HSBC profits slump as bank sets aside £827m to pay damages to Madoff Ponzi scheme victims

Profits at HSBC slumped after Europe’s biggest bank set aside £827million to pay damages to victims of Bernie Madoff’s massive Ponzi scheme.

Earnings slid from £6.4billion to £5.5billion in the first nine months of this year, mainly because of the unexpected hit, which was announced just a day before the lender’s results were released.

Despite the setback, HSBC raised its profit guidance for the full year as the lender continues to slim down and focus on key markets in the UK and Hong Kong.

‘We are becoming a simple, more agile, focused bank, built on our core strengths,’ said chief executive Georges Elhedery.

But what he called ‘historical matters’ still haunt the bank and overshadow its financial figures.

The latest is the gigantic Madoff investment fraud, which went undetected for many years until it was unearthed at the height of the financial crisis in 2008.

HSBC was forced to make a provision for potential losses after partly losing a court case last week brought by one of the fraud’s victims.

If its appeal against the ruling is unsuccessful, HSBC plans to contest the amount to be paid – a process the bank admitted yesterday could take ‘years’.

HSBC also sought to play down its exposure to so-called ‘shadow banking’ – finance provided to large businesses outside of normal bank lending or issuing publicly traded shares or bonds.

This has become a vital source of funding for firms as traditional banks retreated from riskier lending since the global financial crisis.

But the sudden collapse of two US companies – car parts maker First Brands and sub-prime auto lender Tricolor – have raised concerns that more ‘cockroaches’ may emerge, as JP Morgan investment bank boss Jamie Dimon put it.

Bank of England governor Andrew Bailey has ordered a review of the sector amid fears that loose lending by private equity firms and hedge funds could pose a systemic risk to the mainstream banking sector and the wider economy.

HSBC said its exposure to this form of private credit was in the low single-digit billions of dollars, which it said was small compared to its rivals.

In the UK, the bank continues to gain from higher-for-longer interest rates with its net interest income – the difference between what it charges borrowers and pays savers – rising by a tenth to £6.4bn ($8.477bn) so far this year.

HSBC is exiting key parts of its deal-making investment bank in the UK, Europe and the US as part of Elhedery’s drive to shrink the bank.

It has made 11 disposals so far this year, including the recent sale of its UK life insurance arm.

The bank is still on the hunt for a new chairman to replace Sir Mark Tucker with Brendan Nelson standing in until a permanent successor is found.

The shares rose by 3pc to 1024p in early trading after the bank raised its profits guidance for the year, making it the best performer in the FTSE-100 index of leading companies.

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