HSBC Holdings is set to announce today an increase in last year's profits of up to 16 per cent, taking it above GBP5 billion (about HK$63.31 billion) for the first time. Analysts said the group would have been spared the worst of the economic turmoil in the region as the crisis only spread to Hong Kong last October, but they also warned that provisions against bad and doubtful debts could swell this year. 'Provisions are going to be one of the key uncertainties,' said John Leonard, banking analyst at Salomon Smith Barney. He sees the group's pre-tax profits climbing 15 per cent, to GBP5.2 billion last year from GBP4.5 billion - flattered by a GBP100 million gain from a sale of its 5 per cent stake in Hong Kong International Terminals - but provisions jumping 30 per cent to GBP500 million, with the increase due to its lending exposure in Asia. 'I have allowed for a spread across Malaysia, Singapore, Hong Kong where there are a number of situations that will cause its provisions to rise.' Union Bank of Switzerland (UBS) believes HSBC's pre-tax profits will rise to GBP5.275 billion. UBS analyst John Aitken said 43 per cent of the group's loan advances in the first half of the year were in Asia, representing some GBP61 billion. With the tumult in the region, he forecasts non-performing loans in the worst-hit Asian countries could average 21 per cent, but said it is likely that HSBC's portfolio contains some better quality companies - less likely to default on loans. Even then, Mr Aitken predicts local provisions alone will have shot up to GBP393 million, up 128 per cent, and race up another 167 per cent to GBP1.05 billion this year. More ominously, he predicts the largest single component of such a rise will be exposure to the Hong Kong mortgage market. Mr Leonard said features of the group's bad debt profile last year will include the collapse of Peregrine Investments Holdings, accounting for some GBP20 million of provisions. A further GBP10 million could come from its exposure to the ailing up-market retailer Joyce Boutique Holdings. This year, the picture could be much worse. He has forecast provisions rising by some 37 per cent to GBP685 million, but other analysts are even more aggressive. Nick Collier, banks analyst at Morgan Stanley Dean Witter, who agrees HSBC's profits will surpass the GBP5 billion mark, expects last year's provisions to fall to GBP363 million from the previous year's GBP384 million. He foresees a total reversal this year, with provisions leaping 112 per cent to GBP768 million He said lending exposure in Asia will be the prime cause, as worsening economic conditions and rising interest rates in the region put more pressure on borrowers and increase the scope for bad debts to arise. Banque Paribas analyst Simon Peters argues, however, that such estimates are at best guesses. He sees pre-tax profits climbing only 12 per cent to GBP5.07 billion, and also sees a fall in last year's provisions to GBP347 million, but said his provision for this year is only a tentative GBP424 million, up 22 per cent. He said it is likely HSBC will put aside funds only as non-performing loans come up, rather than make provisions from expected future credit losses. 'I am either being far too conservative or far too optimistic. People are waiting to see what happens in the real economy.' ING Barings banking analyst Peter Redhead in Hong Kong, who sees a rise in the group's earnings of 15.5 per cent to HK$43.4 billion, disagrees and advises that the bank should aggressively cover all its problem loans in the region in one go. Any over-provision could always be credited back to the bottom line in the form of write-backs. He expects the group to be ruthless, hoisting its provisions by 53 per cent to $7.49 billion, from $4.9 billion, assuming all the problem loans are accounted for, but other Hong Kong analysts disagree. Jardine Fleming envisages a more relaxed increase, climbing 22 per cent to $6 billion. The one saving grace for the group will be its operations in the West, where its two largest assets are Britain's Midland Bank, and Marine Midland in the US. Marine Midland has disclosed a 24 per cent rise in profits to US$471 million for the year, boosted by its purchase of First Federal Savings and Loan Association. Midland Bank should also see a strong increase in profits. Merrill Lynch banking analyst Richard Coleman, sees a 25 per cent rise to GBP1.6 billion, as commercial banking in Britain continues to enjoy equity returns averaging 30 per cent. For the group as a whole, higher interest rates in Asia are expected to take their toll. Mr Redhead expects the net interest margin to drop 0.2 per cent to 2.8 per cent, followed by a slower 8 per cent growth in net earnings this year. He said future earnings at the group will remain sensitive to continued uncertainties in Asia, plagued by high interest rates and a bad debt cycle in Hong Kong. Furthermore the group's loan growth will be slowed by the slump in consumer spending in the region and falling property prices in Hong Kong. In contrast, HSBC's 62 per cent owned Hang Seng Bank is likely to be largely insulated from the Asian crisis, given what Mr Redhead called its 'Sino-centric' lending policy. Net earnings are forecast to be up 11.2 per cent to HK$9.437 billion last year, although again, higher interest rates in Hong Kong could also be expected to impact Hang Seng's net interest margin. Mr Redhead sees this falling sharply by 0.4 per cent to 2.7 per cent, but he saw its provisions also dropping to $296 million from $715 million, having largely absorbed its exposure to the troubled Siu-Fung Ceramics, and a rise in general provisions.