HSBC says 'real risk' of recession in US as its profits dive by 28 per cent

By Sean Farrell, Financial Editor
Tuesday, 5 August 2008

HSBC warned yesterday that there is a real risk of a recession in the United States and that the bank's markets in Asia would suffer from a severe slowdown in the world's biggest economy.

Europe's biggest bank made the warning yesterday as it reported first-half profit down 28 per cent to $10.2bn as a $14bn hit from bad debts on US mortgages and asset writedowns offset strong growth in Asia and emerging markets. Profit was in line with analysts' forecasts.

Stephen Green, HSBC's chairman, said turmoil in financial markets would persist well into next year. "A recession [in the US] is a real risk," he said. "The length and depth of that is uncertain. I think if a recession occurred it could be shallow ... but any meaningful recovery in the housing market is unlikely before next year. Employment is fragile. These are difficult conditions and they will remain difficult into next year too."

Mr Green rejected the idea that developing economies in Asia and elsewhere could thrive by trading with each other if the US economy slumped. "I don't think emerging markets have completely decoupled from Europe, North America or Japan. There has been an element of decoupling. There is an increasing amount of exports to other destinations. There will be an impact [from a US recession], there is no question."

HSBC said emerging markets will hold up "reasonably well" but with "less momentum than in the recent past". Michael Geog-hegan, the chief executive, said: "The near-term outlook remains negative with a significant degree of uncertainty. There is pressure on a number of emerging markets in terms of inflation." The bank's shares fell 1.1 per cent to 828p on the cautious outlook for Asia and emerging markets.

HSBC has refocused on Asia and developing markets after a disastrous foray into US sub-prime lending that has caused North American bad debts to top $18bn over the past 18 months. Its US impairment charge was $6.8bn, up 85 per cent on the year but down from the previous six months. The charge dragged its North American business to a $2.9bn loss in the first half, from a $2.4bn profit a year earlier.

Mr Geoghegan said: "[North America] continues to disappoint. We warned in late 2006 that we saw the consumer market weakening and regrettably we haven't been proved wrong."

HSBC was caught out by aggressive selling of US sub-prime mortgages by HSBC Finance, formerly Household, which it bought for $14.8bn five years ago. It has replaced the management and set about stripping the business back to credit cards and branch-based consumer lending.

The bank will take its first impairment charge of $527m on the goodwill of the Household purchase. It is shrinking the US mortgage book, stopped lending through intermediaries and has cut the branch network. In a further retreat from Household's riskier businesses, HSBC plans to run off the $13bn US vehicle finance portfolio over the next three years. Mr Green defended the purchase of Household, saying that it brought HSBC an "industrial scale" credit card business and that consumer lending would be a good business in future.

The bank has faced pressure from Knight Vinke, an activist investor, to sell Household or "ring fence" the business. But Mr Green rejected comments yesterday from Eric Knight, the head of Knight Vinke, reiterating his demands.

"It is nonsense," Mr Green said, adding that Mr Knight's comments were "irresponsible and infeasible and not in the interests of our shareholders".

HSBC's impairment charge was $10.1bn in the first half, up 58 per cent from a year ago, mainly due to losses from its book of US mortgages. HSBC's investment bank also wrote down $3.9bn on its exposure to credit trading, monolines and leveraged acquisition financing loans.

Profits in HSBC's Global Banking and Markets business fell 35 per cent from a year before to $2bn, despite GBM's profits in emerging markets rising 51 per cent. Stuart Gulliver, the head of the business, said no mass job cuts were planned.

In the UK, HSBC said it was picking up business as banks reined in lending to customers. Mr Geoghegan said the bank's recent expansion in mortgages had brought new customers who then transferred all their banking business to HSBC.

HSBC is ready to submit a new regulatory application on a planned purchase of a majority stake in Korea Exchange Bank.