HSBC posts record profit despite huge jump in bad debt to $17bn

HSBC's shares rose strongly yesterday as growth in Asia and emerging markets helped the bank achieve record annual profits, despite bad debts surging to more than $17bn (£8.6bn).

Britain's largest bank was the biggest gainer in the FTSE 100, and the only lender to rise on a bad day for the benchmark index, as the company posted pre-tax profits up 9.6 per cent to $24.2bn.

Hong Kong pre-tax profit rose 42 per cent to $7.34bn with the rest of the Asia Pacific region contributing $6.01bn, up 70 per cent.

Asian growth offset a near-wipeout of the bank's profits in North America, where rising bad debts from the US sub-prime crisis caused profits to plunge to just $91m from $4.7bn a year ago.

HSBC warned that the US economy would get worse before it got better, but added that its strong capital and liquidity positions meant it was well placed to withstand market turbulence this year. Bad debts at HSBC's US personal financial services business rocketed to $11.91bn from $6.68bn as Americans struggled to repay mortgages, credit cards and other loans.

HSBC has come under pressure from Knight Vinke, an activist shareholder, to exit its US business, which expanded with the disastrous purchase of the sub-prime lender Household in 2003. Stephen Green, HSBC's chairman, said the bank would hold on to the unit to target Hispanic customers in the US to connect with its Latin American business and build on its US customer base in the South Asian and Chinese communities.

But the bank could look to offload its loss-making HFC UK consumer finance business, which was hit in January by a record £1.1m fine for sloppy processes in selling personal protection insurance. The bank has already sold HFC's Marbles and Beneficial credit card books.

Knight Vinke started applying pressure to HSBC in September, calling on it to get out of unprofitable businesses and reform its internal governance and remuneration of top executives.

The bank announced its first ever set of performance targets yesterday, including a return on equity of 15 to 19 per cent "over the cycle". The company also flagged changes to its board and pay plan.

Sandy Flockhart, chief executive of HSBC in Asia, and Stuart Gulliver, the head of the bank's investment banking business, will join the board in May along with two new non-executive directors, Safra Catz, president and chief financial officer of Oracle, and Narayana Murthy, co-founder of Infosys, the Indian technology giant.

HSBC's top earner, believed to be Mr Gulliver, received £10m last year including bonuses. The chief executive Michael Geoghegan earned £3.54m, while Mr Green recieved £3.01m. HSBC said that Mr Green's bonus would be paid in shares and not cash in future to align his pay with performance. It also apologised in its annual report for lack of clarity about its long-term share plan and said it would consult shareholders about changes to it. Mr Green said the bank would add emerging markets to the group of banks it compares itself with when assessing performance. Knight Vinke said: "We are also pleased that HSBC acknowledges and regrets the way in which the executive remuneration plan was described in annual reports in previous years. We note that, in line with our suggestions, the old scheme is to be dropped and a new one adopted after much wider consultation than in the past."

The bank yesterday became the first to calculate potential losses from a court case between Britain's biggest lenders and the Office of Fair Trading over refunds for overdraft fees. HSBC said its best guess at the cost if it lost the case was £300m on top of the £115m it has already refunded to customers.

The bank increased its fourth-quarter dividend by 8.3 per cent, taking the total payout for 2007 to 90 cents a share, up 11.1 per cent. HSBC shares rose 3.1 per cent to 790p.