VideoChalk it up to the bank's early recognition of its subprime exposures, a parent company with a good name and plenty of geographical diversity, or lots of espresso and chocolate chip cookies, but Iain Mackay, the CFO of HSBC North America Holdings, seems surprisingly chipper these days for the finance chief of a huge U.S. bank.
To be sure, the bank, which touts itself as one of the top 10 financial services outfits in the United States, has an albatross around its neck. In 2003, it acquired Household International (previously known by a more familiar name, Household Finance Corp.), a consumer finance company then under a cloud related to charges of predatory lending. In November 2006, although the company, now called HSBC Finance Corp., reported a 96 percent profit surge, to $551 million for the quarter ended September 30, 2006, over the previous year's quarter, it acknowledged some scary portentsin its mortgage business.
"Real estate markets in a large portion of the United States have continued to slow, as evidenced by a general slowing in the rate of appreciation, or actual decline in some markets, in property values and an increase in the period of time available properties remain on the market." it reported in its 10-Q. In the second quarter of 2006, the company started "to experience deterioration in the performance of 2005 mortgage loan originations in our Mortgage Services business," it noted.
By May 2007, the company was reporting a 39 percent drop in net income, to $541 million for the three months ended March 31, compared to $888 million in the prior-year quarter. The loss stemmed largely from higher provisions for credit losses, including parts of its 2005 and 2006 mortgage services portfolio that had fallen "into various stages of delinquency," according to the filing.
Today, fixing the finance company is at the top of MacKay's priorities in the face of the current crisis. The CFO and other top executives are planning to slash the finance company's home-mortgage business by as much as 70 percent by the end of this year and to cut branches where home loans are originated in half compared to 2006.
Still, Mackay (pronounced Ma-kigh) has other fish to fry. Besides overseeing the finances of the bank's consumer finance unit, he heads up those of HSBC’s U.S. and Canadian businesses, including personal financial services and commercial, private, and global banking. HSBC's assets total $560 billion.
The finance chief's worries are mitigated a great deal, in comparison to some of his peers, by his ability to draw on the from resources of the North American Bank's London-based parent, HSBC Holdings, and other members of the banking group in Asia, Europe, Latin America and the Middle East. An edited version of a recent interview CFO.com had with Mackay follows.
How is the credit crunch affecting you at HSBC North America?
The most obvious impact is around our behavior as it relates to underwriting customers. Our focus on managing those things which we can control — our underwriting being one of them—has been a constant. We're trying to insure that we're putting paper on our balance sheet that will provide some level of return over the longer term. So as a consequence of the distress in the economic environment—and some of that distress frankly being caused by the credit crunch—our appetite for underwriting paper has diminished significantly.
The volumes that we are underwriting within our consumer finance business are in the region of 60 to 70 percent smaller than those compatible volumes of a year ago. Within our banking business we are focused on slowing down our rate of growth, and we're managing portfolios very closely in commercial real estate. We're also managing our portfolios across middle market and large-cap [lending] elements very carefully.
On the liability side of our balance sheet, throughout our history we've got a record of borrowing before we can lend. We're building a fairly strong deposit base before we take a significant asset position on the other side of the balance sheet.
Specifically within the finance company, it's a well understood fact that it's largely funded through the wholesale [loan] market, and the wholesale market has been to all intents and purposes closed for the last couple of moths. Our good fortune—or call it foresight, has been that we really anticipated this quite some time ago. We have to a certain extent pre-funded our 2008 and even some of our 2009 obligations.
The finance company, which is the old Household International, was acquired by HSBC back in 2003. At that time the business was strongly focused on credit cards, retail cards, and branch-based consumer lending origination. There was also broker origination, but it was a relatively small channel.
Over the last five years, the mortgage brokerage grew quite significantly— until early 2007, when we really closed off that channel. In very late 2006, it became quite obvious to us through observing the behavior of the originations through the mortgage brokerage that there was some distress in the subprime market.
At that time the balance sheet of the finance company totaled about $180 billion. And of that, real estate secured was a shade underneath $100 billion. Substantially all of the real estate secured assets are near or subprime assets. As of the second quarter of this year, the real estate secured was about $80 billion, all near or subprime. Of that, about $30 billion [stemmed from] the old broker correspondent channel originations and $50 billion [from] the retail consumer-lending branch network, which at the end of 2006 consisted of 1400 branches is now 750 branches. By the end of the year we'll have just over 700 branches.
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