HSBC Says Likely to See Criminal Charges on Money Laundering

HSBC Holdings Plc said it's likely to face criminal charges from U.S. anti-money laundering probes and the cost of a settlement may "significantly" exceed the $1.5 billion the bank has already set aside.

The bank made an additional $800 million provision in the third quarter to cover the costs of the investigation, adding to the $700 million it had already earmarked. HSBC also put aside more than $357 million in the period to compensate U.K. clients wrongly sold payment-protection insurance on loans as it posted an increase in pretax profit that missed analysts' estimates.

"The final amount of the financial penalties could be higher, possibly significantly higher," HSBC said in a statement today. "The resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges."

Chief Executive Officer Stuart Gulliver's attempts to reduce costs at the bank are being hobbled by the U.S. probes and compensation claims from U.K. clients. A Senate committee said in July that failures in HSBC money-laundering controls allowed terrorists and drug cartels access to the U.S. financial system. Standard Chartered Plc, which like HSBC makes most of its profit in Asia, paid $340 million in August to settle a regulator's claim it broke Iranian sanctions rules.

"The size of the provision is a shock," said Simon Maughan, a financial industry strategist at Olivetree Securities Ltd. in London. "There was a huge fuss made about Standard Chartered's fine, but this far exceeds that."

Underlying pretax profit, which excludes acquisitions and disposals as well as accounting losses on the fair value of the lender's own debt, rose to $5.04 billion in the third quarter from $2.24 billion in the year-earlier period, missing the $5.6 billion median estimate of eight analysts surveyed by Bloomberg. Underlying income, at $16.1 billion, missed the $16.5 billion estimate of Gary Greenwood, a banking analyst at Shore Capital Ltd. in Liverpool, England.

Gulliver, who became CEO in January 2011, is seeking to cut costs by $2.5 billion to $3.5 billion and revive profit by selling assets to focus on emerging economies in which the bank has a greater market share. The savings are likely to exceed that range and be met by the end of 2013, HSBC said today.

Costs as a proportion of revenue increased to 71 percent from 50 percent in the year-earlier period, outside Gulliver's 48 percent to 52 percent target range, as the lender set aside more for the potential U.S. fines and PPI claims.

"Today's cost performance is very disappointing," Maughan said. "It raises a question mark about how rapidly these efficiencies can be made by Gulliver and his team."

HSBC has been in talks with U.S. regulators over allegations it laundered funds of sanctioned nations including Iran and Sudan. The probes prompted Standard & Poor's to question whether the lender, Europe's largest by market value, is too big to be managed effectively.

A settlement of $1.5 billion would be the biggest reached in the U.S. over such allegations, topping the $619 million in penalties paid in June by ING Groep NV, the biggest Dutch financial-services company.

The provision "is based on the discussions we've had with the various departments of the U.S. government" since June, Gulliver told reporters on a conference call today. He said it was up to the U.S. as to when the matter would be settled, and declined to comment further.

The provision for PPI brings to $2.1 billion the amount HSBC has set aside after regulators ordered banks to compensate clients who were forced to buy, or didn't know they had bought insurance to cover their repayments on mortgages, credit cards and other loans. Of that, HSBC had paid out $1 billion in claims by the end of the third quarter.

British banks have been hit by a rise in claims from customers claiming they were mis-sold the insurance. Barclays Plc last month set aside 700 million pounds ($1.1 billion) more for claims while Lloyds Banking Group Plc, Britain's biggest mortgage lender, made an additional provision of 1 billion pounds, bringing the industry total to about 11 billion pounds.

HSBC said profit before tax at its global banking and markets business, its securities unit, almost doubled to $1.97 billion from $1 billion. Securities firms in the U.S. and Europe have posted gains in revenue since European Central Bank President Mario Draghi's July pledge to defend the euro with "whatever it takes" sparked a rally in bond markets.

Deutsche Bank AG last week posted a third-quarter profit gain as revenue from trading bonds and other products jumped 67 percent. Goldman Sachs Group Inc.'s fixed-income, currencies and commodities revenue climbed 28 percent from a year earlier.