Q3 2007 HSBC Finance Corporation, HSBC USA Inc. Earnings & Trading Update Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Welcome to today's conference call. Let me hand you over to Douglas Flint, HSBC Group Finance Director. Please go ahead sir.

DOUGLAS FLINT, GROUP FINANCE DIRECTOR, HSBC: Thank you very much and welcome to all on the call. Good morning, good afternoon and good evening depending on where you are.

With me in London are Michael Geoghegan, our Group Chief Executive, and Stuart Gulliver, the Chief Executive of CIBM. Brendan McDonagh is up very early in Chicago, the Chief Executive of HSBC Finance Corporation and he is also on the call.

Before we start, can I just draw your attention to the traditional forward-looking statement disclaimer and we'll take that as read. At this stage Mike's going to comment on our headline performance and then Stuart's going to update on CIBM. Then I'll make a couple of observations on capital. And then we'll be very pleased to take your questions. Mike?

MICHAEL GEOGHEGAN, GROUP CHIEF EXECUTIVE, HSBC HOLDINGS PLC: Thanks Douglas and welcome to you all, wherever you are, morning, noon or night. As you know, it's been a pretty quiet time in financial services so I think this will be pretty easy this review of our trading statement and obviously our 10-Q filing and 8-Q.

Let me take you through the main points I would like to make. The fact that our profit before tax is ahead of the comparable prior year quarter and ahead of the prior year to date, we take great comfort in and it reflects that our strategy of diversification is very much working and is a strength to the HSBC Group.

The emerging market business again is strong across Asia, the Middle East and most of Latin America. Obviously the U.S. economy remains strong and however we have our issues in the housing market and no doubt we'll take lots of questions on that, as we go through this presentation today.

The customer groups of commercial banking and private banking are ahead -- ahead -- PFS is ahead in Asia, the Middle East and Europe but obviously is adversely affected in the U.S.

Within the issues in the U.S. we're taking the actions I said we would take. I said it would take us two to three years to work through this. We said we would take whatever steps were necessary and we've been doing that. We've restricted the product. We've tightened the underwriting. We've increased the collections activity. We've closed D1. We've closed or announced the closure of certain branches and we're focusing on both the revenue reduction and the cost ramifications.

We've a loan impairment charge of $3.4b. It speaks for itself. But remember, this business has an underlying level of loan impairment as part of its business model. So you need to look at the loan impairment for the quarter which is $1.4b higher than it was extrapolated from the first half trends.

The CIBM strategy is well on track and I know Stuart's with me and he will cover that in detail in a moment. And Douglas will talk about capitalization. We're clearly strongly capitalized. We're liquid and we're diversified. These are our fundamentals and we won't sway from them. I think in the past people have talked about have we had too much capital? I think the market's answered that and we're seeing a wave of funds coming to us because of our strong capital base. And whilst the markets remain uncertain, our position stays strong. Clearly we'll have lots of more points to make with your questions but I'd like now to hand you over to Stuart. Stuart?

STUART GULLIVER, HEAD OF CIBM AND GLOBAL INVESTMENT, HSBC: Thanks Mike. Yes, as you said -- Mike said, I think the CIBM strategy actually is proving that it's working well and to just rehearse that again, the emerging market-led and finance focus. For the third quarter of 2007 we produced a profit before tax broadly in line with the third quarter of 2006. That's after taking write-downs of $925m as a result of difficult market conditions in credit space which you're all aware of. And those write-downs were clearly therefore offset by record performances in other parts of CIBM business, particularly foreign exchange payment, cash management, security services, the group investment businesses and in geographical terms we've had very strong performance from the emerging markets generally.

I think it's also true to say that we're comfortable with our exposures in some of the areas that our competitors have flagged problems in since the end of the third quarter. Now I'll hand you back over to Douglas.

DOUGLAS FLINT: If I can just make three or four small points on the financials. First, in terms of jaws which I know many focus on, in the third quarter on an underlying basis our revenue growth was a little bit faster than it was in the first half of the year. Our cost growth was a little bit slower. You'll note that we make reference to the fact that because of credit spread widening in the third quarter that portion of our own debt that we mark to market as part of the hedging model that we have while the interest rate legs pretty much near (inaudible). We tend -- we have the impact of our own credit spread going through earnings. Up until the end of 2006 this credit spread has tightened. That was a charge to our earnings in the third quarter. Everybody's credit spread widened and we have the benefit of a bit over a billion dollars of credit to the P&L.

To be clear, that's not allocated to any customer group so that's not in the CIBM numbers. It will be disclosed in the second half of the year within what is called 'other'. Again, to be clear, in terms of what's in the results and what's not, we have not recognized any gain yet in the year, in relation to the sale of this building.

And finally in capital, as Mike says we remain strong and indeed our tier one and total capital ratios are essentially in line with those that we disclosed at the end of June. At this point if I pass back to Mike and we'll be very happy to take your questions.

MICHAEL GEOGHEGAN: Thanks Douglas. Time for the questions. Can I ask the telephone operator to provide the dialing instructions if you have a question that you would like to ask.

OPERATOR: Thank you. (OPERATOR INSTRUCTIONS). Okay. Our first question at this point comes from the line of Alistair Ryan. Please go ahead sir.

ALISTAIR RYAN, ANALYST, UBS: Thanks. Good morning. Three questions I guess. First on the credit card shift in finance, whether that's likely to be an indicator that you might be able to move that business into the bank at some point, whether it's part of the charging structure so it's something that might be fundable within the banking subsidiaries at HSBC?

And then secondly, it's some time since you described Hong Kong as excellent. Clearly you've benefited very strongly from the IPO stock market frenzy that's been going on. Whether that's a disproportionate part of the revenue out-performance, you're clearly delivering or whether it's very broadly spread across the business and therefore in a more normal stock market whether we can see the sort of revenue pace we're currently enjoying continuing? Thanks.

MICHAEL GEOGHEGAN: Alistair. Thanks for your question. Part of the issues on the cards, clearly we look at what cards we take into the bank. We generally take what we call our retail cards. These are our principal cards in the name of some of our clients, and we'll continue to do that. Clearly we're going to have a mix of business in our U.S. bank between commercial banking, PFS and CIBM. But we always look at that and see what we can take. And hence maximize our funding capability.

Yes. You're right. The results in Hong Kong were excellent, are excellent and continue to be going strong. And across the board they are -- obviously we have benefited from the IPO. I wouldn't call it a frenzy, but we have benefited from the IPO activity. But more in line with our strategy it is a wealth management business in PFS that continues to go strongly. And we're also seeing an improvement in real estate prices etc. so there is activity there. But outside of PFS we're also seeing a strong commercial banking business, good FX business, good trading business in CIBM. So it's a generally very much a booming market at the current time.

Next question please.

OPERATOR: The following question comes from the line of Sunil Garg. Please go ahead.

SUNIL GARG, ANALYST, JP MORGAN: Hi. This is Sunil Garg from JP Morgan in Hong Kong. I have a couple of factual questions, a couple of guidance questions. Could you confirm that, excluding the $606m fair value gain the revenue performance on a sequential basis would be essentially flat?

And the other factual question is when you talk about doubling of profits from your contribution in the China investments in BoCom and Ping An, does that include the valuation gains that you included in the second quarter?

And just in terms of the U.S. business itself, we've been hearing for the last nine months that the branch channel is good quality, HSBC U.S.A. book is good quality. We've seen a deterioration across the book. Could you talk a little bit more about how you perceive that book going forward? Thanks.

MICHAEL GEOGHEGAN: Right, I'll ask Douglas to take questions one and two, that's the $660m and the China, and I will take the U.S. question. Douglas?

DOUGLAS FLINT: Well let me answer this question slightly differently than you're expecting. If you take out the fair value gains from revenue you still have underlying revenue growth that is accelerated to the first half of the year. So that wasn't -- that wasn't the driver of acceleration. If you take that out underlying revenue growth is still stronger than the first half of the year.

The associates line does not include the dilution gains that we recognized in the first half. It's purely our share of the earnings reflected in our three associates, Industrial Bank, Bank of Communications and Ping An.

MICHAEL GEOGHEGAN: Turning to the U.S. mortgage books, both in the branch network and the correspondent channel, the branch network credit continues to be better than the correspondent channel and that's what you'd expect as we underwrite each person individually.

But the reality is that the real estate values in the U.S. continue to fall, particularly in California, in Florida, some of the rough belt states and in Boston. And what is happening is people are making a choice of whether they want to continue owning their own home or moving into a rental environment. And it's hard to tell how that actually works out. It virtually goes street by street. And until the confidence comes back in real estate in the U.S. you can expect that to continue and that choice between owning and renting. But it's not as severe in the retail channel as it is in the correspondent channel. But it is a fact that is beginning to show up.

Next question please?

OPERATOR: The following question comes from the line of Tom Rayner. Please go ahead.

TOM RAYNER, ANALYST, CITIGROUP: Yes. Good morning. It's Tom Rayner from Citigroup here. Just a couple of questions please. The first one just again on the trends you're seeing in the branch channel. And quite a big step up in delinquencies Q3 on Q2. My question really is given that you were quite early to recognize the problems coming through in the mortgage services portfolio, why do you think -- you've grown balances I think on a year on year basis by about 18% in the branch channel. Why were you not maybe quicker to realize that you were going to see a similar deterioration coming through, although not as severe across your branch channel? And I suppose the same question can be made for the non-mortgage exposures as well because they've all grown, although albeit at a slower pace. That's my first question. I have a second question on mortgage services. Thanks.

MICHAEL GEOGHEGAN: Well let me just take the first question. The reality is that there is some movement between the correspondent channel and the branch channel. So some time what we do is we re-underwrite people in the correspondent channel if they fit into the branch channel profile. There is no question, in the second half of the year we have seen a deterioration. But we have also cut back a large amount of our products. We've reduced our LTVs in a number of areas. And that's one of the reasons why we're closing some of the branches. So I have to say that it is a business. You don't turn off entirely because if you did you would just kill it off altogether. We do -- we have seen some deterioration but we don't see it as severe as the correspondent side.

But I'll ask Brendan. Brendan, would you like to add anything from Chicago?

BRENDAN MCDONAGH, CEO, HSBC FINANCE CORP: Yes, only that I think we've put in a lot of the changes even into the consumer lending network probably in …