HSBC faces tough Knight after US woes

HSBC managed to lose nearly $12bn on dodgy US mortgages last year - and still make record profits...

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Last Updated: 31 Aug 2010

HSBC said this morning that its annual pre-tax profits were up 10% to $24.2bn in 2007 – even though it was forced to write off $17bn on its sub-prime mortgage investments. A whopping $11.7bn of this loss came in North America, where the bank has been scaling down its operation recently – although not enough for activist investor Knight Vinke, who’s pushing for it to get out of the US entirely.

In general, HSBC’s numbers looks pretty good, given that it had more exposure than most to the grubby end of the US mortgage market. Despite its struggles in North America (and to a lesser extent in the UK) the bank has been going great guns everywhere else, particularly Asia and the Middle East where the credit crunch has had slightly less impact. This meant it was still able to increase earnings and bump up its dividend by 11%.

But although most shareholders will be reasonably happy this morning, Knight Vinke shows no sign of leaving the bank in peace. The activist investor thinks it’s time for HSBC to cut and run from its US venture, six years after it spent $14bn on sub-prime specialist Household (not such a good idea, with hindsight). And boss Eric Knight is not an easy man to ignore: he’s already pressured the bank into shaking up its governance structure. He thinks HSBC should be focusing its energies on emerging markets – and he probably has a point.

One thing’s for sure – these losses are unlikely to elicit any sympathy from the Treasury Select Committee. The backbench MPs have been holding forth on the credit crunch today, and pinning most of the blame on the banks and the credit rating agencies (though not the politicians – fancy that). It said the latter responded too slowly to the market turmoil, while it also accused the banks of selling lots of complex products it couldn’t understand.

To prove their point, the committee revealed that Deutsche Bank chairman Lord Aldington apparently couldn’t even tell them what a CDO was. Now admittedly he’s probably the only one – we certainly wouldn’t want to face a quiz on the complexities of these weird and wonderful financial instruments. But then again, we’re not the senior figure at a leading investment bank…

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