滙豐控股 (HSBC) 2002 Q3 法說會逐字稿

Good day and welcome to Household International Q3 2002 earnings results call.

It is being recorded.

At this time, for opening remarks and introductions, I will turn the call over to Craig Streem, VP Corporate Relations.

Please go ahead, sir.

Thank you.

Good morning to all of you.

Welcome.

Today's call will include formal remarks from William Aldinger, Chairman and CEO and David Schoenholz, President, COO.

Their comments will be followed by a very very brief question-and-answer session period.

Given that we just did a lengthy call with the Street last Friday, which included some comments on our outlook for 2003, we are going to keep this morning's call fairly brief.

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

Factors that cause such differences are discussed in the annual and quarterly filings with the S.E.C.

And now I will turn the call over to Bill.

Thank Craig.

Good morning everybody.

Well, we had another strong operating quarter.

Our EPS were up roughly 14%, excluding the settlement charge.

We saw good fundmentals in all of our businesses.

I look at the key metrics around year-over-year receivable growth was roughly 12% year-over-year, revenue growth 25%.

Our operating expenses slowed down to 8% from double digits last year, which is appropriate for this kind of economy.

We saw our delinquency and loan losses increase in the quarter, but that was as expected and as Dave will share with you, we see some encouraging signs in 4th quarter trends.

On the reserve front, we continue to build reserves in the quarter.

Our on balance sheet reserves increased $137 million in the quarter.

Our managed reserves increased almost $300 million to the quarter, and our total reserves today are roughly $4.7 billion, up $1.1 billion year-over-year.

And we have absorbed that and still had very good growth in earnings throughout.

If we focus on the balance of the year, essentially, our approach will be to slow down growth, complete some of the asset sales we talked about on Friday so we can reach our targeted capital ratio of 8.5% by year end.

We also expect to continue to build reserves to further strengthen our balance sheet throughout the year.

Now, if I look forward to 03, I won't talk about numbers, but I just want to reflect on our franchise a little bit.

Last week's settlement put alot of uncertainty behind us.

And it is really time to think about the future.

If you assess HI today we have a fabulous franchise.

We have a large customer base over 50 million customers, we have a market that is growing rapidly.

In this weaker economy we have seen more prime customers move into the nonprime market and that has been a plus for us.

We have also seen a lot of regulatory action.

The FFIEC rules today define 40% of our entire U.S. population as subprime.

That is an opportunity for us as some of the prime lenders step away from that.

So, we not only have a big market share today, we have a bigger market going forward.

And we see fewer competitors.

Obviously, we've seen massive consolidation in the industry over the last six or seven years, we have seen some of our competitors who have been wounded and sidelined and not participating the way they used to.

And all that has worked to our advantage.

So we have a bigger market for the continued strong franchise and fewer competitors.

And just again, to reflect on a few of HI's strengths.

Number one, we have some of the best recognized brands in the industry in HFC and beneficial.

We clearly have the lowest cost structure in the industry, we have a more diversified product array than any of our competitors in the sector and most recently the best practices we put together combined with the terms of the settlement clearly establish HI as a model for the industry in the future.

We are the leader, we are in the space, we are committed.

With all the settlement issues behind us, we have an energized management team and we are ready to take off in 03.

I will close and turn it over to Dave.

Thanks Bill.

I'm going to just touch briefly on two topics and we will quickly get into some question-and-answer session.

First topic I want to talk about is credit quality.

We were satisfied with our credit performance in the quarter.

And the increases that we saw in chargeoff and delinquency were well within our expectations.

As Bill indicated we continue to strengthen our balance sheet reserves.

The total managed lost reserves were up $320 million in the quarter, and up $1.1 billion from year-ago.

Reserves as a percentage of receivables were 4.36% or up 22 basis points in the quarter and up 64 basis points year-over-year.

Reserves as a percentage of nonperforming loans were higher compared both to the prior quarter and the prior year and finally, our owned provision in excess of chargeoffs was about $140 million.

That compared to about $90 million both in the prior quarter and in the prior year.

So our reserve position we are staying well ahead of the curve.

I will touch first briefly on chargeoffs.

Our coincident chargeoff ratio ticked up 13 basis points.

If we lag it, to take out growth, it was up 9 basis points.

We saw decreases in our chargeoff ratio in both the Visa/ MasterCard and auto portfolios.

Visa/MasterCard ratio is down across all portfolios and the decrease in auto was the second straight quarter that we saw a decline in chargeoffs despite continued weakness in the used car markets.

We did see increases in our chargeoff ratios in the real estate, private label credit card and other unsecured portfolios, the single biggest factor there was higher chargeoffs due to bankruptcies.

The good news on that front is that the rate of new bankruptcy filings actually fell in absolute dollars and ratios for the quarter, and that bodes well for future quarters.

As we have done in the past we disclosed the combination of REO expense and real estate chargeoffs, net ratio was up 14 basis points in the quarter.

That increase was due to higher bankruptcy.

It is in higher loss severities primarily in second mortgages.

It is also due just to the natural aging of the portfolio, particularly in the correspondent business.

Our delinquency ratio was up 29 basis points on a coincident basis.

If we lag that, which takes into effect the $1.6 billion loan sale in the quarter, the ratio is up 14 basis points.

We had decreases in our auto and other unsecured portfolios, we had increases in our real estate, private label credit card, and Visa/MasterCard portfolios.

Although the ratio was well within our expectations, we are seeing some impact from the continued slow economy.

Now, based on our current roll rates, new bankruptcy filings and other trends we expect our Q4 chargeoff and delinquency ratios to start stabilizing in the Q4.

I would also echo what Bill said, in that we expect to add to reserves in dollars and percents some in the Q4 to make sure we continue to stay ahead of the curve.

And finally, I would just point out that in the supplement, we have continued to disclose re-H data.

The outstanding balance of re-H accounts, is down in the quarter both in dollars and percents.

And the most recent activity is down as the economy has improved somewhat.

I would also like to point out that over 50% of the total dollar balance outstanding relates to our real estate portfolio, where the potential for any future credit loss is just a fraction of the total balance outstanding.

Second topic I want to touch briefly on is liquidity.

We talked about that at length on Friday so I will not go into it in great detail.

I specifically wanted to give you an update on our transition to a split-rated commercial paper issuer in light of S&P's downgrade on Friday.

As we indicated in the last call, as of Friday, our gross CP balances were 4.4 billion.

Net of an overnight investment portfolio of 1.5, for net CP outstanding of 2.9.

As with yesterday, our gross EP balance was 4.7 billion.

Our overnight investments were 1.2, and net CP balance of 3.5 billion.

Yesterday, we raised $1.2 billion and as of today we finished our funding in the CP market.

We have had no flow-back or secondary trading in the transition to going to a split-rated CP issuer has gone very very smoothly.

We are continuing to offer retail [INAUDIBLE], and we are looking to access the institutional term market with an appropriately sized and priced deal in the next few weeks.

We are encouraged by the fact that compared to where we were in terms of a bond trading spreads last Thursday, spreads came in both on Friday and on Tuesday by over a hundred basis points and as of this morning they are also coming in.

We are encouraged by that.

At this point we will take a few questions.

Tony, can you give the call-in instructions?

Yes, sir, thank you.

Today's question-and-answer session will be conducted electronically.

If you would like to signal to ask a question, please press the star key followed by the digit 1 on your touch tone telephone.

Again, that is star 1 to signal.

If you are using a speaker phone or have a phone with a mute function we do ask that you deactivate the mute function in order that your signal may reach our equipment.

Again, that is star 1 to signal and star 2 to remove yourself if you find that your question has been answered.

We will take our first question from Mark Alpert with Duetsche Banc.

I guess the one number that caught my eye and you mentioned upon it briefly was in terms of the real estate secured portfolio, you know, both the rise in the delinquency ratio from 2.82 to 3.86 and the loss ratio from .86 to 1.03.

And the -- other than the slowdown in the economy and the bankruptcy, I guess number one I am surprised -- I didn't know that bankruptcy played a big role in that number.

Could you explain that?

And number 2, is that, you know, the high LTBs that you raised them significantly over the last couple of years and I am wondering if that isn't also playing a part in the rise in the loss ratio.

Mark, let me just comment a little bit.

In terms of bankruptcies, I think you have seen more consumers filing bankruptcy and then deciding not to reaffirm the house.

Particularly as it relates to second mortgages.

And that is really what has given rise to some of the loss severity.

I would also point out that in our correspondent business, we had hired a new head of collections, and that person is starting in the Q2, kind of taking a look at some of the things, and in some aspects of the portfolio, decided to take a somewhat more conservative view.

Some of that increase in the chargeoff ratio is really due to kind of a nonrecurring element of chargeoff.

Our expectation for the chargeoff ratio going forward, in the Q4, is actually kind of flat-ish.

Based on the role rates of what we have seen.

In terms of the delinquency factor, about 25% of that increase is due to the mortgage sale, and how bankruptcies enter into delinquency is that when a customer does reaffirm, you are immediately prevented from any further collection actions.

And so you can have an increase in delinquency while you are working with that customer and while that customer is going through the bankruptcy proceedings.

A high percentage of our first mortgage customers reaffirm their bankruptcies and so I think the loss rates coming out of that will be obviously much, much less than what we would have expected in a comparable increase in unsecured delinquency.

I am sorry, why did the mortgage sale have to do with the rise in the delinquency ratio?

A denominator effect, Mark.

Right, okay.

And what about the high -- higher LTBs, not high LTBs, but I know you have been doing a lot of 90 percent plus LTBs, is that a factor in the higher loss ratio?

Well, I think to the extent that somebody decides to walk from the property or you have a bankruptcy situation, clearly you have had some loss severities.

We go next to Kenneth Posley with Morgan Stanley Dean Witter.

Hi.

Good morning.

I am wondering if you could talk a little bit about the fee income.

There were a couple of line items that year-over-year were up fairly significantly.

The securitization revenue and the other income, and I am wondering if you can just talk a little bit about the factors driving those year-over-year increases.

If we talk about fee income, it is really driven by increases in our credit card fees, both in Visa, MasterCard and in retail services.

That was fee incomes would include interchange fees, late and over-limit fees and we had good usages in the accounts and good growth, both in terms of Visa, MasterCard, and retail.

We have been adding some subprime accounts into the Visa/ MasterCard area and obviously those are fee intensive.

In the Q3, we actually put through some changes in our grace periods, which gave rise to some additional late-fee income.

With respect to securitizations, you know, in the quarter, we securitized and sold about $2.5 billion compared to $2 billion in the Q2 and about $1.2 billion a year ago.

And when you look at it, the increases are strictly related to volume.

Associated with using -- accessing the asset back markets more is part of our funding and liquidity plans.

And can you comment on other income, Dave?

The hundred million in the quarter, and that is up about 50 million from a year ago.

The biggest part of that relates to our mortgage banking subsidiary.

I think you are aware that we acquired a mortgage banking subsidiary, Decision One.

We have been expanding those originations, and because there is a very -- because loan premiums have increased, we have really focused on using our mortgage banking subsidiary to sell through their originations to investors and to the street.

And that is the biggest driver of that going -- compared to the prior year and going forward.

Great, thank you very much.

We go next to Joel Hauck with Wachovia Securites.

Thanks, good morning.

I just wanted to clarify, did you say, Dave, that loss rates in Q4 are going to be stable from Q3 or will they rise a little bit and then stabilize?

Our expectation is they would be pretty stable in the fourth quarter.

Okay, thanks a lot.

We go next to Matt Vitto with Salomon Smith Barney.

Hi, good morning, two quick questions, first I was just curious about the diverging trends and chargeoffs between the private label portfolio and the Visa/ MasterCard.

You talked about what might be contributing but if you could flesh that out a bit.

What could we expect in terms of the sort of size of those liquidity portfolio you plan to carry given your comments about the impact on margin this quarter?

Well, let me take the liquidity issue first.

At the end of September, our total liquidity portfolio was about $6.5 billion up from about $4 billion at June.

The cost of that liquidity portfolio accounted for all the decline in our net interest margin percent.

As we talked about last Friday, that ongoing effect of that has been factored into some of the 2003 guidance we gave.

As part of selling the thrift, our expectation is that liquidity portfolio will decline in the fourth quarter.

With respect to diverging chargeoff ratios on Visa/ MasterCard and retail services, the real issue related to bankruptcies and I think related to bankruptcy predictive models in terms of scrolling the portfolio, we have probably been well ahead of the curb in Visa/ MasterCard and have recently introduced the same techniques into the retail services business.

Our Visa/MasterCard, quite honestly, guys really got ahead of that curve and we expect to see similar benefits of those tools in the retail book going forward.

Okay, thank you.

We go next to Robert Napoli with U.S.

Bancorp Piper Jaffray.

Good morning, I was curious on two things, on the bankruptcy front your bankruptcies were down in the quarter.

Yet, in the market overall we have seen kind of a double dip in consumer bankruptcy filings in the third quarter, continuing somewhat in the fourth quarter.

I was wondering why you were diverging from that?

And secondly, could you give a little more color on where you think the net interest margin is going to trend over the next couple of quarters?

Let me take the second one first.

I think it is going to be relatively flat.

You know, absent the liquidity portfolio, it would have been absolutely flat in the quarter, and I think we are kind of in a steady state situation there.

With regard to bankruptcy filings, you know, I am not sure how to reconcile that to the -- to your comments.

I mean, our absolute dollars of filings were down slightly in the third quarter compared to the second.

And as a percentage of originations, we are also down slightly.

I think we have done a good job, quite honestly, in the credit risk front in terms of account acquisition and bankruptcy models and trying to avoid accounts that have a propensity for bankruptcy.

I guess your reagents have declined a little bit.

Is there anything on the collections strategy there that has caused that?

What would be your outlook for reaging?

You know, we continue to always evaluate the policies and tweak them here and there and, you know, we have done that a little bit in the third quarter as well.

I think our expectation is that in this economic environment we would expect that balance to continue to trend down.

Thank you.

We go next to David Hoxton with Bear Stearns.

Could you remind us about recent private label transactions either pending or declosed that add to the balance?

We didn't -- we had three small programs that kicked in, in the third quarter.

You know, we have got a few things that are close to being signed or will give some lift in early 03.

But nothing else in the third quarter, David.

Okay.

And then just as a follow-up to last week, could you explain again the sale of the thrift?

Is that selling deposits and some assets or are you selling the charter or both?

I think at a minimum, we will be selling the assets and deposits within the thrift.

There really is not an operating platform in the thrift anymore in terms of branches or anything else.

I mean, so it is pretty much a cold-nose financial transaction with assets and liabilities to the extent that the charter has some value we would obviously look at that.

Our thinking is right now it will be more of an asset-liability sale.

Thank you.

Due to time constraints, we have time for one additional question.

It will come from Brad Ball with Prudential Securities.

Hi, Dave.

Could you explain what the major cause of the difference between the 525 charge you are recognizing versus the 484 that you are paying in restitution?

And also could you talk a little bit about what you are expecting from growth in each of your portfolios for the balance of the year?

Thanks.

Okay, well, let's take the 525 question first.

I mean, to get to that number, we took the maximum settlement fund, assuming that a hundred percent of the states participate.

We also added to that our reimbursement of state investigation and administrative costs.

We put in there an estimate for our legal and professional advisory fees, and we have also put in there an estimate of what we think it will take to settle related civil litigation and so the combination of all of those we think should really help put this issue behind us.

The number is 41 million, is most of that related to the settlement of civil litigation?

I think it is a combination of all of those three extra factors that I talked about.

With respect to growth for the rest of the year, I think in the fourth quarter, our expectation will be, is that the portfolio will be -- will be down compared to the third quarter level.

In the third quarter, before the sale of the mortgages, we were up about $3.7 billion, as Bill indicated we will slow some of those originations and so I would expect that gain to be somewhat less.

Obviously, we will have some seasonal pickup in Visa/Mastercard in retail services.

We have talked about the various loan sales.

Our estimation is the portfolio will be down.

I think importantly, though, in terms of growth momentum in the branches and elsewhere we are continuing to see good growth momentum there.

Your guidance on the margin is flat-ish, that was the guidance you gave?

It is.

Okay, thank you.

Okay.

Thank you all very much.

Again, we appreciate your interest, and wanted to keep this a little shorter today after having an hour and a half on Friday.

Thank you very much.

This does conclude's today's Household International third quarter 2002 earnings results conference.

We thank you for your participation.

You may disconnect at this time.