滙豐控股 (HSBC) 2007 Q1 法說會逐字稿

Good morning, good afternoon and thank you for waiting.

Participants will be in a listen-only mode until the question-and-answer session of the conference.

(OPERATOR INSTRUCTIONS).

I would now like to hand the call over to Douglas Flint.

Please begin, sir.

Thank you very much and thank you to those of you who are on the call in the UK, in the U.S.

and, for those of you who stayed up in Hong Kong, thank you very much for your attention.

The purpose of today's call is to talk about HSBC Finance and I have great pleasure in introducing Brendan McDonagh who is the Chief Executive Officer in the finance company based in Chicago who's going to make some remarks and lead this session.

Brendan?

Good morning, good afternoon and good evening, everybody.

I'd also like to make a couple of quick introductions.

I have with me my two senior colleagues, Tom Detelich, President of Consumer Lending and Mortgage Services.

I've also got Walter Menezes who is President of our Card Services Business including retail services and auto finance.

And it's quite possible depending on your questions that between the four of us here we will take turns in answering those questions.

I'd also like to just start off with a little bit of context, a little bit of background in particular; maybe bring everybody up to the same level of knowledge about the organization.

HSBC Finance Corp., previously known as Household Finance, is, as you can appreciate, a very large organization.

It's 34,000 employees alone in the United States.

We have a further 5,000 employed in our offshore services centers which makes us around about a 40,000 person business.

It's a significant contributor to the HSBC Group and continues to be so.

The business is profitable, as you've seen with the results, and we'll get into that in a minute.

And it's widely spread between both the auto finance, the cards, the consumer lending -- we've got a whole range of businesses.

At a high-level what I'd like to say first is operations are performing within expectations for myself, my senior management team -- particularly for myself, it's a less than 100 days in office.

What we put in place, the initial measures, everything is, as I said, performing within expectations.

We're singularly focused on progress within the areas that we control -- why don't I get into that in a few minutes about the various actions that have been taken in the first few months of this year.

Equally though we're mindful of the various economic and industry factors that are out there -- the U.S.

credit environment, interest rate levels and so on.

I would also like to conclude those opening statements with just also reinforcing that I feel very confident here we're on top of the issues within mortgage services and I also believe that I've got the right leadership team with me.

Now going to the actual financial results themselves.

You've obviously seen the figures; I'm not going to go down through them line by line.

There is one thing I would like to point out.

Obviously profit before tax you've see is $900 million.

There are some one-offs and seasonal items in there I would like to draw your attention to.

The first one is our tax services, tax payer financial services business is very seasonal with the bulk of the profits coming in the first quarter and that roughly has an impact of about $150 million to $160 million.

There are also some accounting adjustments around fair value option accounting which is another couple of hundred million.

And also for the business, generally in consumer finance the first quarter is always a strong quarter, particularly as the U.S.

consumer is in receipt of tax refunds which in some case they use to pay down their debts.

You have seen there's a modest balance sheet contraction from about $182 billion to $179 billion.

But notwithstanding that contraction, net operating income in the first quarter is steady compared to the last quarter of '06.

The loan impairment charges, excluding mortgage services, obviously have increased since the first quarter '06, but they've increased as a result of the following.

We had a very favorable credit environment both in '05 in early parts of '06.

We had extremely low bankruptcies at that time and we have much stronger economic conditions.

We've also had since then the growth in seizing of the portfolios across all the businesses, both card services and mortgages as well.

For example, if you go back five years you have delinquency rates across the whole company, 2 plus percentages of 5.3% in '02, 5.3% in '03.

But they went down to very cyclically low figures of 3.73 in '05 and 4.25% in '06.

So they explain why you have that variance between '06 and '07.

The credit performance in mortgage services in the first quarter was in line with expectation and it reflects a deceleration of the rate growth in delinquencies.

And in a second I'll talk through some of the actions we have taken.

I'm also pleased to show that operating expenses were essentially flat quarter on quarter between the fourth quarter and the first quarter.

And as I mentioned, all the other businesses have performed well and are in line with expectations.

And so I suppose what I'd like to sort of say in one sentence really is that I think we're where we are today is what we expected to be.

It's in line with what we had said in earlier calls a few months ago, particularly at the time of taking over the Corporation, that we would put in a number of fixes, a number of initiatives, some of which I'm going to go through in a little bit more detail.

One of the first areas is obviously we've strategically repositioned the mortgage services business.

And I'd just like to take a couple moments to clarify how mortgages, the various mortgage businesses we have within the finance Corporation.

We essentially have three channels.

The first channel is the 1400 -- circa 1400 branch network tagged consumer lending and they have been -- that's their core business which is the origination of -- excuse me, the origination of mortgages and in fact they -- roughly around about 90% of their mortgages are fixed and around about 90% are in fact first lien mortgages.

And in the presentation you will see that in that particular channel their delinquency performance is around about half of the wholesale and correspondent channels which are the two channels which I'd like to also explain.

So the second channel after consumer lending is our correspondent channel and the correspondent channel is where we essentially have purchased in pools of mortgages that have already preexisted, originated by other corporations.

This particular channel was the channel we have now discontinued.

The correspondent channel was discontinued about a month or two ago.

The third channel is the wholesale channel which is also the brokerage channel which is originations through one of our subsidiaries called DecisionOne and we continue to originate products through that channel, but we have narrowed the product range quite considerably and also, due to a certain amount of tightening of standards and a withdrawal of a series of product, volumes, obviously originations in that channel are down.

One of the other major changes around that whole area is that all three -- well now all two channels, but before all three channels are now under a single management structure.

With regards to those portfolios which are demonstrating the high levels of delinquency that you've seen, we now manage those out of a single collection center.

We've taken our best collection expertise and practices and we're running that through that one center.

Secondly, we've reorganized our management team.

We've created a Chief Operating Officer role which has been extended to cover the credit risk organization.

We've carried out a couple of other strategic initiatives.

Some of you will have seen our decision about two months ago to discontinue the preseason prefile tax products in our tax payer financial services.

We believe that was very important.

We're an organization that's committed to providing the best products and services for our customers.

It sits exactly where our brand is.

And then very recently we announced the agreement to sell our UK insurance operations in an overall agreement with the UK bank and Aviva insurance.

I'd also like to mention one of the activities that's also going on in the mortgage area because there's been a lot of coverage on this -- the whole area of foreclosure.

One of the benefits we have in actually owning our mortgages and having them directly on our balance sheet is we're able to control that process.

And we have a very proactive calling program at the moment around the armory set, particularly those that are going to happen in the second half of this year to proactively call our customers and, where appropriate, to modify or restructure their loan facilities to help them get through that particular experience.

I think at that stage I'll wrap up my comments and I will hand it over for the Q&A session.

Brendan, thanks very much.

May I just say one final remark.

I think it's just worth noting that it's now almost exactly four years since we purchased the finance company and in that four years we've essentially had net income of approaching $10 -- sorry, net income approaching $10 billion on a $15 billion to $16 billion acquisition.

So from an HSBC perspective this has been and continues to be a very important part of the group.

I think at this point we'll take your questions and we'll do our best to answer them.

(OPERATOR INSTRUCTIONS).

Ian Smillie.

Good morning, James.

Two questions.

The first one is on the credit card portfolio in the U.S.

which is delivering strong balance and revenue growth.

Now the (inaudible) charge to loans there looks like it's something in the order of 6%, but you suggest in the text that as that book gets seasoned that charge would rise because you've been growing into the higher yielding part of the market.

Could you give us some sense as to what a sensible go to level of bad debt charge there should be, please?

We don't see those charges going anywhere.

They'll get closer to the 2003/2004 vintages which is where slightly below that we believe because of the in fact that bankruptcies will still not been exactly where we think they were them.

And that's including the mix shift toward the Metris portfolio?

Yes.

Thank you.

And the second question is with reference to the successful growth in the restructured mortgages which you show on page 56 of the finance document, up something like $1.4 [billion] to $1.5 [billion] which is exactly what you've described.

Could you just help us a little bit in terms of how much of those mortgages you expect to become delinquent in the future and how the P&L provisioning works for that?

Is there any provisioning taken at this stage for those extra mortgages which have been restructured?

Or do you wait and see how the consumers behave under the new terms and conditions?

The restructured -- this is Tom Detelich -- the restructured portfolio is reserved distinctly from the current never been restructured portfolio.

So they are reserved separately and generally take into account recidivism rates that are built into the roles.

Can you give us some sense as to what those are and what sort of coverage ratios you're carrying against those mortgages at this time, please?

I do not have the actual coverage at that segment level.

But in fact what we are tracking, Ian, is recidivism and at the moment recidivism demonstrates that the restructuring program is very effective and the provisioning levels take into account the actual level of recidivism and then the severity that we provide is the same as we're providing in relation to the other first and second.

So I think we said at the end of last year we were basically providing close to 100% of seconds and around 40% of firsts.

So that would be the severity we were taking.

The proportion of the book that we would expect to flow through we track the recidivism of the portfolio partly to see whether in fact the actions that we're taking in restructuring the loans makes sense.

At this stage it's early days because this is a second half of '06 program predominantly -- or probably started in the second quarter of '06.

Recidivism is very encouraging in relation to the actions that have been taken.

That's great.

Thanks, gents.

Tom Rayner.

It's Tom Rayner at Citigroup here.

A couple of questions, please.

Just can I start?

Brendan, you've given us some clarity on the impact of seasonality on the Q1's.

I just wanted to clarify a couple of those points.

You mentioned the tax business has been positive around the $150 million.

Is that purely at the operational level or is there also a beneficial impact at the impairment line in Q1 as people sort of enjoy tax refunds it helps their debt service.

Also I just wanted to check on the nature of the fair value adjustments.

Again, you mentioned $200 million.

Is this the sort of mean reversing type of adjustment which we should expect to be zero going forward?

Just so I can get a feel on the $900 million because I also note that there's a $200 million loss in mortgage services which I guess you wouldn't expect necessarily to continue going forward.

So could you just add a bit more clarity on what you said earlier.

And I have a second question, please.

Certainly.

I'm going to let Douglas take the question on the fair value option accounting.

I think while it's very hard to specifically quantify the beneficial impact of people getting tax refunds in the first quarter, having said that we can look at our nonmortgage services 2 plus delinquency rates and they fell from 4.31% to 4.16% in the first quarter.

Now part of that has to be attributable to that seasonal beneficial effect and part of it I think is due to the fact that the nonmortgage services portfolios we have are pretty stable and sound and we're not seeing any further deterioration or any contingent effect.

Tom, the fair value movement is predominantly to do with the fair value of the debt of the finance Corporation and, if you like, the noise in the number is essentially our own credit spread movement.

So last year we had a contraction in credit spread and therefore a charge to the P&L account this year in line with much of the rest of the market.

There's been a widening of our credit spread which has led to a credit to the P&L account.

So you're right, that element over the residual life of the debt goes to zero.

We had a debit last year, we've got a credit this year.

It's noise.

And just on the $200 million loss -- I know you're not going to give us a forecast but for the full year you'd expect to be in profit on that business, can you answer that?

It's Brendan here, I'll take that question.

I think there's an element of, as I said, further seasoning of our nonmortgage portfolios that will occur throughout the rest of the year.

And also in the second half of this year we will have quite a large number of armory sets compared to the first half of the year and that's obviously factored into some of the provisioning we've been able to take to the extent that we could take it and it's factored into our own expectations for the rest of the year.

That sort of leads me into my second question actually.

I was just looking at the delinquency trends, stable [hex] outside of mortgage services, but even within mortgage services, if you look at just the absolute U.S.

dollar millions number rather than the percentage, which is obviously being pushed up by the fact that the book is shrinking, it actually looks very stable Q1 on Q4 within mortgage services as well.

Can you give us any more flavor for how significant these armory sets might be in the rest of the year relative to Q1 because it looks as if you must be well within your comfort zone on the actual delinquency trend and unless we're starting to worry about expected loss going higher, it's hard to see aggressive increases in provisions going forward.

Can you comment on that trend?

Tom Detelich is going to take that question for you.

I'll first point out that we're enjoying in the first quarter not just the seasonality benefits that we have, as Brenda mentioned, brought together the operational teams within consumer lending and mortgage services.

So we're enjoying a little bit of benefits of the best teams placed against the riskiest portfolios and you're seeing that in the performance of the portfolio.

That said, we've had a relatively small amount of armory sets in the first quarter -- less than 10% that we said that we'll see in the entire year.

Indeed we'll see somewhere between $7 billion and $9 billion of the portfolio we set in the second half of the year, depending on the liquidation rates, how many of these loans actually pay off or refinance on their own?

So we are just mildly optimistic in we expect the second half of the year to be significantly more challenging because of the armory sets.

I think that's an important point, Tom.

I think we've made clear in the filing on and the remarks that Brendan and Tom have made that the environment in Q1 is one which is going to be different from the second half because the armory set profile.

On the other hand we have taken a considerable amount of steps to contact the riskiest clients and talk to them about modifications and restructures to enable them to begin to proactively deal with the payment burdens that they will have going forward.

So there are things we're doing, early stages look encouraging but there's a big change in the rate of reset in the second half of the year.

(inaudible) has anything really changed since you took the big provision in '06 where you clearly look forward at these armory sets?

You've obviously done more work since then, has much really changed to make you think that the provisions you took then were wildly out of step with what's needed?

I think the simple answer is not really very much.

I think if we were doing the same exercise again we would come very much to the same number.

Which is why in fact as we end Q1 our provisions are pretty much in line with where they were at the end of the year.

So we pretty much see the same picture.

And the ARMs, the second liens where the severity is higher come off faster than the first liens.

So by the end of this year we should have, you should have through us a much clearer impact as to how this is flowing through, particularly in relation to the second lien book where the severities are highest.

Okay.

Thanks very much for that.

(OPERATOR INSTRUCTIONS).

Jon Kirk.

Good afternoon.

Actually you've gone quite a long way to answering my questions on the profile of armory sets.

But just to sort of flesh that out a little bit -- is the second half going to be the most intensive point of armory setting as far as you're concerned?

Or will that roll through to the first half of '08 as well?

Armory sets will drop off significantly into the first quarter of '08, so the vast majority will happen in the second half of the year -- of '07.

On page 11 of the Q filing you get a profile of what schedule to reset in 2007 and 2008.

So you can see that in '08 it's about what half what it is in '07.

Okay, thanks.

And just another question related to -- there was a comment made right at the back of the presentation actually where one of your ongoing areas of focus is credit cards, vintages originated in the fourth quarter of '06.

Is there anything that we need to worry about in that respect?

Those that worry about this sort of thing might think that was some form of contention between the mortgage book and other areas of household book or is it simply just an isolated bad quarter in that particular area?

What we've seen right now is nothing different than what we had expected when we put these loans on our book.

So they're normal, maturing after vintages that we've seen taking place.

And right now we have just not seen any contingent at all from the mortgage book, it's just that we have higher balances and therefore we've got higher losses associated with big vintages.

Okay, thanks.

John-Paul Crutchley.

Good morning, good afternoon.

Two questions if I can.

The first is actually on the credit card business within the finance Corporation.

Just on the other operating income and fee income which has been quite strong in this period.

And I think you refer in the text to a lot of that being related to late fees, higher over limit fees, etc.

I'm just wondering about sort of the stability of that longer-term?

We don't expect to see any significant decline.

We are looking at all of our card practices relative to what's happening on Capitol Hill in terms of the scrutiny of these fees.

But we don't have any sense of exactly where we are.

We've in the beginning of being able to analyze it.

Okay.

Second question was just on the branch real estate secured 2 plus delinquencies which, as you say, is showing a fairly flat trend.

That's obviously one book which has been growing reasonably substantially over the last year or two.

I'm just wondering, if you were to look at the individual vintages and look at things on a vintage basis, we're using anything in terms of deterioration of individual cohorts of loans or are you confident that the actual credit quality on that is as strong as implied by that to plus delinquency even when you to run things on a lagged basis.

When we look at it on a vintage basis we see in the consumer lending book, but also a deterioration in the vintages but to a much lesser extent and likely related to factors outside of the product.

As the product overall is substantially the same as it has been over a period of the last two or three years.

Indeed most of the product, just to be clear, in the consumer lending book is fixed-rate.

I think Brendan may have described that.

It's about 90% or it's actually greater than 90% fixed-rate, 90% first lien product.

And so it performs very differently.

It's also verified income.

We don't have any stated income product in the retail book.

So generally it performs significantly better than the industry.

But there is some deterioration of vintages and we just haven't seen that come through the rolls thus far.

It's also worth noting that the practices that have been put out by the regulatory framework over the last few months in relation to nontraditional mortgage structures in terms of how they should be underwritten were put in place in the consumer brands channel pretty substantially five years ago.

And therefore the underwriting practices that are now being placed in the correspondent businesses, the small mortgage banks and brokerages and so on which we could not control how they did their underwriting.

Within the branch channel those practices have been in place for some time now.

Okay, thank you.

Simon Willis.

Good morning, good afternoon.

Simon Willis here from NCB Stockbrokers.

I have a couple of questions relating principally to the movement in the loan book and net interest income.

Firstly, net interest income growth remained pretty strong against a flat loan book and I hear what you say about seasonality.

But I wondered if you could give a broader comment, particularly in terms of looking forward as we see the size of the mortgage book shrink a little due to the resets and so on.

And secondly, I wondered if you could give us some idea of where you might see the loan book, the size of the loan book come the end of Q3 or Q4 this year given that you've been flagging that you'd expect one or two areas such as credit cards still to offer you reasonable growth prospects over the medium-term.

And a third question, I wondered if you could give us an indication of how many staff you've moved over to deal specifically with the sub prime problems and whether that means that there's an issue in terms of staffing up effectively to replace them if you do continue to grow in other areas?

Let me take the last question first.

It's Brendan here.

What we've been able to do -- first of all I would say that we've got more than a dozen centers around the United States of America supporting the various businesses whether they be collection centers, operation centers or call centers.

And therefore we're able to recruit in different marketplaces.

So it's not as if we were to reduce the numbers which we did in the mortgage services division particularly when we discontinued the correspondent channel it does not preclude us from increasing collection staff or operation staff across six or seven other centers around America.

So the short answer to that question is that's not really an issue to us because we have such a diversified set of locations.

We're not reliant on one labor market where we in that market may be disproportionately large or whatever.

The size of the loan book is a little hard for us to forecast in the sense that we can look at the runoffs and the payoffs that we've got so far this year, I think about $3 billion we've paid off since the end of December.

But to around about at the rate which we'd expect to be paid off, so you'll have that.

Like you pointed out, there's growth in the other business, growth in the consumer lending side and I think the way I'm looking at it at the moment is that I'd like to generally see the balance sheet to remain where it is and we will replace the runoff in the mortgage services by growth in those other diversified businesses we've got.

The first question you asked was around net interest income.

There's a whole number of components to that and we're obviously -- on the one hand we're seeing an improvement in yield in the mortgage business albeit originating a lot less but there is some P&L affect there which we'll replace in part.

The net interest income that we'll lose as we bring down the balances.

And then you're also seeing a growth in the other segments both card services and consumer lending which have different interest margin profiles and then even within card services there is a different mix between the near prime and prime and sub prime cards.

And again, when I look at the fourth quarter to first quarter, as you can see, our net operating income before impairments is pretty steady and again I don't have too many concerns in that area.

Can I just ask by way of a quick rider to that?

As regards the mix swing towards cards and consumer lending is it fair to assume that over the last three to six months your view of the background of the U.S.

economy hasn't changed sufficiently to deter you from still pushing for growth in those areas?

Probably the short answer to the question is, no.

I did say at the very beginning of my opening remarks we're completely focused on those issues and matters we control.

Obviously the broader U.S.

environment interest rate rises or decreases are outside of our control but when we look at those businesses and particularly let's take consumer lending, that was the heart of what was formally known as Household Finance, those 13, 1400 branches have been around for a long time.

It is an (indiscernible) of the original Household Finance together with Beneficial Finance which was acquired some years ago.

That is their core business, is originating mortgages on a face-to-face basis, relationship driven and to us that is a very solid, dependable business.

On the card side we continue to buildout both on the retail service portfolio which is private-label, we continue to buildout into the sub prime card market and equally we have a number of other portfolios like the General Motors and Union Privilege and we see those growing as the economy grows and we don't see any abnormal growth there but neither do we see any lack of growth if you follow me.

It goes frankly to a comment I made right at the beginning that this is a very large organization with quite a lot of different income streams and sources are coming through and we continue to be a major contributor to the group's earnings.

Okay, thank you.

Michael Helsby.

Thank you very much.

Just a question really around the margin really.

Firstly, on the competitive environment we have seen in the mortgage industry clearly a lot of firms going out of business and you've talked yourselves about the yield being enhanced.

I was just wondering if you could give us a feel for the outlook on the yield, not just in the mortgage business on the secured side but also on the card book too.

And just as we look out into the second half of the year it feels like there have been a lot of questions clearly on the shift in mix, whether we'll start to see that feed through into the net interest margin.

And just also in terms of timing from a cost of funds perspective, when you'd expect that drag that was been since rates have been going up to actually drop out of the numbers?

Thank you.

Going back to your first questions about the environment, the industry has calculated that certainly in the sub prime mortgage market there's something like a 15 to 20% contraction in the industry in the liquidity.

There isn't a week that goes by without another mortgage company in the United States either closing their doors or contracting their business or laying off employees, though that rate seems to have slowed down somewhat.

And you've also seen a lot more stability in the securitization market for those products.

So where probably one of the benefits we have as a very large organization, we've been able to remain in that business.

Having said that, we discontinued the correspondent channel.

We decided that as a general policy we wish to originate through our branch network and through our broker network.

It is much more better for us, it's better controlled.

We are seeing widening of spreads there.

I'm not sure I can forecast how wide they would get, but, like I said, the originations are obviously a lot lower so there is a financial impact but it has to be tempered a little bit by the size of the originations.

I'm not sure that those spreads will narrow again.

I think that there is some restructuring there in the marketplace as a lot of these players are permanently out and there will be continuing consolidation.

In terms of the funding, I didn't quite follow your question there.

Just short rates have clearly been going up and that's been pushing your wholesale funding costs up.

And since the shift in the interest rate environment you've -- for example, in the first quarter you've had a 61 basis point hit to your margin from higher funding costs.

So as rates have stopped going up, just when is that going to drop out of the numbers?

I.e., when is the 61 basis points going to drop to zero?

It's Douglas -- I think one of the other things that we noted in the Q filing is that we have also been extending -- just for asset liability management purposes -- extending some of the maturities of the funding of the finance company and that has pushed some of the costs a little bit higher.

But clearly, in a flat yield curve environment as we have at the moment, the sort of year-on-year deterioration in interest expense has slowed.

But it depends what happens to the shape of the yield curve and to interest rates going forward.

I mean, we are predominantly fixed rate received in the finance company and there is an element of margin risk to the cost of funding which depends upon where we decide to match funding and what the specific rates are at the time that we take on that funding.

But I don't think there's any abnormal trend that one could look to from here on in.

Could I just ask maybe you'd just enhance a little bit when you're saying that spreads are widening.

Can you give us a bit of an example in terms of the magnitude that you're seeing?

This is Tom Detelich -- speaking to the improved margins in the mortgage business.

I might point out this is happening likely for the first time since the refinance boom in the U.S.

began in 2003.

And we've raised our pricing to the -- approximately 100 basis points since the beginning of the year while cost of funds have moved up just marginally.

So there's been a significant improvement in some of the new originations.

That's just an example, not of course across all products.

Okay, thanks very much.

Roy Ramos.

Good morning, good afternoon.

Roy Ramos from Goldman Sachs.

If you could just give us a bit more color in terms of the adjustable-rate mortgages and the proactive refinancing or restructuring that you're doing, which seems to make logical sense in terms of the best thing to do.

My question is what's typically involved in terms of interest rate -- partial interest rate forgiveness or extension maturities and all of that?

And secondly, what kind of P&L or balance sheet impact does this exercise typically entail and does this become part of the restructured loans book that you disclosed in your 10-Q?

Thank you.

Again, Tom Detelich here.

Essentially what we are doing is first segmenting the portfolio across three dimensions, three risks factors, customer risk, market risk and product risks.

And through the segmentation identifying the highest risk customers, those customers then we do an outreach, a phone call to look at their circumstances and we essentially rewrite the loan, including taking new income documentation to ensure that the resolution that we put on the table to the customer is the right solution.

The most common solution that we put in front of the customer is a temporary solution, generally simply not resetting the loan for 12 months, though we do have permanent solutions available for those customers where it doesn't look like that solution is the answer.

But for the largest component of our customers the temporary solution looks appropriate.

Yes, and in relation to disclosure, it's set out in page 56 I think of the Q, but it depends when you print it whether it comes on that page or the next one.

But we set out the movement in the restructure portfolio and we also note at the foot of that pages that the restructured loans don't include those that we've put into less formal account management techniques which we also put in another figure for on top of that.

So the movement is set out and, as you would see, the big element and the big movement isn't really state secured because frankly there's more value in restructuring real estate secured and that of course is the portfolio that's getting the most attention.

So that is what drives the Q.

And just as a follow-on question, when you do delay the resetting temporarily or I guess you also have a more permanent situation, do you just run it through the P&L or do you do a net present value particularly if it's a more permanent nature?

It's just run through the P&L, yes.

So generally speaking it's P&L positive in that these customers would have likely not been able to make payments.

So obviously margin would have been small to zero and you would have had losses and charge-offs in these customers.

So it's generally P&L positive obviously solution.

Roy, it's Brendan McDonagh here.

There are also a couple of other considerations which not financial.

One obvious one which has obviously financial impact -- we build up a better -- higher degree of customer loyalty here, and these customers are likely to be with us longer.

Like I mentioned before, particularly through our 1,400 branch network, it's a relationship based business.

On a sort of nonfinancial side of things, a lot of you have seen a lot of commentary, a lot of interest in Capitol Hill around the effect of the sub prime mortgage issues in America.

Some of you probably will have seen that -- a month or two ago that myself and a few other CEOs of various businesses testified at the U.S.

Senate committee on banking and there was a lot of positive reaction to an organization like ourselves who is in much greater control of their own destiny by having loans with them, having the relationship with the customer.

We can control the restructuring, the modifications which means we can minimize the amount of foreclosures that ultimately happen.

And we get a certain amount of positive reaction both from the public officials and also from the consumer groups.

And at the end of the day it's good for the consumer, it's good for all of us.

Thank you.

Robert Law.

Good afternoon, everybody.

There are three areas I'd like to explore.

First of all, can I just confirm that you're indicating there was a $200 million nonrepresentative credit to revenue in the first quarter?

Yes.

Yes.

Secondly, mortgage services -- could you split the charge of $400 million between first and second lien exposures?

We don't give that disclosure.

The majority -- the good two-thirds kind of thing would be in the seconds, they have higher severity and the incidence of loss is faster.

So a good role of thumb would be perhaps around two-thirds plus would be in the second.

The reason I'm asking the question is because in mortgage services, my understanding is you've provided against foreclosures you expect to happen in second lien but not against first lien.

We've provided against the losses that we can see at each of the balance sheet reporting days.

What we have going forward further on is in relation to looking at the impact of armory sets on the second liens because there is a much smaller traction with the customer because we're sitting behind a first that we have no control over so that when we set the provisioning at the end of last year in the second portfolio we were able to recognize impairment on resets that went further than on the first because we had no traction in relation to the handling of those customers because they were behind the first on the first lien.

The impairment charge was more in recognition of impairment that had already been identified because we do have the ability to talk to those customers with some greater conversation in terms of what do they want to do because this is the first lien against their home.

And secondly, as to whether the first lien customers will going in to delinquency at subsequent dates is sown to the normal incidence of personal circumstances -- divorce, the economy, job losses, accidents and all that good stuff.

So we look forward to the second, but we do have a charge.

So we do have a provision for the first for everything that we can see that is delinquent.

And given that, why I'm asking the question is I'm trying to see how representative the ongoing charge in mortgage services is for the quarter because given the charges you took at the end of the year that's quite a substantial rate of provisioning still in that area.

It's still a $46 billion book and we did not in the first quarter want to adjust the reserves that we took at the end of '06 which were effectively taken at the end of February in relation to what we could foresee at this stage because it's still pretty much the same.

So in fact we slightly built reserves so the provision in the first quarter with the charge-offs was a little bit more augmented to the reserve.

So that's what I would have expected to see, Robert.

Right, but part of the reason for taking reserves against foreclosures you expect to occur in the future would be that you would use those reserves against rising charge-offs in the future?

Indeed, but the circumstances -- a heavy part of the provisions were in relation to the impact of armory sets which is, as we explained, mostly in the second half of this year.

Okay.

The third area was in the unsecured portfolios you commented you expect further seasoning.

Could I invite you to give us some kind of way that we externally might make a stab at how significant that would be?

And as part of that could you comment on why there was the particularly sharp underlying deterioration in personal non-credit card over the quarter in terms of charge-offs anyway?

That would predominantly be because of the very benign Q1 '06 where the (multiple speakers).

I'm comparing it with Q4, right?

There was something like -- according to what I've got, underlying it went from 6.32 to 7.96 over the quarter?

On the charge-offs?

Yes.

That would be essentially just a -- again, a seasoning of the portfolio.

There's been a slowdown in the overall growth of the unsecured portfolio and you're seeing a bit of a seasoning impact.

So it's not seasonal, it's seasoning?

that's correct, not seasonal, no.

Can you give us some feel for what you'd expect in terms of seasoning of the nonmortgage portfolio through the year?

Our projections would be that we'll see the charge-off in the unsecured continue to increase at modest pace, probably to levels that are more historical.

What we're seeing even now are still historically relatively low charge-off rates relative to historical levels and those historically low rates have been for the past two years, they're returning to what we would generally expect and what's priced into the product.

And that's what we expect to see by the end of this year.

Thank you.

(inaudible)

Good afternoon, gents.

A couple of quick questions.

Following on to Robert's question on the loan loss reserves, could you, I guess just reading through what you were saying, as the ARMs reset and as the losses come through is it fair to assume that you would run down the loan loss reserves toward the second half of '07?

And the second question relates to restructured loans, what pressure points should we be looking for in terms of any slippage in this restructured loan will portfolio?

Thanks.

Let me give Tom time to think about the triggers and the slippage in the restructure portfolio.

In terms of utilization of the provision, essentially at the end of each quarter which is when it's visible to you, what we would do is do the same calculation we did at the end of December and look forward to where we see loss from loans that are already impaired.

So the provision at the end of '07 will reflect that impairment which is embedded in the books at the end of '07.

If the provision is the same number is it was at the end of '06 notwithstanding we'll have charged off a whole bunch of stuff in '07, then it would mean that there is a continuing burden at least equivalent to that which we saw at the end of '06 going forward into '08 which would be -- that would be different circumstance.

So I think we basically look forward at each quarter essentially and set the reserve we need out to cover the delinquency in the portfolio.

As the portfolio charges off -- and remember -- the seconds in particular wall run off -- which are the highest severity -- will run off faster than the first liens.

There should, other things being equal, and please recognize all the caveats -- there should, other things being equal, be less of a need to replenish them because the book will have got smaller.

The question on the other side is to whether the bigger portfolio in the first is continuing to track the same way as it was in Q4 '06 or Q1 '07.

So the normal P&L charge that comes from death, divorce, bankruptcy, loss of job, etc., etc., etc.

will continue to flow through reflecting the economy and the circumstances of the customers within that portfolio.

But yes, the provision will be adjusted to reflect the future.

If the past has happened then it will be deducted from the provision and the provision to be booked at the end of the year or the end of the second quarter, third quarter, and so on will be different.

So yes, it will be used if that is required.

Tom, in terms of how we might look at the triggers on the restructure portfolio?

I don't know if this will -- let me take a stab at the question if it doesn't get to what you're looking for, please come back.

Essentially what -- most of the increase you see in the restructured portfolio is in real estate, most of that in mortgage services and the vast majority of that first time ever restructured.

I think the best way to describe what we're seeing in the restructured portfolio is that we're seeing much lower recidivism in that particular pool, the mortgage services pool, I think largely because they've not been restructured in the past.

And then at least partially because we've applied a certain degree of additional due diligence in the restructuring policy practice within mortgage services as we deployed the more common practices across the mortgage business against this portfolio.

So simplifying that, we're applying more diligence in the restructuring policies -- or practices rather, yielding better performance in terms of recidivism and the extent of that better recidivism is about 15 or 20% better repayment or that is low recidivism.

I think the triggers to look for are the big macro ones of how well is the economy doing, how's employment, what's happening to the housing market and then what's happening to interest rates in terms of people's ability to refi and how liquid the secondary market is for real estate loans.

It continues to be reasonably liquid although there are certain tranches that no longer have much of a market.

But the secondary market continues to be pretty liquid.

But these are the major things that will impact the ability of customers that are being restructured, modified or whatever to find a further solution somewhere else because they've got capacity to do so.

So the liquidity of the marketplace is very important.

Douglas, I guess the question is -- it was just mentioned that the bulk of the restructuring was just really deferring the whole reset process.

So since a lot of these loans may have potentially been in problems due to -- despite an economy doing okay, so I guess would there be pressure points outside of any economic deterioration?

No, I think -- I may have misstated or you may have misunderstood, I'm not really sure which.

On the bulk of the restructures not the resetting.

And I'll point out the resetting or the modifications related to the resetting of ARMs are fully reunderwritten loans.

So although we don't actually obtain new signatures we obtain income documentation and verification of the customer's ability to repay.

So the reset of the mods -- or the modification of the resets, I'm sorry, actually perform very well.

They perform better than the average book as a matter of fact.

So there's not -- I think the pressure on those could be if you were to look for where would there be a circumstance that would cause difficulty in that portfolio would be if between now and when the loan resets again we see increases in interest rates and then facing another reset where the customer couldn't afford to make the payment.

Okay, thank you.

Bill Stacey.

Yes, my question follows on from the comment then that Douglas made about liquidity in the secondary market.

And I wonder if given the comment say you could outline what the CIBM division's activity is in the mortgage business at the moment.

And like last year you had said that you expected that revenues might pick up in that part of the business partly offsetting some of the revenue risks in the HSBC finance business.

So I wonder if firstly you could comment on that?

Secondly, just in terms of your overall credit performance versus the unfunded competitors, where NPL ratios were typically in double-digit levels.

Would you attribute the difference between your performance as a funded player in the unfunded players to your better ability to restructure or to regional differences in the portfolios you've bought?

Or would it be the case that what those same correspondents sold to you was on balance actually better quality than what they retained for themselves?

Tom Detelich here.

I would say it's a combination of the mix of product that we have across the whole book, so the entire real estate book including the correspondent book and the retail originated book is about 70% fixed-rate, 30% adjustable-rate.

So that mix generally is going to perform better -- not be subject to troubles obviously related to ARM reset.

And then I think what you have in addition to that is the owned book does give us -- because it's an owned book does give us the opportunity to deploy collection strategies like restructures and modifications that might not be available to pure servicer only.

I think in relation to CIBM, the activity is much reduced at the moment.

Although the market continues to be liquid there is a lower level of activity and the activity that is there is in the high quality product and therefore the margins on that activity are lower than they were historically.

So it's a smaller business opportunity than it was a couple years ago, but it's still a business model that we want to continue because indeed we will predominantly put the broker originated loans to CIBM and other houses for distribution and we will use them and others but predominantly them to manage our portfolio to the extent that there are opportunities to package real estate loans for disposal or package real estate loans from others as some point in the future potentially for purchase.

So we would look at both opportunities.

Thanks very much.

Michael Helsby.

Thanks.

Just a quick question really on the UK business.

First of all, if you could comment on the credit trends.

I think you noted that you saw some stabilization on delinquencies, if you could give us a bit more color there.

And also if you could just talk about the provision.

I think you changed the methodology which led to about a $117 million extra charge.

Is that a one-off step up or is that something that we can consider going forward in the P&L charge?

It's Brendan McDonagh here; I'll answer the second question first.

The short answer is it's one off.

One of the things that we're doing here is -- if there is a business model change is to look at the whole of HSBC Finance as one company.

And the UK was an overseas subsidiary from an American context and we found that we did have a difference in reserving policy, provisioning policy between the parent company in the United States and the UK company.

And we felt it was prudent to take a onetime provision to bring us back up to a coverage level which we felt comfortable with.

In terms of the general credit environment, what we've been doing in fact for probably over a year with the UK subsidiary is a number of various strategic initiatives to basically respond I suppose to a general deterioration in the UK credit environment.

We shrunk the branch network for example -- I think from around about 180 branches I think we're down to about 130 branches or so.

We've also shifted the mix from unsecured loans to secured loans that originated through the branch network.

We have curtailed the amount of originations in UK's own wholesale channel.

And you're just generally seeing the effects of that but some of that is flowing through sort of on a beneficial point of view.

But as it regards the $117 million, that was a one-off to standardize provisioning policies which I felt that should be common across the whole organization.

Okay, thanks very much.

Alastair Ryan.

Good morning.

Just a question about the legal environment really.

Congress in quite a few of the states seem to be seeking to effectively ban a lot of the 80/20 ARM product that's sustained the sub prime industry.

Whether that's an opportunity for your business, particularly through the branches or whether by closing off one of the refinancing options and many people have had that that's potentially a further drag on the credit outlook -- I realize it's rather broad, but a lot of noise continues to emanate from that space?

Thanks.

It's Brendan here, hi.

First of all, from a sort of macro U.S.

point of view I think the sub prime mortgage market is only something like 20% of the total mortgage market in the United States.

So the knock on impact in terms of the credit environment is on a national level probably pretty minimal.

I appreciate at certain regional and local market levels it can be quite impactful.

I think what you're seeing particularly from the legal side -- and by legal let's include regulatory and Capitol Hill, a whole range of approaches and a certain amount of disagreement as to what is the actual way to handle this particular situation.

And I think this general -- for some of the people who are spending a little bit more time on this there is obviously a consensus that there's no silver bullet, there's a whole range of things that have to be done.

One could argue that the U.S.

market is operating quite efficiently, in fact by taking out a certain amount of the capacity, a certain amount of the weaker players, and that the industry would be stronger as a result of that because the remaining players will be that much more frankly stronger.

I think there's been -- what we do is certainly in line with what they call the intra agency guidelines that are out there.

We have gone on record in my testimony to the U.S.

Senate committee that we would favor increased regulation so long as it levels the playing field.

Because I'm sure you're aware that in the U.S.

mortgage market, and particularly from state to state, there are various degrees of licensing or even lack of licensing for mortgage brokers.

And if the Congress and the regulators wish to control that whole marketplace then they really need to regulate all aspects of it and not just one part of it which is typically the banks that are in it, whether they be state-chartered banks or national charter banks.

We recently signed a -- along with a number of other major lenders, endorsed a set of guidelines that we agreed with the chairman of the U.S.

banking committee, Senator Dodd, and we're working with Capitol Hill and the regulators to make sure that what's best for the American consumer we get there.

But through a whole range of initiatives and, as I mentioned, to some extent there will be some increased regulation or legislation, but equally you're seeing a lot of organizations whether it's stepping up on restructurings, modifications -- starting to get this problem behind us at an industry level.

I might add, Brendan, to the second part of your question on the lack of the availability of some of these products in terms of a solution when a customer needs to refinance.

Their has been largely a dispensation discussed where in the event that a customer needs a solution that a product like an 80-20 or refinancing an 80-20 would be made available to the customer.

Thank you.

Tom Rayner.

It's Tom Rayner again at Citi.

I just wanted to follow up from Michael Helsby's question because it seems to me there's a little bit of a hair shirt approach going on that you very clearly flagged up US$350 million to US$400 million worth of positive one-offs in Q1, but didn't really mention the 117 in the UK and reserves have been built up for other reasons in other parts of the business.

And as I said before, we've still got the mortgage service business making a negative contribution in Q1 as is the international.

And I'm just getting a feeling, is it almost a deliberate desire here to be cautious and not over talk what's happening or is it genuinely the second half holds out a much tougher environment for you to sort of progress?

It's Brendan here.

Let me address that in this way.

I think the way I would summarize from my perspective in the first 100 days, we put the team in place, the early strategies are working.

If you excuse the pun, we've sort of got our arms around the problem.

The rest of the business is performing to expectations.

We've got plenty of work to do.

I appreciate it's probably in HSBC's character to be conservative.

I'm been with the organization 27 years.

But to your point, we know that we have seasoning of non mortgage portfolios that we originated in the second half of '06 and I don't mean that they're abnormally delinquent, it's just normal seasoning.

We know that we have a substantial amount of ARM resets in the second half of the year.

Where we could in the additional provisioning that was taken in the '06 results, where we're allowed we have taken provisions against that, but there's a certain amount we're not able to do.

There are a lot of microeconomic issues out there around whether there are interest rate rises or even interest rate decreases, whether the U.S.

consumer market holds.

You can see in the U.S.

environment today the presidential race has nearly started a year early.

So there are a lot of unknowns there.

But I would sum up the first quarter as being solid for us.

As I said, the early strategies are working, we are where we expected to be.

I'm comfortable with that situation, but there's plenty of work to do and I hope that sort of explains it.

Okay, thanks.

I think in the interest of time we -- I don't want to cut out anyone who is on line, but we might take two or three questions and I think that -- I don't know how many are holding on the call, but we've gone well over the hour.

But if we can do two or three certainly we'll do them and if the conference facilitator tells us there's a dozen online or something than we'll try and go on a bit longer.

But if we can maybe do two or three more -- because I think we've covered most of the areas pretty fully.

But if there are two or three more we'll take them.

Ian Smillie.

Can I invite you to comment about the bank performance rather than the finance company?

And if I read the numbers correctly, it looks like every customer group went backwards year-on-year on an underlying basis and I know it's for different reasons.

But the question I was hoping for is if you could tell us when we should start to think about each of those customer groups returning to growth again, please?

I'm not sure I quite agree with you.

In fact, PFS and -- it depends on what you're taking out to get to underlying.

PFS and consumer finance were actually a bit ahead and the other three were a bit down.

In part that reflects some investment in the commercial banking business which we've been investing in infrastructure CIBM in New York.

And remember, this is only a small piece of what is a global business.

The revenue opportunities in the first quarter of the year for the mortgage business were less than they had been in the prior comparable quarter in New York.

I would characterize the performance as fairly steady.

You could say slightly up, slightly down, but fairly steady.

I think there's a lot of action underway with Paul Lawrence who's taken over the business in terms of getting a real focus for where he wants to put additional investment, what he wants to emphasize.

It's a solid quarter; I agree it's not much more exciting than that, but it doesn't give us a cause for concern.

And those actions are underway, Douglas.

Should we expect that to flow through to the P&L within immediate quarters or is that something that's more medium-term if you like, just to give me a sense of when we should start to see it coming through faster.

I certainly wouldn't put it in the second quarter, but you should certainly begin to see the impact coming through or at least of subscribing to what we're doing.

And I would think it would be towards the end of this year and into next year that you'll see some elements of action to get a better focus on what we're going through that particular platform.

There are some pieces that are still going extremely well.

The on-line deposit business or the on-line deposit opportunity continues to grow extremely well, deposits up say $11.5 [billion] at the end of the quarter.

We're very pleased with that and we're using that not only to grow in the U.S.

that business but to take it outside.

So yes, Paul has just taken over at the same time as Brendan has.

There are some things that he wants to do and they will be progressed in reasonably short order, but I would think it would be 6 to 12 months before you see the impact.

That's great, thanks.

(OPERATOR INSTRUCTIONS)

If we've got to that point, let me just say thank you very much for everybody's participation in the call.

I think we covered all the bases that we wanted to.

Thank you particularly to those of you in Asia who are up very late at night and we look forward to talking to you again at the interim stage of the second quarter for the U.S.

businesses, at the interim stage for the Group as a whole at the end of July.

So thank you very much for your participation.

Yes, and Brendan here as well to thank you on behalf of myself and my colleagues Tom and Walter.

And we'll speak to you again at the end of the half year.

Thank you very much.

Thank you.

That concludes today's conference, you may now disconnect and thank you for your participation.