[WATCH] Updated | Malta’s financial services suffered ‘reputational damage’, HSBC CEO says after 23% profit drop

HSBC registers 23% profit loss in 2018 • European requirements to hold additional capital for non-performing loans puts pressure on bank • HSBC CEO says the decrease in profits can be traced to investments in compliance as he praised Malta's economic performance

Andrew Beane: “It is essential that all market participants ensure anti money-laundering standards are fully implemented without delay.”
Andrew Beane: “It is essential that all market participants ensure anti money-laundering standards are fully implemented without delay.”

Updated at 3pm with comments from Andrew Beane

HSBC Malta has registered a pre-tax profit of €38.6 million as at year-end 2018 – a decrease of 23%, or €11.3 million, compared to 2017.

HSBC chief executive officer Andrew Beane said 2018 was a difficult one for the Maltese financial services sector, saying it had suffered further reputational damage.

“It is essential that all market participants ensure anti money-laundering standards are fully implemented without delay in order to avoid more significant long-term risks. We welcome new initiatives announced by the local authorities which the industry must fully embrace and support,” he said.

HSBC’s adjusted profit before tax was €36.5m, a decrease of €19.1m or 34% compared to 2017. The adjusted results exclude the impact of the following notable items: a collective agreement provision charge of €7.6m in 2017; and a provision release relating to the brokerage remediation of €1.8m in 2017 with an additional €2.0m release in 2018.

Beane said the Maltese economy still performed strongly, allowing HSBC to refocus its business to deliver measured growth, following completion of an extensive restructuring process. “New digital innovations will create enduring competitive advantage for HSBC as we bring a range of new world class solutions to benefit our customers and our new account opening process is delivering record volumes.”

But he expressed concern on European Central Bank requirements relating to the treatment of non-performing loans (NPL), which meant banks will be required to hold additional capital against fully secured NPLs.

“For HSBC, the expected impact relates to loans where the bank does not expect to incur additional losses even though the recovery process currently takes years... whilst we will sustain the Bank’s position as a strong dividend generating company, the Board has recommended a final dividend pay-out ratio of 30% in order to allocate additional capital to grow the business and meet the new ECB NPL requirements in the event that reforms to the current system are not forthcoming.”

Profit attributable to HSBC shareholders was €28.7m resulting in earnings per share of 8.0 cents compared with 8.6 cents in 2017.

This will bring the full year 2018 dividend pay-out ratio to 47%. The final gross dividend will be 1.8 cent per share (1.2 cent per share net of tax) which brings the total dividend for 2018 to 5.8 cents (3.8 cents net of tax).

Other figures

Net interest income of the bank decreased by 10% to €108.6m, due to the reduction in the corporate loan book and margin contraction in the bonds portfolio.

Operating expenses were €108.4m, €5.7m or 5% lower compared with prior year. 2017 included a provision of €7.6m relating to the collective agreement, excluding this, adjusted operating expenses increased by €1.9m or 2% driven by continued investments in regulatory programmes, financial crime compliance and business growth.

The effective tax rate was 26%. This translated into a tax expense of €9.9m, €9.1m lower than the €19.0m expense for 2017. During 2018, HSBC benefited from a different tax treatment applied on a specific transaction.

Net loans and advances to customers decreased by 1% to €3,110m. The decline was driven by the corporate loan book due to both risk management actions and a reduction in non-performing loans. The retail loan book grew by 2% compared with the prior year partially offsetting the reduction in corporate lending. The bank continued to improve the asset quality by managing down non-performing exposures by over 19% versus 31 December 2017.

Andrew Beane's statements to MaltaToday

The HSBC CEO told MaltaToday that HSBC continued to pay significant dividend to shareholders but profitability went down 'year on year.'

"The decrease in profits was primarily associated with more investments that HSBC has made in compliance systems. We think this is necessary for the longterm," Beane said.

He praised Malta's current economic performance, topping the EU league table, describing it as "fantastic." It was for this reason that HSBC called for further support on compliance measures.

"What we would like to see is support to see that growth is broad-based and sustainable. To do that, all banks need to demonstrate that we operate the highest standards of compliance. That is what gives access to trade and international markets," he said.

Beane spoke at a press conference in the Malta Chamber of Commerce when he argued that the 2018 results reflect the 2017 Risk Management Action that the bank undertook.

With regards to the use of blockchain, Beane maintained that the bank found no issue and that it already used blockchain itself. "While this opens up a risk appetite, Malta can make good progress here," he said, adding that customer deposits were up by 3% from the previous year, suggesting customers were not as risk-averse.

With regards to the recent cyber attack on BOV, Beane said that HSBC has a sophisticated defensive mechanism based in London and that he as confisdent in the controls operated by the international bank.