HSBC's credit quality better than initially expected

Find out what's to blame for the weaker performance.

According to Barclays, although the provision charge fell 11% HoH, the improvement was not as much as the market had anticipated and this was initially a cause for concern.

Here's more from Barclays:

However, the weaker performance was largely due to increased provisions in Latin America, which were a combination of model/assumption changes and a specific area of credit quality deterioration.

Management provided some useful clarification on the conference call, indicating that $250m of the $422m HoH rise in LatAm provisions resulted from increasing the coverage on $1bn of restructured loans in Brazil from 41% to 66% while credit quality in the rest of the Brazil portfolio has improved.

This general trend is consistent with what we have generally seen from Brazilian banking businesses, although the economic outlook could result in renewed deterioration.

Of the remaining increase in the Latin America impairment charge, $90m related to specific provisions against homebuilders in Mexico, a sector that is under particular pressure.

This book is now 20% covered and although this could need to rise, at c$0.5bn, the exposure is relatively small in the context of HSBC’s $985bn of group loans or even the $14.6bn Mexico loan book.

Credit quality in other parts of the Mexico portfolio is said to be stable, although BBVA and Santander both highlighted some broader deterioration. The Finance Corporation book in the US was a significant offset as valuation adjustments associated with improvements in the US housing market resulted in the runoff book provisions falling from $317m to $79m – much of this is expected to reverse in Q3.