HSBC profits roar ahead 16% as margins widen

The boom in banking earnings continued yesterday as HSBC, the UK-based global banking giant which owns Midland, saw generous margins power pre- tax profits to pounds 3.7bn, up 16 per cent on 1994. "We are firing well on all fronts," said John Bond, HSBC's chief executive.

The strong performance, echoing bumper profits already reported from Lloyd's and NatWest Group, highlighted the best year banks can remember for a long time. In particular, generous interest margins during 1995, combined with bad debt provisions at all-time lows, pushed earnings to high levels. "You would have to go back decades rather than years to find the banks enjoying in real terms this sort of high profitability," said Chris Ellerton, analyst at SBC Warburg.

HSBC benefited from its international geographical spread, which sets it apart from the other large UK retail banks, as net interest margins in all its three main lending areas, Hong Kong, Britain and the US, strengthened profits. ``They have seen a very good improvement in the quality of profits, with underlying earnings not that volatile," said Hugh Pye, analyst at BZW.

But the group stressed it still faces a big challenge in getting costs down at Midland, where job cuts are expected to continue. Midland had a cost/income ratio of 67 per cent last year, down from 70 per cent in 1994. The aim, which is similar to that of its rival NatWest, is to get this down to around 60 per cent. "We are working towards that end relentlessly," said Mr Bond. "Unquestionably there will be fewer people in bank jobs, but we are not planning anything draconian."

The Banking Insurance and Finance Union yesterday said Barclays, which reports its results today, is planning a huge new wave of job losses despite expected profits of pounds 2bn. BIFU said older workers, including staff in their forties, were being targeted. More than 17,000 jobs have been axed since the end of 1991, largely as a result of new technology.

Midland said its cost performance last year was hampered by large one- off charges, pounds 76m for redundancies and pounds 34m for vacant space, which were more than double their 1994 levels. Midland also saw a massive 102 per cent increase in its charge for bad and doubtful debts to 198m. HSBC refused any comment on the details of this increase, but analysts believe it reflected a large specific provision against its exposure to Eurotunnel. Along with NatWest, which also announced an unspecified but large special provision in its results last week, HSBC is the other large UK lender to the troubled cross-channel operation.

Overall, Midland's 1995 pre-tax profit was up 10 per cent at pounds 998m. Operating profit before provisions was up 21 per cent to pounds 1.2bn, which Mr Bond said reflected the improvement being made in restructuring Midland. "There are a considerable amount of investments in the future of Midland's numbers," he said, adding that the modest rise of just 3 per cent in the bank's attributable profit did not tell the whole story. But speaking in Hong Kong, Sir William Purves, HSBC's group chairman, said: "Of course I am not happy with 3 per cent and I don't think our shareholders would be either."

A noticeable area of weakness continues to be investment banking where the attributable profits was 19 per cent lower, at pounds 171m than in 1994. The main reason was lower volumes in James Capel's equity markets, but analysts said the group continues to suffer from a lack of focus. HSBC recently announced plans to integrate its investment banking businesses. Mr Bond also said HSBC is interested in boosting its fund management business through acquisition.

HSBC shares closed down 16p at 1056p in a weak London market.