HSBC Holdings announced further cuts in its U.S. consumer finance business and said a steep loss from North American operations again undermined strong performance elsewhere in the first half.
The London company said Monday that it started shuttering HSBC Finance Corp.'s auto finance business last month, and that it plans to wind down about 80% of the unit's roughly $13 billion car loan portfolio over three years. HSBC also reduced the Mettawa, Ill., unit's consumer finance branch network by another 100 offices, to 900. The company cut about 400 last year.
Michael Geoghegan, HSBC's chief executive, called its consumer results "a tale of two businesses," on a conference call; first-half pretax profits from outside the United States rose 33% from a year earlier, to $4.5 billion.
But the company said it still plans to restore the health of HSBC Finance, which has been pared back to primarily selling home loans through its branch network and issuing credit cards.
"We do believe that you've got to work your way through the difficult times and stabilize the business, and that there is real value in the consumer lending business," Stephen Green, HSBC's chairman, said on the call.
That value will become apparent again "as the U.S. market normalizes, and it will, of course, normalize," he said. "I think it's beyond question."
Geoghegan said HSBC remains "resolute in fixing our business" in North America. Since last year the activist shareholder Knight Vinke Asset Management has pressured HSBC to take more dramatic action on HSBC Finance, including a sale or spinoff.
HSBC Finance will continue to offer auto loans through its branches until it lines up a third-party provider. In a press release, Geoghegan said his company decided to discontinue originations because it "does not have sufficient critical mass or the pricing power to provide an acceptable return."
During the call, he said the business' credit quality is "actually quite strong," though Douglas Flint, HSBC's director of finance, cited increased losses on repossessed vehicles the result of decreased demand for trucks and sport utility vehicles due to rising fuel prices as a reason for the exit.
The percentage of auto loans in HSBC Finance's portfolio that were two or more payments past due increased 60 basis points from the first quarter and 50 percentage points from a year earlier, to 3.5% in the second quarter.
Geoghegan said that the percentage of mortgages originated by third parties for HSBC Finance with two or more missed payments has "stabilized over the last three quarters." The company shuttered the third-party channel last year and is allowing the assets to run off.
The portfolio shrank 7.4% from the first quarter and 24.3% from a year earlier, to $31.4 billion. The delinquency rate increased 50 basis points from the first quarter and 680 basis points from a year earlier, to 13%.
The unit's retail mortgage portfolio shrank 1.8% from the first quarter but grew 0.4% from a year earlier, to $49 billion. Its delinquency rate increased 70 basis points from the first quarter and 340 basis points from a year earlier, to 5.7%.
"We continue to tighten credit standards, and the portfolio size has leveled off," Geoghegan said. However, "we are not calling the bottom of the market" for either mortgage portfolio.
HSBC still plans to reduce HSBC Finance's balance sheet by another third, to about $100 billion, he said.
The parent's first-half net income fell 27.9% from the first half of last year and 7.1% from the second half, to $8.3 billion. Its charge for loan impairments and credit provisions increased 58.5% from the first half of last year but fell 7.7% from the second half, to $10.1 billion.
Its pretax loss in North America increased 23.4% from the second half, to $2.9 billion. For the first half of last year, the North American operations posted a pretax profit of $2.4 billion.
"In developed markets, we are focusing both on businesses with international customers, where emerging markets connectivity is critical, and on businesses with local customers, where our global scale means we can create efficiencies for them and us," Geoghegan said in the press release. One element of the efficiency effort involves unifying HSBC's credit card business under a single platform. It said it had done so for about three quarters of its portfolio. This year it will undertake conversions in India and Indonesia.