HSBC Holdings will recognize a $1.1 billion provision in its third-quarter results following a Luxembourg court ruling tied to litigation stemming from Bernard Madoff's Ponzi scheme, adding another costly legal battle to the bank's growing list of provisions.
The charge comes after Luxembourg's Court of Cassation denied an appeal by HSBC Securities Services Luxembourg regarding securities restitution claims filed by Herald Fund SPC. The court sided with the bank on a separate cash restitution appeal, according to a statement Monday from the London-based lender.
Capital Ratio Takes 15-Point Hit
HSBC's Luxembourg unit served as custodian and administrator for funds that invested with Bernard L. Madoff Investment Securities. Herald Fund filed suit in 2009 seeking return of assets it says disappeared in the fraud. The fund is pursuing $2.5 billion in securities and cash plus interest, or alternatively $5.6 billion in damages plus interest, HSBC disclosed in its July interim report.
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The provision will cut roughly 15 basis points from HSBC's common equity tier 1 capital ratio, a key measure of bank solvency . HSBC classified the charge as a “material notable item” that won't affect its return on tangible equity calculation or dividend guidance for 2025.
The bank warned the final cost remains uncertain. HSBC plans to file a second appeal with the Luxembourg Court of Appeal and contest the payment amount if that appeal fails.
“Given the pendency of the second appeal, and the complexities and uncertainties associated with determining the quantum of restitution, the eventual financial impact could be significantly different,” the bank said in its statement.
Madoff Cases Continue Across Banking Sector
Banks worldwide still face litigation over Madoff's fraud, which collapsed in 2008. Madoff pleaded guilty in 2009 and received a 150-year prison sentence. He died behind bars in 2021. Customer statements at the time showed roughly $65 billion in fictitious investments.
Several non-U.S. HSBC subsidiaries provided custodial, administrative, and related services to funds whose assets were placed with Madoff Securities, according to the bank's regulatory filings.
HSBC shares traded up 0.3% in Hong Kong morning trading, suggesting investors view the charge as manageable despite its size.
Latest in String of Legal Costs
The Madoff provision adds to mounting legal expenses across global banking. BNP Paribas shares tumbled last week after a court ruling linked the French bank to human rights violations in Sudan, sparking expectations of multibillion-dollar settlements.
HSBC has spent the past year cutting thousands of jobs and removing management layers to reduce costs. Earlier this month, the bank announced plans to acquire its Hong Kong subsidiary Hang Seng Bank for $14 billion. To preserve capital during that transaction, HSBC said it would suspend share buybacks for at least three quarters.
The bank also recorded a $2.1 billion impairment on its stake in Bank of Communications in July. Analysts expect HSBC to report third-quarter pretax profit of $7.66 billion when it announces results Tuesday.
Hong Kong Property Exposure Under Watch
Investors will monitor HSBC's exposure to Hong Kong's troubled property sector when third-quarter numbers are released. The city is experiencing its worst real estate downturn since the Asian financial crisis in the late 1990s, putting pressure on banks with heavy lending to the sector.
The Madoff litigation represents one of multiple legacy legal issues still working through courts years after the fraud's discovery. HSBC's various subsidiaries provided services to multiple feeder funds that invested client money with Madoff's firm, which operated what prosecutors called the largest Ponzi scheme in history.
