HSBC bank logo on the wall outside a branch in Mexico City, Mexico, June 14, 2024.
Henry Romero | Reuters
HSBC announced on Monday that it would recognize a $1.1 billion provision in its third quarter results following a Luxembourg court ruling related to the Bernard Madoff investment fraud case.
Herald Funds SPC sued HSBC’s Luxembourg arm in 2009, seeking the return of securities and cash it said were lost to fraud.
The court dismissed the HSBC division’s appeal regarding the Herald’s claim for the return of securities, but accepted the division’s appeal regarding the claim for cash restitution.
The bank will now file a second appeal with the Luxembourg Court of Appeal, adding that if it loses, it will contest the amount to be paid in subsequent proceedings.
Madoff is said to be the mastermind behind America’s largest investment fraud, defrauding customers of a whopping $65 billion. He pleaded guilty in 2009 to the conspiracy, which began in the early 1970s and robbed more than 40,000 people in 125 countries over 40 years until his arrest on December 11, 2008.
Madoff’s victims included director Steven Spielberg and actor Kevin Bacon, as well as numerous retail investors. Madoff was sentenced to 150 years in prison and died in 2021.
In its 2025 interim report released in July, HSBC said Herald had demanded that HSBC return $2.5 billion in securities and cash plus interest or damages of $5.6 billion plus interest.
HSBC, Europe’s largest financial institution, said various HSBC companies outside the United States provide custody, management and similar services to a number of funds whose assets are invested in Bernard Madoff Investment Securities.
The news comes a day before HSBC is scheduled to report its results, with the bank announcing that its $1.1 billion provision will impact its Common Equity Tier 1 (CET1) ratio by about 15 basis points. The CET1 ratio is a measure of a bank’s financial strength and is used to determine its ability to withstand a crisis.
Analyst estimates compiled by the bank on October 17 had expected the third-quarter CET1 ratio to be 14.5%, compared with 14.6% in the second quarter.
Lorraine Tan, director of Asia equity research at Morningstar, told CNBC that while she did not expect the $1.1 billion charge to impact operations, it could weigh on sentiment slightly as HSBC “expects these temporary impairments to be resolved after interim write-offs.”
HSBC’s provision for expected credit losses increased by $500 million in June compared to Dec. 31, including $400 million in unfavorable currency movements and $2 billion in write-offs, according to the bank’s interim report.
Morningstar estimates that HSBC’s CET1 ratio was about 14.4% in the third quarter and will remain at 14% over the next 10 years.
HSBC said the ultimate financial impact of the ruling could be “substantially different” given the pending appeals, but a reorganization under CEO Georges Erhedery will see the bank split its operations into four divisions.
The bank said the restructuring will reduce costs by about $300 million this year and create separate “Eastern Markets” and “Western Markets” divisions.
—CNBC’s Marty Steinberg and Scott Cohn contributed to this report.
