London-based bank said its profits fell to $4.2bn (£3.3bn), from $5.8bn a year ago, as it set aside $642m dollars to cover potential loan defaults in the first three months of the year. This included $250 million in provisions for potential losses related to its direct exposure to Russia.

Banks have started to set aside more money to cover losses from unpaid loans, fearing that customers will fall behind in their payments due to the cost of living crisis. These fears were heightened by the Russian invasion of Ukraine, which disrupted energy flows and global supply chains.

It marks a reversal from 2021, when banks were able to release money set aside for loan defaults linked to the Covid crisis, thanks to government support programs that kept workers and businesses afloat.

Ewan Stevenson, HSBC’s chief financial officer, told reporters on Tuesday that the bank would likely have to set aside $3 billion for possible defaults throughout 2022, though that’s less than half of the 8, $8 billion that HSBC had originally provisioned for loan losses in the first year of the pandemic.

HSBC shares fell 3.7% on Tuesday morning.

“The Russian-Ukrainian war continues to have devastating consequences both in Ukraine and beyond,” said HSBC chief executive Noel Quinn. The bank added that it was “closely monitoring the development of the situation”.

However, the lender has so far kept its operations open in Russia, despite pressure from MPs and the decision of rivals such as JP Morgan and Goldman Sachs to close their offices last month.

HSBC, which has around 200 staff in the country, defended its position, saying it was not accepting new business or customers there. “The vast majority of our business in Russia serves multinational companies headquartered in other countries, and as a global bank, HSBC has a responsibility to help them manage these difficult circumstances,” the bank said.

First-quarter earnings were also hurt by lower revenue from its wealth management business caused by the strict Covid lockdown policy in China and Hong Kong, which is its largest market and accounts for more than half of its profits. Government policies aimed at keeping Covid cases to zero have resulted in the closure of half of its local branches.

But Stevenson was optimistic that conditions were improving: “Hong Kong is now starting to reopen, the branch network is back to normal and we expect customer activity to start normalizing as a result.”

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HSBC’s revenue also fell due to lower investment banking fees. Big banks, including HSBC, are grappling with the end of the investment banking boom in 2021 as fewer companies raise money in capital markets and hold back from mergers and takeovers. However, the bank has benefited from a continued surge in home purchases that began during the pandemic, as well as the surge in home prices that followed. Mortgages grew by $5.8 billion in the first quarter, accounting for more than half of the $9 billion growth in customer loans at the start of the year.

HSBC’s chief financial officer said the pace of mortgage growth will slow in the next quarter due to competition. It also emerged earlier this month that banks were starting to tighten their lending criteria and were taking the cost of living crisis into consideration when calculating how much to offer borrowers.

“We fell back a bit in April. I think that means our origination volumes should go down a bit in the second quarter,” Stevenson said, referring to the number of new mortgages being put in place.

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