HSBC understating loan losses by $30 bn Knight

      Vinke

By Neil Behrmann

May 2008:- Knight Vinke Asset Management, the activist hedge fund firm,, contends that HSBC’s first quarter US$3.2 billion sub prime write-off is by a long way inadequate. If HSBC accounted for the loans at their market value, the write-off should be $30 billion, Knight Vinke claims.

Making the write-down would have pushed HSBC into a $5 billion loss last year instead of a $24 billion pre-tax profit, adds Knight Vinke. The firm claims that HSBC will have to take another $30 billion of impairments on its US loans to get them back to fair value. HSBC is a lender in the US through HSBC Finance Corporation (HFC). Other problems at HFC include the need to refinance at least $80 billion of its own loans in the next 30 months and a potential $10 billion goodwill impairment, states Knight Vinke.

HSBC focused attention on the US subprime disaster when it was the first major bank to publish write-downs of its low grade US mortgage portfolio in February 2007. The publicity surrounding the write-down of the international bank precipitated investor concerns leading to the collapse of Bear Stearns credit and other hedge funds. This, in turn, led to a vicious circle of the price slump of collateralized debt obligations and a variety of asset backed securities, causing the US and European credit crunch.

Knight Vinke’s worries about potential overvaluation of HSBC’s mortgage securities raises fears about loan portfolio valuations of other banks and the recent financial sector stock rally.

                               HSBC Bear Market Rally?

Michael Geoghegan, HSBC chief executive, has said that the problematic mortgage servicing portfolio in the US is still $32 billion, although it has fallen from $49 billion in the past year. The bank is predicting a US recession and notes that increasing numbers of Americans defaulted on home and personal loans in the first quarter. HSBC predicted that US real estate prices would continue to fall into 2009.

Douglas Flint, HSBC's finance director, responded that Knight Vinke's claims were based on a misunderstanding of accounting rules.
“Customer loans are accounted for differently to trading assets,” said Flint. “We wouldn't be permitted by current rules to account for our loan book in the way Knight Vinke suggests we should.”

The bank says that due to strong growth in Asia and other emerging markets, profits were higher in first quarter 2008 compared with 2007. The pre-trading statement didn’t specify actual results.

Knight Vinke originally asked HSBC to sell HFC when the subprime problems surfaced early 2007. It also believes that HSBC should appoint independent financial advisers to review HFC independently.

 

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