HSBC on High Alert Over Private Credit Losses as Shares Surge

HSBC’s chief financial officer has raised a red flag regarding growing risks in the private credit market, expressing particular concern about hedge funds and smaller banks with significant exposure to potential losses. Pam Kaur highlighted the bank’s increased vigilance following a 14 per cent drop in third quarter profits to $7.3 billion. Despite this, HSBC upgraded its full year profit guidance, attributing the adjustment to solid underlying performance.

Kaur noted that the principal worry is the knockon effects facing counterparties, especially smaller financial institutions that may lack the capacity to absorb widespread borrower defaults. She emphasised this as a critical focus for the bank, underscoring the need to manage secondary and tertiary risks within the broader financial ecosystem.

The warning comes after remarks by JP Morgan’s Jamie Dimon, who recently likened troubled loans at a collapsed car parts manufacturer to cockroaches, suggesting problems are seldom isolated. During the third quarter HSBC set aside $1 billion for anticipated credit losses, which it described as steady compared with the previous year. This provision included specific exposures in the UK, increased reserves for Hong Kong real estate, and an allowance for a Middle Eastern borrower. While UK loan losses appeared high, Kaur maintained such figures were not abnormally elevated within context.

HSBC’s overall exposure to private credit remains relatively small. The bank’s profits were affected by a $1.4 billion bill for legacy legal matters, predominantly relating to a $1.1 billion provision attributed to settlements with investors impacted by the 2008 Bernie Madoff scandal. An additional $300 million charge was incurred due to a French withholding tax investigation. When adjusted for these oneoff expenses, quarterly profit before tax climbed 3 per cent to $9.1 billion.

Performance in wealth management was robust, although offset by declining revenues from foreign exchange and debt and equity operations. HSBC has now forecast net interest income to reach at least $43 billion in 2025, aiming for a mid teens or higher percentage return on tangible equity before unique costs. The net interest margin increased to 1.57 per cent, up 0.11 percentage points from the same quarter last year.

Shares rose by 3 per cent to £10.34 in London trading, following similar gains in Hong Kong. Analysts noted results exceeding expectations once major legal costs were removed. Kaur also addressed the ongoing search for a permanent chair after Sir Mark Tucker’s departure, with Brendan Nelson currently acting in the role. HSBC, valued at £173 billion, maintains its dual focus on the UK and Hong Kong as key domestic markets, despite recent strategic exits and costcutting measures targeting annual savings of $1.5 billion by 2027. The third quarter dividend remains unchanged at 10 cents per share.