US woes take shine off HSBC profit rise

PUBLISHED : Tuesday, 04 March, 2008, 12:00am
UPDATED : Tuesday, 04 March, 2008, 12:00am


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Uncertain outlook for 2008, says group chief

A 63 per cent surge in writedowns took the gloss off HSBC Holdings' 21 per cent rise in annual profit to US$19.13 billion, and analysts warned it might face further writedowns this year.

Stephen Green, the group chairman, blamed the poor performance of its North American business on the credit problems caused by the US housing market slump. He said the outlook for the rest of 2008 was uncertain. 'The economic slowdown and the credit outlook in the US may well get worse before they get better,' Mr Green said.

Robert Sage, an analyst at Bear Stearns said in a report: 'Clearly impairment charges [of the bank] will be very high in 2008.' He added that the subprime crisis and credit crunch could worsen, hitting the bank's target price.

The global lender said yesterday that loan impairment charges and other credit risk rose to US$17.24 billion, compared with US$10.57 billion a year earlier. North America, where pre-tax profit fell 98 per cent to US$91 million, accounted for 70 per cent of the group's bad-debt provisions. It contributed nothing to 2007 group pre-tax profit, compared with 21.1 per cent in 2006.

Loan impairment charges from its North American personal financial services business accounted for US$11.9 billion in writedowns mainly from subprime mortgages.

The Hang Seng Index closed down 746.70 points, or 3.07 per cent at 23,584.97 yesterday. HSBC shares closed down 1.16 per cent at HK$119.30 and its Hong Kong subsidiary, Hang Seng Bank, fell 1.99 per cent to end at HK$147.10.

However, HSBC shares rose 1.89 per cent to 780.50 pence at one point in early London trade yesterday.

'The positive impact of the better-than-expected result could only provide short-term support to the shares,' said Ben Kwong Man-bun, chief operating officer at KGI Asia, adding the market was concerned that the bank might need to make further provision this year.

Mr Kwong said the US economic slowdown might also have an impact on Hong Kong and emerging markets' economies.

Michael Geoghegan, HSBC's group chief executive, said the bank's provisions reflected market conditions of the underlying economy and the bank took a cautious approach in its provisioning.

However, he did not rule out the possibility of further reductions in the bank's subprime and non-subprime assets if volatility continued.

He said the bank had taken different measures to mitigate the impact of subprime woes, including reducing its mortgage services portfolio from US$49.5 billion to US$36.2 billion and closing some US branches.

Mr Geoghegan said the bank also slowed growth of its US credit card business and had tightened underwriting criteria for its US credit card and car financing operations.

Mr Green said despite the exceptionally weak performance of US business, the bank had still achieved another new high in earnings.

Net profit rose to US$19.13 billion, compared with US$15.78 billion a year ago, higher than the market average expectation, thanks to strong earnings generated in Asia and emerging markets. Net profit at Hongkong and Shanghai Banking Corp, the bank's Asia-Pacific unit, rose 53.9 per cent to HK$58.02 billion, underpinned by robust economic conditions and markets.

Hong Kong accounted for 30.3 per cent of the group's pre-tax profit last year, compared with 23.5 per cent a year ago, with the rest of the AsiaPacific region contributing 24.8 per cent, to total 55.1 per cent of the group's total pre-tax profit.

Mr Green said the bank would continue to invest in Asia and emerging markets, but said it had no plan to 'walk away' from HSBC Finance, its US consumer finance unit.