A Little Global Difficulty

HSBC illustrates the burden of being a global bank

The advantages of global banking are often taken for granted - especially by people who run global banks. But do the benefits outweigh the burden? HSBC's latest results suggest the trade-off is becoming increasingly fine.

The international lender reported a pretax profit of $4.6 billion for the three months to September - a two-per cent increase year-on-year. However, any appearance of smooth progress was undermined by the fines and other charges that pock-marked the income statement. These costs have become such a regular fixture that HSBC now calls them "significant items". All in all, the bank spent $1.7 billion on them in the quarter, more than double what it set aside last year.

Even ignoring these headline-grabbing features, HSBC's expenses are rising. Wage inflation in some of the emerging markets where the bank operates is partly to blame. But the increase also reflects the costs of hiring compliance officers and designing risk systems, which are supposed to prevent HSBC from making the types of mistakes that have lumbered it with such hefty losses and fines. One in 10 of the bank's 258,000 employees now work in compliance and risk.

What about the benefits? HSBC can point to a few signs that scale and scope pay-off. Though global trade is far from buoyant, its commercial banking arm, which connects small and medium-sized businesses in different countries, reported income up six per cent. Despite the economic slowdown in Asia and Latin America, bad debt charges halved to $760 million.

Yet for all its undoubted strengths, HSBC's annualised return on equity in the first nine months of the year was a pedestrian 9.5 per cent. The theory is that returns will be lower than in the past but also less volatile. But that assumes that regulators will at some point stop uncovering misbehaviour that justifies large fines.

Chief Executive Stuart Gulliver says the benefits of running a global bank outweigh the costs. At the moment, investors are still just about giving him the benefit of the doubt, with HSBC trading at a modest premium to book value. But it's an argument that many banks, which aspire to be global will find increasingly difficult to make.