HSBC May Post First-Half Profit Gain as U.S. Writedowns Slow

HSBC Holdings Plc (HSBA), Europe’s largest bank, may post a gain in first-half net income as shrinking U.S. writedowns outweigh a decline in investment banking revenue.

The bank may report net income of $8 billion for the first six months of 2011, according to the median estimate of four analysts surveyed by Bloomberg. The projection includes dividends on preferred stock. First-half net income for the London-based bank in the year-earlier period was $6.76 billion.

Impairments from the lender’s North American business may fall by $1.5 billion to $3.05 billion, Morgan Stanley analysts led by Chris Manners wrote in a note to clients on July 25.

“Most recently it’s been on track with running down of the impairment charges of subprime, so people are hoping for a positive surprise,” said Jane Coffey, head of U.K. equities at Royal London Asset Management, which manages about $51 billion including HSBC stock.

The bank acquired U.S. subprime mortgage lender Household International, now known as HSBC Finance, for $15.5 billion in 2003. Six years later, HSBC halted consumer-finance lending at the unit, which has recorded about $60 billion of provisions, according to data compiled by Bloomberg from the bank’s annual reports up to 2010.

Chairman Douglas Flint this year described the acquisition as “a very black mark on our history.”

Investment Banking Slump

First-half pretax profit may fall to $839 million at the lender’s investment banking unit from $2.09 billion a year earlier, JPMorgan analysts led by Sunil Garg wrote in a note to clients on July 25.

“We think it will have done well in equities but seen a slowdown in fixed income, currency and commodities in line with the sector,” the Morgan Stanley analysts said.

That’s a view echoed by Sandy Mehta, chief executive officer for Hong Kong-based Value Investment Principals Ltd.

“I think the investment banking business will be soft. Trading volume of some of the U.S. financial companies have been weak,” Mehta said in a telephone interview on July 27. “HSBC has a very good capital provision and they’re going to see a good growth in emerging markets in Asia, but you will see weaknesses in investment banking and trading operations in developed markets.”

HSBC gained 0.8 pence to 606.8 pence at the close of London trading as the 46-member Bloomberg Europe Banks and Financial Services Index rose by 1.3 percent. The bank has declined 6.8 percent this year, while the index is 11 percent lower.

Cost Cuts

HSBC plans cut jobs and close offices to reduce costs by as much as $3.5 billion over the next two years as it expands in faster-growing economies and prepares for stricter capital rules.

The bank is close to a decision to cut more than 10,000 jobs globally, Sky News reported yesterday, citing people familiar with the matter. HSBC spokesman Patrick Humphris declined to comment when contacted by telephone.

HSBC is trying to find a single buyer for its branch network in upstate New York and its U.S. credit-card business, which has about $33 billion in assets, people familiar with the matter said in May. The bank sold part of its Russian consumer banking business last month.

At a gathering for investors in May, CEO Stuart Gulliver, 52, said the bank will focus on retail banking in the U.K., Hong Kong, high-growth markets such as Mexico, Singapore, Turkey and Brazil, and smaller countries where it has a leading market share. It plans to boost revenue at its retail unit by $4 billion in the near-to-medium term.

‘Corporate Trend’

“We’d really like to see evidence that net interest margin is bottoming out,” said Gareth Hunt, an Investec Securities analyst. “They’ve been pretty clear about the corporate trend on net interest margin and the rate at which it’s declining has dissipated.”

The net interest margin fell to 2.05 percent for the first half of 2010 from 2.07 percent the year earlier. It was as high as 3.16 percent for the first half of 2004, Bloomberg data show.

“Even in the Asian markets and Latin America, costs are rising and people will be looking at that,” said Julian Chillingworth, who helps manage about 16 billion pounds ($26 billion) at Rathbone Brothers Plc in London.

The table below shows analyst median estimates for the first half of 2011 in millions of dollars for HSBC. The bank reports at 9:15 a.m. in London on Aug. 1.

           1H 2011 Estimate       1H 2010 Actual  Analysts

Net Income        7,995                6,763         4

Pretax profit    11,050               11,104        10

Bad loan
Provisions        5,330                7,523        11

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net. Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net

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