* Heavy agenda of reforms risks overburdening staff,
* "Creeping concern" of zero tolerance for risk-taking
* H1 profits drop 12 pct after fall in revenues
* HSBC set to benefit from higher interest rates
* Shares up 2.5 pct
(Repeats to additional subscribers)
By Steve Slater and Matt Scuffham
LONDON, Aug 4 Europe's largest bank HSBC
warned that regulators' zeal to punish wrongdoing was
putting its staff off taking reasonable business risks, as it
reported a 12 percent drop in first-half profit.
HSBC Chairman Douglas Flint on Monday called on
international regulators to clarify what they expected of bank
staff after recent record sanctions for misconduct, including a
$9 billion U.S. fine against France's BNP Paribas, had
left them fearful of retribution.
"There's a creeping concern that staff are clearly very
focused on the penalties for getting things wrong and are
building risk-aversion into the way they think," Flint told
reporters on a conference call.
"We've got to avoid getting to the state where there's a
zero risk tolerance."
Flint said rules that were too harsh could hurt lending in
areas such as wealth management or commercial banking where
products can be complicated. Industry sources have warned of
unintended consequences from the regulatory clamp down,
including the threat that lending will be cut to people or
businesses in poorer countries.
Since the action against BNP Paribas for breaching U.S.
sanctions, international banks have become hyper vigilant about
following new rules, including recent moves by Washington and
Brussels to freeze some Russian state-controlled firms out of
western capital markets.
HSBC was fined a record $1.9 billion in 2012 for breaching
U.S. sanctions on money laundering in Mexico and since then has
pulled out of business areas and countries, including Panama, to
cut the risk of future problems.
The bank said it is spending about $800 million a year more
than in 2011 on compliance across its operations in 74
HSBC and its rivals still face the risk of future fines and
legal costs from ongoing investigations, including a global
probe into alleged manipulation in the foreign exchange markets.
Under new UK rules, the bank also has to separate its UK
retail operations from its riskier investment banking arm and on
Monday it warned of a substantial one-off cost to do that.
Chief Executive Stuart Gulliver said the split would also
cost hundreds of millions of pounds each year, without giving a
INTEREST RATE RISE BOOST
Lost revenues from closing businesses and a slowdown in
investment banking pushed HBSC to a 12 percent drop in pretax
profits in the six months to the end of June to $12.3 billion,
just below an average forecast of $12.5 billion from 15 analysts
polled by the company.
Overall, revenue dropped 9 percent to $31.2 billion,
Replacing lost revenues is one of the biggest challenges for
HSBC. Gulliver said they should pick up strongly about six
months after interest rates in major markets rise. HSBC expects
UK rates to start rising in the fourth quarter of this year and
in the first half of 2015 in the United States.
HSBC is more geared to the benefit of higher interest rates
than rivals because of its big deposit base, liquid balance
sheet and relatively conservative risk appetite, analysts say.
A big rise in rates could add billions of dollars to its top
line; HSBC estimates a 25 basis point rise across a range of
rates would lift annual income by almost $1 billion a year.
The prospect of such a boost helped drive HSBC's shares up
2.75 percent after initially dropping as much as 2 percent when
the results were first announced on Monday.
"I think resilience is the word. Gulliver is signaling he
thinks rates will move this year, U.S. rates first half of next
year. Well that's got to be good for margins, that's the one
thing that will get this stock moving," said Numis analyst Mike
Gulliver is in the second phase of a turnaround plan for
HSBC that began in 2011, aiming to make the bank simpler, more
efficient and able to deliver better returns and dividends for
The strategy has helped boost the bank's defences against
future losses with its common core tier one equity ratio, a key
measure of financial strength, rising to 11.2 percent from 10.8
percent at the end of last year and well above the regulatory
minimum of 7 percent.
(Writing by Carmel Crimmins; Editing by Erica Billingham)