This summary is based on the first quarter fiscal 2006 earnings call conducted by HSBC Holdings Pls (HBC) on May 15, 2007.
Group Chief Finance Director: Douglas Flint
CEO: Brendan McDonagh
President of Consumer Lending and Mortgage Services: Tom Detelich
President of Card Services Business: Walter Menezes
Key Investors Issues
- Net income was $541 million compared to $888 million a year ago.
- The company set aside $1.7 billion for credit losses, up 96% from $866 million a year ago.
- Credit loss reserves rose to $6.8 billion from $6.59 billion at year end, and $4.47 billion a year earlier.
First Quarter Highlights
Profit before taxes is $900 million.
Tax for financial services business is seasonal with the bulk of the profits coming in the first quarter and that has an impact of about $150 million - $160 million.
- Operations are performing within expectations.
- HSBC Finance also said credit losses rose following a change in accounting for some British operations and because of abnormally low year-earlier losses following an Oct. 2005 change in U.S. bankruptcy law.
- HSBC Bank has close to 450 U.S. branches, including about 400 in New York state.
- Problems in U.S. mortgage operations, especially subprime loans made to borrowers with weaker credit histories, have weighed in recent months on British-based HSBC, which paid $14.8 billion for Household in 2003.
There was a balance sheet contraction from $182 billion to $179 billion, but not withstanding that contraction, net operating income is steady compared to the last quarter of 2006.
The loan impairment charges excluding mortgage services have increased since the first quarter 2006, but they have increased as a result of favorable credit environment both in 2005 and early parts of 2006, the company had low bankruptcies at that time, having stronger economic conditions.
The company has had since then the growth and seasoning of the portfolios across all the businesses both card services and mortgages as well. If you go back five years, there are delinquency rates across the whole company, two plus percentages of 5.3% in 2002, 5.3% in 2003. They went down to certainly low figures of 3.73 in 2005 and 4.25% in 2006. They explain why three is that variance between 2006 and 2007.
The credit performance in mortgage services was in line with expectation.
It reflects a deceleration of the rate growth and delinquencies. Operating expenses were essentially flat from quarter-on-quarter between the fourth quarter and the first quarter.
The company has strategically repositioned the mortgage services business.
The company has three channels.
- The first channel is the circle 1,400-branch network tagged consumer lending. That is the core business, which is the origination of mortgages. They are around about 90% of the mortgages are fixed and/or about 90% are in fact first lean mortgages.
- The second channel after consumer lending is correspondent channel. The correspondent channel is where the company has essentially have purchased in pools of mortgages that already pre-existed, originated by other corporations. This particular channel was the channel the company has discontinued. The correspondent channels discontinued about a month or two ago.
- The third channel is the wholesale channel, which is a origination through one of subsidiaries called Decision One have continue to originate products through that channel, but the company has narrowed the product range quite considerably and also due to certain amount of piping of standards and the withdrawal of a series of products volume obviously originations in that channel are down.
One of the other major changes around the whole area is that all two channels before all three channels and now under a single management structure.
With regards to those portfolios which demonstrating the high levels of delinquency that you have seen, the company manages this out of the single collection center.
- The company reorganized management team. The company has created a Chief Operating Officer role which has been extended to cover the credit risk organization.
- The company decides to discontinue the pre-season and pre-file tax products in Taxpayer Financial Services.
- The company has announced the agreement to sell UK insurance operations in an overall agreement with UK Bank and Aviva Insurance.
Key questions from the first quarter earnings call conducted by HSBC Holdings Pls on May 15, 2007.
