滙豐控股 (HSBC) 2002 Q1 法說會逐字稿

Good day every one and welcome to the Household International first quarter 2002 earnings results conference call. Today's call has been recorded. At this time, for opening remarks and introduction, I will like to turn the call over to Mr Craig Streem. Vice President, excuse me Vice President, Corporate Relations and Communication. Mr Streem, please go ahead sir.

Thanks

. Good morning every one. Welcome to our first quarter earnings conference call. Today's call is going to include remarks from William Aldinger our Chairman and Chief Executive Officer and David Shoenholz, Vice Chairman and Chief Financial Officer and of course we will have brief Q&A session following remarks. Just last week, we met with many of you in personal by a webcast at our annual financial relations conference and we provided significant information of that our business strategies, key financial matrix

capital management. So in light of that,

to keep today's call fairly brief perhaps to 15 or 20 minutes. Our remarks this morning may contain certain estimates and projections that may be forward looking in nature as to find by the Private Securities Litigation Reform Act of 1995. Factors that may cause such differences are discussed in our annual and periodic filings with the SEC and now I will turn the call over to Will.

Thanks Craig. Well, once again I have to say I am very pleased with the quarter, I think our team continues to deliver spectacular results in a weak economy and if you look at the business, this is now our 15 consecutive record quarter and looking across the business all the matrix

for the quarter, if you look at receivable growth were up about 15% year over year very solid growth there with the best growth really coming from our HFC and beneficial branches along with the mortgage business. I think on the revenue front, they were up 19% year over year and that is the combination of very good loan growth and expanded margins. Credit quality perform pretty much as expected in the weak economy. We saw delinquencies of about 17 basis points in the quarter to 4.63%. Charge offs also were up about 19 basis points to 4.09%. I would add that we expect charge offs to increase modestly over the next several months. The one exception may be in the auto business, where we are seeing some good progress for the new management team and also we should get some seasonal benefits from the spring and early summer months. So we think credit quality will be stable modestly worse, but very manageable.

On the reserve front, we continued to build our reserves. We had it over $200m and reserves in excess to charge offs in the quarter. I would say that we would expect to do that and continue to do that over the next few quarters as we see weak economies. So we are going to continue to see modest loss increases and a strong reserve bill during that period.

On the capital front, we continue to build our capital or tangible equities to tangible managed assets increased in the quarter 8.41%, up substantially almost 54 basis points from year-end and almost 1% from a year ago. So a very big capital build during these

times. Buybacks were about $100m in the quarter. Again we expect to continue our buyback program throughout the year. We probably do more modest levels and we originally plan while we build our capital base through out the year.

Let me conclude my formal comments by saying, over the last year I had a number of investors said to me, Bill, how do you think Household will perform in a recession. I think we have answered that question

and clear over the last several quarters. 15 record quarters, four consecutive record quarters doing, but it is clearly over recessionary period and I am

by saying, I am very comfortable and confident that this team will deliver the high-end of the expectations for the year on the earnings target we said.

So with that I am going to turn it over to David Schoenhoz who will give a small color on the quarter and then we will take some brief questions

after that and to end our call day as today and early today.

Thank you.

Thanks Bill. I would just like to echo Bill's comments about being very pleased with the quarter. We had a level of earnings with good quality of earnings and we substantially strengthened our balance sheet. EPS that we reported at $1.09 was over consensus and I would like to comment on that a little bit as most of you would know our first quarter benefit from seasonal growth in our tax refund lending business. We had a great season very strong. Our

volumes were up or through increased traffic to the block

and through increased traffic to independent

. Even more importantly a credit quality and the business this year was outstanding. We worked on developing some new soaring models that

. So in the quarter,

businesses contributed about $0.19 to the quarter that would compare to about $0.15 year ago. We had expected some increase year over year but not as much as we got and led to really a positive surprise and that

. If you look at the businesses other than

, they were also up extremely well compared to the prior year and really based on a strong run rate

in the 15% year over year receivables growth as Bill mentioned. I like briefly to comment though unsecuritizations, because the quarter benefited from some framing our securitizations more than what we had originally planned. For those of you who listened to our financial relations conference last weak, you have a full appreciation of all of the efforts we made to reduce our reliance and commercial paper in the quarter and because of that we securitized

. In the quarter, we securitized $2.4b and that would compare to $900m in the first quarter, a year ago. And the detail of what we securitized by product is in the supplement and I would just point out that number excludes the real estate secured financings that we did in the quarter. Because we did securitized more, we really have the impact of accelerating some of these transactions from later in the year. So you will see substantial reductions in volumes of receivable securitized both in the second and third quarter. But you really have

is kind of a timing issue and some of that income. In the supplement, we disclosed the net change in the net IO strip that is consistent at how we outlined that a week ago. If we do the

that translated to a $0.04 securitization gain in the quarter this year vs. $0.01 gain in the quarter, a year ago. I like to

to put that in CVO in contacts by talking about our additions to lost reserves. As Bill mentioned, we had a strong

both in dollars and percents.

Our reserve dollars are up year over year over year 24 percent that would compare to our receivables growth of 15 percent. So clearly we have added in excess of our receivables growth put into context our owned excess provision. So that would exclude our off balance sheet receivables, we provided in the quarter amount in excess of our charge-offs equivalent to $0.27 per share, a year ago at numbers $0.23 per share. So I think we feel very good about quality of earnings in the quarter.

In the first quarter, we had 20 percent EPS growth really gives us a good start for the year.

we talked about some of the seasonal and some of its timing. So we are not increasing our estimate. I reduce underscore

confidence in our ability

upper end of the

range 13 to 15 percent. Give a little bit more color on credit quality. In the supplement, you can see we disclosed it both in owned and manage

really to focuses on manage. Charge-off ratio is up sequentially, 19 basis points, which was consistent with our expectations. Our

charge offs were flat and filings were actually down a little bit as a percent. All the products really were tracking consistent with our expectations. Delinquency was up 17 basis points that were actually a lot better than what we had expected. Auto was down, some of that seasonal. The early stage delinquencies were down,

levels are well. Our absolutely flat

control and actually the expansions during the quarter were down to about 2.5 percent from a little bit over a 4 percent in the fourth quarter. As Bill indicated, we would to expect some increases in charge-offs in the second quarter and then coming down later in the year to

pretty stable

We went through an extensive discussion of credit policies in

and so forth conference last week. I just not going to go through that discussion again today. I would

all the policies remain consistent in the quarter and that we will update types of disclose we went through from mid-year.

Comment just briefly on growth during the quarter, we obviously had the normal seasonal run off in Visa and Master Card and were also negatively impacted by 900 million loan sale, but if you exclude that, loan sale growth was at 1.3 percent, was actually a little bit better than last year's first quarter. So, we are absolutely tracking to what our top line receivable growth expectations have been.

You can see in the supplement we have actually broken out some of the detail on unsecured loans and that that grew extremely modestly in the quarter. Net interest margin remained good. Efficiency was actually 32 percent versus 36 percent a year ago and in terms of balance sheet, liquidity, and funding spreads, all of those were positive in the first quarter.

So, with that we will turn it over to Q&A.

Cynthia can you give people with

instructions.

Yes, thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question please press the star key followed by the digit one on your touch-tone phone. We will proceed in the order

to signal. Once again, to ask a question press star one. If you will past three moments, we give everyone an opportunity to

We will take our first question from Todd Pitsinger with Friedman, Billings. Please go ahead.

Good morning guys. Just a few questions, Bill or David, you can share with us. You mentioned that the strength in the portfolio growth was largely driven from the real estate division.

could you break out the gross component between the branch network and the activities in the correspondent channel?

Thank you.

Well in the first quarter, the portfolio was up above $1.5b and about two-thirds of that would have been in the branches; about a third would have been in correspondent.

Okay. Thank you.

We will go next to Bradley G. Ball with Prudential Securities. Please go ahead.

Hey, Bill and Dave could you give us a little more color on the credit costs in both MasterCard, Visa, and the personal non- credit card, both were up this quarter? Do you expect those to continue to go higher in light of your guidance per higher credit costs in 2Q?

Let me take Visa and MasterCard first. On a managed basis, it was up about 45 to 50 basis points. But I think we really need to look at the denominator effect there, because of the seasonal run off and about 35 basis points of that increase related to having a lower portfolio base. We are seeing very good credit quality in all of the prime base portfolios. We did see some increase in charge-offs in our Renaissance Portfolio in the quarter.

kind of expect that given that customer be probably more exposed to softness in the economy. We would point out though that the Renaissance Portfolio is only about 10% of the total Visa or MasterCard both and various small piece of the total portfolio. Our expectations will be for Visa and MasterCard's credit loss system from charge-offs really to improve through out the year. In terms of the other unsecured loans these that also went up quite a bit, clearly that customers also the most exposed to issues of unemployment or under employment based on delinquency trends. Although, we are cautiously optimistic to seek kind of a stable flat to up type ratios for the rest of the year. Clearly, the increase is net charge-off rate though it was one of the reasons we added so strongly to reserves in 1Q.

The growth rates in the Visa and MasterCard will stay in the high-single digit range?

Yes, I think you can see a kind of mid-to-high single digits.

Thanks.

We will take our next question from Mark Alpert for Deutsche Bank.

Good afternoon, good morning. And first of all thanks for the added disclosures that you guys are having in your supplement. I just wanted to make sure in this

you were saying in terms of the calculation of the securitization gain, because you referred to the IO strip and if understand that you correctly thinking the difference between $1.034b and $968m of December and coming up with $0.04 per share, is that what you were doing there?

Mark, that is not what I was doing. If you really go back to that what we talked about the HFC and worked at the net change in the net IO strip, which also includes the IO strips net over the reserve for recourse, when you look at the net change in each of those components. If you were to look in the supplement, put

it will show you what those dollar amounts are on the pre-tax basis.

With $29m?

Yes. If you take $29m after-tax brought it by the share base, I think you can come up $0.04

But it was $54m in Dec. quarter?

That is true.

So it is up YoverY, but it is down vs. 4Q?

That is a true statement.

Okay. Thank you.

We will go next to Bruce Harting with Lehman Brothers. Please go ahead.

David, can you just talk a little bit about the loan sale that you are executed and then going forward what is your strategy is for further whole loan sales and the relative financing costs that you are executed in 1Q on the $500m real estate secured conduit facility vs. alternative funding, a little discussion on the duration of that? Thanks very much.

Okay, Talking about the whole loan sale, about $900m. We executed it to start to finish under 30 days. It was done as a part of the effort to reduce commercial paper and also quite honestly to address some of the issues that Fitch had raised earlier about demonstrating market receptivity to our paper as a source of back up liquidity and cleared a net premium amount on a small gain that we were very comfortable with. Going forward, our objective would be to not to routinely do whole loan sales. We kept servicing on it. Our view is that we are not to do whole loan sales and rather we would continue to do a real estate secured financing somewhat what we did in the quarter. I think you were aware that in the quarter, we did a billion dollar real estate secured financing out of a branch-based home equity loans in a half of billion dollar real estate financing out of the correspondent portfolio. In terms of the cost of funds in those transactions actually related to unsecured spreads, we have a slightly favorable coupon. In terms of duration on those, I have to go back. I think that the billion dollars is

year, but we will have to check.

Thank you.

We will take our next question from

with Merrill Lynch. Please go ahead

Good morning. You guys indicated that our capital ratio of the conference,

fairly been disappoint. Is it possible that your

is rather in a robust level that may be you pick up to start buyback a little back again or are you going to be keep buildings from here?

Mike I think that at the conference, we disclosed ratio targets of 8 to 8.25 and we said that we would end behind that target. So, my expectation is that we would not be building from here and that we would be growing into those ratios or picking up the pace and buybacks a little bit.

Thank you.

We will go next to David Hochstim with Bear Stearn. Please go ahead.

Hai. Two quick questions. One could you give some additional breakdown on what happened in

, you said credit was better in terms of volumes? Have you seen any change in the non-prime credit card customers over the last quarter in terms of spending or payment rates?

No. I think we will state the letter first, I mean obviously given

announcement so forth is that we have seen in our credit card portfolio both in the prime and near prime and sub prime sector continued good demand. Credit behavior is well within expectations and repayments levels had been within expectations. So, I don't see an issue for demand there. As we talked about earlier, our full year expectation is a kind of mid-to-high single digit growth in that portfolio in total. In terms of

, I guess, the other things I would add is that you know, volumes were up 17% to 18%. We did about $4.9m transactions. Delinquency levels were down almost 35% to 40% as we had substantial improvement in credit quality and pricing was pretty much stable with the prior year. So, all in all a very good year.

How much comes in the second quarter, if any? Will the second quarter be better?

Very little will come in second quarter, Dave. I mean, it is really an unique business. It is very intensive in first quarter.

Bill and Dave, just elaborate a litte bit more on Mike and Bruce's question. It seems to me that what you have done here is that you have reduced you reliance out of commercial paper. You boosted your reserves higher than what we have thought. Your capital ratios have been improved. You demonstrated more liquidity in the marketplace. My question is that, are you starting to see this across the yield curve in your unsecured funding, your spreads relative to treasuries? What kind of reception are you getting in the marketplace and how much further improvement do you think can come as these ratios and this execution is demonstrated over time?

Let me just talk about that a little bit, you know, in the first quarter, we went to the capital markets and raised $10b in terms of unsecured or asset-backed types of financings and had good receptivity to our paper. We ended the quarter with CP outstanding at net of the investment portfolio with about $4.5b with the duration of 38 days, which was up from where we were. Spreads behaving well. We had a benchmark 10-year deal, last Nov. that went about a 180 basis points. Today that is about 160 to 165 basis points. A five-year deal in Jan. went out at 155 number. That was the one that people had lots of concerns about early in February. Today that is at 152 basis points. So, we feel very good about the spread levels. I think a lot of the skittishness that was in the market earlier has been taken out. May be there is some room to tighten further. I don't know what that would be, but I feel very confident that we are back on a kind of business as usual funding pattern and hopefully we do tighten some more.

Due to time constrain, we only have time for one additional question.

Our last question comes from Andy Shapper with

Capital.

Please go ahead Sir.

Hai Dave, just had a question about your net interest margins, I was just wondering, can you tell me what you think you will happen to the net interest margins as the economy recover's or the short-term interest rate pick up?

Well let me start with that in terms of our profit expectations, our expectation for profit is in the 13% to 15 % anticipates

starting to raise rates later in the year. Who knows what that is going to be and who knows what the timing of that is going to be. The current interest rate sensitivity if you talk about is 100 basis point gradual increase, parallel shift across the curve is about $0.09 per share. So, as we are as pretty consistent. So, we are not carrying a lot of interest rate risk going into a period of potential rising rates. If the Federalk Reserve did not raise rates, my expectation is that our margin will be pretty stable might be down. All these discussions and liquidity in lengthy maturities and so forth has had a little bit of cost and it costed us a couple of basis points in the first quarter and I would expect that will cost us a couple of basis points in second quarter. But clearly money will

.

Thank you.

This will conclude today's question and answer session. I would now like to turn the call back over to Dave Schoenholz for closing comments.

We would just like to thank you for your continued interest in Household. There are lot of other

in the market today, that I am sure you have an interest in and we look forward to talking to you again at next quarter.

This thus concludes today's first quarter 2002 earning results conference call. Thank you for you participation and you may disconnect at this time.