HSBC warned yesterday that US house prices would keep falling until next year and that the chances of the American economy going into recession had risen.
Britain's biggest bank made $3.2bn (£1.6bn) of bad-debt provisions in the first three months of this year at its US consumer finance business. The figure was down from $4.6bn in the last quarter of 2007, but HSBC said the reduction was at least partly due to seasonal factors such as tax refunds being used to repay debt rather than an underlying improvement.
Michael Geoghegan, HSBC's chief executive, said: "I don't see [US] real estate prices changing from where they are now until well into 2009... We don't think it is a spring 2008 event; we think it is a 2009 event." There is "an increased likelihood" of a US recession this year, the bank added.
Mr Geoghegan warned that US housing delinquencies had moved from the sub-prime market, in which HSBC has been a big player, to near-prime and supposedly safe prime loans.
HSBC's comments on the US are keenly watched because it is the UK bank with the most direct exposure to the American consumer housing market and it was the first lender to warn of the meltdown in sub-prime loans. Many senior bankers do not believe there will be an end to the financial crisis until US house prices stop falling.
The US provisions drew HSBC into a war of words with Knight Vinke, the activist investor that has attacked its strategy and governance. Knight Vinke accused HSBC of underestimating potential losses compared with rivals. But Douglas Flint, HSBC's finance director, responded that the investor's comments were based on "misunderstanding or error".
"Customer loans are accounted for differentlyto trading assets. Wewould not be permitted by current rules to account for our loan book in the way Knight Vinke suggests we should," Mr Flint added.
HSBC said its first-quarter profit was higher than a year ago because growth in Asia and emerging markets had offset its woes in the US, where the bank has suffered from the ill-fated acquisition of Household, the sub-prime lender, in 2003. But Mr Geoghegan said the threat of inflation and slowing export orders from the US meant that there would be some "contagion" for Asia from western markets.
Asked about the effect of falling house prices on the UK economy, Mr Geoghegan said: "Are we concerned? Yes. Are we surprised? No." He added that people would have to get used to owning a home to live in rather than treating it as an investment fund.
Mr Geoghegan said that HSBC would wait to see the Government's proposals on taxing UK companies' overseas profits before deciding whether to join those threatening to move their headquarters. He said the bank reviewed its tax position every three years, but had always decided that theUK was the best place tobe based.
HSBC shares rose 1.85 per cent to 882p.