HSBC Holdings (HBC)

HSBC has recently been on a buying spree, acquiring banks in South Africa, Argentina, and Australia. In 2003, HSBC also bought Household Finance, which was a market leader in credit card and home equity loans in the U.S. Subsequent to that acquisition, HSBC has had to close the mortgage origination division of Household, and take several multi-billion dollar charges against earnings for the losses stemming from that acquisition.

Foreclosures and delinquencies have surged in recent months, particularly among homeowners who took out high-risk mortgages. The distress has forced several mortgage lenders into bankruptcy and stoked anxiety that the problems are now spilling over into the broader economy. As these impairments to value continue, banks are taking multi-billion dollar charges for their mortgage backed bonds, SIVs and consumer (credit card related) debts. We see the potential for a significant negative impact to HBC’s earnings and / or equity value here from exactly those vehicles.

HBC is heavily exposed to credit card assets. In that light it is similar to Capital One Financial (COF), which recently slashed its earnings estimates by over 20% due to higher default rates and building losses. There seems to be some potential for a negative impact to earnings from this exposure as well. In this situation and in this credit climate, the risks are not necessarily outweighing the rewards. We still feel a short position presents a compelling opportunity.