LONDON — HSBC Holdings PLC said Monday that net profit rose 21%, as sharp growth in Asian operations helped offset hefty impairments on subprime and other loans in its U.S. consumer finance business.
The U.K.'s largest, and the world's third-largest, banking group by market capitalization said net profit attributable to shareholders was $19.1 billion in 2007, up from $15.8 billion the year earlier, and well ahead of a median analyst forecast of $18.38 billion.
Net profit was flattered by an effective tax rate of 15.5%, down from the 23.6% tax rate seen in 2006.
Pretax profit in 2007 was up 9.6% at $24.2 billion from $22.09 billion and somewhat below median analyst expectations of $24.94 billion.
The bank hiked its dividend payment for 2007 by 11% to 90 cents a share from 81 cents paid on 2006 profits. Analysts had predicted a dividend of 88 cents.
Growth was driven by a 42% pretax profit increase in Hong Kong, outpacing the 15% growth seen there in 2006, and by 70% growth in the rest of Asia-Pacific, up from the 37% increase in 2006 and flattered by a $1.1 billion gain from stake dilutions in China. In 2007, Hong Kong and Asia-Pacific contributed 31% and 25% of group pretax profit, respectively.
Meanwhile, the North American operations saw a virtual annihilation of its pretax profits, which dropped to $91 million from $4.67 billion, reducing its earnings contribution to 0.4% from 21% the year earlier, largely as a result of impairment charges in its U.S. personal financial business. These rose 79% to $11.7 billion in 2007, mainly as a result of the deterioration in the U.S. housing market. In the first nine months of 2007, the impairment charges at this business were $7.55 billion, it said at the time.
With these, total group impairment charges were driven up 63% to $17.24 billion.
Additionally, HSBC made a total $2.1 billion in write-downs on asset-backed securities and credit trading positions, leveraged and acquisition financing positions, and monoline credit exposures resulting from unprecedented disruption and deterioration in the credit market.
As market conditions caused the value of some HSBC investments to drop, changes in credit spreads resulted in a positive $3.1 billion effect in the revaluation of the bank's own debt.
"The outlook for the rest of 2008 is uncertain. The economic slowdown and the credit outlook in the U.S. may well get worse before they get better," Chairman Stephen Green said, although he added that because of the bank's emphasis on faster-growing emerging markets, "we are better positioned than many of our competitors."
Keefe, Bruyette & Woods analysts said the underlying performance "looks OK." They noted that impairments at its personal finance operations in the U.S. were higher than the $10.5 billion that had been expected, while write-downs were offset by the gains on the valuation of the bank's own debt.
Stripping out the woes in U.S. operations, they said underlying trends by geography were strong. KBW has a market perform rating on HSBC with an 870 pence price target.
Collins Stewart analysts said that HSBC showed capital strength, earnings diversity and surplus liquidity, and that it "remains a safe haven." They said that the pure credit investment write-downs came in below that of Royal Bank of Scotland (RBS) and Barclays (BCS), although noting that 2008 should show elevated impairment levels. Collins Stewart keeps a buy rating and 1,070 pence price target on HSBC.
At 1135 GMT, HSBC shares were up 6 pence, or 0.8%, at 772 pence, making it the only financial services company to trade in the black on the FTSE 100 blue-chip index, which was lower 1.6%.
As of Friday's close, HSBC's market capitalization was GBP90.82 billion. In the past 12 months, the share has shed 14% of its value but outperformed its peers, mainly helped by its Asia exposure. In the same period, the Dow Jones STOXX 600 index has fallen 31% and the FTSE 350 banks index has dropped 27%.
Commenting on the prospects for the business in the U.S., Chief Executive Michael Geoghegan said the group has discontinued mortgage services correspondent and broker origination, while closing about 400 branches and leaving a network of approximately 1,000, causing 6,000 employees to lose their jobs.
"We have tightened our lending criteria, tailored our credit appetite in specific geographies, reduced product offerings and eliminated the small volume of adjustable-rate mortgage products we offered," he added.
Chief Financial Officer Douglas Flint said on a conference call that if employment in the U.S. "holds up," there should be a turnaround in loan impairments within 18 months. "If not, then it might take longer than that," he said.
At the analyst conference, Flint said the bank has injected $1.6 billion into the group's Finance Corp. in the U.S. the first quarter of 2008, in order to maintain a "tangible equity ratio," which had declined sharply on the impairment charges.
CEO Geoghegan, meanwhile, said that while delinquencies in the U.S. are expected to continue to rise, 82% of customers are still current, or less than 30 days' past due on their mortgages.
The CEO also said that the bank has thousands of employees in the U.S. working with overdue customers as they attempt to restructure loans. "We will endeavor to keep as many of our customers in their homes as possible," he said.
Commenting on the outlook for the Asian markets, Chairman Green said that they show more domestic momentum, but won't be entirely immune from the impact of a U.S. slowdown.
Nevertheless, he said they will continue to outperform mature economies.
The bank didn't break out second-half performance in its statement, but, according to a Dow Jones Newswires calculation, net profit attributable to shareholders rose 17% to $8.24 billion from $7.06 billion in the last six months of 2006, representing a slowdown in profit growth from the 25% seen in the first six months of 2007.
In the last six months, the pretax growth rate was 5% to $10.05 billion, a sharp slowdown from the 13% growth rate in the first six months of the year.
