STOCKWATCH - HSBC slumps on H1 profit fall, prospect of worse to come in H2

HONG KONG, Aug 05, 2008 (XFN-ASIA via COMTEX) -- HBC | Quote | Chart | News | PowerRating -- HSBC Holdings Plc was sharply lower on worries that its second-half results could be worse than its first-half performance as conditions in the US credit market continue to deteriorate.

Following the release of first-half results yesterday, management told analysts that emerging markets -- which contributed more than half of earnings in the first six months -- are likely to be weaker in the second half.

At 12:01 pm, HSBC was down 2.70 hkd or 2.09 pct at 126.70, off a high of 127.50 and low of 126.50.

"My sense is HSBC's results in the second half might be significantly lower than in the first half because prospects of further deterioration in the US credit market mean more losses and impairment charges in its US operations," said Lee Yuk-kei, an analyst at Core Pacific-Yamaichi International.

"I don't think the growth that it will achieve in emerging markets in the second half will be sufficient to offset another setback in its American operations," Lee said.

HSBC reported a 29 pct drop in first-half net profit to 7.72 bln usd due to bad debts in its US operations and more asset writedowns.

Its pretax profit was 10.247 bln usd, down 28 pct.

The bank's North America division posted pretax losses of 2.893 bln usd in the first half. However, the UK-based lender said it made profit in all its other geographical divisions.

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

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.

Core Pacific-Yamaichi's Lee said it would take a least a year before the US credit market begins to recover, which means a turnaround in HSBC's American operations is unlikely before the second half of next year.

"It doesn't seem that the policy measures taken so far by the Federal Reserve and the US government have done much good to resolve problems in the credit market and I don't see momentum being regained until about a year from now," he said.

Goldman Sachs said it maintained a "buy" rating on HSBC Holdings with a target price of 150 hkd.

"Numbers were decent to good. Core earnings ex-non recurring gains/losses presented a better picture, up 1 pct year-on-year and 40 pct from the second half to 12.98 bln usd, versus our estimate of 8.364 bln usd," the brokerage said.

Goldman said HSBC faces more challenges in the second half, including slowing growth momentum in emerging markets.

"Bears could point to risk of further mark-to-market loss, weak Hong Kong results, rising Mexico credit costs and seeming inevitable slowdown for the UK, Hong Kong and Asia businesses going forward," it said.

Cubillas Ding, senior analyst with Celent, a Boston-based financial research and consulting firm, said HSBC's interim results displayed its stability relative to its global peers.

"In Europe and the UK for example, HSBC has played its cards well by reining in its mortgage and other borrowing activities from as early as the end of 2006," he said.

"This has positioned them well for the current drop in housing prices, allowing them to expand market share where other banks have been holding back," he said.

But while HSBC is well positioned to cash in on growth in emerging markets, Ding expects their growth momentum to slow.

"Despite expected growth in emerging economies, we expect a slower pace in the future. Inflation pressures are still a concern in these markets as basic commodity, energy and food prices rise," he said.

(1 usd = 7.8 hkd)

jun.concepcion@xfn.com

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