HSBC Sees No Chance Of A Rebound In Consumer Finance
March 02 2009 - 2:02PM
Dow Jones News
With its decision to exit from consumer finance, HSBC Holdings
PLC (HBC) threw cold water on hopes that a large bank can overcome
the funding hurdles inherent in that business.
The London bank, which has sizable banking operations in the
U.S. and considers the market here one of its most important
globally, said it would reverse a significant part of its expansion
beyond banking.
During a conference call with reporters, Niall Booker, chief
executive of HSBC Finance Corp., said subprime lending as a
stand-alone operation is a failed business model, and the purchase
of Household International Inc. was "not successful."
The bank's stark declaration raises questions about the
prospects of consumer finance units at Citigroup Inc. (C) and Wells
Fargo & Co. (WFC). Citigroup has insisted in recent weeks that
its CitiFinancial business is a good one.
HSBC bought Household in 2003, hoping to fund its once
profitable consumer loans at least in part with deposits from HSBC
Bank USA. Household, renamed HSBC Financial, made personal loans,
home equity loans, issued credit cards, and refinanced mortgages--
all largely with subprime customers.
It's now ceasing to make any loans except issuing credit cards.
It had already cut back on some lending and reduced its HSBC
Finance branches to 800 from 1,400 two years ago; it will now close
the remaining branches and eliminate more than 6,000 jobs. HSBC
will remain in the prime and subprime credit card business.
"The combination of the high cost of wholesale funding" consumer
loans with money other than customer deposits, "combined with the
absence of home equity" loan demand in the U.S. market, "plus the
high level of delinquencies...mean that the business model for
subprime home equity refinance we believe is not sustainable,"
Booker said.
Home equity loan demand boomed while rising real estate values
allowed home owners to tap their homes for cash. But since
mid-2007, those loans have created a headache for many banks in the
U.S. Mortgages and home equity loans or lines of credit often
exceed the value of the home as real estates values decline. That
not only creates big losses for companies like HSBC and JPMorgan
Chase & Co. (JPM), but also damp new loan revenue.
However, credit card business in prime and subprime "is robust,"
Booker said. Despite rising losses, and some decline in consumer
spending and transaction volume, "the actualbusiness model is
sustainable."
Asked whether HSBC might have been able to change its consumer
finance business to make other types of loans, Booker said: "We
looked at that as an option," but "you still have the wholesale
funding issue and...you still face [a] fairly high level of
delinquencies."
Moreover, "the real problem was the volume of business that was
required to justify the infrastructure," Booker said. "In the end,
subprime financing, whether it be mortgage based or unsecured,
hasn't got much connection with much of the rest of the group."
The latter is a conclusion Citigroup also reached recently. Citi
Holdings, a unit Citi created to combine business units it
considers not core to its main operations, includes CitiFinancial,
its own consumer finance unit with more than 2,000 branches
nationwide. The bank has said CitiFinancial customers are separate
from its deposit business. It is unlikely to grow it, but
executives said options include selling CitiFinancial or seeking a
joint venture.
Wells Fargo of San Francisco has Wells Fargo Financial, which
offers personal loans, auto loans, credit cards, and home
loans.
For HSBC, the failure of the Household deal is a lesson, said
Brendan McDonagh, chief executive of HSBC North America during the
media call. Future acquisitions will focus on those business that
are directly tied to its retail and commercial banking operations
and the deposit business.
-By Matthias Rieker, Dow Jones Newswires; 201-938-5936;
matthias.rieker@dowjones.com