Delinquencies in Sub-prime Mortgages Hit HSBC, Shares Trade Lower

HSBC's shares are trading lower in London by about 2% after closing down 2% in Hong Kong, following a warning the bank will have to raise its bad debt provisions by 20% to $10.56b for the year ended Dec. 2006. HSBC cites "accelerated delinquency trends across the US sub-prime mortgage market." It blames slowing housing price growth and says problems are developing "particularly in the more recent loans, as the absence of equity appreciation is reducing refinancing options." A London-based analyst points out how disturbing the warning is since it is recent loans that are troubling HSBC, and says the 'key issue was whether all the bad news was now out or if the delinquencies could spread.' Reuters reports JP Morgan downgraded HSBC to "underweight" from "neutral," advising clients to short the stock since it has further to drop. Also, Merrill Lynch reiterated its "sell" rating and said this is a "material negative surprise" noting it's the first time HSBC has pre-announced material information so close to an earnings release (scheduled Mar. 5).

Sources: Press release, MarketWatch, Reuters
Commentary: U.S. Housing Weakness Hits HSBC • HSBC Struggles Against Global I-banks • Barron's Euro Dogs of the Dow 2007
Stocks/ETFs to watch: HSBC (HBC). Competitors: Bank of America (BAC), Barclays (BCS), Citigroup (C), Lloyds TSB (LYG). ETFs: iShares S&P Global Financials (IXG), BLDRS Europe 100 ADR Index (ADRU), BLDRS Developed Markets 100 ADR Index (ADRD), streetTRACKS DJ Global Titans (DGT)

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