Canary In A Contained Coalmine? HSBC Crashes Most Since Crisis On 'Surprise' Revenue Plunge

Just over 10 years ago, HSBC was the first canary in the world's financial crisis coalmine to signal trouble ahead. Today's 7% bloodbath in the banking behemoth is the biggest drop since the financial crisis after reporting fourth-quarter profit that missed estimates on a surprise drop in revenue, which it warned could fall again this year.

As we recently noted, 10 years ago this month, HSBC Holdings, the world's third-largest bank at the time (and one of the most aggressive players in the U.S. market for low-quality mortgages), sent a chill through the financial world with news that its bad-debt charges will be 20% higher than forecast... and became the first canary in the coalmine of what would become the worst financial crisis of a generation.

"This is a material negative surprise for HSBC," said John-Paul Crutchley, an analyst at Merrill Lynch.


Foreclosures jumped 35% in December versus a year earlier, according to recent data from RealtyTrac. For the fifth straight month, more than 100,000 properties entered foreclosure because the owner couldn't keep up with their loan payments, the firm noted.


For its part, HSBC said its overall charge will be about $10.56 billion, about 20% higher than the average analyst forecast of $8.8 billion.


In explaining the outcome, the bank said its own risk projections had failed to predict how many borrowers would fall behind on mortgages as interest rates climbed and saddled them with higher monthly payments.


HSBC's warning comes just weeks ahead of its planned report of annual results and follows a December trading update that was already bearish on U.S. mortgage debt.


The problem is with HSBC's portfolio of sub-prime mortgages, which it snapped up in 2005 and 2006, before the U.S. housing slowdown began to bite. Sub-prime loans are sold to home buyers who fail to meet the strictest lending standards.

And that set the ball rolling.

And now, HSBC';s stock is plunging most since the financial crisis after what Citigroup's Ronit Ghose called “Weak Revenues, Messy Quarter.” Ghose also noted “an unusually large amount of one-offs” in the period, including a multibillion-dollar writedown on the value of its scandal-hit European private bank.

HSBC reported a $3.4 billion pretax loss for the quarter that it blamed on slowing growth in its core markets of Hong Kong and the U.K., while its adjusted profit fell $1.2 billion short of analyst estimates. Chief Executive Officer Stuart Gulliver is battling to reverse five years of declining revenue as he pares back HSBC’s sprawling global footprint and reduces expenses. The bank increased its cost-cutting target by $1 billion to $6 billion of savings, while cautioning it faces more than $3 billion of revenue headwinds in 2017, including currency movements and record-low interest rates in the U.K. Executives also warned U.S. President Donald Trump’s protectionist stance and Brexit could damage their business.

The unadjusted loss was driven by $6.1 billion of “significant items” in the quarter, more than six times what Credit Suisse Group AG analysts had forecast. The items included a $2.4 billion writedown of the value of its European private bank and a $1.6 billion adjustment in the bank’s own credit spreads.

Of course, in a desperate bid to curry favor with shareholders and prove their confidence in the bank, the lender said it will buy back $1 billion of stock in the first half and signaled it may repurchase more later this year.

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We are sure all the one write-offs are 'one-offs' and that this is "contained" - just like it was 10 years ago.