Date
18 January 2017
HSBC Asia's credit risk may rise this year on its commodities-loan exposure worth a combined US$16 billion in 2015. Photo: Reuters
HSBC Asia's credit risk may rise this year on its commodities-loan exposure worth a combined US$16 billion in 2015. Photo: Reuters

Why HSBC’s Asia expansion plan faces major hurdles

HSBC may face the triple hurdles of commodity loan risk, continued China slowdown and rising operating costs in Asia this year.

These cloud its prospects in the region despite its expansion plan, with Asia accounting for 71 percent of its adjusted pretax profit in 2015.

HSBC’s strategic initiatives include fortifying operations in China’s Pearl River Delta and boosting its business in Southeast Asia.

HSBC Asia’s credit risk may rise this year on its commodities-loan exposure worth a combined US$16 billion in 2015, one-third of the total and its largest regionally.

It may need to boost its loan-loss provisions.

HSBC Group has set aside just US$700 million in loan charges on US$18 billion in metals and mining exposure and US$29 billion in oil and gas lending in 2015.

HSBC’s benign credit quality in China may not be sustainable.

The lender’s US$143 billion credit exposure to China accounts for 14 percent of group lending.

This aligns its risks with China’s faltering economy.

In 2015, HSBC held about US$69 billion in corporate loans, many of which originated in the Pearl River Delta, China’s vibrant manufacturing base hard hit by weakening exports.

HSBC may face cost-containment challenges in 2016 amid its continued Asian expansion.

The bank plans to beef up its operations in China’s Pearl River Delta as well as Southeast Asia.

These initiatives partly contributed to a 4.4 percent increase in Asia expenses for 2015 versus a 3.6 percent expense decline overall.

HSBC Group seeks to contain quarterly adjusted operating expenses to a sustainable US$7.6 billion by 2017 versus US$7.9 billion in the third quarter and in the fourth quarter of 2015.

The views expressed in this article are those of Francis Chan, a senior banking analyst at Bloomberg Intelligence.

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