Profits at HSBC tumbled nearly 30% in the first quarter on fears of a surge in defaults linked to inflation and what it called the “devastating consequences” of the war in Ukraine.
The London-headquartered bank said profits fell to $4.2bn (£3.3bn) from $5.8bn a year ago, as it put aside $642m to cover potential defaults on loans in the first three months of the year. That included $250m in provisions for potential losses linked to its direct exposure to Russia.
Banks have started to put aside more money to cover losses from unpaid loans, amid fears that customers will fall behind on payments because of the cost of living crisis. Such fears have been exacerbated by the Russian invasion of Ukraine, which has disrupted energy flows and global supply chains.
It marks a reversal from 2021, when banks were able to release money put aside for defaults linked to the Covid crisis, thanks to government support programmes that kept workers and companies afloat.
Ewan Stevenson, the HSBC chief financial officer, told reporters on Tuesday that the bank was likely to have to put aside $3bn for potential defaults throughout 2022, though that is less than half of the $8.8bn that HSBC originally provisioned for loan losses in the first year of the pandemic.
HSBC shares fell 3.7% on Tuesday morning.
“The Russia-Ukraine war continues to have devastating consequences both within Ukraine and beyond,” HSBC chief executive, Noel Quinn, said. The bank added that it was “monitoring developments closely”.
However, the lender has so far kept its operations open in Russia, despite pressure from MPs and the decision by rivals including JP Morgan and Goldman Sachs to close their offices last month.
HSBC, which has about 200 staff in the country, defended its position, saying it was not accepting new business or customers there. “The vast majority of our business in Russia serves multinational corporate clients headquartered in other countries, and as a global bank, HSBC has a responsibility to help them manage these challenging circumstances,” the bank said.
Profits in the first quarter were also affected by lower revenues from its wealth business caused by the strict Covid lockdown policy in China and Hong Kong, which is its largest market and accounts for more than half its profits. Government policies aimed at keeping Covid cases at zero have resulted in the closure of half its local branches.
But Stevenson was optimistic that conditions would improve: “Hong Kong is now starting to reopen, the branch network is back operating normally again, and we expect client activity to begin to normalise as a result.”
HSBC revenues also fell because of a drop in investment banking fees. Big banks including HSBC are grappling with the end of the 2021 investment banking boom, as fewer companies raise money on the financial markets and hold back from mergers and takeovers. However, the bank benefited from a continued surge in home buying that started during the pandemic, as well as the subsequent jump in house prices. Mortgage lending grew by $5.8bn in the first quarter, accounting for more than half of the $9bn in customer loan growth at the start of the year.
HSBC’s finance chief said the pace of growth in mortgage lending would slow over the next quarter owing to competition. It also emerged earlier this month that banks were starting to tighten their lending criteria, and were taking the cost of living crisis into consideration when calculating how much to offer borrowers.
“We have stepped back a bit in April. I think that means that our origination volumes are likely to fall a bit during the second quarter,” Stevenson said, referring to the number of new mortgages set up.
