Provision to Impact Third-Quarter Results

HSBC Holdings said on Monday it will book a $1.1 billion provision in its third-quarter results after losing part of an appeal in a long-running lawsuit tied to Bernard Madoff’s Ponzi scheme, the largest such fraud in history.

The case relates to Herald Fund SPC, which sued HSBC’s Luxembourg unit in 2009 over assets lost through investments in Madoff’s firm. The Luxembourg Court of Cassation rejected HSBC’s appeal on the restitution of securities claimed by Herald but accepted a separate appeal related to cash restitution, the bank said in a statement.

Herald alleged that HSBC, as its custodian, failed to protect the fund from exposure to Madoff’s operations. The fund, which is now in liquidation, continues to pursue claims for the restitution of securities and cash worth $2.5 billion plus interest, or damages of $5.6 billion plus interest, according to filings cited by HSBC in July.

Investor Takeaway

HSBC’s provision highlights the long tail of litigation risk from the Madoff collapse but is unlikely to materially weaken its balance sheet.

HSBC to File New Appeal

The bank said it plans to lodge a second appeal with the Luxembourg Court of Appeal and would challenge the amount to be paid if that fails. It added that the final financial effect could differ from the current estimate. The ruling weighed slightly on sentiment, with HSBC shares slipping 1% on Monday ahead of its quarterly results due Tuesday.

The lender said the provision would reduce its common equity tier 1 ratio by about 15 basis points, leaving the key capital metric at roughly 14.6%. Analysts said the hit was manageable given the group’s size and existing buffers.

“The charge could weigh on sentiment slightly but the impact should be limited,” said Lorraine Tan, director of equity research for Asia at Morningstar. HSBC has already suspended share buybacks for three quarters to conserve capital after agreeing to take private its majority-owned Hang Seng Bank in a $13.6 billion transaction earlier this year.

Fallout From the Madoff Fraud

Madoff’s investment business collapsed in 2008 after he admitted to running a decades-long Ponzi scheme estimated at up to $64.8 billion. The fraud unraveled after Madoff confessed to his sons in December 2008, one day after his firm’s Christmas party. He later pleaded guilty to 11 criminal counts and was sentenced to 150 years in prison. Madoff died in 2021 at age 82.

HSBC, one of several global banks caught up in the aftermath, has previously settled related cases. In 2012, it reached a confidential settlement with Kalix Fund over losses of about $35.6 million. The new provision revives a chapter of the Madoff saga that has lingered for more than a decade and underscores how post-crisis litigation continues to affect major financial institutions.

Investor Takeaway

The Madoff fallout remains a recurring legal risk for global custodians. For HSBC, the latest provision is a reminder that legacy cases can still dent quarterly results years later.

Limited Financial Impact

While the $1.1 billion charge adds to legal costs, analysts expect little effect on HSBC’s broader capital strength or strategy. Europe’s largest bank by assets has reported steady capital ratios and continues to focus on Asia growth and restructuring its business portfolio. With a common equity ratio well above regulatory minimums, the bank is expected to absorb the provision without altering its dividend or capital plans.

The Madoff case, however, continues to serve as a cautionary note for global custodians about due diligence responsibilities and the long reach of financial misconduct. For HSBC, the next round of appeals in Luxembourg could determine whether the latest provision closes the chapter or adds another layer of legal exposure.