HSBC's profits rose 10 percent last year as buoyant growth in Hong Kong and elsewhere in Asia helped Europe's biggest bank absorb $17.2 billion in bad debts as the U.S. housing crisis deepened.
Profits in Hong Kong rose 42 percent and earnings jumped 70 percent in the rest of Asia, but the bank's North American arm barely scraped a profit as past risky loans to U.S. homeowners now in trouble hit it hard.
The London-headquartered bank reported record pretax profit of $24.2 billion for 2007, up from $22.1 billion in 2006. This was below an average forecast of $24.7 billion from a Reuters Estimates poll of analysts, but results were distorted by some one-off items and did not include a $1.3 billion property gain expected by many analysts.
Underlying profit growth was 5 percent for the year, which analysts said was in line with forecasts.
The bank's impairment charge jumped $6.7 billion from 2006, or 63 percent. Bad debts had been expected to come in at $15.8 billion, based on the average of forecasts from eight analysts.
By 6:35 a.m. EST HSBC shares were up 0.8 percent at 772 pence, one of the top performing stocks in a weak UK share market and lifting the bank's value over 91 billion pounds ($181 billion).
If ever proof were needed about the benefits of diversification, these numbers from HSBC fall squarely into that category, said Richard Hunter, head of UK Equities at stockbroker Hargreaves Lansdown.
Its performance in the ever-strengthening markets of China, India and Hong Kong proved a more than ample buffer against its U.S. subprime woes.
HSBC said the outlook for 2008 was uncertain and that the U.S. economic slowdown and credit outlook may well get worse.
It said its conservative balance sheet and international spread left it well positioned and it expects to improve margins and will continue to invest in building market presence at a time when others with weaker capital positions are constrained.
The bank has said it may sell half its branches in France for $3.2 billion and redeploy proceeds towards emerging markets, and other businesses could follow.
There would be a number of businesses at the periphery of the European platform we have at the moment, and the U.S. platform, where we would say if someone else thought they could make more of this than we did, we would listen, Douglas Flint, HSBC finance director, told reporters on a conference call.
HSBC North America made a 2007 profit of just $91 million and the bank admitted to an exceptionally weak performance in the United States.
The problems stem from aggressive selling of subprime mortgages by its U.S. arm HSBC Finance, formerly the Household business bought for $14.8 billion five years ago. North America bad debts were $12.2 billion, up 79 percent from 2006.
The pain is far from over -- we expect more of the same in 2008 and 2009. Not so much the American dream, more an American nightmare, said Exane BNP Paribas analyst James Eden.
HSBC retrenched its mortgage lending late in 2006 and has shrunk its mortgage book. It does not lend through intermediaries and has cut its U.S. branch network to about 1,000 from 1,400.
But it is suffering as the fall in house prices hurts other credit lines, such as credit cards and personal loans, and said a turnaround may not occur until the end of 2009.
HSBC, which has operations spanning 83 countries, said it had produced exceptionally strong results in Asia-Pacific, Latin America and the Middle East.
In mainland China, the bank made profits of more than $1 billion for the first time. Hong Kong profits topped $7 billion and in Europe they rose 23 percent to $8.6 billion.
Earnings at HSBC's investment banking arm, which has been renamed global banking and markets (GBM), rose 5 percent to $6.1 billion. Its writedown on the value of complex financial assets that have been tarnished by the U.S. subprime crisis was higher than expected at $2.1 billion, up from $925 million previously.
The writedown was less than the multi-billion dollar hits taken by many other banks, however. The bank also made a $2.9 billion fair value gain on the value of debt it is carrying.
HSBC also set new performance targets, including a return on equity of 15-19 percent over an investment cycle and a tier 1 capital ratio of between 7.5 and 9 percent.
It recommended a final dividend of 39 cents per share, taking the full-year payout to 90c, up 11 percent from 2006.
(Additional reporting by Clara Ferreira-Marques)
(Editing by Catherine Evans)