* Pre-tax profit disappoints, shares fall nearly 6 pct
* Drops RoE target back to more than 10 pct from 12-15 pct
* HSBC says targets based on core capital of 12-13 pct
* "We're still on journey to simplify" - CEO (Adds more comments from CEO and analyst, updates shares)
By Steve Slater and Matt Scuffham
LONDON, Feb 23 (Reuters) - HSBC reported a 17percent fall in annual pretax profit and cut its profitabilitytarget, saying allegations its Swiss business had helpedcustomers to dodge taxes had brought shame on the bank.
Results from Europe's biggest bank on Monday reflected thecost of past misconduct and of protecting itself against theimpact of further scandals. HSBC said allegations about itsGeneva-based arm, raided last week by Swiss officials and nowthe subject of a UK inquiry, had badly damaged its image.
"A number of us, myself included, think the practices of theprivate bank back in the past are a source of shame andreputational damage to HSBC. I think shame would be reasonablenoun to use," Chief Executive Stuart Gulliver told reporters.
Gulliver was himself thrust into the centre of the scandalon Sunday when Britain's Guardian newspaper said he hadsheltered millions of pounds in HSBC's Swiss private bank via aPanamanian company.
HSBC confirmed that Gulliver has a Swiss bank account andwhile there is no suggestion he broke any rules, the revelationscome at a sensitive time. HSBC's chairman Douglas Flint is dueto appear before British lawmakers on Wednesday to answerquestions about the bank's alleged complicity in tax evasion.
Gulliver is among the highest paid bank executives in Europewith a pay packet last year amounting to 7.6 million pounds($11.7 million). This is down from 8 million in 2013 after hisbonus was cut to reflect the bank's failure to stamp outmisconduct.
HSBC's pretax profit of $18.7 billion for 2014 was down from$22.6 billion the year before and below the average analystforecast of $21 billion, after a $3.7 billion bill forprovisions, fines and settlements arising from a range ofmisdeeds, including attempted manipulation of foreign exchange markets.
With the U.S. Department of Justice yet to finish its forexprobe, HSBC added an extra $550 million to cover futureforex-related fines and warned it could face a $500 million billto compensate U.S. customers sold debt protection products.
Shares in the bank fell nearly 6 percent, their biggestintra-day drop since November 2011, to hit a near 2-1/2 yearlow. By 1217 GMT they were down 5.9 percent at 569.4 pence.
"For all the recent media furore around potential conductissues, it is the 'underlying' performance which, we believe,should be the greatest cause of investor concern, right acrossrevenues, costs and impairments," said Ian Gordon, analyst atInvestec, which rates HSBC as a "hold".
RETURN ON EQUITY
Gulliver, appointed CEO in 2011, has sold or closed 77businesses and axed over 50,000 jobs to try and simplify HSBC'ssprawling business and boost earnings after higher capitalrequirements imposed since the financial crisis make it moredifficult for large banks to make a profit.
Gulliver said the job was far from done, but rejected somecalls from regulators or investors for breaking up big bankssuch as itself or JPMorgan.
"We're still on a journey to simplify the firm ... and Idon't rule out that we might make more disposals.
"But I don't think the firm is too big to manage. You cansee the validity of the business on the revenue side, even ifthe cost of running (a big bank) has clearly gone up," he said.
HSBC has increased the amount of capital it holds to absorbpotential losses by over 60 percent since before the crisis. Gulliver said the bank intended to increase its core capital tobetween 12-13 percent from 10.9 percent currently, to give itenough reserves to deal with regulators' demands
The bank cut its target for return on equity to more than 10percent in the next 3-5 years from 12-15 percent, originally setin 2011. This measure of profitability fell to 7.3 percent in2014 from 9.2 percent in 2013.
Gulliver said the bank needed to improve profitability inLatin America, Turkey and the United States, and in areas of itscommercial and investment bank.
Before the financial crisis returns in excess of 10 percentwere the norm for large banks.
Group revenues were stable and the bank's commercial bankingdivision generated record profits but its global banking andmarkets division, which includes HSBC's investment bank,reported a 38 percent drop in profits due to lower revenues andhigher costs.
Underlying operating expenses were $37.9 billion in 2014, up6.1 percent from 2013, showing the struggle Gulliver is havingto lower costs in the face of tougher regulation and the needfor more compliance staff. That continues to depress returns.
It paid or set aside $3.4 billion on items such as the forexfine and compensation for UK customers mis-sold insurance products. ($1 = 0.6507 pounds) (Additional reporting by Tricia Wright, Vikram Subhedar andSimon Jessop in London. Writing by Carmel Crimmins; Editing byKeith Weir and Jane Merriman)
HSBC Holdings (HSBA)