Asia will be infected by the economic weakness spreading through the world’s leading economies, threatening the engine of global growth, HSBC has warned.
Cashing in on Hong Kong gets harder
Speaking after reporting a “resilient” 28pc fall in pre-tax profits to $10.3bn (£5.2bn) for the six months to June, despite incurring a further $10bn of bad debt, Stephen Green, HSBC chairman, said: “I don’t believe the emerging markets have completely decoupled. There is no way a serious downturn in the US will leave Asia immune.”
HSBC, the world’s third largest bank, still expects the region to grow but it will be “with less momentum than in the recent past” because of rising inflation in the face of commodity price pressures.
Analysts at Exane BNP Paribas warned that the Asian outlook “provides the greatest threat to HSBC’s premium valuation” and that “some of the gloss has started to fade”.
The bank has been buoyed by the performance of its emerging markets business in recent years, counterbalancing the sub-prime crisis in its US operation.
However, profits from the core Hong Kong division fell 8pc to $3.1bn for the half and the bank warned that “in Asia, it is apparent that corporate activity in some sectors is slowing”.
Mr Green reiterated that emerging economies would continue to grow faster than mature economies and that the bank still planned to derive 60pc of profits from developing markets, which currently account for just over half the business.
He added that the first half of 2008 had seen the “most difficult financial markets for several decades” and that “recession is a real risk” in the US, with “any meaningful recovery in the housing market unlikely before next year”. UK and European economies would also remain weak, he said.
HSBC faced renewed calls from activist investor Knight Vinke to sell the troubled US consumer finance business Household, which accounted for the vast majority of the group’s $10bn of bad debts – a 58pc increase on last year.
Mr Green rejected Knight Vinke’s claim that “there can be no prospect of a fundamental recovery in this business” as “nonsense”.
He revealed plans to wind up the $13bn US vehicle finance business over three years, following plans to close the mortgage services operation, where the sub-prime problems first struck. It will leave the business, which collapsed $2.2bn into the red after $6.6bn of bad debts, predominantly focused on credit cards.
Douglas Flint, finance director, claimed there was good news from the slowing rate of credit deterioration, but warned: “The issue now is whether the US enters a recession, and what that does to the credit card and unsecured books.” HSBC took its first ever goodwill charge against the business, bought for $14.5bn in 2003, as $527m was written off the North American operations.
Ongoing problems in the money markets saw the bank take a $3.9bn writedown on “credit trading, monoline exposures and leveraged acquisition financing loans”, as well as last year’s $2.1bn.
Mr Green said the turmoil could create opportunities: “We continue to have the capacity to deploy capital at a time when others may be constrained.”
He cited the UK division’s recent push into mortgages with its “rate matcher” product to cash in on improving profit margins. It doubled its share of new home loans in the first half and is now not “far off” 5pc of Britain’s mortgage stock, two points above its traditional share.
By Philip Aldrick
Last Updated: 10:59pm BST 04/08/2008