HSBC lifts profits 10% despite £8.7bn bad-debt writedown
HSBC yesterday revealed record 2007 profits despite absorbing a $17.3bn (£8.7bn) hit from the US sub-prime mortgage crisis.
The company raked in money from Asia and other emerging markets, helping to offset problems at its North American arm which was barely in the black and allow it to post pre-tax profits of $24.2bn, 10% up on 2006.
And despite the problems facing financial markets HSBC still managed to pay one unnamed employee nearly £10m, including bonuses. This is more than the £3m taken home by chairman Stephen Green and the £3.5m pocketed by chief executive Michael Geoghegan in salary, benefits and bonuses.
HSBC has been targeting fast-growing emerging markets with the aim of generating 60% of profits from Asia, Latin- America and the Middle East. This year the company hit 64% although thiswas as much to do with failures elsewhere as successes in the developing world.
HSBC’s big weakness was its US operations, where profits dropped 98% to just $91m as the falling housing market prompted a 79% rise in loan impairment charges and a pretax loss of $1.5bn in its personal financial services division.
Across the globe HSBC suffered loan impairment charges of some $16.2bn, almost double those of 2006, the vast majority incurred in North America. HSBC blamed the housing markets of California, Florida, Virginia and Washington for a large chunk of the losses as customers, particu- larly poorer or sub-prime borrowers defaulted on loans. It axed around 6000 jobs from its US operations.
Geoghegan said: “The situation has been very difficult. It is very hard for our customers and frankly we do not like it either when we see our colleagues losing their jobs.”
HSBC’s regional commercial banks suffered another $1bn in impairments loans to businesses while there were smaller losses on loans from its investment and private banking arms.
More significant to its investment banking global markets division was the falling value of assets linked to the sub-prime mortgage crisis which were written down by $2.13bn.
Although the bank said it no longer has any material holdings of collateralised debt obligations backed by sub-prime assets, one of the more toxic of the securities invested in by banks, it still has around $2bn of exposure to the broader sector.
In all, the investment bank saw profits up just 5% to $6bn.
Geoghegan said: “The deterioration in the US housing market and economy and the extremely tight credit market for consumers provides challenges. We expect these conditions to continue or get even worse through 2008.”
He added that the investment bank in particular could take a another hit.
“I do not rule out further asset value reductions. There are forced sellers out there. While we do not need to sell and will in many cases keep out assets to maturity we expect further market volatility.”
But HSBC dismissed the idea, promoted by rebel shareholder Knight Vinke, that the bank should shed its struggling US consumer finance arm Household which it bought five years ago.
Green said selling it “is as unreasonable as it is unrealistic” because it would hit bondholders.
However, the company is adamant that its capital is high and international spread leaves it well positioned.
The hope for HSBC is that it can continue its successes in emerging markets. Such is its rate of expansion that HSBC made its first $1bn profit in mainland China last year. It also put in particularly strong performance in Hong Kong, where profits were $7bn while Latin-America generated $2bn profit. More than a quarter of the credit cards HSBC has in issue are in emerging markets.
Even its investment bank took 74% of its profits from Asia-Pacific, Middle East and Latin-America.
Collins Stewart analyst Alex Potter said: “This bank continues to show capital strength, earnings diversity and surplus liquidity – it remains a safe haven in our view.”
HSBC shares finished the day up 3%, or 24p, at 790p.