HSBC may book US$7b more of subprime charges

PUBLISHED : Friday, 16 November, 2007, 12:00am
UPDATED : Friday, 16 November, 2007, 12:00am

HSBC Holdings' subprime woes could worsen, according to analysts who expect the bank to require some US$7 billion of additional impairment charges in the next few months.

The consumer finance division of the world's fourth-largest lender yesterday reported a US$3.4 billion provision relating to deteriorating credit conditions in the United States.

'The poor results at the US business were not surprising given the sharp rise in defaults on lending and bad-loan charges,' said David Marshall, Fitch Rating's managing director and head of financial institutions for Asia.

The lender was the first to tackle the subprime mortgage problem when it made a US$2.1 billion provision in its accounts last year. HSBC Finance, its consumer finance unit, posted a US$1.1 billion loss in the third quarter this year compared with a US$63 million profit in the previous quarter.

Fitch cut its credit outlook for HSBC from 'positive' to 'stable' last month. Standard & Poor's also downgraded the bank from 'positive' to 'stable' after it released a trading statement on Wednesday.

HSBC said significant contributions from the Middle East and Asia Pacific could more than offset losses at the US business. But not everyone in the market is convinced.

JP Morgan has an 'underweight' recommendation on HSBC while most other brokerages are rating it 'neutral' following the release of the US operation's third-quarter results.

'The credit deterioration seen in the third quarter raises questions about the near-term outlook for this once US$1 billion business,' said JP Morgan analyst Sunil Garg in a report.

'While we expect earnings to rebound in the fourth quarter, credit weakness is likely to remain a drag.'

Goldman Sachs estimated that the bank may need US$7 billion of additional total goodwill impairment charges for its US subprime business.

HSBC has said losses in the mortgage services business were 'broadly in line with expectations'.

'This carried a heavy caveat that expectations would not be tested properly until the second half of 2007 and the first half 2008,' said Morgan Stanley analyst Anil Agarwal.

Bonnie Chan, an analyst at China Construction Bank (International), warned of a potential spillover into the home-secured, credit card and unsecured loan books.

'Defaults from subprime customers are likely to rise further,' she said.

HSBC is closing or integrating 100 outlets in its consumer branch network across the United States. It plans to close a further 260 branches.

Shares of HSBC fell 0.14 per cent to close at HK$138.80 yesterday in Hong Kong and 0.8 per cent to 859 pence (HK$136.79) late yesterday afternoon in London.