HSBC announces bad debt tsunami as banks set aside $ 34 billion

When JPMorgan kicked off the banking results season in mid-July it sent a strong signal to market watchers that the rest of the year would be bleak.

America’s largest bank has set aside a record $ 10.5 billion to prepare for looming defaults, and chief executive Jamie Dimon has warned the growth path will be uncertain for quarters to come as the american economy suffers from the deepest recession in history.

Now, HSBC’s results have hammered the message to the rest of the world. For the first half of 2020, which saw the lender suffer an 82% drop in profits, HSBC added an additional $ 3.8 billion to its provisions – the largest of all European banks. He warned that figure could increase to $ 13 billion for the year.

The HSBC figures follow the trend of what Nicholas Hyett, equity analyst at Hargreaves Lansdown, called “massive provisions for future bad debts” which to date total around $ 34 billion among major US and European lenders.

“There’s probably more of that to come… the annual profits won’t look good,” he said. KBW analyst Edward Firth said HSBC management took a “somber tone” in his earnings call, while RBC Capital Markets analyst Benjamin Toms said the results showed a “Dark perspective”.

The United Nations in may said that the pandemic will cause global GDP to decline by 3.2% this year. Some 90% of the world economy has undergone some form of foreclosure, disrupting supply chains, crushing demand and leading to soaring unemployment.

The damage is evident in government emergency lending initiatives. In the UK, tens of billions of pounds have been loaned to distressed businesses under programs that provide lenders with 80% and 100% guarantees.

But warnings of a looming debt crisis persist. August 2, Time reported that British bankers planning to meet to discuss an impending flood of bad debt and how to get money back without damaging their reputation.

Banks are seen as canaries in the economic coal mine – their ailing retail and consumer units are a sign of wider economic suffering, as people and businesses cannot make ends meet to repay their loans. HSBC is based in the UK but makes the majority of its profits in Asia.

After HSBC, Barclays provisioned the second largest amount of the quarter, with just over $ 2 billion in loan loss reserves.

Neil Wilson of wondered when defaults would impact the economy weeks ago, when JPMorgan reported its billions of dollars set aside.

Wilson said FN at the time: “This begs the question of when bad debt credit losses from businesses and individuals start to catch up with the larger market.

To contact the authors of this story with comments or news, email Ryan Weeks and Paul Clarke

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