HSBC’s losses could touch $13 billion, core capital ratio however improves

On Monday, in a significant development, HSBC Holdings PLC has issued an earnings guidance saying, its bad debt charges could balloon past its previous estimate of $13 billion this year with profits falling by more than 50% due to the Wuhan coronavirus induced lockdown which has majorly affected its retail and corporate customers across the globe.

The announcement by Europe’s biggest bank by assets has reinforced the trend of lenders across the world increasing their buffers to absorb loans that have gone bad; it comes at a time when companies across industries and sectors are reeling from the impact of coronavirus which emerged from Wuhan, China.

For the first six months of this year, HSBC reported a pre-tax profit of $4.32 billion, lower than the $5.67 billion average forecasts by analysts.

The bank has increased the buffering of its non-performing assets charge to between $8 billion and $13 billion, up from $7 billion-$11 billion, underscoring worse-than-expected losses during the second quarter and steeper decline in the economy.

“What we have seen this quarter is quite a sharp shift in economic outlook for the global economy, the famous ‘V’ has got a lot sharper and as a result we have materially increased our provisions,” said HSBC’s Chief Financial Officer Ewen Stevenson.

The bank’s business in Britain has taken a significant hit, said Stevenson, as it took a $1.5 billion charge against expected credit losses.

HSBC’s Hong Kong listed shares plummeted by 4.7% on Monday afternoon, outpacing a fall in the local benchmark, to their lowest since March 2009.

The bank’s credit impairment provisions during the first half soared to $6.9 billion, compared to $1 billion in the same period in the previous year. It had provisioned $3 billion to cover losses from loans in the first quarter.

Impairment charges included a $1.2 billion writedown on the value of software it owns, mainly in Europe, said the bank.

The silver lining in its result is that its core capital ratio, the key measure of its financial strength, rose to 15% at the end of June due to a favorable regulatory changes; HSBC has however warned that this could decline later this year if falling credit ratings hit its risk-weighted asset ratio.

HSBC plans on cutting costs this year by 3% by lowering its employee spending on travel and other items during the pandemic as well as restructuring, said the bank.

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