HSBC (0005.HK) added, however, that success in emerging markets was becoming increasingly expensive, with costs rising 10 percent, or $3.9 billion - a third of that due to higher pay.

Banks across Europe have been posting billions of dollars of losses as the euro zone sovereign debt crisis has eroded the value of their government bond holdings and hit their trading operations, and as they strive to meet tough new rules aimed at preventing a repeat of the 2007-09 banking crisis.

HSBC has been relatively unscathed because it makes more than three quarters of its profits outside Europe and north America. It remained upbeat on Monday about prospects for emerging markets despite fears that some are overheating and could see an abrupt slowdown in growth this year.

"We remain comfortable with the emerging markets (outlook) and are confident that GDP growth in emerging markets will be positive and China will have a soft landing," Chief Executive Stuart Gulliver told reporters on a conference call.

"We think there's some recent buoyancy in the U.S., so the real issue of negative focus is how the euro zone plays about," he added, predicting the euro zone economy would flatline this year, with "marked recessions" in some southern countries.

HSBC, with around 7,200 offices in 80 countries, said pretax profit rose 15 percent to $21.9 billion in 2011, just below analysts' average forecast of $22.2 billion in a Reuters poll.

The figure fell short of the group's record profit of $24.2 billion in 2007, but beat all other western banks that have reported so far for last year, including U.S. rival J.P. Morgan (JPM.N), which made a $19 billion profit.

The world's most profitable banks in recent years have been China's ICBC (1398.HK), which made $32 billion in 2010, and China Construction Bank (0939.HK), which made $26.4 billion.

HSBC's profits were boosted by a $3.9 billion accounting gain on the value of its debt. Stripping that out, underlying pretax profit fell 6 percent to $17.7 billion, due in part to rising wages in emerging markets and to restructuring costs.

CUTS AND BONUSES

Gulliver, who is reshaping HSBC to cut annual costs by $3.5 billion, lift profitability and sharpen its focus on Asia, said he would step up his plan this year.

He said HSBC would continue to pay higher wages in emerging markets, where there is strong competition for bankers among international and local rivals, adding higher revenue from those areas showed the investment was worthwhile.

At 0945 GMT, HSBC shares in London were down 1.5 percent at 566.1 pence, lagging a 0.7 percent decline in the UK's benchmark FTSE 100 index .FTSE. The shares have beaten the STOXX Europe 600 banking index .SX7P by 15 percent over the past year.

"They've had a good run so I can't get too enthusiastic, but they're (HSBC) going in the right direction and it's a good bet in a difficult sector," said Brown Shipley fund manager John Smith, who holds HSBC shares in his portfolio.

HSBC said profits at its investment bank fell 24 percent to $7 billion, hurt as the euro zone debt crisis slowed capital markets activity in the second half of last year.

Loan impairment charges and other credit risk-related provisions, however, fell $1.9 billion to $12.1 billion.

The group said it paid out $4.2 billion in bonuses, down 2 percent on 2010. Banks are coming under intense pressure from politicians and the public to rein in pay awards because of the role of the sector in the world's economic problems.

HSBC said it paid one of its bankers, whom it declined to name, 8 million pounds ($12.7 million) last year. Gulliver was the second-highest paid employee, getting 7.2 million pounds -- including a 2.2 million bonus -- down from 8.4 million in 2010 when he ran the investment bank.

($1 = 0.6306 British pounds)

(Additional reporting by Sarah White and Sudip Kar-Gupta; Writing by Mark Potter; Editing by David Holmes)

• A Permanent Economic Emergency