HSBC enjoys capital boost, warns of gloomy UK outlook

By Sumeet Chatterjee and Lawrence White

HONG KONG/LONDON (Reuters) - HSBC Holdings warned of a dim outlook for its British business next year and urged the government to clarify the status of European Union workers in Britain as Europe's biggest bank grapples with the impact of the vote to leave the EU.

"UK retail banking profit will be challenging next year," Chief Executive Stuart Gulliver told Reuters on Monday, pointing to the Bank of England's muted economic growth estimates and forecast for sharply rising inflation.

Gulliver said that the financial industry has communicated its priorities to the government. Because HSBC has a fully licensed subsidiary in France it is in no hurry to set up businesses elsewhere to protect access to European markets.

"The thing I would say that is slightly more urgent is clarity around the status of EU nationals with jobs working in the UK," Gulliver told reporters on a conference call.

HSBC employs around 42,000 workers in Britain of whom some 2000 are from other EU countries. British firms are employing immigration lawyers to advise such staff over fears around their residency, Reuters reported in July.

Against a backdrop of shrinking profits, HSBC reported a sharp jump in its core capital ratio to 13.9 percent, as the key measure of financial strength was lifted by a change in the regulatory treatment of its investment in China's Bank of Communications.

The change in how Britain's Prudential Regulation Authority treats the investment eased analyst concerns about its ability to build capital buffers to maintain its dividend payouts and lifted HSBC's shares 4.5 percent by 1400 GMT.

The ratio jumped to 13.9 percent from 12.1 percent at the end of June and 11.9 percent at the close of last year.

"This change more accurately reflects the nature of our relationship as a minority shareholder in BoCom," Chief Financial Officer Iain Mackay told Reuters.

Bernstein analysts said the higher capital ratio should be enough to allow HSBC to maintain next year's dividend out of capital, even as earnings decline.

"For yield investors, who have been the source of support for valuation of this stock, this keeps the stock in the safety zone into the next 6-9 months," said the brokerage, which rates the stock as "underperform" due to its rich valuations.

HSBC posted an 86 percent fall in reported pretax profit to $843 million for the third quarter ended on Sept. 30, as it took a $1.7 billion loss on the sale of its Brazilian unit and faced falling revenues from trade and adverse foreign currency movements.

HSBC in August abandoned a timetable for reaching its 10 percent return on equity target, as slowing growth in its core home markets of Britain and Hong Kong hit revenues.

BREXIT CLOUDS

Executives at British lenders last month privately cautioned ahead of reporting their earnings that economic conditions would probably get much tougher next year when Britain is due to formally start the process to leave the EU.

Gulliver said on Monday that the bank had seen limited impact on its British business so far other than a temporary drop in small business loan demand but warned of hard times ahead next year.

A seasonal decline in profits in the fourth quarter would likely combine with dividend and British bank tax payments to head off further boosts in capital in the near term, Mackay told Reuters.

"It's reasonable to assume that there's unlikely to be any particularly strong progress with respect to capital formation in the fourth quarter," Mackay said.

HSBC said in its earnings statement its $2.5 billion share buyback programme announced in August this year was now 59 percent complete and it expected to finish by the end of this year or early 2017.

(Reporting By Sumeet Chatterjee and Lawrence White, additional reporting by Ritvik Carvalho; Editing by Stephen Coates and Keith Weir)