We see the bevy of legal charges in 
HSBC's (HSBA) fourth-quarter results as disappointing but not unexpected, given the industry environment in general and recent headlines about HSBC in particular. However, the key takeaway for us is not the impact of these individual charges, which include an additional $809 million for foreign exchange investigations and $340 million for mis-selling in the UK—we see these as easily manageable for the bank with its nearly $200 billion of shareholders' equity. Instead, the recent legal charges news is clear evidence that our thesis—of regulatory costs remaining at permanently higher levels—is playing out. In fact, we now see our estimate that HSBC will pay another $1.5 billion of fines over the next two years as optimistic, and we're likely to increase this number.
We think that ongoing legal costs, together with slow global economic growth, are likely to make it difficult for HSBC to earn attractive profits. We therefore weren't surprised to see management abandon its 12-15% return on equity target, which we'd long seen as too ambitious. Its new target of greater than 10% strikes us as achievable, but even that will require some improvement in the operating environment, especially in light of growing capital requirements. We may modestly reduce our current 700p-per-share fair value estimate for this narrow-economic-moat bank as we review our projections.
We're also troubled by news that CEO Stuart Gulliver has been pulled into the scandal over whether HSBC helped customers to illegally evade taxes. He appears to have sheltered $7.6 million in a Panama-registered company named Worcester Equities. While HSBC's statements that Gulliver's actions were completely legal, transparent and compliant may be true, we're concerned that this apparent disregard for appearances of propriety (at best) may foretell higher-than-expected legal costs.
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