HSBC Cleans Up Balance Sheet Further With Sale Of $1.6 Billion U.S. Mortgages To Credit Suisse

by Trefis Team
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In the latest step by HSBC (NYSE:HSBC) towards winding down its non-core operations in the U.S., the bank has agreed to sell mortgages worth $1.6 billion to DLJ Mortgage Capital – a subsidiary of Credit Suisse (NYSE:CS). [1] These loans were a part of HSBC’s U.S. Consumer and Mortgage Lending (CML) portfolio, which the geographically diversified banking giant has been working its way through since the economic downturn. The sale will bring total outstanding loans for the U.S. CML unit to below $5.7 billion from the peak level of $62 billion in late 2008.

HSBC will receive $1.495 billion from DLJ as a part of the deal, which will be used to pay down some of its long-term debt. This will reduce HSBC’s interest expenses going forward – something that largely mitigates the pre-tax loss of $51 million the bank will incur as a direct result of the deal. The sale does not meaningfully impact our $44 price estimate for HSBC’s shares, which is roughly 10% ahead of the current market price.

See our complete analysis of HSBC here

HSBC had a sizable presence in the U.S. mortgage industry in the run-up to the economic downturn of 2008, with the banking giant also relying heavily on sub-prime lending to grow its loan balances then. The collapse of the mortgage industry forced HSBC to classify a bulk of its mortgage portfolio in the country as non-core by the end of 2008. At its peak, this non-core unit (now referred to as U.S. CML) had outstanding balances of $62 billion – $46 billion in secured real-estate loans and $16 billion in unsecured loans. Over the years, the bank has allowed this portfolio to run-off, which also selling off chunks of it when a suitable deal turns up. Combined with loan modifications and foreclosures, HSBC’s efforts helped it reduce this portfolio of loans to just over $7.25 billion by the end of 2016. This included $5.65 billion in loans held for investment and a held-for-sale loan portfolio of $1.6 billion.

The recently announced deal with DLJ Mortgage Capital gets rid of nearly all of HSBC’s for-sale loans. Notably, these loans earned the bank around $16 million in pre-tax profits for full-year 2016, and it is very likely that DLJ agreed for a deal because the portfolio is profitable but could still be acquired at a discount to book value. HSBC reports revenues for its U.S. CML portfolio as a part of total revenues for its Corporate Center division, which are detailed in the chart below. As you can see by modifying this chart, the sale does not materially impact revenues for the larger unit going forward. But it is an important move for HSBC in the long run as it will lower corresponding operating costs, and is also a step towards the bank’s goal of a leaner business model. At the same time, HSBC’s plan to use the proceeds of the sale to reduce outstanding debt will positively impacting net interest income figures by lowering interest expenses.

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  1. Sale Of A Portfolio Of US Consumer Mortgage Loans, SEC 6-K Filing, Mar 7 2017 []
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