Investment bank saga, episode 2: HSBC's share price is down after profits dropped 20%

Another day, another major bank's investment arm has sent profits into a nosedive. Are the City gods trying to tell us something?

by Emma Haslett
Last Updated: 04 Aug 2014

Yesterday, Barlcays revealed profits at its investment arm had fallen 28%. Today it’s the turn of HSBC, which announced this morning that pre-tax profits fell by 20% in the first three months of the year, thanks to ‘challenging market conditions’ in its investment bank.

Time was that investment banks were all the rage – all Wolf of Wall Street types throwing dwarves at targets and using £50 notes to light cigars. These days, they’re the City’s embarrassing uncle: they turn up a couple of times a year in a brash pinstripe suit, drink too much, talk loudly about how great life used to be and how enormous their pay packets used to be, slip off before you can give them the bill and then proposition one of the bridesmaids.

HSBC’s situation is no different: pre-tax profits at its investment arm (more than half of which come from Asia) dropped by a fifth to $2.87bn (£1.69bn), mainly thanks to an 11% drop in revenues to $5.16bn, as costs increased to $2.4bn. Its excuse was similar to Barclays’: ‘muted customer activity’ – and it warned that the next quarter is likely to be similar.

The good news was that pre-tax profits at its commercial bank rose 10%, and 9% at its retail banking and wealth management arm. Also, loan impairments were down after the bank pulled out of its riskier markets. So that’s good.

Still – it’s a clear sign that investors are putting less and less faith in investment banks. Companies like HSBC and Barclays, both of which have large, well-established investment banks, are going to have to think fast. The difference is that Barclays has experienced an exodus of bosses lately.

Unless both can convince investors that they’re not the dastardly types they used to be, their investment arms are going to be in trouble. Which would be a shame: not only are investment bankers the ones who have all the fun (or create the fun headlines, anyway) – but they’re also, in good times, the ones that make the most money. So the government has a vested interest in keeping them going.

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