Zhi Tong Cai Jing·2025-10-27 09:53Core Viewpoint - HSBC Holdings is set to recognize a provision of $1.1 billion in Q3 2025 related to the Luxembourg court ruling on the Herald Fund SPC case, which is tied to the Bernard Madoff Ponzi scheme. This provision, while categorized as a significant special item, is expected to negatively impact the CET1 ratio by approximately 15 basis points, potentially leading to a negative market reaction. JPMorgan and market consensus have differing expectations for HSBC's impairment charges in 2025, with JPMorgan maintaining an "Overweight" rating and a target price of HKD 122 [1]. Group 1 - HSBC has faced legal challenges since 2009 related to the Madoff fraud case, with the Herald Fund SPC seeking to recover $2.5 billion in securities and cash, or $5.6 billion in damages (including interest). The Luxembourg court recently rejected HSBC's appeal regarding the recovery of securities but accepted the appeal for cash recovery, prompting HSBC to file a second appeal. The total claims related to Madoff fraud, including those from four other pending lawsuits, amount to $5.2 billion (including interest) [2]. - The market is likely to scrutinize whether the $1.1 billion provision is sufficient given the total claim amount of $2.5 billion from the Herald Fund lawsuit and the additional claims from other lawsuits. The litigation process may be lengthy, creating ongoing uncertainty [3]. - The increase in provisions may raise concerns about the management's guidance of a 40 basis point credit cost for FY 2025, despite the provision being classified as a significant special item. The $1.1 billion provision will also lead to a 15 basis point decline in the CET1 ratio, posing a downside risk to share buybacks [3].