HSBC cautious on future as fears over bad loans linger

Record performance at investment banking unit boosts first-quarter results

HSBC cautioned it had seen little sign of an end to the recession yesterday as rising bad debts hit the bank's first-quarter profits and it warned loan impairments were likely to increase further this year.

The bank nonetheless hailed a "resilient" start to the year, lifted by a record performance from the investment banking division and accounting gains on its own debt. The chief executive Michael Geoghegan called the performance "encouraging", and backed the results in the Global Banking and Markets division, where revenues soared on foreign exchange and interest rate trading.

HSBC reported little detail in its interim management statement, but said pre-tax profits between January and March were "well ahead" of the corresponding period in 2008. This was driven by fair value gains of $6.6bn (£4.4bn) on its debt. Credit spreads widened significantly in the first quarter, which contributed to gains on the debt. However Douglas Flint, the finance director, said that two-thirds of those gains had been lost in April, and will "fully reverse over the life of the debt".

Analysts criticised the bank for its lack of detail, which contrasted with the statements released by Barclays and RBS last week. Alex Potter, of Collins Stewart, said: "It's tough to know what to make of the statement. There's very scant information, unlike its peers."

Stripping out the gains on the debt, HSBC's profits in the first quarter were lower than the previous year, but "significantly higher" than the last three months of 2008. It suffered from a rise in bad debts over the first three months of last year. This was strongly driven by loan impairment charges in its consumer finance portfolio and other writedowns brought on by the financial market crisis. Mr Geoghegan said the bad debts were likely to rise "for some time to come". He added: "We are in this recession. We have not come out of it yet."

HSBC is still attempting to run off its US consumer finance operation which is principally responsible for the weakness in the division, where it lost billions on the subprime housing loans business. Impairments at the business hit $3.9bn, up from $3.2bn last year.

Charles Stanley analysts said: "The operating environment is likely to remain difficult for banks as the dynamics of slower growth and higher unemployment hit revenues and increase bad debts. Unfortunately, it is also likely that the robust revenues from global banking division experienced in the first four months of 2009 will also prove to be unsustainable."

HSBC has not turned to the UK government for a bailout, instead choosing to shore up its balance sheet with a £12.5bn rights issue in April. It enjoyed strong backing from shareholders; 97 per cent taking up their rights.

"The rights issue enhanced HSBC's signature financial strength and this, together with the start made to 2009, means we are well-positioned to ride out the economic uncertainty ahead, and to take advantage of opportunities to grow," said Mr Geoghegan.

Beyond the performance at Global Banking and Markets, HSBC's commercial banking business remained profitable, as did its operations in personal finance outside of North America. It added that Asia remained "at the heart of our operating profitability".

HSBC chairman Stephen Green said the macro environment "remains highly uncertain and signals from the broader economy are very mixed". Despite the depressed economy, US consumer spending has held up well and business sentiment has improved. "Looking beyond the short-term, we can be certain that the banking industry is entering a period of profound change," he said.