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HSBC faces a meltdown at its US credit card operations where around $50bn (£34bn) has been lent to people with poor credit histories, say analysts.
Write-offs at the credit card arm of HSBC Finance Corporation (HFC), formerly Household, a sub-prime lender, could double to $10bn in 2009, according to brokers. Fears are growing that the bank could be forced to ask shareholders for more cash, on top of the £12.5bn it raised during its recent rights issue designed to bolster its balance sheet.
Analysts at Société Générale said that the strong take-up of the share offer did not necessarily "translate into smooth sailing for HSBC over the next couple of years" as it faced the prospect of rising bad debt and sour loans. The bank is not yet out of the woods, added SocGen.
Of particular concern are loans outstanding at HFC's credit card business, which stood at $49.6bn last year - representing around two-thirds of all HSBC credit card loans. The HFC credit card operation wrote off $5.4bn in bad or doubtful loans in 2008, according to the annual report, but made a profit of $520m. But analysts say that the profit will be wiped out this year and the offshoot will plunge into the red.
HSBC refused to comment on the speculation but said the HFC provisions "would be impacted by factors such as US unemployment and wage growth".
There is no suggestion that HFC's problems will push HSBC as a whole into loss - its businesses outside the US are highly profitable. But the bank, led by Stephen Green, has admitted that its purchase of Household for $15bn in 2003 has destroyed about $10bn of shareholder value.
Last month, the company unveiled a rights issue, slashed the dividend and disclosed that group profits had more than halved to $9.3bn. At the time, HSBC insisted that the proceeds of the cash call were not designed to plug an existing capital shortfall, but would give the bank a competitive advantage over rivals. But two weeks later it announced 1,200 redundancies as part of a review of operations to make it more efficient.
Leigh Goodwin, an analyst with Fox-Pitt, Kelton, said the job cuts were in response to a decline in demand for mortgage and savings products.
At the time of its annual results in March, HSBC chief executive Mike Geoghegan said HFC would stop making loans to new customers. It is also shutting 800 HFC branches in a move to shrink its exposure to the US housing and sub-prime markets.
Dissident shareholder Knight Vinke has demanded that the bank walk away from its HFC investment. It has also flagged up concern that the $34bn difference between the book and market value of HFC would have to be closed at some point, as it doesn't believe that US house prices will recover in the near future. But HSBC has queried Knight Vinke's assessment of the financial strength of HFC.
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