HSBC charges into the U.S.: the London bank sees the U.S. as one of the world's ripest targets

Chief Executive, The, March, 2005 by Peter Thal Larsen

But HSBC's investors are concerned that Household does not appear to be growing as quickly as expected. Household's earnings for the three months that ended in September showed its net interest income was roughly flat as rising interest rates and an expansion into less risky parts of the consumer finance market eroded margins. At the same time, costs are creeping up as sub-prime lenders face increased scrutiny from regulators. "They timed the acquisition [of Household] very nicely, but operationally it has been disappointing," says Simon Samuels, banking analyst at Citigroup Smith Barney.

These concerns are beginning to show in HSBC's share price. HSBC shares still command a premium to the sector, trading at about 13 times Citigroup Smith Barney's 2005 forecast for the bank, compared with an average of 11 times for European banks. But that premium has been eroded in the past year as HSBC's shares have underperformed the European banking sector by about 7 percent.

Bond remains bullish about the prospects for consumer finance. He points out that around 40 percent of U.S. adults are excluded from the banking system, either because they do not have property or a regular income or because there is a blot on their credit history. Businesses such as Household use computer modeling to decide whether to award a loan. And, unlike the regular banking market, there are only a handful of sizable players. He says that many of Household's customers are immigrants who need a loan to help them start their new lives. Like other consumer finance groups, Household has faced accusations of predatory lending from consumer groups but Bond attributes Household's problems to "one or two rogue branches."

The next challenge for HSBC is to see whether it can use Household's skills to develop consumer finance businesses in other parts of the world, particularly Asia. HSBC has started switching over its credit card operations to Household's computer systems. Ken Harvey, HSBC's head of information technology, was promoted from Household. The U.S. division's management has also been involved in the search for acquisitions in the consumer finance business in Asia, and HSBC has looked closely at several possible acquisitions in Japan.

Bond believes that there is a natural fit between consumer finance companies, which consume capital, and commercial banks, which tend to have surplus capital on their balance sheets. "It's better, more efficient financial intermediation if the depositors of the consumer society can lend directly to the borrowers," he says.

Much of HSBC's longer-term appeal to investors lies in its position in Hong Kong and the assumption by most investors that it can capitalize on the growth of China. Its operations on the mainland are restricted to working for foreign companies and trading foreign currency, but HSBC is positioning itself for the day when the market opens up. In 2002, it acquired a 10 percent stake in Ping An, a Chinese insurance company. This year, it paid $1.75 billion for 20 percent of Shanghai's Bank of Communications.