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By Don Miller
Europe's biggest bank, HSBC Holdings PLC (NYSE ADR: HBC), said first quarter profits increased substantially over last year, but 2009 will be a "tough" year as bad loans increase and the economy slowly pulls out of the recession.
The bank's profits benefited from record results in its investment bank and steady activity in Asia, but excluding a $6.6 billion (4.37 billion pound) fair value gain on its own debt, first-quarter results trailed year ago earnings.
HSBC incurred charges for impaired loans across all customer groups and regions during the first quarter, according to a statement issued by the bank. In the United States, provisions rose to $3.95 billion from $3.19 billion a year earlier.
"The statement was pretty terrible; the U.S. was much worse than we expected," Simon Willis, an analyst at NCB Stockbrokers Ltd. in London who has a "sell" rating on the stock, told Bloomberg News. "HSBC remains pretty cautious and said there is limited appetite for borrowing around the world."
The London-based bank has set aside $57 billion for bad loans in the past three years, stemming largely from a $15.5 billion acquisition of Household Finance, now known as HSBC Finance Corp. In March, HSBC said it planned to close its consumer-lending units in the United States after losses on subprime loans cut profits.
The bank raised $19 billion (12.5 billion pounds) in a rights offering last month to boost capital and cover losses from bad loans in the U.S. The rights issue lifted HSBC's core equity Tier 1 capital ratio to 8.6% at the end of March, according to Reuters.
HSBC Chief Executive Officer Michael Geoghegan said there had been "green shoots (of recovery) in confidence" but few early signs of recovery across the broader economy.
Royal Bank of Scotland PLC (NYSE ADR: RBS) joined Germany's Commerzbank AG (OTC ADR: CRZBY) last week in reporting charges on bad loans in Europe as consumers and companies continued to run into trouble.
"The reality is it (recession) has got some time to go," Geoghegan said.
But some analysts thought the results gave reason for optimism about HSBC's future.
"HSBC is probably at the bottom of the cycle," LeighGoodwin, an analyst at Fox-Pitt Kelton Ltd. in London told Bloomberg. "HSBC has the least downside risk of all the major banks."
HSBC has weathered the financial crisis better than most rivals thanks to a traditionally strong balance sheet. Bad debts in the first three months of the year rose from a year ago but were lower than in the previous quarter, the bank said.
Asia, which accounts for more than 25% of revenue, remained the bank's strongest region, HSBC said in the statement.
"It's broadly what you'd expect given what's come from other banks," Simon Maughan, an analyst at MF Global told Reuters. "It's done a little bit better as Asia seems to have been weathering the storm pretty well, particularly on the impairment side."
ADR shares of HSBC were down in New York trading yesterday, after having almost doubled since hitting their lows on March 11.
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