HSBC Holdings PLC, the British parent of HSBC Bank USA and HSBC Finance Corp., said pre-tax earnings for the third quarter rose from a year ago despite sharply higher losses on loans, but warned its performance will likely worsen if U.S. housing conditions don't improve.
The London-based banking giant said Wednesday it set aside $3.4 billion for losses on U.S. mortgages and other loans, 70 percent more than Wall Street analysts had expected and the company had projected in July. Still, its overall revenue growth worldwide was more than enough to offset the losses.
"It reflects that our strategy of diversification is very much working and is a strength to the HSBC Group," Chief Executive Officer Michael Geoghegan said on a call with analysts. "We're clearly strongly capitalized, we're liquid, and we're diversified."
However, the company said problems in the U.S. housing market are already impacting consumer finance credit more broadly than earlier this year. And it cited the "probability" that results would deteriorate "if the current housing market distress continues and further impacts the broader economy."
"It is particularly difficult to assess the outlook for the rest of the year and into 2008," the company said in its third-quarter "trading update." It releases full earnings every six months.
"Risks to continuing economic growth exist in the event of a prolonged weakness in the U.S. housing market, which remains our main area of concern," it said.
HSBC is further restructuring its U.S. consumer finance business, restricting product offerings and shutting another 260 loan offices -- not bank branches -- on top of 100 it has already closed or consolidated. That will leave it with 1,000 consumer finance offices. It will take a $55 million charge in the fourth quarter.
Locally, HSBC USA, which owns HSBC Bank USA, said net income plunged 91 percent to $21 million, as volatility in the stock and credit markets forced the bank to cut by $218 million the value of subprime mortgages it plans to sell. It also nearly doubled its provision for losses and had lower trading gains.
"These are challenging times," said Paul Lawrence, HSBC USA's chief executive. "Our focus, as always, will be to serve our customers and key markets like Buffalo well, and to strive for success by playing to the strengths and differentiation that our global advantage provides."
Globally, major banks are being hammered by rising U.S. mortgage losses and extreme instability in the credit markets, which have made it difficult to sell loans and value investments. Losses are particularly severe among adjustable-rate "subprime" mortgages made to borrowers with bad credit, but the credit woes have spread.
In recent weeks, at least nine of the world's biggest banks and brokerages have written down the value of their mortgage-related loans and investments by as much as $45 billion, including more than $8 billion at Merrill Lynch & Co. and as much as $17.5 billion at Citigroup.
About $1.6 billion, or 3.2 percent, of HSBC's mortgage balances in the U.S. consumer finance business were at least two payments late, up from $1.1 billion in June. For the national Mortgage Services business, $3.2 billion, or 8.2 percent, was late.
"We're not through the credit crunch at the current time," Geoghegan said. "We have a long way to go."
On the other hand, the bank was quick to note it has "very little direct exposure" in its $31 billion investment portfolio to the subprime mortgage-backed "collateralized debt obligations" that caused major losses at other firms in recent weeks.
Besides closing consumer finance offices, HSBC also plans to change fee and finance charges on credit cards, reducing income by $50 million to $60 million in the fourth quarter and by $225 million to $250 million next year. It will also restrict credit line increases and balance transfers, and cut back growth in loans and advances.
At the U.S. bank unit, net interest income from taking deposits and making loans rose 19 percent to $923 million because of growth in private-label credit cards, earlier recognition of income on card transactions, the HSBC Direct online saving account, new branches, and expanded products and services.
Loans rose 3 percent to $92.7 billion, while deposits rose 14 percent to $110.8 billion. The bank wrote off $305 million as uncollectible, up 20.6 percent from a year ago, but set aside $402 million to cover losses -- 75 percent for credit cards.
Other revenues fell 39 percent to $374 million, as a 52 percent gain in credit card fees and increases in trust income, deposit service charges, other fees and commissions, and securities gains were swamped by the reduction in the value of loans.
Operating expenses rose 8.8 percent to $891 million, with increases in all categories, as the bank added staff and branches.