One of the largest financial companies in the world has put its investment plans for the U.S. on hold. The message from HSBC Holdings PLC is loud and clear: It will not buy or invest money in U.S. companies until HSBC fixes problems with its current American subsidiaries.
HSBC is a mammoth-sized company. Ranked by market capitalization, HSBC is the world’s third largest bank with a market cap of about $200 billion. It has operations in 82 countries. As a bank, HSBC is smaller only to Citigroup and Bank of America.
But HSBC has a problem: Its U.S. investments are faring the poorest. HSBC executives underestimated the damage a softening U.S. housing market would have on its operations.
HSBC bought U.S.-based Household Finance for about $15 billion in 2003. Household operates in the subprime lending business in the U.S., making loans to less-than-stellar credit-risk borrowers. The weak U.S. housing market took a big bite out of the profitability of U.S. subprime lenders, HSBC’s Household division included.
While HSBC posted profit growth last year of 10% in Europe, 15% in Hong Kong, 8% in Latin America, and 27% in its “rest of” Asia/Pacific business unit… HSBC posted a record 21% decline in profit in 2006 from its North American operations. This economist, and HSBC itself, doesn’t see it getting any better any time soon for HSBC in the U.S. The company says it could take two to three years to “fix” problems at its U.S. operations.
HSBC can be classified as the first major world finance player to say, “no more investing in the U.S.” I expect other major foreign based corporations will follow suit. The risk in the U.S. is too great right now. Smart foreign investors sense worsening economic times ahead for America, so they are starting to stay away. Lack of foreign investment in the U.S. means a weaker greenback and eventually a weaker stock market. What will lure the foreigners back? Higher domestic U.S. interest rates, I’m afraid.