HSBC, Europe’s largest bank, said Tuesday it had increased loan loss provisions by more than 400% as it anticipates “severe recession events” due to the coronavirus pandemic.
The increase in HSBC’s expected credit losses (ECL) for the first quarter to $3 billion from $600 million — its highest quarterly level in nine years — contributed to profit before tax tumbling 48% to $3.23 billion. Revenue dropped 5% to $13.7 billion.
Analysts had expected a profit of $3.67 billion.
HSBC said the economic impact of the COVID-19 pandemic on its customers “has been the main driver of the change in our financial performance since the turn of the year” and that it expected ECL to total $7 billion to $11 billion by the end of the year.
The bank is also delaying parts of its vast restructuring plan, which includes reducing headcount from 235,000 to 200,000 over three years, to reduce uncertainty for employees.
“We are anticipating deep, severe recession events in western Europe and the U.S. in the second quarter,” CFO Ewen Stevenson told the Financial Times. The scale of loan losses depends on the “path of the economic impact and the shape of the recovery,” both of which are still unknown, he added.
As Reuters reports, HSBC’s “bleak outlook, shared by many lenders reporting earnings this season, underscored the scale of the problems facing the sector as it grapples with corporate borrowers in crisis, plunging stock and oil prices, as well as low interest rates.”
The six largest U.S. banks increased their first-quarter loan provisions by a combined $25.4 billion — a year-on-year rise of 350%.
Ronit Ghose, an analyst at Citigroup, said HSBC’s loan losses were “larger-than-expected but HSBC usually errs on the side of conservatism.” He said its “strong capital level is reassuring,” citing its core common equity Tier 1 (CET1) ratio of 14.6%, among the strongest of the world’s largest lenders.
According to the bank, its performance in Asia, where the coronavirus outbreak started and it derives the vast majority of its earnings, was “resilient” in the first quarter, with profit falling 25% while North America and Europe saw steep losses.
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