HSBC <0005.HK> and BNP Paribas , two of Europe's top three banks, trumped earnings forecasts after bad debts fell sharply, more than offsetting slowing investment banking growth and lifting both shares.

The two banks on Monday showed a dip in investment banking income in the latest quarter, but more than made up for that with lower losses on personal and corporate loans as broad economic conditions improved.

Half-year profits for HSBC, Europe's biggest bank, hit $11.1 billion, more than double the $5 billion of a year ago and above the average forecast of $9.1 billion from eight analysts polled by Thomson Reuters.

Loan impairment charges and other credit risk provisions fell to $7.5 billion, down $6.4 billion from a year ago to the lowest level since the start of the financial crisis -- a trend HSBC expects to remain as both personal and corporate balance sheets strengthen.

I would expect that trend to continue. We have not seen indications we are going to have a double dip, Sandy Flockhart, chairman of personal and commercial banking and insurance, told Reuters.

France's BNP Paribas, the euro-zone's second biggest bank after Santander , said net profit rose 31 percent to 2.1 billion euros ($2.7 billion) in the second quarter. For the first half, profit rose 39 percent to 4.4 billion euros.

The rise was also thanks to lower loan provisions and strong retail banking, offsetting volatile financial market conditions that hit investment banking. Its second-quarter provisions halved to 1.1 billion euros, the lowest in two years.

HSBC and BNP have seen provisions cut in half year-on-year. We are very rapidly seeing big retail banks like BNP and HSBC return to a level of provisions that is very close to what it was before the crisis, said Francois Chaulet, fund manager at Montsegur Finance Asset Management in Paris.

BNP said it reflected an improving but still challenging macroeconomic environment in its key euro-zone markets.

That provides opportunity for BNP -- which bought assets from crippled Benelux bank Fortis at the peak of the crisis -- to grab market share, Chief Executive Baudouin Prot said.

Prot said BNP did not need acquisitions to grow and that the bank had achieved critical mass with the Fortis deal, and declined to comment on its interest in Allied Irish Bank's controlling stake in Poland's Bank Zachodni.

HSBC Chief Executive MIchael Geoghegan, meanwhile, said he remained alert to acquisition opportunities and did not rule out further buys.

Growth could remain anemic in various western countries, HSBC warned, although it was bullish on the prospects for emerging markets, even if some cooling off in China's economy is possible.

By 1500 GMT (11 a.m. EDT), HSBC's London-listed shares were up 5 percent and BNP's shares were up 4.7 percent, helping lift the European bank sector <.SX7P> 3.5 percent.

Montsegur's Chaulet said the results backed up a positive recent sentiment on banks after a health check of the European banking system and a relaxation of proposed capital rules.

INVESTMENT BANKING SLIPS

The results set the foundation for decent results from British and French banks later this week, following strong recent earnings from Swiss rivals and mixed results from Spain.

Lloyds Banking Group and France's Societe Generale are due to report Wednesday, with Barclays on Thursday and Royal Bank of Scotland on Friday.

The prospects of bumper profits for banks in Britain and elsewhere will raise pressure from politicians to force them to lend more and potentially revive talk of an industry tax, after the sector was lifted by the watering down of capital reform.

Investment banking at both HSBC and BNP slipped in the second quarter, after the euro-zone debt crisis slowed capital markets activity and also hurt rivals including Goldman Sachs and Deutsche Bank .

BNP's investment bank arm suffered a 30 percent fall in second-quarter revenue from a year ago, and down 28 percent from the previous quarter.

Its equity advisory revenue -- a key area of analyst concern and an important business line for SocGen -- fell 60 percent.

HSBC's investment bank made a profit of $5.6 billion, half of group profit and the second-best half-year ever, although it was down 11 percent from the record level of a year ago.

Income slowed in the second quarter, in line with rivals, and Flint said he expected a slower second half of the year as appetite has reduced, coupled with seasonal factors.

HSBC's capital improved and its Tier 1 ratio was 11.5 percent at the end of June, and Geoghegan said he was happy to hold more capital given regulatory uncertainty and the chance for acquisitions.

But holding more capital depresses return on equity (RoE), which was 9.3 percent in the first half, and HSBC said it will assess if it needs to lower its 15-19 percent RoE target.

It's difficult for us to have a 15 to 19 percent RoE on a Tier 1 capital ratio of 11.5 percent, Geoghegan said at a press conference, adding the lower end was still achievable as returns are improving in the U.S., Latin American and Middle East.

($1=.7664 Euro)

(Additional reporting by Kelvin Soh in Hong Kong and Sudip Kar-Gupta in London; Editing by Andrew Callus and Simon Jessop)

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