HSBC cuts its subprime losses (FT.com)

HSBC appears to have bounced back from its recent difficulties as growth in emerging markets has helped offset the damage from problems in its US subprime mortgage division.

The US problems caused HSBC's bad debts to jump by $2.4bn to $6.3bn in the first half of 2007.

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In spite of this, HSBC's interim pre-tax profits rose by 13 per cent to $14.1bn as robust growth in areas such as commercial banking and investment banking helped offset the 20 per cent fall in profits at the personal financial services division triggered by rising mortgage defaults in the US.

Emerging markets in Asia and Latin America delivered results ahead of expectations although the US and UK markets remained challenging.

Earnings from Asia Pacific, excluding a $1bn exceptional, were more than a third higher than this time last year, with China, India, the Middle East and Singapore proving particularly strong contributors.

Emerging markets were the driver behind the pre-tax profits leap at HSBC's corporate, investment banking and markets arm.

This good news comes as HSBC indicated that the problems in subprime mortgage lending in the US had stabilised - although it will take two to three years to deal fully with the issue.

Mike Geoghegan, chief executive - who has taken a hands-on approach to dealing with the US problems - said HSBC had reduced the size of its US subprime book by $8bn to $41.4bn.

"We were the first to highlight this issue and we were right to do so," he said. "I promised I would give the issue my attention. We are ahead of what we would expect at this stage."

Part of the cut in the subprime loan book had come from HSBC securitising loans into capital markets so they were no longer on the bank's balance sheet. The bank will look at doing more of this.

HSBC has also been targeting US customers who might still default. The bank has contacted 19,000 US customers whose mortgages are due to reset to a higher rate. As a result, it has modified 5,000 loans that might otherwise have fallen into arrears.

HSBC made it clear yesterday it was willing to spend on acquisitions and organically to accelerate growth in Asia. "We will not shy away from investment opportunities in the region . . . We intend to boost our number one position in Asia and the Middle East," Mr Geoghegan said.

As well as developing its position in emerging markets such as Latin America, HSBC is aiming to develop other income streams such as insurance - which contributes 11 per cent to group profits, but which it wants to contribute some 20 per cent.

Mr Geoghegan also said HSBC had been trying to "join up" the bank by offering its customers global products - that domestic or regional competitors would find it difficult to match.

It was offering a premier banking product for affluent customers that it has rolled out in 35 countries and it is trying to cross-refer customers between different parts of the group, such as commercial banking. In commercial banking this system had, for example, generated 3,000 referrals in the first half.

HSBC appeared undaunted by the wobbles in the credit markets.

Stephen Green, chairman, said underlying economic growth remained sound and there was no sign of liquidity drying up.

He said HSBC's corporate and investment banking arm did little in the form of leveraged loans.

"It is too early to tell if this is a temporary bout of indigestion or whether a whole new pricing structure has established itself . . . if it is the latter, it's true that some things that might have got done are not going to get done.

"There's the good news. The real economy continues to remain remarkably robust. When you look round this UK economy we are looking at 3 per cent growth, the eurozone at 3 per cent growth and in China it is certainly not slowing down.

"India is clocking up 9 per cent or 10 per cent. There is a lot of momentum . . . this is considerable distance from recession territory.

"There is still an enormous amount of liquidity chasing deployment - the Chinese reserves, the Middle Eastern reserves, there's a probably $1,000bn-worth of reserve growth or surplus growth awaiting deployment . . . there's no obvious reason to believe liquidity is drying up or even under pressure, so it's difficult to get too despondent.

He added that there might be some "tightening up" in controversial areas such as covenant-lite loans.

"It's too early to tell but you would have thought the froth of the market will get blown off at least and part of the froth is covenant-lite - or zero covenant which is what it often is."