LONDON The threat that HSBC faces a big U.S. fine for lax controls in its anti-money laundering systems and the risk it will be pulled deeper into an interest rate manipulation probe are set to overshadow strong half-year profits on Monday.
HSBC, Europe's biggest bank, is expected to unveil a half-year pretax profit of more than $12 billion, making it one of the most profitable lenders in the world.
Chief Executive Stuart 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.
But a Libor interest rate rigging scandal that erupted a month ago at UK rival Barclays is expected to draw in more banks and investors are nervous about who that will be. Barclays was fined $453 million for its Libor manipulation and more than a dozen banks are being investigated by regulators around the world.
"We expect investors to focus on the potential fines for the improper monitoring of money laundering activities and Libor litigation," said Andrew Lim, an analyst at Espirito Santo.
A scathing report this month by the U.S. Senate slammed HSBC for letting clients shift funds from dangerous and secretive countries, which could result in a fine of about $1 billion, analysts said.
The Senate report criticized a "pervasively polluted" culture at the bank and said between 2007 and 2008, HSBC's Mexican operations moved $7 billion into the bank's U.S. operations.
HSBC may have to set aside hundreds of millions of dollars to cover costs related to the U.S. money laundering and on two UK mis-selling issues -- on insurance products and interest rate swaps for small firms. The bank declined to comment on Sunday.
The bank is expected to show a fall in investment banking revenue in the second quarter from a strong first quarter, continuing a trend seen among top U.S. and European banks.
Lim at Espirito Santo predicted HSBC's investment bank revenues would be down 20 percent from the first quarter as fixed income revenue drops by about a third.
Cost control will remain a key feature for Gulliver, who is struggling to cut costs to below 52 percent of revenue. In the first quarter it improved to 55 percent and analysts said he needs to show the declining trend has continued.
HSBC made an underlying profit of $6.8 billion in the first quarter.
Gulliver has said previously he wants to streamline HSBC and focus more on its fast-growing Asian markets. As a result, the latest quarter should show loan growth in Hong Kong and Asia and a gain in market share in areas such as trade finance.
(Reporting by Steve Slater and Matt Scuffham; Editing by Diane Craft)