By Steve Slater
LONDON, Aug 5 (Reuters) - HSBC Holdings Plc willhasten the run down of its portfolio of U.S. mortgages with moresales of loans to hedge funds, potentially allowing it to bringan end to its disastrous U.S. subprime foray within three years.
Europe's biggest bank, which has been reducing a $118billion book of U.S. consumer loans it no longer wants since2008, said on Monday when it announced first-half results theportfolio was down to $27 billion.
That was down $8 billion in the past year as the bankaccelerated the process by selling portfolios of mortgages tospecialist hedge funds and other investors. It said more salesare underway.
HSBC has been cutting back in the United States since its$15 billion purchase of Household International in 2003 left itas one of the biggest subprime lenders when the U.S. housingmarket crashed in 2007. It racked up losses of $60 billion frombad loans in North America from 2007 to 2012.
Running down the massive book of consumer loans was expectedto take a decade or more, yet the bank's latest update indicatesit is ahead of that timescale - a significant development givenit frees up capital to give the bank more strategic options.
HSBC has to hold about $7 billion of capital to cover forpotential losses in the book because the loans are regarded asrelatively risky.
"The book soaks up a huge amount of risk-weighted assets. Sowhen it goes they get capital build up," said Chirantan Barua,analyst at brokerage Bernstein.
HSBC Chief Executive Stuart Gulliver has repositioned thebank in the United States to focus on commercial and investmentbanking and is directing capital to those businesses.
HSBC is one of the world's best capitalised banks, andanalysts estimate it already has between $7 billion and $10billion of surplus capital in its U.S. operations after sellingbusinesses there.
But it is not expected to be able to take out big amountsany time soon. U.S. regulators want foreign banks to holdsubstantial capital in U.S. units and HSBC has a deferredprosecution agreement with the U.S. Department of Justice thatputs it under extra scrutiny until the end of 2017.
The bank also has several U.S. litigation issues that couldbe costly, including investigations into foreign exchangetrading and U.S. mortgage lending and a class action lawsuitover lending by Household, which the bank is fighting.
SHRINKING BOOK
The bank said in a regulatory filing its U.S. consumer loanportfolio should be cut to about $18 billion by the end of 2016,and analysts said it should fall more sharply than that by then,potentially allowing the bank to sell the remaining assets in anauction to avoid the process dragging on for years.
Bernstein's Barua estimated the book will be reduced toabout $10 billion by the end of 2016, at which point it would besmall enough to try to auction it off to specialist investors.
"Initially they (HSBC) looked at bids coming in but did notdo any dramatic sales ... it was more about damage control,"Barua said. "They have been much more active selling it in thelast 1-1/2 years."
Hedge funds and private equity firms specialising in realestate have bought the assets, attracted by decent yields andthe chance to make a profit as housing markets improve.
HSBC sold a $3.2 billion tranche to Fortress InvestmentGroup in March 2013. In May it sold $1.3 billion of loans to anunnamed buyer, and it sold a $289 million book of performingloans last month at a profit to what the loans were carried onits books at.
Early loan portfolios were sold at significant discounts totheir face value, but prices have risen as the U.S. economy hasimproved and better quality loans have been sold.
As well as New York-based Fortress, other investment firmsactive in the market include Oaktree and Ranieri Partners, whichwas founded by Lewis Ranieri to buy distressed real estate.
HSBC said it is currently trying to sell $1.1 billion ofloans and has another $1.3 billion earmarked for sale inmultiple transactions over the next 15 months.
Some 9.4 percent of the loan portfolio is in California. NewYork, Ohio, Pennsylvania, Florida and Virginia each account forbetween 5 and 7 percent of the book.
After dragging on HSBC's profits until 2012, losses from theU.S. loan book have fallen sharply and the business made aprofit in the first half of this year. (Additional reporting by Joy Wiltermuth at IFR in New York;Editing by David Holmes)
HSBC Holdings (HSBA)