Banking giant HSBC warned today that the turnaround of its US business may take until the end of 2009, as it unveiled a $17.2 billion (£8.7 billion) hit from bad debt and loan provisions.
The group said write-downs relating to defaults last year soared by 63 per cent from 2006 -- more than City expectations -- as the fallout from the slowing US housing market crisis deepened.
But the company, which is the UK's biggest banking group, still managed to post a 10-per-cent increase in pre-tax profits to 24.2 billion US dollars (£12.2 billion). The figure was in line with market estimates.
The US housing crisis, which has seen record default rates and repossessions as high-risk or sub-prime borrowers struggle to meet loan repayments, saw write offs at HSBC's US consumer banking business jump 80 per cent to 11.7 billion US dollars last year (£5.9 billion).
Group finance director Douglas Flint said the bank was now dependent on the general health of the US economy for a turnaround.
Asked when the situation would peak, he said: "A year ago we would have said by the end of 2008 we should be seeing a turnaround. Maybe it's the end of 2009 now, I don't know."
Mr Flint said the "vast majority" customers were keeping up with their loans in the US, with bad-credit customers largely expunged from its operations.
But he added: "You are now exposed to the general economic conditions in the US.
"If unemployment holds up then I think we should see a turnaround within 18 months or so. If it doesn't maybe it will take longer -- it depends on the general economic health of the US."
HSBC's entire North American operation contributed 91 million US dollars, or 0.4% of the total group pre-tax profits, which were buoyed by "exceptionally strong" performance in emerging markets such as Asia.
The bank's Hong Kong and Asia Pacific arm made 13.3 billion US dollars (£6.7 billion) of pre-tax profits, with Europe adding 8.6 billion US dollars (£4.3 billion).
In the UK -- where the bank has 1,500 branches -- profits from the high street retail business were down 16% to £740 million. HSBC said this was largely due to £115 million of overdraft charge repayments in 2007. Along with high street rivals, the bank is currently the subject of a court action from the Office of Fair Trading about the fairness of its overdraft fees. HSBC warned in its accounts that the total potential repayments as a result of the legal action could be 600 million US dollars (£303m).
But profits from the bank's UK commercial banking sector topped the two billion US dollars (£1 billion) for the first time.
HSBC's US consumer business -- comprising mortgages, credit cards and personal loans -- worsened during the second half of the year with a write down of 7.9 billion US dollars (£4 billion) coming after the 3.8 billion US dollar (£1.9 billion) hit announced for the first six months.
The scale of the losses is expected to increase pressure on the bank's management from activist shareholders to overhaul its policy with regard to its troubled US arm.
Knight Vinke Asset Management, owner of less than 1% of HSBC, has called on the bank to sever all ties with US consumer lending. The investment group wants directors to focus instead on growing markets in Asia.
HSBC bosses said today they had taken "vigorous action" to try to stem the losses, including the closure of 400 branches, tighter lending criteria and a reduction in the number of products.
Mr Flint also indicated that the bad debt problems were not spreading from its mortgage business to its credit card or personal loan arm. These segments continued to trade within their "historic parameters", he said.
Across the group, HSBC saw 2.1 billion US dollars (£1.1 billion) wiped off the value of asset-backed securities due to a general decline in market values towards the year end. Broker Collins Stewart said it was a "good number" compared to the £2.5 billion write down suffered by Royal Bank of Scotland for 2007, and £1.6 billion for Barclays.
HSBC chairman Stephen Green warned that the US credit outlook may worsen before any sign of improvement.
He said: "The outlook for the rest of 2008 is uncertain. The economic slowdown and the credit outlook in the US may well get worse before they get better.
"With significant parts of the international financial system in developed markets still in difficulties, HSBC's emphasis on faster growing emerging markets means that we are better positioned than many of our competitors."
The group announced its 2007 dividend would rise 11% -- a move widely seen as a reassuring one for investors amid the credit troubles. Shares in the bank were up nearly 1% today.
HSBC is the last of the UK's "big five" to report on 2007 -- the others being Barclays, Royal Bank of Scotland (RBS), Lloyds TSB and Halifax and Bank of Scotland.
Richard Hunter, head of UK Equities at Hargreaves Lansdown Stockbrokers, said: "If ever proof were needed about the benefits of diversification, these numbers from HSBC fall squarely into that category.
"Its performance in the ever-strengthening markets of China, India and Hong Kong proved a more than ample buffer against its US sub-prime woes."
He added: "HSBC has fared better than many of its competitors in shedding just 14% of its share price in the last year.
"However, it continues to be held back by the spectre of potential further write downs with, in particular, its exposure to the US market having unnerved many investors."