Lower Charges Lift HSBC's Profit

By MARGOT PATRICK

LONDON—HSBC Holdings PLC said Monday lower taxes and a drop in bad-loan charges helped lift first-quarter net profit by 58%, but underlying profit was down, revenue was a touch lower and costs were up sharply in the period.

View Full Image

sinister pictures/Demotix

HSBC said growth was strongest in Asia, Latin America and the Middle East.

Net profit was $4.15 billion in the period, compared with $2.63 billion in the first quarter of last year, and largely the result of lower tax charges. Adjusted pretax profit was $5.5 billion, below analyst expectations of around $6 billion, and down from $6.01 billion a year earlier. The figure strips out moves in the value of HSBC's own debt.

The bank said it would make a $440 million provision toward compensating customers for mis-sold payment-protection insurance, following Lloyds Banking Group PLC and Barclays PLC in putting a figure on its exposure after an industry legal case was abandoned Monday.

HSBC's revenue edged down to $17.04 billion from $17.9 billion, due to a decline in the money it makes on its excess cash, and reflecting its shrinking U.S. consumer-finance loan portfolios since the bank exited subprime mortgages and unsecured lending.

The lackluster results highlight the challenges new Chief Executive Stuart Gulliver faces to bring down costs and improve the bank's profits.

Mr. Gulliver on Wednesday is to deliver a strategic update that is expected to include retreats from lagging markets and business lines and plans for investment in areas where the bank sees longer-term opportunity.

He said Monday the focus will still be on improving revenue in emerging markets, but that developed markets such as Europe must also generate higher profits for the group.

"I don't think we are at an ideal business mix. I want to see a shift in revenue in the group toward the emerging markets but I don't want to do that simply making less in the developed world," he told reporters on a conference call. HSBC currently operates in almost 90 countries.

Analysts said full-year 2011 profit estimates might have to be cut, and that the share price will be under pressure until Mr. Gulliver and his team present a credible strategy to drive profit growth.

Cormac Leech, an analyst at Canaccord Genuity, said the first-quarter earnings were disappointing, with weaker-than-expected revenue and lower profits than he had estimated for Hong Kong and North America.

Growth was strongest in Asia, Latin America and the Middle East, with Europe pretax profit falling sharply, by 65%, and North America pretax profit down 60%.

"Underlying profits held up well against a strong first quarter of 2010, we were profitable in all regions and customer groups, profits increased in each of our faster-growing regions and credit quality improved," Mr. Gulliver said. "There was double-digit revenue growth in many of our businesses in the faster-growing regions."

Impairments across the group were $2.4 billion, down 37% from $3.78 billion in the first quarter of 2010.

HSBC's cost-income ratio, or costs relative to income, hit 60.9%, well above its target of around 52%. Mr. Gulliver said the ratio was more like 55% if one-off charges were stripped out, but that it will take two to three years to get it down to the target. He said there will be further restructuring charges affecting the number throughout 2011.