LONDON Europe's biggest bank HSBC (HSBA.L) met analysts' forecasts with a 28 percent fall in its first-half profit, as a $14 billion hit from bad debts on U.S. home loans and asset writedowns offset strong Asian growth.
HSBC said growth in Asia is threatened, however, by a potential recession in the United States and rising inflation which could leave emerging markets holding up "reasonably well" but with "less momentum than in the recent past".
The bank on Monday reported a pretax profit for the six months to the end of June of $10.2 billion, down from $14.2 billion a year before. The average forecast in a Reuters survey of seven analysts was $10.1 billion.
By 10:45 a.m. EDT HSBC's London-listed shares were down 1.8 percent at 822 pence, underperforming a fairly flat British share index .FTSE. Analysts said a cautious outlook knocked the shares, which have strongly outperformed rivals this year due to its strong balance sheet and Asian exposure.
"The area that is causing some concern is that although their Asian growth is good, it is slower than it was and if you extrapolate from that, then growth is going to be really slow," said Jane Coffey, head of equities at Royal London Asset Management, a top 20 HSBC shareholder.
Chairman Stephen Green said tough market and economic conditions would persist well into next year.
"A recession (in the United States) is a real risk," Green said at a press conference. "The length and depth of that is uncertain. I think if a recession occurred it could be shallow ... but any meaningful recovery in the housing market is unlikely before next year."
HSBC's impairment charge was $10.1 billion for the six months, up 58 percent from a year ago, mainly due to losses from its book of U.S. mortgages.
Its U.S. impairment charge was $6.8 billion, up 85 percent on the year but down from the previous six months and broadly in line with analysts forecasts.
U.S. HOME LOANS WOES...AGAIN
The charge dragged its North American business to a $2.9 billion loss in the first half, from a $2.4 billion profit.
Its North American bad debts have topped $18 billion in the last 18 months. The problem stems from aggressive selling of U.S. subprime mortgages by HSBC Finance, formerly the Household business bought for $14.8 billion five years ago.
The bank will take a first ever impairment charge on the goodwill of the Household purchase of $527 million. It is shrinking the U.S. mortgage book, no longer lends through intermediaries and has cut the branch network, and said it could take two to three years for the problem to work through.
HSBC plans to run off its $13 billion U.S. vehicle finance portfolio over the next three years. Douglas Flint, finance director, said the bank would have considered selling the unit but there were few buyers for financial assets at present.
Activist hedge fund investor Knight Vinke repeated its call for HSBC to sell, spin off, restructure or "ring fence" the former Household business. "There can be no prospect of a fundamental recovery in this business," it said.
HSBC's investment bank also wrote down $3.9 billion on its exposure to credit trading, monolines and leverage acquisition financing loans.
Although HSBC has suffered one of the biggest losses on U.S. mortgages since a housing crisis erupted two years ago, its losses on structured products linked to the crisis has been much lower than rivals such as Citigroup (C.N) and UBS UBSN.VX. Belgian-Dutch Fortis FOR.BR on Monday said profits had halved as it was hit by credit market turmoil.
Profits in HSBC's Global Banking and Markets fell 35 percent from a year before to $2.7 billion, despite GBM's profits in emerging markets rising 51 percent.
Earnings across its Asian businesses hit $6.7 billion, up 20 percent from a year ago, while Latin American profits rose 27 percent and Mideast profits jumped 63 percent.
HSBC shares are down 2 percent this year but have easily outperformed a 31 percent drop by Europe's bank sector .SX7P.
Its core tier 1 equity ratio was 7.5 percent at the end of June, unchanged from the start of the year.
Its capital and funding advantage over rivals could see it pick up bargain assets while rivals have less firepower, but Green said it would be "very selective" on potential acquisitions and the focus would stay on emerging markets.
HSBC is ready to submit a new regulatory application on a planned purchase of a majority stake in Korea Exchange Bank, but Flint declined to comment on whether it is seeking to cut the $6.3 billion price previously agreed.
(Additional reporting by Clara Ferreira-Marques and Raji Menon; editing by Gerrard Raven)