HSBC to Writedown $17.2 Billion; Pressured to Sell U.S. Business Unit - HSBC Finance

Implications: The U.S. subprime market crisis has affected another bank, HSBC, who will take a $17.2 billion writedown in losses for 2007, however, not all the news is bad for HSBC. HSBC sold its HSBC France bank branches to Banque Populaire for $3.2 billion. Rumors were rampant that HSBC wanted to sell HSBC France to move into emerging markets. The sell of HSBC France gives HSBC an opportunity to funnel capital to other investments in emerging markets and faster growing business segments. HSBC's activist shareholders are pressuring HSBC to conduct a strategic review of its France, Britian and US markets, where HSBC doesn't have the scale and therefore should sell up. HSBC acquired Household Int'l in a $15 billion deal and rebranded the name to HSBC Finance. HSBC investors eventually warmed up to the Household Int'l acquisition after Household began bringing in billions of dollars in annual profits. HSBC Finance has a $180 billion loan book and ranks among the Top 10 Subprime Lenders in the US.

Analysis: When HSBC acquired Household International (HSBC Finance) for $15 billion in 2002, the deal appeared to be a steal at the time, however, market conditions and shareholder sentiment has changed. When HSBC acquired Household International, Household was running out of cash and couldn't find financial backers and HSBC bought Household International when it was in distress. HSBC has been unable to sell HSBC Finance, however, HSBC wants to cut its losses and HSBC has put its $40 billion broker led Mortgage Services Unit into run off. HSBC shareholders are lamenting that the Household International deal probably shouldn't have been done and wants HSBC to sell HSBC Finance.

1.  HSBC's interest in Household International spun out of the desire to close the gap with Citi and HSBC wanted to become a bigger subprime lender than Citi. After an aggressive lending spree from 2004 - 2006, HSBC usurped Citi, however, its subprime loan book has subjected HSBC to major writedowns and traditional loans and credit cards may also hamper HSBC's earnings as U.S. consumers turn to their credit cards and lines of credit for everyday expenses

2.  HSBC may also have some exposure to mortgage losses in the U.K., which is also falling into a housing slump. 45% of HSBC's loans are in Europe and because of subprime losses spilling over into Europe, HSBC has had to divert capital from its deposit base into capitalizing HSBC Finance

Takeaway:  HSBC plans to keep its 380 branches operating under the HSBC brand and may opt to divest from other markets where it has a presence but lacks scale, including France, Britian and the U.S. HSBC's Asian Unit accounts for 40% of the bank's earnings and HSBC has the largest market share in Hong Kong, where the region has seen its best growth in years. HSBC may turn its attention to Asia in an effort to increase earnings and return to its historical roots and traditional banking business, which lends only to customers who can pay back their loans. What a novel approach!