HSBC Group – Recent Events

Sub-prime Exposure

On 7 February 2007, HSBC Group issued a Trading Update Statement. The statement, referred to by many as a “Profit Warning”, commented on the challenges of the Mortgage Services operations on HSBC Finance Corporation. The statement explained that the slowing house price growth was being reflected in the accelerated delinquency trends across the US sub-prime mortgage market.  As a result the Group expected to increase impairment and other credit risk provisions for 2006 to a level of 20% above consensus estimates.

In the Financial Statements for 2006, issued in March 2007, the Group confirmed that the impairment charges for the US operations rose by US$ 1.880 billion to US$ 6.796 billion.

In the Financial Statements for 2007, issued in March 2008, the Group confirmed that the impairment charges for the US operation had risen by US$ 5.360 billion to US$ 12.156 billion, resulting in a profit for the year of only US$ 91 million for the entire US operations (US$ 4.668 billion in 2006).

HSBC acquired Household Finance Corporation for US$ 14 billion in 2003.

Activist Investor - Knight Vinke Asset Management LLC (KVAM)

Following on from a meeting in June 2007 with HSBC Group’s Finance Director, KVAM wrote to the HSBC Board of Directors in September 2007. The letter highlighted KVAM’s concern over strategy, asset allocation, governance, share price performance and HSBC’s sub-prime exposure. It stated a request for an independent strategic review.

In November 2007, KVAM restated its six key areas of concern:

1 Perennial stock market underperformance compared to peers.

2 Pursuit of geographic diversification instead of comparative advantage.

3 Lack of scale in key markets – UK, USA and France.

4 Good position in Hong Kong, but franchise at risk due to lack of credible China strategy.

5 Lack of credible CIBM strategy – trading assets now tie up a third of the group  balance sheet.

6 Strategy unchallenged due to poor Board structure and lack of economic incentives  for senior executives to do so. 

HSBC rigorously defended itself on all points raised by KMAM including that they had already reviewed their strategy and therefore their was no need for an independent review.