14th Nov 2007 08:30
HSBC Holdings PLC14 November 2007 HSBC HOLDINGS PLC - PRE-CLOSE TRADING UPDATE HSBC Holdings plc (HSBC) will be conducting a trading update conference callwith analysts and investors today to coincide with the release of its Pre-closeTrading Update and the third quarter results of its principal operations in theUnited States (US), HSBC Finance Corporation and HSBC Bank USA Inc., whoseformal SEC 10-Qs will be available at Investor Relations on www.hsbc.com shortlyafter 08.30 GMT. The trading update call will take place at 10.30 GMT, anddetails for participating in the call and live audio webcast can be also foundat Investor Relations on www.hsbc.com and at the end of this statement. The information that will be covered during the meeting relating to HSBC'soperating performance is as follows. Where reference is made to 'underlyingbasis', comparative information has been expressed at constant currency andadjusted for the effects of acquisitions and disposals. There have been nomaterial changes to the composition of the Group since the half-year. SummaryHSBC's profit before tax in the third quarter of 2007 was ahead of theequivalent quarter in 2006 ('prior year quarter') and so, following our improvedfirst half results, the Group's performance for the first nine months of 2007was also ahead of the comparable period last year. Underlying revenue growth in the third quarter was higher than in the first halfof the year; and underlying cost growth was moderately lower. In Asia-Pacific and the Middle East, the excellent operating and financialperformance delivered in the first half of the year continued during the thirdquarter. Europe, driven by the UK, was strongly ahead of the prior year quarter,though Latin America was lower as a result of higher loan impairment charges inMexico. Higher loan impairment charges in the US were more than offset by revenue growthin the Group, with the result that net operating income* was higher than inthe prior year quarter. The loan impairment charge in respect of our US Consumer Finance business wasUS$3.4 billion in the third quarter of 2007. This charge was some US$1.4 billionhigher than would have been implied by extrapolating first half trends; of thisincrement, some US$0.7 billion related to real estate secured credit with theremainder largely due to branch unsecured loan and cards portfolios. Deterioration in US housing markets is affecting consumer finance credit qualitymore broadly than hitherto and loan impairment charges are expected to remainhigh in these conditions. There is the probability of further deterioration ifthe current housing market distress continues and further impacts the broadereconomy. Personal Financial Services (PFS), although adversely affected by conditions inthe US, was strongly ahead in Europe, Asia-Pacific and the Middle East.Commercial Banking (CMB) and Private Banking performed ahead of the prior yearquarter, with encouraging evidence of additional revenues being delivered as aresult of stronger linkages within the Group. In difficult market conditions, our global Corporate, Investment Banking andMarkets (CIBM) business delivered pre-tax profits broadly in line with the prioryear quarter. Write-downs of securities, credit trading and leveragedacquisition financing positions were broadly offset by record revenues in otherCIBM businesses. The Group has very little direct exposure to US sub-prime mortgage-backedcollateralised debt obligations (CDOs) and hence, since the end of the thirdquarter, has not suffered the further significant write-downs of this assetclass disclosed by a number of other financial institutions. The general market widening of credit spreads and liquidity premia experiencedin the quarter had a favourable effect on the valuation of the portion of theGroup's own debt that is carried at fair value. This is reflected as a gain inthe income statement in respect of items carried at fair value and included inthe 'Other' customer segment. During the quarter, the Group generated capital to support balance sheet growth;the Group's tier 1 and total capital ratios remained strong and essentially inline with those disclosed at the half year. The Group's performance summarised above, achieved in a period of turbulentmarket conditions, reinforces the benefits of HSBC's strong and liquid balancesheet and diversified revenue streams. A more detailed commentary follows: Continuing investment in the businessHSBC continued to pursue its stated strategy of rebalancing the earnings of theGroup with investment slanted towards emerging markets; of targeting selectedhigh-growth areas in developed markets; and using HSBC's unique internationaldistribution platform to build business and revenues from trade and investmentflows between emerging and developed markets. In the third quarter, we concentrated our investment - both acquisitions and inour own business - on emerging markets. We made a strategic investment ininsurance in Vietnam and, in India, we agreed to form an insurance joint venturewith two local banks; we were the first foreign bank to obtain the necessaryformal approvals to open a Rural Bank in mainland China; and we completed duediligence on our proposed majority investment in Korea Exchange Bank, thesixth-largest bank in South Korea, Asia's third-largest economy. Subsequent tothe quarter end, we became the first foreign bank to gain a licence to set up astand-alone Islamic Bank in Malaysia, and we reached agreement to extend ourinsurance business in South Korea through a joint venture. We also sold anon-core credit card portfolio in the UK. World's leading international emerging markets bankIn our operations in Asia-Pacific and the Middle East and in most of our LatinAmerican businesses we continued to perform strongly. The growth of thirdquarter pre-tax profits in our emerging markets businesses, compared with theprior year quarter, exceeded the rate of progress achieved in the first half of2007. HSBC's performance continues to demonstrate our competitive advantages incapturing revenue opportunities arising from the current strength of Asianmarkets. In particular, our global reach enables us to secure business from bothsides of the trade equation and intermediate in investment flows between thedeveloped and developing world through our custody, funds administration andinvestment services businesses. Excellent performance in Hong KongHSBC's third quarter results in Hong Kong were excellent with retail brokerage,funds income, insurance and deposit-related income all strong. Leading international bank in mainland ChinaWithin our operations in mainland China, we grew deposits strongly andconsequently boosted net interest income. Trade-related fees, commercial lendingand cash management activities all made significant contributions to revenue. Wealso increased revenues from securities services, structured products andtreasury activities in buoyant equity markets, and benefited from theprogressive liberalisation of investment products. Profit contributions from our strategic investments in Ping An Insurance, Bankof Communications and Industrial Bank doubled compared with the prior yearquarter. In October, we increased our holding in Bank of Communications to19 per cent. Our total investment in strategic associates in mainland Chinacurrently has a market value of around US$40 billion. Strength throughout Asia-PacificIn other Asia-Pacific countries, encouraging performances continued in the thirdquarter, particularly in the Group's operations in India, Singapore, Taiwan andIndonesia. Strong performance in the Middle EastIn the Middle East, the benefits of a strong economy helped boost customerdemand for deposit products and the region continued to enjoy a benign creditenvironment. Profit growth in the quarter, compared with the prior year quarter,accelerated when compared to the growth rate achieved in the first half of 2007. Restructuring our US businessSound performances were achieved in our retail bank branches, our online depositoffering and our credit card businesses, but PFS profits in North America weresignificantly affected by rising loan impairment charges in real-estate securedlending, and branch unsecured loan and cards portfolios. We continued to run-off our Mortgage Services portfolio, albeit at a decreasingrate, and we also took action to restructure the business in light of marketconditions. We remain committed to this course of action. On 21 September 2007, we announced the closure of the Decision One brokerchannel, which originated loans for onward sale. This contributed to a relatedand significant contraction of the mortgage-backed trading operations of CIBM inNew York as part of a wider CIBM initiative to refocus on emerging markets. Loan impairment charges in the third quarter in the US were higher than both thepreceding quarter and the prior year quarter. The general weakness now emergingin US real estate has had the effect of significantly reducing the availabilityof credit to non-prime customers. This, together with a lack of appetite frompurchasers of securitised retail mortgage-backed debt, has made refinancing moredifficult and contributed to illiquidity across most US housing markets. Thereis also some evidence of changed customer behaviour as foreclosures increase,repossessed properties remain unsold and rental alternatives become moreattractive. All of these factors are contributing to the increases in loandelinquency now emerging in the branch-based real estate-secured consumerlending business and in Mortgage Services. Early stage delinquency rates in bothcards and branch unsecured lending are also showing signs of deterioration. This weakening in the US credit environment has led to a loan impairment chargeof US$3.4 billion in the US Consumer Finance business in the third quarter. Thischarge was some US$1.4 billion higher than would have been implied byextrapolating first half trends; of this increment some US$0.7 billion relatedto real estate secured credit with the remainder largely due to branch unsecuredloan and cards portfolios. At the end of the third quarter, US$1.6 billion (3.2 per cent) of mortgagebalances in our US branch-based consumer finance business were two or morepayments overdue, compared with US$1.1 billion (2.3 per cent) at 30 June 2007.The comparable figures in Mortgage Services were US$3.2 billion (8.2 per cent)and US$2.6 billion (6.2 per cent) of the portfolio, respectively. At 30 September 2007, total loan impairment allowances held against US non-primereal estate lending were US$3.4 billion compared with US$2.6 billion at the endof June 2007. Loan impairment allowances held against the Mortgage Services bookrose by US$0.3 billion to US$2.4 billion while loan impairment allowances heldagainst real estate loans in the branch-based business were US$0.5 billionhigher at US$1.0 billion. Loan impairment charges for credit cards, retail services and motor vehiclelending in the US rose broadly in line with portfolio growth, mix and seasoning,although the weakness in parts of the US economy, notably in housing and certainmanufacturing industries, continued to adversely affect certain customersegments. If US residential property values continue to fall, we would expect anincreasing and persistent trend in overall real estate-secured delinquency andloan impairment charges, expressed both in dollars and as a percentage of theportfolio. Also, the duration of the US non-prime real-estate secured portfoliosin our branch-based consumer lending business and in Mortgage Services would beextended and the portfolios would suffer higher losses throughout their lives. As we now expect more prolonged weakness in the US housing market, we have takensteps to restrict the product range we offer, thereby eliminating the equivalentof around 5 per cent of Consumer Lending loan originations measured on the basisof gross revenue. It is now clear that, in such market conditions, the projectedflow of new business is no longer compatible with the scale of the currentConsumer Finance branch network. As a consequence, we have conducted a rigorousappraisal of both the business and the physical infrastructure of our USConsumer Finance operations. We are already in the process of closing orconsolidating 100 branches within our consumer-lending branch network across theUS, and plan to close a further 260 branches so that our distributioninfrastructure is better aligned with the level of forecast demand implied byour credit underwriting risk appetite. This action will reduce the ConsumerFinance branch network to 1,000 branches. A restructuring charge of up toUS$55 million caused by these planned closures is expected to be taken in thefourth quarter of 2007. Also in the fourth quarter, we will be making changes to fee and finance chargeson credit card services to improve our customer proposition. We estimate thesechanges will reduce fee and finance charge income by between US$50 million andUS$60 million in the fourth quarter of 2007 and by between US$225 million andUS$250 million in 2008. We will also curb growth in customer loans and advancesin light of the anticipated slowing of the US economy and restrict credit lineincreases and balance transfer offers. When we see the economy strengthening, wewill be able to resume growth. Diversification and focus on emerging markets in CIBMCIBM reported third quarter pre-tax profits broadly in line with the prior yearquarter, in spite of write-downs in credit trading and leverage acquisitionfinance businesses totalling US$925 million. CIBM, which is increasingly focusedon emerging markets-led opportunities, earned just under half its revenues fromAsia in the third quarter. The third quarter was an exceptionally difficult period in certain tradingmarkets as liquidity contracted across some asset classes. In particular,structured credit products were adversely affected as investors withdrew fromasset-backed securities markets. Market illiquidity was exacerbated as bankstook into account contingent funding requirements arising from commercial paperissuance and, potentially, from providing support to structured investmentvehicles (SIVs). During this period, HSBC attracted deposits and our commercialsurplus expanded strongly, particularly in Asia. Credit spreads widened across non-government asset classes, contributing topre-tax write-downs of US$750 million on securities, includingwholesale-purchased sub-prime residential mortgages and structured credittrading positions held on balance sheet, and US$175 million (net of fees) inrespect of non-syndicated committed facilities in the leveraged acquisitionfinance business. Of these write-downs, some US$600 million arose in CIBM in NewYork. Within CIBM, wholesale-purchased sub-prime residential mortgages in the US notyet securitised amounted to approximately US$2 billion at the end of thequarter. The Group has very little direct exposure to US sub-primemortgage-backed CDOs. Largely offsetting the write-downs, record quarterly revenues were achieved inForeign Exchange, Payments and Cash Management, Securities Services and GroupInvestment Businesses. CIBM's third quarter performance showed that its emerging markets-led andfinancing focused strategy has produced resilient results in difficultconditions by enabling it to benefit from strong emerging market investmentflows and trade volumes, and market volatility, which encourages client hedgingactivity. In addition, the contraction in general market liquidity has boostedHSBC's attractiveness to counterparties due to the Group's strong balance sheet. In Group Investment Businesses, funds under management grew during the quarterby US$18 billion and our emerging markets strength produced further performancefees. Balance Sheet Management revenues in the quarter remained in line with theprogress made in the first half of 2007. Gains from principal investments werelower than the run rate achieved in the first half. Conduits and SIVsThe Group's principal sponsored conduits, Solitaire, Bryant Park, Regency andAbington Square, which are on-balance sheet under IFRSs, are fundingsatisfactorily with no impairment of assets. The two off-balance sheet SIVsmanaged by HSBC, Cullinan and Asscher, also currently have requisite fundingarrangements in place. In our capacity as managers of the SIVs, we activelycontinue to work with the income note and senior note holders during this periodof market disruption. Asset quality within the SIVs remains high although twofinancial institution issuers of assets held by the SIVs were downgradedsubsequent to the quarter end. Strong performance in CMBCMB's pre-tax profits in the third quarter compared favourably with the prioryear quarter, and were in line with growth achieved in the first half of 2007.Increases in revenue were driven by higher deposits in Hong Kong and mainlandChina and strong lending growth in the UK. The business benefited fromsignificant increases in the volume and value of inter-regional referrals fromwithin HSBC. Credit spread impact on the fair value of our own debtThe general widening of credit spreads and liquidity premia that contributed tothe write-down of positions in CIBM had a favourable effect on the valuation ofthe portion of the Group's own debt that is carried at fair value. To someextent this acted as a counterbalance to credit spread widening on the Group'strading positions and reflected the accounting benefit of having raised debt atspreads no longer achievable in current market conditions. In the third quarter,the favourable impact of this fair value accounting contributed US$1.3 billionto pre-tax profits. This benefit is mainly accounted for within 'Other' andtherefore is not allocated to customer groups and global businesses. Credit environment broadly stable outside the USOutside the US, credit performance in the third quarter remained favourablecompared with historical trends, except in Mexico where the expected impact fromthe seasoning of recent growth in the loan book added to loan impairment charges, as signalled at the interim stage. In the UK, encouragingly, credit trends in the personal business showed signs ofimprovement in the third quarter, reflecting underwriting changes made in thelast two years. Our credit appetite in many markets remains selective in light of elevated assetprice growth relative to underlying income growth. Taxation and other mattersThe Group's effective tax rate in the third quarter was lower than in recentyears, primarily due to the considerably higher contribution from Hong Kong tothe Group's profits in the quarter and adjustment to certain temporary deferredtax timing differences. The gain on sale of the Group's headquarters building at 8 Canada Square remainsunrecognised in the Group's financial performance. OutlookIt is particularly difficult to assess the outlook for the rest of the year andinto 2008. In spite of the severity of the housing market downturn, US annualised economicgrowth in the third quarter was 3.9 per cent, considerably higher than themarket consensus. This partly reflected a significant improvement in thecountry's trade balance, with US exports boosted by a combination of continuedstrength in emerging markets and the weak US dollar. Risks to continuingeconomic growth exist in the event of a prolonged weakness in the US housingmarket, which remains our main area of concern. In the absence of generalconfidence in a housing market upturn, this would lead to continuing high levelsof loan impairment charges. The strength of Asian and Middle Eastern economies and financial markets lookssustainable in the near term as domestic and regional growth continues at arapid pace. Increasing trade between Asia and Latin America and increasinginvestment into the West from the Middle East, India and China provideattractive business opportunities for HSBC at both ends of the flows. In terms of market risk, extreme volatility in traded markets driven by aliquidity shock remains more than a remote possibility, with adverseconsequences for the valuation of all risk and trading positions. Thede-leveraging of the financial system now underway, however, plays to thestrength of a strongly capitalised, liquid and well-diversified Group like HSBC. HSBC remains fully committed to its principles of capital strength andliquidity. This commitment enables us to support our customers and respondflexibly to challenging market conditions and opportunities as they arise. HSBC's results for the year ending 31 December 2007 will be announced on Monday3 March 2008. Conference call details The conference call is being hosted by Michael Geoghegan, Group Chief Executive,and Douglas Flint, Group Finance Director, and will be accessible by diallingthe following local telephone numbers: UK: +44 20 7019 0812UK toll free: 0800 018 0795 USA: +1 210 795 0472USA toll free: 877 818 6787 Hong Kong: +852 2286 5632Hong Kong toll free: 800 964 136 Restrictions may exist when accessing freephone/toll free numbers using a mobiletelephone. Passcode: HSBC A recording of the conference call will be available from the close of business14 November 2007 until close of business on 14 December 2007. Local replay access telephone numbers are: UK toll: +44 20 7192 0843UK toll free: 0800 279 5528 USA toll: +1 203 369 4975USA toll free: 1 866 855 8654 Hong Kong: +852 2802 5151 Replay access passcode: 369682 On 15 November 2007, the replay will also be accessible on HSBC's website byfollowing this link: http://www.hsbc.com/hsbc/investor_centre. Footnote * Net operating income is total operating income after deduction of netinsurance claims incurred and movement in policyholders' liabilities, and loanimpairment charges and other credit risk provisions. Notes to editors: 1. HSBC Holdings plcHSBC Holdings plc serves over 125 million customers worldwide through around10,000 offices in 83 countries and territories in Europe, the Asia-Pacificregion, the Americas, the Middle East and Africa. With assets of some US$2,150billion at 30 June 2007, HSBC is one of the world's largest banking andfinancial services organisations. HSBC is marketed worldwide as 'the world'slocal bank'. 2. An interview with Michael Geoghegan, Group Chief Executive, and DouglasFlint, Group Finance Director, is now available in video/audio and text onwww.hsbc.com and www.cantos.com. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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