HSBC reported a 17 per cent fall in annual pretax profit and cut its profitability target, saying allegations its Swiss business had helped customers to dodge taxes had brought shame on the bank.
Results from Europe's biggest bank on Monday reflected the cost of past misconduct and of protecting itself against the impact of further scandals. HSBC said allegations about its Geneva-based arm, raided last week by Swiss officials and now the subject of a UK inquiry, had badly damaged its image.
"A number of us, myself included, think the practices of the private bank back in the past are a source of shame and reputational damage to HSBC. I think shame would be reasonable noun to use," Chief Executive Stuart Gulliver told reporters.
HSBC confirmed that Gulliver has a Swiss bank account and while there is no suggestion he broke any rules, the revelations come at a sensitive time. HSBC's chairman Douglas Flint is due to appear before British lawmakers on Wednesday to answer questions about the bank's alleged complicity in tax evasion.
HSBC's pretax profit of $18.7 billion for 2014 was down from $22.6 billion the year before and below the average analyst forecast of $21 billion, after a $3.7 billion bill for provisions, fines and settlements arising from a range of misdeeds, including attempted manipulation of foreign exchange markets.
Shares in the bank fell nearly 6 per cent, their biggest intra-day drop since November 2011, to hit a near 2-1/2 year low. By 1217 GMT they were down 5.9 per cent at 569.4 pence.
Return on Equity
Gulliver said the job was far from done, but rejected some calls from regulators or investors for breaking up big banks such as itself or JPMorgan.
"But I don't think the firm is too big to manage. You can see the validity of the business on the revenue side, even if the cost of running (a big bank) has clearly gone up," he said.
HSBC has increased the amount of capital it holds to absorb potential losses by over 60 per cent since before the crisis. Gulliver said the bank intended to increase its core capital to between 12-13 per cent from 10.9 per cent currently, to give it enough reserves to deal with regulators' demands
The bank cut its target for return on equity to more than 10 per cent in the next 3-5 years from 12-15 per cent, originally set in 2011. This measure of profitability fell to 7.3 per cent in 2014 from 9.2 per cent in 2013.
Gulliver said the bank needed to improve profitability in Latin America, Turkey and the United States, and in areas of its commercial and investment bank.
Before the financial crisis returns in excess of 10 per cent were the norm for large banks.
Group revenues were stable and the bank's commercial banking division generated record profits but its global banking and markets division, which includes HSBC's investment bank, reported a 38 per cent drop in profits due to lower revenues and higher costs.
Underlying operating expenses were $37.9 billion in 2014, up 6.1 per cent from 2013, showing the struggle Gulliver is having to lower costs in the face of tougher regulation and the need for more compliance staff. That continues to depress returns.
It paid or set aside $3.4 billion on items such as the forex fine and compensation for UK customers mis-sold insurance products.
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