Trading profits add shine to HSBC's first quarter

HSBC has a good quarter bolstered by global banking and markets and its Asia businesses, but cautions that this may not be sustainable. The results show that impairments are on the rise.

Following a trend set by a number of banks who have booked fixed-income trading profits during the first quarter of 2009, HSBC yesterday announced that it has had "a resilient start to 2009" with record results in global banking and markets (GBM).

Net operating income before impairments was $3.3 billion for the quarter, up from $2.8 billion in the preceding quarter, but down from $3.7 billion in the first quarter of 2008.

HSBC said GBM delivered record results, especially in foreign exchange and interest rate trading, and attributed this to taking market share from competitors who are no longer in the industry or are weakened by balance sheet issues, as well as to the unique conditions during the past quarter which resulted in margin expansion. Client revenues in GBM also grew.

"I don't see this as a business which long term will show this kind of results," commented Michael Geoghegan, HSBC's group chief executive, on a conference call yesterday after the results were released, as he provided an honest assessment of the future potential for GBM to continue to deliver blockbuster profits. But Geoghegan tempered his guarded outlook by saying that HSBC has a strong balance sheet which will help the bank to continue to win market share from competitors.

HSBC set aside $3.9 billion for impairments in the past quarter, 25% more than in the same period last year, but below the $4.6 billion it provided in the final quarter of 2008.

The trend for impairments continued to rise, especially for small- and mid-market businesses, said Geoghegan. He attributed this to the fact that revenues at these companies are falling much faster than costs, currency issues and increasing commodity issues.

But HSBC is well-positioned to absorb the higher provisions, with its balance sheet bolstered by $17.8 billion, net of expenses, which it raised by way of a rights issue in early April. Including the rights issue proceeds, HSBC's tier-1 capital ratio would have been 9.9% on March 31.

"I think the areas in which our rivals were strong, we were also strong," group finance director Douglas Flint said when asked how HSBC is positioned relative to other British banks. "But we were not as exposed to commercial real estate lending or leverage on acquisitions as some of our peers."

HSBC's first-quarter profit was also higher on account of gains on its own debt. It posted a profit of more than $6.6 billion on its debt during the quarter as credit spreads widened, compared to $2.5 billion in the first quarter of 2008. But credit spreads narrowed in April and about two-thirds of those gains reversed, Flint said.

"Asia remained our strongest region and at the heart of our operating profitability," the bank said in a written statement, highlighting the importance of the region with which HSBC is strongly associated.

And Geoghegan reinforced that message: "Asia is still resilient and impairments are not that stretched -- that's a reflection on the style of borrowing in the market. However, India is deteriorating."  China is using the stimulus package to drive domestic business, he added, and that is beneficial to HSBC because of its position in the region.

"Asia is not immune, just in a better position," clarified Geoghegan, but then went on to caution that the uniqueness of Asia also raised its own challenges. "On the revenue line, as risk aversion is up, activity is lower." So, for example, the wealth management business in Asia is not as robust as it was this time last year as customers have become more risk averse and are keeping their money in bank deposits rather than buying private banking products.

The situation in Asia "is offset to some extent by GBM taking positions but this will run off", added Geoghegan, once again highlighting that the quarter's GBM performance may have been a one-off.

The bank is open to acquisition opportunities but Geoghegan suggested that restructuring in the banking industry is not yet complete and hence consolidation could still be some way off. "The crisis is a restructuring in itself," said Geoghegan. "Regulators and the industry are looking at how things will shape up -- it is too early to say."

The bank will focus on organic growth for now, explained the group CEO. "If there are opportunities we will take them but I don't see them on the horizon right now."

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