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* HSBC upbeat on emerging mkts but says 2014 may be volatile
* Bonus pool increases 6 pct to $3.9 bln, CEO gets $8 mln
* Bank to pay 665 staff quarterly allowance to meet EU rules
* 'Some prudence and caution' on capital management - CFO
* Shares down 3.4 pct after fall to 15-month low
By Steve Slater and Matt Scuffham
LONDON, Feb 24 (Reuters) - HSBC missed marketexpectations with a 9 percent increase in annual profit andwarned of greater volatility in emerging markets this year,sending shares in Europe's biggest bank to a 15-month low.
HSBC, which is based in London but made two thirds of lastyear's profit in Asia, has axed more than 40,000 jobs and soldor closed 60 businesses over the past three years to cut costs,but has not yet reached its cost efficiency and profitabilitytargets.
"Having made good headway in pulling out of low-qualitybusinesses, they are now facing the headwinds of emergingmarkets," said Chris Wheeler, an analyst at Mediobanca. "It'snot a disaster, but they are paddling hard to make anyprogress."
Wheeler has a "recommendation on HSBC shares.
HSBC shares were down 3.4 percent at 632 pence by 1215 GMT,the weakest performer in a flat European banks index.They fell to 617p, their lowest since November 2012, and haveunderperformed rivals this year due to HSBC's greater exposureto markets in Asia, the Middle East and South America.
HSBC said it increased its bonus pool for staff by 6 percentto $3.9 billion last year, and lifted Gulliver's pay, includingsalary and bonuses, to $8 million from $7.5 million.
The increase comes despite pressure on banks to rein in bigbonuses that many blame for fuelling the risk-taking that led tothe 2008/2009 financial crisis.
HSBC said it would start paying 665 top staff a newquarterly allowance - either in cash or deferred shares -effectively increasing the amount of their fixed pay to meet anew EU law capping bonuses at 200 percent of salary.
Gulliver said major shareholders supported the plan, butthat the EU rules had made pay structures more complex and hehoped the UK government will be successful with a legalchallenge to the move.
"We had a compensation plan here that the shareholders likedbut sadly because of the EU directive we've had to change. Thisisn't something we would have wanted to do... It's much morecomplicated," Gulliver told reporters on a conference call.
Under the new structure, senior bankers will be guaranteedmore pay, but the maximum they can get will be reduced. Gulliverwill be guaranteed $4.2 million, up from $2.5 million before,and can earn up to $11.4 million, down from $13.8 million.
CAPITAL BUILD-UP
Gulliver is under pressure to show how HSBC can replaceincome lost from the sale of U.S. businesses and a stake in aChinese insurer, and worries that Asia's economic growth isslowing.
He remained optimistic about longer-term prospects foremerging markets, which have been hit hard by a U.S. decision towind down stimulus measures, but warned of "greater volatilityin 2014 and choppy markets".
He predicted China's economy would grow by 7.4 percent thisyear, Britain's should expand by 2.6 percent, the United Statesby 2.5 percent and western Europe 1.2 percent.
HSBC reported 2013 pretax profit of $22.6 billion, up from$20.6 billion in 2012 but below the average forecast of $24.3billion in a Thomson Reuters poll.
Shutting businesses hit the bank's revenues, which fell 5percent. Stripping out the impact of disposals, underlyingrevenue was $63.3 billion, up from $61.6 billion.
HSBC said it continued to build up capital, while itremained unclear how much it would need to hold under global andUK rules. It will pay a final 2013 dividend of 19 cents pershare, up on 2012 but less than expected by analysts.
"There is some degree of prudence and caution until we getgreater clarity on the capital management framework for thebanking sector in Europe and the UK," said Finance Director IainMcKay.
The bank's common equity ratio improved to 10.9 percent atthe end of December from 9.5 percent a year earlier. But it saidchanges by the UK regulator would knock up to 0.35 of apercentage point off that ratio this quarter.
HSBC has said it could buy back shares to use excesscapital, but Gulliver said that would not happen this year.
HSBC's investment bank reported a flat fourth quarter, withpretax profit of $1.9 billion, as a drop in revenue from itsrates business was offset by a strong quarter in equities.
Gulliver said he had now cut $4.9 billion in costs on anannualised basis, and the bank was aiming for $2-3 billion morea year by the end of 2016.
The bank's cost efficiency ratio of 59.6 percent and itsreturn on equity ratio of 9.2 percent were both below the targetranges of mid-50s and 12-15 percent that the bank has set itselffor the next three years.
It set aside another $395 million in the fourth quarter tocompensate UK customers mis-sold loan insurance or companiesmis-sold interest rate hedging products, and it also paid $321million more than a year earlier under a UK bank levy.
