Bank Watch HSBC off DoJ hook chains here to stay

Off the hook

The regulatory temperature for global banks might be getting lower. News that HSBC’s 5-year deferred prosecution agreement with the U.S. has lapsed is the latest development to suggest the regulatory cadence of post-crisis oversight has peaked.

A year of relief

In recent weeks major lenders have heaved a sigh of relief after an international body charged with deciding post-crisis rules announced it would not mandate a “significant increase” of overall capital requirements. JPMorgan, the largest U.S. bank by assets, said finalised rules published by the Basel Committee on Banking Supervision were “significantly better than expected” and positive for European banks. The committee is a body of the Bank for International Settlements, an uber regulator that most national watchdogs are signed up to. Banks had feared BIS rules could demand they bulk up on more capital, after punishing rounds of capital reinforcement weighed on profitability for years. Most recently, UK banks were also cheered after all passed Bank of England stress tests without reservations. That follows all 34 large U.S. banks being pronounced capable of withstanding extraordinary shocks by the Fed in June, following its own tests. 2017 is the first year lenders have aced both Fed and BoE tests since the central banks began kicking their tires. 

Fallout is not over

Making it through the Fed’s exams means all big U.S. banks can now, in theory, pay out 100% of earnings in dividends or buybacks, though none have said they will. Banks realise that even after one of the better years for global lenders, the outlook remains uncertain. Bank indices have advanced by double digit-percentage amounts this year but the spread between leading stocks and underperformers has been substantial. On the regulatory front, even if banks have seen the worst by way of payback for misconduct since the GFC, fallout will haunt them for years to come. In Britain, for instance, both Lloyds and RBS announced additions to their multibillion provisions for mis-sold payment protection insurance this year, the last before an August 2019 cut-off for fresh claims. Few analysts would be comfortable forecasting that PPI provisions won’t rise further before then. More broadly, research out in September showed global banks paid $353bn over five years to 2016 in fines, legal costs, and compensation, compared to $337bn in the prior 5-year period. In HSBC’s case, having seen misconduct costs peak at $1.9bn in 2012 for anti-money laundering lapses, it paid $3bn last year on compliance costs, a 15% rise on the year. Such costs are unlikely to ease. Official regulators in major bank HQs, including HSBC's, will also likely linger.

HSBC: cash in lieu of growth

Still, HSBC’s shares are the best performing stock among banks of similar size in Europe over the last two years, up 50%. Investors have stayed on side as a year and half of asset sales, backed with a closer eye on costs, have enabled the group to steer capital back to shareholders. At the same time, generating profits from growth remains a challenge. If HSBC is doing the best that a major multinational bank can do in modern times, the low tide for returns may linger, even if the flood of new rules is close to a peak.