* $700 mln provision for U.S. anti-money laundering failures
* Cost of U.S. fine, charges may be "significantly higher"
* $1.3 billion set aside to compensate UK customers for
* Shares up 1.9 percent
By Steve Slater and Matt Scuffham
LONDON, July 30 Revelations of lax anti-money
laundering controls at HSBC are "shameful and
embarrassing" for Europe's biggest bank, its boss said on
Monday, and it may have to pay out well over $2 billion for the
scandal and in compensation for UK mis-selling.
HSBC set aside $700 million to cover fines and other costs
after a U.S. Senate report criticised it this month for letting
clients shift funds from dangerous and secretive countries,
Chief Executive Stuart Gulliver told reporters the ultimate
cost could be "significantly higher".
"What happened in Mexico and the U.S. is shameful, it's
embarrassing, it's very painful for all of us in the firm," he
said on a conference call. "We need to execute on the compliance
changes and then prove ourselves worthy and rebuild this over a
number of years. There are no quick and easy fixes."
The Senate report criticised a "pervasively polluted"
culture at the bank and said HSBC's Mexican operations had moved
$7 billion into its U.S. operations between 2007 and 2008.
"The firm clearly lost its way in this regard and it's right
that we apologise," said Gulliver. "Colleagues internally have
been aware that this is the backdrop of why we had to change the
The provision ate into first-half underlying profits, which
fell 3 percent from a year earlier to $10.6 billion, excluding
gains from assets sales and losses on the value of its own debt.
HSBC, which was formed in 1865 and operates in 84 countries,
said a new streamlined and centralised structure set up by
Gulliver has simplified the bank and made it easier to monitor
and enforce standards and compliance.
But it also set aside another $1 billion to compensate
British customers for mis-selling them loan insurance, and $237
million to cover payouts to small UK businesses wrongly sold
complex interest rate hedging products.
HSBC is also one of more than a dozen banks under scrutiny
in a global interest rate-rigging scandal that has rocked the
sector and further damaged the reputation of bankers following
criticism of their culture and standards.
"It's very unfortunate and deeply concerning that even the
banks considered more secure such as HSBC are so seriously at
risk," said a top 30 investor in HSBC.
"And the news is still coming out - we have yet to see the
impact, if any, of the Libor investigation and HSBC's role in
that. It's hard to see how much more bad news the markets can
take," said the investor, who asked not to be named.
Shares in HSBC were up 1.9 percent to 541.3 pence at 1350
GMT, lagging a 2.8 percent rise in Europe's bank index.
SOFT CHINA LANDING
The bank said economic headwinds would persist and it
expected the euro zone economy to contract in 2012, while the
United States would achieve sub-par growth this year and next.
China's economy should have a "soft landing" and grow 8 percent
or more this year, it said.
U.S. and British authorities have fined fellow UK-based bank
Barclays $453 million for manipulating Libor, a
benchmark interest rate based on how much banks charge to lend
to each other. More banks are expected to be drawn into the
investigation into banks submitting false rates from which Libor
is calculated daily.
Royal Bank of Scotland's CEO said it is one of the
banks in the investigation, and Britain set out the terms on
Monday for a reform of Libor, saying urgent change was required.
Thomson Reuters Corp is the British Bankers'
Association's official agent for the daily calculation and
publishing of Libor.
Gulliver said that as a contributor to Libor and its euro
zone equivalent Euribor, HSBC was cooperating with regulators,
but it was too early to say what the outcome would be or to
estimate the potential cost for the bank. No - one at HSBC had
been fired or suspended over any Libor issues, he said.
HSBC is in talks to settle the investigation into its U.S.
anti-money laundering compliance with the U.S. Department of
Justice and other regulators. "It may take several more months
to come to fruition," Gulliver said.
The bank said it could clawback some past bonuses from staff
involved in the problem, but declined to comment if that could
include former Chief Executive Michael Geoghegan.
Gulliver is mid-way through a deep overhaul to cut costs,
sell or shrink unprofitable businesses, and to direct investment
to faster growing Asian markets.
It has cut 27,000 jobs since the start of 2011 and sold or
closed 26 business in that time, including sales of its U.S.
credit card businesses and half its U.S. branches.
HSBC has been running down its U.S. loan book for years, but
said it was unlikely to be able to drain out surplus capital
from its U.S. operations until "well into the future".
Gulliver said he was aware of the investigation into its
U.S. compliance problems in 2010 before he took over, and that
shaped some of his restructuring. This also includes
centralising control functions over a bank that was unwieldy.
HSBC said it had increased its spending on compliance to
more than $400 million last year, more than double its $200
million in 2010.
Behind the problems the bank had shown "a pretty good set of
numbers" and quick execution on his strategy, said Gulliver.
The bank reported a statutory pretax profit of $12.7 billion
for the six months to the end of June, up 11 percent on the year
and above an average analyst forecast of $12.5 billion,
according to a poll by the company.
Its investment bank's profit rose 5 percent on the year to
$5 billion, faring better than rivals in a tough market where
activity has been hit by the euro zone crisis.
Costs represented 57.5 percent of income, similar to the
past year and above Gulliver's 52 percent target.