HSBC posts steep profit drop!

August 4, 2008 at 8:39 AM EDT

LONDON — — HSBC Holdings PLC [HBC-N], Europe’s largest bank by market value, reported Monday its steepest fall in profit since 2001 as costs for bad U.S. mortgage loans mounted.

Net profit for the first half of the year plunged 29 per cent to $7.7-billion (U.S.) from $10.9-billion in profit in the January to June period of last year.

“The first half of 2008 saw the most difficult financial markets for several decades, marked by significant declines in profitability throughout much of our industry,” said HSBC chairman Stephen Green. “HSBC was not immune from the turmoil.”

The biggest losses came from the North American market, which HSBC depends on for a quarter of its revenue. Operations there posted a first-half loss of $2.9-billion, compared with profit of $2.4-billion a year ago.

Part of the blame lies with Illinois-based Household International Inc., a lender HSBC purchased in 2003 that elevated the British bank to the unenviable position of biggest U.S. subprime mortgage lender.

Still, HSBC has weathered the global financial storm with better than some others. In May, the bank reported that first-quarter 2008 profit was actually better than the same period last year, despite a $3.2-billion writedown on subprime mortgage assets in the United States.

If you have read this far you may be wondering why this could be important to you? The answer is quite simple really. The Canadian market is relatively small, we are about 10% of the US population. So if a bank is a having a hard time in the US market, it slowly but surely trickles down to us here in Canada. Here is an example, Accredited Home Lender’s closed their US operations last fall, at that time they left their Canadian operations open as we were still profitable. However come spring time they were forced to close their Canadian operations. This is because banks are having a harder time selling their “ABCP” to investors. If I just lost you there don’t feel bad, ABCP is asset backed commercial paper, or in other words they are selling your mortgage to investors. So because of the instability in the market investors are loosing their appetite for ABCP from sup prime lenders. So what can you do to protect your self? Ask your broker or banker how exposed they are to the US sub prime market. The rest of the players left in the Canadian market are relatively stable, for sub prime Wells Fargo is a good pick as they do not sell their ABCP on the open market, and on the “A” side First National is a good pick as they are Canada’s largest non bank mortgage lender. 

Fee free to contact me if you have any questions or concerns.

Cheers,

Pat