HSBC Holdings, Europe's biggest bank, said paying rising wages in Brazil, China and other emerging market is the price of avoiding the slowdown being felt by most of its rivals as it posted the largest 2011 profit by a western bank.

HSBC, which makes over three quarters of its profits outside Europe and north America, said on Monday it was confident growth in Asia, Latin American and the Middle East would continue to offset sluggish European economies this year.

However, with costs rising 10 percent and its wages bill up over $1 billion (631 million pounds) in 2011, 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 billions of dollars of 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 which has been relatively unscathed thanks to its strength in faster-growing emerging markets, said on Monday 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 emerging markets (outlook) and are confident that GDP growth in emerging markets will be positive and China will have a soft landing, Gulliver said. But he predicted the euro zone economy would flatline this year, with marked recessions in some southern countries.

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 a $19 billion profit.

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 (17.5 billion pounds).

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, due in part to rising wages in emerging markets and to restructuring costs.

Gulliver was paid 8 million pounds last year -- including a 2.2 million bonus -- down from 8.4 million in 2010 when he ran the investment bank.

HSBC said it paid another banker, whom it declined to name, 7 million pounds, while 192 employees took home more than 1 million pounds each, including 64 in Britain.

WAGES AND BONUSES

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, Gulliver said, singling out Brazil, India and China as seeing particularly big increases in wages.

HSBC would continue to pay competitively in these markets, as the growth being delivered made the investment worthwhile, he said, adding that would keep pressure on costs.

While the group remained on track to hit its return on equity target of 12-15 percent by the end of 2013, it would be a challenge to achieve its cost-to-income goal of 48-52 percent by then, he said, adding that was mainly due to a difficult macro-economic backdrop holding back income.

Its 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.

At 1045 GMT, HSBC shares in London were down 2.4 percent at 566.1 pence, lagging a 0.8 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.

They've had a good run so I can't get too enthusiastic, but they're (HSBC) going in the right direction and it's a good bet in a difficult sector, said Brown Shipley fund manager John Smith, who holds HSBC shares in his portfolio.

HSBC said profit at its investment bank fell 24 percent to $7 billion, hurt as the euro zone debt crisis slowed capital markets activity in the second half of last year.

Loan impairment charges and other credit risk-related provisions, however, fell $1.9 billion to $12.1 billion.

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.

The bank, which lifted its 2011 dividend by 14 percent to 41 cents a share, has cut 11,000 jobs so far under Gulliver's plan. He said on Monday that total job losses might be less than the 30,000 originally envisaged.

(Additional reporting by Sudip Kar-Gupta and Kelvin Soh; Writing by Mark Potter; Editing by David Holmes)