HSBC Holdings closes US sub-prime mortgage unit

(NEW YORK) HSBC Holdings, Europe’s biggest bank, said last Friday that it is closing its US sub-prime mortgage unit, cutting 750 jobs and taking US$945 million in charges and write-downs. It said that the business is no longer sustainable.

For London-based HSBC, which is under pressure from activist investors to shake up its corporate governance, it was the latest blow from the meltdown in the US market for loans to home buyers with poor credit histories.

HSBC Finance, the US consumer finance arm of HSBC, said the closure of Decision One Mortgage would result in people losing their jobs at offices in Fort Mill, South Carolina; Phoenix, Arizona and Charlotte, North Carolina.

‘It’s no longer sustainable and not the right place to allocate capital in the future,’ HSBC Holdings group chief executive Michael Geoghegan said in a statement.

Dozens of US sub-prime lenders have curtailed operations, closed down or filed for bankruptcy protection. The sub-prime crisis has roiled the US housing industry and played a central role in nearly 90,000 job cuts.

HSBC Finance will record an impairment charge of about US$880 million, reflecting a write-down of Decision One assets on its books. It will also incur about US$65 million in after-tax charges for restructuring that includes employee termination benefits and facility closures.

HSBC acquired Decision One when it bought Household International in 2003 for US$14 billion.

Decision One is a small part of HSBC’s US operations, which include car loans and credit cards.

HSBC, the world’s fourth biggest bank, with a market value of more than US$200 billion, has been criticised for the underperformance of its share price in the last five years and its purchase of Household, which has exposed it to the US sub-prime mortgage crisis.

HSBC’s charge for bad debts was US$6.35 billion in the first half of the year, up 63 per cent from US $3.89 billion in the same period last year as it continued to suffer from past loans to the hard-hit US subprime mortgage sector. Earlier this year, HSBC Finance got new leadership, which quickly put together a team to examine and monitor credit risk under chief executive Brendan McDonagh. The company also stopped buying sub-prime loans originated by other lenders.

Mr McDonagh said that the company will continue to originate sub-prime loans through its network of more than 1,350 branches.

 

Source: Reuters (Business Times 24 Sept 07)

INSIDE MARKETS – Buy and sell transactions hit low levels; fund managers quiet

PURCHASES by directors and substantial shareholders was low for a second straight week with only 34 companies posting 72 ‘buys’, based on filings on the Singapore Exchange from Sept 17 to 21. The figures were consistent with the previous week’s 35 companies and 72 acquisitions. Investors should note that the buying has been low in each of the past two weeks, with the number of purchases sharply lower than the 124 acquisitions in the first week of September and 106 trades in the last week of August. Sales activity last week were also down with only 23 firms posting 52 disposals, sharply lower than the previous week’s 28 companies and 100 disposals.

Fund managers were quiet. Only six institutions each posted 16 purchases and 22 disposals, against the previous week’s eight asset managers with 30 acquisitions and nine institutions recording 43 disposals.

Several buyers made their maiden entry on the local market last week. The chief executive of Dutech Holdings made his first purchase after the group announced its second-quarter results, while the managing director of Soilbuild Group Holdings returned to the market after being absent since 2006. Legg Mason Inc raised its interest in Straits Asia Resources by 7 per cent to 5.1 per cent. On the sales side, there were bearish signals in Hongguo International Holdings and Aztech Systems as two fund managers lowered their respective stakes to below 5 per cent.

Dutech Holdings

Chairman and CEO Johnny Liu Jiayan recorded his first buys in recently-listed ATM manufacturer Dutech Holdings, after the stock fell below 40 cents per share. The purchases were also made after the group announced its Q2 results on Sept 12. The CEO acquired an initial 200,000 shares on Sept 13 at 39 cents each. He picked up a further 200,000 shares on Sept 17 after the stock fell to 35 cents, doubling his stake to 400,000 shares. Mr Liu is one of two directors who have bought the company’s shares since the stock was listed on Aug 2.

Independent director Graham Macdonald Bell acquired an initial 17,000 shares on Aug 7 at 37 cents each.

Dutech Holdings posted a 5.3 per cent gain in net profit to 12.64 million yuan (S$2.54 million) for the three months to June 30, 2007. Earnings in the first half rose by 14.9 per cent to 23.29 million yuan. After rising from the IPO price of 33 cents to 46 cents on the stock’s trading debut on Aug 2, the counter closed sharply lower at 32.5 cents on Friday.

Soilbuild Group Holdings

Managing director Lim Chap Huat recorded his first buys in boutique property developer and construction firm Soilbuild Group Holdings since July 2006, with 229,000 shares snapped up from Sept 17 to 20 at an average of $1.27 each. The trades, which accounted for 44 per cent of the stock’s trading volume, boosted his holdings (direct and deemed) to 116.3 million shares, or 58 per cent of the issued capital.

Mr Lim is one of three directors who have bought shares in the past two months. Chairman of Remuneration Committee Kelvin Tan Wee Peng bought 10,000 shares on Aug 15 and 16 at an average price of $1.22 each, boosting his direct stake to 150,000 shares. Executive director Low Soon Sim, on the other hand, picked up 10,000 shares on Aug 16 at $1.21 each, raising his direct interest to 570,000 shares.

Soilbuild Group announced its interim results on Aug 14 with a net profit of $28.69 million for the six months to June 30, 2007, against a loss of $2.34 million in the same period last year. The counter closed at $1.30 on Friday.

Straits Asia Resources

Legg Mason Inc became a substantial shareholder of resource development and mining firm Straits Asia Resources on Sept 14 following the purchase of three million shares at $1.36 each. The trade increased its deemed holdings by 7 per cent to 46.8 million shares or 5.1 per cent.

But Fidelity International Ltd reported a disposal-related filing on Sept 11 of 1.2 million shares at an estimated price of $1.33 each, which reduced its deemed stake to 54.5 million shares or 5.9 per cent. The group previously sold 3.7 million shares from Aug 2 to Sept 10 at estimated prices of $1.18 to $1.33 each.

Overall, the fund manager’s stake is down by nearly 5 million shares or 8 per cent since August. Prior to the disposals, the group acquired 13.3 million shares from July 19 to Aug 1 at estimated prices of $1.42 to $1.18 each. Fidelity reported an initial filing on July 18 of 1.8 million shares at 94 US cents each, which raised its interest to 5.01 per cent.

Investors should note that CEO Richard Ong Chui Chat acquired 400,000 shares from July 13 to 31 at $1.43 to $1.17 each, or an average of $1.30 each, which boosted his deemed holdings by 129 per cent to 710,000 shares. He previously acquired 100,000 shares on March 6 at 76 cents each.

Straits Asia Resources announced its Q2 results on Aug 14 with net profit down by 39 per cent to US $7.11 million for the three months to June 30, 2007. Earnings in H1 fell by 41.4 per cent to US$15.53 million. The counter closed at $1.44 on Friday.

Hongguo International Holdings

Consistent sales by FMR Corp in fashion shoes designer, manufacturer, and retailer Hongguo International Holdings since the last week of June totalling 21.2 million shares lowered its interest by 52 per cent to 4.9 per cent. The disposals were made from June 28 to Sept 14 at estimated prices of $1.30 to $0.86 each.

The group last sold 969,000 shares from Aug 15 to Sept 14 at estimated prices of 86 cents to 95 cents each, which reduced its deemed holdings to 19.3 million shares or 4.9 per cent. Prior to the disposals, FMR Corp acquired nearly 21 million shares from December 2006 to June 27 at estimated prices of $0.54 to $1.32 each. The group became a substantial shareholder (for the second time) on Dec 21, 2006, following the purchase of 1.2 million shares at 54 cents each, which raised its interest to 5.2 per cent.

The fund manager’s sentiment is not entirely negative as Schroder Investment Management Group became a substantial shareholder on Aug 7 following the purchase of 884,000 shares at 97 cents each. The purchase, which was made on behalf of clients by its Hong Kong branch acting as Investment Advisors, boosted its deemed holdings to 20.6 million shares or 5.2 per cent.

Investors should note that managing director Li Wei purchased 1.75 million shares in January at $1.16 each, which increased his deemed stake by 9 per cent to 21.5 million shares or 5.4 per cent. Mr Li also has direct holdings of 17.4 million shares or 4.4 per cent. He previously acquired 1.7 million shares from Nov 28 to 30, 2006 at an average of 71.4 cents each. The stock closed at 88.5 cents on Friday.

Aztech Systems

Credit Agricole Asset Management SA ceased to be a substantial shareholder of contract manufacturer Aztech Systems on Sept 19 following the sale of 2.1 million shares at an estimated price of 49.5 cents each. The trade reduced its deemed holdings by 10 per cent – to 19.3 million shares or 4.6 per cent. The sale price was far below the group’s initial filing price in July.

Credit Agricole previously reported an initial filing on July 6 of 1.04 million shares at 61 cents each, which raised its interest to 5.1 per cent. But board member Patricia Ng Sok Cheng and the company bought shares on Sept 20. Ms Ng acquired 100,000 shares at 42 cents each, which increased her direct stake by 72 per cent to 239,000 shares. She also has deemed interest of 15 million shares or 3.6 per cent.

She previously acquired 1.7 million shares from Feb 28 to June 18 via exercise of options at an average of 10.6 cents each and 50,000 shares on Feb 14 on the open market at 41.5 cents each.

Prior to her trades this year, Ms Ng bought 50,000 shares in December 2004 at nine cents each. The company, on the other hand, bought back 500,000 shares on Sept 20 at 42.5 cents each. The group previously acquired 389,000 shares on Aug 17 at 48 cents each, 500,000 shares on Aug 2 at 60 cents each, and 1.2 million shares in March at 37 cents each. The trades since March were the company’s first buybacks since listing. The stock closed at 45 cents on Friday.

The writer is Managing Director, Asia Insider Limited

 

Source: Business Times 24 Sept 07

WALL STREET INSIGHT – Investors look for direction after the rally

Impact of credit market turmoil on Q3 earnings, US economy’s ability to stave off recession, oil price surge top concerns

IN NEW YORK

FROM the Fed and lower interest rates to corporate quarterly earnings, the stock market enjoyed a week of nearly unmitigated good news and outright euphoria that has temporarily but dramatically banished the demons of financial market collapses and hedge fund failures.

But now, as Wall Street’s analysts and traders trade in their obsession with the Fed and capital market liquidity – which started with the ‘will they or won’t they’ of late August, and evolved into the ‘how much will they’ cut interest rates debate of the past two weeks – to the market’s other two fundamental market drivers – economic growth and corporate profitability – investors must wonder if the two weeks’ worth of strong rallying on Wall Street will fade just as quickly as the euphoria.

Looking at the bullishness which has sent the Dow Jones Industrials rocketing forward by more than 5 per cent in just 10 days of trading, Joe Battipaglia, stock market strategist at Ryan, Beck, thinks stocks may be due for a pause this week as the investing community stops to assess whether the gains share prices have achieved lately are justified by market fundamentals.

‘The incredible sense of relief over what appears to be the containment of the credit market crisis and the Fed’s strong response to liquidity issues is probably going to shift to a more sober assessment of where we stand now,’ he said.

And that assessment must include how hard the summer’s credit market turmoil has hit third quarter corporate earnings, the US economy’s ability to stave off recession, and the recent surge in oil prices to yet another record high level which could provoke inflation as well as threaten to dampen consumer spending.

Still, investors’ euphoria over the Federal Reserve’s fifty basis point cut is based on the sound logic that stocks historically tend to perform better when interest rates are falling.

At week’s end, analysts found other reasons to hope that the Fed-inspired bull rally of the past two weeks has more legs, with good news from software developer Oracle, which posted a fiscal first-quarter profit that rose 26 per cent from a year ago, and Nike, which also handily beat fiscal first-quarter earnings and revenue targets.

Goldman Sachs, Morgan Stanley, Lehman Brothers, and Bear Stearns all posted quarterly profits, giving investors assurance that the credit crisis won’t derail corporate earnings.

On Friday, the Dow Jones Industrial Average gained 53.49 points, or 0.39 per cent, to 13,820.19. The S&P 500 was up 7 points, or 0.46 per cent, to 1,525.75. The Nasdaq Composite was better by 16.93 points, or 0.64 per cent, to 2,671.22. It was the second winning week in a row. The Dow and the S&P 500 both climbed 2.8 per cent for the week, and the Nasdaq added 2.7 per cent.

‘I think (Friday’s) strong market performance is an indication that investors are feeling optimistic about the third and fourth quarters for corporate earnings,’ said Hugh Johnson, chief investment strategist at Johnson Illington Advisors.

‘There’s still a lot of worry about the fallout on corporate America from the subprime mortgage contagion, and seeing these good early results gives a boost as we head into earnings pre-announcement season,’ he said.

Currently, the estimated growth rate for the third quarter stands at 4.1 per cent, according to corporate earnings tracker Thomson First Call. On July 1, the estimated growth rate for the Q3 07 was 6.2 per cent.

In the S&P 500 index, there have been 51 negative pre-announcements issued by corporations for the coming quarter, and 26 positive pre-announcements, pretty much the historical average for the S&P 500. But earnings aside, most analysts believe the market will continue to move according to the betting on future Fed action.

‘Over the next few weeks, Wall Street will be parsing the economic data not just to get a sense of the economy’s health, but more so in order to figure out whether the Fed is going to give us another rate cut at its October meeting,’ said Mr Johnson.

This week, Wall Street will have ample opportunity to play the economic guessing game, with several key readings on the economy from new and existing home sales numbers today and tomorrow, respectively, followed on Wednesday by durable goods orders. Consumer confidence poll is due tomorrow and University of Michigan consumer sentiment for September is due on Friday. Final second quarter GDP is to be released on Thursday, and personal income and construction spending on Friday.

Investors will be in the uncomfortable position of hoping for economic data that’s not bad enough that it shows the economy heading for a recession, but weak enough that the Fed feels it necessary to cut rates further to prevent a recession.

‘That’s one reason I think we can expect to see plenty more volatility over the next month or two,’ said Mr Battipaglia. ‘We have a lot of issues yet to be decided, and until we get some more clarity on the economy, we’ll get some big swings,’ he predicted.

 

Source: Business Times 24 Sept 07

LEASEBACK DEAL – MapletreeLog pays $15m for Tuas warehouse

MAPLETREE Logistics Trust Management (MapletreeLog) has bought a warehouse in Singapore for $15.2 million, marking the latest in a rapid run of acquisitions over the last few months.

Yesterday, it announced that it had bought the warehouse in Tuas from Pioneer Districentre, which will lease back the property for seven years – with an option to extend it for a further seven years.

MapletreeLog chief executive Chua Tiow Chye said that this acquisition adds to the trust’s stable core of Singapore properties which will generate long-term and stable returns for unitholders.

‘Given the tight supply situation for high quality logistics real estate in good locations, rentals and capital values are expected to remain firm,’ Mr Chua added.

Just last week, MapletreeLog said that it is investing $92 million in a distribution centre in the Kanto region of Japan, a key logistics area.

The tenant will have a lease tenure of 20 years, which the trust sees as complementing the shorter-term leases it has in its portfolio in higher-growth markets such as China, Hong Kong and Malaysia.

Earlier this month, MapletreeLog completed the purchase of two properties in Selangor, Malaysia for just under RM30 million (S$13 million).

Prior to yesterday’s purchase, its most recent buy in the Singapore market came last month. MapletreeLog then bought four warehouses for $36.8 million from mainboard-listed Union Steel Holdings, which will lease them back for six years, with an option to extend for another six years.

All four properties are located in the Tuas area.

Last Friday, the Reit’s units closed unchanged at $1.17. While the share price was as high as $1.46 in May, it has since lagged behind the broader market.

It is now roughly at the same level as at the start of the year, while the Straits Times Index is still 18 per cent up.

 

Source: The Straits Times 24 Sept 07

HSBC to shut down sub-prime lending unit

Bank says US unit is no longer sustainable; closure will cost $1.3b in goodwill charge

NEW YORK – HSBC Holdings, the British-based banking giant, announced recently that it would close its subprime mortgage subsidiary in the United States, saying the unit was ‘no longer sustainable’.

HSBC’s earnings have been hit by its heavy exposure to the US sub-prime mortgage market, where home loans have been given to people with patchy credit histories.

HSBC said its closure of Decision One Mortgage will entail a goodwill charge of around US$880 million (S$1.3 billion) and a restructuring charge of US$65 million by year-end. About 750 Decision One employees will be affected by the closure, the group said last Friday.

‘This is a small part of our US business,’ said HSBC chief executive Michael Geoghegan. ‘It’s no longer sustainable and not the right place to allocate capital in the future. We said we would make tough decisions and we have done exactly that.’

Decision One, a unit of subsidiary HSBC Finance, originates non-prime mortgages through brokers. The bank said it will still manage Decision One’s US$349 million loan portfolio.

HSBC was the largest provider of sub-prime loans in the US last year, according to Inside Mortgage Finance, a real estate industry tracker, ahead of the US leaders in the domestic market, New Century and Countrywide.

The HSBC decision comes as rising interest rates and falling house prices have triggered a spike in foreclosures by borrowers with already stretched finances.

The group said HSBC Finance will focus on originating and servicing loans through its consumer lending branch network under the HFC and Beneficial brands.

Source: AGENCE FRANCE-PRESSE (The Straits Times 24 Sept 07)

25% more HDB flats rented out since March

MORE Housing Board (HDB) flatowners are cashing in on the rising rental market by letting out their units following a relaxation of the rules on doing so.

The new rules have spurred 5,700 more people to rent out their flats over the past six months.

The latest figures from the HDB show that a total of 15,773 flats have been given the green light for rental by the middle of this month.

This is a 25 per cent jump on the total figure before the March 3 rule change. About 39 per cent of these additional homeowners would not have qualified had the rules not been eased.

Previously, flatowners could rent out their flats only five years after buying them – or 10 years if they had not paid off HDB home loans.

Now, they can do so after living in their flats for just three years – or five years if they had bought it with a government subsidy or grant. It no longer matters if the home loan has been paid off.

The change almost doubled the pool of eligible flats to 645,000, out of more than 800,000 across the island.

The relaxation was part of a series of measures to make it easier for flatowners to earn income from their units.

Besides easing subletting rules, the HDB also allowed homeowners to take out reverse mortgages on their flats. It is also looking into a novel scheme to buy back the tail-end of flats’ leases from homeowners.

Newly minted landlords included Madam Yee Kin Moi, 58. The retired hawker and her husband rented out their four-year-old flat in Choa Chu Kang just last month for about $1,000 a month, and moved in with their daughter to help take care of their 18-month-old grandson.

The rental income, said Madam Yee, covers their monthly housing instalments and helps pay daily expenses as well.

She told The Straits Times: ‘The good thing about renting the flat out is that we do not need to sell it. We can go back to live in it if our children choose to migrate elsewhere.’

According to the HDB, about 27 per cent of flats rented out after March 3 belonged to owners who were older – aged 55 years and above.

Most of those renting out their flats under the revised rules moved in with their family members. About 22 per cent now live with their children, while another 36 per cent live with their parents, siblings and other relatives.

About two-thirds of flats being rented out are three- and four-room units.

HDB statistics show that three-room flats fetched a median rental of $980 islandwide from April to June, while four-room flats fetched $1,180.

Property agents estimate that rents are up about 10 per cent to 15 per cent since then, but say demand for rental flats remains strong as tenants, deterred by rising private rentals, choose public housing instead.

Median rentals of non-landed private homes islandwide grew by 11 per cent from April to June to $31.87 per sq m per month. This means it would cost about $3,200 a month to rent a 100 sq m, three-bedroom home.

As a result, rental flats being put on the market are being snapped up within a month, said the chief executive of property agency Propnex, Mr Mohamed Ismail.

Most homeowners, though, will not rush to rent out their flats even if rental rates become even more attractive. This is simply because they would have nowhere else to live if they did.

The director of Dennis Wee Properties, Mr Chris Koh, pointed out: ‘Not every elderly couple would want to live with their children.’

 

Source: The Straits Times 24 Sept 07