HSBC paid the price yesterday for its £10bn acquisition of Household International, the US loans business for people with poor credit histories, when it more than tripled its bad debt charge to $2.37bn (£1.47bn) in the six months to 30 June.
Household, which HSBC swallowed in March, accounted for $1.5bn of the charge for bad and doubtful debts. Provisions have been made on the basis that 5.5 per cent of advances turn sour, so for every £100 loaned, the bank expects to lose just over £5.
In comparison, only 0.75 per cent of loans in its personal financial services business are not paid back and in commercial banking, traditionally a risky area, only 0.2 per cent did not perform in the first six months.
Douglas Flint, finance director of HSBC, said that Household, which has 50 million customers, had "broadly performed in line with expectations". Household is on track to deliver $200m of synergies every year within two years and contributed $649m to HSBC's pre-tax profit in the first half.
Overall profits rose 26 per cent to $6.88bn, ahead of expectations. Once acquisitions and other exceptional items were stripped out, profits were up 4 per cent. HSBC's shares rose 13p to 777.5p.
The lender, which is one of the UK's "Big Four" and the second largest bank in the world after Citigroup, said personal financial services' profits rose 18 per cent to $2.1bn. That included its UK mortgages, savings and credit cards arm.
Stephen Green, who took over as chief executive of HSBC in May, said he was "cautious" about prospects for a revival in the global economy, but added that he believed "the worst was behind us".
He dampened concerns about the growing debt mountain private individuals are taking on, saying: "No one believes borrowing will continue at the level it has been doing, but we don't see any alarm bells ringing in our business."
HSBC said it would expand Household to new markets, in developing economies and mature ones. It said it would target opportunities to lend money and offer other banking services to immigrant populations who find it difficult to qualify for accounts with mainstream banks.
"This is a market which is going to grow and grow, and will offer attractive opportunities for the next few years," Mr Green said. He highlighted Mexico, where HSBC recently bought the fifth largest bank, Bital, and France, which has a large immigrant population, as areas where Household could be introduced.
"We want to exploit opportunities from changing demographics. Often the significantly under-banked are younger people, while elsewhere the population is ageing, and there is an obvious need for service to be more to do with retirement provision," Mr Green said.
The Household deal has been controversial for HSBC. Businesses which lend money to the "sub prime" market are often criticised for charging customers very high rates of interest. Household last year agreed to pay $484m to settle charges with 50 US states after it was alleged to have misled borrowers about loan terms.
HSBC stressed Household took a "responsible" attitude to how much it lent customers and said it planned to more than double to about $150m the amount spent at Household on compliance, monitoring and training in 2003.
Sir John Bond, chairman of the bank, had to endure a stormy annual meeting in May when shareholders objected to the $37m contract which the bank agreed to pay Household's chief executive, William Aldinger, over three years.
HSBC's total bad debt provisions for the past six months also reflected problems with "a few relationships with telecoms and energy companies", Mr Flint said.
Richard Staite, at SG Securities, said: "They have had a good performance at Household and Bital and the management has shown it is cautious and able to manage the group well. But investors want to see the underlying performance pick up with stronger organic growth."Reuse content