Shares in HSBC Holdings (HSBA) declined by 1% on Monday after the bank revealed that it set aside $800 million to pay for potential money laundering charges in the US.
Investors were unnerved by the bank's money laundering problems, specifically because the bank admitted the final financial penalties could be "significantly higher" than originally estimated.
"The resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges and the imposition of significant fines, penalties and/or monetary forfeitures," explained HSBC in its third-quarter interim management statement.
Morningstar's banking analyst, Erin Davis, reviewed the quarterly results and gives her analysis below:
"HSBC reported a profit of $2,823 million for the third quarter, down 54% from the trailing quarter, as the bank absorbed an additional provision of $800 million against potential fines related to US money laundering charges, $353 million of additional provisions for redress of payment protection insurance, and non-cash, own-debt accounting charges of $1,733 million.
"We think the most significant of these is the doubling of provisions against US money laundering charges, which we think pose some risk of reputational damage. The bank expects a settlement to be forthcoming in the next several weeks, and while we'll watch for whether any damaging details are released in the settlement agreements, we doubt any will be material to our fair value estimate [of 660p per share.]
"On an underlying management-reported basis, the bank's profit before tax was $5,043 million in the third quarter and $14,865 million in the nine months through Sept. 30, up 125% and 21%, respectively, from the year-ago quarters. The underlying results were largely in line with our estimates, as lower net interest income offset lower loan losses.
Overall, while Davis is concerned about HSBC's money laundering charges, she remains upbeat about its current competitive positioning:
"Despite ... global economic malaise, HSBC's attractive footprint meant that it continued to find growth opportunities. Gross loans to customers grew 3.6% from the trailing quarter, led by a 13% increase in North American corporate lending. We think HSBC will continue to see competitive benefits from its solid capital and funding positions as its competitors retrench."
Morningstar Premium Members gain exclusive access to our full HSBC Analyst Report including a fair value estimate, bull and bear breakdowns, and risk analysis. Not a Premium member? Get these reports immediately when you try Morningstar Premium for free for 14 days.