Europe’s biggest bank, HSBC, has raised its bad-loan reserves by a whopping $3.03 billion for the first quarter of 2020, an exchange filing submitted at the end of April shows.
This will be the bank’s highest bad-debt reserve level in nine years, the clearest indication yet that the current economic crisis could be worse than first thought. By comparison, HSBC only allocated $585 million for similar purposes in 2019.
In total, the bank estimates that provisions for credit losses for the entire year could reach between $7 and $11 billion.
The bank’s CEO, Noel Quinn, attributes the massive bad credit reserve to the coronavirus, saying it has severely affected the bank’s customers.
“The economic impact of the coronavirus pandemic has been the main cause of the change in our financial performance since the beginning of the year,” Mr. Quinn said in the exchange filing. “The pandemic is testing us all in ways we never anticipated. It has caused huge disruptions, stress and uncertainty.”
HSBC posted an after-tax profit of $3.04 billion for the first quarter, way below the consensus estimate of $4.37 billion that analysts had projected. This was less than half of the $6.25 billion in profits posted last year. These profits exclude one-time charges.
The bank’s revenues and net profits also declined significantly over that period. Revenues fell 29% to $14 billion in the first three months compared to the same period in 2019. Net profits, meanwhile, plummeted to $1.79 billion from $4.13 billion, while interest income rose 1.9% to $7.61 billion.
It Doesn’t Look Very Good, Even in the Medium Term
Several factors compound the crisis HSBC currently finds itself in. First off, the impact of the coronavirus has been worse than first thought. Owing to the extended lockdowns and social distancing measures, businesses will be tested to their limits. Delinquencies will be high.
Additionally, HSBC generates more than half of its revenue in Asia, one of the worst affected regions. The bank’s profits in Hong Kong, for instance, fell more than 12% in the first quarter.
Finally, HSBC has been significantly affected by the price war between Saudi Arabia and Russia, which has pushed oil prices to historic lows. The recently bankrupted Singaporean-based oil trader Hin Leong Trading, for instance, owes HSBC to the tune of $4 billion!
Not Alone in This
The only silver lining for the bank is that the current crisis has affected the whole world. In the US, the big banks have set aside even more money, a combined $25 billion to be exact, for potential loan losses. Spanish lender Santander meanwhile intends to set aside as much as $4.2 billion.
It will mask, at least in the short term, the financial troubles at HSBC and, hopefully, allow the bank to work on their issues quietly.
AUTHOR BIO
Michael Hollis is a Detroit native who now lives in Los Angeles. He is an account executive who has helped hundreds of business owners with their merchant cash advance ISO solutions. He’s experimented with various occupations: computer programming, dog-training, scientificating… But his favorite job is the one he’s now doing full time — providing business funding for hard working business owners across the country.