滙豐控股 (HSBC) 2002 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Household International 2nd quarter, 2002 earnings results conference call.

Today's call is being recorded.

For opening remarks and introductions, I turn it over to Mr. Craig Stream, Vice President Corporate Relations and Communications.

Go ahead, sir.

Thank-you.

Good morning, everyone.

Welcome to our 2nd quarter conference call.

Today's call is being webcast at the household.com website, will feature formal remarks from Bill Aldinger, our Chairman and CEO, and David Schoenholz, Vice Chairman and Chief Financial Officer.

We will have a Q&A period and as has been our custom recently, given the other companies and other conference calls going on, we're going try to keep the call fairly short.

Our remarks this morning may contain certain estimates and projections that may be forward-looking in nature.

A variety of factors may cause actual results to differ materially to the results discussed in the forward-looking statements.

Factors that may cause such differences are discussed in the annual and quarterly filings with the SEC.

Now it is my pleasure to turn the call over to Bill.

Thanks, Craig.

Good morning, everybody.

I want to start with saying I'm very pleased with the quarter.

It is a very solid quarter.

It also happens to be our 16th consecutive record quarter.

What is clear out there is that the consumer is holding up well.

We're seeing very strong loan demand, we're also seeing stable credit quality.

And the highlight of the quarter clearly is receivable growth.

Receivables were up 15% in the quarter and the best growth was in our mortgage portfolios where we had strong returns and the lowest charge-offs of any portfolio.

Speaking of charge-offs, they were up modestly in the quarter, our expectation is that they will be up modestly again in the 3rd quarter and we expect them to flatten out in the 4th quarter.

On the reserve front, we've added some reserves about, $85 million in the quarter, this is about the seventh quarter in a row where we've added reserves.

Our ratios improved in the quarter.

Our reserves to non-performs loans are up to 112%.

To receivables at 4.14%.

Expect to add to reserves as long as charge-offs continue to increase.

One other topic I want to mention before we turn it over to Dave and that is on stock options.

We have made the decision to begin expensing stock options in the 4th quarter.

The impact this year is very modest, we think less than one cent.

And next year, the impact will be about 2 cents.

With that, I conclude my comments, we're well-positioned for the rest of the year.

Now I turn it over to Dave for more color on the quarter.

Thanks.

Thanks, Bill.

I'd like to really comment on four things before going to Q&A.

The first is to give more color on what's going on in the portfolio and growth.

The second area is really to talk about credit.

Third, talk about balance sheet management and then finally, particularly in light of cap 1's announcement yesterday, to have a brief discussion on bank regulatory matters.

So, if we start off with growth, as Bill said, it was really a great quarter for growth, great growth quarter.

Receivables were up $4.3 billion.

That translates to 17% annualized growth rate in the quarter, as Bill mentioned, we are 15% on a year-over-year basis.

During the quarter, we benefited from a stronger pound.

So, we did have some effects for about $500 million.

If you exclude that, we grew at a 15% annualized rate which is still very, very good.

Real estate product was the fastest grower.

That grew at about a 23% annualized rate.

And if you look at the absolute dollar amount of growth in the quarter, real estate product was about 60% of that total.

Year-over-year, Bill 2/3 of the dollar increase in the portfolio has come from real estate and we think that's really important when you look at the lost characteristics of that product versus some unsecured product.

We had good growth in both our branch-based consumer lending business and also in our mortgage business.

In each of those channels we had very strong in volume, we're continuing to see good EA account executive productivity in the branches and it was also good to see that in the quarter we had a little bit lower attrition in each of those portfolios.

If we take a look at the branch growth, which includes real estate and unsecured product,total we grew at about a 15% annualized growth rate in the quarter.

We have good momentum in the branches.

Auto grew about -- at a 16% annualized rate in the quarter.

Marketplace is -- we see reasonable pricing, we see -- continue to see good dealer acceptance of the highway platform and even though the 16% rate is a little lower than we've seen in other quarters, we are very happy with that growth rate going forward.

Visa Mastercard product grew by about 10% annualized rate in the quarter.

We're cautious about the whole sub prime area.

Our portfolio sub prime visa Mastercard is about $1.3 billion that, compares to about $1.1 million a year ago.

To put it in perspective, that's less than 1% of our total portfolio.

Now, the other thing, when you look at our supplement and look at visa and mastercard, you will see we're down year-over-year, just remember that last year we sold a $900 million goldfish portfolio.

Private label business grew 5% annually at an annualized rate in the quarter we had three new small merchants, we have other merchants, hopefully that are in the pipeline and expect that growth rate to pick up in the second half of the year.

And then finally on our unsecured product, you can see from the table that it grew at an 18% annualized rate.

Now, we also break out the pieces of that portfolio and I point out that the fastest-growing part is our union privilege loan portfolio which grew at a 33% rate, that's a prime-based portfolio, very good credit quality.

Our domestic unsecured product, which is probably of a lower credit quality, grew at less than a 6% rate.

You can also see that in the foreign side this is where you're seeing a big part of the FX.

So,summary, good consumer demand, credit and product mix is good.

And really, the whole front end of the business right now is performing extremely well.

We're very happy with that.

Let me switch to credit quality and to comment that generally we're very pleased.

In the supplement, we give you a whole bunch of statistics, own-basis, management-basis.

I will focus on the managed basis, that's the truest picture of the portfolio.

And also we will focus on sequential quarter changes.

We talked about delinquency, it was down 10 basis points that, was a little better than what we thought.

The biggest improvements in visa mastercard and that biggest improvement was in the sub prime portfolio, delinquency was down very nicely.

We had some increase in delinquency in auto Of that is seasonal and some of it was expected in that we've been working with McKinzy to develop some models that based on the customer's credit and behavioral characteristics and on the type of collateral that we may be able to work longer with the borrower.

Our outlook for delinquency going forward both in the auto portfolio and in total is to be kind of stable to down for the rest of the year.

Charge-offs, as Bill mentioned, were up modestly, 16 basis points.

That was consistent with what we thought.

About half of that increase was due to bankruptcy, which is really the reason we saw the increase in the credit card portfolio.

Going forward, as Bill indicated, probably some pickup in the 3rd quarter modestly and then probably trending downward in the 4th.

In the supplement, we indicated the consolidation of REO and product, you can see the combined loss rate of 1.23%.

That was up 18 basis points in the quarter that was due to the aging of the portfolio.

And we're seeing higher loss severities due to bankruptcy filings, but overall, that portfolio continues to behave extremely well.

We also included in the supplement, some re-age data.

We introduced that in April based on December numbers.

We said we would update it at mid-year.

We presented it in a fashion to look at comparative trends.

The total portion of the portfolio that's being raised was 16.7% at the end of June versus 16.9 at the beginning of the year.

I think what is significant is if you look at the re-age activity in the last six months, you can see it trending downward.

That's what you would expect as the economy starts to improve and so forth.

You would expect that.

Really no big differences by-product and really no big differences in any of our policies.

Finally, with respect to reserves, the increase in total, $225 million in the quarter.

The reserve ratio was 4.14%.

That was up from 4.10 in the prior quarter and up pretty nicely from the 3.78% a year ago.

Reserves to non-performing loans were also up in the quarter both compared to March and a year ago.

So, we're very comfortable with our reserving and really looking forward -- we currently have an outlook for stable reserve ratios.

Now, switching over to balance sheet management, this is obviously an important area and we continue to be conservative and take a cautious approach.

Let me comment first on liquidity.

At June 30, our commercial paper outstanding was about $3 million, that's comparing to about $5.35 billion at the end of March and had an average life of 32 days.

Now, that level is kind of artificially low.

In the 2nd quarter we were very active in the term markets.

We thought the markets were attractive and wanted to take advantage of the funding based on market timing.

Going forward, we would expect that cp balance to be more in the 5 to $6 billion range.

Cp backup lines were $10 billion and our undrawn conduit lines were about $6.7 billion versus $5.4 billion at the March quarter.

Now, we added another billion dollars in conduit lines in the quarter, which is on top of the $5 billion we added in the 1st quarter.

In addition, at June 30, we traded an investment portfolio of about $4 billion.

That dpirs $1 billion at the beginning of the quarter -- compares to about $1 billion at the beginning of the quarter.

All of the liquidity management things are the right thing to do, but there is cost to that.

We estimate that the cost of the liquidity portfolio, the cost of extending maturities and commercial paper outstandings was about 2 cents in the quarter.

Looking to the rest of the year, we expect that to be maybe around 3 cents in each of the respective quarters.

And quite honestly, it is this liquidity management which caused the slight decrease in the net income margin percent that you can see why we talked about funding, we were very active in the quarter.

We had no problems in accessing the markets.

Spreads were good.

We did a $2.5 billion, U.S.

Collar denominated global. $2.7 billion euro denominated global.

Swap back to dollars were almost equal in the markets.

Also active on the securitization side, we did a $600 million U.K., visa mastercard deal.

We did a $925 million public auto deal, we did a $1.3 billion branch-based real estate deal.

I'd also comment that we did a billion-dollar wholesale securitization which closed in early July.

Now, those real estate deals we account for as real estate secured financing.

I'd like to comment briefly on some of the concerns that fitch raised earlier about the opportunity monetize our collateral.

For the first six months, we've done $2.3 billion in our watch-based product.

A billion out of our wholesale product and a $900 million hold on sale.

So, we're very comfortable in how the market has received our paper.

Let me switch to capital.

If we focus on the [INAUDIBLE] it was 2.4% at the end of the quarter, versus 2.81 at the beginning of the quarter, but 7.6% a year ago.

Now, the 1st quarter was kind of artificially high because we had just done a preferred deal and as we indicated before, we're looking at a range of 8 to 8.25.

During the quarter, we brought back $68 million in common, but slowed the common buyback program and are absolutely committed to maintaining the necessary capital targets.

Finally, let me comment briefly and kind of bank regulatory issues.

And as I said, I think that's probably on people's minds given the announcement yesterday.

There is no question that the national banking regulators are taking a more conservative view and we've seen that and we've been able to respond to that.

Now, as we disclosed in the 1st quarter in our SEC filings that, we had talked to them about capital requirements and that we put in an extra $1.2 billion of capital in the 1st quarter in our national banking subsidiaries.

That translated into the higher capital ratios and higher capital targets we're seeing for the company overall.

And we've also enhanced the liquidity in the bank, you know, of the $4 billion liquidity portfolio behind june, we've dedicated $2 billion of that to enhanced liquidity in the banking subsidiaries.

We had also indicated in the 1st quarter disclosures that we going to merge our three national credit card banks and we did that, effective July 1.

We merged the three into one.

Two of them were subsidiaries of HFC.

Was a subsidiary of Household Bank FSB.

The one will now be a sub of HFC.

We did it to really streamline and simplify some of the regulatory process, as always just to opt mist capital and liquidity management.

We've maintained a constructive dialogue with all the regulators and are very comfortable that we're going to be able to continue to run our business the way we've always run our business and so we feel good about that.

Now, those conclude the overall comments was I going to make and operator, perhaps you could give the polling instructions for Q&A.

Thank-you.

Sir.

Our question and answer session will be conducted electronically.

If you would like to ask a question, firmly press the star key followed by the digit 1 on your touch-tone phone.

We will come to you in the order you signal.

And if you find your question has been asked and answered before you could ask it and would like to remove yourself from the question roster, please firmly press the star key followed by the digit 2.

Again, if you would like to ask a question, press the star key followed by the digit 1.

And for our first question, we go to Bob Napoli with U.S.

Bancorp piper Jaffray.

Good morning and nice quarter.

I wonder if you could expand more on two issues that are on everybody's minds.

The -- are there any other discussions going on with regulators?

I mean are they looking for any other niche types of information or spending -- I wonder if you could talk about that a little more.

Then, the second issue, you know, that frequently comes is that the predatory lending issue, can you just talk a little bit about what's going on with some of the lawsuits and the extent that you can help us out on that.

Thanks.

Well, Bob, we're going to split the question.

Dave will talk about the regulatory.

I will talk about --

Let me quickly take the regulatory thing.

We're always having conversations with the regulators.

Part of it is to maintain an act of constructive dialogue, but there is nothing analogous to what was discussed yesterday.

Let me talk about the predatory lending issue.

I hate that term, but it is now become synonymous with sub prime lending, unfortunately.

We've been the poster child lately for the issue.

I think you need to look at it in a broader perspective, what's happening with state legislation, federal legislation, what is happening with the ACORN suits and what is happening with the ags?

So, we have three or four elements that combine to raise the question, what's going to be the impact on household, particularly on our long-term model?

Let me start with the states first.

A number of states in the last year have enacted what they call predatory lending statutes that were really,some cases, appropriate.

There are a lot of people who do act badly in the sector.

That's been in place, California is one of those states.

A number of big states have done that.

We expect more states to do it.

The impact on us of those changed laws has been virtually nill or minimal.

That's because we already have in place our best practices and in many places, our best practices exceed what these states have been asking or are in line with what the states are asking.

So, that is evidence, by as Dave went through, our growth rate is tremendous in the branch, looking at 15% annualized growth rate, high revenue growth and roas in the 2%.

So, we would say that state legislation to date has not impacted the returns or the business model.

We would expect more states to follow on because it is a great political issue, but we don't think that it's going to impact our model because of the way we've positioned our best practices and because of the 124-year history.

The next one is federal legislation.

We don't think anything will pass this year.

Our preferred solution would be federal legislation because it would be consistent.

We're going to work constructively with the federal regulators and legislators to hopefully get something next year.

So, again, even what sarbaines proposed is not that different from our model today.

Now let's talk about the lawsuits.

We think, straight out, that the class action suits brought by acorn, in particular, are just baseless and we don't see any long-term impact there.

We think they're wrong.

On the ags, obviously, again, it's a political issue.

There's been lots of talk.

We will, like we do on everything else, focus on resolving that issue over the next six months or so.

But I can't go in any details except to say that I am confident that our best practices and our current model ultimately will prevail and will do what we do because we do not do predatory lending.

The final message is lots of moving parts, lots of headline issues, but, economically, we run a very strict model and a very good model for our customers and we don't think when we're sitting here talking to you next year there will be anything substantially different in the returns or practices.

I'm sorry for such a long answer.

No, thank you.

Our next question go to Mike Hughes with Merrill Lynch.

Thank you.

One fundamental question and one beat the dead horse question.

The income was a little lighter this quarter.

I wonder -- the impact of ralph, I hoped for some information there.

And the beat the dead horse there, the regulatory scene is most focused on actions backed by deposits.

I presume due to the capital additions you've made, you're probably already hitting the 200% risk-based capital, but I want confirmation that the regulars couldn't interpret you guys have "deposits-backing sub prime assets" and you're hitting capital ratios such as those.

Mike, on the second one first, your assumption is absolutely right.

We are, based their sub prime guidance, we are well capitalized already and that's what we accomplished in the 1st quarter.

So, I think that issue we've dealt with and are done with.

We would not expect anything more on that front.

On the fee side, they were down that, really relates to late limits.

That's the flip side of an improving delinquency position.

So, you know, as we see a little bit of compression on that revenue side, we're expecting to see the offset really on the credit side and also on the collector expense side.

Going forward, you know, I think the run rate will pick up a little bit as volume picks up, but that's really what it's related to.

Is that anything particular behind the increase and charge-off rate on real estate securities?

As I indicated, you have a portfolio that's grown rapidly and will continue to age a little bit, and so that's one point.

And the other thing, we are particularly in second, in seconds where you have additional bankruptcy filings and are seeing additional loss severity.

The combination of ROE and charge-offs at 120 basis points is still pretty darn good.

Yeah, okay, thank you.

Our next question, we go to Bradley Ball with Prudential Securities.

Thanks.

Bill, you mention that he did in light of the state's rules, you're still operating, sounds like as profitably state by state as you were prior to the new laws that are being put in place.

I assume that it takes into consideration the adjustments that you began making about a year ago when you discontinued single premium life insurance as well as the other "best practices" that you put in place.

Just acknowledge that if that's the case.

That's right, Brad.

Thanks.

And then, separately, just a quick question for Dave on credit quality.

Can you dig down a little deeper on the increase in charge-offs in the other unsecured?

It was a little sharper than we had expected.

What's going on there and what's the forecast for the other unsecured charge-offs as the year progresses jairks well that, product type includes some of the branch base on secured product and so you have a customer who probably, the entire customer profile is the most exposed to kind of an economic downturn.

That's what you're seeing there, increases in bankruptcy and I think that type of customer, who has less resilience, our expectation for that is consistent what we talked about in the portfolio in total.

I think we probably will have a -- a little bit of a bump there in the 3rd and then our expectation is that is going to start to level out.

Is that assuming that unemployment has peaked?

If we see a higher level of unemployment here, does the forecast change?

If unemployment continues to go up and the consumer starts to topple, obviously we'd have to reassess that.

Okay.

Thank you.

Our next question, we go to Matt Veto with Salomon Smith Barney.

Hi, good morning, couple of questions.

First, on the litigation front.

It seems like we read something a while back that a court made a preliminary ruling preventing the enforcement of an arbitration clause.

Did I read that right?

And secondly, the incremental cost of a couple of pennies for the liquidity portfolio build, would that be incremental to the earnings guidance you have talked about or is that baked into your forecast?

Let me cover the second point, I think the -- as we did in the 2nd quarter, I mean the run rate of the business absorbed the liquidity costs and our expectations for the second half of the year is at the run rate of the business will absorb those costs, so that doesn't change where we were before.

Yeah, on the arbitration clause, I think that was the California case.

As we know, California tends to object the outer edges on most of the legal issues and the supreme court has upheld arbitration clauses in a number of cases, we are on appeal there and, you know, I think -- I think the entire financial services industry, in every part of the business, as you saw arbitration clauses effectively, are the right thing.

We're going ton use them and appeal that jurisdiction.

But it's been upheld in multiple jurisdictions.

Great, thanks.

Okay.

For our next question, we go Michael Hodus with Goldman Sachs.

Hi, good morning.

I wondered if you could elaborate a little bit on the interplay you're seeing with the fixed income investment community.

Household has taken steps to improve liquidity, lower -- lower leverage -- quantify that to a certain extent.

Can you just give us, you know, your sense of what kind of assumptions you're baking into the outlook for spreads to treasuries and how you see that evolving?

Well, our -- part of the reason we were such an acrite issuer in the term-debt market in the 2nd quarter is that we saw spreads being attractive.

We had good demand for our product.

A good investor receptivity and which is why we issued -- now, having said that, spreads have been volatile because of the overall capital market environment and so, therefore, you need time when you're going to issue.

Our spreads, compared to historical levels, are still pretty comparable.

The other point I would make is that spreads on the asset-backed side have really been more consistent and more stable than spreads on the unsecured product and which is why we've been pretty active in the asset-backed markets, including the real estate market.

So, our expectation will be that as spreads might be a little bit higher, just given uncertainty, but we will issue opportunistically and it's relates to overall bofr yoshing costs, that's well under control.

Great, thanks.

Ladies and gentlemen, due to time constraints, we have time for only one additional question.

That question comes from Joel Hauck with .

Thanks and congratulations for being ahead of the other companies in the space.

My question was why have you changed the securitization disclosure where you no longer break out the amortization of gains in the overlight provision?

And can we get that put back in to the quarterly supplement?

The question of securitization disclosure has been controversial and what we had disclosed previously was securitization information on a managed basis and our conclusion was, and I think we got feedback from people that they thought that that was confusing.

So, what we've conclude is that we would disclose it on only an owned basis and that if somebody wanted to also understand the net people -- net impact relative to financial statements, we would simply disclose that amount and that's the approach we've taken.

And to supplement, there is a footnote in there that talks about that and I think I would not want to go back and muddy the issue.

Okay, and perhaps it is a follow-up offline.

That's fine.

Okay, great.

Thanks, Dave.

Mr. Stream, back to you for closing remarks.

Thank-you.

Thank-you for your attention today and I apologize for the questions I couldn't get to.

We are constrained by time.

Either me or celeste and we will try to get your questions answered as quickly as we can.

Have a good day.

Thanks.

Ladies and gentlemen, this concludes our conference call for today.

You may disconnect at this time.