Last week’s announcement by HSBC Holdings plc that it expects aggregate impairment charges for the group to be approximately 20% higher than consensus US$8.8 billion in fiscal 2006 is a concern, says Fitch Ratings, but at this stage it is not of sufficient magnitude to warrant a change in HSBC’s rating or outlook.

“The approximately US$1.8 billion increase in expected impairment charges relates very largely to the US$50 billion mortgage services loan book of HSBC’s subsidiary, HSBC Finance Corp.,” Fitch notes.

“The increase in the provision for credit losses was largely driven by deterioration in the performance of the mortgage loan originations acquired in 2005 and 2006 by the mortgage services business unit, particularly in the second-lien and portions of the first-lien portfolios, which has resulted in higher delinquency, charge-off and loss estimates in these portfolios.”

“Additionally, a portion of the increase reflects HSBC’s estimate of the future effects of re-setting interest rates on adjustable-rate mortgages. Volatility in such portfolios is to be expected and is factored into ratings to a large extent,” the rating agency adds.

The additional impairment charge is equivalent to approximately 8% of HSBC group’s FY06 consensus operating profits, it says. “HSBC’s analytics on the mortgage portfolio are evolving with the changing dynamics of the interest-rate environment and its effects on adjustable-rate mortgages. Although HSBC has adjusted provisioning based on recent performance data, there is a possibility that data could continue to deteriorate and further provisioning may be needed,” it cautions.

Fitch notes that HSBC Finance is not alone in suffering increased mortgage credit deterioration. Most U.S. mortgage lenders active in subprime lending are experiencing rapidly rising delinquencies. Fitch will monitor developments in the mortgage and other portfolios of HSBC Finance in the context of HSBC’s overall financial and risk profile. Although business lines will inevitably be amended (for example HSBC Finance’s approach to using mortgage brokers), Fitch does not expect HSBC to reduce its commitment to the U.S. market or to its U.S. subsidiaries.