HSBC reported a 14% drop in third-quarter pre-tax profits after setting aside a hefty $1.1 billion provision related to a long-running lawsuit tied to Bernie Madoff’s infamous Ponzi scheme. The hit dragged profit before tax down to $7.29 billion, falling short of analyst expectations of $7.65 billion.
This legal provision was the most significant part of a total $1.4 billion in exceptional costs for the quarter, contributing to the drop in profits despite otherwise solid revenue performance.
Lawsuit
The lawsuit at the center of the issue involves HSBC Securities Services Luxembourg (HSSL), which is defending itself against a claim filed by Herald Fund SPC. The case has been dragging on since 2009, with investors seeking compensation for losses in Madoff’s fraudulent scheme.
Just last week, the Luxembourg Court of Cassation issued a mixed ruling—denying HSSL’s appeal on the securities claim but allowing it on the cash restitution claim. HSSL now plans to pursue a second appeal through the Luxembourg Court of Appeal.
The $1.1 billion provision reflects the financial uncertainty still surrounding the case, which remains a risk factor for HSBC going forward.
Profits
HSBC’s profit after tax came in at $5.5 billion, down 18% compared to the same period last year, and below the market expectation of $5.97 billion. That decline mirrors the effect of the lawsuit provision and rising operating costs.
However, strip out the legal charges and one-time items, and the picture improves. On an adjusted basis, pre-tax profit would have risen to $9.1 billion—actually up 3% year-on-year, and above consensus forecasts.
So, while the headline numbers might look grim, there’s a more optimistic story underneath.
Revenue
Despite the profit dip, revenue tells a different story. Total revenue hit $17.79 billion for the quarter, up 5% from the same time last year and beating expectations of $16.72 billion.
A big driver of that growth was net interest income (NII), which reached $8.78 billion—15% higher than the year before. This increase came from a combination of deposit growth and structural hedging. The bank also saw a rise in wealth-related fees as client activity bounced back.
These numbers helped fuel a nearly 3% rise in HSBC shares after markets opened, taking the year-to-date gain to an impressive 31.5%.
Outlook
Group CEO Georges Elhedery emphasized that the bank is staying focused on its long-term strategy, despite the legal setback. He highlighted that HSBC is becoming a simpler, more agile institution, built around its core strengths.
Elhedery said the bank now expects its 2025 return on tangible equity (RoTE), excluding one-off items, to reach the mid-teens or better—a signal of strong confidence in the bank’s direction.
HSBC also upped its guidance for net interest income. Previously expected to be around $42 billion, the bank now forecasts NII will come in at $43 billion or higher by 2025.
Strategy
HSBC has been actively pursuing strategic moves this year, including its plan to take full control of Hang Seng Bank and delist it from the Hong Kong stock exchange. Though the acquisition and legal provisions will put some pressure on capital in the short term, analysts see the bank’s solid branding in Asia as a strong foundation for growth.
According to Richard Hunter at Interactive Investor, HSBC’s well-established presence in the Asian market positions it to grow, despite these short-term hits. He added that the reorganization could pave the way for new expansion opportunities in the region.
Matt Britzman from Hargreaves Lansdown echoed this sentiment, saying that while the lawsuit provision dented headline numbers, the core business remains strong. Net interest income and wealth management both showed solid growth, and costs stayed largely in check.
So while the lawsuit headlines may have taken center stage this quarter, the underlying engine at HSBC still appears to be running smoothly.
FAQs
Why did HSBC profits fall in Q3?
Due to a $1.1bn provision for a Madoff lawsuit.
What was HSBC’s Q3 pre-tax profit?
$7.29 billion, below the $7.65bn forecast.
What is the lawsuit about?
Investor losses linked to Madoff’s Ponzi scheme.
How did HSBC’s revenue perform?
Revenue rose 5% to $17.79bn, beating forecasts.
What’s HSBC’s 2025 profit outlook?
RoTE expected to reach mid-teens, excluding one-offs.
