Household HSBC Watch

HSBC is heavily exposed to credit card assets. In that light, it is similar to Capital One, which earlier this year slashed its earnings estimates by over 20 percent due to high default rates and building losses. We see potential for a negative impact to HSBC’s earnings from this exposure as well. HSBC credit card purchases are collateralized at the consumer level. We must ask how HSBC determines which purchases can actually be collaterized. It is very hard to collaterize a tank of gasoline that is gone, or groceries that are gone. Credit card collateralized debt obligations sound more like the mortgage crisis and motgage CDO’s. Even for merchandise that can be repossessed, such as a computer purchased at Best Buy, HSBC will clearly note that a $1000 computer purchased last year is a $125 computer now. (HSBC is the financing for Best Buy credit cards.)

Watch for changes in HSBC credit card operations as merchants go bankrupt and consumers spend less. The original HSBC trend was for customers to pay off credit cards by refinancing their home. That clearly will not happen for some time to come. Cash-out refi’s have slowed to a crawl. High fuel and grocery prices and falling home prices may cause credit card holders to declare bankruptcy or walk away from the debt. If HSBC has a collateralized purchase with a “no bankruptcy” clause in the credit card contract the customer will simply stop paying.