HSBC profit up 10 percent, bad debts hit $17 billion
LONDON (Reuters) - HSBC's (HSBA.L) pretax profit rose 10 percent last year, driven by buoyant growth in Asia which helped Europe's biggest bank absorb $17.2 billion in bad debts as the U.S. housing crisis deepened.
Profit in Hong Kong rose 42 percent and earnings jumped 70 percent in the rest of Asia, but the bank's North American arm barely scraped a profit as past risky loans to U.S. homeowners now in trouble hit it hard.
The London-headquartered bank, Europe's biggest by market value, reported record pretax profit of $24.2 billion for 2007, up from $22.1 billion in 2006 but below an average forecast of $24.7 billion from a Reuters Estimates poll of analysts -- but results were distorted by one-off items and did not include a $1.3 billion property gain expected by many.
Underlying profit growth was 5 percent for the year, which analysts said was in line with forecasts.
The bank's impairment charge jumped $6.7 billion from 2006, or 63 percent. Bad debts had been expected to come in at $15.8 billion, based on the average of forecasts from eight analysts.
By 1447 GMT (9:47 a.m. EST) HSBC shares were up 2.2 percent at 783 pence, making it the top performing stock in a weak UK market and lifting its value to almost 93 billion pounds ($185 billion).
"If ever proof were needed about the benefits of diversification, these numbers from HSBC fall squarely into that category," said Richard Hunter, head of UK equities at brokerage Hargreaves Lansdown.
"Its performance in the ever-strengthening markets of China, India and Hong Kong proved a more-than-ample buffer against its U.S. subprime woes."
HSBC said the outlook for 2008 was uncertain and that the U.S. economic slowdown and credit outlook "may well get worse".
In Britain, it said the impact of a court case into charges applied to current accounts could be $600 million. That was a "best estimate" and would be on top of 115 million pounds paid to customers last year, before the refund process was suspended across the industry pending the court decision.
But HSBC said its conservative balance sheet and international spread left it well positioned and it expects to improve margins. It will "continue to invest in building market presence at a time when others with weaker capital positions are constrained".
The bank has said it may sell half its branches in France for $3.2 billion and redeploy proceeds towards emerging markets, and there were "a number of businesses at the periphery" of its European and U.S. operations that could be sold, Douglas Flint, HSBC finance director, told reporters on a conference call.
HSBC North America made a 2007 profit of just $91 million and the bank admitted to an "exceptionally weak" performance in the United States.
The problems stem from aggressive selling of subprime mortgages by its U.S. arm HSBC Finance, formerly the Household business bought for $14.8 billion five years ago. North America bad debts were $12.2 billion, up 79 percent from 2006.
But HSBC has no plans to heed calls from activist investor Knight Vinke, which argues the bank should walk away from what some analysts have called the "American nightmare".
"Would we walk away from Household leaving bondholders high and dry? This is as unreasonable as it is unrealistic," HSBC Chairman Stephen Green told reporters. "Walking away from it would be unthinkable and irresponsible."
HSBC retrenched its mortgage lending late in 2006 and has shrunk its mortgage book. It does not lend through intermediaries and has cut its U.S. branch network to about 1,000 from 1,400, focusing on the Hispanic population.
But it is suffering as the fall in house prices hurts other credit lines, such as credit cards and personal loans, and said a turnaround may not occur until the end of 2009.
HSBC, which has operations spanning 83 countries, said it had produced "exceptionally strong" results in Asia-Pacific, Latin America and the Middle East.
In mainland China, the bank made a profit of more than $1 billion for the first time. Hong Kong profit topped $7 billion and in Europe it rose 23 percent to $8.6 billion.
Earnings at HSBC's investment banking arm, which has been renamed global banking and markets (GBM), rose 5 percent to $6.1 billion. Its writedown on the value of complex financial assets that have been tarnished by the U.S. subprime crisis was higher than expected at $2.1 billion, up from $925 million previously.
The writedown was less than the multi-billion dollar hits taken by many other banks, however. The bank also made a $2.9 billion fair value gain on the value of debt it is carrying.
HSBC also raised its full-year dividend by 11 percent and set new performance targets, including a return on equity of 15 to 19 percent over an investment cycle and a tier 1 capital ratio of between 7.5 and 9 percent.