Bad debt hits HSBC profit

LONDON, England (CNN) -- HSBC Holdings, Europe's biggest bank by market value, posted a decline in profit on Monday as it set aside more money for bad debts associated with Argentina and Hong Kong bankruptcies.

Net income for the six months to June 30 fell 7 percent to $3.28 billion from $3.54 billion a year ago -- less than the 10 to 21 percent predicted by analysts polled by Reuters.

Its bad debt provision rose 62 percent to $715 million, while analysts at Merrill Lynch had expected exposure to double to $915 million.

Like its rivals, including Barclays (BARC) and Deutsche Bank (DBK), HSBC (HSBA) has been forced to increase its reserves to cover possible bad loans, mainly from Argentina and increasingly from its exposure to Hong Kong, which has been battered by two recessions in four years and is suffering from record unemployment levels.

HSBC was founded in the former British colony in 1864 and its Hong Kong banks contributed to nearly half its pretax profit last year. Hang Seng Bank, in which it has a 62.14 percent stake, said net income slipped 3 percent to $669.3 million, while Hongkong & Shanghai Banking Corp. saw earnings drop 10 percent to $1.6 billion.

The bank said it remained cautious about its outlook for the global economy and was comfortable with its level of bad debts, particularly in Latin America.

"We've managed our exposure in Brazil very carefully, and its certainly very manageable for us. We're not experiencing any unexpected problems out there at the moment," Chief Executive Keith Whitson told Reuters.

Chairman John Bond said the recent turmoil in the financial markets -- bought on by the collapse of Enron and WorldCom – was more likely to be shaped by investor and consumer sentiment than by economic indictors showing signs of recovery.

"Given the events of recent months, our view is that the outlook for the rest of 2002 is more likely to be shaped by sentiment than by economic fundaments or policy action although there are signs of recovery in the world economy.

"It is unlikely that the decline in personal wealth caused by the fall in the equity markets can be reversed quickly... Consumers, who drove a prolonged period of growth and mitigated the effects of the bursting of the technology and telecom bubble, are becoming more cautious.

"Without growth in corporate profitability and investment, a stock market rebound is unlikely. We continue to position HSBC for a subdued environment.''

At the pretax level, profit for the first-six months of this year, excluding costs, fell to $5.06 billion, compared with banking analysts' forecasts of $4.480 billion to $5.060 billion.

"They are in line with guidance given two months ago,'' analyst Justine Shih at Commerzbank in London told Reuters. "Given that a lot has happened since, the fact they are in line with that guidance has been taken well.''

The company stock, which has outperformed the European banking sector index by about seven percent this year, edged lower 0.4 percent to 701 pence in London trading on Monday.