HSBC's results hinge on US write-downs

Margins are under pressure and how many billions of dollars HSBC Holdings will write down on its US subprime loan portfolio is anybody's guess, but the market is sure to move after the index heavyweight reports annual results on Monday.

Underlying earnings are expected to continue to build on the momentum established in the first nine months of last year, as HSBC probably benefited from the ongoing global economic recovery.

Analysts are expecting the bank to record US$7.71 billion in net profit, according to a Bloomberg survey. That would represent a 34.7 per cent increase from 2008's dismal figure of US$5.728 billion, which was a plunge of 70 per cent from the previous year.

But a number of swing factors will influence the bottom line. Key among these will be accounting measures such as changes in the fair value of HSBC's own debt, which the bank must carry at market value.

And a great deal of attention will be focused on the performance of the bank's US subprime lending unit, HSBC Finance Corp. HSBC last year decided to wind down its US portfolio by stopping all new household, car and personal lending, although it is keeping its credit-card business.

Contrary to what might be expected, core underlying profit and margins at HSBC Finance have risen in recent quarters. But at the bottom-line level, these profits have been more than offset by hefty provisions for bad or doubtful debts, and HSBC is expected to continue booking significant provisions on Monday to the tune of several billion US dollars.

'That's around a US$2 billion swing factor in terms of their provisions,' said John Wadle, banking analyst at Mirae Asset Securities. 'I suspect they will give some guidance on the current performance of the US book.'

Trading income is expected to remain robust, but analysts question whether it can maintain the strong pace of growth that it showed in the first half of the year. In addition, low global interest rates have pressured lending margins. But that could be partially offset by a continued recovery in fee income on credit cards, funds and the brokerage business.

While asset values have risen, net asset value per share is forecast to have declined 5.4 per cent to US$7.04 due to the diluting effects of HSBC's massive US$17.7 billion rights issue in April last year, according to the Bloomberg survey.

And then there is the question of declaring the final dividend, which if large could potentially have political implications given the recent debate over bonuses and executive pay.