By Steve Slater and Lionel Laurent

LONDON/PARIS, Aug 2 (Reuters) - HSBC and BNP Paribas, two of
Europe's top three banks, trumped earnings forecasts after bad
debts fell sharply, more than offsetting slowing investment
banking growth and lifting both shares.
The two banks on Monday showed a dip in investment banking
income in the latest quarter, but more than made up for that
with lower losses on personal and corporate loans as broad
economic conditions improved.

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.

Loan impairment charges and other credit risk provisions
fell to $7.5 billion, down $6.4 billion from a year ago to the
lowest level since the start of the financial crisis -- a trend
HSBC expects to remain as both personal and corporate balance
sheets strengthen.

"I would expect that trend to continue. We have not seen
indications we are going to have a double dip," Sandy Flockhart,
chairman of personal and commercial banking and insurance, told
Reuters.

France's BNP Paribas, the euro-zone's second biggest bank
after Santander, said net profit rose 31 percent to 2.1 billion
euros ($2.7 billion) in the second quarter. For the first half,
profit rose 39 percent to 4.4 billion euros.

The rise was also thanks to lower loan provisions and strong
retail banking, offsetting volatile financial market conditions
that hit investment banking. Its second-quarter provisions
halved to 1.1 billion euros, the lowest in two years.

"HSBC and BNP have seen provisions cut in half year-on-year.
We are very rapidly seeing big retail banks like BNP and HSBC
return to a level of provisions that is very close to what it
was before the crisis," said Francois Chaulet, fund manager at
Montsegur Finance Asset Management in Paris.

BNP said it reflected an improving but still challenging
macroeconomic environment in its key euro-zone markets.

That provides opportunity for BNP -- which bought assets
from crippled Benelux bank Fortis at the peak of the crisis --
to grab market share, Chief Executive Baudouin Prot said.

Prot said BNP did "not need" acquisitions to grow and that
the bank had achieved critical mass with the Fortis deal, and
declined to comment on its interest in Allied Irish Bank's
controlling stake in Poland's Bank Zachodni.

HSBC Chief Executive MIchael Geoghegan, meanwhile, said he
remained alert to acquisition opportunities and did not rule out
further buys.

Growth could remain anaemic in various western countries,
HSBC warned, although it was bullish on the prospects for
emerging markets, even if "some cooling off" in China's economy
is possible.

By 1500 GMT, HSBC's London-listed shares were up 5 percent
and BNP's shares were up 4.7 percent, helping lift the European
bank sector 3.5 percent.

Montsegur's Chaulet said the results backed up a positive
recent sentiment on banks after a health check of the European
banking system and a relaxation of proposed capital rules.

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For a graphic on Europe's bank earnings click on:
http://graphics.thomsonreuters.com/CoNews/EZ_BKSPR0710.html
For a graphic on loan losses at HSBC and BNP Paribas click on:

http://r.reuters.com/paz72n
HSBC results story
BNP results story
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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.

Lloyds Banking Group and France's Societe Generale are due
to report Wednesday, with Barclays on Thursday and Royal Bank of
Scotland on Friday.

The prospects of bumper profits for banks in Britain and
elsewhere will raise pressure from politicians to force them to
lend more and potentially revive talk of an industry tax, after
the sector was lifted by the watering down of capital reform.

Investment banking at both HSBC and BNP slipped in the
second quarter, after the euro-zone debt crisis slowed capital
markets activity and also hurt rivals including Goldman Sachs
and Deutsche Bank.

BNP's investment bank arm suffered a 30 percent fall in
second-quarter revenue from a year ago, and down 28 percent from
the previous quarter.

Its equity advisory revenue -- a key area of analyst concern
and an important business line for SocGen -- fell 60 percent.

HSBC's investment bank made a profit of $5.6 billion, half
of group profit and the second-best half-year ever, although it
was down 11 percent 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.

HSBC's capital improved and its Tier 1 ratio was 11.5
percent at the end of June, and Geoghegan said he was happy to
hold more capital given regulatory uncertainty and the chance
for acquisitions.

But holding more capital depresses return on equity (RoE),
which was 9.3 percent in the first half, and HSBC said it will
assess if it needs to lower its 15-19 percent RoE target.

"It's difficult for us to have a 15 to 19 percent RoE on a
Tier 1 capital ratio of 11.5 percent," Geoghegan said at a press
conference, adding the lower end was still achievable as returns
are improving in the U.S., Latin American and Middle East.
($1=.7664 Euro)
(Additional reporting by Kelvin Soh in Hong Kong and Sudip
Kar-Gupta in London; Editing by Andrew Callus and Simon Jessop)