will hsbc collapse monday

US triggers $11bn HSBC fall-out
John Waples and Grant Ringshaw

EUROPE’s biggest bank, HSBC, is to write off $11 billion to cover mounting losses in its troubled American offshoot, HSBC Finance Corporation.

Stephen Green and Mike Geoghegan, the bank’s chairman and chief executive, are making the huge provisions — which will be announced alongside tomorrow’s full-year results — in an attempt to draw a line under the bank’s miserable experience since buying the business, then known as Household, for $14 billion (£7.2 billion) four years ago. The duo are under unprecedented pressure from shareholders over ballooning bad debts at its US mortgage business.

HSBC’s US business has faced escalating losses from thousands of low-income families who have been unable to repay loans. But the scale of its write-off, largely linked to the US business, will surprise many investors; they will want to know whether the worst is now over and whether the write-off, technically called an “impairment charge”, covers anticipated losses for this year as well.

The provision is equivalent to a third of last year’s operating profits of $30 billion and half its pretax profits, expected to be just north of $22 billion. This will be the highest-ever profit made by a British-based bank. To put it in context, the write-off is equivalent to the overall profits of £5.7 billion announced by HBOS, Britain’s fourth-largest bank, last week.

HSBC has already replaced its senior North American management team, and Doug Flint, the group’s finance director, and Geoghegan have been charged with putting the operation back on track.

The problems within the division will cast a cloud over the results. But in order to calm the nerves of investors, Green is expected to raise the final dividend by nearly 10%.

The bank is keen to show that the growth in Asia and other emerging countries has compensated for its US problems. Three weeks ago the bank was forced to issue the first profit warning in its 142-year history after a hastily arranged board meeting.

The warning came after the bank discovered that rising problems in the US mortgage business meant that the group’s bad-debt provisions had surged by $1.75 billion — 20% higher than analysts and investors had been forecasting. The bank is understood to have lent about $11 billion in so-called second-lien mortgages — a form of high-risk loan where a bank only has a second claim if a borrower defaults.

The problems have led to a cull of senior executives. Two weeks ago, Bobby Mehta, chief executive of HSBC Finance Corporation (HFC) and also head of the bank’s overall North American operations, resigned. Sandy Derickson, chief executive of HSBC Bank USA, also stepped down. The two were some of the highest-paid executives at HSBC, sharing $40m in performance-related bonuses in 2004 and 2005.

The scale of HFC’s problems started to emerge at the bank’s preclose trading statement in early December.

In a move that shocked the City, HSBC admitted it had seriously underestimated the number of people in America who were defaulting on second home loans in portfolios bought by the bank. What was even more shocking was that many of the loans had been taken out just six months earlier.

The mounting problems have raised questions about HSBC’s decision to buy Household. At the time of the deal, investors were sceptical about the wisdom of HSBC buying a consumer-finance group that specialised in sub-prime lending, or loans to people with patchy credit records.

Although HSBC has claimed it gained huge expertise in handling risky mortgages through the Household deal, the recent profit warning has raised suggestions that its systems and management controls were lacking.

HSBC is also facing huge pressure from shareholders concerned about the problems at HFC and the bank’s woeful share-price performance. Last year, HSBC’s shares were the worst performers of any British bank, falling by 0.2%. Geoghegan has staked his reputation on turning round the problems at HFC, saying “the buck stops at my door”.

Some leading shareholders are also understood to have called on the bank to clarify its succession planning as part of a growing desire for it to look for an external candidate as its next nonexecutive chairman. Traditionally HSBC’s chairman has had an executive role and been promoted from within. Before Green succeeded Sir John Bond as chairman in May, he had been chief executive.

The bank has attempted to strengthen its lineup of nonexecutive directors after facing criticism that too few were independent. It has recently recruited Simon Robertson, formerly president of Goldman Sachs Europe and now chairman of Rolls-Royce.

Last Friday the bank announced that Richard Cousins, now chief executive of Compass, the caterer, is to join the HSBC board as a nonexecutive director.

Shares in HSBC closed the week at 886p — 10p off their low for the past 12 months— valuing the company at £102 billion.