* H1 pretax profit $9.7 bln vs $13.6 bln year-ago
* Shares rise 3.6 pct on pragmatic measures
* Announces up to $2.5 bln share buy-back for H2
* Earnings drop as gloom gathers over Europe banks
* HSBC scraps end-2017 target for 10 pct return on equity (Recasts, adds investor quotes, China plans)
By Sumeet Chatterjee and Lawrence White
HONG KONG/LONDON, Aug 3 (Reuters) - HSBC announceda $2.5 billion share buy-back and pared ambitions to growdividend payouts and returns as it took pragmatic steps tosoothe investors amid slowing growth in its home markets ofBritain and Hong Kong.
The lender's London-listed shares were trading 3.6 percenthigher at 0808 GMT after the buy-back took the sting out of a 29percent drop in January-June pretax profits, which matchedanalysts' expectations.
As Britain's vote to leave the European Union cloudseconomic prospects and Hong Kong absorbs slower growth in China,HSBC, Europe's biggest bank, has opted to "remove a timetable"for reaching its targeted return on equity (RoE) in excess of 10percent by the end of next year. Return on equity at end-Junewas 7.4 percent.
"Abandoning the timetable for reaching a 10 percent RoE isnot pessimistic as much as realistic that interest rates in theU.S. aren't going up and 'lower-for-longer' is brutal for them,"Richard Buxton, CEO of Old Mutual Global Investors, one ofHSBC's 30 largest investors, told Reuters.
Group Chief Executive Stuart Gulliver said the bank hadremoved the word "progressive" from its guidance on dividendpayout plans, as a reflection of tougher market conditions.
"'Progressive' was interpreted by everyone as meaning it isgoing to go up every quarter notwithstanding what is happeningin the world, so what we are saying is we are committed tosustain the dividend at the current level," he told Reuters.
While investors interpreted the new guidance as pragmatic,analysts at Shore Capital said they were "less than convinced"by the management's pledge to maintain the dividend, noting thatboth Gulliver and Chairman Douglas Flint are set to step down inthe next couple of years.
"With the earnings outlook continuing to deteriorate ... afuture dividend cut could therefore still be on the cards,especially if a new leadership takes a different view."
CAPITAL BOOST
The share buy-back follows HSBC's disposal of its Brazilunit last month in a $5.2 billion deal.
Gulliver told Reuters HSBC's core equity ratio would move to12.6 percent from 12.1 percent at the end of June, following thebuy-back, in line with the bank's target range of 12-13 percent.
The bank could announce further buy-backs up to the value ofthe entire Brazil disposal in the future, Gulliver said,depending on the global economic outlook next year and beyond.
HSBC's reserves could be boosted yet further as the bankrepatriates capital 'trapped' in the United States following thesale of assets from its disastrous 2003 purchase of consumerlender Household.
The core capital ratio in HSBC's North America business wasin the mid-20s and Gulliver said it could remit a 'material sum'as dividends to the bank's London-based holding company,boosting the Group's capital further.
UK, ASIA SLOWDOWN
Europe's banking sector, rattled by deteriorating profitscaused by record low interest rates, is braced for fresheconomic turmoil as Britain's ponders its future relationshipwith the EU.
Gulliver said the bank had seen reduced applications forfunding from small businesses in Britain following the June 23referendum, but that the impact of Brexit had otherwise been'muted' so far.
"The fall in profits is pretty much to be expected as indeedis lower guidance on ROE given nigh on zero interest rates,"said Hugh Young, head of equities at Aberdeen Asset Management,a top HSBC shareholder, adding that he believed the managementwould continue to invest in its business plan as necessary.
HSBC is also grappling with slowing growth in Asia, wherefirst-half profit fell 8 percent and plans to funnel capitalfrom Western businesses into China's Pearl River Delta regionhave been pared back.
"Our plans haven't changed in China... but we are saying theredeployment of capital will take longer," Gulliver toldReuters, blaming China's slowing growth and fluctuating currencysince the 'Asia pivot' strategy was announced last June. (Reporting by Sumeet Chatterjee in HONG KONG and Lawrence Whitein LONDON; Additional reporting by Sinead Cruise in LONDON;Editing by Kenneth Maxwell and Alexandra Hudson)
HSBC Holdings (HSBA)