Its bad loan provisioning charges surged by a remarkable 35.5 percent, dragging down the group’s pre-tax profit growth momentum to merely 5.3 percent from the over 10-percent growth of previous years, despite sound performance in emerging markets.
This is largely due to its US operations, which took a major hit for bad debts after problems in its mortgage lending due to the market trending downward as a result of softening housing prices, an uncertain interest rate environment and changing consumer behavior since mid-2006.
The group impairment charge was up $2.8 billion (36 percent), from 2005, with the "major setback in part of our mortgage business in the United States" causing a $725-million drop in its US personal finance profits.
Acquired aggressively in 2005 and early 2006 to boost market share, its US wholesale sub-prime mortgage portfolio contributed to its delinquency ratio, resulting in higher impairment costs to write-off the bad debt and beef up provisioning.
Credit costs swelled by 38.2 percent ($1.9 billion), accounting for over two-thirds of the increase in the group’s provisioning charges.
Experts think the trouble in US sub-prime mortgage will be solved any time soon, as conditions could worsen in the next few quarters as the US housing market continues to deteriorate.
At the same time, the bank has also failed to indicate whether the current provisioning level is adequate to cover future downturns, although group chairman Stephen Green made it clear their US operations are undergoing "restructuring… to avoid any repetition of the risk concentration that built up over the past two years."
This includes broad changes in management as well as strengthened risk controls and processes.
The good news, though, is that Asia was the chief growth engine.
Asian profits were up 22.8 percent, versus 9.72 percent for Europe and 8.2 percent for Latin America (excluding exceptional gains). Asia’s pre-tax profit rose by $1.6 billion to $8.7 billion.
North America was down $1.2 billion; Europe was up $618 million; and Latin America was up just $131 million.
This suggests that if Asia had not performed so strongly, the group’s profits would have been down.
One of the most "outstanding achievements" perhaps, was that each of HSBC’s private and commercial banking businesses in Asia outside Hong Kong exceeded $1 billion pre-tax profits, underscoring the increasingly regional balance of HSBC’s Asian activities, which had historically been skewed towards Hong Kong.
Indeed, with pre-tax profits from emerging markets in Asia and Latin America over 20 percent of the group’s total, up from 18.6 percent in 2005, it is no wonder why recent remarks from the senior management stressed the lender’s renewed focus on Asia, though it remains to be seen whether HSBC would be able to maintain the momentum in 2007.
Investors are still concerned, though, that ‘the world’s local bank’ is not global enough: more efforts are needed for emerging markets, but the bank has been focusing too much on the US.
In Hong Kong, it is less possible for HSBC to see any rehabilitation in mortgage lending, despite SME banking and wealth management still looking set to deliver healthy growth in 2007. Just last week, as well as in fourth quarter results, HSBC aggressively cut its mortgage lending rate to maintain its market share at the expense of lower net interest margin.
In HSBC’s UK home market, the outlook on the consumer finance market remains gloomy.
HSBC, the only global bank without a strong market presence in the wholesale business, reported a mixed bag of results in this area. Pre-tax profit from trading and global banking business grew 44.4 percent and 14.4 percent respectively, driven by strong performance in forex and derivatives trading, M&A advisory and bond underwriting, but pre-tax profit from the balance sheet management nearly halved.
It has yet to demonstrate a clear strategy in the wholesale business, however. It seems that HSBC is cutting short the investment banking program and their aspirations to be a global player, probably to decide on what they can and cannot offer in the near future. TAB