HSBC Chief Executive Michael Geoghegan yesterday said that the US subprime mayhem might not be over. He also added that if interest rates continue on its downward spiral, tackling inflation will be increasingly difficult.

Addressing shareholders in Hong Kong yesterday in an informal meeting ahead of the group's annual general meeting in London scheduled to be held on May 30, the chief executive said the lack of confidence within the banking sector is at its worst in decades after the subprime fiasco blew up.

Sounding a note of caution that there is still a possibility that US might slip into a full-fledged recession, even though the country's economic conditions had re-stabilized, echoing recent comments by ex-US Fed chairman Alan Greenspan, he said: "Our provision (for Q1) had slowed somewhat in the US." However, he did not rule out that the company's battered US subprime business might have to take further writedowns this year.

Geoghegan said it is tough to tell whether the "slowing provision" is just a "lull" or the beginning of a longer trend.

"I am slightly optimistic to see some improvement in the US economy," Geoghegan said, "but I also expect a period of inflation." He said both conditions would be detrimental to the US economy, and he urges that the government should increase interest rates before skyrocketing prices become a runaway problem.

The US had trimmed its interest rates seven times since last September in an attempt to revive a flagging economy hit hard by bad mortgages. The banking giant HSBC alone had to cough up a staggering $17 billion in US subprime writedowns last year.

Geoghegan said interest rate is unlikely to go up in the short-term during the election period, but he believes that something should be done to cope with the negative interest rate situation, soon after the new administration settles in.

A lack of "care"

Speaking at a luncheon held by Asia Society yesterday, Geoghegan attributed the troubles haunting the financial services sector to a lack of "care" when banks raced to shore up returns.

He said that banks were so caught up in generating rosy returns on capital without diligently growing their capital foundation.

"I don't think balance sheets make banking, and is no substitute to relationship banking," he emphasized that banks should now focus more on deposits. "There is nothing more important than deposits and you will never have too much capital."

Criticizing the current US investment banking model as "flawed", he said it needs to be reined in under an umbrella of regulation. In due course, he believes the model should change to "(commercial) banks will lend and investment banks will advise," Geoghegan said.

Investment banks were among the biggest losers due to subprime fallout, as Bear Stearns was bailed out by JPMorgan through selling its shares at a huge discount.

(HK Edition 05/28/2008 page2)