Although profits at HSBC Bank USA during the fourth quarter remained lofty, profit growth slowed slightly as the U.S. economy cooled and the bank continued digesting its merger with the larger Republic National Bank of Manhattan.
HSBC USA Inc., the bank's parent company reported cash earnings growth of 47 percent to $179 million, compared with $122 million in the fourth quarter of 1999 before it merged with Republic to create New York's largest branch network.
Year-over-year operating profit growth had been running higher than 80 percent for HSBC, formerly called Marine Midland Bank, earlier in the year.
The bank also announced it is writing off the $79 million book value of Republic's securities subsidiary because of problems from an investment scandal that occurred before the merger. The fraud surrounding investment manager Martin Armstrong could lead to further bank expense.
"At the present time, it is not possible to estimate what additional cost may be incurred by HSBC USA Inc. as a result of the Princeton Note Matter," the bank said in a statement released Monday.
HSBC was in the process of acquiring Republic in 1999 when federal officials announced an investigation of Armstrong's firm, Princeton Economics, for allegedly defrauding Japanese investors out of $1 billion. Republic could have substantial liability in the case because Armstrong conducted much of his business through the company's securities division.
The scandal resulted in the late Edmund Safra, Republic's former chairman, lowering his own proceeds from selling the company to HSBC by $450 million, cutting the price of the $9.9 billion deal by about 4 percent. Safra also set aside $180 million in an escrow account for potential liability from the securities scandal.
Robert M. Butcher, chief financial officer for HSBC Bank USA, said the potential liability is not a major concern.
"We really don't know where this whole thing will go, but we have a substantial amount of cover if there are proceedings that were to cost more than the value of the subsidiary which originally caused this problem," Butcher said.
The bank is still trying to finish wringing anticipated cost savings from the merger. About 75 percent of targeted cost savings have been reached by consolidating systems, closing 21 branches and eliminating some New York City area jobs.
Another 15 percent of targeted cost savings have been identified, but the bank will still need to slash more expenses before it completes merger integration June 30.
Bank officials said customer retention has been a priority during the integration process, and total deposits rose by 5 percent during the year to $55 billion. HSBC's funds under management jumped 13.5 percent in 2000 to $30 billion.
"The merger strengthened our North American operations by adding significant private banking, factoring, banknote and bullion capabilities," Youssef Nasr, CEO of HSBC USA, said in a statement Monday.
HSBC took $85 million in restructuring charges for the merger during 2000 and expects to incur additional charges in 2001.
The U.S. subsidiary of HSBC Holdings plc reported $568 million in net income for 2000, up 22.4 percent from $464 million in 1999. The company's cash earnings as a percent of average common equity was 11 percent in 2000, down from 21.8 percent in 1999. Net income for the fourth quarter was $138 million, up 21 percent from $114 million from the same period last year.
The U.S. operation produced about 9 percent of the global banking group's $6.63 billion profit in 2000. Group profits grew 23 percent during the year, a similar pace with HSBC's U.S. profit growth. Bank analysts expected HSBC to report earnings growth of 25 percent.
Group Chairman John Bond said he expects economic conditions will make 2001 a "challenging year."
Butcher expressed similar sentiments for the group's U.S. operation which saw net loan charge offs more than double in 2000, to $239 million.
"We have still seen reasonable growth and a pretty good credit picture all around," Butcher said.