HSBC Facing Subprime Trouble; Impairment Charges to Jump 20 Percent

Ahead of its 2006 earnings release, HSBC Holdings Plc said late Wednesday that 2006 loan impairment levels at Europe’s largest bank will exceed analyst expectations by more than 20 percent due to troubles in its U.S. mortgage business. Analysts had generally expected HSBC to report loan impairment charges and other credit risk provisions of $8.8 billion; the bank cited rapidly-increasing delinquencies and foreclosures in its U.S. mortgage banking operations as the culprit behind increasing losses. HSBC acquired Household International Inc., primarily a subprime mortgage banking originator and servicer, in 2003 as part of a deal worth $15.5 billion. HSBC said that the impact of slowing house price growth is being reflected in accelerated delinquency trends across the US sub-prime mortgage market, particularly in the more recent loans, as the absence of equity appreciation is reducing refinancing options.

“We have taken account of the most recent trends in delinquency and loss severity, and projected the probable effects of re-setting interest rates on adjustable rate mortgages, in particular in respect of second lien mortgages,” said the company in a statement. “It is clear that the level of loan impairment provisions to be accounted for as at the end of 2006 in respect of Mortgage Services operations will be higher than is reflected in current market estimates.” HSBC will report full earnings on March 5, and said that outside of its U.S.-based mortgage operations, performance was in line with expecations.

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