Hsbc Holdings Plc · LSE:HSBA
Hsbc — HSBC Finance — Debt Investor Presentation (March 2008)
67 slides from Hsbc's debt investor presentation, Mar 12, 2008
Slide 1: HSBC Finance Corporation Investor Roadshow
HSBC Finance Corporation Investor Roadshow 12 March 2008
Slide 2: Disclosure statements
Investor Presentation Disclosure statements This presentation, including the accompanying slides and subsequent discussion, contains certain forward-looking information with respect to the financial condition, results of operations and business of HSBC Holdings plc and HSBC Finance Corporation. This
Slide 3: Table of contents
Investor Presentation Table of contents Year end results and communications …….…..… Brendan McDonagh, Niall Booker & Iain Mackay Business overview Consumer and Mortgage Lending ...………........................................................... Tom Detelich Card and Retail Services, Group Cards …….………
Slide 4: Financial overview: Year end results and communications
Financial overview Year end results and communications Brendan McDonagh Niall Booker & Iain Mackay
Slide 5: Key developments
Year end results and communications Key developments • Increased delinquencies at December 2007 compared with • Continued outreach and assistance to our mortgage June 2007 and December 2006 across all domestic portfolios customers as a result of the weak housing and mortgage industry, rising • Conta
Slide 6: HSBC Finance Corporation – financial results
Year end results and communications HSBC Finance Corporation – financial results % Better/(Worse) $m H2 2006 H1 2007 H2 2007 versus H2 2006 versus H1 2007 Net operating income before loan 7,793 8,227 9,311 19.5% 13.2% impairment charges (1) Loan impairment and (4,772) (4,073) (8,107) (69.9%) (99.0%)
Slide 7: HSBC Finance Corporation – YTD financial results
Year end results and communications HSBC Finance Corporation – YTD financial results % Better/(Worse) $m 2006 YTD 2007 YTD versus 2006 YTD Net operating income before loan impairment 15,763 17,538 11.3% charges (1) Loan impairment and other related charges (7,022) (12,180) (73.5%) Net operating inco
Slide 8: HSBC Finance Corporation – YTD financial results
Year end results and communications HSBC Finance Corporation – YTD financial results • 2007 loss before tax of $6.6 billion was $9.4 billion below prior year due to higher loan impairment charges of $5.2 billion and goodwill impairment of approximately $5.9 billion ($1.3 billion in Q3 2007 at the Mo
Slide 9: HSBC Finance Corporation 2+ delinquency ratio
Year end results and communications HSBC Finance Corporation 2+ delinquency ratio 16% 14% 14.0% 12% 11.8% 10% 10.1% 10.2% 10.6% 9.9% 9.7% 8.9% 8.9% 8% 7.5% 6.9% 5.7% 5.7% 6.3% 6% 4.7% 5.2% 5.2% 5.8% 4.5% 4.5% 4.7% 4.4% 4.2% 4.5% 4.4% 4.8% 4.1% 4.4% 4.4% 4% 3.6% 3.6% 3.1% 3.5% 3.3% 3.2% 3.7% 3.4% 3.7
Slide 10: Real estate secured 2+ delinquency
Year end results and communications HSBC Finance Corporation Real estate secured 2+ delinquency 5.0 18 4.1 16 15.4 2+ delinquencies ($ billions) 4.0 14 3.2 1.1 12 10 .3 3.0 2.6 0.8 10 7.9 2.3 2.3 2.3 0.7 8 1.9 2.0 0.6 0.6 1.8 0.6 5.6 6 .2 5.8 1.5 0.4 1.3 1.3 0.5 6 1.2 1.2 3.0 4 .4 0.3 3 .7 0.2 0.9 0
Slide 11: Customer loans and advances
Year end results and communications HSBC Finance Corporation Customer loans and advances $bn 200.0 182.6 180.0 177.6 178.2 178.3 177.7 174.3 168.5 163.8 21.6 21.5 21.4 21.4 21.4 20.7 21.3 160.0 20.9 20.8 12.8 12.9 12.4 12.7 13.0 13.2 13.3 12.1 20.6 11.9 19.3 19.5 19.8 20.3 19.0 21.6 18.4 120.0 19.7
Slide 12: Mortgage Services loans by vintage and type
Year end results and communications Mortgage Services Loans by vintage and type December 2006 December 2007 Second lien ARM $3.0 bn 49% 39% 5% 7% 8% 5% 36% 51% $1.8 bn Second lien Fixed $7.2 bn 33% 57% 5% 5% 5%4% 54% 36% 1% $4.9 bn First lien ARM 30% 46% 16% 8% 7% 11% 46% 36% $14.3 bn $24.1 bn First
Slide 13: US Retail Branch loans by vintage and type
Year end results and communications US Retail Branch Loans by vintage and type December 2007 Vintages ($ bn) 100% 13% December 2007 25% 26% 34% 80% 2007 12.9 25% 2006 13.6 60% 54% 28% 32% 2005 9.9 40% 19% 2004 and prior 13.8 19% 46% 20% 24% 31% 50.2 15% 9% 0% First lien fixed First lien ARM Second l
Slide 14: Adjustable rate mortgages – ARM resets
Year end results and communications HSBC Finance Corporation Adjustable rate mortgages – ARM resets $bn 12.0 H2 2006 H1 2007 H2 2007 10.7 9.9 10.0 8.0 5.8 6.0 5.1 5.3 3.8 4.1 4.1 3.8 3.7 4.0 3.0 2.7 2.0 1.3 1.1 1.0 0.8 0.5 0.3 0.0 2007 2008 H2 2007 2008 2008 2009 Total Mortgage Services Retail Branc
Slide 15: Ongoing areas of focus
Year end results and communications HSBC Finance Corporation Ongoing areas of focus In unpredictable, turbulent markets, we are focused on what we can control: • Continued liquidation of Mortgage Services portfolio • Continued tightening of underwriting standards and intensified risk management • Ri
Slide 16: Building our Insurance business
Building our Insurance business Group Insurance North America • Insurance contributed $3.1bn(1), 13% of Group • 1,000-day strategy for rolled profit before tax out globally. North American initiatives as a part of the 1,000 day strategy included PBT by region, 2007 formation of a product development
Slide 17: Business overview: Consumer and Mortgage Lending
Business overview Consumer and Mortgage Lending Tom Detelich Group Executive HSBC Finance Corporation
Slide 18: CML measures to react to the market and manage risk
Consumer and Mortgage Lending CML has implemented several significant measures to react to the market and manage risk Limit sub-prime • Closed correspondent originations (MS) originations to • Exited Decision One wholesale business Retail • Eliminate higher risk products such as high LTV PHL loans,
Slide 19: Consumer Lending branch business faces challenges to its economics
Consumer and Mortgage Lending However, the Consumer Lending branch business faces some challenges to its economics • Origination NIM has been under pressure during competitive environment in Revenue 2003-2006. Higher default rate dilutes NIM • Lower origination due to tightened underwriting and lack
Slide 20: Our view of the sub-prime market
Consumer and Mortgage Lending Our view of the sub-prime market • Home Price appreciation will return to long-term average • Shrinking market near-term, small market long-term • Fewer players, greater retail share • Risk priced more appropriately 3.03
Slide 21: Home price appreciation will dictate timing of recovery
Consumer and Mortgage Lending Home price appreciation will dictate timing of recovery… Moody’s projection 30% Actuals: OFHEO HPI February 2008 Baseline Projection: Moody’s Economy.Com 25% 20% HPI Y/oY Change % 15% 10% 5% 0% -5% -10% -15% -20% 2004 2005 2006 2007 2008 2009 2010 USA CA IL 3.04
Slide 22: Projecting a smaller origination market with greater share for survivors
Consumer and Mortgage Lending We are projecting a smaller origination market with greater share for surviving retailers Industry sub-prime originations and share of retail channel 700 80% Sub-prime market originations ($ in billions) 625 600 71% 70% 600 530 60% Share of retail channel 500 50% 400 38
Slide 23: Market view and HSBC Finance objectives
Consumer and Mortgage Lending These market view and HSBC Finance objectives… Sub-prime market view HSBC Finance objectives • Home price appreciation will return to long- • Lower cost/improve efficiency term average • Reduce balance sheet/decrease capital • Shrinking market near-term, smaller market
Slide 24: Shaping our business model
Consumer and Mortgage Lending …are shaping our business model Business model elements Rationale • Improved price • Build future around long-term viable retail premiums/ROE over origination model Revenue the cycle • Expand product set to increase diversification • Reduce volatility/ROE and better lev
Slide 25: Migrate our mix toward lower credit risk
Consumer and Mortgage Lending A key element is to migrate our mix toward lower credit risk without giving up our core sub prime market Representative customers • Near-prime and non-prime conforming Lower credit risk • Sub-prime • (FICO>600, CGS (1) >90) • Sub-prime No market • (FICO<600, CGS (1) <90
Slide 26: Rationalization of the branch network
Consumer and Mortgage Lending Another is the rationalization of the branch network given near-term expectations and long-term strategy • We have resized the network from 1,382 branches down to approximately 1,000 branches which is larger than the very short-term opportunity would suggest • Biased lo
Slide 27: The post-rationalization network is a valuable asset
Consumer and Mortgage Lending The post-rationalization network is a valuable asset • Strong face-to-face and relationship-based selling skills and ability to sell multiple products • Systems, process and culture for high-quality originations in place • Primary face to a customer base with high custo
Slide 28: Improving utilization of the network by rebuilding revenue engine
Consumer and Mortgage Lending We are focused on improving the utilization of the network by rebuilding our revenue engine • GSE (Freddie) product pilot is on track for a March 17 launch GSE product • FHA product is targeted for later in the year after GSE national rollout Revitalize NRE • Vouchers w
Slide 29: Business overview: Card and Retail Services, HSBC Group Cards
Business overview Card and Retail Services HSBC Group Cards Walter Menezes Group Executive HSBC Finance Corporation
Slide 30: Credit Card Services Agenda
Credit Card Services Agenda • Credit Card Services • Retail Services • Group Cards 4.01
Slide 31: Credit Card Services overview
Credit Card Services Credit Card Services overview • Fifth-largest US MasterCard/Visa issuer • $30.5 billion in gross receivables • Over 21 million active accounts • Capability to issue all four brands: MasterCard, VISA, American Express and Discover Credit Card Services receivables ($ billions) 30.
Slide 32: GM Card Program overview
Credit Card Services GM Card Program overview • Fifteen-year relationship with General Motors • Largest automobile credit card rewards program • Primarily prime and super-prime customers • Strong value proposition of 3% and 5% of spend drives customer loyalty and volume • Continued innovation of ris
Slide 33: UP Card Program overview
Credit Card Services UP Card Program overview • Eleven-year relationship with AFL-CIO • Largest affinity card portfolio in the US • Relationships with 14 million union members • Strong endorsement from union leadership and internationals • Each union marketed under its own brand • Above industry ave
Slide 34: Metris Card Portfolio update
Credit Card Services Metris Card Portfolio update • Acquired December 2005 ($5.3 billion in receivables at acquisition) • Primarily serves near-prime segment • Leverages all four networks (MasterCard, VISA, American Express and Discover) • Fully integrated into HSBC business; leveraging best practic
Slide 35: Competitive advantages of Card Business
Credit Card Services Competitive advantages of Card Business • Full-spectrum lender • Large customized partnership programs • Analytically-driven decision making (sales and marketing, risk management, operations and collections) • Efficient, low-cost operations • Global strengths of HSBC franchise •
Slide 36: Credit Card Services performance
Credit Card Services Credit Card Services performance Receivables (billions) Net interest margin 2004-2007 CAGR approximately 16% $35 14% $30.5 $28.2 11.9% 11.8% $30 12% $26.0 10.8% 10.4% $25 10% $19.6 $20 8% $15 6% $10 4% $5 2% $0 0% 2004 2005 2006 2007 2004 2005 2006 2007 Net income (millions) Ret
Slide 37: HSBC Finance Credit Cards - Credit trends
Credit Card Services HSBC Finance Credit Cards - Credit trends Net charge-offs 10.0% 8.2% 8.0% 8.0% 7.2% 6.9% 7.1% 6.9% 7.0% 6.2% 6.8% 5.8% 5.5% 6.0% 4.0% 4.0% 2.0% 0.0% Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 2+ delinquency 5.8% 6.0% 5.2% 4.6% 4.5% 4.5% 4
Slide 38: Actions to mitigate Credit Risk
Credit Card Services Actions to mitigate Credit Risk • Slowing receivable and account growth, and tightening initial credit line assignment criteria • Closing inactive accounts • Decreasing credit lines and tightening credit line increase criteria • Balancing prime/non-prime mix • Reducing balance t
Slide 39: Retail Services Agenda
Retail Services Agenda • Credit Card Services • Retail Services • Group Cards 4.10
Slide 40: Retail Services overview
Retail Services Retail Services overview • Third-largest private label issuer • $19.3 billion in managed receivables • 16 million active accounts • More than 60 active merchant relationships Retail Services receivables ($ billions) 19.3 18.1 17.1 15.6 2004 2005 2006 2007 Note: Results reported on an
Slide 41: Diversified Portfolio
Retail Services Diversified Portfolio 34% 31% 10% 6% 4% 15% General merchandise Department store Home improvement Furniture Consumer electronics Power sports vehicles IFRS Receivables as of December 2007 4.12
Slide 42: Partnerships with some of the nation's largest retailers
Retail Services Partnerships with some of the nation’s largest retailers 4.13
Slide 43: Retail Services overview
Retail Services Retail Services overview • Strong partnership culture • Flexible program structure • Ability to serve multiple origination channels • Efficient, low-cost operations • Global strengths of HSBC franchise • Low cost of funds and capital 4.14
Slide 44: Retail Services performance
Retail Services Retail Services performance Receivables (billions) Net interest margin 2004-2007 CAGR approximately 7% $25 10% 8.9% 8.4% $19.3 $20 $18.1 8% 7.5% $17.1 6.9% $15.6 $15 6% $10 4% $5 2% $0 0% 2004 2005 2006 2007 2004 2005 2006 2007 Net income (millions) Return on average assets 2004-2007
Slide 45: Retail Services Credit trends
Retail Services Retail Services Credit trends Amounts written-off (Net charge-offs) 6.0% 4.7% 4.4% 4.3% 4.3% 4.2% 3.9% 4.2% 4.1% 3.8% 3.8% 4.0% 4.0% 3.5% 2.0% 0.0% Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 2+ delinquency 4.0% 3.3% 3.1% 3.0% 2.7% 2.8% 2.8% 2.
Slide 46: Actions to mitigate Risk – Retail Services
Retail Services Actions to mitigate Risk – Retail Services • Implementing numerous credit-tightening efforts across retail merchant base, including power-sports industry • Reducing contingent lines within inactive accounts • Increasing collections capacity and intensity • Increasing outbound calling
Slide 47: Card and Retail Practice Change summary
Card and Retail Card and Retail Practice Change summary Deliver high brand values and strong customer value proposition in our products and service. Key changes to our practices include: • Eliminating over-limit fees when occurrence is due to finance charges or fee assessment • Extending time custom
Slide 48: Group Cards Agenda
Group Cards Agenda • Credit Card Services • Retail Services • Group Cards 4.19
Slide 49: Group Cards presence; exporting best practices globally
Group Cards Group Cards presence • HSBC issues cards in approximately 40 countries across five continents, making it one of the few truly global players in the industry • Over 100 million cards in force Exporting Best Practices globally • HSBC has established global cards centers of excellence to im
Slide 50: Building global scale
Group Cards Building global scale • WHIRL, our global card system, now services 86 million cards (comprising 75% of our business) across 16 countries • Since 2003, new cards businesses have launched in Australia, Canada, China, the Czech Republic, Iraq, Poland, Uruguay and Vietnam • Plans are underw
Slide 51: Update – developing countries
Group Cards Update – developing countries China • Launched Wal-Mart co-branded card in August 2006 (joint venture with the Bank of Communications) Mexico • Leveraging the branch network through bundled products like Tu Cuenta India • Growth has been achieved through multiple sales channels including
Slide 52: Our aspirations
Group Cards Our aspirations • Leverage our expertise from developed markets to substantially grow our business in developing markets • We will achieve this by: • Providing successful acquisition tools to gain new customers • Being the first choice for our relationship-banked customers • Growing our
Slide 53: HSBC is well-positioned for global growth
Group Cards HSBC is well-positioned for global growth • Size and scale, complemented by strong local presence • Strong balance sheet, funding and capital market access • Full spectrum lending capabilities • Global resourcing and low-cost structure • Strong position across card spectrum (MasterCard/V
Slide 54: Retail Credit Risk: Bruce Fletcher
Retail Credit Risk Bruce Fletcher Chief Retail Credit Officer HSBC North America Holdings Inc.
Slide 55: Who is the typical HSBC Finance customer?
Retail Credit Risk Who is the typical HSBC Finance customer? Lifestyle Credit Behaviour • Financially unsophisticated • Leveraged • Payment sensitive versus pricing sensitive • Inconsistent payers • Limited discretionary income • Minimal savings • Living the ‘American Dream’ of home • Some with irre
Slide 56: What has changed for the customer?
Retail Credit Risk What has changed for the customer? Event Reaction • Declining or stagnant home prices • Inability to use home equity as income • Reduced credit availability • Inability to refinance into a lower payment • Significant payment shock without a way • Expiration of teaser rate ARM prod
Slide 57: What are we hearing from customers?
Retail Credit Risk What are we hearing from customers? HSBC conducted focus groups with both current and delinquent customers to gain insight into the customer mindset. A typical HSBC Finance customer: HSBC Finance Mortgage Services • Is aware of the ‘industry turmoil’ customers include: • In most a
Slide 58: How will we manage our business?
Retail Credit Risk How will we manage our business? Factors that we can control include the following: • Reduce the risk profile to deal with the tougher environment and portfolio performance • Enhance default management and focus on loss mitigation • Proactive account management • Concentrate on ke
Slide 59: What is driving our performance?
Retail Credit Risk What is driving our performance? Market • The unprecedented credit tightening and worsening housing market (both unknown depth and duration) is affecting both performance and liquidation, as well as the outlook for this year, and is also affecting employment Vintage • While perfor
Slide 60: Which geographies are impacted most?
Retail Credit Risk Which geographies are impacted most? • Some metropolitan areas, notably in California and Florida, have rising unemployment as well as falling housing prices, and may already be in recession S&P/Case-Shiller Monthly Home Price indices – December 2007 Y/Y% change Miami -17.5 Las Ve
Slide 61: Life events: unemployment and bankruptcy
Retail Credit Risk Life events • Historical life events contributing to delinquency, such as divorce, mortality, and sickness are relatively stable, where as unemployment and bankruptcy are on the rise Weekly Unemployment Claims and BK Filings Unemployment and bankruptcy 35,000 500 Unemployment Clai
Slide 62: What have we done?
Retail Credit Risk What have we done? Reduce risk profile • Discontinued operations of Mortgage Services, Decision One, and the sub-prime mortgage broker-based business in HSBC Financial (Canada) • Tighten originations underwriting • Across all products in all business units • Loan to value, credit
Slide 63: Mitigating losses through default management
Retail Credit Risk How do we mitigate losses through default management? Main goal • To identify customer needs and match them with • Continue to manage Foreclosure Avoidance Program the right treatment option to prevent foreclosure for delinquent customers, program designed to provide and build sus
Slide 64: How we deal with an ARM Reset customer
Retail Credit Risk Here’s how we deal with an ARM Reset customer Screenshot of MS ARM Reset Modification tool Process • Customer receives an ‘ARM Awareness Letter’ advising of pending ARM rate increase, and inviting them to call us to discuss • Letter is followed up with an outbound callout campaign
Slide 65: Treatment enhancements
Retail Credit Risk Treatment enhancements Illustration of risk segmentation and 1. Low value of home limits options possible treatments 2. Loan type creates difficulty for customer 3. Behavior of customer defines risk 4. Customer and market risk 2 5. Product and customer risk 1 Product risk 6. Marke
Slide 66: What else are we working on in Default Management?
Retail Credit Risk What else are we working on in Default Management? Areas of particular focus include the following: • Do more long-term modifications • Examine profitability of foreclosure versus modification • Enhance the bid price on foreclosure versus walk process • Improve treatment tools • I
Slide 67: HSBC
HSBC
HSBC Finance — Debt Investor Presentation (March 2008) on 6ix