This article has been adapted from our sister site across the pond, Fool UK.
HSBC kicked off the reporting season for U.K. banks by reporting pre-tax profits of more than $11 billion (7 billion pounds) in the first six months of 2010.
This is more than double the $5 billion recorded in the same period of 2009 and is largely down because of a steep fall in bad debts. It's also well ahead of analysts' consensus estimates of pre-tax profits around $9 billion.
HSBC ("The world's local bank") made a profit in every geographical region except the United States, where it reported a modest loss of $80 million. Revenues were flat at $40 billion, leading to earnings per share of 38 cents and an unchanged quarterly dividend of 16 cents a share.
Investment banking produced surprisingly strong results, with HSBC's global banking and markets arm pumping out $5.6 billion. Though down 13% on the previous half-year, this is a sparkling performance in comparison with 80%-plus drops being revealed at some investment banks.
HSBC's return to mega-profits is being driven by loan losses almost halving -- down 46% to $7.5 billion versus $13.9 billion a year earlier. Indeed, CEO Michael Geoghegan remarked that "loan impairment charges now stand at their lowest levels since the start of the financial crisis."
Although HSBC described growth in Western nations as "anemic," the bank's strongholds in the Far East (lending in Asia was up 15%), Latin America, and other emerging markets are helping to boost its profitability and stability.
On a strong day for shares, HSBC is up 5% as I write, versus 2% for the FTSE 100 index.
Doing well in the U.K.
Clearly, these results show that HSBC has weathered the worst of the financial storm that began in the summer of 2007, when subprime mortgage securities generated losses in the hundreds of billions of dollars.
In addition, the turnaround in profits was particularly strong in HSBC's retail and commercial arms, where profits more than tripled to $4.3 billion versus a mere $1.2 billion last year. HSBC's U.K. profits rose more than a quarter (26%) to $2.1 billion -- almost a fifth of total profits.
After today warning U.K. banks that they need to lend more, Chancellor George Osborne will be pleased with HSBC's feedback. The bank declared its U.K. lending was up year on year, and it was "very much open for business" in Britain. Indeed, HSBC and its First Direct arm often feature at the very top of mortgage best-buy tables, so the bank is putting its money where its mouth is.
Today, with a tier 1 capital ratio of 11.5%, HSBC is among the best-capitalized banks in the world. Also, its market cap of 120 billion pounds makes HSBC the biggest bank in Europe.
Despite their return to bumper profits, banks are still under pressure.
Financial institutions face EU regulations to curb risk-tasking and excessive pay. Similarly, HSBC and its rivals face a 2 billion-pound-a-year U.K. levy for a future bailout fund. Also, HSBC's profits could be held back by an as-yet weak recovery in the U.S. housing market.
Hence, the banking backlash is not over yet, and future profits could be hit by regulatory crackdowns and lost profits from the sale of now-discredited payment protection insurance. Indeed, in the most extreme scenario, HSBC and other "universal" banks could be forcibly separated into investment banking and retail banking entities.
That said, with HSBC you're buying quality on a global scale, so I remain a fan of its shares. Trading on a price-to-earnings ratio in the low teens and with a dividend yield heading for 4%, they offer solid exposure to the world's fastest-growing regions.
Finally, banking giants Barclays, Lloyds Banking Group, and Royal Bank of Scotland all report first-half results later this week, so watch this space.
More from Fool UK's Cliff D'Arcy:
Brian Richards prepared this article for publication on Fool.com. It was originally written by Cliff D'Arcy. Neither Brian nor Cliff owns shares of any companies mentioned. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.