HSBC Private Bank Profit Slumps Amid Swiss Client Outflow

HSBC Holdings Plc, Europe’s largest lender, said full-year earnings at its private bank dropped 81 percent as customers pulled money from its Swiss cross-border business and the firm made provisions for regulatory probes.

Pretax profit from private banking declined to $193 million from more than $1 billion a year earlier, when the company benefited from one-time asset sales, London-based HSBC said today in a statement. Earnings were also depressed by a writedown in the value of HSBC’s Monaco business.

Client assets fell to $382 billion as of Dec. 31, down from $398 billion a year earlier, after net outflows of $26 billion, including withdrawals from Switzerland, and the disposal of operations in Panama and Luxembourg. Operating costs rose 4 percent after regulatory provisions of $352 million.

“We continued to address legacy issues and reposition our business model and client base in global private banking,” Chief Executive Officer Stuart Gulliver, 54, said in the statement.

Gulliver’s initiatives to transform the private bank left that unit’s contribution to the company’s underlying pretax profit of $21.6 billion at 0.9 percent, compared with a goal of 3 to 5 percent, according to a presentation. The bulk of the restructuring of the Swiss business is complete and earnings from private banking will improve, the CEO told investors on a conference call today.

Secrecy Model

Gulliver said in 2012 that the Swiss offshore private-banking model built on secrecy is disappearing, and appointed Peter Boyles, 58, who joined the firm in 1975, to oversee a transition at the division after HSBC suffered “reputation and financial damage” from the theft of client data in 2009.

HSBC wants its global private banking business, which includes units in Switzerland, the U.K. and Asia, to attract new customers by focusing on wealth created in emerging economies, onshore domestic markets and also grow through referrals from within the firm. The data theft by Herve Falciani, a former software technician in Geneva, led to investigations of tax dodgers by France, Spain and the U.K.

Swiss banks are increasing due diligence of affluent individuals seeking to deposit funds in the world’s largest cross-border financial haven. Switzerland amassed about $2.2 trillion in accounts opened for foreigners, prompting a crackdown on tax evasion by the U.S. and some European governments.

Geneva Sales

HSBC is planning to sell parts of its Swiss private bank, people with knowledge of the matter said this month. The U.K.’s Lloyds Banking Group Plc sold its Geneva wealth-management unit to Union Bancaire Privee last year, while Standard Chartered Plc is also seeking a buyer for its Geneva business.

ABN Amro Bank NV, Banco Santander SA and Bank of America Corp. are among the other foreign wealth managers that sold offshore Swiss businesses in the past two years.

HSBC reported regulatory investigation provisions of $352 million at its private bank and said it continued to cooperate with a U.S. Department of Justice investigation into whether the bank helped Americans hide money from the Internal Revenue Service.

The bank’s Geneva-based unit is one of at least 14 Swiss banks being probed. Credit Suisse Group AG and Julius Baer Group Ltd., Switzerland’s second and third-largest wealth managers, have said they expect to pay a fine to resolve their disputes.

Tax Matters

Credit Suisse agreed to pay $196 million and admitted servicing thousands of U.S. clients without approval in a Feb. 21 settlement with the U.S. Securities and Exchange Commission. The bank made provisions for potential costs related to the SEC investigation in the fourth quarter. It also set aside 295 million francs ($332 million) for U.S. tax matters in 2011. Credit Suisse’s dispute with the Justice Department is unresolved.

HSBC “has produced records and other documents to the DoJ and is cooperating with the investigation,” the bank said today in the statement. While the terms on which the probe will be resolved are uncertain, it’s “possible that fines and/or penalties could be significant,” HSBC said.

Patrick Humphris, a spokesman for HSBC’s private bank, declined to comment on the details of the $352 million provisions.

Disclosure Program

“Some of it may be in respect to the U.S., but that would only be if they are a long way down the road in actually reaching a settlement and I’m not sure they’re in that position at the moment,” Christopher Wheeler, a London-based analyst, said in a telephone interview. “Part of it may be in respect to other settlements that they’ve reached with other authorities.”

As one of the banks already being probed, HSBC isn’t eligible for a voluntary disclosure program announced by the Justice Department on Aug. 29 and accepted by the Swiss government. Through the program, banks may seek a non-prosecution agreement in exchange for a fine, or a non-target letter if they show they didn’t help clients break U.S. tax laws.

The program attracted 106 Swiss financial companies as of Dec. 31, U.S. Assistant Attorney General Kathryn Keneally said last month.

HSBC said today its global private banking unit reported an underlying pretax loss of $165 million for Europe, and a decline in pretax profit in Asia and North America, resulting in a cost-efficiency ratio of 91 percent, versus 69 percent a year earlier.

Underlying pretax earnings rose to $16 million from $10 million in the Middle East and North Africa.