(Oct 27): HSBC Holdings plc will set aside US$1.1 billion to cover litigation by investors who lost money in Bernard Madoff’s fraud, joining other global banks unexpectedly hit recently with ballooning costs on various cases dating back years.
The provision will be recognised in its upcoming third quarter of 2025 results, and will have an impact of around 15 basis points on the group’s common equity Tier 1 capital ratio, according to a statement on Monday.
HSBC is defending a claim brought by Herald Fund SPC that dates back to 2009 for restitution of securities and cash. In July, the bank disclosed the fund was seeking the return of securities and cash of US$2.5 billion plus interest or damages of US$5.6 billion plus interest.
A court in Luxembourg denied HSBC’s appeal in respect of Herald’s securities claim last Friday, but accepted the one in relation to a cash demand, the statement said. HSBC, based in London, will now pursue a second appeal.
Because of the pending second appeal and the “complexities and uncertainties associated with determining the quantum of restitution, the eventual financial impact could be significantly different”, HSBC said.
“Increasingly, it appears that HSBC has done a poor job in measuring and controlling its legal risk,” said Mark Williams, a master lecturer in the finance department at Boston University’s Questrom School of Business.
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Investors initially brushed aside the provision in Hong Kong early trading with HSBC shares up 0.3% as of 11.38am Hong Kong time on Monday.
The “manageable charge” helps clear a long-standing legal overhang, said Tomasz Noetzel and Francis Chan, senior analysts at Bloomberg Intelligence.
Multiple banks are still defending against Madoff’s Ponzi-scheme litigation. Madoff pleaded guilty in 2009 and was sentenced to 150 years in prison, where he died in 2021. At the time his Ponzi scheme fell apart, customer statements reflected about US$65 billion in non-existent investments.
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HSBC joins other global financial institutions who have been battling cases. BNP Paribas SA shares plummeted last week after a court ruling linked it to human rights abuses in Sudan, triggering speculation the firm will ultimately have to pay billions of dollars to settle related cases.
HSBC, which has spent the past year shedding thousands of jobs and stripping out layers of management to rein in costs, earlier this month announced a US$14 billion buyout of its troubled Hong Kong subsidiary Hang Seng Bank Ltd. In order to keep its capital levels in check as it pays for the deal, HSBC said it won’t be buying back shares for at least the next three quarters.
“The additional charge to earnings this year could weigh on sentiment slightly because we were hoping these one-off impairments were cleaned up after the interim write-offs,” said Lorraine Tan, the director of equity research (Asia) at Morningstar.
HSBC recorded a US$2.1 billion impairment linked to its stake in Bank of Communications Co in July. The bank is expected to post a third-quarter pre-tax profit of US$7.66 billion on Tuesday. Investors will be keeping a close eye on its exposure to Hong Kong’s struggling property sector which is facing stress from the worst real estate slump since the Asian financial crisis in the late 1990s.
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