HSBC Holdings PLC, reporting its 2006 results, said the cost to cover bad debts soared 36% to $10.57 billion in 2006 because of the bank's ill-fated move to buy risky subprime loans from U.S. originators.
Overall, the London bank said net income rose 4.7% to $15.79 billion in 2006 from $15.08 billion. HSBC is the world's third-largest bank ranked by market value behind Citigroup Inc. and Bank of America Corp.
In 2005 and 2006, HSBC's U.S. business, HSBC Finance Corp., increased the number of subprime mortgage loans it bought from originators. But amid increasing interest rates and slowing housing price appreciation, borrowers defaulted at record rates, including in 2006 where loans were just months old. Last month, the bank replaced the top management of its U.S. operations and acknowledged that it had made mistakes in its mortgage strategy.
This isn't going to be the last we hear about this, from HSBC or any other bank that has subprime exposure. This story is going to last awhile.