HSBC Holdings plc warned investors that slowing volume and worsening performance with its subprime and second mortgages forced it to set aside more money for bad loans.
The London-based company announced on Wednesday it is setting aside $1.76 billion, or 20 percent more than the consensus estimates of $8.8 billion, for loan impairment charges and other credit risk to be accounted for at the end of 2006 for mortgage services operations.
“The impact of slowing house price growth is being reflected in accelerated delinquency trends across the U.S. subprime mortgage market, particularly in the more recent loans, as the absence of equity appreciation is reducing refinancing options,” HSBC said in the announcement. “Slower prepayment speeds are also highlighting the likely impact on delinquency of higher contractual payment obligations as adjustable rate mortgages reset over the next few years from their original lower rates.
“We have taken account of the most recent trends in delinquency and loss severity and projected the probable effects of resetting interest rates on adjustable rate mortgages, in particular in respect of second lien mortgages.”
The warning from comes ahead of the group’s 2006 results announcement, due March 5, and follows a trading statement issued last December regarding HSBC Finance Corp.
The December statement cited that challenges continued in the U.S. mortgage services operations, particularly in second lien and stated income products purchased in 2005 and 2006.
“Tighter underwriting and pricing criteria have led to a significant reduction in the volume of higher risk mortgages purchased,” the statement read. “Outstanding balances within this operation were flat at the end of the third quarter compared to the position at the half year. This slowdown in growth of the mortgage services portfolio will of itself lead to higher reported delinquency percentages as the portfolio seasons and will constrain revenue growth.”
