Midland brake on HSBC

A 94 per cent fall in dealing profits at Midland Global Markets took the shine off a big decrease in bad debt provisions at Midland Bank in 1994, leaving profits up only £61m.

This 7.2 per cent increase in profits was in stark contrast to far higher increases at Lloyds and National Westminster, and the total profits of HSBC, Midland's parent, increased just 23 per cent to £3.2bn.

This was despite HSBC's bad debt provisions collapsing from £1,158m to £275m.

HSBC's chief executive, John Bond, said the bank had lost £93m in its proprietary dealings in derivatives in 1994 and had now "reined in" this area until a clear trend emerged.

HSBC's shares lost 6p to 660p, with sentiment influenced by the Barings collapse. But Mr Bond was adamant that HSBC's own safeguards on derivatives trading were satisfactory.

Mr Bond said the bank had good controls in place and was not a significant player in derivatives relating to stock indices, which caused the disaster at Barings. Roughly 90 per cent of the bank's derivatives exposure involved foreign exchange and money markets products.

Dealing profits at HSBC Holdings plummeted 76 per cent in 1994 to £261m, compounded by a loss in securities trading and a sharp drop in income from interest rate derivatives trading. Full-year dealing profits, down from £1.089bn, were mainly hit by turbulent market conditions in the first quarter of 1994, he said.

Keith Whitson, chief executive of Midland, said growth was proving difficult while margins in the UK remained so low. With ominous implications for staff numbers and branches, Mr Whitson said: "We have to look at costs. We have to be a high-volume, low-cost producer."

He admitted that the cost/income ratio, which increased from 60.1 per cent to 70.1 per cent, had to be reined back.

Chris Ellerton, an analyst with SG Warburg, said that while HSBC's figures were roughly in line with expectations, the bad debt fall was higher than expected as were investment gains. Profits on disposal of investments was £336m, up 28 per cent on 1993, which included profits from the sale of Midland's stake in 3i.

Loan growth in the UK and US was flat, while growing strongly in Hong Kong and South-east Asia. Mr Bond said the group was expecting most growth to come from the Far East and was allocating its capital accordingly.

HSBC made a return on average shareholders' funds of 20 per cent. It paid a final dividend of 19p, bringing the total 1994 payout to 27p, an increase of 15 per cent over last time. The group's securities trading operations made a loss of £111m compared with a £290m gain in 1993. Profits from dealing in interest rate derivatives dived to just £2m from £335m. Equities and other trading profits dropped to £27m from £87m.

Foreign exchange income fell by 9 per cent to £343m from £377m.