HSBC bracing for hit on $9 Billion ARM reset
As more customers default, the $1.7 billion that the bank already set aside for loan losses may not be enough.
A $9 billion wave of risky mortgages resetting at higher interest rates in the United States could force Europe’s biggest bank, HSBC Holdings, to absorb another big hit to profits as more customers default.
Most of HSBC’s (down $2.03 to $89.42, Charts) reset activity, which increases the chances of defaults by triggering sharply higher monthly mortgage payments, will take place in the second half of the year.
The London-based bank’s HSBC Finance Corp. set aside $1.7 billion for loan losses in the first quarter, but that may not be enough, analysts say.
This month, U.S. lenders, including JPMorgan Chase & Co. (down $1.29 to $43.98, Charts, Fortune 500) and Countrywide Financial Corp. (down $1.39 to $28.68, Charts, Fortune 500), revealed bigger-than-expected problems on loans that are considered a better risk than the ones held by HSBC.
Both companies blamed their problems on the slumping U.S. housing market.
HSBC’s U.S. mortgage operations, which cater to a riskier clientele, may face deeper problems on about $9 billion in adjustable-rate mortgages.
HSBC has tightened lending standards and made a number of management changes to minimize losses. The company also is reaching out to homeowners most likely to have problems with higher payments. HSBC and other lenders are modifying payment terms to offset a sharp rise in delinquencies and defaults.
HSBC’s first-quarter loss provision anticipated problems with the adjustable-rate mortgages, but problems in the risky subprime lending market have accelerated since then.
