Profits up as HSBC axes 30,000 of its staff

The bank reported better-than-expected results for the six months to June 30 after profits improved three per cent to $11.5bn (£7bn), with Asia driving its performance.

HSBC’s UK arm saw pre-trax profits rise 29 per cent to £843m.

It was boosted by the contribution of its Leeds-based internet bank, First Direct, where profits grew 15 per cent on a year earlier, with its mortgage book growing by the same percentage.

HSBC warned over the volatility of global financial markets as it revealed plans to cut its workforce around the world by roughly 10 per cent, axing another 25,000 between now and the end of 2013.

HSBC said 5,000 of the 30,000 planned job cuts had already taken place, and it would cut costs further by retreating from countries such as Russia, Poland and the United States. The bank’s 110,000 staff in Europe and North America will bear the brunt of the job cuts.

“We’re not celebrating here at all,” said new HSBC chief executive Stuart Gulliver. “This illustrates to us what a long journey this is and how tough it will be. That’s unfortunately one of the reasons we have to make these job cuts.”

He wants to sell assets and retreat from countries where HSBC is unable to compete effectively, with the aim of sharpening its focus on Asia.

The company has 1,290 branches and around 52,000 staff in the UK. HSBC employs around 335,000 people worldwide.

In the UK HSBC added it is on course to meet its targets for business lending agreed with the Government under Project Merlin, having lent £22.7bn, but the group was behind on small firm lending with £5.6bn advanced in the first six months against a full year goal of £11.7bn.

Mortgage lending rose by 35 per cent to £6.7bn with HSBC’s share of the UK mortgage market at a record of nearly 11 per cent.

Marcus Mitchell, head of finance for direct banking at HSBC, said First Direct had an “encouraging” first half of 2011.

He added First Direct, which employs about 2,700 staff, contributed a 15 per cent profits increase to the bank’s UK performance.

This was aided by continuing growth in the bank’s mortgage book, despite its number of customers remaining flat at 1.2m.

“We had a very good year in 2010 in the mortgage book and the carry-over benefit on the balance sheet into 2011 has helped grow revenues this year by 12 per cent year-on-year,” said Mr Mitchell.

The bank’s mortgage book increased 15 per cent year-on-year to a “record level”.

Mr Mitchell added bad debts at the internet bank are “quite benign”, as First Direct benefits from its focus on an affluent customers base in the south of England.

Loan impairments were down 20 per cent year-on-year during the first half. Its typical loan-to-value is no higher than 70 per cent.

“The view from the credit guys is that the numbers of customers that we are seeing coming through with bankruptcy or insolvency are record low numbers,” he said. “They are pointing towards evident self-moderation by customers who are managing their finances well.

“There’s no evidence of distress in the mortgage book.”

Current account balances were eight per cent higher, year-on-year. Savings balances were flat.

The bank also took on an extra 200 staff during the first six months of the year.

“First Direct has a very competitive cost-income ratio,” said Mr Mitchell. “In terms of the head office and support infrastructure what we are is a very lean operation.”

Across the group, HSBC’s strong profits were driven by higher than expected revenues and a big improvement in bad debts across the group, which fell 30 per cent from a year ago to $5.3bn (£3.3bn), the lowest half-year level for five years.

With banks under increasing regulators to shore up their balance sheets to help prevent a repeat of the financial crisis, HSBC said its core tier one capital ratio – a key measure of financial strength - increased to 10.8 per cent from 10.5 per cent six months earlier.

HSBC’s return on equity improved to 12.3 per cent in the first half, up from 9.5 per cent in 2010 and within the 12-15 per cent range Gulliver is targeting.

The bank also warned increased regulation could hinder a global economic recovery that is already losing momentum, as governments grapple with sovereign debt crises.

Shares in HSBC closed up 13p at 607.5p, a 2.2 per cent increase, as analysts said the figures were an impressive start to the week’s bank reporting season.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: “HSBC has set the bar high for those that follow, beating market expectations and planning to streamline its business further.”

He added that HSBC’s global diversification is not necessarily matched by the other UK banks while the bad debt figures have reduced impressively.

“Cost cutting and prudent growth management through its retail and commercial operations have been contributors to the upward surprise, whilst the bad loan figures have reduced impressively,” he said. “The additional strengthening of the capital cushion will also provide further comfort.”

WARNING OVER REGULATION

REGULATORS are drawing up plans to minimise risk to taxpayers from another financial crisis by shoring up the banking system.

As part of this, the Government-appointed Independent Commission on Banking has recommended introducing a ring-fence, to separate banks’ retail arms from their riskier investment banking divisions.

HSBC wants all banking book assets to be included in a “ring-fence” and warned against hampering recovery with excessive regulation.

“The pace and quantum of regulatory reform continues to increase at the same time as the global economy appears to be losing momentum in its recovery,” said chairman Douglas Flint.

“We believe the critical judgements ultimately to be made must consider two principal factors. The first of these is how any restructuring will likely affect the quantum and cost of credit supply to the real economy.

“The second is whether the benefit of this incremental restructuring – on top of the aggregate of all the reform measures already in hand under Basel III and EU directives – outweighs the considerable cost and time commitment involved.”

The ICB, chaired by Sir John Vickers, reports its conclusions next month.