HSBC will allocate $1.1 billion in the third quarter to address potential fallout from the Madoff case

On Monday, HSBC said it would include a $1.1 billion provision in its third-quarter results following a court ruling in Luxembourg in connection with the Bernard Madoff investment fraud case.

In 2009, Herald Fund SPC sued the Luxembourg branch of HSBC, seeking the return of securities and cash it claimed were lost as a result of fraud.

The court rejected the HSBC unit’s appeal in relation to Herald’s claim for the return of securities, but upheld the unit’s appeal in relation to its claim for the return of cash.

The bank will now file a second appeal to the Luxembourg Court of Appeal, adding that if it fails, it will dispute the amount payable in subsequent proceedings.

HSBC’s Hong Kong shares fell 1.1%, while the company’s London-listed shares were last trading 1.3% lower.

Madoff was described as the is the mastermind behind the biggest investment fraud in the USA, defrauding customers of as much as USD 65 billion. In 2009, he pleaded guilty to participating in a scheme that began in the early 1970s and defrauded more than 40,000 people in 125 countries over four decades before he was caught on December 11, 2008.

Madoff, whose victims included director Steven Spielberg and actor Kevin Bacon, was sentenced to 150 years in prison. He died in 2021.

In its interim report for 2025, published in July, HSBC reported that Herald requested HSBC to return securities and cash of $2.5 billion plus interest or damages of $5.6 billion plus interest.

HSBC, Europe’s largest lender, said various non-US HSBC companies provided custody, administrative and similar services to a number of funds whose assets were invested in Bernard Madoff Investment Securities.

The news came a day before HSBC announced its results, in which the bank said a $1.1 billion provision would impact its Common Equity Tier 1, or CET1, ratio by about 15 basis points. The CET1 ratio is a measure of a bank’s financial strength and is used to determine its ability to withstand difficulties.

Analyst estimates The bank’s forecast of the CET1 ratio for the third quarter prepared on October 17 will be 14.5% compared to 14.6% in the second quarter.

Lorraine Tan, director of equity research for Asia at Morningstar, told CNBC she didn’t think the $1.1 billion charge would have an impact on operations but could slightly affect sentiment as HSBC “hoping that these one-time write-offs will be removed after the temporary write-offs.”

HSBC’s allowance for expected credit losses for June increased by $500 million from December 31, according to the bank’s interim report, including unfavorable currency movements of $400 million and write-offs of $2 billion.

Morningstar assumes that the HSBC CET1 ratio will be approximately 14.4% in the third quarter and will remain at this level of 14% for the next 10 years.

HSBC, which said the final financial impact of the ruling could be “significantly different” given pending appeals, is currently undergoing a restructuring under chief executive Georges Elhedery and plans to split its business into four divisions.

The bank announced that the reorganization will reduce costs by approx This year, $300 millioncreating separate sectors of “eastern markets” and “western markets”.

— CNBC’s Marty Steinberg and Scott Cohn contributed to this report.