More on Retail Banking Distress - Saudi Youth and Credit Cards

A rather short article from AlQabas relaying a recent survey among Saudi youth.

1. 52% are suffering from debt caused by the improper use of credit cards.
2. Two thirds expressed concerns about the rising cost of living, the housing shortage, decline in salaries, and the increase in unemployment.

Credit cards are a particularly insidious form of debt.  The interest charges are relatively high. As a result it's quite easy to get into a debt trap - where the debt keeps increasing even if one makes the minimum monthly payment.

Banks are not always responsible in the underwriting stage - cards are often given to those who shouldn't have them.  Where there is no central credit bureau, the bank is essentially lending "blind" as it doesn't know the customer's credit history (payments) nor does it know how much credit outstanding the customer has.  

And credit monitoring and management is absolutely woeful.  I know a customer of one regional financial institution - the winner of more than one award for excellence in banking who restructured a client's credit card debt to a five year personal loan. One month after the negotiations concluded the chap got a letter from the credit card division of that same bank thanking him for "paying off" his balance and offering him a new credit card with a higher limit!  This after they had spent the previous six months writing him letters threatening legal action and all sort of woeful consequences if he didn't pay his bill.   Somehow when his balance was transferred from the credit card division to the personal loan division it registered as a "payoff". 

HSBC Middle East Business

A while back the press reported on the decline in HSBC's Middle East earnings from US$1.7 billion to US$0.5 billion. I didn't see a detailed analysis. So a closer look today – with some focus  on retail in line with the earlier post on Emirates NBD.

So you can follow along here are links to HSBC's 2009 Annual Report and their 2009 Investor & Analyst Presentation. The annual report is a slim 504 page "puppy". You'll find the numerical analysis of ME business on pages 116 and following. I've also indicated sources for the major data. All amounts are in US$ millions.

First a geographical context. Just where is HSBC's ME business concentrated?

Let's look at net income allocated by geography. (Page 117 from Annual Report)

Country	2007	2008	2009
Egypt	$   153	$   223	$ 224
UAE	$   617	$   861	$   (3)
Other	$   300	$   367	$   41
Share of Saudi British Bank	$   237	$   295	$ 193
TOTAL	$1,307	$1,746	$ 455

 

1. The important of the UAE to HSBC's ME business is clear, though it should be noted that ME business is a relatively small part of HSBC's franchise. In the range of a rounding error compared to other geographic regions. 
2. As a general comment, HSBC's main lines of business across the ME (in order of income contribution) are Global Banking and Markets, then Commercial Banking and then Personal Financial Services ("Retail"). 
3. In 2007 and 2008 the UAE represented almost 50% of net income in the ME.
   

Now the asset side of the ledger – loans and advances only as FYE 2009. (Page 212 from the Annual Report).

	Egypt	UAE	Other	Total
Residential Mortgages	$       0	$  1,693	$   248	$  1,941
Other Personal	$   275	$  3,748	$1,560	$  5,583
Property Related	$   125	$  2,118	$   775	$  3,018
Commercial, International Trade & Other	$2,106	$10,214	$4,847	$17,167
TOTAL	$2,506	$17,773	$7,430	$27,709

 

1. HSBC's share of Saudi British Bank (reflected in the income data above) is not reported here. 
2. The Bank has significant US$ exposure in each of the product lines, particularly in the UAE. 
3. Equally, it's clear that the UAE business drives the Bank's ME franchise. 
4. The UAE is 64% of the loan book. 77% of real estate related lending. 67% of Personal Loans. 59% of Commercial and International Loans.
   

 Third, a sectoral breakdown by net income. What are the contributions of various lines of business? (Page 117 from Annual Report)

Line of Business	2007	2008	2009
Personal Financial Services	$   245	$   289	$(126)
Commercial Banking	$   482	$   558	$   21
Global Banking & Markets	$   495	$   816	$ 467
Private Banking	$       3	$       4	$      6
Other	$     82	$     79	$   87
TOTAL	$1,307	$1,746	$ 455

 

1. The Global Banking & Markets segment are large corporate and sovereigns. I expect that the Dubai Inc exposure is within this segment.

Now breakdown of business in the UAE using net income. (Page 117 Annual Report)

Line of Business	2007	2008	2009
Personal Financial Services	$ 108	$ 133	$(177)
Commercial Banking	$ 262	$ 330	$(136)
Global Banking & Markets	$ 242	$ 388	$ 307
Private Banking	$     3	$    4	$    (2)
Other	$     2	$     6	$     5
TOTAL	$ 617	$ 861	$    (3)

 

1. Global Banking & Markets plays a key role with Commercial Banking next and then Retail. 
2. Both Retail and Commercial Banking have taken some rather dramatic hits – some US$776 million in reversal from 2008 levels. 
3. The Bank has yet to take any sizeable provisions for its GB&M business. I suspect that it is just a matter of time before this shoe drops.

And now loan impairment and provisions in the ME by line of business. (Pages 122-124 Annual Report)

Line of Business	2007	2008	2009
Personal Financial Services	$  66	$ 223	$   588
Commercial Banking	$(11)	$   45	$   573
Global Banking & Markets	$    0	$   12	$   173
Private Banking	$    0	$     0	$       0
Other	$    0	$    (1)	$       0
Inter Segment Eliminations	$    0	$     0	$       0
TOTAL	$ 55	$ 279	$1,334

 

1. Here a negative number is "good". It is a "de-expense" in the words of Emirates-NBD. 
2. HSBC doesn't provide a further breakdown of these lines of business by country. Or at least I didn't find them. So we have to work with ME wide figures. Thus, the analysis below probably understates the situation in the UAE as most of the loan problems are centered there. 
3. Over the three year period, we can see the distress building. 
4. Loan Impairment Charges ("LIC") to Gross Operating Income (before LIC and operating expenses) ("GOI") may be useful metric to quantify the extent of the distress. 
5. For Retail Banking that ratio was 9.6% for 2007. In 2008 23.2%. And in 2009 62%. I'd note that in the latter two years GOI was roughly the same so it's not a case of the numerator shrinking. 
6. For Commercial Banking, there was a net recovery in 2007. In 2008 5.5%. In 2009 72%. For GB&M, in 2007 0%. In 2008 1.4%. In 2009 21%. 
7. Let's take a purely "balance sheet" look at this same issue. On Page 211 we see that in 2009 of all HSBC's 7 geographic regions, the ME has the highest percentage of impaired loans at 6.8%, 0.8% more than the USA where HSBC is still struggling with the impact of Household Finance. What a change from 2008 where the ME had a 1.0% ratio and was tied for fifth place! 
8. One final place to look and that's charge offs. A provision is an amount added to a reserve (or as HSBC calls it an "allowance"). Provisions pass through the income statement as an expense.  The provisions are then added to the reserve/allowance account.  This account serves as a "contra" to the loan account and is subtracted from it. When a loan is deemed to be uncollectable either in part or in full, the uncollectable amount is charged off. This transaction does not pass through the income statement but is offset against the loans account  and the contra account. 
9. In 2009, HSBC charged off US$384 million of loans. Of this amount US$376 million was for Personal non mortgage loans. By contrast in 2008, the Bank charged off US$164 million of which US$153 million was for Personal non mortgage loans. The year to year increase on Personal non mortgage loans is 146%.