HSBC Holdings, Europe's biggest bank, posted higher first-half profit and struck an upbeat tone on the global economy yesterday, despite a big rise in bad debts linked to its problems in the US housing market.

HSBC, which blamed bad US mortgage loans for its first ever profit warning earlier this year, said pretax profit rose 13 percent to US$14.16 billion in the six months to June 30, boosted by strong growth in Hong Kong, Asia-Pacific and record profits from its investment banking arm.

That was ahead of an average forecast of US$13.27 billion from a Reuters Estimates poll of nine analysts.

But the bank said it benefited from a gain of US$1 billion from the dilution of its Chinese mainland holdings and that pretax profit was up 5 percent excluding that gain.

HSBC said its charge for bad debts was US$6.35 billion in the first half of the year, up 63 percent from US$3.89 billion in the same period last year as it continued to suffer from past loans to the hard hit US subprime mortgage sector.

"We think that the true underlying growth may be some way short of the headline growth," said NCB analyst Simon Willis, keeping a "reduce" rating on HSBC shares. He added the bad debt charge was about US$1 billion higher than he had expected.

HSBC said its handling of US housing problems was on track, although it acknowledged the rest of this year will stay tough due to an expected rise in the number of homeowners on adjustable rate mortgages shifting to a higher repayment.

"We're very pleased with progress in mortgage services, although clearly there's a long way to go," Douglas Flint, HSBC finance director, told reporters on a conference call, saying the deterioration in impairments was as expected.

HSBC estimated it will see US$5.3 billion of mortgage resets in the second half, but it had previously expected US$10 billion of resets in 2007, including US$7 billion in the second half.

Upbeat on economy

HSBC sounded upbeat about the global economy, saying weakness in the United States was not constraining economic activity elsewhere.

By 1105 GMT, shares in the London-based bank were up 2.8 percent at 905 pence, outperforming a flat FTSE 100 index and valuing the bank at 106 billion pounds (US$216 billion).

"With the shadow of credit concerns casting itself heavily over both global markets and HSBC itself in recent days, the stock appears to be enjoying something of a relief rally - relief that bad debts were not even worse," said Keith Bowman, equity analyst at stockbroker Hargreaves Lansdown.

"That said, investors should not sigh too deeply, profits from the group's personal financial services division were down a considerable 20 percent and worries over credit conditions are unlikely to recede just yet," he added.

HSBC said there were risks to the world economic outlook, and that it remained cautious in its risk appetite.

"Excess liquidity in global financial markets could lead to further asset price dislocation," it said.

Underlying revenues rose 16 percent in the first half, just outpacing cost growth of 15 percent.

The bank said growth was driven by an "excellent performance" in Asia - where profits in Hong Kong rose by a quarter and in the rest of Asia-Pacific by 37 percent.

Michael Geoghegan, HSBC chief executive, said he was willing to spend on acquisitions as well as organically to accelerate growth in Asia. "We will not shy away from investment opportunities in the region," he told analysts.

Profits in its CIBM investment bank arm rose by almost one-third to a record US$4.2 billion.

HSBC has scaled back its ambitions for CIBM this year and now says it will be emerging markets-led and financing focused, rather than trying to take on Wall Street's biggest banks in merger and acquisition advisory.

"CIBM has a lot going for it without taking high level risks for short-term gains," Geoghegan said.

HSBC proposed a second interim dividend of 17 US cents a share, taking the half-year payout to 17 cents, up 13 percent over the year before.

Reuters

(HK Edition 07/31/2007 page6)