Rising provisions for bad debts at subsidiaries Hongkong Bank and Hang Seng Bank caught analysts off guard yesterday when HSBC Holdings reported an otherwise healthy 23 per cent rise in 1996 pre-tax profits to GBP4.52 billion (about HK$57.05 billion). Attributable profit came in at $37.58 billion, up 25 per cent on the year for the group. The overall result came in spot on expectations and analysts in Hong Kong said they would maintain their hold and buy recommendations on the bank but most stopped short of saying they would advise their clients to accumulate more shares. Some planned to lift their 1997 earnings forecasts. Goldman Sachs banking analyst Roy Ramos said: 'The group continues to do well in terms of underlying profitability. They are growing their top line and their bottom line.' He did not see Hong Kong bad debt provisions as significant for the group and yesterday's report would not blow out anybody's numbers. For Hang Seng Bank, however, the more than five-fold jump in provisions to $715 million caught most analysts off guard. Hongkong Bank's provisions came in at $1.44 billion, a 123 per cent rise on the previous year. ING-Barings banking analyst Peter Redhead said the bad debt provisions were a 'bigger problem for Hang Seng Bank and they will probably effect sentiment in the stock'. 'The pleasures of size have helped HSBC,' he said. Sir William Purves, group chairman for HSBC Holdings, declined to name the source of problem loans for the bank. 'You know very well which accounts that is for,' he replied to reporters' questions. Financially troubled Siu Fung Ceramics was said to have borrowed heavily from HSBC group banks. Hang Seng Bank now has a big question mark over it, analysts say. At the operating level, the bank looks strong. Unrealised capital gains on fixed assets and securities may also provide investors some comfort. Hang Seng Bank was sitting on $5.4 billion in unrealised gains at the end of 1996, up from $4.1 billion the previous year - a 33.6 per cent jump. 'But you have to question why the management did not write back some of that profit and help shareholders a bit,' Mr Redhead said. 'We will be putting a sell on the shares in the morning. Despite the bad debt worries, Sir William said he was satisfied internal credit controls were not breached last year. He could not guarantee against further provisions this year, but analysts expect Hongkong Bank's provisions will be lower in 1997. Most analysts said they were willing to take the bank's word that there was no meaningful deterioration in asset quality for Hongkong and Hang Seng banks, aside from the few isolated cases covered by last year's provisions. Sir William said: 'We have improved our credit control significantly. This is not indicative of an across-the-board credit weakness.' On the bigger question of whether the bank would take a mainland shareholder into a consolidated Hong Kong business, Sir William said: 'That is not the way that the board plans to proceed. We have every intention of maintaining our stake in Hang Seng Bank.' He also said there was a vast number of shares out there if someone wanted to make an investment. 'That is not something the board has any control over.' As for relations with the Bank of China: 'We will go on with what we've been doing. We are competitors, yes, but we are also friends. 'We have worked together closely on syndicated loans and in capital markets.' On the stellar rise of the bank's shares since interims were reported in August, Sir William said: 'I think there has been a re-rating of the bank. We are now seen as an international bank.' He invited US rating agencies back to take another look at the bank, in light of the bank's solid share-price performance. 'The major rating agencies are based in New York and they seem to pay more attention to what is written in the media there than what one sees on the ground in Hong Kong.' Some investors were hoping for a share split with the earnings report but the bank had no such plans, Sir William said. 'If the stock exchange were to advise us such a change was necessary, we would consider it.' Such a split would in theory make the shares more appealing to retail investors. HSBC is one of the most expensive counters on the stock exchange, trading in board lots of 400. The minimum investment comes to $75,600. HSBC has never ruled out the possibility of an acquisition in the United States, but Sir William indicated that no deal was imminent: 'In my view, many banks in the US are overpriced. We are not in the market to expand just for the sake of expanding.' Sir William warned such large percentage bottom-line gains would not necessarily be repeated. 'Whether a bank as large as ours can, year after year, continue to produce results like this, I leave to your imagination.'