London: Profits at HSBC Holdings fell 14% from a year ago as a jump in costs offset a fall in bad debts at Europe’s biggest bank, due to outline a drastic shake-up of its business this week.
HSBC said it would take a $440 million provision to compensate UK customers who were wrongly sold insurance as banks scrapped a legal fight on the issue, which has implicated most of the UK’s big banks.
That provision -- and markedly higher staff costs in investment banking -- helped lift the ratio of costs to revenue to 60.9% from 55% in the previous quarter.
“We have increased our emphasis on cost management ... launching a number of cost reduction programmes... which will be covered in more detail at the Strategy Day (this Wednesday),” chief executive Stuart Gulliver said in a statement.
HSBC said it made a pretax profit of $4.9 billion in the first quarter, down from $5.7 billion a year ago, though higher than the $4.4 billion in the fourth quarter.
The bank also said its performance in April was “satisfactory and in line with expectations”.
The update came two days before Gulliver unveils a radical shake-up, expected to outline dramatic cost-cutting, a pull back from some of the 87 countries it has a presence in, and possibly the sale of its US credit-card business.
Gulliver was named CEO in September after a damaging boardroom power struggle, promising to “re-engineer the business” and to be more rigorous and disciplined on where to allocate capital when he took the helm at the start of the year.
HSBC shares were 1.3% lower at 643.2 pence at 03:20 pm, roughly in line with the European banking sector.
“These results look like a continuation of the trends seen at the full-year, with top line revenue continuing to shrink, offset by falling bad debts,” Seymour Pierce research analyst Bruce Packard said in a note.
Costs are expected to be cut by at least $2 billion annually after jumping to an “unacceptable” level last year, potentially seeing jobs go and investment reined in.
Gulliver aims to cut costs to a range of 48% to 52% of revenues, and it will take two to three years to reduce costs to that level, he told journalists on a conference call.
He also needs to take action to get return on equity (RoE) into his 12% to 15% target range. Profitability was only 9.5% last year and around 5% in 2009 and 2008.
Analysts say there are plenty of low-return areas the self-dubbed “world’s local bank” can target, such as European and North American retail banking, and businesses in Latin America and Asia.