HSBC shrugs off $550 million FHFA settlement
It's a sad indictment of the state of the banking industry that a half billion dollar settlement looks like a good outcome. HSBC's share price went up on news of its agreement with the FHFA. But neither it nor the rest of the industry should take too much comfort.
|HSBC chairman Douglas Flint wonders if customers are giving banks a second chance|
One of the world’s biggest banks is forced to pay out half a billion dollars to settle accusations of mis-selling securities and nobody bats an eyelid. Its stock price edges up on the news. The chairman and chief executive say nothing.
HSBC saw no apparent need to delay its nervously awaited three-tranche, dual-currency issue of $5.7 billion of AT1 securities. The bonds, which convert into shares on any breach of 7% on HSBC's CRD IV common equity tier 1 ratio and on which coupons are fully discretionary and can be turned off, drew strong demand as the AT1 market seemed to recover its poise after the summer sell-off.
HSBC priced the bonds just two days before news broke of the FHFA settlement, which looks like a regular run of business item.
Welcome to the banking industry in 2014.
Neither chairman Douglas Flint, chief executive Stuart Gulliver or any other senior executive of HSBC apparently felt any need to show contrition or remorse at the news on Friday that, in return for $550 million of the shareholders’ money, the Federal Housing Finance Agency (FHFA), conservator of Fannie Mae and Freddie Mac, had resolved claims in its 2011 lawsuit alleging violations of federal, Virginia and District of Columbia securities laws in connection with private-label sub-prime mortgage-backed securities HSBC had structured and sold to Fannie and Freddie between 2005 and 2007.
The only comment from HSBC comprised just eight words from Stuart Alderoty, senior executive vice-president and general counsel for HSBC North America: “We are pleased to have resolved this matter.”
We’re sure HSBC is pleased. Just three weeks earlier Goldman had handed over $3.15 billion to settle similar allegations and in March Bank of America had settled with the FHFA for $9.3 billion.
HSBC had warned analysts in the run-up to a case due to go to court at the end of September but always likely to be settled – along with the usual legalese pony about no admission of wrongdoing or liability – that it might cost as much as $1.6 billion. So putting this one behind it for just a half a billion dollars looks like excellent news for HSBC.
“In the somewhat surreal world of US regulatory justice, we believe that HSBC’s $550 million settlement with FHFA will be seen [in relative terms] as a positive outcome,” notes Ian Gordon, banks analyst at Investec.
HSBC’s share price even moved up on the day the settlement was announced. Having opened at 654.70 it closed at 657.6. The price has barely moved in the two business days following.
The FHFA filed claims against 17 banks in 2011 and has now come to terms with 15 of them. Cumulative settlements amount to $24.3 billion, with just two banks, RBS and Nomura, left to settle.
As a percentage of the volume of toxic sub-prime RMBS over which FHFA had alleged misrepresentations in each case, banks have paid out between 11% to 13%. By comparison, HSBC has settled for 9% of the $6.2 billion RMBS at issue in an agreement that looks less severe than most prior settlements. It would take a bold trader, however, to bet what this might mean for RBS and the allegations against it over $32 billion of RMBS sold to Fannie and Freddie.
Far bigger for HSBC than any headlines over the FHFA settlement were those at the start of September when respected UK fund manager Neil Woodford, who had built a big following at Invesco Perpetual before launching his own fund, announced he was selling down his position in HSBC stock over legal risk.
While praising the bank as a conservatively managed and well-capitalized company and applauding the efforts of Gulliver to simplify it, Woodford had become unnerved at the $1.9 billion hit it took in 2012 over money-laundering for Mexican drug cartels and by the overall $16.7 billion settlement paid by Bank of America in August to end investigations over selling toxic mortgages.
Woodford noted: “I am concerned that these fines are increasingly being sized on a bank’s ability to pay, rather than on the extent of the transgression. In particular, I am worried that the ongoing investigation into the historic manipulation of Libor and foreign-exchange markets could expose HSBC to significant financial penalties. Not only are these potentially serious offences in the eyes of the regulator, but HSBC is very able to pay a substantial fine.
“The size of any potential fine is unquantifiable, so this represents an unquantifiable risk. Nevertheless, a substantial fine could hamper HSBC’s ability to grow its dividend, in my view. I have therefore sold the fund’s position in HSBC.”
Do Woodford’s well-publicized concerns now look misguided in the light of the FHFA settlement?
That settlement might look like a good outcome for HSBC in isolation, but it does not mean the bank is somehow in the clear. Gordon at Investec says: “HSBC still faces a myriad of ongoing conduct/litigation issues, which we assume will generate incremental charges in excess of $2 billion.”
The expectation is that findings will emerge from the authorities' investigations into foreign-exchange fixing in the next six to 12 months, but the list of activities now being investigated on both sides of the Atlantic is itself almost unquantifiable, with the European Commission now also investigating the credit default swap market, for example.
It’s not only equity investors worrying about the squeeze the authorities are now putting on bank’s profits as they appear to tax the banks’ deep pockets in partial reparation for past mis-deeds and recompense for tax-payer funded bailouts – creditors are concerned too.
In its latest review of the global trading and universal banks, published this week, Fitch points out: “Uncertainty about the level of fines and potential related business restrictions is a significant current risk for these banks.
“The dramatic increase in BNPP’s settlement amount compared to existing provisions and the fact that Credit Suisse Group settled for an amount ($2.8 billion) vastly in excess of the $780million settlement fine paid in 2009 by UBS AG in a similar case highlight the challenges in estimating future conduct costs for the banks.”
And while the rating agency doesn’t expect any fines or settlements to be set so high as to undermine the viability of any of the large banks and tip them into bankruptcy – that really would be the authorities shooting themselves in the foot – it notes the potential for downgrades “where fines materially exceed already existing provisions and therefore result in a loss for the bank”.
Gerald Ratner’s comparison of cheap jewellery
and a prawn sandwich was terminal for his business,
yet banking seems to have come through a series of crises with considerable reputational damage
It adds that fines and settlements are not the only risk to earnings and ultimately to ratings: “Alongside Standard Chartered’s recent settlement concerning deficiencies in anti-money- laundering surveillance systems at its New York branch, BNPP’s settlement suggests that regulators are increasingly turning to restrictions on specific activities as a way of penalizing conduct failures. These restrictions may have longer-lasting implications for banks’ business profiles than one off fines.”
HSBC’s pleasure at settling with the FHFA for a modest half a billion may extend to the comforting knowledge that no customer will stop doing business with the bank as a result.
Flint is one of the more thoughtful chairmen of any global bank that Euromoney knows. There’s some irony that his most recent public pronouncement before the settlement came in a speech on business ethics in banking.
Flint dared to ask why, after the uncovering of so much wrongdoing, bank’s businesses have been so little disrupted. He points out: “Gerald Ratner’s famous comparison of cheap jewellery and a prawn sandwich was terminal for his business, yet banking seems to have come through a series of crises with considerable reputational damage, but with the core offering still taken and used by a seemingly loyal if, from time to time, reluctantly loyal customer base.”
When Flint was building his career, a settlement for half a billion dollars would have made screaming headlines and cost senior people their jobs. Could it be, he wonders, that customers are giving banks a second chance because they recognize the enormity of the regulatory reform under way?
Maybe. But Flint admits there may also be other explanations. He asks: “Should we see it as a good thing – a reflection of a human desire to forgive or reward a stated commitment to reform? Or should we regard it as somehow a forced dependency that public policy needs to unravel? Or is it simply lethargy and a perception that industry players are each as bad as each other, so what’s the point?”
We don’t know, Douglas. You tell us.