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HSBC Profit Up 5%, Hurt By $10.6 Billion Charge For Bad Debt

HSBC, Europe's biggest bank, reported a 5% rise in 2006 pretax profit to a record $22.1 billion on Monday but it suffered a $10.6 billion hit for bad debts after problems in its U.S. mortgage lending.

HSBC, which has about 125 million customers worldwide, saw its profit rise from $21 billion in 2005 but the result was below an average forecast of $22.4 billion in a poll of analysts by Reuters Estimates.

The bank, which generates the bulk of its its revenues in Europe, North America and Hong Kong, said it had enjoyed strong growth in Asian business in 2006. Both its global private banking and investment banking operations showed strong growth.

HSBC, with headquarters in London, said there had been no deterioration in its troubled U.S. mortgage lending since it warned about the impact of the deepening problem a month ago, and said it was confident it would not spread to other areas.

HSBC shares were up 0.45% at 889 pence., valuing the bank at 102.6 billion pounds ($197 billion).

The bank warned on Feb. 7 that problems had deepened in its lending to lower quality U.S. home borrowers, resulting in the steep jump in bad debts charge and prompting it to oust the head of its North America operations and restructure the business.

Doesn't See Further Deterioration

"It has not deteriorated (since then)," Douglas Flint, finance director, told reporters on a conference call.

He said the level of bad debts this year will be sensitive to economic conditions, the housing market, interest rates levels and the availability of financing options for sub-prime borrowers.

Flint said he was confident the impairment problems would not spread wider.

"There is no additional concern elsewhere in the world in relation to abnormal credit trends. The abnormal credit trends are all in the mortgage services business," he said.

Mark Durling, banking analyst at Brewin Dolphin, said last month's warning cushioned the impact and HSBC is seen as conservative in terms of impairments.

"There is some more (bad debt) pain to come, but not as bad as what the market has factored into the share price," he said. North American bad debt soared to $6.8 billion in 2006 from $4.9 billion, representing 64% of the group's total, even though the region only accounts for 21% of profits.

Bad debts in Europe, which are mostly in the UK, rose 12% on the year to $2.2 billion. Underlying bad debts in the UK were up 8% from 2005, in line with its lending growth,and bad debts in the UK retail bank were near flat on the year.

Flint said UK impairments from higher bankruptcies and individual voluntary arrangements were offset by its tighter lending on unsecured loans in the last two years.

HSBC said its group impairment charge was up $2.8 billion, or 36%, from 2005, and the "major setback" had caused a $725 million drop in its U.S. personal finance profits.

"We are restructuring this business to avoid any repetition of the risk concentration that built up over the past two years," it said in a statement. This included changes in management and strengthened risk controls and processes.

CIBM Growth Slows

The bank's CIBM investment bank arm posted a 12% rise in profits to $5.8 billion, aided by buoyant capital markets, although the unit's profit growth slowed from 37% in the first half.

"In the third quarter there was a significant slowdown in flow from client revenues," Flint said. "The fourth quarter bounced back, so we had three good quarters and one weak quarter."

HSBC said its income rose 14% to $70.1 billion, matched by a 14% rise in cost growth.

Its costs as a ratio of income nudged to 51.3% from 51.2% in 2005.