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Banks' consumer lending units proving a tough sell

HSBC Finance Canada is the last remnant of the global parent bank’s $14.2-billion (U.S.) acquisition of subprime lender Household International in 2003.

Kirsty Wigglesworth/Associated Press/Kirsty Wigglesworth/Associated Press

Risky consumer lending, once a shining business for many major banks, is all but chopped liver in the wake of the financial crisis.

HSBC Bank Canada has tried for months to unload its consumer finance division, which specializes in non-prime consumer loans, but a deal is unlikely to be reached, according to a person familiar with the process.

The sale of HSBC Finance Canada was desired because it complied with HSBC's global plans to shed non-core assets, but with no buyers lined up the chances of success have dropped sharply.

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The same story recently played out at Citigroup Inc., which had been in exclusive talks to sell its OneMain subprime consumer lending unit since the summer. Potential private equity buyers backed away just over a week ago and now the unit's future is up in the air.

Both non-prime and subprime lending are risky businesses because they lend money to individuals with poor credit quality. HSBC's business offers products such as private-label store credit cards that charge higher than normal interest rates.

It is a hard time to sell such businesses. As the European crisis unfolds and sovereign debt ratings suffer downgrades, management teams and investors are growing increasingly skittish. Loads of non-core European bank assets are also expected to be shopped around as financial institutions look to shore up their balance sheets by raising cash.

In this environment, consumer lending arms are especially tough sells because loads of capital must be stashed away to offset their risks. Consumers also aren't as willing to borrow at astronomical interest rates any more. Americans have already started to pay off their credit cards and save more, and many people believe Canadians' household debt as a percentage of personal disposable income, already sitting at 153 per cent, can't grow much higher.

This isn't the first time that HSBC Bank Canada considered selling its consumer lending arm. The bank previously entertained offers, according to a source, but the bids it received were never high enough. Rather than accept an offer worth less than the present value of the loans that should eventually be repaid, the bank always considered the possibility of simply winding down its subprime portfolio after the loans came due.

Still, the bank decided to give a sale one last shot, and slapped a first-quarter deadline on its decision. Should the sale process prove futile, more than 1,000 employees could be out of work, though some would be kept around as the portfolio is wound down.

An HSBC spokesperson said the bank does not comment on speculation or rumours.

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The future of Citi's OneMain division isn't as clear cut. According to the Wall Street Journal, which first reported that the private equity buyers had backed away, Citi may wait out the current market jitters and give a sale another stab once calm is restored. The unit may be desirable if the markets turn positive because OneMain is profitable. So too is HSBC's arm, which posted a profit of $21-million before tax last quarter, but that return is diminished by the amount of capital that must be stored away.

HSBC Finance Canada is the last remnant of the global parent bank's $14.2-billion (U.S.) acquisition of subprime lender Household International in 2003. After disastrous losses, HSBC started to wind the unit down in 2009, and that process involved restructuring the Canadian arm a few times.

The division now up for sale has two units: private-label credit cards, which carry higher interest rates than bank-issued cards and are issued by companies such as furniture retailer The Brick; and a branch network that underwrites mortgages and unsecured loans.

In April of 2010, HSBC Holdings PLC chief executive officer Stuart Gulliver announced a plan to sell non-core assets and to cut costs by $3.5-billion. That initiative triggered the sale of HSBC's U.S. credit card division to Capital One, as well as the sale of HSBC Bank Canada's retail brokerage to National Bank of Canada for $206-million.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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