HSBC could write down billions of dollars of goodwill on its European, US and investment banking operations as part of the restructuring it outlined last week, potentially slashing this year's reported profits below 2018's level.
"We do hold currently quite a bit of goodwill against our European business. We are signalling that as we do the (restructuring) work, there may need to be some impairment of that goodwill," chief financial officer Ewen Stevenson told reporters last week at the bank's third-quarter results.
The bank also carries goodwill against its investment bank and US operations, which it is also expected to look at.
HSBC had goodwill of more than US$13bn at the end of 2018. Up to US$10bn of that looks ripe for review, and at least a few billion dollars appears likely to be impaired, depending on how far the restructuring goes.
"We've had a strong hint that we'll be looking at several billion dollars of goodwill writedown," said Ian Gordon, analyst at Investec in London.
HSBC interim chief executive Noel Quinn plans to announce full details of his restructuring in February. He said US and European operations need "decisive action" to improve, and changes are needed in global banking and markets.
HSBC had US$4.04bn of goodwill for GBM at the end of 2018; it had US$3.56bn for its European retail banking and wealth management; and there was US$2.62bn against its commercial bank in Europe, according to details in its 2018 annual report. There was another US$3.06bn of goodwill spread across other areas, including about US$400m for its US private banking business.
"There are pockets of goodwill sitting everywhere, and I think all we’re trying to signal is ... there may well be some need to revisit some of that goodwill, but we haven’t done the analysis yet," Stevenson told analysts.
Accounting for goodwill is a complex and inexact science. It is often taken in big lumps, and banks can wait years to write down the goodwill they carry against a business - often only acting when there is an event to do so, like restructuring.
"As soon as you identify a business as being non-core or earmarked for disposal or rationalisation, your goodwill impairment test will likely throw up a writedown," Investec's Gordon said.
Analysts don't worry too much about it, however. Some regard it as "accounting noise" because it doesn't affect capital or the tangible book value that valuations and returns are based on.
Goodwill is set against acquisitions and is impaired when future cash flows look like they no longer match the valuation. HSBC's annual report said it takes an impairment when the carrying amount exceeds its "value in use" estimate. But accounting variables include forecasts for cashflow, cost of capital, financial and economic metrics and inflation.
HSBC last took a goodwill writedown in 2016. That was a US$3.2bn writedown on the purchase of Republic New York's European assets 17 years earlier. In 2008 HSBC took a goodwill impairment of US$10.6bn on its disastrous US$15bn purchase of US consumer finance business Household in 2003.
Other banks also tend to take big, lumpy writedowns. UK rival Royal Bank of Scotland took a £16.2bn goodwill writedown in 2008 on several acquisitions, including ABN AMRO and banks in the US.
Stevenson said he was flagging potential writedowns partly because HSBC wants to issue debt in the next few months and it didn't want to surprise investors in when details of the restructuring are announced alongside full-year results in February.
The bank also looks set to take other more tangible charges related to its restructuring, such as hefty charges for thousands of potential redundancies, exiting businesses and writing off some of its technology investment.
HSBC is likely to want to take as much of the charges as possible in its 2019 results, although analysts expect a lot of the restructuring costs could be pushed into fiscal 2020.
But the goodwill hit could tip HSBC's 2019 pre-tax profits below US$19.9bn reported in 2018. Before last week's Q3 results - which fell short of expectations - HSBC had been expected to report a pre-tax profit of US$21.7bn for 2019.