HSBC could be forced to set aside up to $ 11 billion (£ 8.8 billion) to cover bad debts this year, as it braces for the economic fallout caused by the Covid-19 crisis.

It would be the largest allowance for loan losses since the eurozone debt crisis in 2011, when the bank took a loan loss allowance worth $ 12 billion.

On Tuesday, HSBC announced that it had already taken a $ 3 billion (£ 2.4 billion) charge to help cover potential defaults from customers affected by the home. That knocked profits down 48% to $ 3.2 billion for the three months ending in March.

Provisions for loan losses were much worse than the $ 1.8 billion expected by analysts and $ 2.4 billion more than at the same time last year.

HSBC said the additional charges were mainly due to “the global impact of Covid-19 and falling oil pricesBut warned of other difficulties to come. He also said fraud could increase during the crisis, leading to “potentially large” loan loss charges.

“The outlook for global economies in 2020 has deteriorated significantly over the past two months. The impact and duration of the Covid-19 crisis will likely lead to an increase in ECL [expected credit losses] and put pressure on revenues due to declining customer activity levels and falling global interest rates, ”the bank said.

Depending on the severity of the economic downturn, HSBC said loan loss provisions could reach between $ 7 billion and $ 11 billion for the year 2020.

HSBC CFO Ewen Stevenson said: “Much of this is based on opinions on the length and severity of the economic impact of Covid-19, and really on the shape of the recovery we are seeing.”

He explained that while China and Hong Kong could be on the road to recovery, Western Europe, the UK and the US could experience second-quarter lows. “But then there’s a very wide range of what’s going on [after] this includes the risk of what is called the “second wave” in some countries. ”

He said the current crisis was “very different” from that imagined by the Bank of England in its annual stress tests – also known as the annual cyclical scenario – which determine whether banks can withstand a severe economic downturn. .

“We are now seeing, for example, unprecedented levels of government support and intervention in the global economy, which was not imagined in the ACS scenario,” Stevenson explained. The scenario also modeled a much more severe slowdown in Asia and much higher interest rates that would have pushed credit losses much higher, he added.

Bank of England insisted UK lenders are strong enough to survive the Covid-19 crisis, despite forecasting a ‘more severe’ short-term impact than latest stress tests were able to simulate.

The bank said it plans to cut costs to help offset an expected drop in revenue and is preparing for a significant drop in profitability in 2020. However, it has temporarily halted the majority of layoffs related to its turnaround plan. – which was to lead to around 35,000 job cuts.

In February, HSBC said it may have to set aside around $ 600 million to cover the costs of bad debts resulting from the pandemic. At that time, the disease was still largely contained in Asia and affected the bank’s largest market, Hong Kong.

The quartered British bank had $ 589 million in provisions in the first quarter, two-thirds of which was for consumer debt such as mortgages and credit cards. However, Stevenson said some of that money has already been earmarked for potential hardship due to Brexit.

HSBC said there was an increased risk that companies in certain industries would struggle to repay debts. In the early stages of the epidemic, companies involved in the oil and gas industries, as well as the transportation and consumer sectors were hit hardest. But HSBC said the long-term impact of the outbreak on some industries was “uncertain” and may not be factored into its forecast.

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