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HSBC tries to put its house in order Focus remains on U.S. banking business, while consumer finance unit is scaled back

HSBC Holdings Plc is making progress in shutting down and running off its money-losing and less reputable consumer finance businesses, but its U.S. credit card business has remained profitable despite losses at rivals, and it's business as usual at its U.S. bank, the company's top North American executive said Friday.

The company has finished closing about 800 remaining HFC and Beneficial consumer finance offices, after closing 600 during 2008. It previously shut down HSBC Finance's national loan origination systems for mortgages and home equity loans through brokers or loan purchases, said Brendan McDonagh, CEO of HSBC North America Holdings.

That doesn't affect loans made through HSBC's regular U.S. bank branches and HSBC Mortgage Corp. in Depew, which operate here as normal.

HSBC Finance's troubled national loan portfolio in the United States, which has caused the bulk of HSBC's global losses for the last several quarters, is now down to $89 billion from $125 billion, McDonagh said.

That includes the broker-originated mortgage services business with $25 billion, $57 billion in mortgages and personal loans from the consumer finance branches, and $7 billion from auto loans. And more than 45 percent of mortgages -- $31 billion -- have been modified.

The bank is continuing those efforts through a unit in Florida, while other loans will either be paid or written off over the next few years, including a separate $4 billion portfolio of home-equity loans at HSBC Mortgage.

"The pig is in the python," he said. "All of the banks just have to allow this whole thing to work its way through."

Meanwhile, the $40 billion U.S. credit card business has been "carved out" since it's still making money, and will be retained alongside HSBC's retail banking operation. Two-thirds of its loans are now housed at the bank, for cheaper funding.

But the rest of HSBC Finance is now a "non-core" business or is in "run-off" mode, McDonagh said. "It was a better decision for all of us, and now we can focus on the core business," McDonagh said. "We're open for business. We stay focused on what we can control."

>'Business as usual'

On the retail side, HSBC Bank USA, the biggest bank in Buffalo, continues "doing what it normally does," McDonagh said.

The bank has opened 94 branches in other states since 2006, filling in the suburban communities outside New York City and targeting niche, mostly Asian or international communities in California, Florida, Seattle, and Washington, D.C.

"The bank is very much business as usual," McDonagh said. "With the exception of New York state, we can't compete with mass-market banks. But we'll go into a city like Washington and carve out a network."

McDonagh, an Irish native and formerly HSBC's top executive in Buffalo, is a member of HSBC's Group Management Board, making him a senior executive globally for the bank.

In a wide-ranging interview with The Buffalo News editorial board and a reporter, he spoke of the changed landscape and climate for the banking and credit card industries, and how HSBC has been faring with its U.S. operations in both areas.

He also marveled at the financial crisis that wreaked havoc on the industry over the past year, eliminating storied names and giants like Lehman Brothers Holdings, Bear Stearns, Merrill Lynch & Co., Wachovia Corp. and Washington Mutual.

"We're still here," he said. "What a difference a year makes."

More than 89 banks have failed this year as bad debts and expenses depleted their capital. That's on top of 22 last year, and McDonagh said more are likely to follow, especially among smaller and community banks that went astray. "I think the big ones that were going to go are gone," he said. "I think you'll see more smaller ones."

>A bad deal

HSBC has suffered tens of billions of dollars in losses, mostly from the consumer finance business it bought in 2003 with Household International.

That purchase has been called "an unmitigated disaster" by activist shareholder Knight Vinke, and even HSBC executives now admit it was a mistake. "Household is not one of our greatest acquisitions," McDonagh said.

Still, the London-based behemoth has survived, largely on the strength of its operations in Asia and other emerging markets. The global bank did not take any financial support from the British government and was not eligible in the United States, but raised $17.7 billion on its own from investors, with 97 percent of its shareholders taking up its "rights issue" in April. And it still pays a dividend.

>Hard decisions

That corporate support has allowed McDonagh to make hard decisions here, such as shutting down the finance company. HSBC also examined other parts of its finance business, considering activities that could damage its global brand and reputation.

As a result, it abandoned its refund anticipation loan business, which consumer groups had long denounced. It eliminated all but one contract to provide such loans through tax preparers, but can't get out of the remaining one -- its largest, with H&R Block -- for at least two years, McDonagh said. That sacrificed $200 million in annual profits at its height, but the fights with activists and Congress weren't worth it, he said.

"You can't be seen to profit from something that doesn't fit the corporate ethics," he said. "We didn't even sell the business. We just shut it down."

It also unilaterally canceled about $250 million in credit card fees and charges, which McDonagh said amounted to "fee-stacking," in which one penalty fee leads to another.

By doing so, HSBC acted ahead of Congress, which banned some credit card fees and practices as part of the new credit card reform law that took effect.

"Some of the stuff that was in the credit card act is right," McDonagh said. Some players and practices "don't have a place" in the industry.

However, the law is also impacting the remaining companies. For example, JPMorgan Chase has said the law will cost it $700 million in annual revenues that have to be replaced. That's led banks to raise interest rates, scale back credit lines or cancel cards to account for what they say is added risk. And it'll likely lead to cost-cutting.

"The credit card industry will work it out, but it'll come through industry consolidation and new technology and, yes, jobs will be lost," he said.

By contrast, HSBC's credit card division is one of the few U.S. card issuers still making money, largely because it has a big subprime business, McDonagh said. Subprime cards, for borrowers with bad credit, are actually making more money now than traditional cards for good borrowers.

That may seem counterintuitive since bad credit results from not paying bills. But subprime customers typically have just one credit card, with a $500 limit, as their primary method of payment. Many don't own homes, so they're not paying a mortgage. And they've learned to manage debts.

Prime customers, by contrast, often have multiple credit cards with high credit limits and less loyalty to their cards, and they usually have a mortgage to pay. If they lose their job, the credit card is last on the list to pay, but their balances are usually higher, causing heavy losses.

Also, the profit margins on prime cards are narrower, so issuers depend on a high volume of transactions. But with the recession, consumers have cut spending, and are saving.

>A 'break-out strategy'

Meanwhile, the U.S. bank unit is concentrating on its core business. The branch expansion, together with the HSBC Direct online banking initiative, are part of what McDonagh called the bank's "break-out strategy." HSBC had previously been limited to New York state, with half of its branches in stagnant upstate markets.

But it needed to grow deposits to fund loan demand. And competitors in New York City, many of whom also had offices in nearby Connecticut and New Jersey, were eating its lunch six years ago. "They were getting our customers on both ends of the commuter line," McDonagh said. "We were closing more accounts than opening."

So it filled in the gaps in the suburbs, and then looked elsewhere. Rather than opening branches on every corner, it targeted the Asian communities in California, where people were already familiar with the HSBC brand. It also took on the embassy banking business in Washington, D.C., from another bank, and now serves 70 embassies and 3,000 foreign nationals, diplomats and their families in that area.

Still, there are no plans to either abandon the upstate New York market, or pull jobs out of Buffalo. Indeed, while some jobs migrated elsewhere and job totals locally ebb and flow, the area has seen more jobs come in than leave, McDonagh said. The bank has about 5,000 workers in the Buffalo area, more than in greater Chicago, where McDonagh is based.


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