LONDON HSBC beat expectations with an underlying first-quarter profit of $6.8 billion as Europe's biggest bank saw a rebound in investment banking, growth in Asia and a fall in U.S. bad debts.
HSBC said on Tuesday it was making good progress with its strategic revamp, including cost savings, and had shed 14,000 jobs since last year as part of chief executive Stuart Gulliver's drive to boost profitability.
"We are pleased that the measures that are under our control, we are getting some serious traction on," Gulliver told reporters.
He pointed to Hong Kong, the rest of the Asia-Pacific region and Latin America as showing the benefit, with revenues up 16 percent, 18 percent and 7 percent on the year respectively, and highlighted strong performances in commercial banking and investment banking, called Global Banking and Markets (GBM).
GBM's rates business was boosted by the European Central Bank's massive injection of liquidity in December and February, although that boost has faded in the last two months.
Reflecting concerns about the euro zone backdrop, HSBC is hoarding more of its excess liquidity in Europe at central banks. It now has $153 billion at central banks, up $23 billion since December and up by $85 billion in the last nine months.
Other banks, including Santander and BNP Paribas, are also parking excess cash with central banks, preferring that to the risk a counterparty could hit trouble.
HSBC, which makes over three quarters of its profits outside Europe and north America, has bounced back more strongly from the 2008 financial crisis than many competitors, helped by its presence in faster-growing emerging markets.
However, it is facing the same regulatory pressure as rivals to reduce risks, as well as the euro zone's uncertain political backdrop, which are combining to create "significant headwinds" in developed economies, the bank said.
Gulliver said he did not expect the euro zone to break up. It was impossible to predict if Greece would leave, but even if it did the rest of the bloc could stay together, he said.
Britain's financial regulator is requiring banks to make "contingency planning against a euro zone dislocation," which HSBC was part of, he added.
In contrast, China's economy should have a soft landing and emerging market economies should show growth of more than 5 percent this year, HSBC predicted.
Gulliver is quitting areas where HSBC lacks scale and increasing its focus on Asia. He will provide a more detailed update on strategy at an investor day on May 17.
"We view this as an encouraging update ahead of the company's forthcoming strategy day," said Gary Greenwood, an analyst at Shore Capital.
"Highlights include a strong recovery in the Global Banking and Markets business, a reduction in the underlying cost income ratio ... and a reduction in impairments," he said.
HSBC said underlying first-quarter profit rose 25 percent to $6.8 billion, compared with a forecast for $5.8 billion. Including a $2.6 billion hit from the movement in the value of its own debt, HSBC's statutory profit was $4.3 billion.
HSBC shares were down 0.7 percent at 551 pence by 1520 GMT, giving up early gains after a sharp 1.8 percent fall by Europe's bank index.
Expenses nudged higher due to a rise in bonuses at the investment bank and wage inflation in certain regions, such as Asia, but underlying costs as a percent of revenue improved to 55.5 percent from 58.7 percent a year ago.
Gulliver wants to get that level below 52 percent, which some analysts said could be tough, and to lift return on equity (RoE) above 12 percent by the end of 2013. RoE, a key measure of profitability, came in at 6.4 percent, although on an underlying basis it was nearer 11 percent, the bank said.
"We are confident we can hit 12-15 percent RoE and are not going to change it (the target)," Gulliver said.
A year since setting out his strategy, Gulliver has made 27 disposals that have released more than $60 billion in risk-weighted assets and hiked annualized cost savings to $2 billion.
It was not all good news in the first quarter, however.
Bad debts in Latin America jumped 62 percent to $600 million, mainly due to a rise in Brazil after HSBC increased lending there and the country's growth slowed.
Its underlying profit of $1 billion in Europe was down $98 million on a year ago due to higher costs and bad debts.
And HSBC joined rivals in lifting its charge for the mis-selling of payment protection insurance in Britain, taking another 290 million pound ($469 million) provision. It has now set aside 745 million pounds, and that may not be enough.
"The volume of claims has increased quite significantly over what our original assumptions were. I cannot say if this is the final provision, I doubt it, we may find we have to top it up again," Gulliver said.
GBM's revenues came in at $5.8 billion, up 11 percent on the year and a big improvement on the previous three months, echoing trends seen among rivals. Foreign exchange trading was strong alongside rates, and the bank said April was "satisfactory".
Losses from bad debts in the quarter were $2.4 billion, broadly flat from a year ago, but well below the near $3 billion expected and showing improvement in the United States due to better foreclosure and impairment trends, where the bank is running down its consumer loans book.
($1 = 0.6180 British pounds)
(Editing by Mark Potter and Jon Loades-Carter)