Earnings at HSBC plunged during the third quarter as funds set aside to cover a money-laundering scandal in the United States rose to US$1.5 billion (Dh5.51bn), with the bank braced for possible criminal charges.
The bank's Middle East unit deepened the gloom by reporting a fall in revenues and wrote off millions of dollars in investment losses.
At a group level, Europe's biggest bank missed analysts' estimates with net profits of $2.4bn, a 52.1 per cent decrease compared with a year earlier. HSBC Middle East, the biggest international bank operating in the UAE, generated profits before tax of $276 million, a 31.8 per cent drop in quarterly profits compared with a year ago.
Allegations of lax controls on transactions involving Iran, Mexican drug cartels and alleged terrorist financiers have wrought significant reputational damage on the bank. HSBC admitted all failings identified by the US authorities in July.
"The resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges and the imposition of significant fines, penalties and/or monetary forfeitures," said the bank. During the third quarter, the bank set aside $800m to cover the costs of a US Senate investigation into its anti-money laundering practices, having booked $700m three months earlier.
In the Middle East, the bank's loan book was flat during the quarter at $29.6bn, with increased trade finance and lending to governments offset by a dip in corporate and interbank lending.
During the same quarter, net operating income fell 16.6 per cent to $576m compared with a year earlier. Charges booked for bad debts during the quarter held steady at $82m, a decline of just $4m from the same period last year.
"Our results were affected by decisions to exit certain markets as well as a challenging political and economic environment across the region," said HSBC.
The bank booked a $74m investment loss on a subsidiary during the quarter, without disclosing which business had been affected.
A spokeswoman for HSBC said the writedown was the result of a "strategic adjustment being considered within the Mena [Middle East and North Africa] business."
No further information was available.
HSBC is in the midst of a vast strategic review, which has resulted in it closing business arms around the globe as well as exiting several of its markets in the region in a bid to reduce costs.
Globally, the bank employed 267,000 staff at the end of the quarter, down almost 22,000 from the start of the year. HSBC is also in the midst of planning an exit from Pakistan and has pulled out of domestic private banking in the UAE this year.
The bank also announced it was exiting its Islamic retail banking business, HSBC Amanah, in markets including the UAE, the United Kingdom, Bahrain and Singapore.
The bank would instead focus its Islamic operations on Saudi Arabia and Malaysia, with a limited presence in Indonesia.
HSBC has been one of few lenders to report decreased earnings this quarter during a generally positive earnings season for banks.
Rival lender Standard Chartered also said last week that it had made "limited top-up provisions on existing exposures" in the Middle East, without specifying which loans were turning sour.
After HSBC, Standard Chartered is the second-biggest international bank operating in the Emirates.