External Analysis of HSBC

Executive Summary

HSBC Finance Corporation (HSBC Finance) is a subsidiary of HSBC North America Holdings, a bank holding company of HSBC in America and Canada.Together with its subsidiaries, the company offers real estate secured loans, auto finance loans, credit card loans, private label credit card loans including retail sales contracts and personal non-credit card loans to the middle-market consumers in the US, the UK, Canada, the Republic of Ireland, Slovakia, the Czech Republic and Hungary.The company is headquartered in Prospect Heights, Illinois and employs about 19,020 people.

The company recorded revenue of $1,559 million in the financial year ended December 2008 (FY2008), a decrease of 70.2% over FY2007.The operating loss of the company was $2,751 million in FY2008, compared to operating loss of $4,378 million in FY2007. The net loss was $2,783 million in FY2008, compared to net loss of $4,906 million in FY2007.

Industry Analysis

The banking industry has come under increasing pessimism of late because of rising short and long-term interest rates. The banking industry's market capitalization made a substantial decline. Most investors are concerned with whether the industry can sustain continued profitability as a result of these factors.

Banks have responded in recent years to these problems by diversifying away from interest sensitive products and services. But interest rates are the fundamental aspect of any financial services. Therefore, I believe the financial services industry will be deeply affected by rising interest rates. Banks have experienced good business factors over the past two years. Interest rates were low, credit quality was good, and inflation was low. These factors are usually predictive of the types of earnings banks should report. But good times can't continue because interest rate hikes cause reduced lending activity, damaged credit quality, and reduced values of bond portfolios.

Porter's Five Forces Analysis:

Rivalry among competing sellers:

The banking industry is continuing to restructure and position itself for our changing economy as a result, many mega-mergers have occurred in recent years. Citicorp and Travelers Insurance agreed to merge in April 1998 at a value of $70 billion. Bank of America and Nation's Bank also agreed to merge shortly afterwards which became the largest bank in the United States. Bank mergers are usually consummated as a cost-cutting measure but also to compete with non-bank providers of financial services. Bank rivalries are very strong, and as we've seen many of the largest banks are merging to increase their power. In fact, Charlotte, NC is practically owned by Bank of America and First Union.

Potential entry of new competitors:

There is virtually no chance of a new entrant significantly affecting the major banks' market share. The only place that new entrants may have a chance in the industry is through Internet banking, because of its low cost.

Firms offering substitute products:

This is not really an issue within the banking industry, because there aren't really any legal alternatives, except buying a safe and borrowing from a loan shark

Competitive pressures stemming from supplier and buyer bargaining power:

I grouped these two categories together because in the banking industry the buyers are ...