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SCMP Reporter

Banking analysts yesterday moved to mark down significantly their earnings forecasts for HSBC Holdings, following the firm's worse than expected half-year results unveiled on Monday.

 The group, which owns Hongkong Bank and Britain's Midland Bank and has a majority stake in Hang Seng Bank, faces profit downgrades by up to 15 per cent after it revealed a huge US$1.14 billion provision against bad and doubtful debts.

 Most analysts expect the dramatic increase in bad-debt provisions to continue and possibly increase during the next two years, with increasingly more bad-debt charges being made in Hong Kong.

 Former top-rated banking analyst John Aitken at Rabobank in London saw pre-tax profits for the full year marked down by 7 per cent to GBP4.5 billion (about HK$56.74 billion) before plummeting by 12 per cent to GBP4.4 billion next year.

 After suffering what analysts universally expected would be a constant stream of bad-debt provisions, the bank would then be adversely affected by the cyclical downturns in Britain and the United States, where it operated through HSBC Americas.

 'The Western profit sources in the US and the UK have topped out,' Mr Aitken said.

 Provisions were expected to reach US$2.8 billion for the full year and climb to US$3.4 billion next year, before subsiding to US$2.97 billion in 2000.

 Among the most bearish predictions, Robert Fleming banking analyst Hugh Pye said following the 14 per cent fall in first-half pre-tax profits to US$3.7 billion, he expected full-year profits to fall to US$7.05 billion, or only GBP4.3 billion, down 4 per cent from his original estimate of GBP4.5 billion.

 He said the group, which was now reporting in US dollars, would see profits climb to US$7.46 billion next year and US$9.2 billion in 2000.

 ABN-Amro banking analyst Rob Down was also very bearish, estimating pre-tax profits at only GBP4.2 billion, hit by minimal volume growth and continuing margin pressure.

 'While bad debts should ease in the second half in the rest of Asia, it will be more than offset by Hong Kong,' he said.

 This view was shared by Merrill Lynch banking analyst Richard Coleman, who expected a high level of provisions at the bank for the next three to four half-year results, although he saw the level gently declining at the group as a whole.

 'They have made all the provisions they can in Indonesia and Thailand, but Hong Kong will go up,' he said.

 He saw this year's profits at GBP4.39 billion, before rising to GBP4.9 billion next year and GBP5.55 billion in 2000.

 The view that HSBC had not made sufficient provisions for its Hong Kong operations was also shared by SG Securities, which said specific provisions had fallen from 68 per cent to 58 per cent for the year to date despite a fall in collateral.

 The underprovisioning would have to be made up in the second half, the brokerage said.

 'Unlike in the second half of 1997, HSBC did not increase its provisioning more than the increase in non-performing loans,' analyst Alvin Ching said.

 'Instead, the results indicate a degree of underprovisioning attributable to Hong Kong operations.'  SG said it expected Hong Kong non-performing loans to peak at 5.2 per cent in 2000, compared with 30 per cent for the rest of Asia in the same year.

 The securities firm also said it had downgraded HSBC's earnings forecast by 15.44 per cent to HK$35.26 billion.

 Salomon Smith Barney banking analyst John Leonard said he had downgraded the group's pre-tax profits forecast by 10 per cent to US$7.45 billion and reduced next year's profits estimate down 5 per cent from an estimated US$8.9 billion to US$8.5 billion. Mr Leonard said bad-debt provisions would rise to US$2.13 billion before declining to US$1.75 billion next year.

 'There will be a fairly strong stream of small and medium-sized corporate failures washing up at the bank,' Mr Leonard said.

 Morgan Stanley Dean Witter cut this year's pre-tax earnings forecast for HSBC Holdings by 5.1 per cent to GBP4.75 billion and downgraded the net earnings' outlook for Hang Seng Bank by 7.7 per cent to HK$8.1 billion.

 On Monday, Hang Seng Bank said it was raising provisions charges to HK$902 million from HK$205 million from the bank's trade finance and corporate exposure.



Gloomy HSBC earnings data brings out bears in analysts