HSBC Middle East ray of hope

HSBC's Middle East subsidiary outperformed the group's overall half-year results as US losses saw a 29% drop in profits.

A sign for a branch of HSBC bank seen backdropped by part of St Paul's Cathedral, in central London.

HSBC's Middle East subsidiary outperformed the banking group's overall half year results as losses in the US saw the company record a 29 per cent drop in overall net profits. The bank's regional arm bucked the downwards trend, seeing its profits rise by 65 per cent. Europe's largest bank by market value announced net profits of US$7.7 billion for the six months, down from $10.9bn a year earlier. It was its steepest fall in profit since 2001 as costs from bad US mortgage loans mounted. HSBC, the first European bank to take losses on US subprime mortgages, set aside an additional $10.1bn this year, bringing total costs since 2006 to $38bn. "The first half of 2008 saw the most difficult financial markets for several decades, marked by significant declines in profitability throughout much of our industry," said Stephen Green, the chairman of HSBC. "HSBC was not immune from the turmoil." The biggest losses came from the North American market, which the bank depends on for a quarter of its revenues. Operations there posted a first half loss of $2.9bn, compared with profits of $2.4bn a year ago. Results from operations in the Asia-Pacific, and particularly in the Middle East, however, weathered the storm, although Mr Green added that emerging markets would grow "with less momentum" than before. In the Middle East, economic expansion and robust consumption helped the figures across the board. Profits before tax from operations in the region grew 65 per cent from a year ago to $209 million, while revenues rose by 52 per cent. A statement from HSBC said the increase was fuelled by "higher net interest income from balance sheet growth and wider spreads in a falling interest rates environment". The UAE's booming property market helped HSBC more than double mortgage balances in the country. "Consumption rose as employment levels increased and low interest rates supported an ongoing expansion in credit," the statement added. HSBC contributed its 20 per cent increase in net interest income globally to substantial interest income growth in the Middle East, India and Indonesia, mainly due to a favourable interest rate environment. Net income from interest bearing products in the Middle East rose about 40 per cent from a year ago. "In the Middle East, credit card balances rose following the success of efforts to increase card holder spending and the number of cards in circulation," the bank added. The total number of credit cards in the region jumped 12 per cent during the first six months of the year to 1.3 million. In the UAE, HSBC increased its customer accounts to 20,658 by the end of June. That represents a rise of 12 per cent during the year and a jump of 35 per cent from a year ago. Despite the strong showing in the region, the overall results and outlook were greeted negatively by analysts. "There's some pretty negative news," said Alan Beaney, the investment head at Principal Asset Management in England, which manages $2bn including HSBC stock. "Asia is slowing as was to be expected, and the US took a hit." In the UK, "we are monitoring the mortgage market carefully", Michael Geoghegan, the group chief executive of HSBC told analysts in London. Credit quality on loans did not deteriorate in the first half, Mr Geoghegan said. The bank increased first half mortgage lending in the UK as other lenders pulled back, he added. HSBC's profit in Hong Kong was hurt by "significant falls" in share prices, which reduced the value of the bank's investments, it said in the half-year report. Part of the blame could lie with Illinois-based Household International, a lender HSBC purchased in 2003 that elevated the bank to the unenviable position of biggest US subprime mortgage lender. * With Agencies [e-mail]