HSBC, Barclays profits hit by surge in bad debt

LONDON (Reuters) - HSBC and BARCLAYS (BARC.LO)on Monday reported a surge in bad debts 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 positive, analysts said.

By 1225 GMT HSBC's shares were up 5.7 percent at 640 pence while Barclays was 6.6 percent higher at 322.25 pence.

"(The results) were certainly better on average than people were expecting," said David Bradbury, head of equities at Canada Life.

"HSBC, which is normally very cautious, doesn't seem as cautious as it normally does, which is a positive sign. You can argue the worsening bad debts will be more of problem for HBOS/Lloyds, which is the obvious read-across."

BAD DEBT HIT

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 unveiled 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 bank said.

Bad debts are fueled by unemployment, currently at a 12-year high of 7.6 percent in the UK, and economists say the jobless rate is unlikely to reach a peak until after economic recovery has begun.

Bank profits have also been eroded by writedowns against the value of risky credit-related securities they hold. The International Monetary Fund projected in April that such writedowns could reach a total of $4.1 trillion worldwide.

SETTING THE TONE

The results from Barclays and HSBC 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 follow the same pattern, 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)