HSBC's profits up on year despite U.S. hit

A customer enters a branch of HSBC in central London, November 8, 2008.

LONDON (Reuters) - Europe's biggest bank HSBC said its profit in the third quarter was ahead of a year earlier as growth in Asia helped offset almost 3.2 billion pounds in bad debts on U.S. home loans and asset writedowns.

HSBC also said its profits in the nine months to the end of September were lower than the same period of 2007, but by less than the 28 percent drop reported for the first-half.

The biggest bank outside China said global economic growth will slow during the next few quarters as recession takes hold in several countries.

"We're confident that Asia may well slow but it won't be impacted as much as other economies around the world," Michael Geoghegan, HSBC chief executive, said on a conference call.

By 10:40 a.m. its shares were down 0.2 percent at 745 pence. Its shares are down 12 percent this year, while the DJ Stoxx Europe bank index has more than halved.

Jane Coffey, head of equities at Royal London Asset Management (RLAM), said there were no nasty shocks in the update and HSBC remained well positioned.

"They have a loan to deposit ratio of 88 percent, strong capital ratios, they are not dependent on government support and they are still paying a cash dividend.

"All those things make it more expensive than other banks, but you can understand why you are prepared to pay that premium," Coffey said. RLAM is the 21st biggest investor in the bank, according to Thomson Reuters data.

HSBC's tier 1 capital ratio was 8.9 percent at the end of September, near the top of its 7.5-9 percent target range, and the bank said it was "a major recipient" of deposit inflows during the current financial market turmoil.

Douglas Flint, finance director, said he was comfortable with the capital position and its target range was appropriate even though its capital advantage had been eroded, as it was strongly cash generative.

Many rivals have raised capital in recent months, and Spain's Santander, Europe's second biggest bank, on Monday said it plans to raise $9 billion (5.7 billion pounds).

U.S. BAD DEBTS RISE

HSBC said its charge for bad loans in personal financial services in the U.S. rose to $4.3 billion in the quarter, up by $700 million from the previous quarter.

It had been expected to report another near $4 billion on bad U.S. home loans as its mortgage book is run down and unsecured losses pick up as unemployment rises.

HSBC Holdings injected $1.3 billion into HSBC Finance during the third quarter. A recovery in the U.S. arm remains unlikely until 2010, Geoghegan said, adding it may not occur until the latter part of that year as a recession there bites.

HSBC wrote down the value of credit trading positions by $600 million in the quarter, lower than writedowns in the previous two quarters partly due to changes in accounting rules.

It followed other banks in reclassifying how some assets are accounted for. Without the reclassification HSBC said its third-quarter writedown would have been $835 million higher.

Bad debts also rose in its European retail business.

However, HSBC said its investment banking arm, Global Banking and Markets, was profitable in the third quarter.

HSBC is expected to post one of the biggest profits of any bank this year. It should report a 2008 pretax profit of $21.7 billion, according to the median of 11 estimates compiled by Thomson Reuters, down 10 percent from its record $24.2 billion in 2007.

It will consider acquisitions in developing and developed markets, Geoghegan said, but added that valuations in the west may not be as cheap as implied by stock markets, given impairment charges faced by many banks.

(Additional reporting by Raji Menon; Editing by Greg Mahlich and Jon Loades-Carter)