Bonds put damper on HSBC rise to pounds 1.5bn: Dealing profits fall from pounds 522m to pounds 73m after Midland Bank owner goes the wrong way on interest rates

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MIDLAND BANK's owner, Hongkong and Shanghai Bank, suffered a large drop in its dealing profits because of bond market turmoil in the spring, but still increased half-year pre-tax profits by nearly a quarter to almost pounds 1.5bn thanks to a larger-than-expected fall in provisions against bad debts.

Provisions plummeted from pounds 432m to pounds 173m in the six months to 30 June, the vast bulk of the fall due to Britain's economic recovery.

At the same time HSBC's dealing profits fell from pounds 522m to pounds 73m, as a result of going the wrong way on interest rates following the US rate rise in February. The fall included a pounds 92m loss on proprietary position-taking in interest-rate products.

Sir William Purves, group chairman, said that proprietary trading had been stopped and positions shut down until a time when markets regained stability.

He said: '1993 was an exceptional year for dealing profits and 1994 has had an exceptionally difficult first half. Many of our peer group have suffered similar declines in the dealing area.'

Overall, the Hong Kong banking group's result was better than analysts' expectations of around pounds 1.33bn. Earnings per share rose to 36.99p from 33.12p, while the dividend jumps from 7p to 8p. The shares shed 10p to 749p on worries about the dealing performance.

Midland reported a 15 per cent rise in pre-tax profits to pounds 443m. Bad debt provisions fell to pounds 54m from pounds 321m last time, larger than expected and mirroring big falls at the other UK clearers.

Midland's operating income fell by 11 per cent despite a 7 per cent increase in net interest income. Operating costs were static at just over pounds 1bn.

Keith Whitson, Midland chief executive, said: 'This is a solid performance against a background of steady economic recovery and intense competitive pressure in all areas of our business. Disappointing treasury results were largely offset by a marked improvement in the provisioning requirement for bad debts.'

Sir William said that the group should benefit from continued growth in the economies of South- east Asia and particularly Hong Kong, coupled with improved economic conditions in North America and Britain, 'but we will need to meet the challenges of a more competitive marketplace'.

HSBC's net interest income of pounds 2.24bn was 7 per cent higher than the same period in 1993, but Sir William warned that margins in both the UK and Hong Kong were under pressure. The need to control costs has become a key area for the bank, with loan demand in Europe flat. Operating costs of pounds 2.2bn were 2 per cent higher than in the first half of 1993. HSBC's cost-to- income ratio crept up to 59.4 per cent, compared with 57.7 per cent. Operating profits before provisions fell by 4 per cent to pounds 1.51bn.

The capital position remained strong with total assets of more than pounds 200bn. The total capital ratio for the group was 13.8 per cent, with a Tier 1 ratio of 8.6 per cent.

HongKong Bank remained the biggest profits generator for the group with a profit attributable to shareholders 4 per cent higher at pounds 564m. Midland made pounds 282m attributable to shareholders, the same as last time, while the US arm, Marine Midland, increased attritutable profit by 39 per cent to pounds 71m.

HongKong Bank Malaysia, The British Bank of the Middle East and Hongkong Bank of Canada also made profits.

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