HSBC Investment Bank Profit Falls While U.S. Unit Boosts Loan Provisions

HSBC Holdings Plc (HSBA), Europe’s largest bank by market value, said investment banking profit fell in the third quarter amid Europe’s sovereign debt crisis and posted higher bad-debt provisions for its U.S. unit.

Pretax profit at the investment bank, led by Samir Assaf, fell 53 percent to about $1 billion in the third quarter from a year-earlier, London-based HSBC said in a statement yesterday. Bad loan provisions increased to $3.89 billion from $3.15 billion, a rise attributed to its U.S. unit, the bank said. The shares fell.

HSBC has so far set aside more than $65 billion for souring loans in North America following its purchase of U.S. subprime lender Household International in 2003. This quarter’s increase in loan impairment charges is a consequence of foreclosure moratoriums in some U.S. states, Finance Director Iain Mackay told journalists yesterday. HSBC, like Barclays Plc and Royal Bank of Scotland Group Plc, also recorded a slowdown in revenue from investment banking amid volatile European markets.

“The big humdinger, which has caught everybody on the hop, is the bad debt charge,” said Christopher Wheeler, a London- based analyst with Mediobanca SpA. HSBC made provisions against its Household business at the onset of the financial crisis in 2006, Wheeler said. “Here we are again, doing the same thing.”

HSBC fell 5.8 percent to 506.3 pence in London yesterday, the eighth-worst performer in the Bloomberg Europe Banks and Financial Services index, valuing the bank at 90.4 billion pounds ($144 billion).

‘Significant Headwinds’

Bad loan provisions in the U.S. rose 21 percent to $2.39 billion, as HSBC yesterday warned of “pressure on future credit performance” in the U.S. and “further house price weakness” as more properties come onto the market. The bank has about $50 billion of U.S. subprime mortgages in runoff, Mackay told analysts yesterday.

“We are unable to foreclose on a broad base of customers who are delinquent,” Mackay said. “If they stop paying there’s very little we can do in terms of foreclosure. People are taking payment holidays” because “their bank cannot foreclose on them.”

Bad loan provisions in Hong Kong rose to $112 million from $35 million, the company said.

The pick-up in Asian loan impairments could have a “negative read across” for Standard Chartered Plc, Credit Suisse Group AG analysts including London-based Amit Goel wrote in a note to clients yesterday. Standard Chartered, which earns most of its profit in Asia, fell 2.6 percent to 1377 pence in London.

Headwinds

The banking industry also faces “significant headwinds” because of continuing political, regulatory and macroeconomic uncertainty, especially in Europe, Chief Executive Officer Stuart Gulliver said.

Investment banking revenue declined 19 percent to $3.5 billion because of its credit and rates business in Europe.

“Our fixed income business was very directly impacted by the uncertainty in the euro zone and to a lesser extent some of the events in the U.S. in the third quarter relating to the debt ceiling,” Mackay said. These lines of the business “will continue to be stressed for some period of time,” he said.

RBS, the U.K.’s biggest government-controlled bank, last week said third-quarter investment-banking revenue slipped 29 percent to 1.1 billion pounds from a year-earlier. Barclays said revenue at its Barclays Capital investment banking unit fell 15 percent to 2.25 billion pounds when it reported earnings on Oct. 31.

‘Softer End’

HSBC’s net trading income fell to $106 million from $1.39 billion, the company said. The lender’s cost-efficiency ratio for the nine-month period, minus a gain from its own debt, worsened to 59.1 percent from 54.4 percent a year-earlier.

The bank is seeking to meet the “softer end” of its target range for cost-efficiency of 48 percent to 52 percent by 2013, and a return on equity of 12 percent to 15 percent, Gulliver told analysts on a conference call yesterday.

The anticipated $2.4 billion joint cost of the U.K. bank levy on their foreign operations and the Independent Commission on Banking’s proposals is “too high,” Mackay said. HSBC would probably not be in a position to decide on whether to relocate its headquarters for at least another 12 to 18 months, Gulliver, said. “This is a non-trivial decision,” he said. “You don’t move your head office on a regular basis.”

Shield Taxpayers

Britain’s Chancellor of the Exchequer George Osborne has pledged to implement the ICB’s proposals by 2019. The plans, aimed at shielding customers and taxpayers from another financial crisis, may cost the industry as much 7 billion pounds, according to the ICB.

The bank’s net investments in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain fell 33 percent to $5.5 billion, from $8.2 billion in June.

“The outlook for the global economy is very challenging as problems in developed markets begin to affect growth rates around the world,” the company said. “Faster-growing markets clearly possess significant potential for growth, however, and continue to offer attractive business opportunities.”

Net income increased 66 percent to $5.22 billion from $3.15 billion a year-earlier, lifted by $4.1 billion gain on the value of its own debt, the lender said. That beat the $3.84 billion median estimate of eight analysts surveyed by Bloomberg.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net. Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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