HSBC H1 net profit falls 29 pct on US bad debts; outlook challenging - UPDATE

HONG KONG, Aug 04, 2008 (XFN-ASIA via COMTEX) -- HBC | Quote | Chart | News | PowerRating -- HSBC Holdings reported a 29 pct drop in first-half net profit to 7.72 bln usd from 10.895 bln a year earlier, due to bad debts in its US operations and more asset writedowns.

Pretax profit amounted to 10.247 bln usd, down 28 pct year-on-year.

Loan impairment charges and other credit risk provisions were 10.06 bln usd in the six months to June, 3.712 bln or 58 pct higher than the first half of 2007 but 8 pct lower than the 10.89 bln booked in the second half of last year.

The bank's North America division posted pretax losses of 2.893 bln usd in the first half.

The UK-based lender, however, said it made profit in all the other geographies that it operates in.

The group's Asian operations, including Hong Kong, posted pretax profit of 6.7 bln usd in the first half, up 20 pct, excluding dilution gains.

The Hong Kong unit had pretax profit of 3.1 bln usd, down 8 pct year-on-year.

HSBC's Middle East operations generated pretax profit of 900 mln usd, up 63 pct, while Latin American operations booked pretax profit of 1.3 bln usd, up 27 pct.

Net interest income rose 16 pct to 21.18 bln usd from 18.23 bln a year earlier.

Earnings per share fell 32 pct to 0.65 usd.

HSBC said the outlook for the near term remains highly challenging with significant uncertainty.

"Globally, consumer confidence is declining and despite the short-term success of the recent fiscal stimulus, the US economy continues to be weak, driven by continuing housing market difficulties," it said in a statement.

"We expect growth in emerging markets will hold up reasonably well, albeit with less momentum than in the recent past," it said, noting that corporate activity in some sectors in Asia is slowing and that demand for equity-related and wealth products has fallen as equity markets have declined.

Addressing reporters later via a video link from London, HSBC group chairman Stephen Green said the bank has no intention of selling off its American unit despite the difficulties that it continues to face there.

"It is much better for us and our shareholders not to sell these assets in a fire sale, but to work through the challenges and with our customers in that market," he said.

"It is wrong to assume that the consumer finance business (in the US) has no future... It is a cyclical business and it will normalize over time. So, the most important thing is to work through the difficulties," he said.

Green as well as HSBC group chief executive officer Michael Geoghegan declined to make any forecasts on how the US unit will perform in the second half, stressing this will depend largely on how the US economy performs and the efforts to tackle the unit's problems.

"I can't say that there won't be any more writedowns and impairment charges. But despite writedowns of more than 3.9 bln usd, the commercial and private banking divisions of our US unit produced pre-tax profits," Green said.

"You've got to be comfortable with this performance," he said.

Of the 2.893 bln usd first-half loss of HSBC's US unit, the personal financial services business lost 2.05 bln usd while the global banking and markets business lost 1.63 bln usd.

However, the commercial banking division had a pretax profit of 430 mln usd, down 10 pct year-on-year, while the private banking division saw pretax profit of 58 mln usd, down 3 pct.

"I can't say if there will be a further credit deterioration in the US market in the second half. We will have to see where markets will go," Geoghegan said.

He said HSBC continued to take decisive actions to improve the financial position of its US unit.

"Today, we announced the run-off of our vehicle finance business," he said, citing the business' lack of critical mass or pricing power to provide the group with an acceptable return on investment.

"We will not be originating further loans. We expect an orderly run-off of about 80 pct of the portfolio of 13 bln usd to be achieved in three years, with the remaining balance trailing off after that time," he said.

"In mortgage services, we reduced the outstanding portfolio by 13 pct during the first half, down to 31 bln usd from 36 bln usd, of which around 60 pct was from repayments," he said.

He also noted that the US unit reduced costs by 12 pct compared to the year-earlier period.

Asked about the current state and outlook for the US economy, Green said economic conditions are challenging and that predicting where the economy is headed next is difficult.

"Everyone knows that the US economy is weak or even weakening further. No one knows if it is going into technical recession," he said.

"The consensus forecast seems to be for the US economy to register weak growth, but not slip into recession," he said.

"The quality of credit will depend largely on the housing market which is declining and the unemployment rate, which of late, has not been comforting," he said.

HSBC declared a second interim dividend of 0.18 usd a share for 2008.

(1 usd = 7.8 hkd)

roby.lau@xfn.com

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