HSBC's (HBC) Earnings Weighed Down by Ongoing Money Laundering Investigations

Yesterday, banking giant HSBC (HBC: Charts, News) reported a sharp plunge in profit during its third quarter earnings report. London-based HSBC earned a pre-tax quarterly profit of $2.8 billion - barely half of the $5.5 billion it earned in the prior year quarter.

Excluding one-time charges, such as provisions set aside for ongoing criminal investigations, the company's profit came in a $5 billion - missing analyst expectations by a slim margin. On an earnings per share basis, HSBC earned 13 cents, down from 28 cents a year earlier. Daily Chart
HSBC has been rattled by money laundering allegations, which have been haunting the bank since July. The allegations state that HSBC turned a blind eye to money laundering activities in Mexico, the Middle East and Asia, which knowingly came from illegal sources, including drug cartels and terrorist organizations. HSBC is one of several British banks - which include Barclays (BCS: Charts, News) and Standard Chartered - accused of money laundering and other market manipulating activities. During the quarter, HSBC was required to set aside $800 million related to the U.S. investigation, as well as investigations relating to the Bank Secrecy Act and Office of Foreign Assets Control. HSBC has already set aside $700 million earlier for fines. The $1.5 billion that HSBC has set aside for the money laundering investigation does not include legal costs. It was also required to add a provision of $353 million to repay customers who were inappropriately sold its Payment Protection Insurance product. CEO Stuart Gulliver updated investors regarding its legal troubles. "We are actively engaged in discussions with US authorities to try to reach a resolution, but there is not yet an agreement," Gulliver stated. "The US authorities have substantial discretion in deciding exactly how to resolve this matter. Indeed, the final amount of the financial penalties could be higher, possibly significantly higher, than the amount accrued." HSBC intends to distance itself from its legal troubles by selling some assets in Asia and Latin America, where the bank claims it does not have the scale to compete. However, Asia remains its most profitable segment, which continues to outpace its European and North American operations, which continue to post quarterly losses. Its Hong Kong business notably posted a pretax profit of $1.8 billion, a 40% increase over the prior year quarter. HSBC's global banking and markets division posted a pretax profit of $2.2 billion, which nearly doubled its profit a year earlier. HSBC's commercial banking segment also posted a 16% increase in pretax profit to $2.2 billion. HSBC has cut its staff by approximately 10%, or 266,700 employees, since the beginning of 2011. 15,000 employees left the company as HSBC sold off some assets. HSBC reduced costs by $500 million during the quarter, and expects to save $3.5 billion by the end of fiscal 2013. HSBC's management expressed concerns regarding larger macroeconomic issues in the near term, including the European debt crisis and the fiscal cliff in the United States. However, it expressed confidence that China and Latin America were beginning a rebound, fueled by strong local investment, which would aid the global economy. Shares of HSBC are trading near the top of its 52-week range of $35.72 to $50.46. The stock trades at 7.7 times forward earnings with a 5-year PEG ratio of 1.25. The stock pays a quarterly dividend of 45 cents per share - a 3.64% yield at current prices. Other News About HBC HSBC: A Bank in Good Company The bullish case for scandal stricken HSBC. HSBC Probe Signals Big Bank Legal Crackdown Are the British banks about to be struck down by regulators? Other Stocks in the News Yum! Brands: What the Yankees and China Have in Common Is Yum about to hit a grand slam in China? Netflix Adopts Poison Pill to Fend Off Icahn Can Netflix keep Icahn from taking over 10% of the company? Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Nov 6, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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