Subprime steamroller still shows no signs of slowing down

LOSSES & LAWSUITS

LONDON/NEW YORK/HONG KONG – Barclays and HSBC are the latest in a long line of banks to post losses in the wake of the subprime crisis. The most disturbing fact is that these losses reported recently are not expected to be the last, as banks struggle to assess the extent of their exposure to the subprime crisis.

HSBC revised its subprime hit recently when it raised its bad debt provision by $1.4 billion to $3.4 billion. The bank has also announced the closure of its US mortgage-backed securities trading department, in an attempt to cut costs in the wake of the subprime crisis.

The bank will cut around 120 jobs after announcing the closure of its subprime mortgage arm Decision One. The closure, designed to free up resources for investment in emerging markets, will reportedly cost HSBC around $150 million, significantly less than the $261 million cost to Normura Securities when it ceased its mortgage operations last month.

HSBC is now expected to announce a further $1 billion writedown on its subprime holdings. The bank has reportedly refused to deny claims its mortgage exposure may be even higher after $3.4 billion second-quarter writedowns.

The bank set aside $1.8 billion in March to counter its subprime exposure, which caused the first profit warnings in its history, but its shares climbed after it cited a strong performance in Asian markets.

Another London-based bank, Barclays, has revealed £1.3 billion of writedowns on credit-related securities since the start of July. Under pressure to reveal the details of its subprime exposure, Barclays also disclosed that it had issued an £800 million writedown in October alone, coupled with an earlier loss of £500 million in the third quarter. The bank's share price took a hit as speculation continued about the extent of Barclays' subprime exposure.

At the end of October, Swiss bank UBS – the world's biggest wealth manager – reported its first quarterly loss for five years; the result of its freefalling US subprime-related investments bringing net losses of Sfr830 million ($716 million) down from net profits of almost Sfr2.2 billion a year earlier.

That downturn overshadowed growth in other areas, because of losses of Sfr3.68 billion from within UBS's subprime-ridden securities division. There was talk of a fourth-quarter recovery but this only came amid word of further deterioration to come.

Deutsche Bank recently posted pre-tax losses of $258 million for its investment banking division for the third quarter – marking a 93% plunge in profits. The bank was hit by €2.2 billion of writedowns, including €1.56 billion on its debt and equity trading book and €603 million of leveraged and other loan commitments. Deutsche saw the wave coming, managing to report an improvement to its anticipated performance from estimates made a few weeks earlier, but its pre-tax earnings of $2 billion were still 19% down from the previous year, due to the turbulence affecting its investment operations.

Deutsche Bank's recovery from the subprime blow was achieved partly by heavy pay cuts. Bonuses and compensation in its investment division were cleaved; expenses falling 40% and compensation from €1.38 billion a year earlier to €177 million, after it reclaimed funds allocated to its bonus pool for the first and second quarters. The German bank's performance was also buoyed by €305 million from the partial sale of holdings in German insurer Allianz, and industrial conglomerate Linde, with another €187 million from the sale and leaseback of its New York offices.

Credit Suisse has pursued a similar policy of compensation cutbacks to offset its subprime writedowns, after its investment wing announced a 99% drop in third-quarter pre-tax profits. Its compensation costs have fallen 63% from the same period in 2006 to limit the effects of a 50% drop in net revenues.

In Hong Kong, the Bank of China announced a 23% profit increase for its third-quarter profits – the Chinese lender admitted on August 23 to holding $9.65 billion in subprime assets.

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