HSBC (HBC) Earnings: Storm Flags Go Up For US Banks

HSBC (HBC) is the latest money center bank to be clobbered by more write-downs. For the most recently reported quarter net profit fell to $7.72 billion from $10.9 billion a year earlier and that was in line with market expectations. Loan impairment charges and other provisions jumped 58% to $10 billion.

The bank’s chairman commented, "Ultimately, the real economy will recover from this crisis, although it may get worse before it gets better."

The statement about the future of the credit markets is not exactly what Wall St. wants to hear, but the viewpoint is almost certainly accurate. Recent data suggest that the home loan troubles are moving from subprime to prime customers. According to The New York Times, "Homeowners with good credit are falling behind on their payments in growing numbers."

Is it any wonder? Even the middle class is faced with sharply rising fuel and commodities prices. Getting money from home equity loans is not, in most cases, an option because real estate prices have fallen so far. Unemployment has hit 5.5% and will probably continue to rise though the end of next year.

The estimates for the total write-offs due to the mortgage-backed paper crisis keep rising. The IMF puts the number at $1 trillion. Several experts believe that figure could double. If the higher number is accurate, banks could face another $1.2 trillion in write-offs. If that hits firms like Citigroup (C) hard, it might wipe out three-quarters of the value of its common shares as it raise money to replenish its reserves.

The banking industry is not at the end of its present crisis. It is at the beginning. And, the deepest part of the problem may last into 2010, because the "high quality" borrower population is starting to erode.

Douglas A. McIntyre