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HSBC profits nearly double as costs and bad debts fall

A woman uses a cash point machine at a HSBC bank in the City of London February 28, 2011. REUTERS/Andrew Winning
A woman uses a cash point machine at a HSBC bank in the City of London February 28, 2011. REUTERS/Andrew Winning

By Steve Slater

LONDON (Reuters) - HSBC aims to keep the pressure on costs after first-quarter earnings nearly doubled due to the bank's three-year efficiency drive and a halving in bad debts charges.

The jump in profits reinforces HSBC's position as one of the strongest global banks after the financial crisis partly as a result of a radical overhaul to simplify its sprawling structure and improve profitability.

Its strong focus on Asia, which generated around two-thirds of profit in the first quarter, has also helped offset a harsh business environment, particularly in the euro zone.

Europe's largest bank moved faster and more aggressively than many of its peers to cut costs after the crisis. And it will continue to wield the knife - with a further 6,000 job cuts expected this year from businesses already put up for sale, on top of 40,000 already culled. HSBC has closed or sold more than 50 businesses since 2011.

"We're moving into calmer waters but there are still challenges ahead," Chief Executive Stuart Gulliver told reporters on a conference call.

Gulliver declined to say whether he would announce any additional cost savings at a strategy update for investors on May 15. But he said: "Clearly you can expect us to continue to focus on our cost base."

The CEO said HSBC still expected the euro zone economy to contract during 2013 and that UK economic growth remained muted.

Across Europe, HSBC's smaller rivals are playing catch-up with cost cuts to help offset rising bad debts and weak loan demand. French banks Societe Generale and Credit Agricole on Tuesday said they would keep making cuts to cope with a weak domestic economy.

In Germany, the cost of thousands of job cuts contributed to a net first-quarter loss at Commerzbank , which warned that earnings would be under pressure this year as loan-loss provisions rise.

In contrast, HSBC posted a pretax profit of $8.4 billion, up from $4.3 billion a year ago and above the average forecast of $8.1 billion from analysts polled by the company.

"We see these results as an endorsement of the strength of the franchise and its ability to generate earnings even in a sluggish macro environment," said Chirantan Barua, analyst at Bernstein. He said HSBC's strong capital position and capital generation meant it could increase its dividend by at least 30 percent this year.

COSTS

HSBC shares rose more than 3.3 percent to 737.4 pence, their highest level since mid-March, helping to drive the European benchmark <.SX7P> nearly three percent higher.

A $1.1 billion gain from disposals aided HSBC earnings as did a halving of bad debt provisions to $1.2 billion - its lowest quarterly level since before the financial crisis.

The bad debt charge fell across all regions and in particular in the United States, where HSBC is winding down its consumer business. The U.S. consumer book saw a decline in loan-loss provisions of $430 million to $544 million.

Costs in the first quarter were down 10 percent from a year ago and the bank is now saving $4 billion a year on an annualized basis, above the top end of its own target range of $3.5 billion.

HSBC wants to get costs below 52 percent of income by the end of the year from just over 53 percent on an underlying basis currently. Analysts say the bank should be able to raise its cost savings target by $1 billion a year.

The bank's investment banking division posted a 16.5 percent increase in first-quarter pretax profit from a year ago, helped by a strong performance at its equities division.

This mirrors strong results from Europe's other major investment banks such as Deutsche Bank , Barclays , UBS and Credit Suisse .

(Writing by Carmel Crimmins. Editing by Jane Merriman)

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