HSBC suffers 28% profits fall
HSBC has reported a 28% fall in pre-tax profits as the bank took a £3.4 billion hit from investments linked to the credit crunch.
The bank only made a profit of £5.1 billion in the first six months of the year, compared to the £7.1 billion seen in the same period last year. Although in-line with analysts’ expectations, the bank’s North American arm suffered a £1.4 billion loss over the period, while losses linked to risky sub-prime mortgages totalled £3.4 billion.
HSBC, Europe’s largest bank has been one of the most exposed to investments that have collapsed in value since the credit crunch took hold last year. The bank announced that it has set aside a further £5 billion to guard against further losses.
“The first half of the year saw the most difficult financial markets for several decades,” said Stephen Green, chairman of the bank. “HSBC is not immune from the turmoil. Ultimately the real economy will recover from this crisis, although it may get worse before it gets better.”
However, although the bank is expecting growth in emerging markets to slow, it is still pressing ahead with the purchase of 51% of the Korea Exchange Bank (KEB) from US private equity fund Lone Star. The £3.3 billion sale has been stuck in limbo because of an ongoing probe by South Korean regulators into Lone Star’s purchase of KEB in 2003.
Today’s trading update by HSBC will be followed by Barclays and the Royal Bank of Scotland later this week. Barclays is forecast to reveal a 35% drop in profits to £2.6 billion, while according to recent reports the Royal Bank of Scotland (RBS) could announce a hit of nearly £6 billion on investments linked to the credit crunch - which would be the biggest loss in British banking history.
Should this happen, chief executive of RBS Sir Fred Goodwin and chairman Sir Tom McKillop are sure to face the wrath of shareholders, many of whom bought extra shares in the bank after it announced a £12 billion rights issue two months ago.
All sub-prime financial products are aimed at borrowers with patchy credit histories and the term typically refers to mortgage candidates, though any form of credit offered to people who have had problems with debt repayment is classed as sub-prime. Depending on the lender’s own criteria, sub-prime can apply to borrowers who have missed a few credit card or loan repayments to people who have major debt problems and county court judgments (CCJ) against their name. To reflect the extra risk in lending to people who have struggled in the past, rates on sub-prime deals are typically higher than for “prime” borrowers.
A way a company can raise capital by creating new shares and invite existing shareholders in the company to buy these additional shares in proportion to their existing holding to avoid a dilution of value, which means keeping a proportionate ownership in the expanded company, so that (for example) a 10% stake before the rights issue remains a 10% stake after it. As an added incentive, the new shares are usually offered below the market price of the existing shares, which are normally a tradeable security (a type of short-dated warrant) and this allows shareholders who do not wish to purchase new shares to sell the rights to someone who does.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.