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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (7555)	2/8/2007 11:28:17 AM
From: John Pitera	Read Replies (1) \| Respond to of 33421

HSBC -- US Housing credit conditions have worsened 3 times in 3 months and the HSBC credit scoring system is flawed. ---------------------------------------------- HSBC shares sink as debts mount for U.S. home loans Thursday, February 08, 2007 6:31:33 AM (GMT-06:00) Provided by: Reuters News By Steve Slater and Brian Kelleher LONDON/HONG KONG, Feb 8 (Reuters) - HSBC's <HSBA.L><0005.HK> shares slumped to a 9-month low on Thursday after Europe's biggest bank announced its bad debt charge last year would be about $1.8 billion higher than expected as problems grew in its U.S. mortgage lending. HSBC said its 2006 charge for bad debts would be about $10.6 billion -- or 20 percent above analyst consensus forecasts -- as problems deepened in its lending to lower quality U.S. home borrowers. "HSBC doesn't like losing money, it prides itself on its credit quality. It has been let down in one subsidiary. We are focusing on it and we're going to get it right," Michael Geoghegan, HSBC chief executive, told analysts on a conference call. The warning was issued late on Wednesday after the bank held a board meeting. Analysts said it was the first ever profit warning from HSBC, which was established in 1865 and is the world's third biggest bank after Citigroup <C.N> and Bank of America <BAC.N>. By 1200 GMT its London-listed shares were down 2.1 percent at 912 pence, after sinking as low as 906-1/2p, their lowest since May and valuing the bank at 106 billion pounds ($208.9 billion). Its Hong Kong-listed shares closed down 2 percent to HK$140.70. HSBC said there were accelerating delinquency trends across its U.S. sub-prime mortgage market, particularly for more recent loans. "The disturbing fact is that it's recent loans, it's not something that's gone wobbly over time. It's stuff that they've acquired that has gone spectacularly wrong in a short space of time," said Mike Trippitt, analyst at Oriel Securities in London. He said the key issue was whether all the bad news was now out or if the delinquencies could spread. Problems in the U.S. housing market have hit several lenders, but HSBC has warned that conditions have deteriorated three times in as many months, highlighting that its credit scoring system is flawed, analysts said. BIGGEST PURCHASE HSBC said it was acting conservatively to include provisions for mortgages it expects to lose money on in the future. Mortgages are frequently bought and sold in the complex U.S. mortgage market, and in recent years HSBC became a big buyer of sub-prime loans originated by other lenders. It focused on buying second-lien loans, also known as "piggyback loans", which borrowers take out in addition to the primary mortgage. Second-lien loans carry higher interest rates, but in the event of default, the first mortgage lender has first claim on the property, so they are higher risk. Geoghegan said HSBC had included in its provisioning the expectation that many of its second-lien loans will default, following a recent deterioration in the U.S. housing market. "We've been as conservative as we can be from an accounting perspective. We feel comfortable ... that we have covered all the risks that we know today," he said. "Management made a mistake in this brokerage business, where it went for volume and it went for second-lien business. It won't happen again." The problems add to criticism of HSBC's purchase of Household International for $14.8 billion in 2003, which was its biggest ever acquisition. The unit is now part of HSBC Finance. "It (Household) is a deal that has been earnings accretive, so financially it's been a reasonable deal, but it's clearly changed the shape of group earnings and made them more volatile, hence the sustained de-rating of the group. So it's not necessarily been a good strategic deal," said Ian Gordon, analyst at Dresdner Kleinwort. The bank's North American operations, which include HSBC Finance, last year generated 31 percent of group profit, but 65 percent of bad loans. North American debts are now expected to come in near $7 billion for 2006, or 67 percent of the group. Geoghegan defended the purchase of Household, however, saying it had contributed $9 billion to profits since purchase. He said it was not for sale, but would pull back from some areas of business, including second-lien mortgages. The U.S. consumer finance arm would also shift more towards immigrant communities in the United States, such as in Texas and Florida, he said. Merrill Lynch, JPMorgan, Dresdner and several other analysts said they would cut their 2006 earnings forecasts by 5-10 percent following the warning. Analysts had expected HSBC's 2006 pretax profit to come in between $23.1 billion and $24.8 billion, up 10-18 percent from $21 billion in 2005.