x Abu Dhabi, UAEMonday 22 January 2018

Bad debts in Middle East hit HSBC

$438m impairment costs bring pre-tax profits down to $393m at the bank's regional division

HSBC Middle East's profits dropped by almost 40 per cent in the first half of the year after the banking giant was forced to write-down US$438 million (Dh1.6 billion) of risky loans. Impairment charges for bad and doubtful debt rose by 12 per cent from $391m in the first half of last year, with analysts attributing the increase to the lender booking provisions to cover its exposure to Dubai World's debt restructuring.

Pre-tax profits declined to $393m from $643m in the same period last year, as the regional division of the bank lagged the performance of the group's other divisions. Globally, the bank more than doubled its first-half pre-tax profits to $11.1bn as bad-debt provisions fell and as its North American unit returned to profit for the first time in three years, the bank said yesterday. Nevertheless, HSBC remained positive in its banking outlook for the UAE and the region.

"The medium and long-term outlook for the UAE and the rest of the region remains positive with strong growth potential," said Michael Geoghegan, the group chief executive. HSBC has one of the largest exposures to Dubai World's $23.5bn debt restructuring. The bank is a member of the seven-member co-ordinating committee leading creditor talks with the conglomerate. "As one of the long-term bankers to Dubai World and the various entities related to the Government of Dubai, HSBC will continue to work constructively to address the prevailing issues," said Mr Geoghegan.

Other banks have started the process of building provisions to protect their balance sheets from losses connected to Dubai World. Abu Dhabi Commercial Bank on Saturday reported a second-quarter net loss after booking provisions linked to the Dubai Government-controlled conglomerate. It was likely that HSBC may have done the same, analysts said. "It makes sense as UAE banks with the highest exposures to Dubai World provisioned in the second quarter," said Germaine Benyamin, a banking analyst at HC Securities and Investment.

HSBC said its provisioning in the region more than halved compared with the second half of last year as late payments and defaults improved. Although more difficult access to debt and equity funding was weighing on the performance of the region's economy, particularly in the UAE, the bank said it was seeing business lift. "We have seen customer activity beginning to pick up and believe the region has a sustainable and strong future," said Mr Geoghegan.

"HSBC's own exposure in Dubai is acceptably spread and is primarily to operating companies within the emirate." While HSBC did not provide a detailed breakdown of Middle East countries, it said total loans and advances increased moderately in the UAE to $15.3bn in the first six months, compared with $14.8bn in the previous six months. Analysts said the slight rise reflected the sluggish resumption of credit growth in the country.

The UAE, Saudi Arabia and Egypt are HSBC's three biggest markets in the region. HSBC's total assets in the region accounted for 2 per cent of the group's balance sheets, it said. "The Middle East is an important part of HSBC's international business mix and a region that HSBC remains strongly committed to," said Mr Geoghegan. As the first of the UK's banks to report earnings for the period, HSBC's global results beat earnings forecasts. Its loan impairment charges and other credit risk provisions fell to $7.5bn for the half-year, down $6.4bn from the same period last year.

That was the lowest since the start of the financial crisis and below some forecasts of almost $10bn. tarnold@thenational.ae