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HSBC loan losses swell

A fivefold increase in provisions for bad debts looks to be the first chapter in a brutal year
April 28, 2020

HSBC (HSBA) this week revealed a fivefold increase in its first-quarter loan loss provisions, in the first concrete sign of the damage the Covid-19 crisis is already inflicting on the operations of UK-listed lenders.

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When the group published full-year results in February, management suggested slowing growth and credit issues could result in virus-linked loan impairments of up to $600m (£480m) in Hong Kong and China this year. Just over two months on, that initial estimate has been blown away by a $3bn charge for the first quarter alone, some 73 per cent worse than consensus forecasts.

HSBC said the expected credit losses (ECL) reflected both a deteriorating economic outlook and a single charge “relating to a corporate exposure in Singapore”, which investors are likely to interpret as a nod to the bank’s exposure to Hin Leong, the scandal-hit oil trader under investigation for disguising $800m of losses.

“The impact and duration of the Covid-19 crisis will likely lead to higher ECL and put pressure on revenue due to lower customer activity levels and reduced global interest rates,” HSBC said in its updated outlook for 2020. The lender added that it plans to reduce operating expenses to offset the drop in revenue, although a complex group-wide restructuring announced earlier this year will remain on hold until the crisis abates.

It’s unclear that those measures will be enough. While first-quarter operating expenses dipped 5 per cent, the cost of the huge impairments meant profits fell 48 per cent year on year, to $3.2bn. Those provisions are likely to include major revaluations of credit extended to oil and gas clients, which HSBC highlighted as a source of “heightened risk”. The bank’s $25.8bn exposure to the sector – as outlined in full-year disclosures – amounts to just over a fifth of HSBC’s common equity tier-one (CET1) capital, according to calculations by RBC.

On that front, the cancellation of the final dividend for 2019 – at the Bank of England’s request – meant that capital ratios held up at 14.6 per cent. But the road ahead remains decidedly gloomy. The reduction in interest rates around the world will result in “material downward pressure on net interest margins in future quarters”, while negative movements are set to cause “mid-to-high single-digit” growth in risk-weighted assets.

“We expect the strategic targets to be revisited once the longer-term consequences of Covid-19 on activity levels and rates is clearer,” said analysts at UBS, who now view a double-digit return on tangible equity target in 2022 as “unlikely".