HSBC Holdings PLC's North American arm still isn't adding much to the company yet, but it has reduced its consumer finance losses to the point where it is no longer weighing down its parent.
On Monday HSBC reported a blowout first-half pretax profit of $11.1 billion, double its earnings a year earlier. Though the improvement of the company's U.S. business was among the highlights, the North American operation was the only geographic subsidiary to report a loss.
Because of more than half a billion dollars in first-half hedging losses and a sharp second-quarter jump in consumer finance writedowns, HSBC North America Holdings Inc. reported it had an $80 million loss through June, down from the $2.1 billion hit it took a year earlier. Credit provisioning in its personal financial services segment fell from $6.4 billion in the second half of last year to $4.6 billion through June 30.
But after stripping out the hedging writedowns and other one-time items, HSBC North America Chief Executive Niall Booker noted, the company produced an underlying $492 million pretax profit.
"We have a core business that makes money," said Booker, who took over after former CEO Brendan McDonagh left HSBC at the end of July, on the North American subsidiary's conference call with reporters and analysts. "We believe we have a unique capability in terms of joining up our corporate customers and our premier high-net-worth customers internationally."
On both HSBC North America's earnings call and that of its parent, executives stressed the difference in performance between the company's successful capital markets, card and commercial banking businesses and the terribly performing consumer finance business it largely acquired in a long-regretted 2002 acquisition of Household International. That business is now in runoff, dropping from $91 billion of assets a year earlier to $69 billion by midyear.
"We haven't seen much slowdown in the runoff yet, which is encouraging," Booker said. "The fact that the book is running off at a fair clip significantly reduces our risk."
The North American unit also sold off its $4.3 billion auto finance portfolio in July, HSBC said in its earnings release.
Year over year, revenue in North American dropped 28%, to $8 billion, largely because of the runoff of the personal financial services portfolio, which included some higher-yieldng assets.
HSBC North America's performance would have been weaker still without the support of the Canadian operations, which turned in a $502 million pretax profit.
HSBC executives abroad and in the U.S. made it clear that the company's misadventures in U.S. consumer finance had informed a lasting shift in strategy.
"We'll be in the U.S. as it is required for our business on a global basis. … But overall I don't see us growing domestic business in the United States, because frankly we haven't got any right to win," said Michael Geoghegan, HSBC Holdings' CEO.
Instead of competing against the largest American retail banks on price, he said, HSBC intends to focus on international trade and the affluent consumers associated with it.
Booker seconded that on the later North American call, outlining what he described as HSBC's strong position within its chosen segments of the banking industry. The company was proud to have one of the few credit card books that has remained profitable during the recession, he said, thanks to its ability to acquire and retain affluent customers. And HSBC expects to build upon its $1 billion first-half profit in its North American global banking and markets unit.
"We are not trying to be all things to all men," Booker said. "But with the government encouraging exports in the U.S., we think that's an opportunity for our commercial banking in particular."
Because of HSBC's chosen business lines, he told analysts, he was not especially worried about the impact of financial reform legislation on HSBC's business.
"The danger would be if [the legislation] made some businesses unprofitable or unsustainable," Booker said. "But I don't think Dodd-Frank takes us into that territory at all."
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