HSBC was the first bank to recognize the problem with housing related loans. It could be the first bank to recognize round two, but others will surely follow.
(…) But because economic and housing data suggest many more U.S. consumers are likely to default, analysts are wondering how many billions of dollars more the bank may lose on loans it currently records as good. "There is the potential there for a large loss," says Adam Steer of research firm CreditSights.
HSBC entered the U.S. subprime market in 2003 with the purchase of lender Household International Inc. and quickly built up a large portfolio of assets consisting mostly of risky mortgage loans. As of March 31, HSBC placed a value of $90 billion on those assets, well above the $57.5 billion the bank believed the loans would fetch were it to sell them in the markets.
The bank’s rationale is that while things might look very bad now, and cash-strapped investors are wary of buying such loans, chances are good that its customers will ultimately pay the loans back. An HSBC spokesman said the bank understands the value of the loans better than the market, because it sees day to day how borrowers are paying, and the "vast majority" in fact do pay back the loans.
Mr. Steer, though, isn’t so sure. In a research report, he and colleague David Hendler note a steady increase in the number of home loans that HSBC Finance has modified or "re-aged" — meaning, respectively, that the bank lowers the payments on delinquent loans, giving borrowers more time to catch up, or tacks missed payments onto the balance if borrowers manage to make their current payments.
As of March 31, the bank had modified or re-aged some $28.8 billion in mortgage loans, up 12% from the end of last year and amounting to 41% of such holdings.
"They had to provide longer-term assistance in order to avoid foreclosure," Mr. Steer said. "We know from experience that this generally doesn’t work."
In one ominous sign, borrowers are already falling behind on the modified loans at a high rate. As of March 31, 24% of loans modified or re-aged since January 2007 were more than 60 days delinquent again, and 3% had already been written off.
In principle, HSBC doesn’t have to take the hit should its U.S. unit have heavy losses. HSBC Finance is a separate entity with $75 billion in long-term debt, holders of which could be left to absorb losses. HSBC management, though, has said the parent bank will stand behind the U.S. unit.
Not everyone shares the view that problems at HSBC Finance are worsening. In a report this month, UBS analyst Alastair Ryan estimated that three-year losses would be $17 billion, down from a $20 billion estimate he made in March. He cites, among other things, the fact that overall nonperforming loans increased only slightly in the first quarter as evidence of a "peaking of losses." (…)
![[HSBC]](http://s.wsj.net/public/resources/images/MI-AX074_HSBC_NS_20090604185318.gif)
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