Bottom line veils serious doubts

PUBLISHED : Tuesday, 02 August, 2005, 12:00am
UPDATED : Tuesday, 02 August, 2005, 12:00am

Global reach and a spectrum of retail businesses are paying off for HSBC. The banking giant rode out a flattening US dollar yield curve and deteriorating consumer credit quality in Britain to turn in a respectable 9.5 per cent rise in first-half net profits, helped by strong growth in Asia and an improved personal lending business in North America.

Its results look good in comparison with arch-rival Citigroup. Excluding one-off items, Citi's second-quarter profits fell 7 per cent.

Despite HSBC's strong performance, however, there are still questions over the bank's decision to build up its investment banking unit.

Like the trading arms of Citigroup, JP Morgan and Bank of America, HSBC's corporate and investment banking unit has been hit hard by rising short-term interest rates and falling long-bond yields. The result, a flattening yield curve, knocked almost US$500 million off HSBC's money market and balance sheet trading revenues in the first half.

Meanwhile, HSBC's nascent investment bank continues to eat cash. Costs rose 24 per cent against the first half of last year to reach US$3.3 billion, as the unit added almost 1,600 staff. Pre-tax profits slumped, falling 18 per cent to US$2.3 billion.

HSBC chairman Sir John Bond is undismayed. Yesterday, he said first-half costs were in line with management expectations. With the bank halfway through its five-year expansion plan and projected recruitment almost complete, he claimed 'clear evidence of sustainable progress'.

Sir John compared HSBC's investment in its corporate and investment banking arm to the US$600 million put into building its retail banking presence around Asia outside Hong Kong in the past four years. That business, he said, earned a pre-tax profit of US$1.3 billion in the first half, up 30 per cent from the previous year.

However, as the fall in first-half trading revenues showed, investment banking is a more unforgiving business than retail financial services. HSBC makes decent money from corporate and institutional banking, foreign exchange, derivatives and the like, and it has a few advisory mandates. But it has a ways to go before it can show the capital markets strength in depth that would allow it to compete with Goldman Sachs or Morgan Stanley.

Sir John is likely to retire soon. Given a few more quarters of difficult market conditions, would his successor show as much commitment to a business that could easily prove ruinously expensive?