JPMorgan released a research report stating that HSBC Holdings (00005) announced a $1.1 billion provision in Q3 2025, related to a Luxembourg court ruling on the Herald Fund SPC case, which invested in Bernard Madoff's Ponzi scheme. While this provision is a significant one-off item and will not impact adjusted ROTE or dividends, it will reduce the Common Equity Tier 1 (CET1) ratio by approximately 15 basis points, likely triggering a negative stock reaction.

Notably, JPMorgan and consensus market estimates had projected impairment charges of $1.3 billion and $1.0 billion, respectively, for HSBC in Q3 2025. The additional $1.1 billion provision was not anticipated by the market. The bank maintains an "Overweight" rating on HSBC with a target price of HK$122.

**Legal Background**: Since 2009, HSBC has faced Luxembourg lawsuits tied to the Madoff fraud case, with Herald Fund SPC seeking to recover $2.5 billion in securities and cash or $5.6 billion in damages (including interest). On October 24, the Luxembourg court dismissed HSBC's appeal on securities recovery but accepted its appeal on cash recovery, prompting HSBC to file a second appeal.

During this process, HSBC will recognize the $1.1 billion provision in Q3 2025, reducing its CET1 ratio by ~15 bps. Given ongoing appeals and complex damage calculations, the final financial impact remains uncertain.

Beyond Herald, four other pending lawsuits related to Madoff’s fraud involve total claims (including Herald) of $5.2 billion (with interest).

**JPMorgan’s Concerns**: 1. The $2.5 billion claim from Herald, alongside four other lawsuits totaling $5.2 billion, raises market doubts over whether the $1.1 billion provision is sufficient. Litigation may drag on, prolonging uncertainty. 2. Higher provisions could fuel concerns over management’s 2025 guidance of 40 bps credit costs, despite the $1.1 billion being classified as a one-off. 3. The $1.1 billion provision’s 15 bps CET1 impact poses downside risks to share buybacks.

Previously, JPMorgan estimated that suspending buybacks for three quarters would leave HSBC with a ~14% CET1 ratio post-Hang Seng Bank (00011) privatization, assuming a $1.75 billion buyback announcement in Q2 2026 earnings. However, the bank now sees significant downside risks to this amount.