HSBC's falling profit hits shares with bank mired in tax scandal

HSBC Holdings Plc, struggling to contain a scandal over tax evasion at its private bank, reported lower- than-expected fourth-quarter profit as costs and conduct provisions rose. The shares slumped the most since 2011.

Pretax profit dropped 56 percent to $1.7 billion from the year-earlier period, London-based HSBC said in a statement on Monday. That missed the $3.7 billion average estimate of five analysts surveyed by Bloomberg. Full-year profit fell 17 percent to $18.7 billion, more than analysts forecast.

Chief Executive Officer Stuart Gulliver's efforts to spend billions on compliance and revive profit were eclipsed this month by a report from the International Consortium of Investigative Journalists showing details of how HSBC handled Swiss accounts for tax evaders and criminals. The CEO, 55, on Monday scrapped four-year-old profitability targets, blaming a "radically different" regulatory environment.

"It's all pretty grim reading," said Gary Greenwood, an analyst at Shore Capital Group Ltd in Liverpool, England, with a hold rating on the stock. "The numbers themselves are pretty rubbish, as costs are going up higher than revenues. With the negative headlines they are getting elsewhere at the moment, this certainly does not help."

Shares of Europe's largest bank slid as much as 6.5 percent, the largest decline since August 2011, and traded 5.9 percent lower at 12:35 pm in London. The stock is down 6.4 percent this year after dropping 8.1 percent in 2014.

HSBC has become the center of a political storm at home following the ICIJ report, prompting Gulliver to issue full-page newspaper advertisements on Feb 15 to offer his "sincerest apology". Chairman Douglas Flint, 59, will be questioned by UK lawmakers on Wednesday in London over his role as finance director at the time.

British banks are already under pressure to toughen internal compliance and raise capital buffers amid a series of scandals.

At HSBC's Global Banking and Markets unit, which houses investment-banking activities, pretax profit dropped 38 percent to $5.9 billion in 2014, missing analyst estimates, as the lender set aside $809 million to cover costs related to a global probe into currency market manipulation.

Gulliver said on a conference call that the investment bank had a "satisfactory start" to 2015 and there's "nothing strategic we need to do" to securities operations.

HSBC's dividend for the year was 50 cents, compared with 49 cents a year earlier. The company's common equity Tier 1 ratio, a measure of financial strength, fell to 11.1 percent from 11.4 percent at the end of the third quarter.

"Capital has really gone backwards, the dividend is weaker than expected and global banking and markets had a tough fourth quarter," said Mike Trippitt, an analyst at Numis Securities Ltd. The London-based analyst has an add rating on the stock.

Operating costs climbed 6.1 percent to $37.9 billion in the year.