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HSBC profit up as bad debt charge jumps

HSBC Holdings, Europe’s biggest bank, reported another big hit from exposure to the U.S. mortgage crisis Wednesday and warned that bad debts could increase if the U.S. housing market worsens.
/ Source: Reuters

HSBC Holdings PLC, Europe’s biggest bank, reported another big hit from exposure to the U.S. mortgage crisis Wednesday and warned that bad debts could increase if the U.S. housing market weakens further.

In a much-anticipated third-quarter trading update, HSBC said it would close or consolidate up to 260 branches in its U.S. consumer finance division by the end of the year, more than double the 100 branches it had announced earlier.

HSBC said that pretax profit in the third quarter of 2007 was ahead of the same period a year ago. It added that its performance over nine months was also ahead of 2006, without releasing specific figures. HSBC shares gained 2.6 percent to 864.5 pence ($17.90).

HSBC Finance Corp. took a higher-than-anticipated $3.4 billion (2.3 billion euros) impairment charge in the quarter, compared with charges of $1.9 billion and $2.2 billion in the first and second quarter respectively. The division added $3.4 billion to its credit loss reserves.

“If the housing market continues to weaken and if it has a broader impact on the underlying real economy then charges will stay elevated and could increase,” said HSBC Finance Director Douglas Flint.

Reserves against bad debt in HSBC Finance’s consumer lending division, including mortgages it originates, more than doubled between the end of June and Sept. 30, to $1.01 billion (690 million euros) from $492 million. Loss reserves in mortgage services, which handle mortgages written by other lenders, rose to $2.42 billion (1.66 billion euros) from $2.15 billion.

Analysts have been keeping a close eye on impairment charges and loss reserves at HSBC Finance Corp. because it is one of the largest lenders to U.S. consumers with weak credit. It was among the first to signal problems in subprime mortgages a year ago.

The bank reported bad debt exposure of $10.6 billion last year, leading to its first ever profit warning.

The global credit crisis was sparked by rising defaults on those mortgages. The mortgages were repackaged with other less risky debt and sold to investors across the globe. Banks worried about exposure to the expanding crisis have balked at taking on new debt, creating a severe scarcity of credit.

Because of the impairments and lower revenue, HSBC Finance swung to a loss in the third quarter of $1.1 billion (750 million euros), from a net profit of $551 million a year ago.

While acknowledging that the outlook was “genuinely uncertain,” HSBC sought to reassure investors that revenue growth across its global operations, supported by a broad spread of other products, had offset the impact of bad debts.

HSBC said that pretax profit in the third quarter of 2007 was ahead of the same period a year ago. It added that its performance over nine months was also ahead of 2006, without releasing specific figures. HSBC shares gained 2.6 percent to 864.5 pence ($17.90).

The bank does not report quarterly results for its entire group operations and is not due to announce annual results until March. HSBC has 1,300 branches in 46 states.

“In Asia-Pacific and the Middle East, the excellent operating and financial performance delivered in the first half of the year continued during the third quarter,” it said. “Europe, driven by the U.K., was strongly ahead of the prior year quarter, though Latin America was lower as a result of higher loan impairment charges in Mexico.”