HSBC suffers £295m hit from ‘shadow bank’ collapse

HSBC has taken a $400m (£295m) hit from the collapse of a “shadow bank” at the centre of an alleged fraud.Europe’s biggest bank said it had taken the charge as a result of a “fraud-related” exposure to an unnamed company. It is understood to be mortgage lender Market Financial Solutions (MFS), according to the Financial Times.Mayfair-based MFS collapsed into administration in February amid what a judge called “very serious” allegations of fraud. The company has been accused of double-pledging assets to back loans, creating a multibillion-pound hole on its balance sheet.HSBC said its exposure to the company was “secondary” and through a financial sponsor, meaning it did not deal directly with MFS but through another company that lent to it.MFS provided short-term, property-backed loans to borrowers that may not have qualified for traditional bank financing. It operated in the fast-growing private credit market, known as “shadow banking”. In the private credit industry, loans come not from banks but from sources such as hedge funds and financiers. The sector is less well regulated and less transparent than mainstream banking.HSBC also revealed it had set aside $1.3bn in the first three months of the year to cover credit losses, including $300m to cover an economic downturn caused by the Iran war. Profits at the bank fell by 1.1pc to $9.4bn during the first quarter.Shares fell by as much as 5.6pc, making it the worst performer on the FTSE 100.HSBC’s admission will stoke fears about the exposure of global lenders to private credit. Barclays revealed a £228m impairment in its results last week, which was also understood to have been linked to MFS.Pam Kaur, chief financial officer at HSBC, insisted that the issue was “idiosyncratic” and said HSBC was “quite comfortable that this is a one-off fraud”.However, she added that the bank continued to “review our risk appetite, tighten due diligence and so on”.Speaking on a call with analysts, she said: “We have gone back and reviewed all our highest risk exposures across our portfolio and specifically looked at the private credit exposures as called out in the slide, and we see no comparable fraud risks in this matter.”HSBC forecast “a mid-to-high single-digit percentage adverse impact on profit before tax” from a range of issues including higher oil prices, rising inflation, a material slowdown in gross domestic product, rising unemployment and market disruption.However, the bank said it was “well positioned to manage the changes and uncertainties prevalent within the global environment in which we operate, including in relation to the conflict in the Middle East”.