'US subprime crisis persists'

HSBC Holdings's Asia-Pacific head Sandy Flockhart said the subprime credit collapse that cut profit at Europe's largest bank this year will continue to hurt lenders.

"I don't think we're near the end of it yet,'' Flockhart said today in an interview in Hong Kong. He said HSBC remains "dependent on the outlook for the US economy''.

HSBC first warned investors in November last year that defaults on subprime US home loans were rising. The bank set aside $3.4 billion, $1.3 billion more than it expected, for third-quarter US losses, Chairman Stephen Green said last month.

Green is shifting HSBC's focus toward faster-growing markets in Asia after the 2003 purchase of U.S. lender Household International Inc. led to soaring loan provisions. Flockhart, who took up his position in July, said HSBC's commercial-banking operations in Asia-Pacific will continue to grow between 15 percent and 20 percent annually, faster than the bank's global average.

The London-based bank has said it aims to generate 60 percent of pretax profit in emerging markets in Asia, Latin America and the Middle East, up from 51 percent in the first half of 2007.

US Treasury Secretary Henry Paulson is negotiating a deal among banks, mortgage companies and securities-industry lobbyists to fix some subprime mortgage rates before they reset higher and trigger a wave of defaults. The Treasury chief yesterday proposed letting state and local governments "temporarily'' exempt taxes on bonds issued to help refinance subprime borrowers.

The economies of China and India grew at 11.5 percent and 8.9 per cent respectively last quarter, compared with 4.9 percent in the U.S. Economists at Bank of America Corp., Lehman Brothers Holdings Inc. and Morgan Stanley forecast US growth will slow to less than 1 percent this quarter amid the housing recession and turmoil in credit markets.

Flockhart said the Federal Reserve may lower its benchmark interest rate, most likely by a quarter point, this month to prevent a recession. Asian economies are better equipped than in the past to weather the impact of a slowdown in the U.S., he said.

"They will be affected, but certainly not to the extent that they would have been perhaps in the past. We are still going to see double-digit growth rates'' in Asia and emerging markets, Flockhart said.

Asia and the Middle East, which contributed 40 percent of pretax income to the company's global commercial banking business in the first half, grew by a compound annual rate of 25 percent between 2004 and 2006, Flockhart told reporters in a briefing in October.

Pretax profit from commercial banking rose 20 percent to $3.4 billion in the first half of this year, HSBC said in July, making up 24 percent of the company's earnings.

Flockhart also said that Hong Kong's low unemployment rate and competition for banking staff make employee retention a "critical issue'' for HSBC.

"Here in Hong Kong, where we have a business that's growing strongly, we do have high turnover,'' he said. ``We've got to make sure we remain competitive. It's one of the key issues for us.''

HSBC last week won a Hong Kong court order preventing Steven Wallace, its former Asia head of investment banking, from switching to rival Citigroup Inc.

HSBC lost Asia Chief Executive Officer Michael Smith to Australia & New Zealand Banking Group Ltd. Other Asia-Pacific departures include George Pavey, head of equity capital markets; Guy Gui, head of the natural resources group; Ashok Mittal, former head of investment banking in India; and Jonathan Orders from equity capital markets.