HSBC 2008 Annual Report Download - page 72

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Customer groups > Personal Financial Services
70
Subsequent developments
The branch-based US consumer lending business of
HSBC Finance has historically focused on sub-prime
customers who rely on drawing cash against the
equity in their homes to help meet their cash needs.
Unsecured consumer lines of credit have served as a
means of generating new customer accounts, with
the potential to subsequently provide the customer
with a mortgage product, typically a secured debt
consolidation loan. As a result, the bulk of the
mortgage lending products sold in the US consumer
lending branch network have been for refinancing
and debt consolidation rather than for house
purchase.
The unprecedented deterioration in the US
housing market over the last two years, including
declining property values and lower secondary
market demand for sub-prime mortgages, has
undermined the ability of many real estate loan
customers to make payments or refinance their loans.
In many cases, there is no equity in their homes or, if
there is, few institutions are willing to finance its
withdrawal. As a result, loan originations in this
business have fallen dramatically for both HSBC
Finance and the industry as a whole. Management
believes it will take years before property values
return to the levels seen prior to the decline and, as
such, has concluded that recovery in the sub-prime
mortgage lending business is uncertain and the
industry is unlikely to stabilise for a number of
years. Management also expects that changes in
regulation and practice will make it problematic to
plan and execute a sub-prime lending business
strategy with a reasonable degree of confidence.
Given the above, in 2008 HSBC began to
reposition its US consumer lending business to
reduce risk by tightening lending criteria and
expanding its lending to include government
sponsored entity and conforming loan products. As
part of this repositioning, HSBC intended to place
greater emphasis on unsecured loan products while
decreasing secured loan production. To date, the
results of this repositioning effort have not met
expectations, in part due to the continued
deterioration in the economy, leading management to
re-evaluate whether, given the Group’s risk appetite,
the initiative can produce the volume necessary to
ensure that the consumer lending business will return
to profitability in the foreseeable future.
As a consequence, at the end of February 2009,
the Board of HSBC endorsed management’s
recommendation to discontinue as soon as
practicable originations of all products by the
branch-based US consumer lending business of
HSBC Finance. At 31 December 2008 this business
had outstanding balances of US$62 billion
comprising US$46 billion in real estate secured and
US$16 billion in unsecured loan balances. HSBC
will continue to service and collect the existing loan
portfolio as it runs off, and will continue the Group’s
efforts to help customers in need of loan
modification and other account management
programmes to maximise collection and preserve, as
far as possible, home ownership. In the US,
substantially all consumer lending branches branded
HFC and Beneficial will cease taking loan
applications and will be closed. HSBC Finance will
also continue to run-off the loan portfolios of its
mortgage services business and its vehicle finance
business. HSBC will provide all necessary support to
HSBC Finance to enable it to run off these
businesses in a measured way and to meet all its
commitments.
The operations of HSBC’s other US Personal
Financial Services businesses, including its card
business, and the retail bank branch business of
HSBC USA are unaffected by this decision. HSBC
USA will continue to service its customers with real
estate secured and unsecured products.
HSBC expects as a result of this decision
affecting the US consumer lending business of
HSBC Finance that total revenue will fall by
approximately US$50 million in 2009 and operating
expenses by approximately US$700 million on an
annualised basis. Closure costs of up to
US$195 million will be incurred, predominantly
related to one-off termination and other employee
benefit costs, a substantial portion of which will be
recorded in the first half of 2009.
In addition, a non-cash charge of approximately
US$70 million is expected to be incurred in relation
to the impairment of fixed assets associated with the
consumer lending branch network, also to be
recognised in the first half of 2009.
Employees supporting originations operations
will be evaluated for service elsewhere in HSBC’s
operations, but it is currently expected that
approximately 6,100 employees will be displaced.