LONDON — HSBC Holdings PLC, Europe's largest bank by market value, reported Monday its steepest fall in profit since 2001 as costs for bad U.S. mortgage loans mounted.
Net profit for the first half of the year plunged 29 percent to $7.7 billion from $10.9 billion in profit in the January to June period of last year.
"The first half of 2008 saw the most difficult financial markets for several decades, marked by significant declines in profitability throughout much of our industry," said HSBC Chairman Stephen Green. "HSBC was not immune from the turmoil."
The biggest losses came from the North American market, which HSBC depends on for a quarter of its revenue. Operations there posted a first-half loss of $2.9 billion, compared with profit of $2.4 billion a year ago.
Part of the blame lies with Illinois-based Household International Inc., a lender HSBC purchased in 2003 that elevated the British bank to the unenviable position of biggest U.S. subprime mortgage lender.
Still, HSBC has weathered the global financial storm with better than some others. In May, the bank reported that first-quarter 2008 profit was actually better than the same period last year, despite a $3.2 billion write-down on subprime mortgage assets in the United States.
Today's half-year results compare favorably with what other British banks are expected to report later this week in their own half-year earnings results. On Friday, analysts are expecting the Royal Bank of Scotland to report the largest loss in British banking history _ of between 1 and 1.5 billion pounds ($2 billion to $3 billion).
HSBC owes its relatively good performance to two things: its ample capital base, which means the cost of funding operations hasn't shot up in the midst of the credit crunch as it has at other British banks such as Alliance & Leicester PLC; and its strong and growing position in the quickly growing emerging markets of Asia, where HSBC rakes in over 50 percent of its pretax profit.
Operations in the Asia-Pacific region, excluding Hong Kong, reported a pretax profit of $3.6 billion, up 8 percent on the $3.3 billion the company made in the first half of 2007.
One of the positive signs in the earnings report was "the continuing strength in the retail businesses in the developing markets," HSBC's finance director, Douglas Flint, said in a conference call Monday morning.
HSBC's aggressive expansion into emerging markets is ongoing: the bank has opened 63 new branches across Asia in the last six months.
Right now, the company is primed to become a major player in the quickly emerging economy of South Korea through the purchase of a controlling 51 percent share of the country's sixth-largest bank, Korea Exchange Bank, from the U.S. private equity firm Lone Star Funds.
Although the deal hit a substantial road bump last Thursday, when the deadline for its completion passed without gaining the necessary approval from South Korean regulators, the fact that it's been put on ice could prove to be a financial boon to HSBC.
Asian financial stocks have fallen by 18 percent since September, when the $6 billion deal was first agreed upon, and so HSBC could use the deadline's end to renegotiate a lower price for the Korean bank, which would give HSBC more than 7.7 million customers and 345 branches in Asia's fourth-biggest economy.
HSBC confirmed that negotiations with Lone Star were ongoing in a regulatory announcement released Sunday, which said the two companies were "discussing how this transaction may be taken forward."
It said last week that it still believed in the long-term prospects for Korea and wished to play a major part in the country's further development.
HSBC shares fell 1.1 percent to 828 pence ($16.24) on the London Stock Exchange Monday.