HSBC could have to put aside £8.8bn to cover bad debts in coronavirus crisis

Bank’s profits halve as it says outlook for world economies has worsened in past two months

HSBC could be forced to put aside up to $11bn (£8.8bn) to cover bad debts this year, as it prepares for the economic fallout caused by the Covid-19 crisis.

It would be the biggest provision for credit losses since the eurozone debt crisis in 2011, when the bank took a loan loss provision worth $12bn.

On Tuesday, HSBC announced it had already taken a $3bn (£2.4bn) charge to help cover potential defaults by customers affected by the outbreak. It caused profits to fall 48% to $3.2bn for the three months to March.

The loan loss provisions were far worse than the $1.8bn expected by analysts and $2.4bn higher than in the same period last year.

HSBC said the extra charges were mainly due to the “global impact of Covid-19 and weakening oil prices”, but warned of further difficulties ahead. It also said fraud could rise during the crisis, leading to “potentially significant” loan loss charges.

“The outlook for world economies in 2020 has substantially worsened in the past two months. The impact and duration of the Covid-19 crisis will likely lead to higher ECL [expected credit losses] and put pressure on revenue due to lower customer activity levels and reduced global interest rates,” the bank said.

Depending on the severity of the economic downturn, HSBC said loan loss provisions could surge to between $7bn to $11bn for full year 2020.

The HSBC chief financial officer, Ewen Stevenson, said: “It’s very much premised on views on how long and how severe the economic impact is of Covid-19, and really the shape of the recovery that we see.”

He explained that while China and Hong Kong may be on the path to recovery, western Europe, the UK and US may see their trough in the second quarter. “But then’s there’s a very wide spectrum of what happens [after] that including the risk of what’s called ‘the second wave’ in some countries.”

He said the current crisis was “quite different” from that imagined by the Bank of England in its annual stress tests – also known as the annual cyclical scenario – which determine whether banks can weather a severe economic downturn.

“We’re now seeing, for example, unprecedented levels of government support and intervention into the global economy, which wasn’t imagined in the ACS scenario,” Stevenson explained. The scenario also modelled a much more severe downturn in Asia, and much higher interest rates that would have pushed credit losses much higher, he added.

The Bank of England has insisted that UK lenders are strong enough to survive the Covid-19 crisis, despite forecasting a “more severe” short-term impact than the latest stress tests were able to simulate.

The bank said it plans to cut costs to help offset an expected drop in revenue and is bracing for a material drop in profitability in 2020. However, it has temporarily halted the majority of redundancies linked to its turnaround plan – which was expected to lead to about 35,000 job losses.

In February, HSBC said it might have to put aside about $600m to cover the costs of bad debts arising from the pandemic. At that time, the disease was still largely contained in Asia and affecting the bank’s largest market, Hong Kong.

The ringfenced UK bank accounted for $589m of first quarter provisions, two-thirds of which was aimed at consumer debts like mortgages and credit cards. However, Stevenson said some of that money had already been earmarked for potential hardship due to Brexit.

HSBC said there was a heightened risk that businesses in some sectors may struggle to repay their debts. In the first stages of the outbreak, companies involved in the oil and gas industries, and the transport and consumer sectors have been hardest hit. But HSBC said the long-term impact of the outbreak on some industries was “uncertain” and may not be accounted for in its forecasts.