Wednesday 9 November 2011

Italian government bonds breached the 7% danger level, HSBC said it had cut its exposure to troubled eurozone countries in Greece, Ireland, Italy, Portugal and Spain

Stuart Gulliver, chief executive of HSBC, warned of "significant headwinds" caused by the eurozone crisis, which has driven its investment banking arm to a loss in Europe.

As yields on Italian government bonds breached the 7% danger level, HSBC said it had cut its exposure to troubled eurozone countries in Greece, Ireland, Italy, Portugal and Spain by $2.7bn (£1.68bn) in the quarter to $5.5bn and took an impairment charge of $171m on its Greek holdings. Its shares fell 5% to 510p.

The $509m loss in the European investment banking arm pushed the entire European operation to a "small loss", compared with profit at the same time last year, as European bond and interest rate trading was impacted by the eurozone crisis.

Some 5,000 jobs have been axed across the group since the first quarter and Gulliver, who used to run the investment bank but has been at the helm since the start of the year, has already unveiled a plan to cut 30,000 roles to save $3.5bn over three years. The "painful" cost-cutting process had begun in Hong Kong just a few days ago, he said.

"The sector faces significant headwinds. The continuing macroeconomic, regulatory and political uncertainty, particularly in Europe, adversely affected our industry's performance in the quarter," Gulliver said. He called on the European Central Bank to buy government and for the bailout fund, the European Financial Stability Facility, to be bolstered, but added there was "no easy solution" to the current crisis. Speaking from Hong Kong, Gulliver said there was feeling in Asia that "this crisis could go terribly wrong".

He said that if the single currency collapsed it could cause a "deep recession" and that were was a "frustration, confusion and a fear factor" about the situation in the markets. A former trader himself, Gulliver said reality was dawning that the European politicians would not take action quickly enough to stop the "panic" in the markets.

He stressed that the exposure to the eurozone was small in the context of a $2.7tn balance sheet. The bank has just been designated as one of the 29 banks in the world that is "too big to fail" - or a globally significant financial institution ("G-Sifi"). While banks in this category will be required to hold more capital, Gulliver stressed HSBC would not be tapping its shareholders for cash.

Across the group, in the third quarter, pre-tax profit rose to $7.1bn from $3.5bn because of a $4.1bn benefit from a fall in the value of its own debt. Stripping this out, profits were down from $4.6bn to $3bn in the quarter and over the nine months were down to $1.43bn from $14.7bn in the same period the year before. On a statutory basis, third quarter profits were $18.6bn, up $4bn on the same period in 2010.

In Europe, the statutory profit before tax in the third quarter was $2.5bn greater than in the third quarter of last year but on an underlying basis the bank conceded it had made "a small loss" compared with the same quarter a year ago. While the European investment banking arm was at a loss, overall it was a profitable although these fell to $5.8bn from $7.5bn in the nine months.

The bank continues to be troubled by its US arm where it is unable to "foreclose" on customers in difficulty because of regulations and where, in September, it was hit by customers stopping paying their mortgages as they realised the bank could do nothing to penalise them.

The bank will not decide until the next 12 to 18 months whether the cost of the bank levy - some $600m this year - and the impact of Independent Commission on Banking, which combined he reckons will cost HSBC some $2.5bn, will be great enough to force the bank to shift its headquarters from London.