HSBC fears it may have to pay back £300m in overdraft fees

HSBC fears it may have to pay back £300m in overdraft fees

HSBC yesterday said it may have to pay £300m to customers reclaiming overdraft fees as it reported record profits of £12.1bn despite the "exceptionally weak performance" of its US business.

Britain's biggest bank last year paid £115m to customers who were charged overdraft fees and believes that if a test case goes against the industry it could face further claims of £300m. This is the first estimate given by a high street bank about the potential impact of the case brought by the Office of Fair Trading, which according to some estimates could cost the industry £10bn.

HSBC reported a 10% rise in profit despite a record $17bn (£8.5bn) charge to cover bad loans. The bulk of this was caused by problems in the US, where impairment charges and other risk provisions rose by 79% to $11.7bn. This almost wiped out the contribution from the North American division, which crashed from $4.6bn in 2006 to $91m last year.

HSBC shares were the largest gainers in the FTSE 100 yesterday, up 24p at 790p.

The bank said that the outlook for 2008 was "uncertain" and that it was looking for ways to redeploy capital from developed markets to developing ones. It is already in talks to sell 400 branches in France to Banque Fédérale des Banques Populaires. But, responding to demands from activist investors Knight Vinke to sell off the US arm, Stephen Green, the chairman, said this would be "unthinkable and irresponsible".

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bank admitted, though, that its Beneficial Bank operations in Britain were being scaled back. "We are looking at many options for that business longer term," said Dyfrig John, head of HSBC's European operations.

John said the retail bank in the UK, which reported a 16% fall in pre-tax profit to £740m, would increase its share of the mortgage market through HSBC branches and its First Direct telephone operations. UK profits were held back by the overdraft charges and a £85m charge for mispricing in its trust operations over 40 years.

The economic slowdown and the credit outlook in the US "may well get worse before they get better", the bank said as it admitted the global banking and markets operation had written down $2.1bn on instruments affected by the sub-prime mortgage crisis. This arm still reported $6bn of profits and the bank appointed its head, Stuart Gulliver, to the board.

Gulliver is one three new executives appointed to a board that is dominated by non-executives, much to the consternation of shareholders. Three non-executive directors - Baroness Dunn, Sir Brian Moffatt and Lord Butler - are leaving and Safra Catz and Narayana Murthy will join in May.

Knight Vinke said the board changes "have gone a long way to addressing our concerns". But it kept up its pressure on the bank, criticising its US arm, which it said was "structurally unable to support the $150bn of debt on its balance sheet".

For the first time, the bank issued measures to judge its performance based on financial performance, customer retention and employee engagement. It is aiming for a return on equity of 15-19%, a cost-efficiency ratio of 48-52% and it also set goals for regulatory capital and total shareholder returns.

The bank was helped to its record pre-tax profits by its tax charge, which was cut to 15% from 24% a year ago.