HSBC US troubles
The terrible thing is that I was pleased to learn overnight that has made a fairly big banking boo boo in the US. It unexpectedly announced a rise in bad debt provisions at its US mortgage business, which would lift total group loan-loss provisions by 20 per cent to about $10.5bn in total (more than 拢5bn), which ain't small potatoes.
Why should this be of any satisfaction to me? Well, there鈥檚 a slightly complacent view around in the banking industry that these days the banks are living in a risk free world, that the days of lending going horribly wrong are past. How so? Well it would be thanks to financial innovation (the ability to parcel up risk and place it out with investors in the market) and technological innovation (the ability to monitor much more precisely what鈥檚 being lent to whom).
The thing is that once upon a time I was the banking editor, at a time when almost every UK bank鈥檚 forays overseas ended in tears, and when it was almost guaranteed that if a bank could lend to a terrible prospect, it would do so. Bad debts accumulated by British banks between 1982 and 1992 were so enormous that they could have sunk a medium-size economy.
In the 15 or so years since then, banks鈥 profits have tended to rise in an almost straight line, along with the path of the global economy. And I鈥檝e watched with growing alarm as their confidence has grown and they鈥檝e become bolder and bolder in their expansion, especially their overseas expansion.
Now I鈥檓 not denying that the quality of their management and 鈥 more important 鈥 the quality of their management systems is much better than it was. And it is true that they are much better at measuring and containing risk than they were. They have become better quality businesses. But when I鈥檝e asked them 鈥 as I regularly have 鈥 whether there weren鈥檛 dangers in their becoming much larger and more complex businesses through all their acquisitions and diversifications, they鈥檝e looked at me as though I was a Neanderthal.
So, of course, this morning I鈥檓 doing the 鈥淚-told-you-so鈥 dance in the London snow. And the great thing about the HSBC鈥檚 announcement is that it鈥檚 a non-fatal warning to all banks to watch out. When a huge market 鈥 like the US housing market 鈥 turns down, even the mighty HSBC isn鈥檛 immune. And what鈥檚 particularly humiliating for HSBC, is that these seem to be old-fashioned consumer credit losses, rather than a thoroughly modern intake of toxins relating to some kind of synthetic and thoroughly opaque financial product. Let鈥檚 hope the losses are salutary for it and its peers.
I'm 
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Commenting is perhaps a little like teaching - it's not doing!
Mr. Peston's comments about HSBC's US position do not add much to the sum of human-kind.
No business can predict the future nor should it be criticised for actions it has taken - only 1 observer predicted last month's UK interest hike so what chance does a global business have when a key feature of the US economy goes sour?
Let's have something more insightful rather than 'sour grapes'!
Robert's "I told you so stance" may seem a little hard to swallow for many investors who wish they'd followed the many SELL recommendations issued when HSBC's share price reached the heady heights of 拢10 and above only a few months ago.
I remember when HSBC bought HOUSEHOLD BANK at a time when the US finance firm was being prosecuted for predatory selling. Many commentators at the time signalled their concern, sighting the risky sub-prime business in the States as an area of concern for the banking giant.
It seems as though HOUSEHOLD (now HSBC FINANCE in the US, and BENEFICIAL FINANCE in the UK) has begun to bite it's saviour on the backside and rear it's ugly head again with some risky lending in the US.
I wonder if this is why the sub-prime Beneficial Finance in the UK has so far failed to adopt the name HSBC FINANCE as their branches accross the pond have done, instead, choosing to keep the brand HSBC in the small print?
A useful and informed view, I think. But why not drop the annoying, useless phrases like "The thing is ..."? Sorry to be picky but they simply get in the way of the meaning - and we're all short of time!
Insightful article with a warm style that means one does not nod off half way though; unlike so many tedious dry articles. Keep up the good work!
Your point about acquisitions is very relevant as I worked for M&S Money when it was purchased by HSBC. HSBC management tried to replicate the HSBC organisational structure when it wasn't always appropriate given the nature of the business. M&S also demotivated staff by withdrawing staff benefits (e.g. 20% staff discount), while HSBC decided not to harmonise staff contracts (e.g. holidays)given that they were inferior to HSBC. If you multiply these issues by the number of acquisitions HSBC are involved in you can imagine it must get very complex and difficult to manage effectively.
Good article which opens up debate and is also a timely reminder that banks are not immune to 'market forces' despite their size. Also, (and because of their size)bank management errors made in chasing further 'quick' profits and in making their business bigger may not impact on bank shares in the way shareholders might like.
Seem to remember Midland Bank having a similar problem in USA with Crocker - some time back!
Eddy Weatherill - Chief executive - IBAS - Independent Banking Advisory Service
The letmotif of Robert Peston's article appears to be "to stay at home". As the former FT's Banking editor I'm sure he might perhaps find upon reflection his article somewhat simplistic (as much as my previous comment!). Mr Peston writes of UK banks' "forays overseas" and being "bolder in overseas expansion" and uses HSBC as an example to prove his case. There is too a lack of perspective between the size of the Household debt problem and HSBC's actual profits (the majority of which comes from "overseas")
HSBC is not a good example to illustrate the points that Mr Preston is trying to put across (not all without their validity I might add) because it ignores HSBC's own roots (the Far East) and the fact that whilst HSBC is now has a British HQ it is an international bank - indeed far more so than HBOS, Lloyds, Barclays and even RBS.
HSBC expanded into the US (Marine Midland) well before expanding into the UK (Midland Bank). Incidentally HSBC were only able to buy Midland because of the latter's disastrous purchase of Crocker Bank in the US (this would have been a good example for Mr Peston to have used perhaps). Not long after buying Marine Midland HSBC were hit by the mortgage crisis and defaults in the North Eastern USA. Having weathered that particular storm, that side of the business is doing pretty nicely. If HSBC had not "forayed overseas" in the past(from its then base in Hong Kong) it would not be the bank it is today - one of the biggest and best capitalised companies in the world.
Banking is all about taking calculated risk and even accounting for downturns eg Argentina, Far Eastern debt crisis, Household etc HSBC continues to get the equation right - just look at its profits and capitalisation. As a shareholder I would be extremely concerned if HSBC were to start to restrict its focus in just one region or market.
In any event there are clouds on the UK market to worry about (home mortgages and personal debt defaults et al). A concern for undiversified banks restricted to that market!
This leaves me wondering how exposed the big banks really are to a credit crunch?
In the UK customers are defaulting on significant loans via IVA's and bankruptcy at a growing rate. This article suggests that they may be complacent about their exposure to these risks as well.
They may have parcelled off risk to other firms in opaque deals, but as the deals are opaque the banks may not know the true level of exposure of these firms, and whether the risk really has been passed, or if it will come back to haunt them.
I cannot speak for other UK, banks, but this story comes as no surprise to anyone familiar with HSBC's operations in the US. As an employee of HSBC Securities for 11 years in the Eighties and Nineties, I can tell you that the message from Hong Kong, and later from London when the head ofice moved, was perverse.
The gist was that the return on assets from Asian operations was so high that HSBC would never commit enough capital to US operations to allow the bank to compete with the big players on Wall Street, which in turn meant HSBC's employees would always mke less than their peers. It was clear to all of us HSBC only stayed in the US because Asian and European clients needed access to US markets.
The unintended consequence was that by the mid-Nineties New York management finally realized the only way to be paid a competitive wage under these conditions was to take huge risks in order to generate Asia-sized returns. The foray into subprime lending was only one aspect of this. Huge layoffs in HSBC's trading operations in New York every couple of years, when one desk or another blows up, is another.
Interesting piece, not exactly what I would have expected from the 大象传媒's Business Editor, refreshingly different in fact!
There's never been any shortage of contempt held for banks, but the context of this example makes it all the more telling, as the massive house price crash in the US gradually begins to reverberate around the rest of the world. The number of US mortgage lenders who have gone bust in the last few months has now reached 20 (see ), and organisations as influential as Merrill Lynch are warning that we are on the brink of a global credit crunch (see ). The days of cheap money do seem to be drawing to a close, and interest rate rises now seem to be the theme around the world. The US is quite clearly already well advanced in the process of succumbing to these threats, with their house prices apparently falling at the fastest rate since records began in 1963. Question is, can the UK avoid the same fate?
What do you think, Robert?
6 months later, maybe HBSC deserve a pat on the back for owning up to their US shortcomings. As for the rest of the banking sector it is THE SILENCE OF THE LAMBS....
Is this the end of the banks shortcoming in the USA. I don't think so and believe that HSBC and more banks will come up with bad news.
i was a soldier for this country , ive been with HSBC for 11 years since i was in school at the age of 16 (we got a free mitre football for joining) ive come out the army an all hell has broke loose with them , i got a management loan with HSBC 15,000 i had to pay over 拢400 pound a month for that loan with over an apr of 14% , i feel sick i had to get a loan from another company to cover what i had to pay to HSBC , an i got the the loan from LOAN SHARKS an they charged less APR than HSBC , HSBC owe me over 3,ooo for bank charges have i got them , ha no i havent (like i said before i thought for this country in IRAQ 2003 and what thanks have i got nothing , apart from a leg that wouldnt even get me in the POLICE OR BE A FIREMAN
I love the reference to 'modern opaque toxins'... do you know the winning numbers to any given lottery in advance Mr Preston?
Add credit crunch... NR crisis etc etc
...chickens/home/roost!
hahahahahahahahahahahahahahaha...lol