DealBook: HSBC’s Profit Declines on Slowdown in Asia and Markets

LONDON – The British bank HSBC reported on Monday that its first-half profit declined 5 percent amid a slowdown in market activity and a decline in its Asian operations, which account for more than half its earnings.

HSBC, based in London, said its earnings fell to $9.75 billion from $10.3 billion in the first half of 2013. The year-earlier period included gains from moves undertaken as part of a three-year restructuring, among them an accounting gain from the reclassification of its stake in the Chinese lender Industrial Bank.

On an underlying basis, HSBC said pretax profit fell 4 percent, to $12.6 billion, from $13 billion in the first half of 2013. The bank's underlying profit included adjustments for the effect of foreign currency movements and acquisitions.

In Asia, HSBC's pretax profit fell 15 percent, to $7.89 billion. Asia accounted for about 64 percent of its pretax profit in the first half.

HSBC said its investment bank was affected by "low market volatility and client activity" in its markets business, but the bank increased its market share during the first half in debt and equity capital markets, mergers and acquisitions, and lending.

Increasing regulatory scrutiny and duplicative efforts by regulators around the world are eating into resources that would normally be focused on customers, Douglas Flint, the bank's chairman, said in a statement.

"Greater focus on conduct and financial crime risks at all levels of the firm globally is clearly the right response to past shortcomings," Mr. Flint said in a statement. "There is, however, an observable and growing danger of disproportionate risk aversion creeping into decision-making in our businesses as individuals, facing uncertainty as to what may be criticized with hindsight and perceiving a zero tolerance of error, seek to protect themselves and the firm from future censure."

The bank is facing a variety of issues, including a proposed "ring fencing" of HSBC's retail bank in Britain, stress tests on its assets by various financial regulators and investigations into potential manipulation of global benchmark interest rates and currency markets.

Sky News reported on Sunday that Mr. Flint wrote George Osborne, Britain's chancellor of the Exchequer, to ask that Britain delay ring fencing beyond 2019. Under ring fencing, HSBC and other British banks would separate their retail and small-business operations from riskier trading and investment banking activity in order to better weather future economic upheavals.

On a conference call with journalists on Monday, Mr. Flint declined to comment on "any private letters that I might have written," but said that ring fencing is coming at a time when regulators are contemplating a variety of structural changes across the finance industry.

"If the goal post is moved," Mr. Flint said on the call, "it will be another frustration and another unwarranted cost."

The cost of ring fencing is "climbing to a very substantial number," HSBC said, noting that it would be in the hundreds of millions of pounds a year over several years while it is being implemented.

Revenue fell 9 percent, to $31.2 billion. Net interest income — the measure of what a bank earns on its lending after deducting what it pays out on deposits and other liabilities — fell 2 percent, to $17.4 billion.

HSBC's operating expenses declined slightly, to $18.3 billion, while charges for poorly performing loans and other credit risks fell 41 percent, to $1.84 billion, from $3.12 billion in the period a year earlier.

Mr. Flint, the HSBC chairman, said the bank was facing "growing fatigue" and increased competition for its employees in the current regulatory environment.

"This is adding to cost pressures both from increased salaries as market rates increase, and from investment in training and systems support to improve productivity," Mr. Flint said. "This underscores the importance of finalizing the regulatory reform agenda in the near term."

The bank's common equity Tier 1 capital ratio, a measure of its ability to absorb losses, rose to 11.2 percent at the end of the first six months of 2014 from 10.8 percent at the end of 2013.

European banks are required to have a minimum common equity capital ratio of 4 percent this year under the so-called Basel III rules, but larger banks are required to maintain a much higher minimum, which is set by national regulators.

HSBC, one of the world's largest banks, operates in 74 countries and had assets of $2.75 trillion at the end of the first half of 2014.

Correction: August 4, 2014
An earlier version of this article misstated the charges HSBC took in the first half of 2014 for poorly performing loans and other credit risks. It was $1.84 billion, not $1.84 million.
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