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Greenberg: Quantity Over Quality in HSBC Earnings?

Monday, 2 Aug 2010 | 12:57 PM ET
HSBC
AP
HSBC

The headlines Monday trumpet HSBC's sharp improvement in second-quarter profits.

But that isn't impressing Peter Atwater, president of the Financial Insyghts, a financial services consulting firm.

Atwater's resume includes a stint as the former head of asset-backed securities at JP Morgan .

In a post on Minyanville.com Monday, and in subsequent comments to me, Atwater pointed out that:

  • The earnings that count—net interest income and trading income—were down.
  • Non-interest income was basically flat, with a gain of just one percent.

The biggest drivers were two non-cash items:

  • A $6.4 billion dollar reduction in the provision for impaired loans.
  • And a $3.4 billion dollar gain in the fair value on liabilities and derivatives.

Atwater considers a lower provision combined with gains in liabilities an odd couple of sorts. And it's not a good odd couple, when the spread between a bank's borrowing costs and Treasurys are widening, as he says would be implied by a gain in the fair value on liabilities.

That's especially true when there continues to be concerns about a deterioration in credit worldwide.

My Take: It's always quality over quantity, and when it comes to banks, the headlines about HSBC notwithstanding: We ain't out of the woods, yet.

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