Fitch Ratings-Hong Kong/London-12 February 2015: Publication of historical details on client transactions at HSBC’s Swiss private banking subsidiary and the allegations the bank helped clients evade tax highlights tail risks on compliance and conduct breaches for global banks, Fitch Ratings says.
We believe the control environment in HSBC’s wealth management has been strengthened considerably since the period of alleged wrongdoing. But renewed scrutiny of practices at the private banking subsidiary and possible investigations could result in new fines or other legal action. We believe an intact franchise is essential for HSBC to offer international connectivity – a key strategic objective. The group also remains exposed to additional unquantified and therefore unprovisioned cases, such as investigations into interest-rate setting.
The increase in conduct, legal and regulatory risks is industry-wide. Wealth management in general gives rise to material reputation and operation risks. But it also appears that organisational complexity and a lack of management oversight played a role in HSBC’s historical conduct failings. HSBC’s management has improved its control framework, which should help adherence with compliance requirements and protect its reputation. But we believe conduct risks cannot be fully averted for such a large and diversified group. This is incorporated into our assessment of the operating environment and the risks HSBC’s business model exposes it to.
We expect the group’s financial results to remain solid, benefitting from diversified operations. Reliable income from global customer relationships and tight cost control should help offset sustained litigation and regulatory risks. We believe conduct charges, both direct and from reputational damage to the franchise, should remain manageable for HSBC’s capitalisation and profitability at its current rating. Fines and settlements that materially dent capitalisation, restrictions that affect its businesses substantially or findings that could set the stage for additional material litigation risks and reputational damage could put HSBC’s ‘AA-‘/Stable ratings under pressure.
HSBC’s global private banking is the group’s smallest division. It has been refocusing and de-risking since the data theft in 2010. Swiss private banking is one of several key markets (including the US, India, Turkey and Brazil) where expansion initiatives have had less than anticipated results. But HSBC has a good record of repositioning once risks emerged, and we believe it has improved the risk profile of these operations.
HSBC’s Swiss private bank is one of around a dozen Swiss wealth-management firms into which the DoJ and other US authorities started investigations in 2013 regarding alleged client tax evasion. In November 2014, HSBC settled with the US Securities and Exchange Commission (SEC) for US$ 12.5m, but the key settlement with the DoJ is still outstanding.
Credit Suisse, one of the few banks that settled in 2014, paid US$ 2.8bn, of which US$ 196m to the SEC and the rest to the DoJ, US Internal Revenue Service, Federal Reserve System and New York State Department of Financial Services. According to the SEC, HSBC generated around US$ 5.7m pre-tax profit from 368 undeclared client accounts. Credit Suisse generated US$ 82m from around 8,500 client accounts, although many factors are likely to have been taken into account in a settlement.