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By Jason Simpkins
Soaring demand in emerging markets helped HSBC Holdings PLC (HBC) overcome a $17 billion hit on its exposure to subprime mortgage defaults and log record net profits in 2007.
HSBC reported a jump of more than 20% in net profit, which climbed to a record $19.13 billion last year as total income increased 25% to $87.60 billion. The company also raised its 2007 dividend by 11% to 90 cents.
The company said profits from its U.S. operations slumped more than 98% to $91 million as a result of surging bad-debt charges, which soared 63% to $17.24 billion. In addition to those charges, HSBC said it took a $2.1 billion write-down in its global portfolio on its exposure to asset-backed securities, leveraged loans and holdings guaranteed by bond insurers.
However, a number of strong performances in emerging markets such as Hong Kong, China, India and Latin America buoyed the company in the face of the U.S. downturn.
Annual profit rose 42% in Hong Kong, and leapt 70% in the rest of the Asia-Pacific region. The bank also reported pre-tax profit of $2.18 billion from its Latin American operations, up 26% from 2006.
"If ever proof were needed about the benefits of diversification, these numbers from HSBC fall squarely into that category," Richard Hunter, head of U.K. Equities at stockbroker Hargreaves Lansdown PLC, told Reuters.
The bank got 78% of earnings from emerging markets, up from about 50% in the first half.
"The economic slowdown and the credit outlook in the U.S. may well get worse before they get better,", company chairman, said in a statement. "With significant parts of the international financial system in developed markets still in difficulties, HSBC’s emphasis on faster-growing emerging markets means that we are better positioned than many of our competitors."
Moving Out of the U.S. Market
While successful operations in emerging markets bolstered the HBSC’s bottom line, the company is still far from clearing the prickly subprime thicket.
Activist investor Knight Vinke is pushing HSBC to dispose of HSBC Housing Corporation (HFC), the company’s U.S. lending arm, MarketWatch recently reported.
"This is clearly not a business which HSBC should own in the future, regardless of what management says, and the financial costs of downsizing it appear not yet to have been properly taken into account by the market," Knight Vinke said.
HSBC bought HFC in 2003 when the company was known as Household International, for $15.5 billion. The company lent directly to customers with subprime credit, the contingent of borrowers at the very center of the U.S. housing disaster and resulting credit crisis.
Knight successfully lobbied HSBC to jettison its French regional banking subsidiaries, which included 400 branches, for $3.2 billion last week.
HSBC has already cut 6,000 jobs in the United States, and reduced the number of active branches to 400 from 1,000.
Knight and others would like the bank to invest more in emerging markets where HSBC has had so much success. But such a move could easily backfire, as many analysts expect that U.S. turmoil will eventually catch up with emerging markets.
HSBC runs the risk of upping its exposure to those markets just before their economies lose traction. Such a mistake would be eerily similar to the HFC miscalculation made five years ago.
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