HSBC impairments jump four-fold for Middle East

The global banking giant HSBC writes off US$1.33 billion worth of riskier loans to Middle East customers after an "extremely challenging" last year.

The global banking giant HSBC has written off US$1.33 billion (Dh4.88bn) worth of riskier loans to Middle East customers after an "extremely challenging" last year. The four-fold jump in loan impairment charges for bad and doubtful debt hit profits from the Middle East in yesterday's group financial results for last year. Regional profits before tax fell 74 per cent from $1.75bn in 2008 to $455 million last year, compounding falling profits from banking operations in Europe and Asia.

At a group level, HSBC pre-tax profits fell 24 per cent to $7.1bn, bolstered by higher returns on investment and wholesale banking but still below market expectations. The bank wrote off a total of $26.5bn on impairment and other credit risk provisions worldwide, with the biggest exposure, $15.5bn, taken in the US. "2009 was an extremely challenging year for the Middle East, where HSBC is the leading international bank," said Michael Geoghegan, the group chief executive of HSBC. "The region was significantly affected by falling capital inflows, a sharp decline in oil revenues, lower property prices and concerns over levels of debt in Dubai. Despite a recovery in oil prices in the second half of the year, credit conditions remained difficult."

But the bank is optimistic on future prospects for the Middle East, where it has been doing business for more than a century. "We remain confident that the authorities in the region will provide the necessary conditions and support for continued growth, and we expect the economy to recover during this year and next," Mr Geoghegan said. "The Middle East will continue to be an important market at the heart of international trade and investment flows. Our commitment to the region is undiminished and in January 2010 we launched our SME [small and medium-sized enterprises] fund in the UAE to support our business banking customers."

HSBC does not provide a detailed breakdown of Middle East countries, but its three biggest markets in the region are the UAE, Saudi Arabia and Egypt. It is believed the write-downs for the UAE do not so far include any provision for Dubai World, the indebted conglomerate seeking to renegotiate $26bn of loans to creditors, including the Dubai Government. HSBC is a member of the co-ordinating committee comprising five banks, four British and one Japanese, involved in the talks. Depending on the outcome of those talks, HSBC may be forced to make impairment provisions in the current financial year.

In Saudi Arabia, the bank is believed to have included a charge for its exposure to the troubled Saad and Al Gosaibi conglomerates, which are also in talks over debts of as much as $20bn. "Loan impairment charges rose to unsatisfactory levels, and we took appropriate action to minimise this and to manage risk," Mr Geoghegan said. "Our exposure to the region, and within the region, remains acceptably spread."

The bank said there was evidence of a two-speed global economy, with emerging markets in Asia growing faster than developed markets in Europe and the US. HSBC's proportionate level of provisioning for bad debts in the region is higher than that of local banks. "They want to be more risk averse and protect shareholders," said John Sfakianakis, the chief economist at Banque Saudi Fransi. "It does not necessarily mean they are being more pessimistic, but it is part of the HSBC psychology to be more precautionary. Remember, they were the first bank to take provisions in the US back in 2007. Things are not as optimistic in the region as they were 18 months ago."

World markets were disappointed by the HSBC results. The shares fell 35 pence to £6.96 a share in London afternoon trading. Mr Geoghegan also tried to defuse the issue of bankers' bonuses by announcing that he was to give his $4m bonus in the form of deferred shares to British and Hong Kong charities. [e-mail]