HSBC (NYSE: HSBC) and BNP Paribas, strengthened by the financial crisis in their roles as top European banks, both trumped earnings forecasts as bad debts fell sharply to make up for slowing investment banking growth. Both showed a dip in investment banking income in the latest quarter, echoing the trend shown by U.S. and European rivals after the euro-zone debt crisis, but they more than made up for that with lower losses on personal and corporate loans.
Half-year profits for HSBC, Europe's biggest bank, hit $11.1 billion, more than double the $5 billion of a year ago and above the average forecast of $9.1 billion from eight analysts polled by Thomson Reuters.
Its loan impairment charges and other credit risk provisions fell to $7.5 billion for the half-year, down $6.4 billion from the year ago level.
"The headline numbers look good, with a doubling of profits, but that's because last year was just a terrible year for everyone," said Francis Lun, general manager at Fulbright Securities in Hong Kong. "Looking more closely, pre-tax profit on its global banking and markets segment was down 13%, and that is really key to the recovery."
France's BNP Paribas, the euro-zone's second biggest bank after Santander, said net profit rose 31% to 2.1 billion euros ($2.7 billion) in the second quarter.
Its rise was thanks to lower loan provisions and strong retail banking, offsetting volatile financial market conditions that hit investment banking.
HSBC said the positive trends should remain, citing improving corporate health as companies refinance and raised capital and better conditions in retail banking.
"The drivers of the lower bad debt performance continue to be in place," said Douglas Flint, finance director. "Obviously if we have a double dip then things will be different, but at the moment the drivers of the first half continue to be in place."
By 0900 GMT HSBC's London-listed shares were up 3.5% and BNP's shares were up 4%, helping lift the European bank sector 2.5%.
INVESTMENT BANKING SLIPS
The results set the foundation for decent results from British and French banks later this week, following strong recent earnings from Swiss rivals and mixed results from Spain's banks.
BNP's second quarter provisions halved to 1.1 billion euros ($1.4 billion), the lowest level in two years.
Its investment bank arm suffered a 30% fall in second-quarter revenue from a year ago, and down 28% from the previous quarter, because of a slump in capital markets activity that has also hurt rivals including Goldman Sachs and Deutsche Bank.
BNP's equity advisory revenue -- a key area of analyst concern and an important business line for domestic rival Societe Generale, which reports on Wednesday -- fell 60%.
HSBC's investment bank made a profit of $5.6 billion, its second best half ever but down 11% from the record level of a year ago.
Income slowed in the second quarter, in line with rivals, and Flint said he expected a slower second half of the year as appetite has reduced, coupled with seasonal factors.