HSBC sees 14% profit drop after provision hit from Madoff lawsuit

Europe’s largest lender HSBC announced a 14% year-on-year decline in third-quarter profits on Tuesday.

Pre-tax profits fell to $7.3 billion (€6.26bn) over the period, largely due to a $1.1bn (€943.65 million) provision related to the Madoff fraud case.

Even so, HSBC raised its profitability outlook for 2025, claiming that it is “becoming a simple, more agile, focused bank”.

“The positive progress we are making gives us confidence in our ability to upgrade our targets and we now expect 2025 RoTE excluding notable items to be mid-teens, or better,” said the lender in a statement.

HSBC said a day before the earnings release that it would set aside the $1.1bn provision to cover litigation by investors who lost money in the Madoff scandal.

Bernie Madoff, the former chairman of the Nasdaq stock exchange, was sentenced to prison in 2009 after orchestrating the largest-ever Ponzi scheme, resulting in billions of dollars of losses for his clients. A Luxembourg court recently denied HSBC’s appeal to avoid paying a securities provision to Herald Fund SPC.

Boosted by the provision, operating expenses for HSBC came in at $10.08bn (€8.66bn) in the third quarter, a 24% rise.

Net interest income jumped 15% year-on-year to $8.78bn (€7.55bn), while net fee income rose 12% to $3.51bn (€3bn).

Return on Tangible Equity (ROTE), meanwhile, fell from 15.5% to 12.3%.

“The news is hot on the heels of the announcement that HSBC would be buying the remainder of Hang Seng Bank which it does not already own, for an estimated $13.6bn,” added Richard Hunter, head of markets at interactive investor.

Earlier this month, HSBC announced a bid for the Hong Kong bank that valued the lender at more than 290 billion Hong Kong dollars (€32.04bn), above its recent market value.

Taken together, developments around Hang Seng and the Madoff lawsuit “muddy the waters of some key metrics,” said Hunter.

“But for all the noise, there is also evidence of growing success for its strategic plan, which is significant but simple,” he added.

“Whereas HSBC had been moving towards becoming a business with a slavish reliance on interest rate movements and levels, the revised and increasing focus on the growth in affluent wealth, especially in Asia, is key to the new offering.”