HSBC, Europe’s biggest bank, last night gave warning that bad debts in its troubled US mortgage lending business would be 20 per cent higher than forecast.
The bank blamed the impact of slowing house price growth, which it said is being reflected in accelerated delinquency trends across the US sub-prime mortgage market. It said that the level of loan impairment provisions for 2006 for its mortgage services operations will be higher than is reflected in current market estimates. Analysts had previously expected HSBC to report a bad debt charge of $8.8 billion (£4.5 billion).
The warning comes less than four weeks before HSBC’s full-year results, and follows its caution at its pre-close trading update in December that bad debt trends among US mortgage borrowers were deteriorating at a faster than expected rate.
City analysts had expressed alarm at the time that customers were defaulting less than six months after taking out their loans, a situation viewed as virtually unprecedented.
Last night’s alert will deepen concerns over the ability of HSBC’s US mortgage operations to model accurately default trends. When HSBC bought the operation, then called Household International, for $15 billion in 2003, it placed much emphasis on the strength of its computerintensive techniques to model consumer behaviour. Before the acquisition, HSBC had no experience of lending in the US sub-prime market.
In its statement, HSBC also cited the effect of higher payment obligations on borrowers as adjustable mortgage rates reset to higher interest rates from the level at which the loans were taken out.
HSBC said last night that Michael Geoghegan, group chief executive, is continuing to co-ordinate the necessary actions to manage the bank’s response. It also said that, apart from the mortgage services operations, the performance of the rest of its businesses was in line with its expectations.