The UK bank’s US exposure should only be a short-term liability and shareholders will again benefit once the economy rebounds.

HSBC has been roundly criticised in the media for its results and its new group chairman, Stephen Green, accused by Michael Taylor, head of equities at Threadneedle Investments, of being “asleep at the wheel”.

The reality is much more complex. It is true that HSBC’s shares performed badly among its bank peers in 2006 and that it is exposed to the US market – the US was responsible for 26% of first-half 2006 pre-tax profits – at a time when the housing market is weak and there is uncertainty about the economic outlook.

But overall, investors have benefited from the bank’s increased US exposure since 2002 when it bought Household International, the consumer finance operation, and will benefit again when the economy resurges.

In the media frenzy, all the positives about the second largest bank in the world have been sidelined. And there are many: the bank’s booming Asian and Middle East businesses; an increasing emphasis on Latin America that saw that business post a 50% profit increase in 2005; and an exposure to 79 different countries which ensures risk is well spread.

Chinese promise

In addition, there is the enormous rise in value of the bank’s stakes in Bank of Communications and Ping An Insurance, added to which its chances of succeeding in China, whether through joint ventures with those Chinese partners or on its own, look extremely good due to its historical experience of the country. Additionally, the Household model added an area of expertise to the bank, which it has used to start new businesses and enlarge existing ones. Last but not least is the strength of a management team that has worked together extremely successfully for many years.

In The Banker’s view, there is only one major issue where it falls down. The bank admits its analytics model was wrong-footed in the business unit that buys US mortgages from other banks for securitisation or to keep on the HSBC books. This has been a lucrative business but the weak housing market and rising interest rates have now made it problematic because the risks were calculated incorrectly. As a result HSBC has had to write off some of those loans and more of this will be necessary.

The bank’s fault lies in refusing to give a ballpark figure for this exposure, citing the uncertainty of the economic outlook in the US. In our view, a bank is in the business of making forecasts about risky propositions and expected rates of non-performing loans (NPLs).

After all, when a top executive at HSBC states that its business is about the successful exploitation of risk, not the avoidance of risk, that philosophy surely includes making predictions for potential NPLs.


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