滙豐控股 (HSBC) 2001 Q1 法說會逐字稿

Good day everyone and welcome to this Household International first quarter earnings results conference call. Today's call is being recorded. At this time for opening remarks and introduction I would like to turn the conference over to Mr. Craig A. Streem, Vice President of Corporate Relations. Please go ahead, Sir.

Thanks [_______________]. Good morning everyone and welcome to our first quarter earnings conference call. This morning's call will begin with remarks from Bill Aldinger our Chairman and CEO. And then we are going to go right to the Q&A period. Joining Bill for the Q&A will be Dave Schoenholz, Group Executive and Chief Financial Officer and Rocco Fabiano Group Executive, Retail Finance. I also want to mention that we are going to try to keep the call to a total of about 30 minutes. So I would encourage you to keep your questions brief and to the point, and we will try to do the same with our responses. Now before turning the call over to Bill, I want to 2 remind you that our comments this morning will contain certain estimates and projections that may be forward looking in nature as defined by the Private Securities Litigation Reform Act of 1995. A variety of factors may cause actual results to differ materially from the results discussed in these forward-looking statements. Factors that may cause such differences have been discussed in our annual and quarterly filings with the SEC. And now I'll turn the call over to Bill.

Thanks Craig. I noted that you used about 10% of our call for your disclaimer, thanks.

We will extend it at the end.

Let me begin by saying, I think we had a knockout quarter. It just was a really, really strong quarter. I couldn't be more pleased with how things turned out. You know, as we look across the board, all businesses performed well. The star of the quarter was tax masters, where income was up 25%, year over year, and combined were up 17% EPS year 3 over year. I want also to remind everybody that it is the 11th consecutive record quarter. So we continue to perform well with a lot of momentum and we are doing it in both a strong economy and in a weakening economy as well. Well, look at some of the key matrix across the board, receivable growth was solid for the quarter. We are now very comfortable with a 11 to 14% growth for the year, based on what we saw in the first quarter and early April. On the margins, they improved significantly, obviously with rate cuts; that was a big factor there. On credit, it was stable; frankly it exceeded my expectations and was better than the plan that we put together last year in October. So we're feeling really good about credit at this point. Despite the good performance of credit; however, we took the opportunity to add about a $148 million to reserves, and I think this positions us well in the event that the economy continues to slow, going forward. Now on the expense side, expenses were up 13% for us, that is high, but again we took the opportunity to do some investment spending. We opened 23 branches in the UK and Canada. We also increased marketing spending. 4 We added collectors in the US, and we continue to see sales and standards go up. So we're continuing with investments spend reflecting the good growth in earnings. Finally on the buy back side, we did about 8.8 million shares, repurchased in the quarter. Our target is till 20 million shares for the year, but the timing of those purchases will vary based on growth rates and other factors. And then to conclude really, I'm very comfortable that we will achieve our goal of 13 to 15% EPS growth even in a recession. And I also want to remind all of you that last year when we got ahead of that 15% level towards the end of the year, we took the opportunity to re-invest and really make this year more certain, and my goal would be if we meet our targets, or at the upper end of the targets later in the year, we'll probably take the opportunity to re-invest those numbers in marketing and technology and so forth to assure an even stronger 2002. At this point I'm going to conclude my comments, turn it over to question and answer period, and Dave Schoenholz will lead that for us. Thank you. 5

Thanks Bill. As we start, [_______________] can you give our listeners the following instructions.

Sure. Today's question and answer session will be conducted electronically. If you do wish to ask a question, please press the star key followed by the digit 1 on your touchtone phone. We will continue in the order that you signal, again i.e., star 1 to ask a question. We will pause for a moment to [_______________]. Our first question will come from Dave Hudson with Bear Stearns.

I wonder if Rocco could tell us what is actually going on with the RAL business this year end [_______________] what we might expect next year, will there be another big increase?

Rocco do you want to supply some comment on this?

Sure. I think the tax master, it was a case of preparing for the worst and achieving the best. This was the really two contributors. This is our second year with the 6 debt indicator; we talked about that in the past. This being the second year, it went much more smoothly and I think we benefited significantly from that in terms of some of our risk management practices and tax masters. And the second factor, which is probably a more important contributor, as this is also the second year in which the IRS has undertaken their [_______________] income tax credit audit, as I think most of you know, we increased our prices this season in expectation that we might see some problems from that audit, but what we also did is we built some models that enabled us to predict substantial impact of that model and therefore not to write down RALs to those customers. And, it turned out we benefited from both. We saw much better volumes than we expected. The price increase did not dampen volumes to anywhere near the level of it. Either we know of [_______________] had expected and the models were very successful in predicting who is likely to receive an [EITCR] and therefore we were able to avoid some of the offsets there. So, we benefited both of those causes, that was a pleasant surprise on tax masters. You know, I 7 would hope we could do as well next year but I would say it is very early to look forward to see what would happen for the next tax season.

Thank you, could you just provide some [_______________] recall on the auto business.

Sure. On the auto business, that continues to do well, as you know, we see the same seasonal pattern this year in terms of credit performances as we have in the past. We've had, on that we can really be very pleased, particularly on the delinquency levels, our entry rates on delinquency were at historically low levels actually, and so we're very pleased there, I would like to say, particularly on the delinquency side, I think, as we've talked about it our growth rate is a little slower this year then it was historically then, and we are quite comfortable with that.

On pricing, is there any change in pricing?

We actually have pushed up pricing a bit. We, ironically, despite the 8 drop in the broader marker rates, we think there is still some margin expense and opportunity. So we have seen some modest price increases but really the issue is trying to hold the line on prices well, the broader market rates are down.

Thank a lot.

Our next question will come from Bradley Ball with Prudential Securities.

Thanks, hi guys. Dave, could you elaborate on the increased marketing spends during the quarter, where are you spending additional dollars, is it in the card business, is it domestic, is it international? Thanks.

Let me just comment a little bit about expenses in total, as Bill indicated, we are up about 13% year over year. In the quarter, our marketing dollars were over $30 million at 30%, Brad, that was really, kind of, across the board, in terms of the portfolios. So, particularly in our domestic credit card portfolio both in Union Privilege, where we have seen really good growth opportunities, GM, where we've had success in getting new accounts and 9 also our own branded near prime credit card offerings.

Anything in terms of spending internationally.

As Bill indicated, we've opened up 23 offices internationally. You'll see those increases, not so much in the marketing line but contributing in part to the salaries, a level toward the salaries line and also contributing in part to the increases in servicing and admin. expenses.

Thanks.

Our next question comes Bruce Harting with Lehman Brothers.

Great quarter there. Just a quick [_______________] on the net interest margin. Any comments you can make about continued progress from here and then. I guess bigger picture question would be, in the last year First Union sold its card portfolio, Wachovia is selling, and PNC, etc., sort of a conceptual question on what you are seeing out there in the field, and are you the, you would 10 seem to have the right monoline strategy here, on both the card portfolio, as well as home equity, the growth you are putting up on the home equity side seems unfettered, and can you just make some comments on what you're seeing out there in the field and how the banks, the point about all the banks are selling their card portfolios, just seems like this, this continued strength of monolines taking share away from the bigger companies. Wachovia putting itself up for sale, First Union now, would be a further testament of the power of the monolines like your self. Can you just give some maybe anecdotal information of what you're seeing out there, and how you keep this growth trend growing on the real state receivables. Thanks.

Sure, Bruce let me just commented on the net interest margin and then I can talk about the second piece. In the quarter, we really had in some ways the best of all worlds. Fed reduced the short end of the curve by 150 basis points. There was some widening on spreads between Prime and LIBOR and for our Prime based products, there was also some repricing lags of our contracts. So we saw in the first 11 quarter the benefit for the flip side of what cost us some margin in 2000. Going forward, our view today is that there will probably be some further reductions at the short end of the curve, that there will be some tightening of the Prime-LIBOR spreads, and we have reduced our street prices in response to the falling interest rate environment. So, I think, our view, going forward, on margin is something that will be kind of maybe flat, up a little bit, but we're not going to see the very substantial sequential quarter increase we saw in the first quarter. With respect to the second point, my overall comment is, I would take exception a little bit with the view of characterizing us as a monoline. I think, if you look at what Household has been able to do with its breadth of products both secured and unsecured, and the variety of distribution channels, I think that's the sustainability of the model and it is really a differentiating factor against some of the few credit card companies. Bill, you [want to]?.

I would also emphasize that we've been really trying to point that the paint a picture for a while that we are 12 not just a monoline. We have a much broader array of products with distribution channels, of size and so forth. So let me come back to your questions, firstly on the competition side. We have seen less and less competition over the last 18 months. If you look at the branch-based business, we've gone from 12 competitors when I joined Household down to about four. The banks that have been in it have been getting out, you saw Bank One exit last year, you have seen more other banks sell off portfolios, so that business as far as competitive private label, we are really down to two major competitors, [_______________] and GE. If you look at the credit card business, in general, obviously the banks are exiting fast, the competition is more rational today than it has been in a couple of years. The pricing is rational, and I think it is a reasonable business to grow in. We've got, we're seeing more portfolios than we've ever seen to look at both from the credit card side, on the equity side some other things, and we've been disciplined in purchasing. I think we are going to continue to see more opportunities and we have a lot of flexibility to purchase stuff as people 13 begin to exit. For me, I only look at two things, one is the price, we want to be able to make a very good return. I think the other thing is, we wanted to be down in the middle because we don't want to stretch and buy a lot of aid paper that's undifferentiated, and we need to be more in our core market when we do these purchases. So we've been disciplined there. So big opportunities ahead, and I think less competition than we've seen in a long time. That's why our sales are so good. Next question?

Our next question will come from Bruce Berkowitz with Fairholme Capital.

Good morning, great quarter guys on all fronts. Dave, a quick question. What would Household's efficiency ratio be if you were just to maintain the business and its franchise?

Bruce that is a hard question because I don't think you can just maintain, I think you have to invest and grow and so forth. But, without some of the investment spending we put in, it would certainly be several efficiency points lower than the 35% rate we had in the first quarter. 14

Thanks Dave.

We'll go next to Robert Hottensen with Goldman Sachs.

Hi Bill. I am in the spirit of the last couple of questions, I mean, one of the themes that you talked about on your Investor Day was the, you know, the reinvestment in the business, on both the marketing loan losses and technology, and you talked a little bit about, the marketing up 30%. But, sort of, your view on the investments that you are making in terms of how then that will affect our confidence in the top line growth the next year and so forth. And also, I think, someone's going to ask this question in terms of, we look at our models on a line by line basis, and the 2 cent difference really coming from RAL, but at the same time, the outlook looks excellent, and your sense of where your guidance would be over the course of this year and next, in that context?

Okay. I'm going to take them in the reverse order. I think its clear that we do have a lot of momentum and, clearly we would have to acknowledge that we're 15 looking at the upper end of the range that we set out for people. But, what my view is rather than to take every last penny to the bottom line, I would prefer, as we get on later in the year, to take advantage of very good returns and invest more in technology that will continue our leadership and help us in our sales and marketing side, as well as, the cost side, and to finance the marketing expenses as we get later, so that we can assure better growth than 2002, it just adds more certainty to the numbers. And so, I think on, I think yes we absolutely wanted to earn more money, you probably could grow faster than 15 but that's not, in my view, the best thing to do for the long run. Coming back to the front end of the question about investing in the future, I think, you've seen a lot of the investments pay off for us, we've grown our branch network for the last few years, we've added thousands of sales people in the last couple of years. We obviously spent, tons of money on technology, which we think has given us a huge edge, in not only the sales process in the branch network, which has reflected 15 to 20% growth rates, but also in the modeling, that's 16 where we are spending tremendous amounts of money on modeling in every area, credit side, as well as, underwriting side, in the people investments, as I have mentioned in the past, we are somewhere in the neighborhood of 150 Ph.Ds. We've made enormous investments in people, and in all things that will differentiate us from the competition and prepare us for a different world in the future. So, I think, our view is that we set certain targets for investment, but to the extent that we are surprised and way ahead of schedule, we accelerate the investments rather than take it to the bottom line. Did I get your question right, Bob, anything missed.

Yeah, you did. Thanks a lot Bill.

Thanks.

Our next question will come from Moshe Orenbuch with CS First Boston.

Bill, actually I was probably going to be asking similar questions about the reinvestment, I mean, is there anything that you look at right now and just feel like you 17 would like to be doing but have been in any way constrained because it certainly doesn't look that way from here, and obviously you're going to have increased financial flexibility over the coming quarters, if you maintain that 15% earnings growth, because it just seems like, it's a more near term phenomenon.

Yeah, I would say we are investing pretty much in everything we want right now. I don't feel like we're lacking anything and so we have had the luxury, really a front ending stuff we didn't even anticipate, like the branches, and so, I think, we could look to new areas, perhaps, we've looked at expanding in Europe and we've looked at Asia, and so forth. So we may revisit some of those things over time based upon results that we see. But no, I don't feel constrained, and I do feel like we have the luxury of preparing for a worst case environment and if we get anything better than that, we should have a heck of a future here.

Thanks.

Next question. 18

Michael Hughes with Merrill Lynch.

It was a great quarter. My question has been answered, thank you.

Thanks Mike. It seems we have another question?

Does that conclude your question Mr. Hughes, your statement?

Yes, thank you.

Well, okay. We'll take our next question from Mark Alpert with Deutsche Bank.

Good morning. Could you talk a little bit about Renaissance in the, I guess the overall decline in card receivables of $1 billion was a pretty big drop, I imagine there is some forex in there as well, and if you have the ROA and earnings of the card business versus a year ago, I don't know, but if you have that could you share that with us?

Mark let me just give a little color on the portfolio, I mean, the 19 portfolio was down about $1 billion in the quarter but it is still up 7% from a year ago. You are right, the UK did contribute to the decline in dollars, that was primarily related to foreign exchange, as we saw a good increase in the number of accounts, in our UK portfolio, particularly in the [_______________] area. On the domestic side we hit some of the seasonal runoff in the GM portfolio, we did add accounts on the General Motors portfolio in the quarter and we are very pleased with that. If you look at Union Privilege, Renaissance, and kind of our own near-prime portfolio, those were all pretty flat in dollars in the quarter and growing nicely in accounts. So all in all, we were very pleased with the performance of the Visa Master card book in the first quarter. In terms of returns, those returns continue to increase year over year, as we have turned the corner there in terms of response rates and other things.

And on a separate accounting issue, could you walk through the securitization effect, the drag seems to be getting bigger soon because you didn't have very much in securitization, so I was wondering 20 whether your securitization plans are going forward?

Sure Mark. We did securitize less in the quarter, we securitized about $900 million versus about $1.5 billion last year in the first quarter and about $2.8 billion in the fourth quarter. That's really related to timing of how we do our funding plans and trying to take advantage of what we perceive to be the best market conditions. We did disclose in the [_______________] in that effect that net effect cost us about 14 cents in the first quarter here and that was compared to an 8 cents hit a year ago, so we absorbed that nicely. In the second half of the year, our expectation would be to increase our securitization activity, probably a little bit less than the fall, $7 billion we did last year. Our expectations on that negative impact will be probably slightly larger full year than it was last year.

Thank you.

We will go next to Michael Freudenstein with J.P. Morgan. 21

Hi, good morning. I just wanted to ask about the home equity business, I guess, have you seen any pickup in the re-financing, I ask that because we see the other, the fee income was up strongly, and so I am wondering whether was that driven by non-prime card business, sort of the Renaissance type business, or was there some lift in prepayment penalties there?

Mike two questions, the increase in fee income is coming out of Visa Master Card World and not related to prepayment penalties. In terms of what our attrition experience is up until March, the 5 months' leading up to March we saw our monthly attrition rates decline or were stable in every month. In March we saw our monthly attrition rates pickup but only to the same level we saw in March a year ago. We are seeing them up a little bit in April, but too early to say what kind of trend that is. Even if we have an increase in prepayment speeds from what we are seeing right now and it was still very comfortable with the allotment of 14% growth rate that Bill talked about, and in a refinancing activity it provides opportunity as well as potential for losing the 22 portfolio as seen by the fact that we grew our real estate book about 15% annualized in the first quarter.

Great. I was just wondering, could you give us a sense of your correspondent channel and how healthy that was this quarter?

We have added about 14% annualized rate in the quarter.

Okay, thanks a lot.

Joel Gomberg with William Blair & Company.

Thanks. Could you talk about the competitive environment in the branch business in the UK and why you see opportunities there and then maybe talk about who your competitors are there as well? Thanks.

Thanks. In the branch business in the UK, we have carved out kind of a special niche and there isn't a whole lot of competition. We the high street banks are really 23 vacated to that kind of retail orientation and branch based customer service orientation, and so we feel very good about the prospects for growing that, as evidenced by the fact that we opened up 16 new branches in the UK. Those branches were done under the beneficial brand and really going back and targeting a sector that really has been under served, so we are very pleased with that growth prospect. We really don't see a huge competitive pressure there.

Thanks.

Our next question will come from Robert Napoli, ABN Amro.

Good morning, it is a good quarter, very good quarter. I wonder if you could comment on your concerns with regards to trends in the state and regional predatory lending laws, I think what we saw in Philadelphia, I guess a couple of weeks ago and Illinois making progress, I guess in Philadelphia we have to be a bank for lend if the laws get passed, what your concerns are, what kind of trends you see, and what effect it could have on your business if things don't go well? 24

This is Bill Aldinger. We see a ground swell of local and state and federal issues regarding predatory lending and we are spending a lot of time on it. Again I come back to the point, I think some of this is appropriate, there have been some very bad actors out there and to the extent that we can put in place some preferably model legislation that would be good for everybody, we get rid of the weak players, we allow the good players to continue to thrive. Our concern naturally is when you get a ground swell like this you get an overreaction and potentially it could cut back on your lending and profitability and so forth and also it may cut off credit to the consumer who really needs it most. To date we haven't seen obviously, an impact on our growth rate, so while we work hard on it, we are concerned about it, we don't ignore it, day to day it has not at all hit our numbers, and I think in some states we have actually seen, to our surprise, what we want in favor of all the pieces that they put in place its actually helped our growth rates as people have exited there faster than we expected. So, so far it is a net 25 positive although a lot of our time was spend dealing with it and I think we just got to be sure we don't get an overreaction down the line.

Do you see the overreaction and some of the laws that are out there that people are proposing?

Well, we thought Philadelphia was extreme, we don't think that will hold up, I think we are not crazy about some of the Illinois recommendations today, although again I think we can live with them. I just think they are overreacting. But there is nothing that is today what is going to shut us down.

So a concern, but not a grave concern?

I would worry about it when you see the sales start to slow, we are not seeing that at all.

Thank you.

We will take our final question from John McDonald with UBS. 26

Good morning. Could you comment a little bit on the unsecured business in terms of growth and what kind of credit trends are we seeing there?

Sure. You know when I talked about strong growth in the branches in the quarter, the bulk of that growth is really coming in real estate secured product, a 75% of the branch growth is in secured product with the remainder of it virtually all in what we call it a PHL, or personal homeowner loan, and that PHL we classify as unsecured loan growth, although it is underwritten as an unsecured loan, but it does have a valid mean attached. We have been very cautious in this environment in terms of pure unsecured lending through the branches, and we have, starting last year, tightened up our under writing, so what you are seeing there is really growth in the PHL side.

And the credit trends, Dave.

Credit trends have been good. Both delinquency and [_______________] down in the quarter compared to a year ago and 27 right now those [_______________] were fine, we are very encouraged.

Thanks.

This would conclude our question and answer session. I would like to turn things back to our speaker for any additional or closing comments.

Thank you this is Bill Aldinger. I want to thank everybody for your interest in Household and spending the time with us today. Again to recap on field results for the quarter, I think that we are highly confident that we can achieve our goal of 13% to 15% EPS growth even in the recession and echoing some of the comments you have all raised with us, really we will have a lot of flexibility to invest in the future still coming within our 13 to 15% growth rate. So with that I am going to close now and say thanks again.

This concludes today's conference call and you may disconnect at this time.