HSBC Finance Corp. predicted Tuesday that its subprime mortgage losses would peak in the second half, and it said its other businesses such as credit cards and traditional mortgages would not be affected.
"Excuse the pun, but we sort of have our arms around the problem," Brendan McDonagh, the chief executive of the U.S. consumer finance unit of HSBC Holdings PLC, said during a conference call with analysts to discuss first-quarter results.
Separately Tuesday, Citigroup Inc. CEO Charles Prince echoed that assessment, saying subprime losses are not seeping into Citi's other portfolios.
"My view is that subprime lending credit issues are ring-fenced to the subprime area — we do not see it leaching over into corporates, into primes, into sovereigns," Mr. Prince said in a speech to a conference held by UBS AG.
HSBC Finance said it expects $9 billion of adjustable-rate mortgages to reprice this year, mostly in the year's second half. By comparison the Prospect Heights, Ill., lender expects just $4.8 billion of ARMs to reprice next year.
In anticipation of higher losses, HSBC Finance almost doubled its provision in the first quarter, compared to a year earlier, to $1.7 billion. This pushed first-quarter net income down 39%, to $541 million. But Mr. McDonagh said the company would reduce its reserve level as the ARMs run off either through refinancings or chargeoffs.
Simon Adamson, an analyst at CreditSights Ltd. in London, said HSBC Finance offered a mix of good and bad news.
"The bad news is that the quality of its subprime mortgage book continues to deteriorate, and the main impact of ARM resets has yet to work through," he wrote in an e-mail Tuesday. "The good news is that the rate of deterioration seems to be slowing and there is no sign of contagion in the branch-based mortgage book and unsecured lending."
Mr. McDonagh, who was promoted as part of a management overhaul in January, said HSBC Finance has been working with borrowers to refinance their adjustable-rate mortgages before they reprice.
On the conference call, Tom Detelich, the head of the unit's mortgage services division, said it is offering to rewrite the terms of loans held by customers with a high risk of delinquency. The most common move, he said, is to delay the resetting of a loan for 12 months.
This raised a red flag for Mr. Adamson who said, "Postponing resets on some 'modified' loans … might just be delaying the losses," if interest rates rise.
HSBC Finance slowed the growth of its mortgage business last year after credit quality began to deteriorate. It discontinued its correspondent business and tightened standards in its wholesale business.
Douglas Flint, the chief finance director of the London-based parent company, put to rest any speculation that $1.9 trillion-asset HSBC Holdings wants to shed its U.S. consumer finance business.
"It's now almost exactly four years since we purchased the finance company, and in that four years we've essentially had net income approaching $10 billion on a $15, $16 billion acquisition," Mr. Flint said on the call. "So from an HSBC perspective, this has been, and continues to be, a very important part of the group."
HSBC Holdings' other U.S. company, HSBC USA Inc. of New York, also reported, saying in a regulatory filing late Monday that it earned $273 million in the first quarter, off 11% from a year earlier.
HSBC USA also added to its reserve, increasing it 31% from a year earlier, to $205 million.
