Mortgage Financials Wobble Under HSBC Results, Inflation Data

Maybe the credit crunch and housing mess will take a bit longer to resolve, after all. That seemed to be the sentiment on on Wall Street Monday, at least, after banking giant HSBC Holdings Plc (HBC) reported a 29 percent drop in first half 2008 net profit, to $7.72 billion from $10.9 billion a year earlier. The earnings total was largely within expectations, although woes in the U.S. continued to worsen — the bank’s U.S. business was the only region operating in red during early 2008, the bank said. The bank’s U.S. operations lost $2.9 billion during the quarter, led by loan impairment charges in the first half totaling $6.8 billion, up 85 percent from year-ago levels; the bank also took a $527 million hit to goodwill in its U.S. businesses, and said it would exit its auto financing business stateside as well. HSBC’s U.S. mortgage services reduced portfolio holding by 13 per cent during the period, bringing the total mortgage portfolio down from $36 billion to $31 billion, the bank said — 60 percent of the portfolio run-off came in the form of repayments (meaning the other 40 percent was due to write-offs and related credit expenses). “The economic and financial environment in the first half of the year deteriorated progressively,” said chairman Stephen Green. “In the major developed economies where we operate, economic growth slowed as asset prices, particularly of residential property, declined; this in turn affected consumer confidence and hence spending. In credit markets, illiquidity remained a major issue, with trading volumes low and no sign of resumption of normal activity levels in the securitisation markets.” Not exactly a vote of confidence; although if there was any silver lining to be had out of HSBC’s results, it’s that despite mounting U.S. losses, the bank appears to among the few still standing enough to report a profit in its overall business. Which should be worth something. Inflation fears jump Adding to market uncertainty Monday was an inflation reading showed that inflation remains a concern: the Commerce Dept. said that inflation hit its worst level in 27 years during June, up 0.8 percent from May. Which means that an otherwise healthy 0.6 percent gain in nominal spending, the likely result of tax rebates, was all but negative for the month once inflation took its bite. Real consumer spending is up just 1.2 percent from one year ago, as a result. Inflation’s up 4.1 percent in the past year, the largest rate of growth in 17 years; it’s an increase driven by so-called non-core factors, food and energy. Taken together, Wall Street financials, particularly in the mortgage sector, sold off heavy in early trading Monday, before rebounding somewhat on the news that oil prices had fallen below $120 per barrel for the first time since early May; a passing threat of hurricane damage and the emerging belief that rising inflation may force consumers to curb spending were cited as key reasons. See full story. In other words, much like a mortgage market that has been characterized by a series of fits and starts as of late, the broader economy is trying to figure out just how bearish to be about the future. “We’re all learning to dance with the bear and trying not to get mauled,” Scott Richter, portfolio manager at Fifth Third Asset Management, said on Bloomberg Television. “There’s no doubt that the economy is in a very fragile state. It’s grinding ahead at a very below-par type of pace.” The result is that after falling sharply early, the Dow Jones Industrial Average recovered to 11,330.55, up 4.23 points in afternoon trading Monday, when this story was published; mortgage financials, however, were only partly involved in the jump. Most were trading lower off of their open prices, although nearly all were paring early losses. Of the stocks tracked by HW, Fannie Mae (FNM), Morgan Stanley (MS), PMI Group Inc. (PMI), Lehman Brothers Holdings Inc. (LEH), and MBIA Inc. (MBI) had moved into positive territory by the time this story was published. Disclosure: The author held no positions in firms mentioned in this story when it was published; other indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.