Profits treble but HSBC feels the pain from higher costs

The lender said pre-tax profits surged to $19.1bn (£12.3bn) in 2010, from $7.1bn (£4.6bn) in 2009.

But the increase was lower than City expectations of $20bn, and HSBC’s shares shed 33.1p to close at 678p after the bank revealed an eight per cent rise in costs and an eight per cent fall in underlying revenues.

HSBC’s UK bank made pre-tax profits of £1.3bn, up 33 per cent. It has doubled the size of its mortgage book to £362bn since 2005.

Its results were helped by another strong performance from its Leeds-based internet bank First Direct, which grew its mortgage book by 14 per cent in 2010, while reducing bad debt write-offs by 33 per cent.

First Direct’s new head of finance, Marcus Mitchell, said customer numbers have grown by 20,000-30,000 to 1.2 million as the bank continues its focus on London and the South East.

“It’s been a very encouraging year,” said Mr Mitchell. “We’ve maintained our deposit base in a difficult market. But the real success story has been the strong growth in the mortgage book.”

While HSBC does not break out profit figures for First Direct, which employs 2,100 in Leeds, Mr Mitchell said it made a “considerable contribution” to the UK performance.

Across the group, HSBC extended £11.8bn of new UK mortgage lending in 2010, giving it an 8.8 per cent share of all new lending.

Of this, £2.7bn helped first-time buyers get a foot on the housing ladder, an increase of 17.8 per cent.

“The (mortgage) market is lower,” said Mr Mitchell. “But I think we’ve taken our opportunities well. I think we’ve got very strong opportunities in the mortgage market.”

He insisted the bank will not overstretch itself in its attempt to gain market share. “We’ve been doing this in a way that’s not just chasing growth for the sake of chasing growth,” he said. “We’ve been particularly careful.”

First Direct’s typical loan to value is 43 per cent on mortgages, he said, compared with an upper limit of 85 per cent. HSBC’s total UK personal deposits increased 8.6 per cent to £93.1bn, although deposits at First Direct were flat.

Impairment charges across the group almost halved to $14.1bn (£8.6bn) as all its regions improved.

HSBC’s new chief executive Stuart Gulliver, who took over at the start of the year, cut the bank’s long-term return on equity (RoE) target to 12-15 per cent from a previous 15-19 per cent target as the cost of hoarding more capital to make banks safer takes it toll.

“The market has seen revenues flat, costs up and most of the gain through loan impairment charges coming down. That’s why we need to look at how we run this bank going forward ... we need to fine-tune some aspects,” said Mr Gulliver .

“It’s not a bad result, but it’s not at all where I want to be, in terms of RoE or the cost efficiency ratios.”

HSBC said it had made a good start to the year and Mr Gulliver said he would unveil more details of his strategic plan in May. He also plans to introduce quarterly reporting later this year.

He aims to get costs back below 52 per cent of revenues after an “unacceptable” spike to 55.2 per cent, but said that will take two to three years.

Costs surged in Europe, while there remains pressure to pay investment bankers well in fast growing Asian and Latin American markets.

“They’ve revised down their return on equity range so people are saying why should it trade at a premium to book value,” said Colin Morton, fund manager at Leeds-based Rensburg Fund Management. “All in all it’s not a very good performance.”

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: “Apart from the profit numbers being slightly shy of analyst estimates, a further triple whammy has dented sentiment, in the form of a lower proposed return on equity, a deterioration of the cost income ratio and further pressure on margins.

“On a more positive note, and a constant theme throughout this round of results, has been a significant reduction in bad loan provisions. The group remains one which is well placed in terms of its business mix and geographical diversification, whilst its independence throughout the financial crisis has left it master of its own destiny.”