HSBC – $26.5B
March 5, 2008 – 5:25 pm2008-03-05:
FT Alphaville has a great piece called “HSBC’s involuntary asset growth” which discusses the bank’s dealings with its off-balance-sheet vehicles (SIVs, money market funds, conduits). The upshot is that the bank has taken back on its books tens of billions of these vehicles, likely without significant market write-downs at this time. HSBC is still in “try to ride it out mode” with regards to everything beyond subprime, it appears.
Typifying the efforts are remarks in the article:
What then, the impact of all this? HSBC is still desperate to shift Cullinan [a $42B SIV] and Asscher [$8.7B] off balance sheet, and the “restructuring” plans it announced last year continue apace.
To the extent that it is now launching two entirely new off-balance sheet vehicles which will buy assets from Cullinan as and when required to fund amortizing debt. The new vehicles have an asset limit of $50bn and will begin issuing new commercial paper and medium term notes shortly, buying up Cullinan assets with the proceeds. Cullinan’s $1.9bn capital note holders have already traded in their SIV shares for equity notes in the new vehicle.
We are curious as to how this is going to work: the off balance sheet vehicles failed, so how is HSBC going to convince the market to buy into repackagings of the same vehicles?
HSBC also has $35B of conduits which are now back on the balance sheet, and a staggering $109B of money market funds. Check out the article for more.
There has to be some serious mark-down exposure in all that.
2008-03-02:
HSBC is set to announce a staggering $16B (8.1B GBP) in write-downs for the fiscal year 2007. Interestingly, the article (helpfully) headlines instead on the subject of a planned 10% dividend hike:
HSBC will tomorrow reveal a record $16bn (£8.1bn) of bad debts at its full year results but seek to reassure investors that it is containing the sub-prime crisis by lifting its dividend in line with its banking peers.
HSBC, which is expected to increase its dividend by about 10 per cent, will stress that its Asian and emerging markets businesses are performing strongly as it tries to fend off the attentions of activist fund manager Knight Vinke.
To which we remark:
- In line with which banking peers? Most we have seen have been cutting dividends (e.g., Citigroup)
- How does this “contain” the crisis?
- What if emerging markets are peaking too? (I.e., if the level of coupling is anything greater than zero as the US tumbles into recession).
- Is it really so wise to hike a dividend while record write-offs are being experienced and cash is getting more scarce? Perhaps HSBC is a little too concerned with goosing the stock value to fend off buyout vultures?
Anyway, not to get too distracted by the prospect of windfall dividend increases, about those write-downs…
The bad debt charge, which tops the [$]10.6bn that last year led to its first profits warning in 142 years, will be roughly £3.4bn higher than anticipated at the half year. For the final three months of 2007, write-offs in its North American consumer finance division are expected to have jumped to $4bn – from $3.4bn in the previous three months and double the $2bn quarterly run rate predicted in June.
Only £3.4bn higher? Hey, what’s being off by 72% among friends? Here, have a nice dividend increase…
But to be fair, total income on the year is to be about $73B. A little more than half of the bank’s income comes from developing markets; the goal is to grow this to 60%. That is admirable; however we think investors may be disappointed to find a challenging near-term even for developing markets, as the growth cycle peaks and some measure of general economic slowdown contagion from the US weighs in. Add to this :
Unlike the investment banks, HSBC has direct exposure to the sub-prime market and has to work through the loan book over time.
This means likely continued loan write-offs for quite some time (and of course, all sorts of consumer loans are becoming problematic, not just sub-prime home loans). Thus we expect a challenging few years ahead of HSBC; we wouldn’t pin our hopes on more dividend increases.
Note: we are now adding this $16B to HSBC’s 2006 write-downs of approximately $10.5B to reach our new running total.
Original Writeup, 2008-01-29:
HSBC wrote down about $4.3B related to subprime in the third quarter of 2007. Those are our latest figures (via DeutscheBank). They also list $2B in remaining “other” exposure related to subprime; we have no idea what that actually is.
HSBC was big into origination of subprime mortgage product. When the market capitulated, HSBC pulled out relatively quickly: the correspondent division of HSBC mortgage services (which was prime) was shut down in March 2007; in September 2007 they closed Decision One (their subprime wholesale subsidiary); and in November it was announced that numerous HFC and Beneficial branches would be shuttered (360 total for the year).
We estimate this represents 1,500 to 2,000 people laid off, though we don’t have a specific total (we did get a specific number of 750 due to Decision One alone).
For background on these subsidiaries, Decision One was founded in 1996. It was bought out in 1999 by Household Finance, which was in turn acquired by HSBC in March 2003. According to the Mortgage Banker’s Association, for Q-2 2006, HSBC Household Finance was considered the #2 subprime lender; Decision One was #23 on the list.
As far as we know, HSBC Household is still around — typically wholesalers and correspondents divisions shut down earlier than portfolio lenders, as lack of trust spread in the secondary market. That is, HSBC Household kept most production for the bank’s portfolio, which is why they’ve been able to continue nominally. However, we don’t yet have the numbers on the size of this portfolio (or other non-prime, or even shaky sorts of prime holdings, for that matter). A more exact reading on remaining exposure seems to elude others as well; but Goldman has projected another $13B in impairments.
As HSBC Household was between Wells Fargo and CitiMortgage on the old subprime rankings, it could have between $17B and $24B of subprime loans sitting on its books still.
HSBC will likely have to sell off assets to stay well capitalized, like Citigroup and many of the other major banks.
If you have more information on HSBC Household and remaining exposure throughout the bank, please let us know.
