Risk Management

Subprime Pain Shared by London’s HSBC

The U.S. crisis takes its toll on the giant bank, with a writedown of $4.9 billion and climb to $4.3 billion in impairment charges.
Stephen TaubNovember 10, 2008

America’s subprime mortgage implosion has taken a heavy toll on Europe’s largest bank as measured by market capitalization: HSBC Holdings PLC.

London-based HSBC wrote down the value of its assets by $4.9 billion in the third quarter, and for the most part blamed problems in the U.S.

The bank said in a press release that loan impairment charges in Personal Financial Services in the U.S. rose by $700 million, to $4.3 billion in the September period. “The increase was primarily due to higher provisions for credit losses in respect of the Consumer Lending real estate secured portfolio and the card portfolio,” it added.

This was driven by rising delinquency on portions of the 2006 and 2007 loan origination vintages as well as higher early stage delinquency on credit card receivables, the bank elaborated. “These trends reflected the continuing weak housing market and higher unemployment and under-employment, particularly in states that had enjoyed the fastest rate of home price appreciation,” the bank said.

HSBC also said that continuing market illiquidity and forced asset sales by other institutions resulted in a further $4.8 billion reduction in the value of asset-backed security holdings in the “available-for-sale” securities debt portfolio in the third quarter. The decline predominantly reflected illiquidity and was reflected in reserves with no impact on the income statement or the group’s capital position, it said.

“Recovery depends on the success of further economic stimulation, which is likely to take some time to take effect,” CEO Michael Geoghegan said.

Two weeks ago, Iain Mackay, CFO of HSBC North America Holdings, told CFO.com in an interview that his focus these days is on managing those things which he and his team can control, including underwriting. “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,” he said. “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.”

He added that underwriting volumes within the consumer finance business — which is the old Household International acquired by HSBC back in 2003 — 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,” Mackay added. “We’re also managing our portfolios across middle market and large-cap [lending] elements very carefully.”