HSBC results show the bank’s contempt for law

February 22, 2016

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HSBC released its annual results today, reporting a £13.3 billion profit, and £2.5 billion in bonuses to top staff.

New analysis from Move Your Money, also released today, shows that over the last 5 years executive rewards at HSBC have been more closely correlated to shareholder value than to fines for financial crime, regulatory action, or a variety of traditional performance measures – such as profitability, share price or market capitalisation.

It just goes to show how far above the law giant mega-banks like HSBC really are.

Our analysis suggests that bankers reward themselves for delivering returns to shareholders, no matter what the cost is to society or to other stakeholders. If certain activities make money for the bank then its staff are likely to be paid higher bonuses, even if those activities are later found to be illegal.

The bank has faced no repercussions from the Government or the supine regulator for designing and abetting illegal tax evasion, and now its executives are pocketing huge wads of cash as a reward. Bank staff are simply not being held to account for their criminal activity, either by the Government or by the bank itself.

HSBC recently escaped further investigation from both HMRC and the FCA for its role in designing, facilitating and promoting tax evasion and avoidance schemes in its Swiss subsidiary.

By refusing to take any meaningful action on big bank criminality, the Government is not only giving HSBC a get out of jail free card, it is boosting bankers’ bonuses for the privilege as well.

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The analysis:

 

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Bonuses (£m) Profits (£m) Correlate
Profits 2011 4200 13800
2012 2350 13700
2013 2400 13600
2014 2380 12200
2015 2473 13300
0.411072

The same is true with a number of other areas that you would expect to have an impact on bonus levels.Total profits of the bank are only weakly correlated to bonuses, earning a correlation ratio of 0.41 (where 1 is perfect correlation, -1 is perfect inverse correlation, and 0 is no correlation at all). So instead of rewarding bankers for success or punishing them for failure, big bonuses are awarded pretty much whatever happens at the bank.

In some areas, there is clearly no link at all.

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Bonuses (£m) Avg Share Price (p) Correlate
Mean Share Price 2011 4200 593
2012 2350 568
2013 2400 699
2014 2380 627
2015 2473 567
-0.18842

The mean share price, or average price of the banks shares over the course of the year, has almost no correlation to bank bonuses whatsoever. Bonuses are supposedly used to reward good performances, but the share price appears to carry no weight in calculating bonuses.

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Market Capitalisation Bonuses (£m) Mkt Cap (£bn) Correlate
2011 4200 84.8
2012 2350 122.4
2013 2400 132.4
2014 2380 110.6
2015 2473 88.1
-0.64448

Market capitalisation, or how much the bank is worth as a business overall (calculated by the value of the shares times by the number of shares in total) also seems to play no part in determining the size of bankers’ bonus pools at HSBC. In fact the correlation is -0.64, suggesting that the less the business is worth, the more the bankers’ get in bonuses.

This is clearly an example of correlation not signifying causation – or rather, negative correlation not signalling causation. But this in itself is instructive: why is the value of the business unconnected to the value of bonus rewards at HSBC?

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Bonuses (£m) Share Price (p) Correlate
Share Price (end of year) 2011 4200 491
2012 2350 647
2013 2400 662
2014 2380 609
2015 2473 536
-0.77659

The same is true of the share price at the end of the year, earning -0.78 negative correlation. Why is the share price and value of the business so disconnected from bankers’ rewards?

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Bonuses (£m) Fines & Cust. Redress (£m) Correlate
Fines & Customer Redress 2011 4200 559
2012 2350 2687
2013 2400 789
2014 2380 1869
2015 2473 1545
-0.62941

Fines and customer redress are more closely related to bonuses than total bank profits, earning -0.63, a stronger negative correlation. This suggests that there are some repercussions for incurring fines and compensation claims. But why isn’t this correlation stronger? If the bank – and its staff members – have committed crimes or defrauded customers, shouldn’t its staff be rewarded lower bonuses as a result?

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Bonuses (£m) RoE % Correlate
Return on Equity 2011 4200 10.9
2012 2350 8.4
2013 2400 9.2
2014 2380 7.3
2015 2473 7.2
0.826991

The most strongly correlated metric examined was Return on Equity – or the value created for shareholders. This earned 0.83 correlation, strongly suggesting that total bonus pools are linked to the amount of value made for investors and shareholders in the bank.   

It makes sense that bank staff are rewarded for creating value for their investors, because this can help attract investment to the business.

But when this relationship is prioritised above all others, it can create perverse incentives that can have damaging consequences on society, other stakeholders and the financial system itself – not to mention undermining the rule of law itself.

Because if bankers are not punished or held to account for illegal activity, then they will be personally incentivised to make money for the bank even when doing so breaks the law.

It’s a heads-I-win-tails-you-lose scenario – and at the moment, it’s HSBC and the 423 members of their staff paid over €1m last year who are holding all the coins.

All figures have been taken from HSBC annual accounts and converted using Wolfram Alpha to contemporaneous prices in GBP. Sources have been supplemented with reporting from the BBC, Bloomsbury, and The Guardian. 

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