HSBC Sets Aside $3.2 Billion for Bad Loans

HSBC Holdings Plc said Monday morning that bad bets on U.S. mortgages continued to eat away at the company’s bottom line, but not enough to offset strong growth in markets outside the United States. Europe’s largest bank by assets said it set aside $3.2 billion during Q1 in loan impairment charges, compared to $1.6 billion in the year-ago period. The impairment charges, however, came in less than analysts had expected; which means investors rewarded the company’s stock — both abroad and here in the States, where the company’s stock (HBC) was up nearly 3 percent by Monday afternoon. Higher margins in international markets, including Asia, Latin America and the Middle East, generally served to more than offset U.S.-based losses; two-thirds of the bank’s profits come from emerging markets, making the bank overall less susceptible to the ongoing mortgage mess in the United States, and to a lesser extent, the UK. “It seems likely that the deterioration in the US housing market will extend into 2009,” the bank said in a press statement Monday. “[I]t is also clear that US economic growth has slowed and there is an increased likelihood of a recession this year.” Troubled stateside borrowers HSBC noted that its retail originations continue to perform better than its wholesale (and primarily subprime) originations from recent years. At the end of Q1, HSBC said that five percent of US branch-based mortgages were severely delinquent, up 19 percent from one quarter earlier. In contrast, loans originated via wholesale channels — including the now-defunct Decision One Mortgage — jumped to a severely delinquent rate of 12.5 percent by the end of Q1, up 11.6 percent from one quarter earlier. HSBC singled out California, Florida, Arizona, Virginia, Washington, Maryland, Minnesota, Massachusetts and New Jersey as particularly problematic — and said that the nine states accounted for roughly half of the increase in all delinquencies during the quarter. The bank in particular singled out second liens as key drivers of future expected losses, particularly in situations where the second is tied to an adjustable-rate first mortgage. HSBC said it held $17.1 billion in adustable rate mortgages at the end of the quarter, and nearly $12.7 billion in second liens; it’s worth noting as well that $7.2 billion of the company’s $81.9 billion mortgage portfolio are in stated income mortgages. For more information, visit Disclosure: The author held no positions in HBC when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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