Freddy Mac’s official statistics
is facing heavy weather in its US subprime operations:
The impact of slowing house price growth is being reflected in accelerated
delinquency trends across the US sub-prime mortgage market, particularly in
the more recent loans, as the absence of equity appreciation is reducing refinancing
options. Slower prepayment speeds are also highlighting the likely impact
on delinquency of higher contractual payment obligations as adjustable rate
mortgages reset over the next few years from their original lower rates.
As a result, says HSBC, its total provision for the year 2006 is likely to
exceed by 20% the $8.8 billion consensus estimate. Says Peter
Thal Larsen in the FT:
The worsening picture in the US helped push HSBC shares, which were the worst
performers in the UK financial services sector last year, to a 9-month low
on Thursday. By mid-morning they were down 231⁄2p at 907p, the lowest
level since last May.
Concerns about HSBC’s US mortgage book have triggered a sharp fall in
the bank’s share price, largely because the problems raised questions
about the bank’s ability to price correctly loans in the sub-prime lending
at Breaking Views also piles on, but he has a few more numbers:
The bank has just added an extra $1.8bn in 2006 provisions for Household,
now HSBC Finance. That will drag the division’s pre-tax profits to about $2.3bn,
40% below previous estimates. It’s a big enough hit to deprive the whole group
of half its profits growth.
The bad news will certainly revive doubts about whether Household was worth
buying, even at the cut-price $14.2bn HSBC paid in 2003.
There seems to be $300 million missing somewhere, since profits seem to be
only $1.5 billion lower than expected, by these calculations. But putting that
to one side, can I just point out that HSBC’s subprime mortgage business is
still on track to make well over $2 billion in 2006? I appreciate that
2007 might be worse, with ARMs resetting and all that. But I have a feeling
that the subprime business is never going to lose money for HSBC –
the worst that happens is that its profits will be less spectacular than they
might have hoped.
Once again, there’s nothing indicating a massive credit crunch. I see increased
provisioning much the same way as I see wider MBS spreads: as an indication
that the market’s own cushioning systems are working pretty well.