HSBC Holdings PLC · LSE:HSBA
HSBC — Household International — Investor Presentation (September 2003)
53 slides from HSBC's investor presentation, Sep 19, 2003
Slide 1: Household International Investor Presentation
Household International Investor Presentation HSBC Group WHQ, London September 19, 2003
Slide 2: Forward-looking information disclaimer
This presentation, including the accompanying slides and subsequent discussion, contains certain forward-looking information with respect to the financial condition, results of operations and business of HSBC Holdings plc and Household. This information represents expectations or beliefs concerning
Slide 3: Agenda
AGENDA • Background and Overview • Business Model Drivers • Integration Update • Managing Credit Risk • Financial Review • Summary • Q&A 3
Slide 4: Household
HOUSEHOLD • Established in 1878 • Recognized leader in U.S. consumer lending – Leading market share in all businesses – Leading brand names in consumer finance – Profitable and growing credit card businesses – private label and bank card • Extensive customer base and distribution network – Over 53 m
Slide 5: Household's Receivables by Type
HOUSEHOLD’S RECEIVABLES BY TYPE June 30, 2003 International First Mortgage- 9% Correspondent Auto 15% 7% Private Label 12% First Mortgage- Branch 21% MasterCard/Visa 15% Second Mortgages Personal Non- 7% PHL Credit Card 4% 10% $112.1 Billion (1) (1) Excludes commercial and other receivables 55
Slide 6: Household's Customer Base
HOUSEHOLD’S CUSTOMER BASE Household’s 53 million customers have the following characteristics: • Average age between 40–50 Subprime • Average household income between 21% $45,000 and $60,000 • Average home value* between Near Prime Prime $120,000–$175,000 13% 66% • Average auto value** between $12,0
Slide 7: Household's Core Customer Is the Middle Income
HOUSEHOLD’S CORE CUSTOMER IS THE MIDDLE INCOME PROBABILITY OF DEFAULT Low Medium High EXPECTED LOSS GIVEN DEFAULT Low Real Estate Secured – 1st Lien Medium Real Estate Secured – Auto 2nd Lien High Credit Card – GM PHL Credit Card – Credit Card – Subprime Credit Card – UP Household Bank Personal Non-
Slide 8: Household's Distribution Channels
HOUSEHOLD’S DISTRIBUTION CHANNELS Over 1,700 Branch offices Over 140 retail merchants in 45 states in the at 70,000 retail locations United States; United throughout the United States, Kingdom, Ireland United Kingdom and Canada and Canada Branch Retail Offices Merchants Over 4,500 active Auto Tax 5,
Slide 9: Household's Consumer Lending Franchise
HOUSEHOLD’S CONSUMER LENDING FRANCHISE Nationwide Coverage and Well Diversified Northeast U.S. Population 11% Correspondent 6% Consumer Finance 11% MasterCard/Visa 14% West Private Label 9% Auto 4% U.S. Population 8% Correspondent 8% Consumer Finance 11% Midwest MasterCard/Visa 7% U.S. Population 23
Slide 10: Agenda
AGENDA • Background and Overview • Business Model Drivers • Integration Update • Managing Credit Risk • Financial Review • Summary • Q&A 10
Slide 11: Characteristics of Household's Business Model
CHARACTERISTICS OF HOUSEHOLD’S BUSINESS MODEL • Centralized approach to business • Sales skills and culture • Partnering skills and culture • Low cost producer • “Best in Class” technology • Strong marketing and credit management analytics 11
Slide 12: Consumer Lending Operating Model
CONSUMER LENDING OPERATING MODEL • 1,315 distributed retail branches • Direct lending channel • 7 centralized collection, underwriting and appraisal facilities • Centralized support functions: – Marketing – Human resources – Credit risk – Policy and compliance – Financial control 12
Slide 13: Consumer Lending Business Mix
CONSUMER LENDING BUSINESS MIX 6/30/03 Outstandings Percent of Total ($ Billions) Outstandings Real Estate First Lien $24.1 56% Second Lien 3.7 8% Total Real Estate 27.8 64% Personal Homeowner Loan (PHL) 4.7 11% Unsecured Loans 10.7 25% Product total $43.2 100% 13
Slide 14: Consumer Lending Key Competitive Advantages
CONSUMER LENDING KEY COMPETITIVE ADVANTAGES • Operating model – Distributed branch network/Centralized support – Low cost producer • Credit risk and marketing approach – Unique blend of both direct marketing and credit risk analytical talent: focus is optimization of profit – Proprietary data marts
Slide 15: Branch Cycle - Real Estate
BRANCH CYCLE - REAL ESTATE Marketing Branch Does Branch Prepares Customer YES Distributes Mail-Based Outbound Calls and Customer Solution Brings in Leads Through LMS Handles Inbound Calls and Preliminary Documentation? Application NO "TUD" Branch Processes Underwriting Customer Wants Order Appraisal
Slide 16: Consumer Lending Net Loan Account Growth
CONSUMER LENDING Net Loan Account Growth $ in Millions 1,456 1,500 1,068 982 1,000 390 500 0 (56) (236) (500) (530) (1,000) Q1 '02 Q2 '02 Q3 '02 Q4 '02 Q1 '03 Q2 '03 Jul - Aug '03 *The net loan account gains for 2002 exclude loan sales 16
Slide 17: Correspondent / Wholesale Lending
CORRESPONDENT / WHOLESALE LENDING • Acquirer of non-conforming loans through correspondents and mortgage brokers • Approximately 2/3 of U.S. non-conforming loans are originated through mortgage brokers or correspondents • Channel provides additional opportunity for real estate secured growth and is
Slide 18: Correspondent / Wholesale Lending Business Mix
CORRESPONDENT / WHOLESALE LENDING Business Mix 6/30/03 Percent of ($ in Billions) Outstandings Total Outstandings First Lien Fixed $ 5.6 27% ARM 11.3 55% 16.9 82% Second Lien 3.6 18% $20.5 100% 18
Slide 19: Correspondent Net Loan Account Growth
CORRESPONDENT / WHOLESALE LENDING Net Loan Account Growth $ in Millions 2,000 1,875 1,800 1,639 1,600 1,507 1,329 1,400 1,200 1,072 1,000 862 749 800 600 400 200 Q1 '02 Q2 '02 Q3 '02 Q4 '02 Q1 '03 Q2 '03 Jul - Aug '03 *The net loan account gains for 2002 exclude loan sales 19
Slide 20: Credit Card Services
CREDIT CARD SERVICES MasterCard/Visa Receivables as of 6/30/2003 GM 41% Union Plus 31% Non-Prime 28% Total outstandings $16.5 billion YOY growth of 7% 20
Slide 21: Credit Card Services Strategy for Profitable Growth
CREDIT CARD SERVICES STRATEGY FOR PROFITABLE GROWTH • True partnership approach • Full spectrum lending • Leverage of Household franchise • Customer care orientation (Sales and Service) • Conservative line assignment and management • Risk-based pricing • Analytically driven decision making (Marketin
Slide 22: Models Are Continuously Validated With Experience
MODELS ARE CONTINUOUSLY VALIDATED WITH EXPERIENCE Over 150 scorecards are in production today • Leverage a suite of custom models – Risk and response models – Bankruptcy prediction models – Behavior scores – Transaction-based models – “Purpose-built” models • Strict, well-documented control process
Slide 23: Retail Services Business Overview
RETAIL SERVICES BUSINESS OVERVIEW • Third largest third-party private label provider • $13.5 billion managed receivables • YOY growth of 18% • Over 13 million active cardholders • Over 70 active merchant relationships 23
Slide 24: Our Portfolio Is Diversified
OUR PORTFOLIO IS DIVERSIFIED Consumer Electronics 31% Department Store 14% Furniture Discount 21% 3% Home Products 9% Misc Rec Vehicle 4% 18% June 30, 2003 24
Slide 25: Private Label Credit Is Key to Retailers
PRIVATE LABEL CREDIT IS KEY TO RETAILERS THE MARKET IS SIGNIFICANT ($ Billions) +4% +1% $92.5 -1% $92.5 $91.6 +2% +.5% $88.9 +9% -1% $88.0 $87.6 $87.2 '96 '97 '98 '99 '00 '01 '02 SOURCE: The Nilson Report 25
Slide 26: Market Share Is Shifting to Third Parties
MARKET SHARE IS SHIFTING TO THIRD PARTIES 63% 63% 61% 59% 56% 53% 52% 48% 47% 44% 41% 39% 37% 37% '96 '97 '98 '99 '00 '01 '02 Proprietary 3rd Party Private Label Receivable Share SOURCE: The Nilson Report 26
Slide 27: We Are More Than Just a Credit Partner
WE ARE MORE THAN JUST A CREDIT PARTNER Household’s Marketing Capabilities Marketing Strategy/Consulting • Customer needs/channel analysis • Business strategy development • Product innovation, eMarketing Maximizing Sales and Profitability by: CRM/Analytics • Tailored/targeted Customer • Retaining and
Slide 28: Agenda
AGENDA • Background and Overview • Business Model Drivers • Integration Update • Managing Credit Risk • Financial Review • Summary • Q&A 28
Slide 29: Integration Overview
INTEGRATION OVERVIEW • 32 integration projects and teams established • New organizational structure announced • Efforts underway to “export Household model” globally • Regulatory, audit, and compliance management on track • Detailed financial forecasts support integration benefit 29
Slide 30: Summary of Integration Benefits
SUMMARY OF INTEGRATION BENEFITS • Funding and liquidity benefits • Technology cost savings and more effective, common platforms • Full spectrum mortgage and consumer lending • Credit card management • Retail and insurance services • UK operations • Administrative cost savings 30
Slide 31: Funding and Liquidity Benefits
FUNDING AND LIQUIDITY BENEFITS • Funding benefits arise from many sources • Credit spreads - HFC 5-year new issue credit spread has tightened to Treasuries +85bps compared to 2H ‘02 average T +335bps • Asset transfer - Approximately $25 billion of Household managed receivables available to transfer
Slide 32: Technology
TECHNOLOGY • North American technology organization combined into one service corporation under Household management • HSBC will adopt Household credit card and mortgage systems • Cost savings will be achieved from credit card conversions currently scheduled for U.S., U.K., Mexico, and Canada • Tele
Slide 33: Full Spectrum Mortgage Lending
FULL SPECTRUM MORTGAGE LENDING • Access to HSBC funding allows Household to offer more price competitive products, improve conversion of loan applications and segment better credit quality customers • Access to Household credit and marketing skills allows HSBC to expand its product range and improve
Slide 34: Credit Card Management
CREDIT CARD MANAGEMENT • Global functional responsibility for credit cards assigned to Household • HSBC Bank USA portfolio of $900 million to be combined with Household managed portfolio of $16.5 billion • One common platform in 2004 • Integration will save HSBC outsourcing costs and can be absorbed
Slide 35: Retail and Insurance Services
RETAIL AND INSURANCE SERVICES • Revenue opportunities to target retailers who were reluctant to partner with a non-bank • Early success with John Lewis Partnership and eBay • In discussion with 21 potential partners • Offering HSBC commercial banking services to Household merchants • Combined North
Slide 36: U.K. Operations
U.K. OPERATIONS • Household to operate as a separate “monoline” brand but with close ties to HSBC • Technology and treasury functions being integrated with HSBC with additional administrative consolidation in 2004 • Significant funding benefits • Credit card management combined under Household •Impr
Slide 37: Administrative Cost Savings
ADMINISTRATIVE COST SAVINGS • Combined North American purchasing organizations and began renegotiating strategic sourcing arrangements • Eliminating redundant staffing and streamlining administrative organizations • Evaluating call center consolidation 37
Slide 38: "Exporting the Household Model"
“EXPORTING THE HOUSEHOLD MODEL” • Initiative underway with HSBC Mexico •Remittance and cross-border pilot •Credit card marketing consultation •Substantial credit risk support and scorecard development •Technology and operation support and backup • Initiatives underway with HSBC Brazil •Market evalua
Slide 39: Regulatory, Audit and Compliance Management
REGULATORY, AUDIT AND COMPLIANCE MANAGEMENT • All regulatory commitments related to the A.G. Settlement have been delivered to date and process established for future compliance • Community affairs department created and specific plans developed • Compliance organization aligned with Group direction
Slide 40: Integration Summary
INTEGRATION SUMMARY • Integration efforts well under way • Appropriate management structure and resources in place to ensure success • Steps being taken to “export Household model” • Economic benefits are being realized 40
Slide 41: Agenda
AGENDA • Background and Overview • Business Model Drivers • Integration Update • Managing Credit Risk • Financial Review • Summary • Q&A 41
Slide 42: Credit Quality Trend
CREDIT QUALITY TREND 7 6.5 6 5.24 5.36 5.30 5.5 4.90 PERCENTAGE 5 4.64 4.66 4.46 4.89 4.5 4.20 4.75 4 4.29 4.28 3.84 4.13 3.5 3.64 3.73 3 2.5 2 '97 '98 '99 '00 '01 '02 1Q '03 2Q '03 Managed 2+ Delinquencies Managed Chargeoffs The above information includes non-GAAP financial measures and is provided
Slide 43: Risk Adjusted Revenue
RISK ADJUSTED REVENUE 20,000 8.0% 7.21% 7.40% 7.64% $17,647*** 18,000 7.14% 7.07% 7.5% $15,925 7.22% 16,000 7.18%*** 7.0% $14,254 14,000 6.5% $11,375 $11,518 12,000 $10,671 6.0% 10,000 5.5% $8,502 8,000 5.0% 6,000 4.29% 4.28% 4.82% 4.5% 4.13% 4,000 3.84% 3.73% 4.0% 3.64% 2,000 3.5% 0 3.0% '97 '98 '9
Slide 44: Strong Balance Sheet
STRONG BALANCE SHEET $6.0 $5.6 $5.1 $5.0 5.01 3.78 3.99 3.99 3.65 4.74 $4.0 3.72 $3.8 $3.2 $3.0 $2.5 $2.5 $2.7 $2.0 1.16 1.10 1.00 1.07 1.05 1.13 1.16 $1.0 $0.0 '97 '98 '99 '00 '01 '02 2Q '03 Managed Reserve Levels (Billions) % of Managed Receivables % of Nonperforming Receivables Coverage The above
Slide 45: Lowering the Risk Profile
LOWERING THE RISK PROFILE 100% 90% 80% 69% 70% 56% 60% 50% 44% Unsecured Real Estate Secured 40% 31% 30% 20% 10% 0% '97 June 30, 2003 45
Slide 46: Median Housing Prices
MEDIAN HOUSING PRICES Median Housing Prices 1968 - Q2 2003 (1,2) 250 225 200 $ Thousands 175 150 125 100 75 50 25 0 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 Year West Midwest Northeast (1) Source: National Association of Realtors. (2
Slide 47: Household's Exposure to the Housing Bubble
HOUSEHOLD’S EXPOSURE TO THE HOUSING BUBBLE Our view is that Household’s exposure to a ‘housing bubble’ is reduced by several factors: • Portfolio is geographically diverse, with approximately 20% in highly over-priced markets as defined by Economy.com Housing Monitor Q1 2003 • Median house value in
Slide 48: Growth in Consumer Debt
GROWTH IN CONSUMER DEBT U.S. Consumer Debt Burden vs Mortgage Debt household debt service payments as a percent of total disposable (%) (%) income vs mortgage debt to total debt (source: Federal Reserve) 15.0 72.0 14.5 70.0 14.0 68.0 13.5 66.0 13.0 64.0 12.5 62.0 12.0 60.0 Percent of mortgage 11.5 d
Slide 49: Focus on Bankruptcy
FOCUS ON BANKRUPTCY • Household bankruptcy unit filings are up 9.2% year-over-year, adjusted for receivables growth • Average $ per filing for unsecured product has been flat due to tightened underwriting and account management • Percentage of $ filings in real estate product has increased, leading
Slide 50: Agenda
AGENDA • Background and Overview • Business Model Drivers • Integration Update • Managing Credit Risk • Financial Review • Summary • Q&A 50
Slide 51: Financial Review
FINANCIAL REVIEW KEY FINANCIALS - MANAGED BASIS Six Months Ended 6/30/03 6/30/02 % Change Net Operating Earnings ($ Millions) (1) $696.1 $998.4 -30% Net Income ($ Millions) (2) $619.4 $998.4 -38% Receivable Growth (end of period, annualized) 9.45% 9.20% 3% Net Interest Margin 8.76% 8.64% 1% Consumer
Slide 52: Net Income 2002 vs. 2003
NET INCOME 2002 VS. 2003 (Managed basis, after-tax, $ millions) June 30, 2002 Net Income $ 998 Revenue $308 Credit costs (296) 12 Sub-total 1,010 Expenses (175) Sub-total 835 Securitization revenue (139) June 30, 2003 Net Operating Earnings 696 Purchase accounting adjustments 43 Discontinuation of s
Slide 53: Summary
SUMMARY • Household is an established industry leader in consumer lending • Household/HSBC integration is proceeding well and to deliver promised results • Credit quality impacted by pace of U.S. recovery but portfolio and reserves are well-positioned • Business fundamentals are improving after a di
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