Wednesday, November 14, 2007

Banks Absorbing the Losses So Far

As the losses mount for the banking industry for Q3 and Q4, it is apparent that at this point the banking industry is able to absorb the losses from real estate (see yesterday’s post on B of A). They may not like the losses, some people will lose their jobs, some parts of the bank may be shut down, but the banks can absorb the losses. Admittedly, the process has not fully played out, but so far the chances of a failure of a large bank is small. Let’s face it the world is a big place and the banks lend all over the world, diversifying their risks and profits. Text in bold is my emphasis. From Market Watch:

HSBC Holdings on Wednesday said it would have to write off a further $3.4 billion from its U.S. business during the third quarter, but said profit before tax will increase because of strong growth from Asia and the Middle East.

The lender, one of the first to report the damage from U.S. subprime mortgages, said it's taking a $3.4 billion loan-impairment charge in its U.S. consumer finance business during the third quarter, which it said was $1.4 billion higher than would have been implied by extrapolating first-half trends.

Of this increment, about $700 million is related to real estate secured credit, with the remainder largely due to branch unsecured loan and cards portfolios.

"I think the thing that's emerged in the third quarter is that the housing market deterioration is beginning to have a broader impact, both within the market and beginning to extend into other areas," said Douglas Flint, group finance director, in a prepared interview.

The bank, which now carries a larger market capitalization that Citigroup, warned that further deterioration could occur in the U.S. if the current housing market distress continues.

The bank also has been curtailing its U.S. business, shutting its Decision One lending arm and eliminating the equivalent of around 5% of consumer lending-loan originations. HSBC said Wednesday it is going to close another 260 branches as the "projected flow of new business is no longer compatible with the scale of the current consumer finance branch business."

But HSBC said it has not had to make any significant write-down from subprime mortgage-backed collateralized debt obligations "disclosed by a number of other financial institutions."

The company's off-balance sheet structured investment vehicles have "high" asset quality, though two issuers of assets held by the SIVs were downgraded.

In Asia-Pacific and the Middle East, its "excellent" performance continued, and the U.K. led its Europe segment to be strongly ahead of the year-ago quarter, HSBC said. British personal business credit trends showed signs of improvement, which the bank attributed to underwriting changes it has made.

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