HSBC boosted by lower provisions
The winds of economic recovery blowing through Asia brought a sharp drop in bad-debt charges declared by Hongkong and Shanghai Banking Corp (HSBC) yesterday - along with a broad hint of write-backs which could boost profits in the second half of the year.
Also positive for earnings at a group level was the news that restructuring costs likely for the acquisition of Republic New York Corp could be lower than initially forecast.
But it was the improved outlook in the region which helped HSBC - the subsidiary of HSBC Holdings responsible for the group's Asian operations - to a 66 per cent increase in net profit to HK$17.9 billion for the year to December 31.
The main contributor to the result, which was broadly in line with market expectations, was a reduction in loan-loss provisioning from HK$12.53 billion to HK$7.84 billion.
The group was cautiously optimistic on the outlook for bad debts and hinted that over-provisioning could see write-backs in the second half of the year.
A special general provision of HK$1.6 billion raised in 1997 remained intact, said HSBC, but if economic conditions continued to improve in Asia, this might be released during the course of this year.
Enlarging on this theme, group chief executive Keith Whitson said an element of stability had returned to both Hong Kong and the mainland.
Mr Whitson also said the ultimate restructuring costs associated with the Republic New York acquisition could be US$70 million lower than originally forecast.
It emerged, however, that mortgage business written by HSBC and its subsidiaries, including Hang Seng Bank, went into reverse due to a decision in the first half not to join the price war raging in Hong Kong.
At HK$183.55 billion, HSBC's residential mortgages in the SAR were down 5.4 per cent on the HK$194.05 billion mortgage portfolio in 1998.
There was a tacit admission from HSBC chairman David Eldon that the group might have waited on the sidelines for too long in the expectation that the war would be short-lived.
'Yes, we have lost some market share in residential mortgages,' Mr Eldon said. 'But we intend to do something about it, and I imagine during the course of this year you will see us being very much more aggressive than we have been.
'We did take a decision not to lead the market down, and I do have some concerns that the market did go down probably further than most people would have liked to have seen.
'But we will be aggressive, market-driven, and we will recapture the market share we have lost.' The conservative attitude to mortgage lending - along with a less upbeat attitude than most of the bank's competitors have towards the economic recovery in the SAR - was also partly responsible for a decline in HSBC's loan/deposit ratio.
Net advances to SAR customers were down 6.5 per cent from HK$516.7 billion to HK$483.22 billion.
The bank has said that the economic recovery in Hong Kong remained 'fragile' and Mr Eldon also took a cautious line.
'There are clear signs that the economy in Hong Kong is improving but the improvement remains a little bit patchy,' he said.
Apartment sales were not as buoyant as might be expected, and consumer spending remained a matter for concern.
'Turnover at supermarkets is fairly high - but values of items being bought is not. Also, the amount of money being spent in restaurants remains relatively low,' said Mr Eldon.
'There has been some fairly high spending going on over November, December and January, and this could have been partly due to the fact that we had a buoyant stock market and people felt a little better.
'I think we should wait to see what the figures look like in March and April before we can make some better judgments as to whether the fragility is working its way out.' Analysts welcomed the result, but since it was in line with expectations they did not believe it would come to the aid of HSBC's share price, which closed down 75 HK cents at HK$89 after the announcement.
