U.S. Units of HSBC, RBS Getting Past Credit Ills

Soft but steadily improving earnings in the United States show that two of Europe's biggest banks — HSBC Holdings PLC and Royal Bank of Scotland PLC — have put their worst problems here behind them.

But what lies ahead for RBS's big U.S. subsidiary — Citizens Financial Group Inc. in Providence, R.I. — remains uncertain after its Edinburgh parent swung back to a loss in the third quarter because of charges involving its ownership by the U.K. government. This raises questions about Citizens' ability to invest for growth in the United States, where profits were narrower than in the prior quarter but higher than a year earlier as business-loan losses receded.

HSBC, meanwhile, is on surer footing in the U.S. and abroad. Profit growth slowed globally while earnings rose in the most important part of its U.S. business, a New York-based retail bank with 470 branches, on lower credit card losses and growth in mortgages.

Losses were higher in its U.S. consumer lending arm, which is in runoff mode after making too many loans to people with poor credit.

The stateside results of HSBC and RBS were similar to those of other large domestic lenders that have lots of home loans and credit cards: Fewer people missed credit card payments, and more homeowners took advantage of low interest rates to refinance mortgages.

But there was an important distinction. HSBC's U.S. operation — HSBC North America Holdings Inc. — and Citizens and its sister bank, Cleveland's Charter One, are regional banks tethered to global problems.

Right now, HSBC's directives to New York from London are clear: Clean up the subprime lending mess and focus on getting more deposits from rich people. Don't bother competing with megabanks for monster deposit share. Irene Dorner, the head of HSBC's retail operation, said in a conference call with reporters Friday that it is opening five branches on the West Coast this year in well-to-do neighborhoods.

Citizens' mission in the U.S. is less clear right now, given its parent's problems back home.

"Because of the government ownership, the big question with Citizens that doesn't exist with HSBC in this country is: What is going to happen to it?" said Bert Ely, an independent banking consultant in Alexandria, Va. "Who is ultimately going to own Citizens? Is RBS eventually going to be reprivatized? Or will Citizens get sold onto someone else?"

Right now the 1,500-branch, $136 billion-asset Citizens is essentially a state-controlled institution by way of its money-losing parent, which is 80%-owned by the U.K. government.

RBS lost money in the third quarter because of a big charge involving government-mandated insurance on risky assets. The distractions of being a government-owned enterprise do not bode well for growth in the U.S., where it blundered by making too many bad business-related loans.

Banks must spend money right now if they want to make money after the economy rebounds; the fight for U.S. deposit and lending relationships is heating up.

There are signs that Citizens is losing ground in key areas like business and retail banking.

Commercial lending and deposit income were down slightly from the prior quarter, according to RBS' quarterly report.

In terms of profits, it is doing all right.

RBS' U.S. retail and commercial operations reported operating profit of $113 million in the quarter, down 42% from the previous quarter but an improvement on the year-earlier loss of $67 million.

The U.S. unit is benefitting from sharply lower impaired commercial and corporate loans. Bad business-related credits were the biggest driver of its $174 million loss in 2009.

RBS executives did not discuss the U.S. operations in the conference call.

But the company has repeatedly said that it is committed to its U.S. business, noting in its quarterly report that it has added 27,000 customer and business accounts so far this year while "garnering positive response" to a new branding initiative.

HSBC's bottom line was somewhat similar, though it showed progress in its main mission of collecting deposits from wealthy people in New York and San Francisco who do a lot of business overseas.

Getting more of what HSBC calls "premier" banking clients — who get special perks for storing $100,000 in investments and deposits at the bank — helped HSBC's retail profits rise 39% from the previous quarter, to $417 million.

One perk — favorable mortgage rates — helped drive HSBC's mortgage fees higher. Premier accounts charge a $50 per month maintenance fee.

HSBC now has about 460,000 of them after opening about 37,000 in the quarter.