LONDON HSBC reported a 10 percent rise in third quarter profits on Monday, helped by tighter cost control and fewer losses from bad loans, and confirmed it was being investigated as part of a global probe into currency market trading manipulation.
Europe's largest bank said underlying pretax profit was $5.1 billion for the three months to September 30 - up 30 percent on a statutory basis - with strong Hong Kong and British markets together accounting for more than half of earnings and offsetting a fall in Latin American profits.
Chief Executive Stuart Gulliver said he saw evidence of a broadening recovery in which the U.S. should continue to grow, albeit slowly, and the UK would outperform the eurozone.
"There are signs for optimism around. We've always been confident China would have a soft landing ... which is supportive for the rest of Asia-Pacific," he told a conference call with reporters.
HSBC (HSBA.L) said it was cooperating with Britain's Financial Conduct Authority, which is leading an investigation into the $5.3-trillion-a-day foreign exchange market that has spread to include regulators in the United States, Asia and Switzerland. Traders from some of the world's top banks, including Barclays (BARC.L), Citigroup (C.N) and JP Morgan (JPM.N) have been suspended or put on leave.
HSBC, which has vowed to instill a more responsible corporate culture after it was fined a record $1.9 billion last year for lax anti-money laundering compliance, said it had not suspended or fired any staff, after being contacted in October.
"We haven't suspended anyone. It's at a very early stage and the names we've been given so far don't work for us anymore," Gulliver said.
HSBC warned of more regulatory uncertainty and set aside more money for potential settlements or compensation.
It made an extra provision in its private bank to cover a U.S. investigation into U.S. citizens with bank accounts in Switzerland. Gulliver said agreements with other banks had set a precedent on the scale of settlement, so HSBC topped up a provision made in August. It declined to specify how much it had set aside.
HSBC took another $428 million charge last quarter to cover costs of compensation in Britain - broadly split between expected redress for insurance mis-selling, mis-sold interest rate hedging products, and for UK wealth management customers.
The latter relates to how products were sold in the past to wealthy Britons and follows a critical review by the UK regulator last year. Most of the $149 million put aside for that will cover the cost of a review into past practice that begins next year.
Despite the mushrooming FX probe, with its echoes of the recent interest rate fixing scandal, investors focused on HSBC's improved quarterly performance and growth prospects.
HSBC shares rose 2.8 percent to an 8-week high of 707.3 pence by 1330 GMT, helping keep the European banking index .SX7P in positive territory after a call for higher capital requirements by the Swiss finance minister hit UBS UBSN.VX and Credit Suisse CSGN.VX.
"We feel some of the biggest news is the outlook statement. HSBC is traditionally the most dour of all the banks and here they allude to 'reasons for optimism', 'a broadening recovery' and even state 'China is stabilizing'. This is very strong from HSBC," said Alex Potter, analyst at Mirabaud Securities.
The rise in HSBC's profits, in line with analysts' forecasts, was underpinned by a 4 percent dip in losses from bad loans and a $700 million fall in operating expenses to $9.6 billion, although that was mainly due to the absence of one-off items last year.
Underlying costs were up on the year due to investments, wage inflation and regulatory costs. Revenues were flat.
Gulliver said he had pushed through $4.5 billion of annualized cost savings since 2011, allowing HSBC to absorb significantly higher compliance costs, with more than 2,800 compliance staff added.
HSBC said its capital position improved and its common equity Tier one ratio, a key measure of financial strength, was 10.6 percent under tough new rules. But it said the regulatory landscape was uncertain.
"There are a number of unclarified points, which probably collectively mean that the capital ratio we will be holding will be slightly higher than we thought two or three years ago," Gulliver said.
"But it's not a significant raising of the bar...it isn't the same as saying we're heading for a Swiss finish," he said, referring to tough Swiss rules that will require banks there to hold significantly higher levels of capital.
Plans by Britain's financial watchdog are still under consultation, but could require banks to hold core capital of 12 percent or more, analysts said.
(Editing by Sophie Walker)