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HSBC's pretax profits fall 12% Changes in fair value of debt led to drop

HSBC Holdings Plc, the British banking giant that is selling its upstate New York retail branches, said Tuesday that pretax profits for the first quarter fell 12 percent because the bank took a hit from changes in the fair value of its own debt.

However, "underlying" pretax profit rose 25 percent, led by higher revenues in global banking and markets, commercial banking, and retail banking and wealth management, especially in faster-growing regions.

The London-based parent of HSBC Bank USA reported pretax profits of $4.32 billion, down from $4.91 billion in the same quarter a year ago. That includes a $2.6 billion hit from "adverse credit spread movements," the bank said.

Without that and foreign currency adjustments, underlying profits rose to $6.78 billion from $5.41 billion a year ago. In particular, pretax profit rose 21 percent in Hong Kong, 24 precent in the rest of Asia and 11 percent in Latin America.

Including the $2.4 billion impact of the fair value of the bank's debt -- an accounting rule that requires banks to adjust their earnings for the price at which they could buy back their own debt -- total operating income was flat at $20.44 billion, while net operating income after loan impairment charges fell 5.6 percent to $13.84 billion.

However, net income for shareholders fell 38 percent to $2.58 billion, or 13 cents per share, from $4.15 billion, or 22 cents per share, in the same quarter a year ago. The bank announced a quarterly dividend of 9 cents per share.

"We have had a good start to the year," group CEO Stuart Gulliver said in a news release. "Our performance in April has been satisfactory, and we remain confident that we will deliver on executing our strategy We continued to reshape the group and improve capital deployment."

Within the U.S., HSBC Bank USA said profits plunged 51 percent to $235 million, reflecting the sale of HSBC's national U.S. credit card business. Net interest income from taking deposits and making loans fell 6.8 percent to $587 million, while fee and other income dropped 38 percent to $367 million. The bank did not set aside any money for loan losses. Expenses fell 8.1 percent to $856 million.

HSBC is in the midst of a massive global restructuring, designed to boost profitability and shareholder returns by refocusing on its more profitable businesses, especially global commercial banking, and the geographic markets where it either has enough scale or the potential to gain it.

So far this year, the bank has announced 11 transactions to sell or close businesses, as it repositions its operations. As a result, it has already achieved total annual cost savings of $2 billion, while reducing staff by 14,000 in the past year, and by 3,500 just since January.

"It is a year since we set out our strategy of establishing ourselves as the world's leading international bank," Gulliver said. "We have made significant progress in executing this strategy since last May."

As part of that strategy, the bank is sharply downsizing its U.S. operations, targeting major cities and markets around the country with significant internationally oriented populations instead of a mass-market approach.

It already sold its U.S. credit card business, with $30 billion in loans, to Capital One Financial Corp. of McLean, Va., which is closing facilities in California and Buffalo and cutting 80 jobs in Western New York.

And it's getting out of consumer and small-business banking in upstate New York, selling 195 branches to First Niagara Financial Group for $1 billion. That deal, announced last July, is slated to close on May 18, with many of the branches reopening as First Niagara the following Monday. First Niagara is also selling 64 of them to KeyCorp, Community Bank System and Financial Institutions' Five Star Bank, while closing 35 overlapping offices.

Competing banks have touted their ability to capture customers and deposits because of the disruption from the merger. But according to HSBC's filing with the Securities and Exchange Commission Tuesday, total deposits being sold held steady at over $15 billion, even rising from Dec. 31.

Most recently, the bank on Monday announced an agreement to transfer mortgage processing and servicing to PHH Mortgage Services, which will hire at least 400 and possibly 500 employees from HSBC Mortgage Corp. (USA) in Depew.

HSBC will still employ more than 3,500 in Western New York, where it will maintain administrative, support and other back-office functions for its retail banking in other markets, as well as commercial, corporate, private and investment banking.