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(Bloomberg) -- HSBC Holdings Plc’s past misconduct is threatening to catch up with Chairman Douglas Flint.
Flint, 59, will face fresh questions at a U.K. Parliament hearing on Wednesday over his role as finance director when the bank was found helping customers avoid taxes through its Swiss unit. Chief Executive Officer Stuart Gulliver offered HSBC’s “sincerest apologies” for the affair in full-page ads in British newspapers this week.
Gulliver, 55, is struggling to contain a political storm unleashed by new details about tax evasion at the same time as he’s exiting businesses, cutting ties with some customers and spending billions on compliance. HSBC is also expected to report that 2014 profit dropped last year, fueling doubts that the bank’s size and strategy compensates shareholders for the risks.
“I don’t think anyone needs to go just yet,” though “a change in regime and culture” may eventually result from the tax probe, said Colin McLean, founder of SVM Asset Management Ltd. in Edinburgh, who helps oversee more than $800 million, including HSBC shares. “If they want to establish a clean break with these issues and a different tone at the top, then the chair is the person to be singled out by shareholders.”
Gulliver won’t attend the Treasury session, which will gather oral evidence from HSBC and British tax authorities. Andrew Tyrie, who chairs the committee, said on Feb. 13 that he’s seeking “reassurance” that banks “have put in place reforms to ensure that they operate on the basis of sharply improved standards.”
A spokeswoman for HSBC declined to comment on next week’s meeting or whether Flint could be forced to step down. She didn’t make him available for comment.
The Swiss private-banking unit cut the number of accounts by almost 70 percent, and 106 out of 140 clients mentioned in files are no longer with HSBC, according to Gulliver.
HSBC shares are little changed this year after losing 8 percent in 2013. Since Gulliver took over in 2011, promising staff would act with “courageous integrity,” the bank has been unable to escape sins of the past.
HSBC’s most recent woes stem from seven-year-old data stolen by Herve Falciani, a self-described whistle-blower. The information technology worker pilfered client account details from HSBC’s Geneva office in 2008 and passed them to the French government. More detail about the stolen data was released this month, prompting Geneva authorities to search HSBC’s Geneva private-banking office on Wednesday.
The Swiss scandal comes after a $1.9 billion fine for helping Latin American drug cartels launder money. As part of the 2012 settlement, the U.S. Justice Department installed an independent monitor for five years.
Flint “is undoubtedly expecting to take a battering from the members of the committee, many of whom will have one eye on the upcoming election” in May said Christopher Wheeler, an analyst at Atlantic Equities in London. “While most private banking units were assisting their clients to mitigate their tax bills at the time, in the current climate that will be seen as irrelevant.”
Wheeler said he’d be “surprised” if Gulliver came under pressure in the same way, because even though he was also on the executive committee at the time, he was CEO of the investment bank, a separate unit.
On Monday, HSBC is expected to report a 7 percent drop in full-year profit to $21 billion, according to the average estimate of 16 analysts compiled by the bank. They estimate profit attributable to ordinary shareholders will fall 3 percent to $15.1 billion.
Earnings are being eaten away by operating costs, which are forecast to rise 4 percent to $40.3 billion, exceeding Gulliver’s target of about 50 percent of revenue for a second year, while pretax profit at the investment bank is estimated to fall 23 percent to $7.2 billion.
Investors may grill Gulliver over whether the risks from HSBC’s sprawling global operations outweigh the rewards. Some have given up already: fund manager Neil Woodford dumped his HSBC shares last year, saying there was an “unquantifiable risk” of further fines.
While Gulliver has exited 74 businesses and shifted investment to the most profitable markets, compliance costs and conduct fines have helped keep earnings stagnant for five years.
Regulatory investigation and litigation expenses are forecast to reach $1.3 billion for the full year, with redress for U.K. customers adding $1.2 billion, analysts estimate.
“Can HSBC run a global banking operation serving 52 million customers in 74 countries and territories through the efforts of 256,000 staff and not periodically trigger expensive regulatory breaches?” Jason Napier, an analyst at Deutsche Bank AG with a hold rating on the stock. “Benefits to shareholders of the global model are under pressure.”
The bank has multiplied its compliance workforce to more than 7,000 from 1,500 four years ago and is spending as much as $1 billion on compliance each year, Flint has estimated. Staff were hired to ferret out wrongdoing and introduce automated systems to detect suspicious transactions.
“HSBC’s management are being distracted at precisely the wrong time, getting a bashing from politicians while trying to address serious concerns about its global footprint,” said Chirantan Barua, an analyst at Sanford C. Bernstein & Co. in London, who has an outperform rating on HSBC. “Management needs to take a hard look at their cost base.”
--With assistance from Richard Partington in London.
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