HSBC (HSBA.L) reported a deeper-than-expected 17 percent slide in annual pretax profit and cut its earnings target, saying allegations its Swiss business had helped customers to dodge taxes had brought shame on the bank.
Earnings from Europe's biggest lender on Monday reflected the cost of past misconduct and protecting itself against the impact of further scandals. HSBC said allegations about its Swiss operations had badly damaged its image.
"A number of us think the practices of the private bank in the past are a source of shame and reputational damage to HSBC. I think shame would be a reasonable noun to use," Chief Executive Stuart Gulliver told reporters.
Gulliver was himself thrust into the center of the scandal on Sunday when Britain's Guardian newspaper said he had sheltered millions of pounds in HSBC's Swiss private bank via a Panamanian company.
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.
Gulliver is among the best paid bank executives in Europe with a pay packet last year amounting to 7.6 million pounds ($11.7 million) down from 8 million in 2013 after his bonus was cut to reflect the bank's failure to stamp out misconduct.
HSBC reported pretax profit of $18.7 billion for 2014, down from $22.6 billion the year before and below the average analyst forecast of $21 billion, after it was hit by higher costs and a series of provisions for misdeeds, including attempted manipulation of foreign exchange markets.
Shares in the bank fell nearly 6 percent, their biggest intra-day drop since November 2011, to hit a near 2-1/2 year low. At 1040 GMT they traded 5.6 percent lower.
"When the first paragraph of your report cites 'significant items including fines, settlements and UK customer redress' impacting revenues and costs, it certainly doesn't bode well for the rest of the report," said Augustin Eden, analyst at Accendo Markets.
RETURN ON EQUITY
Gulliver, appointed CEO in 2011, has sold or closed 77 businesses and axed over 50,000 jobs to try and simplify HSBC's sprawling business and boost earnings after higher capital requirements imposed since the financial crisis make it more difficult for large banks to make a profit.
HSBC has increased the amount of capital it holds to absorb potential losses by over 60 percent since before the crisis. Gulliver said the bank intended to increase its core capital to between 12-13 percent from 10.9 percent currently, to ensure that it had enough reserves to deal with regulators' demands
The higher capital reserves mean that HSBC is cutting its target for return on equity (RoE) to more than 10 percent in the next 3-5 years from 12-15 percent, originally set in 2011.
RoE, a measure of how well shareholders' funds are used to turn a profit, fell to 7.3 percent in 2014 from 9.2 percent in 2013.
Before the higher capital costs imposed during the crisis, RoEs well in excess of 10 percent were normal for large banks.
Underlying operating expenses were $37.9 billion in 2014, up 6.1 percent from the year before, 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.
($1 = 0.6507 pounds)
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