Walk don't run

HSBC: HSBC is showing that a pedestrian performance need not be a bad thing. The global lender’s annualised 6 per cent return on equity in the first half of 2009 looks paltry beside racier bulge-bracket rivals who clocked up four times as much. But that is mainly a symptom of HSBC’s laudably conservative balance sheet. And it belies encouraging signs in the lender’s more difficult markets.

Underlying interim pre-tax profits of $5 billion were half those achieved by HSBC a year earlier. The performance would have been worse but for booming trading revenues amid a broad-based pick-up in market activity. Trading income of $4.5 billion in the banking and markets division was seven times the figure for a year earlier. These kind of gains are not something normally associated with HSBC. Niether the bank, nor any of its rivals with big trading desks, should count on them recurring.

With charges for bad debts on the $400 billion consumer loan book rising to 5.4 per cent, from an already high 4.1 per cent a year ago, it is clear why the focus among banking investors is shifting from structured credit to ordinary lending. HSBC is hardly immune to deteriorating credit quality just because it is not concentrated on Western markets. Around half of its commercial loans originated in Hong Kong have gone to businesses exposed to China’s paralysed export belt.

Still, HSBC’s overall loan book is not in as bad a shape as might have been feared. In the US, HSBC investors’ bête noire, impairments fell in absolute terms. That suggests charges on that part of the business may have peaked. And HSBC said the link between unemployment and arrears was not as tight as it expected.

Meanwhile, HSBC’s funding position further improved in the period. Its loan to deposit ratio fell, to just under 80 per cent. That compares to 129 per cent at Barclays. The challenge will be to find matching assets providing a decent return without carrying uneconomic risk. But an abundance of deposits is not a bad problem to have.

HSBC’s cautious approach and sound balance sheet may not be a recipe for mind-boggling shareholder returns. But the lender's modest overall performance at least looks more sustainable than the ephemeral trading bonanza enjoyed by its peers.