Global Price War in Banking Sector has begun!

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Sir John Bond, chairman of HSBC, warned on global price war in the banking sector as the world's largest banks use their growing surplus capital to undercut rivals. He estimated that over the next two years, the world's five largest banks would generate about $60bn of surplus capital, which could be used to launch a price war.

Sir John Bond, chairman of HSBC, warned on global price war in the banking sector as the world's largest banks use their growing surplus capital to undercut rivals. He estimated that over the next two years, the world's five largest banks would generate about $60bn of surplus capital, which could be used to launch a price war.

“That is a significant amount of capital to reinvest in the business against the background of the current market conditions,” Sir John said. The HSBC chairman also warned that the use of common risk management techniques raised the threat of sharp swings in capital markets, as financial services institutions were taking similar investment decisions to one another, and many were highly geared.

“The risk of market disruption rises as financial institutions use increasingly similar technology to manage risk,” he said.

The bank saw pre-tax profits rise 53 per cent to $9.37bn in the half year to the end of June, helped by a full six months' contribution from Household International, the US consumer finance business it bought last year. Household contributed $1.9bn this time, compared with $536m during three months of the first half.

Strong credit quality, especially in the US and Hong Kong, also lifted the results. Bad and doubtful debts accounted for just 0.96 per cent of average advances, down from 1.53 per cent a year earlier a benefit of $966m.

The group's profits were also boosted by a strong performance in Hong Kong, where an improving economy and the bank's pursuit of non-interest income helped lift pre-tax profits by 40 per cent to $2.58bn.

Stephen Green, HSBC's chief executive, said the group had reached agreement in principle to buy 19.9 per cent of Bank of Communications, China's fifth-largest lender.

David Eldon, HSBC's most senior executive in Asia, indicated that the deal would be HSBC's last acquisition in the country's commercial banking sector. “We are going to have a fair amount of work to do, which is going to keep us occupied for the time being,” he said.

Mr Eldon said HSBC wanted to concentrate on other areas of China's fast-growing financial sector, including asset management joint ventures with local partners.

HSBC, which already has a stake in Bank of Shanghai and Industrial Bank through its Hang Seng unit, is expected to sign a deal with Bank of Communications this week.

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Helen Russon