HSBC cautious despite signs of recovery

HSBC on Monday sounded a cautious note about the recent recovery in the banking sector as a combination of low interest rates and higher bad debt charges dented its first-quarter profits.

The bank’s executives warned that even though the financial markets are showing signs of revival, any improvement in the global economy is still likely to be some way off. “It’s idle to speculate whether we’re at or near the bottom. I don’t think anybody thinks there is going to be a sharp recovery,” said Stephen Green, HSBC’s chairman.

He was speaking as HSBC revealed that pre-tax profits for the first three months of the year were “well ahead” of the same period of 2008.

However, this was entirely because the bank booked a $6.6bn profit from the reduced value of its own debt. Excluding this accounting quirk – much of which has since been reversed as debt markets recovered in April – profits were down, although they were higher than in the fourth quarter of last year, weighed down by increased bad debt charges.

Under international accounting standards, the bank set aside $3.95bn for bad debts in its US consumer finance division, much of which has now been closed to new business.

US bad debts were lower than in the fourth quarter of 2008, partly because borrowers were able to use tax rebates to repay debts.

The bank was also squeezed by low interest rates, which dented the profits it can earn on its large base of customer deposits. However, its treasury division generated “strong” revenues by taking advantage of reduced interest rates.

HSBC’s Global Banking and Markets division produced record results, helped by the strong trading in foreign exchange and interest rate products that has also boosted some of its rivals. But Michael Geoghegan, HSBC’s chief executive, said this performance was unlikely to be sustained throughout the year. The gloomy economic picture, outside Asia, would continue to weigh on the banking sector. “I’m delighted that confidence has returned to the banking industry but I’m a little surprised at the strength of that confidence at this moment in time,” he said. HSBC shares closed at 578p, up ½p.