Lender blames 'regulatory reform' as it reports 12 per cent drop in first-half profits, saying it is wasting resources on compliance, writes Don Weinland / SCMP.

Banking giant HSBC said yesterday that group profits before tax fell to US$12.3 billion in the first half compared to a year earlier, down 12 per cent and worse than analysts' expectations.

Underlying revenue was down a more modest 4 per cent year on year at US$31.36 billion, and chairman Douglas Flint said the bank continued to make strenuous efforts to reshape its operations in the face of significantly increased regulatory pressure.

"The demands now being placed on the human capital of the firm and on our operational and systems capabilities are unprecedented," Flint said in a statement accompanying the results, published after the Hong Kong market close. 

"The cumulative workload arising from a regulatory reform programme that is unfortunately increasingly fragmented, often extraterritorial, still evolving and still adding definition is hugely consumptive of resources that would otherwise be customer facing."

Operating costs excluding significant items increased 4 per cent on investment in risk and compliance, the report said. 

Regulators have ordered HSBC to pay billions of dollars for misdeeds in recent years, particularly over its sales of payment-protection insurance in Britain. 

Redress remains a significant drag on profit growth in the retail and wealth management business, which accounts for about 40 per cent of revenue in the banking group. 

HSBC shares trading in London fell 2 per cent after the results were published, but quickly rebounded to to finish 0.91 per cent higher at the close.

The stock had hit a year low in July in the wake of a late June warning from competitor Standard Chartered that first half profits could fall 20 per cent from a year ago, though investors have been gradually been buying back HSBC shares since. Standard Chartered reports its interim earnings tomorrow.

Traders appeared relieved that HSBC's first-quarter fall of 20 per cent in pre-tax profit appeared to have been arrested in the second quarter. 

Asia was the biggest contributor to HSBC's profits before tax in the first half, bringing in US$7.89 billion, a 14 per cent fall from the same time last year. Excluding one-off items, profits before tax from Asia increased year on year by 2.3 per cent.

Stuart Gulliver, group chief executive, said in a conference call with analysts after results were published that HSBC was "very happy" with its 20 per cent stake in China's Bank of Communications, although there was a risk of impairment charges from this holding in the second half of the year.

HSBC is in the second phase of a turnaround plan that began in 2011, aiming to make the bank less complex, more efficient and able to deliver better returns and dividends for shareholders.

The bank has axed more than 40,000 jobs and sold or closed 60 businesses, which it said had delivered annual cost savings of more than US$5 billion.