Nothing reassuring in HSBC’s tale of the unexpected

Marc Sidwell
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STUART Gulliver tried to reassure the market yesterday in his third quarter message accompanying HSBC’s interim management statement. He ended with an upbeat take on China, “where we continue to expect a soft landing”. That would be more reassuring if it wasn’t coming from a bank that was admitting at the same time how offbeam some of its expectations have proven.

The amount of money HSBC set aside in July for a possible anti-money-laundering fine now seems so over-optimistic that it has more than doubled its provision, from $700m (£438.45m) to $1.5bn, and reserved the possibility that the financial penalties could end up significantly higher.

The cost of customer redress in the UK, mainly for the mis-selling of payment protection insurance, also continued to rise, with another $357m required in the third quarter.

Not all the news was bad for HSBC. Underlying profit before tax in the third quarter was up 125 per cent on the same period in 2011. Reported profit before tax for the quarter, however, was down 51 per cent on 2011. Reported revenue for the quarter was also down 27 per cent compared with 2011, to $14.566bn.

A more troubling measure was return on equity, down from 14.6 per cent in the previous quarter and 13.2 per cent a year ago to just 5.8 per cent in the last quarter, well below the group’s medium-term target of 12-15 per cent. With a cost of capital in 2012 of 11 per cent, that means HSBC was destroying value rather than creating it in the last quarter.

There was cold comfort for the firm’s employees as well. After 30,000 jobs cut over the last two years, the likelihood remains of more by the end of 2013.

Unexpected costs aside, HSBC would be doing much better. But after Gulliver’s open-ended statement on US fines and further cuts, investors and employees must now expect the unexpected. This is a terrible indictment for the bank that was supposed to offer the height of predictability, but also ominous for the future of the sector: if even the once reassuringly boring HSBC can’t shake off such uncertainties, who can?

Superficially, things also weren’t looking too bright for mobile satellite communications services firm Inmarsat, largely thanks to wireless broadband venture LightSquared, which filed for bankruptcy in May.

Yet the massive 81.9 per cent decline in Inmarsat’s revenue from the division which includes LightSquared only brought the group’s total revenue down by 10.5 per cent compared to the third quarter of 2011, to $325.9m.

The pull-out of troops from Afghanistan did affect land revenue, down 7.3 per cent. However, a 25 per cent rise in revenue from maritime data services gave a robust signal that in our data-hungry age demand for the kind of services Inmarsat offers looks set to remain something of a rising tide.