Bad debt leaves HSBC puzzle

PUBLISHED : Saturday, 01 March, 2008, 12:00am
UPDATED : Saturday, 01 March, 2008, 12:00am

Profit forecasts swing as analysts struggle to nail provision

Analysts are in a quandary predicting HSBC Holdings' 2007 earnings - estimates range from a 5.6 per cent decline to a 26 per cent gain - largely because they do not know how much the lender will set aside for bad debt, mainly for subprime woes.

Forecasts from six brokerage houses suggest the bank could make provisions from US$14.43 billion to US$17.4 billion, an increase of 36.56 per cent to 64 per cent from a year ago.

Net profit is expected to range from US$14.89 billion to US$19.91 billion, compared with US$15.78 billion in 2006.

'It's because of the divergence in expectations for the bank's provision,' said William Wong Kwok-wai, an analyst at BOCI Research, who thinks HSBC could make a provision of more than US$17 billion.

'Just HSBC Finance alone may need to book a provision charge of US$1.1 billion,' Mr Wong said, referring to the bank's United States unit, which has been hard-hit by the subprime fallout.

CLSA, which forecast that HSBC would see a decline in profit, expressed concerned that the negative credit environment would not only affect HSBC's subprime business, it could also spill over to traditional loans, such as credit cards. It cut the bank's target share price to HK$80 at the end of January.

The remainder of 2008 'will be a full year of credit restriction, where banks become highly risk-averse in light of rising impairments, but also underlying collateral', CLSA said.

However, analysts expect HSBC's substantial provision could be at least partially offset by its robust earnings in Asia, as well as some exceptional gains.

Goldman Sachs expected HSBC would post core attributable profits of US$6.95 billion, down 29 per cent in the second half of the year compared with the first half.

But it also forecast that net profit for the year would rise about 15 per cent. This would include a US$1 billion gain from the A-share listing of its mainland associates - Bank of Communications and Ping An Insurance (Group) - as well as US$1.3 billion on the sale and lease-back of its London headquarters.

The US brokerage is still concerned HSBC has to make higher provisions for HSBC Finance. It expects 70 per cent of HSBC Finance's loan book could fall into negative equity if property prices fall 20 per cent to 25 per cent, from peak to trough.

JP Morgan expects HSBC's North American business could report a loss for the second half of last year due to rising credit costs. However, the expected pre-tax profit growth of 25 per cent in Hong Kong and strong growth in Asia will help to offset the surge in provisions.

JP Morgan added that the strong economies in the region, as well as loose monetary policy, would continue to drive HSBC's Asia earnings. 'This is expected to provide a partial offset of US and European weakness,' the brokerage said.

Meanwhile, Hang Seng Bank, HSBC's subsidiary, is expected to report net profit growth of 32.49 per cent to HK$15.94 billion for last year, according to the average forecast of 20 brokers polled by Thomson Financial.

JP Morgan expects Hang Seng Bank will post profit growth of 36.6 per cent, driven by a wider net interest margin, strong fee income and the non-recurring gains from the listing of Industrial Bank on the Shanghai exchange. The broker said the outlook for the bank's loan growth in Hong Kong and on the mainland this year would remain good.

ABN Amro recently cut its earning forecasts for Hang Seng Bank for this year and next year. The firm believes the bank's net interest margin may narrow as interest rates are cut and sees a decline in fee income due to the sharp slowdown in equity markets.

Charge into unknown

Growth in Asia is expected to help offset the subprime impact

The upper end of brokers' forecasts for HSBC's 2007 provision, in US$: $17.4b