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HSBC’s caution is to its credit

The point of view of the economic and financial agency Breakingviews.com.

The example of HSBC shows that it is not necessarily absurd to advance step by step. In the first half of 2009, the annualized financial rate of return of the international bank was 6%, which may seem ridiculous compared to the performance four times more impressive achieved by its prestigious competitors. In reality, this result illustrates all a caution that is to his credit. It also denies the signs of improvement observed in its difficult markets.

HSBC has an average pre-tax profit of $ 5 billion (€ 3.5 billion). It is less than half its level of the previous year and would have been much lower if brokerage incomes had not been increased tenfold by the general upturn in the market. The investments and markets division earned $ 4.5 billion, seven times more than in the same period in 2008. This earnings profile is unusual for HSBC, which, like its rivals very active in brokerage, not hope to see this kind of bargain come regularly.

Impairment losses for bad debts accounted for 5.4% of the $ 400 billion of outstanding consumer loans, which had already reached 4.1% a year earlier. In these circumstances, we understand why investors in the banking sector began to monitor ordinary credit activities rather than structured finance.

The bank is affected by the deterioration of borrowers’ solvency.

About half of the companies it has lent to in Hong Kong are affected by the failure of Chinese exports.

If you look at all the credits, the numbers are not as bad as you might think. In the United States, the “bête noire” of HSBC, the absolute value of depreciation has fallen. It, therefore, seems that most of the losses have been suffered in this area. In this regard, HSBC states that the correlation between unemployment and default has been lower than expected.

The financial equilibrium of the bank improved during this first semester. Outstanding loans account for just under 80% of deposits, compared with 129% at Barclays. It will be necessary to devote oneself to finding investments low risky and sufficiently remunerative but the abundance of deposits never hurts.

To be cautious and to ensure that the structure of the accounts remains healthy may not be HSBC’s best way to ensure the shareholder’s profitability is staggering. On the other hand, the bank is likely to confirm its modest results over time. Its sisters, who have only enjoyed the ephemeral effervescence of the markets to earn comfortable brokerage commissions, cannot promise as much.