HSBC’s warning signs point to a bigger risk for global banks

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HSBC’s warning signs

The limits of record bank profits

HSBC Holdings reported pretax profit of $9.6 billion for the three months through September. Revenue reached $18.6 billion, below the $19 billion consensus. So many investors are concerned about major banks’ profitability in the modern environment of intensifying deposit competition and uncertain interest rates.

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“There is sometimes a market expectation that we upgrade guidance or targets,” HSBC Chief Financial Officer Pam Kaur told reporters, according to Reuters.

Banks have benefited from higher interest income and customer activity, but expenses tend to rise more rapidly compared with revenues. Therefore, market participants reflect these concerns in their falling demand for banks’ shares.

Deposit competition threatens lending margins

Competition for deposits in Hong Kong and the UK is encouraging lenders to offer more attractive rates. This may affect the difference between what banks earn on loans and securities and what they pay depositors. Time deposits increased to 38% of HSBC’s Hong Kong portfolio, up two percentage points from the previous quarter. This may increase funding costs and negatively impact margins.

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Banks compete for customer deposits while also financing households, businesses, and commercial real estate. If current trends persist, lenders may tighten underwriting standards or reduce lending to riskier borrowers. HSBC’s reported expected credit losses fell 17% to $800 million in the quarter due to lower charges associated with Hong Kong real estate.

Private credit creates another transmission channel

Private-credit funds have expanded, and they mostly finance companies that have limited access to public debt markets. The connections between lenders, investment funds, and insurers tend to become more complex. The Financial Stability Board estimated that private credit reached $1.5 trillion to $2 trillion in assets. It identified approximately $220 billion in drawn and undrawn bank credit lines to private-credit funds across reporting jurisdictions.

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These figures show how stress in private markets may affect regulated lenders through indirect exposures. The FSB also warned that the sector’s current scale and structure have not been tested during severe economic conditions. A potential crisis scenario may start with rising defaults among highly leveraged companies. Banks connected to affected funds could then face liquidity issues.

The IMF warns that resilience is not safety

The International Monetary Fund has identified several shocks that could have a serious negative impact in the medium term. They include rising sovereign bond yields, a correction in artificial-intelligence-related assets, and cyber incidents. Athanasios Vamvakidis, deputy division chief in the IMF’s Monetary and Capital Markets Department, stated, “But resilience is not safety.” This warning referred to the overall positive assessment of most banks’ resilience.

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The IMF identified a group of weaker banks that could become undercapitalized stressed. The major risks are observed in spheres related to non-bank financial institutions. However, experts do not consider that another 2008-style crisis is inevitable. The most important aspect is taking timely and systematic response measures.

What could trigger the next banking crisis?

The most concerning scenario is a combination of shocks spreading throughout the industry. Higher sovereign yields weaken bond portfolios and increase funding costs. This will directly affect leveraged borrowers, while private-credit losses and forced asset sales may be transmitted between markets and banks.

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Rising expected credit losses, unsatisfactory loan performance, widening credit spreads, and tighter bank lending standards may serve as relevant indicators in this regard. The next global banking crisis may develop through interconnected markets, where leverage, liquidity problems, and low credit quality reinforce one another. Moreover, trends in the real and financial sectors may be opposite, so traditional economic indicators may not reveal the actual situation in the economy.

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