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By Anshuman Daga and Lawrence White
SINGAPORE/LONDON (Reuters) -HSBC has shelved plans for new stock buybacks this year after reporting an unexpected hit to its capital on Tuesday, as a cocktail of rising inflation, geopolitical tensions and economic weakness dented its prospects.
Shares in Europe's biggest bank were trading 3.6% lower by 1014 GMT against a 0.8% gain in the benchmark FTSE 100 index, as investors reacted to revised payout plans, which compounded disappointing news on the bank's balance sheet.
HSBC's core capital ratio, a key measure of a bank's financial strength, fell 1.7 percentage points to 14.1% from the end of 2021, driven in part by losses on a hedging strategy it has set up in advance of expected central bank rate hikes.
Capital "is still a very strong level, but an eyebrow raiser nonetheless," said Simon Peters, investment strategist at Algebris Investments.
The bank's capital will be further sapped when it books a loss of around $2.7 billion in the second half of the year, due to the sale of its France retail operations.
That comes as soaring energy prices and supply chain outages, partly due to the conflict in Ukraine, threaten to scupper a nascent global economic recovery from the pandemic.
HSBC Chief Executive Noel Quinn, who has run the London-headquartered bank for the last two years, is ploughing billions into Asia to drive growth, with a focus on the wealth management business. He has also moved global executives there.
Pretax profit of $4.17 billion for the first quarter ending on March 31, was down from $5.78 billion a year earlier, but beat the $3.72 billion average estimate of 16 analysts compiled by HSBC.
In February, HSBC, which earns about two-thirds of its reported pretax profit from Asia, brought forward its key profitability target by a year and more than doubled its annual profit as expected bad loans from the pandemic failed to materialise.
HSBC's revenues fell 3%, in part due to COVID-19 restrictions in the bank's biggest market of Hong Kong as its branches were closed, hitting its sales of investment products.
But Chief Financial Officer Ewen Stevenson told reporters the bank remained "massive bulls" on growth in the region and had no plans to change strategy there.
The lender blamed volatility in the value of some government and corporate bonds it holds as hedges against dips in interest income for its capital hit, a trend Stevenson said could continue this year for HSBC and other banks.
Those investments will eventually result in a positive return for the bank if rate hikes proceed as expected, Stevenson told Reuters.
HSBC meanwhile is "not considering" breaking itself up, Stevenson told reporters, after media reports that an anonymous shareholder had recommended the oft-discussed move to unlock the value of the bank's component businesses.
The bank said expected credit losses came in at $600 million in the first quarter, less than expected. In the same period last year it unlocked $400 million of reserves as the outlook improved.
The swing to a net credit loss mainly reflected the impacts of the Russia-Ukraine conflict and inflationary pressures on the forward economic outlook, the bank said.
On Tuesday, Swiss wealth titan UBS reported a 17% rise in quarterly net profit to its best since 2007 on the back of strong trading.
HSBC's smaller rival Standard Chartered reports results on Thursday, followed by Southeast Asian banks such as DBS Group on Friday.
HSBC also holds its annual shareholder meeting in London on Friday.
(Reporting by Anshuman Daga and Lawrence White; Editing by Sinead Cruise, Edmund Blair and Jane Merriman)