View from City Road: Maximum exposure at HSBC

THE fact that HSBC has provided dollars 450m against its loans to Olympia & York, 60 per cent of the total, tells us very little about the property lending risks at Britain's biggest bank. Most of the money was secured on the O&Y holdings in Gulf Resources and Abitibi Price, rather than on property projects, and the provisions reflect the fall in the share prices of the two companies, which have been badly hit by the energy and paper and packaging industry recessions.

Of rather more interest is the fact that HSBC has toppled Barclays from the top of the league table of bank exposure to property, construction and domestic mortgages, and by some margin. The enlarged group has pounds 32bn of loans in these categories worldwide compared with under pounds 22bn at Barclays, a bank with only a marginally smaller loan book. This is worrying.

Domestic mortgages, totalling nearly pounds 19bn (compared with Barclays' pounds 11bn), are largely in Hong Kong. There was a 54 per cent surge in home prices in 1991. But this cooled to 10 per cent last year after the Banking Commissioner sensibly banned loans above 70 per cent of value, in return for which margins were allowed to widen to highly profitable levels that are now coming through in the group results. Provisions remained small, as they have in the British clearing banks' domestic mortgage books.

HSBC's property and construction lending also takes the record from Barclays, at pounds 13bn against pounds 10.8bn, but is concentrated in Hong Kong and its region rather than the UK. Provisions have been modest compared with UK experience despite several years of depressed prices, because the market was never allowed to reach a frenzy of lending and the economy kept growing. Inflation in Hong Kong has continued high enough to mask any property lending problems, as it did in previous British recessions, although that is not something that can always be relied on for a bail-out.

For both domestic and commercial property lending, HSBC looks less vulnerable in the short term than the rest of the British banks. Unfortunately, the bottom line is what may happen if politicians fail and there is an exodus from Hong Kong. Property is not a moveable asset.

For those who believe Hong Kong's problems will be resolved favourably, the Asia Pacific region's growth prospects coupled with the coming recovery at Midland should confirm HSBC as Britain's most profitable bank. The share price rise of 20p to 624p showed the optimists are winning.