HSBC plc (HSBC) - Get HSBC Holdings PLC Sponsored ADR Report said Tuesday that it will pay more than $750 million to the U.S. Department of Justice to settle a long-running dispute with authorities that it mis-sold mortgage bonds in the run up to the global financial crisis.
HSBC said the definitive settlement, which includes a civil penalty of $765 million, will apply to its HSBC North America division but will not include an admission of liability or wrongdoing. HSBC had flagged the settlement in its first half earnings release.
"We are pleased to put this investigation related to activity that occurred more than a decade ago behind us," said HSBC USA CEO Patrick Burke. "Since the financial crisis, HSBC has been strengthening our culture, processes and internal controls to ensure fair outcomes for our clients. The US management team is focused on putting historical matters into the rear view mirror and completing the turn-around of HSBC's US operations."
HSBC shares closed at 655.7 pence each in London Tuesday, after rising around 0.2% on the session in a move that still leaves it with a year-to-date decline of 14.4% and values Europe's biggest bank at £130.43 billion ($176.6 billion).
The settlement puts a major U.S. litigation risk behind it as the bank moves to accelerate earnings as part of its "Asia pivot" strategy under new CEO John Flint, although investors are still questioning the rising costs associated with the bank's planned expansion. HSBC also said it will hold its dividend in place at 10 cents a share as it pursue's its current strategy of returning to growth and creating value.
HSBC said profits for the six months ending in June rose 4.6% from last year to $10.7 billion, topping the consensus forecast, while adjusted group revenues grew 2% to $13.7 billion, a figure that fell modestly shy of analysts' estimates. Overall group expenses, however, rose 6% to $17.5 billion, while most of the group's U.S. profits were wiped out by the $765 million DoJ settlement.
"We will seek to achieve these aims by increasing returns from the Group's areas of strength, particularly in Asia and across our network; turning around low-return businesses of high strategic importance, particularly in the United States; investing in building a bank for the future with the customer at its centre; and making it easier for our colleagues to do their jobs," CEO John Flint said in a letter to investors.
"Our investment in the first half included hiring more front-line staff in our strongest businesses and expanding our digital capabilities in core markets, both of which will improve the service we offer customers," he added. "Our first-half reported and adjusted operating expenses rose as a consequence, which contributed to a drop in adjusted profit before tax."
Flint, who took over from the retiring Stuart Gulliver earlier this year, has said he wants to "pivot" Europe's biggest bank towards growth opportunities in Asia, where HSBC made more than 88% of its profits -- $9.4 billion -- in the first half of the year, a figure that's 23% higher than over the same period in 2017.
However, both the bank's rising cost base, which has plagued other financial institutions attempting to expand in China and Southeast Asia, as well as the escalating trade tensions between the U.S. and China, have some investors questioning its ability to enhance shareholder returns in the second half of the year.
"The group continues to prioritise investment in technology and business in China, the cornerstones of its strategy plan, as it attempts to make banking faster and easier through automation and online applications," said Share Center analyst Graham Spooner. "Nonetheless, the group remains 'cautiously optimistic' as it is yet to be impacted by trade tensions. However, investors should remain cautious of the potential of a hit to its Asia wealth unit and rising costs; nonetheless we maintain our 'buy' recommendation for the bank for investors seeking an income portfolio with a medium level of risk."