The global imbalances story is well documented. The spend thrift United States has borrowed trillions at a government and consumer level whilst cash rich economies in Asia and the Middle East have been more than willing to fund the spending spree. In turn the rest of the world has benefited from U.S. consumer spending helping to drive exports from the cash rich nations running big trade surpluses.
On Monday HSBC reports earnings and I would argue that no other company in the world better highlights the global imbalances story than what the HSBC marketing team tells us is the ‘world’s local bank’.
On March 3 HSBC unveiled a 10 percent jump in profit. Not a bad return given the problems the rest of the banking industry has faced, but if you break that down it is clear that growth in Asia is compensating for the big problems in the U.S. Growth in Hong Kong topped 40 percent, the rest of Asia 70 percent, but bad debts totaled $17.2 billion.
The ‘American Nightmare’
$12.2 billion of those losses came from the U.S. where HSBC bought subprime lender Household five years ago for $14.8 billion. Activist Investor Knight Vinke Asset Management has been pushing for HSBC chairman Stephen Green to walk away or ring fence what it describes as an ‘American nightmare’ but Green is adamant he will not.
Green maintains that commitments to bondholders makes this impossible but the sale of Household at this time would be very difficult. Buying the lender in 2002 and selling in 2008 would be bad business even if a buyer could be found, and HSBC is simply going to have to get on with trying to limit losses.
The UK Opportunity
HSBC is having a very different experience with the credit crunch in the UK. Rather than trying to limit losses and cut back on lending, Chairman Stephen Green is trying to expand. Whilst rivals and smaller building societies have pulled back from mortgage lending, HSBC has offered to match mortgage rates for those who need to refinance and plans to make big market-share gains from the most credit worthy customers. The strategy could be highly profitable if the UK housing market does not fall off a cliff and means HSBC will not have to acquire the likes of Alliance & Leicester to gain market share.
HSBC recently got out of France by selling its branches for $3.2 billion and plans to focus on investments in emerging markets. HSBC Finance Director Douglas Flint is looking at other non-core businesses in Europe and the U.S. that could be sold. If and when HSBC completes the $6.3 billion takeover of Korean Exchange Bank expect the next HSBC deal to be done in a member of the so-called BRIC countries.
HSBC will stay long Asia and Latin America and short Europe and the U.S. for sometime to come. Whether that is the best way to play the global imbalance story is for you to decide.