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SCMP Reporter

Midland Bank, the wholly-owned subsidiary of HSBC Holdings, reported a sharp increase in profits yesterday.

  This was in spite of declining net interest margins, and sluggish performance in certain of its European markets.

  Interim pre-tax profits were up 24 per cent to GBP651 million while attributable profits grew 35 per cent to GBP439 million.

  'Competitive pricing led to reduced lending spreads, particularly in the retail mortgage market,' the bank said.

   'The proportion of lower spread treasury assets also increased, mainly as a result of Midland becoming an active player in the repo trading market, which is a high volume, low risk but very low spread business.'   HSBC Holdings finance director Douglas Flint said activity in the repo market alone had affected Midland's net interest margins by 10 basis points, which fell to 2.57 per cent, from 2.86 per cent.

  Analysts welcomed the result which they said was surprising given the tight UK mortgage market.

  'It is clear also that they have done well on costs,' one analyst said. Cost-to-income ratios had improved significantly to 62.8 per cent, from 68 per cent, as cost savings achieved through the bank's restructuring of its domestic retail network began to feed through.

  Operating expenses fell GBP11 million to GBP1.13 billion and staff costs were GBP7 million lower.

  Redundancy costs were also reduced by GBP14 million   Midland chief executive Keith Whitson said the reduced costs, added to a GBP121 million increase in operating profits, came from new business at the corporate and the personal level, encouraged by the bank's newly refurbished retail network.

  Net interest income increased by GBP42 million with a 16 per cent increase in average interest-earning assets.

  International banking saw a GBP22 million fall, however, to GBP68 million operating profit.

   Lower operating profits in Germany and a poor performance from France had little impact on better results in other countries, namely Latin America, Switzerland and New York.

  In Germany, in particular, the bank reported good growth on client-led foreign exchange dealing, but bond and bond derivative trades were lower, as German interest rates began to stabilise, compared to falling levels last year.

  HSBC Midland, the group's main treasury operations spanning London, New York and Tokyo, produced an operating profit of GBP79 million, which is about GBP33 million higher than last year.

  Dealing profits, particularly buoyed up by interest rate derivatives trading, rose GBP42 million to GBP94 million    Bad debts rose to GBP89 million, from GBP68 million.

   New specific charges rose GBP41 million to GBP121 million.

SOLID GAINS Pre-tax profit up 24pc to GBP651m, attributable up 35pc to GBP439m Interest margins down to 2.57pc Cost-to-income ratio at 62.8pc 



Midland Bank reports sharp increase in profits despite interest decline