HSBC Holdings Plc said a $1 billion (630.6 million pound) increase in its wages bill in Brazil, China and other emerging markets was the price of avoiding the stagnant growth which has dogged some rival lenders more dependent on Europe.
Posting a pretax profit just shy of $22 billion, the largest in 2011 by a western bank, HSBC said on Monday it was confident growth in Asia, Latin America and the Middle East would continue to offset sluggish conditions in Europe.
However, with costs rising 10 percent in 2011, due partly to surging wages in emerging markets, Chief Executive Stuart Gulliver told reporters it would be a challenge to meet the bank's 2013 target for reducing costs as a proportion of income.
Banks across Europe have been posting hefty losses as the euro zone sovereign debt crisis has hit their trading profits, and as they strive to meet tough new rules aimed at preventing a repeat of the 2007-09 banking crisis.
HSBC, Europe's biggest bank and which makes over three quarters of its profits outside Europe and north America, has been relatively unscathed thanks to its strength in faster-growing emerging markets.
It said it expected that trend to continue, despite fears some of these economies were overheating and could see an abrupt slowdown.
We remain comfortable with the (outlook in) emerging markets and are confident that GDP growth in emerging markets will be positive and China will have a soft landing, Gulliver said.
In contrast, the euro zone economy would flatline this year, with marked recessions in some southern countries, he added.
HSBC, with 89 million customers in 85 countries, said pretax profit rose 15 percent to $21.9 billion in 2011 compared with a forecast for $22.2 billion in a Reuters poll.
The figure fell short of the group's record profit of $24.2 billion in 2007, but beat all other western banks that have reported so far for last year, including U.S. rival J.P. Morgan, which made $19 billion.
The world's most profitable banks in recent years have been Chinese groups ICBC, which made a 215 billion yuan ($34.2 billion) pretax profit in 2010, and China Construction Bank, which made 175 billion yuan ($27.8 billion).
HSBC's profit was boosted by a $3.9 billion accounting gain on the value of its debt. Stripping that out, underlying pretax profit fell 6 percent to $17.7 billion.
At 2:15 p.m., HSBC shares in London were down 4 percent at 551.9 pence, lagging a 1 percent decline in the UK's benchmark FTSE 100 index. The shares have beaten the STOXX Europe 600 banking index by 15 percent over the past year.
There's a slight miss (on profits) and the market isn't that impressed with the message on costs, said Alex Potter, analyst at Berenberg Bank.
WAGES AND BONUSES
HSBC said it paid out $4.2 billion in bonuses, down 2 percent on 2010. Banks are coming under intense pressure from politicians and the public to rein in pay awards because of the role of the sector in the world's economic problems.
Gulliver was paid 8 million pounds ($12.7 million) last year - including a 2.2 million bonus - down from 8.4 million in 2010, when he ran HSBC's investment bank. Another banker, whom HSBC declined to name, netted 7 million pounds, while 192 employees were paid over 1 million pounds each, including 64 in Britain.
Gulliver said HSBC would continue to pay competitively, particularly in emerging markets, as the growth being delivered made the investment worthwhile.
Wage price inflation and competition for staff is very high. We are not the only people to work out that the emerging markets have high GDP growth and there's a limited pool of talent, he said on a conference call.
While HSBC remained on track to hit its return on equity target of 12 to 15 percent by the end of 2013, it would be a challenge to achieve its cost-to-income goal of 48 to 52 percent by then, Gulliver said, adding this was mainly due to a difficult macro-economic backdrop.
The cost-to-income ratio deteriorated to 61 percent in 2011 from 55.6 percent the year before for its underlying business.
Gulliver said HSBC would offset some of the pressure by redoubling its cost-cutting efforts elsewhere in the business and said it was confident of hitting the upper end of its $2.5-$3.5 billion annual cost-savings range.
In the last year HSBC has cut 11,000 jobs and sold 19 businesses as part of Gulliver's business plan. Deals already struck will cut $50 billion in risk-weighted assets from its balance sheet.
This is a redesigning of the group, not a shrinkage. It's to get ourselves on the front foot, Gulliver said.
HSBC, which lifted its 2011 dividend by 14 percent to 41 cents a share, said profit at its investment bank fell 24 percent to $7 billion as the euro zone debt crisis slowed capital markets activity in the second half of the year.
Loan impairment charges and other credit risk-related provisions, however, fell $1.9 billion to $12.1 billion.
HSBC's star division was commercial banking, where profits jumped 31 percent to $7.9 billion. In a throwback to its roots as a bank specialising in trade finance, last year's growth was led by increased business in Brazil, Hong Kong, China, Mexico, Argentina and Singapore.
(Additional reporting by Sudip Kar-Gupta and Kelvin Soh; Writing by Mark Potter; Editing by David Holmes)