HSBC unit faces challenge of originating loans after successful portfolio cleanup - S&P

Monday, May 23, 2011

After successfully cleaning up its loan portfolio over the last few years, especially in the consumer credit segment, the Mexican banking unit of the UK's HSBC (NYSE: HBC) now faces the challenge of originating loans amid a more favorable environment, S&P analysts told BNamericas.

"At some point, HSBC Mexico's asset quality deteriorated to the point that its non-performing loan [NPL] ratio was the highest among its peer group," S&P director of financial institutions group Angélica Bala said.

The bank succeeded in improving its asset quality by reviewing its risk management policies and made it without selling bad loan portfolios, like some of its competitors did, she said.

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HSBC Mexico's NPL ratio improved to 2.7% as of end-March, from 4.2% at the same time in 2010, and is now more in line with those of its main peers.

The bank's average loan losses fell to 3.6% as of March 31, from 9.9% and 6.4% at the same time in 2009 and 2008, respectively.

"HSBC Mexico already adjusted its origination and collection policies. Its challenge now is to begin originating loans," credit analyst Alfonso Novelo said.

"Its profitability ratios are pretty marginal, and one way of improving this is by growing lending, specifically in the consumer segment," he said, adding that maintaining these new origination policies will be key for the bank to avoid falling back into the same problems.


On Monday (May 23), S&P revised its outlook on HSBC Mexico's global scale ratings to stable from negative, reflecting its expectation of improved financial performance in 2011.

"The stable outlook reflects our view that management will focus on improving the bank's efficiency and growing the loan portfolio," Novelo wrote in the report, adding that the bank's bottom line will be less pressured by new loan loss provisions as a result of better asset quality.


In early May and as part of a US$2.5bn-3.5bn cost-cutting strategy across the globe, HSBC CEO Stuart Gulliver announced that the bank would look for organic growth in its strategic markets of Brazil, Mexico and Argentina and reallocate capital from less strategic and underperforming businesses.

He also said HSBC would seek organic growth in Mexico and Brazil - which account for roughly 80% of its business in Latin America - as well as in Argentina.

The plan also considers selling assets or downsizing in other Latin American countries where results have not met expectations, such as Chile, Colombia and some Central American countries, BNamericas recently reported.

Novelo said S&P's analysts in London also think that HSBC will keep focusing on Latin American countries where it has leading positions - and that countries where it has failed to achieve a significant market presence or reverse losses could see deeper cost cutting.

But HSBC will unlikely divest these assets at a fire-sale price, as its overall profitability is not under pressure given its large, global presence, he said.

HSBC's Latin American units stood out in 1Q11, reporting a 29% year-on-year increase in pretax profits thanks to stronger lending. The region represented 11% of HSBC's US$4.91bn global pretax profits in the quarter.

To read S&P's full report, in English, go to this link

To read S&P's full report, in Spanish, go to this link