Steve Slater and Matt Scuffham London

REGULATORS’ zeal to punish wrongdoing was deterring HSBC’s staff from taking reasonable business risks, Europe’s largest bank warned yesterday as it posted a 12 percent drop in first-half profit.

HSBC chairman Douglas Flint called on international regulators yesterday to clarify what they expected of bank staff after recent record sanctions for misconduct – including a $9 billion (R96bn) fine against France’s BNP Paribas for breaching US sanctions – had left them fearful.

“There’s a creeping concern that staff are clearly very focused on the penalties for getting things wrong and are building risk aversion into the way they think,” Flint told reporters. “We’ve got to avoid getting to the state where there’s zero risk tolerance.”

Industry sources have warned of unintended consequences from the regulatory clampdown, including the threat that lending would be cut to people or businesses in poorer countries.

HSBC was fined a record $1.9bn in 2012 for breaching US sanctions on money laundering in Mexico and since then has pulled out of some business areas and countries to cut the risk of future problems.

The bank said it was spending about $800 million a year more than in 2011 on compliance across its operations in 74 countries.

HSBC and other banks still face the risk of fines and legal costs from ongoing investigations, including a global probe into alleged manipulation in foreign exchange markets.

Under new UK rules, the bank also has to separate its UK retail operations from its riskier investment banking arm and yesterday it warned of a substantial one-off cost to do so. Chief executive Stuart Gulliver said the split would also cost hundreds of millions of pounds each year, without giving a precise figure.

Lost revenue from closing businesses and a slowdown in investment banking pushed HSBC to a 12 percent drop in pretax profit in the six months to the end of June to $12.3bn, just below an average forecast of $12.5bn by 15 analysts.

Overall, revenue dropped 9 percent to $31.2bn, including disposals.

Replacing lost revenue is one of the biggest challenges for HSBC. Gulliver said revenue should pick up strongly about six months after interest rates in major markets rose.

HSBC expects UK rates to start rising in the fourth quarter of this year and in the first half of next year in the US.

HSBC is more geared to benefit from higher interest rates than its rivals because of its big deposit base, liquid balance sheet and relatively conservative risk appetite, analysts say. – Reuters