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HSBC Profit Beats Analysts’ Estimates on Emerging-Markets

HSBC Holdings Plc (HSBA), Europe’s largest bank, said first-quarter profit rose 26 percent, beating analysts’ estimates, helped by increased income at its securities unit and a decline in U.S. loan losses.

Pretax profit, excluding losses on the revaluation of HSBC’s own debt, rose to $6.8 billion from $5.4 billion in the year-earlier period, the London-based bank said in a statement today. That beat the $5.9 billion median estimate of 13 analysts surveyed by Bloomberg. Investment-banking revenue climbed 12 percent after bond markets recovered in Europe.

“The first quarter has been an impairments story for HSBC,” said Chirantan Barua, an analyst at Sanford Bernstein Research in London who has an outperform rating on HSBC. “if you look at the U.S. subprime book, it’s holding up.”

Impairments for bad loans in the U.S. fell by about $500 million from the year-earlier period, when a moratorium on foreclosures was a greater drag on earnings. The lender, which operates in about 85 countries, has set aside more than $65 billion for souring loans in North America following its 2003 purchase of Household International Inc., which lent to U.S. customers with subprime credit.

“Markets remain volatile with high levels of debt and regulatory and political uncertainty in developed economies, contrasting with an encouraging outlook in faster-growing markets,” Chief Executive Officer Stuart Gulliver said in the statement. “Our performance in April has been satisfactory.”

Investment Bank

HSBC shares rose as much as 3.4 percent before erasing their gains as the U.K. benchmark FTSE 100 Index declined. They closed 1.2 percent lower at 548.6 pence, giving the bank a market value of about 100 billion pounds.

Pretax profit at the investment bank, which is overseen by Samir Assaf, rose 5 percent to $3.08 billion. It profited from an improvement in trading after the European Central Bank provided unlimited three-year loans to the region’s lenders through its Longer Term Refinancing Operation. That offset a decline in revenue from equity trading, HSBC said.

HSBC itself took $300 million in the second round of the LTRO in February, the bank said.

Sales at the lender’s foreign-exchange business, which is overseen by co-heads of global markets Jose-Luis Guerrero and Spencer Lake, rose 30 percent to $957 million.

Gulliver Plan

Gulliver, 53, is part-way through a plan to cut as much as $2 billion of expenses by the end of this year as he battles wage inflation in emerging markets and prepares for stricter capital rules that will crimp earnings. The core Tier 1 capital ratio, a measure of financial strength, improved to 10.4 percent from 10.1 percent at the end of last year, HSBC said.

The CEO has announced about $6 billion of asset sales since last May as the bank sheds jobs and redeploys capital in faster- growing markets. HSBC completed the sale of its U.S. credit card unit to Capital One Financial Corp. for a premium of $2.5 billion last week. It’s also in talks to sell operations in Pakistan and South Korea.

Gulliver also plans to eliminate 30,000 jobs by the end of next year. Staff numbers were 14,000 lower at the end of the first quarter compared with the year-earlier period, at 285,000, the bank said today.

U.S. loan impairments fell 30 percent from the year-earlier period, when HSBC logged an additional $400 million charge because of a foreclosure moratorium that began in late 2010. The U.S. housing market slump has eased, with data last month showing the smallest 12-month drop for the S&P/Case-Shiller index of property values since February 2011.

Brazil Charges

The drop in impairments is “almost entirely to do with the commercial mortgage loan portfolio and the cards and retail services portfolio,” Finance Director Iain Mackay said in a call with analysts today. More U.S. customers also paid down delinquent loans after receiving their tax returns in the quarter, he said.

Lower impairment charges in North America were offset by higher charges in Latin America, particularly Brazil, where more clients are failing to pay back loans after a “rapid rise in lending balances in previous periods,” HSBC said.

Brazil “won’t become another Household” for HSBC, Gulliver said on the conference call. He said the bank had a $250 million increase in impairments in South America’s most populous nation, whose economy slowed after its central bank raised interest rates.

Cost Reductions

HSBC followed Barclays Plc (BARC), Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc in increasing the amount it’s putting aside to compensate Britons who were improperly sold payment protection insurance. The bank earmarked an additional $468 million after taking a $440 million charge last year.

The bank’s cost efficiency ratio, excluding losses on the revaluation of HSBC’s own debt, improved to 56 percent from 59 percent as revenue increased on the same basis by $1.2 billion.

“Overall costs must have gone down, and that’s a good achievement for a growing bank,” said Barua.

Net income fell 38 percent to $2.58 billion from $4.15 billion. Pretax profit, including the revaluation of HSBC’s own debt, acquisitions and sales of businesses and other charges, fell 12 percent to $4.3 billion. Credit valuation adjustments require banks to book losses when the value of their debt rises, and gains when it declines, on the theory that a loss, or profit, would be realized were the bank to repurchase that debt.

HSBC acquired Household for $15.5 billion and gained almost 50 million U.S. clients. It stopped taking new business in 2009 and had about 8.8 million active customer accounts at the end of 2011, according to a company filing. HSBC North America returned to profit in 2010 after three years of losses, asset sales and more than 6,000 job cuts.

The lender has been asked by U.K. regulators to monitor the crisis in the euro region and make appropriate plans for “dislocation,” Gulliver said on a conference call with journalists today. “We’ve been fully participating in that.”

To contact the reporters on this story: Howard Mustoe in London at hmustoe@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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