HSBC hurt by exposure to US subprime market
HSBC hurt by exposure to US subprime market
By Maggie Urry
Copyright The Financial Times Limited 2007
Published: July 30 2007 10:37 | Last updated: July 30 2007 10:37
Half-year profits at HSBC were hit by the bank’s exposure to the US subprime mortgage market and a $236m (£116.5m) charge for fee refunds in its UK retail banking operations.
UK Daily View
Video: Jane Croft on US sub-prime effect on HSBC profits
The loan impairment charge jumped 63 per cent, or $2.46bn, to $6.35bn in the half-year to the end of June. That followed a sharp rise in the charge in the second half of 2006, which in February forced HSBC to issue a profits warning. This was one of the first signs of problems in the US subprime market.
HSBC shares have been weak in recent months and responded to the news with a rise of 2.5 per cent, or 22p, to 902½p. Keith Bowman, analyst at Hargreaves Lansdown, said “the stock appears to be enjoying something of a relief rally – relief that bad debts were not even worse”.
Group pre-tax profits rose 13 per cent to $14.16bn, driven by good performances in Asia, and in corporate and commercial banking. But Stephen Green, chairman, said profits were boosted by a $1bn post-tax gain from the dilution of HSBC’s holdings in its mainland China associates. Excluding that, he said, underlying pre-tax profits rose 5 per cent.
Analysts at Keefe Bruyette & Woods pointed out that the income statement also included a $874m gain from fair value adjustments to financial instruments. The gain in the comparable period was $260m. Further, they said, the rise in trading income from $4.26bn to $5.51bn “may give rise to quality questions”.
Mr Green said that while the world economy remained buoyant, and global economic growth was forecast at 3.8 per cent, there were risks ahead, notably from nervousness about credit markets.
Reviewing the results he said, “pre-tax profits in personal financial services as a whole declined 20 per cent”. That was in spite of “very strong” results from Asia. Mr Green said conditions in the UK personal banking market were “challenging” but the main problem was in the US.
He said “the actions taken to restructure and manage down our exposure in this business are progressing well. The charge for impairments was lower than in the second half of last year and was in line with our expectations”.
Michael Geoghegan, chief executive, said that in personal financial services, Asia increased pre-tax profits by 38 per cent. However, the division’s profits fell by a fifth to $4.73bn.
In North America, profits fell 43 per cent compared with the first half of 2006, although they showed a strong recovery on the second half of last year. First-half profits were $1.8bn, a $1.5bn improvement on the previous six months.
In the half-year impairment charges on mortgages were $760m, and loans of $715m were written off against existing allowances, leaving the total allowance broadly unchanged at $2.1bn. Mr Geoghegan said the group had managed down its exposure to the mortgage business by $8bn to $41.4bn.
“We have stopped underwriting subprime mortgages and made management changes,” he said.
The group is calling customers facing interest rate resets, and has so far contacted 19,000 of them, modifying the loans of 5,000 on them.
In Europe, the personal finance business was down 34 per cent, hit by a decision to cut credit exposure where pricing did not adequately reflect risk. Refunding unauthorised overdraft fees in the UK cost the bank $236m. Mr Geoghegan said the group welcomed the Office of Fair Trading’s move last week to take a number of banks including HSBC to court to “achieve legal clarity”.
Offsetting the weakness in personal financial services, other divisions increased profits. The group’s investment banking arm, which has suffered from a series of personnel losses including last year the departure of John Studzinski, co-head of the division, increased pre-tax profits nearly a third to $4.16bn. It was aided by a good performance on its private equity investments.
Stuart Gulliver, now sole head of the division, said the division had refined its strategy away from the perception that HSBC was “trying to be a global bulge bracket firm”. He said the division would focus on emerging markets and financings rather than on M&A and equities. “What we have got works for HSBC because it works for our clients,” he said.
Mr Green said that the group had “one or two” leveraged buy-out positions that it was planning to distribute among other lenders. However, he said that if the recent turmoil in the credit markets prevented HSBC doing that “we would be comfortable” in taking the positions onto the balance sheet.
Pre-tax profits from North America as a whole fell from $3.74bn to $2.44bn, a 35 per cent decline. Profits from all other territories were up, with Hong Kong increasing pre-tax profits by 25.5 per cent to $3.33bn and the rest of the Asia-Pacific region more than doubling profits to $3.34bn.
A second interim dividend of 17 cents, added to the first interim dividend of the same amount, puts the pay-out so far in the year up 13 per cent.
The group said its Tier 1 capital and total capital ratios remained strong at 9.3 per cent and 13.2 per cent respectively.
Operating expenses rose 15 per cent to $18.6bn and the cost efficiency ratio was 48.3 per cent compared with 50.1 per cent in the first half of 2006.
By Maggie Urry
Copyright The Financial Times Limited 2007
Published: July 30 2007 10:37 | Last updated: July 30 2007 10:37
Half-year profits at HSBC were hit by the bank’s exposure to the US subprime mortgage market and a $236m (£116.5m) charge for fee refunds in its UK retail banking operations.
UK Daily View
Video: Jane Croft on US sub-prime effect on HSBC profits
The loan impairment charge jumped 63 per cent, or $2.46bn, to $6.35bn in the half-year to the end of June. That followed a sharp rise in the charge in the second half of 2006, which in February forced HSBC to issue a profits warning. This was one of the first signs of problems in the US subprime market.
HSBC shares have been weak in recent months and responded to the news with a rise of 2.5 per cent, or 22p, to 902½p. Keith Bowman, analyst at Hargreaves Lansdown, said “the stock appears to be enjoying something of a relief rally – relief that bad debts were not even worse”.
Group pre-tax profits rose 13 per cent to $14.16bn, driven by good performances in Asia, and in corporate and commercial banking. But Stephen Green, chairman, said profits were boosted by a $1bn post-tax gain from the dilution of HSBC’s holdings in its mainland China associates. Excluding that, he said, underlying pre-tax profits rose 5 per cent.
Analysts at Keefe Bruyette & Woods pointed out that the income statement also included a $874m gain from fair value adjustments to financial instruments. The gain in the comparable period was $260m. Further, they said, the rise in trading income from $4.26bn to $5.51bn “may give rise to quality questions”.
Mr Green said that while the world economy remained buoyant, and global economic growth was forecast at 3.8 per cent, there were risks ahead, notably from nervousness about credit markets.
Reviewing the results he said, “pre-tax profits in personal financial services as a whole declined 20 per cent”. That was in spite of “very strong” results from Asia. Mr Green said conditions in the UK personal banking market were “challenging” but the main problem was in the US.
He said “the actions taken to restructure and manage down our exposure in this business are progressing well. The charge for impairments was lower than in the second half of last year and was in line with our expectations”.
Michael Geoghegan, chief executive, said that in personal financial services, Asia increased pre-tax profits by 38 per cent. However, the division’s profits fell by a fifth to $4.73bn.
In North America, profits fell 43 per cent compared with the first half of 2006, although they showed a strong recovery on the second half of last year. First-half profits were $1.8bn, a $1.5bn improvement on the previous six months.
In the half-year impairment charges on mortgages were $760m, and loans of $715m were written off against existing allowances, leaving the total allowance broadly unchanged at $2.1bn. Mr Geoghegan said the group had managed down its exposure to the mortgage business by $8bn to $41.4bn.
“We have stopped underwriting subprime mortgages and made management changes,” he said.
The group is calling customers facing interest rate resets, and has so far contacted 19,000 of them, modifying the loans of 5,000 on them.
In Europe, the personal finance business was down 34 per cent, hit by a decision to cut credit exposure where pricing did not adequately reflect risk. Refunding unauthorised overdraft fees in the UK cost the bank $236m. Mr Geoghegan said the group welcomed the Office of Fair Trading’s move last week to take a number of banks including HSBC to court to “achieve legal clarity”.
Offsetting the weakness in personal financial services, other divisions increased profits. The group’s investment banking arm, which has suffered from a series of personnel losses including last year the departure of John Studzinski, co-head of the division, increased pre-tax profits nearly a third to $4.16bn. It was aided by a good performance on its private equity investments.
Stuart Gulliver, now sole head of the division, said the division had refined its strategy away from the perception that HSBC was “trying to be a global bulge bracket firm”. He said the division would focus on emerging markets and financings rather than on M&A and equities. “What we have got works for HSBC because it works for our clients,” he said.
Mr Green said that the group had “one or two” leveraged buy-out positions that it was planning to distribute among other lenders. However, he said that if the recent turmoil in the credit markets prevented HSBC doing that “we would be comfortable” in taking the positions onto the balance sheet.
Pre-tax profits from North America as a whole fell from $3.74bn to $2.44bn, a 35 per cent decline. Profits from all other territories were up, with Hong Kong increasing pre-tax profits by 25.5 per cent to $3.33bn and the rest of the Asia-Pacific region more than doubling profits to $3.34bn.
A second interim dividend of 17 cents, added to the first interim dividend of the same amount, puts the pay-out so far in the year up 13 per cent.
The group said its Tier 1 capital and total capital ratios remained strong at 9.3 per cent and 13.2 per cent respectively.
Operating expenses rose 15 per cent to $18.6bn and the cost efficiency ratio was 48.3 per cent compared with 50.1 per cent in the first half of 2006.
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