HSBC May Post Loss as U.S. Unit Pushes Bad Loans to $15 Billion

July 31 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank by market value, may report a second straight loss after setting aside $15.3 billion, mainly for consumer loans that soured in the U.S.

The first-half net loss probably will be $600 million, compared with earnings of $7.72 billion a year earlier, according to the median estimate of seven analysts surveyed by Bloomberg. London-based HSBC had a $2 billion loss in the second half of 2008 after bad-loan provisions increased 37 percent.

“The key thing is the U.S.,” said Leigh Goodwin, a London-based analyst at Fox-Pitt, Kelton Cochran Caronia Waller LLC, who has an “outperform” rating on HSBC. “We will be looking for any signs they have turned the corner.”

HSBC has disclosed $53 billion of provisions in the past three years, much of which stems from the 2003 takeover of U.S. finance company Household International Inc. HSBC decided in March to stop making consumer loans at the operation and Chief Executive Officer Michael Geoghegan said the same month that the bank’s credit-card unit faces a “difficult” two years because of the sluggish economy.

HSBC is scheduled to report its latest results on Aug. 3. The company increased capital in April with a $17.8 billion rights offer as bad debts in the U.S. eroded reserves. The bank said in May it would take a pretax accounting charge of $4.7 billion for the rights offer because most of the shares were denominated in currencies other than U.S. dollars.

Mostly North America

North America will account for about 61 percent of the first-half provisions, compared with 67 percent during all of 2008, Paul Measday, a London-based analyst at JPMorgan Cazenove Ltd., wrote in a July 17 note to clients. Europe will represent about 19 percent, Asia 9.5 percent and Latin America 9.7 percent, he said.

About 77 percent of the funds set aside for defaults will be for consumer debt, which includes mortgages, auto finance loans, personal loans and credit cards, Measday said.

Chairman Stephen Green said in March that HSBC regrets the decision to buy Household International, now called HSBC Finance. “It’s an acquisition we wish we hadn’t done with the benefit of hindsight, and there are lessons to be learned,” Green told reporters during a March 2 conference call.

HSBC gained 3.3 percent in London trading this year, valuing the bank at 103.2 billion pounds ($170 billion). In the same period, shares of London-based Barclays Plc doubled and the 63-member Bloomberg Europe 500 Banks Index advanced 31 percent.

Not Optimistic

“I can’t imagine HSBC is going to be particularly optimistic about the U.S.” when it posts first-half results, said Julian Chillingworth, chief investment officer at London- based Rathbone Brothers Plc, which manages $21 billion of assets including HSBC stock.

HSBC’s writedowns and credit-market losses are more than twice those of Credit Suisse Group AG and Barclays Plc, according to data compiled by Bloomberg. Since the third quarter of 2007 HSBC’s $42.2 billion compares with $20.1 billion at Barclays and $18.9 billion for Credit Suisse.

Loan-loss provisions may not peak at HSBC’s U.S. unit until 2010, Anil Agarwal, a Hong Kong-based analyst at Morgan Stanley, wrote in a July 17 research note. The company injected $1.7 billion of capital into its U.S. bank and about $1 billion of equity into HSBC Finance in the first quarter. HSBC may have to add a further $6 billion of “capital support” in the next two years, Morgan Stanley analysts estimate.

No Bailout

HSBC’s first-half loss would compare with net income of $4.9 billion at JPMorgan Chase & Co., which posted credit loss provisions of $16.6 billion in the period. Bank of America Corp. made $7.5 billion after setting aside $26.8 billion in the period for credit losses.

HSBC has kept its ranking as the world’s third-largest bank by market value after emerging from the global credit freeze much healthier than U.K. competitors Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, which had to be bailed out by the government. HSBC lends 82 pence for every pound it takes in deposits, compared with 150 pence at Edinburgh-based RBS.

Pretax profit at HSBC’s securities unit, led by Stuart Gulliver, may more than double to about $6 billion, Deutsche Bank analyst Michael Chang wrote in a July 23 note to clients. The division had record first-quarter earnings, lifted by foreign exchange and interest-rate trading and bond sales, the bank said in May. The securities unit “could be a source of upside for consensus expectations on results day,” Chang said.

China Listing

HSBC, which gained more than 17 percent of its profit from China last year, may become one of the first foreign companies to be asked to list its shares in China’s A-share market, Goldman Sachs Group Inc. analyst Roy Ramos wrote in a note July 20. The A-share market includes shares of mainland companies listed on the Shanghai or Shenzhen stock exchanges.

“The branding, advertising and positioning advantages of being one of the first foreign-listed banks in China could be significant” and help increase deposits, Ramos said.

The bank’s currency-trading capabilities in Hong Kong and China also make HSBC “better placed than most” to gain from China’s plan to increase international trade using the yuan, rather than the U.S. dollar, Ramos said. New York-based Goldman Sachs advised HSBC on its rights offering.