HSBC Profit Up 10 Pct, Bad Debts Hit $17 Bln

By Steve Slater and Clara Ferreira-Marques

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 U.S. arm made a loss as past risky loans to 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. Profits were below an average forecast of $24.7 billion from a Reuters Estimates poll of analysts -- but 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.

HSBC shares closed up 3.1 percent at 790 pence, the top performing stock in a weak UK market and lifting its value to over 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 strong balance sheet and international spread positioned it well 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 will direct investment at 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.

"AMERICAN NIGHTMARE"

HSBC's U.S. personal financial services unit swung to a loss of $1.8 billion from a $3.1 billion profit in 2006.

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.