HSBC Sets Aside $3.2 Billion for More Bad U.S. Loans

HSBC Sets Aside $3.2 Billion for More Bad U.S. Loans

May 12 (Bloomberg) -- HSBC Holdings Plc, Europe's biggest bank by market value, said first-quarter profit increased as it set aside a less-than-estimated $3.2 billion to cover bad loans in the U.S.

HSBC rose 1.9 percent in London trading after Chief Executive Officer Michael Geoghegan told reporters he's seen a ``lull'' in U.S. delinquencies even as U.S. economy slips into recession. The outlook for the rest of the year ``remains unusually difficult to foresee in the current environment,'' the company said in a statement.

Geoghegan cut 2,000 jobs in the first quarter to manage declining earnings in the U.S. HSBC reported higher pretax profit in Asia, where Geoghegan's main concern is inflation, and the U.K., where it's using branch deposits to boost mortgage lending.

``The situation doesn't seem to be easing in the U.S., but they don't have the same funding issues as other banks and are pretty well placed in Asia, the Middle East and Latin America,'' said Julian Chillingworth, chief investment officer at London-based Rathbone Brothers Plc in London who helps manage $21 billion including HSBC stock.

HSBC gained 16 pence to 882 pence in London trading, valuing the bank at 105 billion pounds ($206 billion), the third-largest market capital in the world after Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. HSBC has advanced 4.8 percent this year, the best-performance in the eight-member FTSE 350 Banks Index, which declined 8.7 percent.

Targets

Three analysts surveyed by Bloomberg predicted the first- quarter loan loss would range from $4.2 billion to $4.8 billion in the U.S. consumer-finance unit. Today's report indicated HSBC's defaults didn't worsen beyond earlier forecasts in the U.S. and improved in the U.K.

HSBC met or exceeded new performance targets set out in March, the statement said. The benchmarks included return on equity of 15 percent to 19 percent and a cost-income ratio of between 48 percent to 52 percent.

``That is quite impressive given they achieved that in fairly tough market conditions,'' said Derek Chambers, a London-based analyst at Standard & Poor's Equity Research Ltd., who has a ``hold'' rating on the stock.

Financial companies worldwide have posted losses of $323 billion related to the collapse of the U.S. subprime mortgage market. Royal Bank of Scotland Group Plc, the U.K.'s second- biggest bank, wrote down 5.9 billion pounds of credit-related assets this year, including collateralized debt obligations tied to the U.S. subprime housing market and leveraged buyout loans.

Subprime Giant

HSBC's subprime losses started after the 142-year-old bank paid $15.5 billion for Household International Inc. in 2003, becoming one of the largest U.S. subprime lenders. CEO Geoghegan replaced American managers, closed mortgage units and stopped trading and selling mortgage-backed securities in the U.S. since 2006, when the bank had worldwide loan losses of $10.6 billion.

HSBC Finance Corp., the former Household unit, said first- quarter net income fell 53 percent to $255 million. Pretax profit was $452 million, better than the $1.8 billion loss estimated by analysts at Credit Suisse Group. The unit posted $2.9 billion in credit loss provisions and benefited from a $1.2 billion accounting gain on its own debt.

Delinquencies

Payments on 5 percent of mortgages at HSBC Finance branches were overdue by two months or more at the end of March, up from 4.2 percent in December. Delinquency rates for credit cards also increased because of the weakening economy. Bad debts at its U.S. former Household unit may rise to about $15 billion this year, analysts at UBS AG said this month.

In addition to the loan losses, HSBC wrote down $2.6 billion on investments. The writedowns included $1.1 billion on traded securities, $700 million related to bond insurance, $500 million tied to U.S. subprime mortgage and $300 million on buyout loans.

HSBC, which gets two-thirds of its profit in emerging markets, said deposits and commercial lending rose in Hong Kong. It opened seven branches in China, where it is the largest international bank.

``People need to remember how strong Asia can be,'' said Simon Maughan, a London-based analyst at MF Global Securities Ltd., who has a ``buy'' rating on HSBC.

Profit rose in India, lifted by foreign exchange revenue, and across all its operations in the Middle East, the bank said.

HSBC plans to increase mortgage lending this year as banks including Edinburgh-based HBOS Plc trim lending amid the shortage of funds. It gets less than 30 percent of its funding from wholesale markets.

Under Pressure

The bank is under pressure from investor Knight Vinke Asset Management LLC to have an independent review of its strategy and spin off its U.S. operation. ``The response of the board has varied from outright rejection, to saying that the appointment of advisers is a matter for the audit committee, and most recently, to suggesting that the board will not tell us if it has done do,'' the New York-based investor said in a statement today.

Knight Vinke also has criticized the bank's plans for a management-incentive program. The writedowns announced today bring total credit losses to since 2006 to $25 billion, Knight Vinke said in statement today.

BLOOMBERG