HSBC’s Third-Quarter Profit Falls on Madoff-Linked Charges, but Income Outlook Improves

HSBC Holdings (HSBA.L) on Tuesday reported a 14% drop in its third-quarter pre-tax profit, hit by a $1.1 billion charge after losing part of an appeal in a lawsuit tied to Bernard Madoff’s Ponzi scheme — the largest financial fraud in history.

However, the bank raised its income outlook for the year, signaling that interest rate cuts in key markets such as Hong Kong and the UK are likely to happen more gradually than initially expected. HSBC now forecasts net interest income of about $43 billion for 2025, up from its June estimate of around $42 billion.

“The intent with which we are executing our strategy is reflected in our performance this quarter, despite the legacy legal matters,” said Chief Executive Georges Elhedery in a statement.

Shares of HSBC listed in Hong Kong rose 2.2% in afternoon trading.

The bank reported a pre-tax profit of $7.3 billion for the third quarter. Before the surprise provision announcement on Monday, a consensus of analysts compiled by the bank had expected pre-tax profit of about $7.66 billion.

In addition to the Madoff-related charge, HSBC also took an extra $300 million provision linked to historical trading activities at HSBC Bank plc.

Profit Recovery Hampered by Write-Downs

HSBC raised its return-on-equity target to “mid-teens or better,” improving on its previous mid-teens forecast.

Still, the results underline how Elhedery’s efforts to boost profitability remain constrained by large litigation costs, ongoing restructuring, and property-related write-downs.

In recent quarters, HSBC has taken $5 billion in impairments on its China banking holdings, while losses from its exposure to Hong Kong’s weakening commercial property market have mounted.

The bank said the deterioration in Hong Kong’s commercial real estate sector had forced it to update its credit loss models.

During the first nine months of the year, charges for non-performing loans rose by $900 million compared with the same period last year, with two-thirds of that increase stemming from Hong Kong property exposure.

HSBC noted that the losses reflected “higher allowances for newly defaulted exposures and the impact of oversupply in the non-residential property sector, which continues to pressure rental and capital values.”

Restructuring and a Major Deal

Since taking over as CEO a year ago, long-time HSBC insider Elhedery has shaken up the bank by reorganizing its operations along East-West lines, trimming senior management ranks, and winding down underperforming investment banking units.

So far this year, HSBC has announced plans to exit 11 underperforming markets and business lines while signaling a willingness to invest further in areas where it sees growth potential.

The $226 billion-valued bank announced in October that it had offered $13.6 billion to buy out minority shareholders in Hang Seng Bank, a Hong Kong lender hit hard by its local property exposure.

To build the capital required for that deal, HSBC said it would suspend share buybacks for roughly three quarters.

The bank also declared an interim dividend of 10 cents per share — its third payout in 2025 — following a previously announced total of 20 cents.