HSBC Holdings Plc, Europe's biggest bank, said its third-quarter profits were ahead of last year's and revenue growth across the group offset a jump in its charge for bad debts in the United States.
The trading update on Wednesday reassured investors that HSBC was not further exposed to big debts in mortgage-related financial products and was benefiting from its broad spread, and its shares jumped over 4 percent.
The bank does not report quarterly results and is not due to announce annual results until March 3, 2008.
HSBC increased its bad debt charge related to its U.S. consumer finance business to $3.4 billion for the third quarter, which was higher than analysts had expected and up from $2.2 billion in the second quarter.
The charge was $1.4 billion more than had been implied by extending first-half trends. HSBC said half of that was due to deterioration in the subprime housing market and the remainder was because problems had spread to unsecured lending, such as credit cards and personal loans.
Things are getting worse (for U.S. consumers) and numbers are going to have to come down because provisions are higher than expected. There's a pretty serious headwind it's walking into, said Simon Maughan, analyst at MF Global.
HSBC Finance Director Douglas Flint said the impairment charge will stay elevated and could increase if the housing market continues to weaken and the bank said the outlook was genuinely uncertain.
There's been a broader deterioration of the housing market and associated credit, but I don't think anybody knows if we've reached the bottom, Chairman Stephen Green told reporters on a conference call.
Unlike big writedowns announced by several Wall Street banks, HSBC's loss is related to mortgages it has on its books, and it said it had little exposure to U.S. mortgage-backed collateralized debt obligations (CDOs).
Rivals including Citigroup, Merrill Lynch and UBS have announced about $45 billion of losses and writedowns in the past month after a meltdown in mortgage securities and troubles in the CDO market.
HSBC, which is now the world's largest bank outside China after sharp share price falls by its peers, said it plans to close a further 260 of its U.S. consumer lending branches, adding to 100 already being shut, cutting the network to 1,000 branches. It will also scale back its U.S. unsecured lending.
DIVERSE OR TOO COMPLEX?
Continued growth in the Asia-Pacific, especially Hong Kong, and the Middle East and an improvement in Europe, led by Britain, underpinned growth across the group. It reinforces the benefits of HSBC's strong and liquid balance sheet and diversified revenue streams, the bank said.
But Knight Vinke, the U.S. activist investor that has attacked the bank in recent months, said the higher provision underscores the risks associated with not focusing sufficiently on business where HSBC has comparative advantage and with having too large and complex a group.
Profits in HSBC's investment bank arm, CIBM, were broadly in line with a year ago as record revenues were offset by a writedown in credit trading and leverage acquisition finance businesses of $925 million.
Stuart Gulliver, head of CIBM, told analysts the unit's volumes in October and November had been better than in the third quarter but it was too early to say if that trend would hold up as markets remained difficult.
Underlying group revenue growth in the third quarter was higher than the 16 percent reported in the first half, and underlying cost growth was moderately lower than its first-half level of 15 percent, the bank said.
By 6:30 a.m. EST HSBC shares were up 2.9 percent at 867 pence, down from an early high of 886p, and lifting the bank's market value to 103 billion pounds ($214 billion).
The bank said it had continued to pursue its stated strategy of rebalancing the earnings of the group with investment slanted towards emerging markets.
Its shares are down about 7 percent this year, but have outperformed other major western banks in recent months due to its greater focus on Asia and strong capital position. The DJ Stoxx Europe bank index has fallen 13 percent this year.
(Editing by Greg Mahlich/Elizabeth Fullerton)