Hsbc Shares Off Highs, Asia Takes Shine Off

International banking group HSBC Holdings Plc posted a 10 per cent rise in pre-tax profits for 1997 yesterday despite the impact of bad debt provisions in its key Asia Pacific region.

Shares in the group initially rose after the results but fell back in late trading in London.

HSBC officials were cautious over the outlook for its business in Asia, warning that the financial turmoil in the region may not be over.

Profits for 1997 were 4.971 billion pounds ($8.1 billion) compared with 4.524 billion in 1996. HSBC boosted its general bad debt provisions by 291 million pounds, including 175 million pounds made as a precautionary measure in view of the uncertain conditions within Asia.

 

Our perception is the turmoil and disturbances are by no means over, Hongkong Bank chairman John Strickland told reporters at a news conference in Hong Kong.

And HSBC chairman William Purves made it clear that the full picture may not yet be clear in terms of the affect of the crisis on credit quality. The coincidence of weak exchange rates, significantly lower stock exchange levels and high interest rates in many countries...has led to a deterioration in credit quality, the full impact of which is only beginning to emerge, Purves said in a statement.

The group also said it would report its results in dollars from this year rather than in sterling.

In 1997, exchange rates again had an effect on our results since the dollar and currencies closely linked to it form the main currency block in which the groups business is transacted, Purves told reporters.

The pre-tax figures included a 16 per cent rise in operating profit before provisions, a buoyant performance by HSBCs British banking unit Midland Bank and a flat performance by Hongkong Bank which reflected slower growth in Hong Kong in the wake of the Asian crisis.

HSBCs results were pretty much as expected operationally, said Inigo Edsberg, banking analyst at Panmure Gordon, but until we have more information about bad debts, we remain sceptical. It remains a hold.

HSBC shares were up three pence higher at 17.85 after touching 18.30. We are properly provisioned in the current situation, thats what you would expect, we are conservative people, HSBC chief executive John Bond told Reuters in an interview. I cant forecast what will happen in the course of the rest of the year.

But Bond agreed that the there would have to be a material deterioration in the situation in Asia for provisions to be raised again.

Bond said HSBCs exposure to the three main problem countries in Asia Indonesia, Thailand and South Korea amounted to less than two per cent of the groups assets while the whole of its loan portfolio in Asia outside Hong Kong was 13 pct of assets.

These are entirely manageable numbers in a bank that is showing a very strong equity position and loans at only 51 per cent of assets its a very conservative balance sheet, he added.

Bond said there had been inevitable slowdown in its Hong Kong market adding that HSBC expects slower growth there in 1998, probably around three per cent, with the biggest influence continuing to be the performance of the Chinese economy.

He said the link between the Hong Kong and dollars is in the best interests of Hong Kong and noted that the IMF had recently expressed its support for the peg.

While agreeing the recent Asian financial crisis might provide some opportunities for banks such as HSBC, Bond said HSBC would be careful and that the most important thing is a soundly based economic recovery (which) we believe will happen in the fullness of time.

The turmoil in Asia saw a rise in treasury and capital markets dealing profits, mainly from foreign exchange activities, as HSBC benefited from higher volumes and wider margins but it said that debt securities and equities trading weakened in the second half of the year.

Bond said HSBC continues to look for value-enhancing acquisitions but said the price of assets in the financial sector makes this difficult - There is nothing on the front burner.