HSBC's global reach paid off in the first half of the year, as the company's expansion in the emerging markets of Asia and Latin America drove profits to a new record, despite its well-documented mortgage woes in the United States.
HSBC Holdings Plc said Monday that net profits for the first two quarters rose 25 percent, led by a strong performance throughout Asia, and increases in Europe and Latin America.
The company's global commercial banking, private banking and investment banking units also recorded gains of at least 20 percent each, overcoming a similar drop in personal financial services, mostly in the United States and United Kingdom.
Executives hope to maintain that strength in coming quarters. "Our strategy is clear. We have well-diversified earnings by both geography and customer," said Group Chairman Stephen Green in a press release.
In the United States, HSBC USA, parent of HSBC Bank USA, said profits rose 1.4 percent to $290 million. Total revenues increased 9.4 percent, while expenses rose 13.3 percent and the bank set aside 19 percent more for loan losses.
HSBC's American Depository Receipts, which represent shares of HSBC stock abroad but are traded in the United States, rose $3.39, to $92.34.
The London-based financial services giant, the world's second-largest behind only Citigroup, said it earned $10.9 billion, or 95 cents per share, in the first half of 2007, up from $8.7 billion or 78 cents a share, in the same six-month period a year ago. HSBC reports group financial results every six months rather than quarterly.
Net operating income rose 14 percent to $32.1 billion, while pre-tax profit rose 13 percent to $14.2 billion. Revenues rose 23 percent to $42.1 billion.
Not including Hong Kong, Asia-Pacific pre-tax profit more than doubled from last year to $3.34 billion, while Hong Kong rose 25 percent, to $3.33 billion. European earnings increased 12.5 percent to $4.05 billion, and Latin America profits rose 15.6 percent to $1 billion.
But pre-tax profits in North America fell 35 percent to $2.4 billion, as the company set aside sharply more for continued loan losses, especially for mortgages. Across the company, the provision for losses soared 63 percent, to $6.3 billion globally.
By business line, investment banking profits rose 32 percent to $4.2 billion, private banking earnings increased 30 percent to $780 million, and commercial banking profits rose 19.5 percent to $3.4 billion. Personal financial services, by contrast, fell 20 percent to $4.7 billion.
Green and his predecessors are counting on the company's diverse operations, especially in faster-growing emerging markets, to propel the bank's bottom line. The bank has been investing heavily in the past two years in countries like China, Brazil, Argentina, and Vietnam, spending $3.2 billion on acquisitions to boost market share.
"These results illustrate the value we are creating from our position as the world's largest and most profitable international emerging markets bank, and from our unique global reach which allows us to act as a bridge between developed and developing markets for our customers," Green said in a release.
However, the refocus on emerging markets has come amid widespread criticism among investors that HSBC bet too heavily on the United States and subprime lending when it spent $15.5 billion to buy consumer finance lender Household International in 2003. Subprime lending refers to borrowers with bad credit.
That drove growth for two years, but came back to bite the bank last year and early this year, when rising interest rates and flat or falling home prices left many mortgage borrowers unable to pay back their loans.
As a result, industry losses soared, forcing HSBC to issue its first profit warning ever in January and set aside $10.6 billion for loan losses, 20 percent more than Wall Street expected.
The bank replaced two top executives at HSBC North America Holdings, cut off its purchases of mortgage loans originated by independent brokers, and tightened underwriting.
But the woes aren't over. Experts predict as much as 20 percent of subprime loans industry-wide made within the past two years will end in foreclosure, as adjustable-rate loans with initial low "teaser" rates reprice over the next 18 months.
In the release, Green and CEO Michael Geoghegan cited additional steps they took, including contacting 19,000 customers and modifying loans for 5,000 of them, while reducing its risk exposure by $8 billion to $41.4 billion. About $5.3 billion in loans are scheduled to reprice in the second half of the year, down nearly 25 percent.
"The actions taken to restructure and manage down our exposure in this business are progressing well," Green said.
Globally, net interest income from taking deposits and making loans rose 9 percent to $18.2 billion. Expenses rose 15 percent to $18.6 billion. The bank's efficiency ratio was 48.3 percent, which means it spent 48.3 cents for every $1 of revenue.
At HSBC USA, net interest income rose 4.1 percent to $807 million because of growth in credit cards, rollout of the bank's online savings product, new branches, and expansion of small business products and services. The bank plans to open 33 branches this year, several of which are under way.
Fee revenues rose 15.5 percent to $777 million. Trust and deposit service revenues were basically flat, but credit card fees rose 42 percent, residential mortgage banking fees were up 56 percent, and trading revenues from derivatives and foreign exchange rose 16 percent.
Total loans fell 3.1 percent in the last six months to $87.4 billion, including $29.6 billion in commercial loans, $17.6 billion in credit cards, and $37.8 billion in mortgages. Deposits rose 4.6 percent to $106.9 billion.
Expenses of $878 million included a 6.2 percent increase in salaries and benefits, and a 15.8 percent increase in fees from HSBC affiliates, like HSBC Finance Corp., for providing services to the bank.
"We are pleased with the progress we're making in many areas of the U.S. bank," said Paul Lawrence, president and CEO of HSBC Bank USA. "However we know we still have a good deal of work to do."