HSBC's U.S. Unit May Boost Subprime Reserves

HSBC Holdings could be hit with another bout of subprime sickness this week when its HSBC Finance unit reports third-quarter numbers, providing a peek at what may be in the cards for U.S. lenders. The Wall Street Journal called the largest European bank's U.S. consumer-lending unit "the classic canary in the coal mine" in identifying problems in the subprime market after flagging unexpectedly high delinquencies in February before the current crisis surfaced. That resulted in HSBC's first-ever profit warning. Now, the Journal says, analysts expect HSBC may have to lift its reserves against subprime loans at HSBC Finance's (formerly Household International) mortgage-services business by $2.4B to a total of $4.5B. Britain's Sunday Telegraph estimated the "hit" at $1B, but said it could run higher. That level of reserves suggests that default losses over the life of the loans could wipe out some 14% of the $41.4B loan portfolio by year-end. HSBC's first-half group charge for bad debts was $6.35B, 63% above the $3.89B in 2006's first half. Analysts expect the loan portfolio to drop to $165.8B next year from $182.5B in 2006. HSBC Finance is set to release its numbers Wednesday. Meanwhile, HSBC has agreed to buy a 50% minus one share stake in South Korea's Hana Financial. Terms weren't disclosed.

Sources: Wall Street Journal, Reuters I, II, MarketWatch
Commentary: HSBC Closes Decision One: Just the Tip of Its Subprime Iceberg • The Short Case on HSBC Holdings
Stocks to watch: HBC. Competitors: BCS, C, RBS
Earnings call transcript: HSBC Holdings PLC Q2

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