Spring break

HSBC has received a first-quarter fillip. The UK-based emerging markets bank reported a 33 per cent increase in pre-tax profit in the first three months, compared with the period to the end of December. Strip out accounting funnies arising from the increased value of HSBC’s own debt and the figure more than doubled. This brings chief executive Stuart Gulliver tantalisingly close to the targets he set last year.

What went right was HSBC’s trading business, which is heavily skewed towards fixed income. Its rates division, which includes trading government debt, produced $1.2 billion of revenue, five times the previous quarter’s haul. Clients did more business, but the European market rally also lifted the value of securities sitting on HSBC’s balance sheet.

Further gains came from offloading low-yielding UK sovereign bonds as part of managing HSBC’s deposit-heavy balance sheet. Then there was a dash of good fortune: last year’s fourth quarter was unusually dire as UK regulators slapped HSBC with a $570 million banking levy. In all, HSBC produced a creditable underlying return on equity of 11 per cent, close to the bottom of Gulliver’s 12-15 per cent target range, and a cost base equivalent to 55 per cent of revenue, versus his goal of 52 per cent.

Most telling isn’t how HSBC made its spoils but what it’s doing with them: not much. A look at the bank’s balance sheet shows that while loans to customers increased by $21 billion during the quarter, the amount it keeps on deposit with central banks and in cash expanded by $23 billion. That’s a signal that markets are far from normal. HSBC has also cut lending to banks, notably in Europe, reflecting fears that the European Central Bank’s assistance of the banking sector has soaked up the banking system’s precious collateral.

Fortunately, Gulliver isn’t entirely at the mercy of market swings. HSBC remains strongly exposed to trade flows and fast growing economies. Over the past year it has sold assets and — controversially — signalled a partial retreat from certain Asian markets, of which there could be more to come. That suggests that, unless markets swing again, Gulliver’s goal is still within reach.