By Lawrence White and Selena Li
LONDON/HONG KONG, May 5 (Reuters) - HSBC reported an unexpected $400 million loss linked to the collapse of British-based mortgage lender Market Financial Solutions on Tuesday, raising further questions about lenders' private credit exposure and sending the bank's shares down 6%.
The loss shows why regulators worldwide have become more concerned about banks' exposure to the $3.5 trillion private credit industry, highlighting the often indirect and opaque nature of the lending.
The loss was linked to HSBC's lending to Apollo-backed unit Atlas SP and its financing of Market Financial Solutions (MFS), two sources familiar with the matter told Reuters. Atlas SP disclosed in February it had a 400-million-pound exposure to MFS, after MFS entered administration following fraud allegations.
HSBC Chief Financial Officer Pam Kaur declined to identify the firms involved when questioned by reporters on Tuesday but confirmed the exposure was to "private credit-related loans".
A spokesperson for Atlas declined to comment.
Europe's largest bank by market value and Apollo partnered in financing private credit opportunities, HSBC said on its website last November.
"We did a broad read at all our highest risk concentrations and exposures across the board, and we don't see anything comparable there," Kaur said, referring to the fraud-related charge.
HSBC shares, which have risen 52% in the last year, were down 6.2% by 1327 GMT in London following the results announcement.
Citi analysts said the shares were also weighed down by HSBC's wealth revenue growth - an 18% increase in the quarter from a year ago - lagging behind that of rival Standard Chartered at 32% following its aggressive push to grow the number of relationship managers.
REGULATORS PROBE LENDERS' EXPOSURE
The emergence of wider signs of stress in private credit has driven regulators in the U.S., Britain and elsewhere to probe lenders' exposure, while officials such as U.S. Federal Reserve Chair Jerome Powell have also tried to calm market anxiety.
The U.S. Treasury Department last month said it would meet international insurance regulators over distress concerns, while Canada's banking regulator has also launched a review of lenders' exposure.
HSBC rival Barclays reported a 228-million-pound ($308 million) impairment charge in the quarter related to exposure to MFS's collapse.
Wall Street peers told investors last month they were stress-testing or monitoring private credit portfolios.
Three of the six biggest U.S. lenders disclosed about $108 billion financing exposure to private credit or related loans during their quarterly earnings.
HSBC began expanding its private credit lending last year, Reuters reported at the time, joining a raft of its global rivals that had already begun partnering with specialist private credit firms as the industry ballooned.
The bank said it has $111 billion in private-markets-related exposure, of which $22 billion is private credit-related.
The MFS-linked loss alongside provisions taken against the impact of the U.S.-Israeli war with Iran drove HSBC's expected credit loss for the first quarter to $1.3 billion, causing earnings to undershoot analysts' expectations.
HSBC posted pretax profit of $9.4 billion for January-March, versus $9.5 billion a year earlier and the $9.59 billion average of broker estimates compiled by the bank.
It revised its 2026 credit charge to 45 basis points of average gross loans, from 40 bps, citing "uncertainty in the outlook".
HSBC UNDERPERFORMS EUROPEAN RIVALS
KBW analyst Ed Firth said the results overall were lacklustre, especially given the performance of British peers.
HSBC's flat profit performance also compared unfavourably with European peers like Deutsche Bank, which reported record first-quarter profit last week, and UBS which beat forecasts thanks to bumper trading.
HSBC and Standard Chartered have bet on increased Middle East trade with Asia and beyond to fuel growth, making them two of the global banks most exposed to the Iran conflict, according to company data and sector analysts.
StanChart last week booked a $190-million credit charge due to cautious scenario planning stemming from the conflict, while Lloyds Banking Group and Deutsche Bank made provisions in the same quarter of $204 million and $90 million, respectively.
($1 = 0.7395 pounds)
(Reporting by Selena Li in Hong Kong and Lawrence White in London; Editing by Christopher Cushing and Emelia Sithole-Matarise)
