HSBC Holdings , Europe's biggest bank, said first-quarter profits were well ahead of last year, swelled by record results in its investment bank, but would have been down without accounting gains on its debt.

Excluding a $6.6 billion fair value gain on its own debt, first quarter profit was below a year ago, though still significantly higher than in the fourth quarter.

About two-thirds of the debt gain reversed in April, said Finance Director Douglas Flint.

Bad debts in the first three months of the year rose from a year ago but were lower than in the previous quarter on both an underlying and reported basis, the bank said in a trading update on Monday. It does not issue full quarterly results.

By 1005 GMT (6:05 a.m. EDT), HSBC shares were down 4 percent at 554.5 pence, compared to a 2.7 percent drop in the DJ Stoxx European banking sector <.SX7P>. Its shares have lost 4 percent this year, but have surged 59 percent in the last two months.

Impairments in the bank's troubled U.S. consumer finance business, which HSBC is in the process of running down after losing billions in the last three years on soured subprime housing loans, totaled $3.9 billion.

That was up from $3.2 billion a year ago but down from $4.6 billion in the fourth quarter of 2008, and better than had been expected, executives said.

In the U.S. we have been pleasantly surprised in regard to the first quarter but we don't think that's a trend and need to look at it for the next four quarters, Michael Geoghegan, chief executive, told reporters on a conference call.

He said bad debts in Britain were likely to rise for some time to come and many other markets were deteriorating but were proving more resilient in Asia, the bank's traditional stronghold.

There are green shoots (of recovery) in confidence, and that's important in driving an economy round, Geoghegan said, but added it was too early to see significant green shoots across the economy.

The reality is it (recession) has got some time to go, he said.


HSBC, which has weathered the financial crisis better than most rivals and has not taken any taxpayer bailouts, raised 12.5 billion pounds in a record rights issue last month to restore its traditionally strong balance sheet advantage.

That left it well positioned to ride out the economic uncertainty ahead, and to take advantage of opportunities to grow, the bank said.

The fundraising lifted HSBC's core equity tier 1 capital ratio to 8.6 percent at the end of March.

Global Banking and Markets (GBM), the investment bank unit, delivered record first quarter results on the back of strong trading in foreign exchange and interest rates.

That included writedowns of about $900 million on the value of structured credit assets and impairments on available for sale securities.

GBM's performance, which echoed strong performance among most other investment banks amid buoyant capital markets in the first quarter, continued in April, the bank said.

(Editing by John Stonestreet and Sharon Lindores)