Earnings at HSBC tumble by 28%

HSBC yesterday insisted its strategy is on track despite unveiling a 28% drop in first-half profits amid mounting losses from US home loans and signs of stress in the emerging markets on which it has pinned its hopes for growth.

The company largely met analysts' forecasts with a pre-tax profit of $10.2bn (£5.2bn) for the first half of the year, down from $14.2bn (£7.2bn) the year before as it saw UK profits soar 45% despite the credit crunch.

Underlying its figures were a 51% increase in loan impairments to $10.1bn for the six months, most of it from its US personal finance operations, and writedowns of $3.9bn from its investment banking arm.

Meanwhile, the company reported rising inflationary pressures in Asia, a key driver of growth for HSBC in recent months and a focus of its future strategy.

Its shares dipped slightly, closing down 1.1%, or 9p, at 828p. Chairman Stephen Green said: "Overall, I think it was a resilient performance in the most difficult market for several decades."

But the company continues to be hampered by its American Household business, which it bought five years ago.

In the US, HSBC took a charge of $6.8bn (£3.5bn), an increase of 85% on the year, to cover bad loans, dragging its North American business to a $2.9bn (£1.5bn) loss, the only region not to record a profit.

It also wrote $527m off the value of its North American personal financial services businesses.

The company has now shrunk its consumer lending branch network from 1000 to 900 and cut its loan book back by 14%.

It also announced it has closed its vehicle finance business and will run down most of its portfolio over the next three years to focus on credit cards and straight-froward loans This prompted activist hedge fund investor Knight Vinke to renew its call for HSBC to sell the company: "There can be no prospect of a fundamental recovery in this business," it said.

HSBC chief executive Michael Geoghegan pledged: "The region continues to disappoint but we remain resolute in fixing our businesses there."

But he added "we are not calling the bottom of the (mortgage) market".

Chairman Stephen Green said the US economy would continue to be weak. "We have to say recession is a real risk."

The credit crunch also weighted on HSBC's global banking and markets division, where pre-tax profit was down 35% to $2.7bn (£1.4bn) following a write-down of $3.9bn (£2bn) on exposure to investments hit by the credit crunch.

HSBC was very upbeat about its performance in the UK, where its pre-tax profit rose 45% to $3.5bn (£1.8bn). The company said that, having tightened credit standards in late 2006, it was seeing little deterioration in its unsecured lending or credit card books.

It has also increased its share of the UK mortgage market, where its share peaked at 12% in May.

Geoghegan said: "We are now monitoring the mortgage market carefully, focusing on quality customers who are being let down by others."

But the company forecast looming problems in the corporate lending market where it increased lending balances by 13%.

"We have been watching lending standards as we expect turmoil as less well capitalised banks prove unable to cater to customers," Geoghegan said.

The company has retained its strategy of focusing on emerging markets, which it hopes will eventually provide 60% of profits. But it cautioned that it is seeing inflation rise in these markets and growth is beginning to slow as economic problems in develop markets spread.

Green said: "There has been an element of decoupling. But it is not complete and there is no way that a serious downturn in the US is going to leave Asia immune."

Meanwhile, market worries about the state of British banks, in particular the prospect of Royal Bank of Scotland posting a loss when it reports first-half figures on Friday weighed on the pound which traded as low as $1.9601, hitting lows it has not seen since June.