HSBC continued the restructuring of its US mortgage business, which has suffered heavy losses on subprime loans, by announcing the closure of its wholesale lending arm with the loss of 750 jobs.
HSBC, which is under pressure from activist shareholder Eric Knight to review its strategy, said the move reflected the strategy of focusing on providing mortgages through its 1,300 consumer lending branches in the US.
These loans, which HSBC holds on its own books, have better delinquency rates than the industry average.
"Today's market requires a strong and flexible business platform, and we will focus on our branch network as the primary point to provide our HSBC Finance customers with loans and mortgages," the bank said.
The move follows HSBC's decision in March to stop acquiring portfolios of loans from other mortgage lenders, which led to heavy losses after delinquencies on blocks of subprime mortgages.
The wholesale lending arm, called Decision One, originated non-prime loans through brokers which it then securitised. But since the credit squeeze in the summer investor demand for such securities has dried up. It has warehoused loans of $349m on its books.
Michael Geoghegan, HSBC's chief executive, said the unit was a small part of its US business. The closure will result in the loss of 750 jobs in South Carolina and Arizona, adding to the thousands of job cuts already announced by the US mortgage industry. There will be an after-tax charge of $65m for restructuring costs.
HSBC to close subprime unit
HSBC Holdings Plc , Europe's biggest bank, said on Friday that it would close its U.S. subprime mortgage unit, cutting 750 jobs and taking $945 million in charges and write-downs, because the business is no longer sustainable.
For London-based HSBC, which is under pressure from activist investors to shake up its corporate governance, it was the latest blow from the meltdown in the U.S. market for loans to home buyers with poor credit histories.
HSBC Finance, the U.S. consumer finance arm of HSBC, said the closure of Decision One Mortgage would result in about 750 people losing their jobs. Decision One has operations in Fort Mill, South Carolina, Phoenix, Arizona and Charlotte, North Carolina.
It's no longer sustainable and not the right place to allocate capital in the future," said Michael Geoghegan, group chief executive at HSBC Holdings.
Dozens of U.S. subprime lenders have curtailed operations, closed down or filed for bankruptcy protection. The subprime crisis has roiled the U.S. housing industry and played a central role in nearly 90,000 job cuts.
HSBC Finance will record an impairment charge of about $880 million, reflecting a write-down of Decision One assets on its books. It also will incur about $65 million in after-tax charges for restructuring that includes employee termination benefits and facility closures.
HSBC acquired Decision One when it bought Household International Inc. in 2003 for $14 billion. Decision One is a small part of HSBC's U.S. operations, which include auto lending and credit cards.
HSBC, the world's fourth biggest bank, with a market value of more than $200 billion, has been criticized for the underperformance of its share price in the last five years and its purchase of Household, which has exposed it to the U.S. subprime mortgage crisis.
HSBC's charge for bad debts was $6.35 billion in the first half of the year, up 63 per cent from $3.89 billion in the same period last year as it continued to suffer from past loans to the hard hit U.S. subprime mortgage sector.
This year, HSBC Finance got new leadership, which quickly put together a team to examine and monitor credit risk under Chief Executive Brendan McDonagh.
HSBC Finance has closed two of its three channels for subprime mortgage lending. McDonagh told Reuters in an interview that the company will continue to originate subprime loans through its network of more than 1,350 branches.
"Historically, loans originated in branch offices generally perform better," McDonagh said in a telephone interview. "You are in direct control of the relationship, you underwrite on a one-to-one basis."
Before Friday's announcement, Decision One restructured its operations as defaults on risky subprime loans to people with weak credit escalated. The unit centralized loan processing and underwriting and reduced the number of operating centers to two from 17.
Decision One relied on a network of independent mortgage brokers to find borrowers and to submit loan applications, a model that has been curtailed or discontinued by other lenders burned by lax underwriting standards and outright fraud.
In the first six months of this year, HSBC sold about $371 million in loans originated by Decision One to its U.S. bank and recorded a pretax loss of $400,000 from those deals.
In contrast, HSBC booked a $17 million pretax gain on Decision One loan sales during the fourth quarter of 2006, its financial statements show.
Decision One disclosed its plans in a management conference call with its staff that earlier on Friday Reuters reported would take place.