HSBC agreed to pay $1.58 billion to settle a 14-year-old shareholder lawsuit over allegations that executives of a U.S. subprime-lending business acquired by the bank misled investors.
The HSBC Finance unit will record a $585 million pretax charge in the second quarter to resolve the litigation, which the parent company inherited through its 2003 acquisition of Household International, the bank said Thursday in a statement. The settlement is subject to court approval.
"This settlement is too small to have any influence over dividend decisions," Keefe, Bruyette & Woods Inc. analysts Mark Phin and Richard Smith wrote in a note to investors. "We had nothing explicit in our estimates for this case, but have $2 billion for litigation until 2017 and remain broadly comfortable with that."
HSBC has been reducing staff and cutting costs as revenue growth slows in its key markets across Asia and the U.K. The lender has also been striving to bring misconduct costs and litigation charges to an end, boosting its compliance workforce to about 9,000 staff from 1,500 in 2010. The pace of hiring accelerated after U.S. authorities fined the bank $1.9 billion in 2012 and charged it with violating sanctions laws and allowing Mexican drug traffickers to launder hundreds of millions of dollars.
The pretax charge represents about 9 percent of the $6.57 billion in pretax profit the KBW analysts had estimated for the second quarter before the announcement.
Investors of Household International sued in 2002, alleging the company and three executives made misleading comments about mortgage-lending practices.
A federal jury in Chicago in 2009 ruled that executives at Household, which was acquired by London-based HSBC in March 2003 for $15.5 billion, made recklessly misleading comments. In October 2013, a judge entered a $2.46 billion judgment against HSBC on some claims.
HSBC won a new trial in the case in May 2015 after an appeals court said the investors hadn't shown that a drop in the company's share price wasn't the result of other factors. That trial had been scheduled to begin last week.
The acquisition of Prospect Heights, Illinois-based Household International contributed to record bad debts at HSBC's North American division before it decided to halt subprime lending from the unit in March 2009.
The case is Jaffe Pension Plan v. Household International Inc., 02-cv-05893, U.S. District Court, Northern District of Illinois (Chicago).