Investment Banking Buoys HSBC and Barclays

Investment Banking Buoys HSBC and Barclays


By JULIA WERDIGIER
Published: August 3, 2009

LONDON — HSBC Holdings and Barclays reported robust first-half profits Monday based largely on the performance of their investment-banking businesses, along with their Wall Street peers. Yet the banks also set aside a combined $22 billion to cover potentially bad debts as recession and high unemployment lead to more retail loans going sour.

The two banks, among the largest in Britain, were the first of a group of European banks, including UBS and Royal Bank of Scotland, to report earnings this week. Some analysts predict that the industry will continue to struggle because fewer clients can repay their debts as the global downturn continues.

HSBC’s profit fell 57 percent from a year ago after the bank set aside $13.9 billion in credit risk provisions and said the timing and scale of a “recovery in the wider economy remains highly uncertain.” Profit at Barclays increased 10 percent after earnings at its investment banking unit almost doubled but reserves against anticipated loan losses, also called impairment charges, reached £4.6 billion, or $7.7 billion.

“The underlying trend is rising bad debts and there are still at least one or two more quarters to come,” said Julian Chillingworth, chief investment officer at Rathbone in London.

HSBC and Barclays joined banks like Credit Suisse and JPMorgan Chase in benefiting from a strong performance of their investment-banking units even as loan loss provisions climbed. Demand for investment banking services rose because more companies are seeking to sell shares and bonds to raise capital.

As it has among Wall Street banks, a rift is emerging in Europe between those banks that remained relatively unscathed during the financial crisis and can now grow and benefit from their investment banking services and those that accepted government funds and needed to scale back riskier operations.

HSBC and Barclays could expand their investment banking operations while rivals like Royal Bank of Scotland and Lloyds, which accepted government funds, are struggling to cut costs and recover from huge losses. Rather than accept government assistance, HSBC conducted a rights offer and Barclays tapped foreign investors to raise capital.

Shares in HSBC gained about 5 percent in London on Monday and shares in Barclays jumped 7 percent. The share price of Barclays has more than doubled since the beginning of this year, while HSBC stock is down about 5 percent amid concern about rising loan-loss provisions and its struggling mortgage lending business in the United States.

Rising loan losses among European banks continue to spook investors. Deutsche Bank’s loan provisions of 1 billion euros, or $1.4 billion, for the second quarter sent the company’s shares lower even though the bank’s net income rose and revenue from sales and trading at its investment bank unit more than doubled.

Barclays said profit rose to £1.89 billion in the first half of this year from £1.72 billion. Impairment charges increased 86 percent to £4.6 billion and pretax profit at its British retail business dropped 61 percent. At Barclays Capital, its investment-banking unit, earnings rose to £1.05 billion from £524 million.

Barclays is benefiting from an expansion into investment banking services; it bought Lehman Brothers’ American businesses and has been hiring senior bankers in Europe and Asia this year.

Robert E. Diamond Jr., president of Barclays, said Barclays Capital’s expansion is about two-thirds done “but more is to do in Asia.” He expects income from the cash-equities and advisory business to continue to grow and said the pipeline for financing, fixed-income and risk management services is “very big.”

Barclays, which said it planned to resume paying dividends before the end of this year, struck a note of caution Monday, predicting that loan losses will continue to go hand-in-hand with unemployment rates. “We expect the remainder of 2009 to be challenging,” John Varley, the bank’s chief executive, said in a statement. “We expect credit-market losses to be lower than in the first half but impairment trends to be consistent with those experienced over the first half.”

Stephen Green, HSBC’s chairman, was more optimistic when he said that “it may be that we have passed, or are about to pass, the bottom of the cycle in the financial markets.”


http://www.nytimes.com/2009/08/04/business/global/04banks.html?ref=business