HSBC, Barclays profits hit by surge in bad debt

LONDON (Reuters) - HSBC and BARCLAYS (BARC.LO)reported a surge in bad debts on Monday to a combined $21 billion as recession took its toll on borrowers but Britain's two biggest banks offered encouragement they could be through the worst.

Both banks reported buoyant investment bank earnings as they took advantage of resurgent debt and foreign exchange trading and grabbed market share from troubled rivals, while an improvement in capital strength was also encouraging, analysts said.

By 1005 HSBC's <0005.HK> shares were up 6 percent at 642 pence and Barclays was 7 percent higher at 323 pence.

"HSBC is today underlining its credentials as a major force in the world of global banking. Profits have surpassed expectations, questions over the bank's financial strength have been laid to rest via a substantial fund raising, whilst management direction remains unimpeded by government intervention," said Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers.

HSBC reported a pretax profit of $5 billion for the six months to the end of June, halving from $10.2 billion a year earlier, but just ahead of an average forecast of $4.9 billion from 11 analysts polled by Reuters.

Barclays' profit came in at 3 billion pounds, up 8 percent from a year ago, but below the average forecast of 3.5 billion pounds from seven analysts polled by Reuters.

HSBC reported a 39 percent jump in bad debts to $13.9 billion pounds, while Barclays' impairments soared 86 percent to 4.6 billion pounds.

"It may be that we have passed, or are about to pass, the bottom of the cycle in financial markets," said Stephen Green, HSBC chairman.

At Barclays there have been signs of a slowdown in the rate of increase in impairments or even stabilization, but bad debts are likely to top 9 billion pounds for the full year, up from 5.4 billion in 2008.

The results continued the trend shown by U.S. rivals such as JP Morgan , where investment banking revenues have bounced back from the torrid end to 2008 but retail bad debts are soaring as the recession feeds into the wider economy.

Other European banks are expected to continue that trend, including BNP Paribas , Unicredit and Royal Bank of Scotland later this week.

HSBC and Barclays both reckon they are well positioned to take advantage of problems among rivals after they avoided taking taxpayer rescue funds to stave off collapse during the worst financial crisis since the 1930s.

HSBC said its tier 1 capital ratio, a key measure of balance sheet strength, was 10.1 percent at the end of June, up from 8.3 percent at the end of December, helped by the bank's 12.5 billion pounds rights issue in April.

Barclays said its tier 1 ratio improved to 10.5 percent from 8.6 percent six months earlier, and would rise to 11.7 percent once it completes the $13 billion sale of its asset management arm Barclays Global Investors to U.S. money manager BlackRock, which it said is on track for later this year.

(Additional reporting by Clara Ferreira-Marques and Victoria Bryan; Editing by David Cowell)