HSBC defies the banks' critics as the city shines again

A sharp fall in bad debts has helped the bank to profits of $11bn, with the US the only region to make a loss. James Moore reports

HSBC has kicked off what is set to be another contentious banking reporting season by unveiling a near doubling of profits to $11.1bn (£7bn) from $5.02bn a year ago.

The bank reported the soaring earnings at a time of continuing controversy over bonuses and lending to small businesses. Over the weekend the Chancellor, George Osborne, called on banks to do more, while calls for pay restraint have come from the Financial Services Authority, politicians and the Bank of England.

HSBC's booming profits were primarily driven by a sharp fall in bad loans, with provisions falling by $6.4bn to $7.5bn in the first half of the year. Its revenues actually fell slightly, by 3.8 per cent to $19.8bn.

But all the bank's regions and business segments made money, with the exception of the US, which lost $80m as HSBC continues the run off of its disastrous foray into sub-prime lending. Personal financial services – the retail business – showed a marked improvement, turning a $1.25bn loss into a $1.17bn profit.

The bank's Hong Kong-based chief executive, Michael Geoghegan, said emerging markets in Asia would continue to be crucial to the growth of the operation and will remain its chief focus. But he warned that overall the outlook remains "uncertain". "Whether the West can sustain growth will remain unclear for some time," he said.

The banking sector's critics argue that sustaining growth in the West will in part depend on banks' willingness to lend to businesses, but HSBC, which currently lends only just over 80 per cent of what it has on deposit, said it was keen to advance money to "viable businesses" and consumers. However, it said, many of its customers are concentrating on paying money back.

While HSBC's new lending to small and medium-sized businesses (SMEs) in Britain grew by 38 per cent to £1.4bn when compared to the first half of last year, net new loans fell. But the bank denied that this was because its terms are unaffordable – it argued that low interest rates meant the rates being paid by SME customers are often lower than before the financial crisis and, even where credit is being made available, businesses are focusing on paying loans back.

It's an argument the British Bankers' Association (BBA) backs. "Many larger companies are going direct to the markets for funding and, as is common in the downturn, smaller businesses repay borrowing and will finance through other money such as personal savings or the business's on-going capital," said Angela Knight, the chief executive of the BBA.

The global banking and markets division at HSBC slowed slightly, with profits down 13 per cent to $5.6bn, in common with investment banks around the world. However, the bank said that this was still a good result and that the last six months represented the division's "second best ever" performance.

Despite the fall in profit, the cost of paying bankers at the division increased to $2.52bn against $2.49bn in the first half of last year. Stuart Gulliver, the head of global banking and markets, put that down to the bank paying the previous government's bonus tax during the first half of this year.

Mr Geoghegan also publicly reiterated the bank's commitment to its London base despite continued speculation that it plans to move its headquarters to Hong Kong.

But, speaking after the results presentation, he expressed annoyance at the continued questions over the bank's pay policies and its attempt to sharply increase the salaries of its top executives.

"We are based in the UK which is a phenomenal place to be based. It has a sensible timezone and the ability to get the best people in financial services. I travel 200 days a year. Having me [based] in Hong Kong allows me to understand better the growth in the region.

"We are a global business and we have to have the best people. If we do not pay international rates we will lose them and shareholders will lose."

He described some of the criticism aimed at banks in the UK as "disappointing". "I don't get these sort of questions about remuneration in Asia," he said. "I asked a journalist there why not and they said to me that they aspire to have success. They said 'we all want to get to where you are, to where your job is and you should be paid for that'."

Mr Geoghegan also said there "must be a level playing field across the G20" countries when it comes to new regulations about how much capital banks have to hold and the sorts of businesses they can do. HSBC is planning to hold higher levels of capital than it has typically kept on its books while the uncertainty is resolved.

He said that this meant shareholders' returns would be lower but he said he still expected the bank to come in towards the lower end of its target of producing a return on capital of between 15 and 19 per cent. HSBC will pay out $2.8bn in dividends to its investors, who will receive 16c a share.

The results were in line with the City's expectations, and HSBC remains a favourite among analysts – 22 maintain "buy" recommendations on its shares.

Despite its booming earnings the bank can be a difficult target for critics, given that most of its earnings come from abroad and that it did not receive direct help from the taxpayer.