HSBC Canada reported another drop in bad loans, which helped pad its profits.Dan Kitwood
HSBC Bank Canada is under the spotlight, whether it likes the attention or not.
In the same week that the it publicly announced the sale of its retail brokerage to National Bank Financial for $206-million, the bank is also shopping its consumer finance division, known as HSBC Finance Canada. (This unit is comprised of private label credit cards and non-prime mortgage and consumer lending.)
This unit was brought under the Canadian bank's umbrella when HSBC bought Household International for $14.2-billion (U.S.) in 2003 south of the border. That purchase ended up being a big mistake, because Household's U.S. division was engaged in the reckless brokered sub-prime mortgage lending that fostered the financial crisis. That cost HSBC billions in writedowns and management later admitted that it regretted the acquisition.
But the Canadian business has been profitable. It hasn't been all roses, because some restructuring charges were incurred during the financial crisis, yet the unit is still making money and it continues to underwrite new unsecured loans and mortgages. In the first six months of the 2011 fiscal year, consumer finance turned a profit of $23-million before tax, and had a $53-million profit before tax for all of 2010.
So why try to sell? HSBC isn't commenting on the deal, but someone familiar with the process said there are worries inside the bank about how much capital they will need in the event of European bankruptcies. That theory makes sense. And it's not as though other profitable units aren't being sold. South of the border, the U.S. credit card division was making money, but was sold to Capital One this summer. And just like the U.S. credit card business, Canadian consumer finance has been labelled a non-core asset, so HSBC doesn't want to pay it much more attention.
However, HSBC may not sell the unit. Offers have been put in before, and the bank turned them down because they weren't high enough, by their estimates. The same thing could happen again. If that occurs, the bank may just wind down the unit.
Why would it prefer to wind the unit down rather than get any sort of cash? Because doing so could be more profitable. The consumer finance loans on HSBC's book are in good shape, so the bank is open to letting them run their course and then collect the money over time. In other words, that process could be more valuable than the net present value other bidders would calculate for their offers.
Tim Kiladze