Outlook: Household debt takes on a whole new meaning for HSBC

America has proved a graveyard for too many UK corporate reputations to count and so there was a sharp intake of breath when HSBC's Sir John Bond splashed out £10bn on the takeover of Household last November. The deal brought with it a US chief executive who was on a package worth $37m (£23m), including free dental care for life for him and his wife.

Those with longer memories could recall the days when HSBC was known, at least in this country, as Midland Bank and it bought a US crock called Crocker and paid dearly for its mistake.

Household specialises in what is euphemistically termed the "sub-prime" sector of the market - customers who lack the credit history to open a conventional bank account and, by definition, are therefore a bigger credit risk.

HSBC's half-year results demonstrate how much more of a risk. In the three months that Household has actually been part of the HSBC stable, the group's bad debt provisions have more than tripled to $2.4bn. Almost all of the increase is due to the 50 million Household customers now on its books.

Need this be a worry for a trillion dollar bank such as HSBC, now the world's second biggest lender after Citigroup? In many ways, it is no bigger a risk than lending to a corporation like Enron. Indeed, in some ways it is smaller since the bank's eggs are in a great many more baskets and it is dealing with a much more predictable bunch of customers.

Household's bad debt provisions as a percentage of advances may far outstrip those in personal, commercial and investment banking. But the returns are also much higher, with a cost to income ratio which is almost half that of HSBC's conventional personal account business. Sir John reckons that HSBC can extract a further $1.2bn in cost savings out of Household.

While the rest of the UK's Big Five banks struggle to sell more savings and loan products into a finite and unreceptive retail market and business lending remains subdued by slow growth, HSBC is ploughing its own furrow. The Household operation is part of the way forward. Consumer finance, as the division is called, accounts for 10 per cent of business and HSBC clearly sees scope to expand both by introducing the format to developing countries and exploiting the influx of migrant workers into developed economies such as the US. It is not just white trailer trash HSBC is on the lookout for.

Sir John describes the Household acquisition as HSBC's most important deal since it bought Midland a decade ago and indeed it is, provided the bad debt provisions can be kept to manageable proportions.

Royal Mail dispute

Suing your biggest union may not be best way of resolving an industrial dispute but it is easy to see why the Royal Mail chairman, Allan Leighton, is so agitated. The Communications Workers Union has accompanied its threat of strike action over a pay demand with a poster campaign depicting him as a fat cat who took home a £3m bonus last year - a figure which the union appears to have confused with the three-year deal Royal Mail's new chief executive Adam Crozier is on if he succeeds in turning the business around.

Mr Leighton certainly has a more generous girth than the average postal worker seeking a meagre £300-a-week wage, but to call him a fat cat confuses the issue quite apart from being untrue. If the postal workers really do proceed with the first national pay strike in seven years, then they will be signing their own death warrants.

Royal Mail lost £611m last year and the competition is lining up to cherry-pick its most profitable business under a liberalisation timetable which promises to open its entire market within four years. Moreover, it is facing the most uncompromising watchdog ever to have sunk its teeth into a state-owned monopoly. Postcomm, the postal regulator, wants Mr Leighton to deliver the mail on behalf of his competitors for 11.5p a letter - less than half the price of a first-class stamp.

As if that were not enough, Royal Mail has to find the cash from somewhere to fill a £4.6bn hole in its pension fund.

In those circumstances, a 14.5 per cent pay award over 18 months looks extraordinarily generous. The unions say the offer has more strings than the Philharmonic Orchestra and only amounts in reality to 4.5 per cent up front with the rest dependent on increased productivity.

A step-change in efficiency is essential, however, if Royal Mail is to stand any chance of surviving in the competitive world it is now being dragged reluctantly into. The organisation needs to save £1.2bn from its costs and in order to achieve that is cutting 30,000 jobs and the second delivery.

Until recently, Mr Leighton, who earned his spurs at Asda, and Mr Crozier, who came from the Football Association, thought they had the unions onside in their mission to turn Royal Mail around. Indeed, they had begun to crow about how the number of strike days at Royal Mail was at its lowest in a decade.

But as the leadership of the CWU has swung further to the left, a mood of militancy has begun to re-assert itself with London postal workers, as usual, in the vanguard. The £800 "share in success" payments Mr Leighton has promised staff if he achieves the turnaround may be all very for Asda shelf-stackers, but not for them.

Being a state-owned business, Royal Mail has acted as a receptacle for a militant tendency largely driven out of other privatised industries. But, as with the militant tendency, the unions are living in a bygone age if they belief a strike will achieve their ends.

Nothing in Mr Leighton's previous life will have prepared him for the challenge he has at Royal Mail. But it is vital for the company's future that he prevails.

S&N/Centrepulse

It is fast approaching crunch time for Smith & Nephew's Sir Christopher O'Donnell. In the next couple of days he will have to decide whether to increase his bid for the Swiss hips, knees and teeth group Centrepulse or retire hurt.

The bid battle with Zimmer of the US for control of Centrepulse has taken Switzerland's Takeover Panel into unchartered waters since it has never before been confronted with a contested takeover. Unfortunately, it is S&N which appears to have lost its bearings.

Sir Christopher's £1.5bn cash and paper bid already lags that of Zimmer by nearly 30 per cent, partly because exchange rates have gone against him and partly because Zimmer's paper is much more highly rated.

The deadline for final bids for Centrepulse is still two weeks away but because of S&N's need to obtain shareholder approval for a higher offer, it needs, in effect, to make up its mind by tomorrow. It has asked the Swiss Takeover Panel to amend the rules to give it more leeway but, so far, to no avail.

The current Zimmer bid is worth some 360 Swiss francs a share against S&N's Sfr270, so Sir Christopher has a long way to close the gap, even supposing he can count on shareholder approval. Worse, Zimmer can come back with a higher bid of its own at virtually any time up to the 18th because of the way it has adjourned its own shareholders meeting.

The cards, then, are stacked overwhelmingly in Zimmer's favour. It is the smaller company but it has the most to gain from buying Centrepulse, a deal which would turn it into the world's number one in orthopaedic joints.

Sir Christopher can either bid higher, in the faint hope that it might be enough to win the day and if, not, at least force Zimmer to overpay. Or he can throw in the towel and blame it all on the intransigence of the Swiss Takeover Panel. Either way, we do not have long to wait for his move.

m.harrison@independent.co.uk