Developing markets boost HSBC

With the UK economy still largely flat-lining and government austerity measures yet really to bite, the UK's banks are struggling to put the recession behind them. After all, both Lloyds and Royal Bank of Scotland (RBS) reported pre-tax losses in their first-quarter trading for 2011; Lloyds even saw its bad debt charge rise on the year. But not all banks are equal and HSBC - a truly global lender which is in no way dependent upon the UK's weak economy - is in a different league.

As with its rival, Standard Chartered, HSBC's biggest asset is its robust presence in fast-growing Asian markets. In 2010, the bank generated 61 per cent of its profit in Hong Kong and the rest of the Asia Pacific region. What's more, profit from those regions grew by an impressive 26 per cent on the year to reach a combined $11.6bn (£7.1bn). Asia isn't HSBC's only growth market, either - a further 9 per cent of group profit came from Latin America, where pre-tax profit rose by 60 per cent to $1.8bn. Even in the UK, HSBC is making progress - pre-tax profit grew 13 per cent in 2010 to $2.4bn, although that remains well down on 2008's UK profit of $6.7bn.

The lender's bad debts are falling fast, too. In this year's first quarter, the impairment charge fell 37 per cent year on year to $2.38bn. That was the lowest quarterly level since the second quarter of 2006, even though the North American business remains a drag on performance. That's because the hard-hit US consumer finance arm, which is being wound down, is still struggling with a painful bad debt crisis. In 2010, the bad debt charge for North America, at $8.3bn, represented nearly 60 per cent of the total group charge, yet North America's loan book accounts for just 20 per cent of the group's loans. But, as that troubled operation shrinks, the burden is diminishing. North America, for example, managed a modest pre-tax profit of $454m in 2010, which is a big improvement on 2009's $7.7bn divisional loss.

And conditions in North America are continuing to improve, with the North American impairment charge falling a further 30 per cent in the first quarter. Once the US book has been successfully run down, City analysts expect to see a big improvement in group performance. "Then, the group's RoE [return on equity] target should morph into something more appropriate, back to the original 15-19 per cent, from the currently underwhelming 12-15 per cent," reckons banking analyst Arturo de Frias Marques of broker Evolution Securities.

However, HSBC faces regulatory challenges. True, the group's 10.7 per cent core tier-one capital ratio makes HSBC one of the world's best-capitalised banks and it shouldn't, therefore, struggle too much to meet the tougher capital requirements proposed under the new Basel III regime. But the proposal of the UK's Independent Commission on Banking - publicly endorsed by chancellor George Osborne last week - that banks should ring-fence their retail operations from their investment banks, is a problem. That's because the proposal envisages ring-fencing within separate subsidiaries of a group, with possibly enhanced capital requirements. That's likely to mean an extra cost for those, such as HSBC, with big investment banks. The bank is also being hit with the government's banking levy, designed to raise £2.5bn a year from the sector. Chairman Douglas Flint has branded that as "an additional cost of basing a growing multinational banking group in the UK", implying that relocation overseas is possible.