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HSBC First-Half Profit Seen Rising as U.S. Loan Losses Shrink

HSBC Holdings Plc (HSBA) may say first-half profit rose 13 percent as bad loans in the U.S. shrank after Chief Executive Officer Stuart Gulliver sold assets to focus on more profitable markets.

Pretax profit rose to $14.4 billion from $12.7 billion in the year-earlier period, according to Jason Napier, an analyst at Deutsche Bank AG in London with a buy rating on the stock. Europe’s largest bank is scheduled to publish earnings on Aug. 5 at 9:15 a.m. London time.

Gulliver, 54, is reaping the reward of reversing the lender’s expansion in U.S. consumer banking and has closed or sold more than 50 businesses worldwide since he took the top job in 2011. HSBC is cutting back in the U.S. after its 2003 purchase of subprime lender Household International Inc. required it to set aside more than $65 billion for souring loans in the country. That may help reduce provisions for bad debts by 37 percent to $3 billion, said Gary Greenwood, an analyst at Shore Capital in Liverpool, England.

“The drivers for HSBC are provisions and cost efficiency,” said Greenwood, who recommends buying the shares. “We are coming out of all the disposals they have made and people will have their eyes on top-line growth.”

The lender, which last year agreed to pay $1.92 billion to settle U.S. probes of money laundering, said in May it will eliminate as many as 14,000 jobs as part of plans to remove $3 billion of costs.

Total Costs

Total expenses may fall 14 percent to $18.2 billion, Greenwood said. Revenue, excluding swings in the value of the lender’s debt, may fall 11 percent to $34.7 billion from $39.1 billion after the asset sales, he estimated.

HSBC has a target for return on equity, a measure of profitability, at 12 percent to 15 percent. It was 8.4 percent in 2012, though the core units the bank wants to keep meet the goal, Gulliver said in May.

The stock has gained 17 percent this year to a market value of 141 billion pounds, the second-best performer out of Britain’s five largest banks after Lloyds Banking Group Plc. (LLOY)

HSBC sold its U.S. credit card unit for a premium of $2.5 billion in May 2012, and $3.2 billion of U.S. consumer loans in March this year. In addition, the bank sold its upstate New York branch network to First Niagara Financial Group Inc. (FNFG) in the first half of last year.

Impairments in North America will drop more than 58 percent in the first half, and will fall 30 percent from 2013 to 2015, Citigroup Inc. analyst Andrew Coombs, who has a buy rating on the stock, estimated in a July 17 note to clients.

Investment Bank

HSBC’s investment banking business, led by Samir Assaf, may post an 8.5 percent gain in pretax profit to $5.48 billion on reduced costs and impairments, according to Coombs.

Bad debts will fall in Asia in the first half, and then increase in the rest of the year through 2015, Coombs said. Losses from soured loans in Hong Kong will more than double in the period to $491 million, and rise 49 percent in the rest of Asia to $536 million, according to Coombs.

Investors will want to know more about the bank’s plans in those growth markets and their outlook, said Colin McLean, who helps oversee 600 million pounds, including HSBC stock, at SVM Asset Management Ltd. in Edinburgh.

“They’re making much more of a bet on China stabilising in terms of its growth rate, so we’ll be looking to that. The U.S. and where they’re focusing on growth and China,” McLean said by telephone.

Asia Focus

Standard Chartered Plc (STAN), which like HSBC gains most of its profit in Asia, experienced an increase in bad consumer loans in Korea in the first half, the bank said in June.

Pretax profit rose 3 percent to $4.07 billion in the first half from $3.95 billion a year earlier, according to Napier at Deutsche Bank. London-based Standard Chartered reports second-half earnings on Aug. 6 at 9:15 a.m.

Korea was a “major” source of impairments as the government helped consumers reduce their debts, the lender said in June. South Korean President Park Geun Hye, who took office in February, set up a fund aimed at easing households’ debts by buying and rescheduling overdue loans.

Consumer banking in South Korea has been constrained by rising household debt that’s burdening the economy. Borrowing and credit purchases by Koreans swelled to a record 963.8 trillion won ($858 billion) at the end of 2012, central bank data show.

Revenue Growth

The lender may say loan impairments rose 15 percent to $756 million, Deutsche Bank’s Napier, who has a hold recommendation, said in a July 10 note to clients.

Standard Chartered may say revenue growth will come from its wholesale business, or corporate banking unit, which last year contributed about three quarters of profit. Weaker revenue growth in Korea and Singapore will be offset by Hong Kong, Africa and India, the bank said in June.

The bank’s shares have declined about 2 percent this year, giving a market value of 37.4 billion pounds. The Bloomberg European Banks and Financial Services Index has risen 11 percent in the period.

Officials at both banks declined to comment.

-- Editors: Jon Menon, Edward Evans, Keith Campbell

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net.

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

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