HSBC reviews American offshoot

* Richard Wachman
* guardian.co.uk, Sunday November 16 2008 00.01 GMT
* The Observer, Sunday November 16 2008
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HSBCis reviewing the future of its HFC consumer finance business in the US after losing $40bn on American mortgage and credit card writedowns since 2006.

Shareholders have demanded that the bank, headed by executive chairman Stephen Green, appoint a financial adviser to mull options for HFC, formerly known as Household. Last week it revealed that it had lost another $4bn.

So far, HSBC has resisted pressure to conduct a formal, strategic review; last night it would only say that HFC's restructuring plans were ongoing.

However, informally, the bank is looking at several plans that could involve: spinning off HFC into a new arm's-length company that would blunt the impact of future losses; aggressively running off much of the business; a possible sale in three years when, it is hoped, the housing market recovers; a debt-for-equity swap with HFC bondholders.

Broker Collins Stewart reckons that HFC could break even by 2011 and that losses will taper off in 2010.

Collins banking analyst Alex Potter said: 'Yes, HFC has lost a lot of money, but HSBC's position is a strong one in that, as a whole, the group is extremely profitable, which is more than you can say about many other financial institutions currently.'

Potter estimates that HSBC will make $22bn profit in 2008, only marginally down on the $24bn it recorded in 2007. It has been buoyed by its many Asian operations that have been comparatively unaffected by the credit crisis.

But last week chief executive Michael Geoghegan cautioned that the Far East was looking less solid than six months ago and that growth could slow.

HSBC acquired Household in 2003. The American firm specialises in sub-prime lending, but analysts say it has been ruined by the housing slump and is now worthless.

'It is a drain on the group's resources, and should be jettisoned,' says one City investor who supports a campaign being waged by Knight Vinke, the shareholder activist group that has accused HSBC of strategic and corporate governance failings. The bank denies the charges.

HSBC, whose share price has held up relatively well during the credit crunch, has hit out at the government's bail-out plan for the bank's rivals, saying competitors had taken risks and been punished by the markets - only to be rescued by the government's £37bn package.

Yesterday, HSBC said that restructuring continued apace at HFC. A spokesman said current action would 'position it [HFC] for the long term'.

* guardian.co.uk © Guardian News and Media Limited 2008