Behind the Spin: HSBC

THE DILEMMA

by
Last Updated: 31 Aug 2010

The 'world's local bank' has suffered heart-stopping moments over the past year that would have had lesser financial firms reaching for the defibrillator. Last year, HSBC wrote off close to £5.3 billion in bad debt; its shares slumped 10% in the six months to May; and it underperformed the European bank sector by 5%. Much of its stress can be ascribed to its US operations, which were shaken by the collapse in the US subprime mortgage market earlier this year. Two senior heads rolled, but investors are still reeling from the issue of the bank's first-ever profit warning: confidence has been knocked. Closer to home, HSBC (like all the high street banks) has received a lot of unwanted public and media attention for unfair current-accounts charges. And the bank did itself no favours by closing a Dorset branch to everyone but its wealthiest customers, which created negative PR.

THE SPIN

'I want to clarify this is not trailer-park lending,' said HSBC's US CEO Michael Geoghegan of the subprime lending the bank owns there. 'This is main-street America. While trailer-park lending makes good headlines, frankly, it is not the customer base of HSBC Finance.' Group chairman Stephen Green later reassured shareholders: 'We are restructuring this business to avoid any repetition of the risk concentration that built up over the past two years.' Of its Dorset debacle, the bank said: 'With a full-service branch just a mile away, we are tailoring banking to the communities we serve.'

THE STRAIGHT TALK

Despite its huge bad-debt write-off, the bank reported a 5% increase in pre-tax profits to a record £11.5 billion for 2006. Said Green: 'It is a testament to HSBC's strength and diversity that we grew pre-tax profits in 2006.' He revealed that pre-tax profits from emerging markets approached 50% of total group revenue. And this is where HSBC's strength lies: while other banks vie for a foothold, HSBC is already there. The worry for investors is how well head office can keep tabs on its ever-expanding global empire.

THE VERDICT

In the long term, HSBC is rock-solid. In the short term, it must show that it's in control. Green admits it will take some years to sort out the US mortgage portfolio. Meanwhile, pulling off the biggest-ever single property deal in the UK - a £1.09 billion sale-and-leaseback arrangement for its Canary Wharf HQ with Spanish property group Metrovacesa - will boost its bottom line this year. Maybe a triple bypass won't be needed after all.

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