More subprime fallout at HSBC

If you watched Don Coxe of Harris Inv. Mgmt on BNN on Thursday evening (“Simon” was on his best behaviour as a co-host btw, knowing that Coxe could crush him – both verbally and intellectually – in a millisecond), you’d have thought that former Fed Chairman Alan Greenspan’s concerns about the subprime debacle were illfounded. In essence, Coxe said: “Greenspan called the last two recessions wrong, so therefore if he thinks the subprime market is going to hurt the economy or housing than it most certainly will NOT.”

Here’s another perspective from CIBC’s U.S. Equity Research, that involves facts and no personailites. It appears that HSBC is no longer as interested in tax refund lending, either, having been one of the first to be burned on subprime (as discussed here last month):

Future “Pre-Tax Season” Landscape to Change on HSBC’s RAL Announcement

Yesterday, HSBC (HBC-NYSE) announced that it would discontinue offering tax refund anticipation loans (RALs) to consumers before W-2s are released. It intends to continue to offer RALs during the tax season. One hundred percent of the RALs H&R Block facilitates are done via HSBC. We are maintaining our SP rating on H&R Block (HRB-NYSE).

This decision should not have any impact on this tax season (since W-2s were already released). However, it is likely to have an impact on how tax preparers such as HRB and JTX will operate next tax season (particularly next “pre-tax season”).

The announcement creates a modest increase in uncertainty relating to RALs next tax season. However, the timing of the announcement allows HRB & JTX more than 8 months to strategically and operationally adjust. At this point, there are too many scenarios to derive any definitive conclusions.

HRB’s stock price is largely tied to its perceived ability to sell its sub-prime mortgage business by the end of March–so we don’t expect much impact. As a % of operations, JTX has moderately more exposure to financial products. However, it has less relative exposure to HSBC than HRB does.

If you are banking on a continuation of an accomodating credit market, it can’t come as a surprise that credit concerns in one area of the economy will seep into others…even the 2008 tax refund loan sector.

MRM