It’s been a bad couple of weeks for HSBC’s CEO, Stuart Gulliver.
On February 18, Swiss prosecutors announced an investigation into HSBC’s Swiss banking arm, HSBC Suisse, for money laundering, and searched its premises. This followed allegations, supported by documents leaked to the press, that HSBC Suisse had connived at tax evasion, tax fraud, money laundering and illegal transactions by its customers. HSBC Suisse is now under investigation in a number of countries in addition to Switzerland, and already faces prosecution in France and Belgium.
But then Gulliver’s own personal finances came under scrutiny. The Guardian newspaper revealed that he has a Swiss bank account controlled through a Panamanian company, through which he apparently put his bonuses while in Hong Kong in order to conceal them from Hong Kong staff. In short, he is a client of HSBC’s Swiss bank. And although he has lived in the UK for ten years and educated his children here, he is registered as “non-domiciled” for UK tax purposes.
The Guardian further revealed that Gulliver is employed through a “secondment” from the Netherlands- based HSBC Asia Holdings, rather than directly by the UK bank. HSBC was at pains to point out that Gulliver pays UK taxes, less a credit for tax paid in Hong Kong – though evidently not on his pre-2003 bonuses, since a Panamanian company is of course offshore. But I would have to agree with John Christensen of the Tax Justice Network (quoted in the Guardian) that these arrangements look suspiciously as if they are intended to avoid UK taxes on Gulliver’s global investment income.
Of course no-one is suggesting that any of this is illegal. But it does raise questions about the attitude of a bank to its customers’ tax affairs when its CEO appears to have structured his personal finances in such a way as to avoid significant taxation. Tone comes from the top, and all that.
But the questions over his personal finances are the least of Gulliver’s worries. In addition to the Swiss bank can of worms, HSBC revealed on Wednesday February 25 that it is under investigation in many countries for numerous other offenses and faces “unquantifiable” litigation costs and fines. The list includes the following:
- Rigging of London interbank offered rates, European interbank offered rates and other benchmark interest rates.
- Rigging of FX benchmark rates. This has been partially settled already, but further investigations continue in the US, UK and elsewhere.
- Rigging of the gold and gold derivatives markets from January 2004 onwards
- Violation of US anti-trust legislation in relation to the selling of credit default swaps from 2006-2009
- Mis-selling of consumer ‘Enhancement Services Products’ by HSBC Finance through its legacy Cards and Retail Services business
- Illegal foreclosures of US mortgages and other breaches of US law with regard to mortgage servicing obligations. This has been partly settled but further litigation seems likely.
- A range of offenses connected with US mortgage origination and securitization prior to the financial crisis
- Money laundering and sanctions breaches. HSBC has settled with official prosecutors in the US, but faces private lawsuits
- Extensive involvement in Madoff's Ponzi scheme.
To be sure, HSBC is by no means the only bank facing extensive regulatory investigation, litigation and fines. But this list is a very serious indictment of the bank’s management. Several of the alleged offenses have occurred, or at least continued, during Gulliver’s time as CEO.
Litigation costs, regulatory fines and customer compensation have knocked a large hole in HSBC’s profits. The bank’s 2014 full-year results, released on Wednesday February 25, revealed that profits had fallen by 17%. And the costs of cleaning up the mess and ensuring that the bank behaves better in future are beginning to bite. HSBC’s cost-income ratio has risen by 5.8%. The profitability of the bank has diminished considerably.
Douglas Flint, the bank’s chairman, warned that this change may be permanent (my emphasis):
Cost progression continued globally in large part to implement regulatory change and enhance risk controls, notably around financial system integrity and conduct. Streamlining initiatives could only partly offset this cost expansion. Further customer redress costs and regulatory penalties around past failings reinforced the Board’s continuing commitment to prioritise whatever further investment in systems and controls is necessary to mitigate future repetition. It is clear now that societal, regulatory and public policy expectations of our industry are changing its long-term cost structure.
And Gulliver spelled out the implications for shareholders (my emphasis):
It is already clear that the regulatory costs of operating a global business model have increased since we announced our strategy for HSBC in 2011.
As the Group Chairman’s Statement explains, the regulatory environment continues to evolve. Our commitment to be the world’s leading international bank means that improving our regulatory and compliance abilities and implementing Global Standards must remain priorities for HSBC. Our Compliance staff headcount has more than doubled since 2011 and there is more work still to do to strengthen the Group’s compliance capability.
At the same time, the level of capital that we hold has increased by over 60% since before the financial crisis. Specifically, we have further strengthened our capital levels in response to increasing capital requirements from the UK Prudential Regulation Authority. Whilst we expected an increase in the amount of capital we were required to hold when setting targets for the Group in 2011, we could not have foreseen the full extent of the additional costs and capital commitment that would subsequently be asked of us. The pace of change has been exceptional.
As a consequence, some of the targets that we set for the Group in 2011 are no longer realistic. In recognition of that fact, we have set new medium-term targets that better reflect the ongoing operating environment. We are setting a revised return on equity target of more than 10%. This target is modelled using a common equity tier 1 capital ratio on a CRD IV end point basis in the range of 12% to 13%.
Our cost target will be to grow our revenue faster than costs (‘positive jaws’) on an adjusted basis. We are also restating our commitment to grow the dividend. To be clear, the progression of dividends should be consistent with the growth of the overall profitability of the Group and is predicated on our ability to meet regulatory capital requirements in a timely manner.
Only three years ago, HSBC was targeting RoE of 12-15%. Now, with RoE at a dismal 7.3% - nearly two percentage points lower than in 2013 – it will struggle even to meet its new target.
This is by any standards a poor record for a CEO. Gulliver appears so far to have escaped shareholders’ wrath, although his remuneration package was reduced. But I wonder for how long he will stay in post. With the headwinds facing HSBC in 2015 it is difficult to see how performance will improve significantly. And if it doesn’t, Gulliver may reach the end of his rope.
