HSBC’s profits fell by nearly 30% in the first quarter due to fears of a jump in inflation-related defaults and what it called the “devastating effects” of the war in Ukraine.
The London-based bank said profits fell to $ 4.2 billion (£ 3.3 billion) from $ 5.8 billion a year ago as it set aside $ 642 million to cover potential loan defaults in the first three months of the year. This includes $ 250 million in provisions for potential losses associated with direct exposure to Russia.
Banks have begun to set aside more money to cover losses on outstanding loans amid fears that customers will lag behind in payments due to the cost of living crisis. Such fears are heightened by Russia’s invasion of Ukraine, which has disrupted energy flows and global supply chains.
This marks a turning point in 2021, when banks managed to release money set aside for defaults related to the Covid crisis, thanks to government support programs that kept workers and companies afloat.
Ewan Stevenson, chief financial officer of HSBC, told reporters on Tuesday that the bank would likely have to set aside $ 3 billion for potential defaults in 2022, although that is less than half of the $ 8.8 billion that HSBC initially forecast loan losses in the first year of the pandemic.
Shares of HSBC fell 3.7% on Tuesday morning.
“The Russia-Ukraine war continues to have devastating consequences both inside and outside Ukraine,” said HSBC CEO Noel Quinn. The bank added that it was “closely monitoring developments”.
However, the lender has so far kept its operations open in Russia, despite pressure from lawmakers and the decision by rivals, including JP Morgan and Goldman Sachs, to close its offices last month.
HSBC, which has about 200 employees in the country, defended its position, saying it does not accept new businesses or customers there. “Most of our business in Russia serves multinational corporate clients based in other countries and, as a global bank, HSBC has a responsibility to help them cope with these challenging circumstances,” the bank said.
Earnings in the first quarter were also affected by lower revenues from its wealth business, caused by a tough policy to block Covid in China and Hong Kong, which is its largest market and accounts for more than half of its profits. Government policies aimed at keeping Covid’s cases at zero have led to the closure of half of local branches.
But Stevenson was optimistic that conditions would improve: “Hong Kong is now reopening, the branch network is back to normal, and as a result, we expect customer activity to begin to return to normal.”
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HSBC’s revenue also fell due to a drop in investment banking fees. Large banks, including HSBC, are struggling to end the investment banking boom in 2021 as fewer companies raise money in financial markets and refrain from mergers and acquisitions. However, the bank is taking advantage of the ongoing jump in home purchases that began during the pandemic, as well as the subsequent jump in house prices. Mortgage lending rose $ 5.8 billion in the first quarter, representing more than half of the $ 9 billion in customer loan growth at the beginning of the year.
The CFO of HSBC said that the growth rate of mortgage lending will slow down in the next quarter due to competition. Earlier this month, it also became clear that banks are beginning to tighten their lending criteria and take the cost of living crisis into account when calculating how much to offer borrowers.
“It simply came to our notice then. “I think that means that our lending volumes are likely to fall slightly in the second quarter,” Stevenson said, referring to the number of new mortgages.
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