Combined third-quarter profits for HSBC USA and HSBC Finance Corp. fell 15.5 percent, as a tight profit margin, lower banking fees, higher operating expenses and higher loan losses offset growth in the company’s bank branch network, commercial lending, retail mortgage and credit card divisions.
The two U.S. units of HSBC Holdings Plc reported total profit before taxes of $936 million for the period, down from $1.1 billion a year ago. Not including certain accounting costs and costs for the transfer of credit card and mortgage loans between the two, profits fell 1.5 percent to $973 million.
Still, officials were optimistic. “I am pleased that we maintain momentum as we execute our strategic initiatives and strengthen our presence within the U.S.,” said Martin J.G. Glynn, chief executive of HSBC USA and HSBC Bank USA. “We will continue to leverage the HSBC brand to complement our global footprint and strengthen our banking franchise.”
London-based HSBC, one of the world’s largest banks, reports earnings every six months, so it did not file for the third-quarter. The two U.S.-registered units, however, must report quarterly under American law.
Complicating matters further, HSBC also now reports most earnings using international accounting rules, not U.S. rules.
HSBC USA, the New York-based parent of HSBC Bank USA, said profit before taxes fell 11.2 percent to $342 million, as the bank set aside more to cover loan losses and incurred higher operating costs because of its expansion. Net income fell 5.7 percent to $231 million.
HSBC suffered as short-term rates on deposits rose faster than long-term rates on loans and investments, hurting balance sheet management.
Overall net interest income from taking deposits and making loans fell 6 percent to $626 million, while net fees fell 15.9 percent to $207 million. However trading revenues from its corporate and investment banking division soared 65 percent to $309 million, while other operating income rose 60 percent to $155 million.
U.S. deposits at Sept. 30 rose 15 percent from a year ago to $74.3 billion as a result of HSBC’s online savings account, branch expansion in new markets, and refined marketing of wealthy customers. During the quarter, the bank opened five branches and established a new bank in Maryland for national expansion, while introducing advertising at New York’s John F. Kennedy and LaGuardia airports. In all, it opened 11 offices in 2006 and 25 in 2005.
Online savings deposits reached $6.3 billion and generated more than 250,000 new accounts. The bank’s Premier business for wealthier clients grew to 100,000 households and $12 billion in deposits.
On the lending side, the bank expanded its commercial banking presence with offices and lenders in Washington, Los Angeles, New Jersey and Chicago. Commercial loans grew 17 percent, driven by small business and middle-market lending.
In private banking for the wealthy, the bank opened three Wealth and Tax Advisory offices in 2006, adding to a 64 percent increase in fees so far this year.
Credit quality remained strong, but the bank recorded increases from unusually low levels of bad loans and losses. The bank set aside 16 percent more for losses, totaling $216 million.
Operating expenses rose 17.7 percent, as the bank has invested heavily in new bank and commercial lending offices, advertising, and building up its corporate and investment banking business lines.
Meanwhile, HSBC Finance, the former Household International consumer lending company, earned $631 million before taxes in the quarter, up 4.6 percent from last year, but down 45 percent from the second quarter.
The Prospect Heights, Ill.-based division recorded strong growth in its branch-based retail mortgage lending and national credit cards as it raised rates and absorbed acquired credit card lender Metris Cos.
But that was partially offset by higher operating costs to support 17 percent growth in average loans, as well as a drop in other income. And it struggled with flat growth from the second quarter and strongly higher loan losses in the mortgages it buys from brokers, especially among second mortgages purchased in 2005 and 2006.
In response, HSBC Finance set aside $1.6 billion for losses, an 11.7 percent increase. The company is now tightening credit criteria, increasing collection efforts, raising rates, and working more closely with customers to make sure they can afford increases in their adjustable-rate mortgages.
“We have good performing businesses in the residential branch-based business and credit card business,” said HSBC North America and HSBC Finance CEO Bobby Mehta. “We are monitoring credit very closely.”
Article By JONATHAN D. EPSTEIN
News Business Reporter
11/16/2006
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