HSBC retreats from US, regrets Household deal

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(Agencies)
Updated: 2009-03-02 20:14

LONDON -- HSBC is closing most of its US consumer finance business as it seeks to put an end to its troubled purchase of Household of six years ago by writing off most of the value of the sub-prime business.

"With the benefit of hindsight, this is an acquisition we wish we had not undertaken," HSBC Chairman Stephen Green said in a statement on Monday.

Europe's biggest bank will take a $10.6 billion goodwill charge for its US business and run off most of its loans.

The move will leave HSBC's main focus in the world's biggest economy on corporate and commercial business, private and premier banking, and its credit card business.

HSBC's US bad debts jumped to $16.3 billion last year as the economy soured, adding to billions lost in recent years caused by Household, which was renamed HSBC Finance (HFC).

The latest problems prompted the bank to launch a 12.5 billion pound rights issue on Monday.

Household was bought for $14.8 billion in 2003, in HSBC's biggest ever acquisition, led by former chairman John Bond.

He was criticised at the time for exposing the traditionally conservative lender to US sub-prime borrowers.

As the US economy deteriorated from 2006, HSBC began to pull back from US sub-prime borrowers and stopped originating home loans and auto financing.

It is now going a step further, and will write no further US consumer finance business through HFC and Beneficial brands, and close most of its 800 branches. About 6,100 staff will lose their jobs.

"It is clear that the sub-prime mortgage refinance model no longer operates effectively," it said.

The bank will run off its outstanding $62 billion of real estate-secured and unsecured US loan portfolio.

"We expect the legacy of high-risk loans to take years to wind down," said Sandy Chen, analyst at Panmure.

Activist investor Knight Vinke Asset Management has urged HSBC to cut its losses on HFC throughout the last two years.

It said last year that if HSBC had accounted for HFC's assets as conservatively as other banks its losses would have been over $50 billion, and HFC was unable to support its debt without help from its parent.

It wanted HSBC to walk away from the business and bondholders, but HSBC rejected that suggestion as "unthinkable and irresponsible".

HSBC said on Monday US bad debts will "remain elevated" and operating losses in the business will continue this year and in 2010.

"We're recognising reality," HSBC Finance Director Douglas Flint told reporters on a conference call. "In 2003 when we acquired Household neither we nor anyone foresaw recession and depression in the United States six years forward."