This article has been adapted from  Fool U.K. , our sister site across the pond.

HSBC Holdings (NYSE: HBC) unveiled a steep rise in its quarterly earnings this morning, largely thanks to a dramatically reduced tax bill.

Lower loan losses
The U.K.'s biggest bank saw its net operating income (before credit provisions) fall 5% to just over $17 billion (10.4 billion pounds).

However, as with other banks, HSBC's profitability was boosted by lower loan losses, down 37% to under $2.4 billion. Despite this improvement, underlying profit before tax fell 10% to $5.5 billion.

Tax relief
Up to this point, HSBC's results look fairly mundane -- even disappointing. However, this is where the bank's massive losses in U.S. subprime lending finally come good. Have a look at the table below:

Item ($bn)

Q1 2011

Q1 2010

Underlying profit before tax 5.5 6.1
Profit after tax 4.4 2.9
Effective tax rate 20% 52%

As you can see, HSBC's after-tax earnings were boosted mightily by a much lower tax bill. As a result of this tax windfall, the mega-bank's earnings per share (EPS) climbed an impressive 53% to 23 cents per share.

This rise in earnings enabled HSBC to hike its quarterly dividend from eight to nine cents per share, a rise of 12.5%.

Two flies in the ointment
One concern for HSBC's owners should be the large increase in the cost of running the bank. Operating expenses leaped a sixth (17%) to nearly $10.4 billion. As a result, the bank's cost/income ratio shot up to almost 61%, from under 50% a year ago.

HSBC attributes this cost hike to "continued investment in our businesses in the faster-growing markets and in Global Banking and Markets." In other words, more high-priced bankers!

Also, HSBC has started to make provisions to compensate customers for the bank's mis-selling of payment protection insurance (PPI). However, HSBC's initial PPI provision of $440 million is a mere fraction of the 3.2 billion pounds set aside last Thursday by Lloyds Banking Group (NYSE: LYG).

This morning, Barclays (NYSE: BCS) also revealed that it does not intend to appeal against the High Court judgment of April 20 regarding PPI compensation. Instead, the bank will set aside 1 billion pounds for PPI provisions in its second-quarter results.

Valuation
In its London listing, the consensus 2011 forecast is for HSBC to produce EPS of 57.8p and an annual dividend of 26p. Based on a share price of 644p, these give a price-earnings ratio of 11 and a dividend yield of 4%, covered 2.2 times.

These are undemanding ratings for a bank with global reach and scale, as well as heavy exposure to emerging markets. Hence, I'd be happy to own shares in HSBC.

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