Shares dip on fears bank may have to set aside US$10.56b for mortgage business after admitting error
HSBC Holdings, in a rare move before its earnings announcement next month, said its US mortgage provision would be 20 per cent above the market average estimate, sending its shares tumbling.
The warning yesterday suggested the bank could set aside provision of up to US$10.56 billion for the US mortgage business, compared with the market estimate of US$8.8 billion, prompting analysts to cut their earnings forecasts on the lender by 5 to 10 per cent.
HSBC chief executive Mike Geoghegan admitted that the 'management made a mistake in the brokerage business and second-lien mortgage' but vowed 'it won't happen again'.
Mr Geoghegan also said 90 per cent of US clients were paying and the bank had changed management and lending policies, focusing more on prime mortgage lending.
The bank said the US mortgage business, mainly second-lien or broker-referred mortgages, was deteriorating. The US business accounts for about 6 per cent of HSBC's assets.
'The impact of slowing house price growth is being reflected in accelerated delinquency trends across the US sub-prime mortgage market,' it said.
'The slower prepayment speeds are also highlighting the likely impact on delinquency as adjustable rate mortgages [are] reset over the next few years from their original lower rates.'
HSBC's Hong Kong-listed shares slumped as much as 2.58 per cent in morning trading, but the loss narrowed to 2.02 per cent and the stock closed at HK$140.60.
HSBC's American depositary receipts fell 2.75 per cent in New York morning trade while its London-listed shares were down 1.67 per cent in late afternoon trade.
Kent Yau Ho-yin, the deputy head of Hong Kong research at Core Pacific-Yamaichi International, said HSBC's early warning was a move to reduce the shock at its full-year earnings release next month.
HSBC entered the US mortgage business in 2003 when it bought Household International, a consumer financing play. It later renamed the unit HSBC Finance.
The purchase and other US acquisitions helped lift group profit and now makes up about 30 per cent of its earnings.
HSBC financial director Douglas Flint said the bank had to make 'appropriate levels of provision' after taking account of recent trends in delinquency and loss severity and the effects of resetting interest rates on adjustable rate mortgages.
'I think the market will revise the bank's profit forecast downwards,' said Anthony Lok, the head of research at BOCI.
He added he was likely to lower his profit forecast for HSBC by at least 5 per cent.
JP Morgan revised its pre-tax profit forecast for HSBC downwards by 8 per cent and downgraded the stock's rating to underweight from neutral. Merrill Lynch also cut its net profit forecast by 10 per cent to US$16.6 billion.
'We downgraded HSBC to a sell in early January, highlighting the vulnerability of the bank's share price to negative news flow on the US consumer finance market and consequent earnings downgrades,' Merrill said in a research report.
Dragged down by HSBC, the Hang Seng Index fell 1.74 per cent in the morning session but closed 0.27 per cent higher at 20,735.05 due to support from heavyweight China Mobile and good earnings by Esprit Holdings, Bank of East Asia and Hang Lung Properties.
China Mobile rose 2.12 per cent to HK$77.05, while Esprit jumped 7.35 per cent to HK$89.10.
'China-related stocks lent support to the market as investors snapped them up after the A-share market stabilised for the past two days,' said Ricky Tam, a director at Champlus Asset Management.