31st Mar 2009 16:40
Geographical regions
|
Page |
|
|
Summary |
87 |
|
Europe |
89 |
|
Hong Kong |
99 |
|
Rest of Asia-Pacific |
107 |
|
North America |
119 |
|
Latin America |
129 |
Additional information on results in 2008 may be found in the 'Financial Summary' on pages 23 to 38.
Summary
Europe
HSBC's principal banking operations in Europe are HSBC Bank plc ('HSBC Bank') in the UK, HSBC France, HSBC Bank A.S. in Turkey, HSBC Bank Malta p.l.c., HSBC Private Bank (Suisse) S.A., HSBC Trinkaus & Burkhardt AG and HSBC Guyerzeller Bank AG. Through these operations HSBC provides a wide range of banking, treasury and financial services to personal, commercial and corporate customers across Europe.
Hong Kong
HSBC's principal banking subsidiaries in Hong Kong are The Hongkong and Shanghai Banking Corporation Limited ('The Hongkong and Shanghai Banking Corporation') and Hang Seng Bank Limited ('Hang Seng Bank'). The former is the largest bank incorporated in Hong Kong and is HSBC's flagship bank in the Asia-Pacific region. It is one of Hong Kong's three note-issuing banks, accounting for more than 65 per cent by value of banknotes in circulation in 2007.
Rest of Asia-Pacific (including the Middle East)
HSBC offers personal, commercial, global banking and markets services in mainland China, mainly through its local subsidiary, HSBC Bank (China) Company Limited ('HSBC Bank China'). HSBC also participates indirectly in mainland China through its three associates, Bank of Communications (19.01 per cent owned), Ping An Insurance (16.78 per cent) and Industrial Bank (12.78 per cent), and has a further interest of 8 per cent in Bank of Shanghai.
Outside Hong Kong and mainland China, HSBC conducts business in 20 countries in the Asia-Pacific region, primarily through branches and subsidiaries of The Hongkong and Shanghai Banking Corporation, with particularly strong coverage in India, Indonesia, South Korea, Singapore and Taiwan. HSBC's presence in the Middle East is led by HSBC Bank Middle East Limited ('HSBC Bank Middle East'), whose network of branches, together with HSBC's subsidiaries and associates, gives it the widest coverage in the region; in Australia by HSBC Bank Australia Limited; and in Malaysia by HSBC Bank Malaysia Berhad ('HSBC Bank Malaysia'), which is the largest foreign-owned bank in the country by operating income and pre-tax profits. HSBC's associate in Saudi Arabia, The Saudi British Bank (40 per cent owned), is the Kingdom's fifth largest bank by total assets.
North America
HSBC's North American businesses are located in the US, Canada and Bermuda. Operations in the US are primarily conducted through HSBC Bank USA, N.A. ('HSBC Bank USA') which is concentrated in New York State, and HSBC Finance, a national consumer finance company based in the Chicago metropolitan area. HSBC Markets (USA) Inc. is the intermediate holding company of, inter alia, HSBC Securities (USA) Inc., a registered broker and dealer of securities and a registered futures commission merchant. HSBC Bank Canada and The Bank of Bermuda Limited ('Bank of Bermuda') operate in their respective countries.
Latin America
HSBC's operations in Latin America principally comprise HSBC México, S.A. ('HSBC Mexico'), HSBC Bank Brasil S.A.-Banco Múltiplo ('HSBC Bank Brazil'), HSBC Bank Argentina S.A. ('HSBC Bank Argentina') and HSBC Bank (Panama) S.A. ('HSBC Bank Panama'), which owns subsidiaries in Costa Rica, Honduras, Colombia, Nicaragua and El Salvador. HSBC is also represented by subsidiaries in Chile, the Bahamas, Peru, Paraguay and Uruguay and by a representative office in Venezuela. In addition to banking services, HSBC operates insurance businesses in Mexico, Argentina, Brazil, Panama, Honduras and El Salvador. In Brazil, HSBC offers consumer finance products through its subsidiary, Losango.
In the analysis of profit by geographical regions that follows, operating income and operating expenses
include intraߛHSBC items of US$2,492 million (2007: US$1,985 million; 2006: US$1,494 million).
Profit/(loss) before tax
|
2008 |
2007 |
2006 |
|||||||||
|
US$m |
% |
US$m |
% |
US$m |
% |
||||||
|
Europe |
10,869 |
116.7 |
8,595 |
35.5 |
6,974 |
31.5 |
|||||
|
Hong Kong |
5,461 |
58.7 |
7,339 |
30.3 |
5,182 |
23.5 |
|||||
|
Rest of Asia-Pacific |
6,468 |
69.5 |
6,009 |
24.8 |
3,527 |
16.0 |
|||||
|
North America |
(15,528) |
(166.8) |
91 |
0.4
|
4,668 |
21.1 |
|||||
|
Latin America |
2,037 |
21.9 |
2,178 |
9.0 |
1,735 |
7.9 |
|||||
|
9,307 |
100.0 |
24,212 |
100.0 |
22,086 |
100.0 |
||||||
Total assets15
|
At 31 December |
|||||||
|
2008 |
2007 |
||||||
|
US$m |
% |
US$m |
% |
||||
|
Europe |
1,343,011 |
53.1 |
1,236,633 |
52.5 |
|||
|
Hong Kong |
407,151 |
16.1 |
356,894 |
15.2 |
|||
|
Rest of Asia-Pacific |
262,305 |
10.4 |
243,205 |
10.3 |
|||
|
North America |
552,612 |
21.9 |
549,285 |
23.3 |
|||
|
Latin America |
97,944 |
3.9 |
101,088 |
4.3 |
|||
|
Intra-HSBC items |
(135,558) |
(5.4) |
(132,839) |
(5.6) |
|||
|
2,527,465 |
100.0 |
2,354,266 |
100.0 |
||||
For footnote, see page 143.
Europe
Profit/(loss) before tax by country within customer groups and global businesses
|
Personal Financial Services US$m |
Commercial Banking US$m |
Global Banking & Markets21 US$m |
Private Banking US$m |
Other US$m |
Total US$m |
||||||
|
2008 |
|||||||||||
|
United Kingdom |
1,546 |
2,361 |
(469) |
250 |
2,997 |
6,685 |
|||||
|
France22
|
139 |
176 |
273 |
10 |
2,242 |
2,840 |
|||||
|
Germany |
- |
31 |
184 |
32 |
(22) |
225 |
|||||
|
Malta |
59 |
67 |
16 |
- |
- |
142 |
|||||
|
Switzerland |
- |
- |
- |
553 |
- |
553 |
|||||
|
Turkey |
3 |
91 |
130 |
- |
- |
224 |
|||||
|
Other |
(89) |
(4) |
61 |
153 |
79 |
200 |
|||||
|
1,658 |
2,722 |
195 |
998 |
5,296 |
10,869 |
||||||
|
2007 |
|||||||||||
|
United Kingdom |
1,221 |
2,064 |
1,214 |
317 |
976 |
5,792 |
|||||
|
France22
|
173 |
192 |
692 |
25 |
(49) |
1,033 |
|||||
|
Germany |
- |
36 |
195 |
45 |
19 |
295 |
|||||
|
Malta |
45 |
67 |
45 |
- |
- |
157 |
|||||
|
Switzerland |
- |
- |
- |
475 |
- |
475 |
|||||
|
Turkey |
144 |
75 |
118 |
(1) |
- |
336 |
|||||
|
Other |
(2) |
82 |
263 |
54 |
110 |
507 |
|||||
|
1,581 |
2,516 |
2,527 |
915 |
1,056 |
8,595 |
||||||
|
2006 |
|||||||||||
|
United Kingdom |
1,496 |
1,801 |
1,299 |
380 |
(185) |
4,791 |
|||||
|
France22 |
174 |
236 |
545 |
22 |
(107) |
870 |
|||||
|
Germany |
- |
29 |
114 |
41 |
16 |
200 |
|||||
|
Malta |
42 |
50 |
29 |
- |
- |
121 |
|||||
|
Switzerland |
- |
- |
- |
305 |
- |
305 |
|||||
|
Turkey |
121 |
50 |
64 |
- |
(18) |
217 |
|||||
|
Other |
76 |
68 |
253 |
57 |
16 |
470 |
|||||
|
1,909 |
2,234 |
2,304 |
805 |
(278) |
6,974 |
Loans and advances to customers (net) by country
|
At 31 December |
|||||
|
2008US$m |
2007 US$m |
2006 US$m |
|||
|
United Kingdom |
313,065 |
326,927 |
305,758 |
||
|
France22 |
70,896 |
81,473 |
55,491 |
||
|
Germany |
5,756 |
6,411 |
4,439 |
||
|
Malta |
4,343 |
4,157 |
3,456 |
||
|
Switzerland |
12,708 |
13,789 |
9,151 |
||
|
Turkey |
6,125 |
7,974 |
5,233 |
||
|
Other |
13,298 |
11,544 |
8,971 |
||
|
426,191 |
452,275 |
392,499 |
|||
Customer accounts by country
|
At 31 December |
|||||
|
2008US$m |
2007 US$m |
2006 US$m |
|||
|
United Kingdom |
351,253 |
367,363 |
318,614 |
||
|
France22
|
74,826 |
64,905 |
43,372 |
||
|
Germany |
11,611 |
10,282 |
11,607 |
||
|
Malta |
5,604 |
5,947 |
4,529 |
||
|
Switzerland |
44,643 |
41,015 |
30,062 |
||
|
Turkey |
5,845 |
6,473 |
4,140 |
||
|
Other |
8,694 |
8,969 |
7,041 |
||
|
502,476 |
504,954 |
419,365 |
|||
For footnotes, see page 143.
Profit before tax
|
2008 |
2007 |
2006 |
|||
|
Europe |
US$m |
US$m |
US$m |
||
|
Net interest income |
9,696 |
7,746 |
8,289 |
||
|
Net fee income |
7,492 |
8,431 |
7,108 |
||
|
Net trading income |
5,357 |
6,943 |
4,529 |
||
|
Changes in fair value of long-term debt issued and related derivatives |
2,939 |
1,059 |
28 |
||
|
Net income/(expense) from other financial instruments designated at fair value |
(1,826) |
167 |
116 |
||
|
Net income from financial instruments designated at fair value |
1,113 |
1,226 |
144 |
||
|
Gains less losses from financial investments |
418 |
1,326 |
624 |
||
|
Dividend income |
130 |
171 |
183 |
||
|
Net earned insurance premiums |
5,299 |
4,010 |
1,298 |
||
|
Gains on disposal of French regional banks |
2,445 |
- |
- |
||
|
Other operating income |
2,096 |
1,193 |
1,428 |
||
|
Total operating income |
34,046 |
31,046 |
23,603 |
||
|
Net insurance claims incurred and movement in liabilities to policyholders |
(3,367) |
(3,479) |
(531) |
||
|
Net operating income before loan impairment charges and other credit risk provisions |
30,679 |
27,567 |
23,072 |
||
|
Loan impairment charges and other credit risk provisions |
(3,754) |
(2,542) |
(2,155) |
||
|
Net operating income |
26,925 |
25,025 |
20,917 |
||
|
Total operating expenses |
(16,072) |
(16,525) |
(13,871) |
||
|
Operating profit |
10,853 |
8,500 |
7,046 |
||
|
Share of profit/(loss) in associates and joint ventures |
16 |
95 |
(72) |
||
|
Profit before tax |
10,869 |
8,595 |
6,974 |
||
|
% |
% |
% |
|||
|
Share of HSBC's profit before tax |
116.7 |
35.5 |
31.5 |
||
|
Cost efficiency ratio |
52.4 |
59.9 |
60.1 |
||
|
Year-end staff numbers (full-time equivalent) |
82,093 |
82,166 |
78,311 |
||
|
Balance sheet data15
|
|
||||
|
At 31 December |
|||||
|
2008 |
2007 |
2006 |
|||
|
US$m |
US$m |
US$m |
|||
|
Loans and advances to customers (net) |
426,191 |
452,275 |
392,499 |
||
|
Loans and advances to banks (net) |
61,949 |
104,527 |
76,830 |
||
|
Trading assets, financial assets designated at fair value and financial investments20
|
433,885 |
445,258 |
242,010 |
||
|
Total assets |
1,343,011 |
1,236,633 |
867,032 |
||
|
Deposits by banks |
80,847 |
87,491 |
67,821 |
||
|
Customer accounts |
502,476 |
504,954 |
419,365 |
||
For footnotes, see page 143.
All commentaries on Europe are on an underlying basis unless stated otherwise.
2008 compared with 2007
Economic briefing
In the UK, growth in gross domestic product ('GDP') decelerated markedly in 2008 to 0.7 per cent from 3.0 per cent in 2007, with a technical recession of two successive quarterly contractions in GDP confirmed during the second half of the year. Weakness proved widespread across most of the economy, prompting a sharp deterioration in labour market conditions as unemployment hit a 9-year high of 6.1 per cent in November 2008. Consumer Price Index ('CPI') inflation reached a decade-long high of 5.2 per cent in September 2008 before falling back to 3.1 per cent by the year-end, still some way above the Bank of England's 2 per cent target. House prices continued to fall throughout the year and housing activity decreased sharply. The Bank of England reduced interest rates by 350 basis points during 2008, to finish the year at 2 per cent, as policymakers sought to mitigate the worst effects of the economic slowdown.
The expansion of the eurozone economy slowed sharply in 2008, with GDP growth of 0.7 per cent following a 2.6 per cent expansion in 2007. As in the UK, conditions deteriorated markedly as the year progressed and three successive quarterly declines in GDP were recorded during 2008, confirming that the economy had entered a period of recession. Consumer spending growth proved subdued following the sharp rise in oil prices during the first of half of 2008 and a progressive increase in the unemployment rate towards the year-end. Inflation remained a concern for much of 2008, hitting a peak of 4.0 per cent in July before falling rapidly to 1.6 per cent in December. The European Central Bank, having initially raised interest rates by 25 basis points in July, cut them by 175 basis points to finish the year at 2.5 per cent.
Reconciliation of reported and underlying profit before tax
|
2008 compared with 2007 |
|||||||||||||||||
|
Europe |
2007 as reported US$m |
2007 acquisitions, disposals & dilution gains1 US$m |
Currency translation2 US$m |
2007 at 2008 exchange rates3 US$m |
2008 acquisitions and disposals1 US$m |
Under- lying change US$m |
|
2008 as reported US$m |
Re- ported change % |
|
Under- lying change % |
||||||
|
Net interest income |
7,746 |
(390) |
(224) |
7,132 |
219 |
2,345 |
9,696 |
25 |
33 |
||||||||
|
Net fee income |
8,431 |
(134) |
(244) |
8,053 |
15 |
(576) |
7,492 |
(11) |
(7) |
||||||||
|
Other income4 |
11,390 |
(121) |
(380) |
10,889 |
3,007 |
(405) |
13,491 |
18 |
(4) |
||||||||
|
Net operating income5 |
27,567 |
(645) |
(848) |
26,074 |
3,241 |
1,364 |
30,679 |
11 |
5 |
||||||||
|
Loan impairment charges and other credit risk provisions |
(2,542) |
30 |
152 |
(2,360) |
(6) |
(1,388) |
(3,754) |
(48) |
(59) |
||||||||
|
Net operating income |
25,025 |
(615) |
(696) |
23,714 |
3,235 |
(24) |
26,925 |
8 |
- |
||||||||
|
Operating expenses |
(16,525) |
416 |
531 |
(15,578) |
(88) |
(406) |
(16,072) |
3 |
(3) |
||||||||
|
Operating profit |
8,500 |
(199) |
(165) |
8,136 |
3,147 |
(430) |
10,853 |
28 |
(5) |
||||||||
|
Income from associates |
95 |
(12) |
14 |
97 |
- |
(81) |
16 |
(83) |
(84) |
||||||||
|
Profit before tax |
8,595 |
(211) |
(151) |
8,233 |
3,147 |
(511) |
10,869 |
26 |
(6) |
||||||||
For footnotes, see page 143.
Review of business performance
HSBC's European operations reported a pre-tax profit of US$10.9 billion, compared with US$8.6 billion in 2007, an increase of 26 per cent.
These results included gains of US$2.4 billion on the disposal of seven regional banks in France in July 2008, and of US$425 million on the sale of the card acquiring business in the UK to a joint venture with Global Payments, Inc. in June 2008. Excluding these disposals and, in 2007, the acquisition of HSBC Assurances and the disposal of Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited and substantial fair value gains on own debt, underlying pre-tax profits fell by 33 per cent. This primarily reflected a sharp decline in Global Banking and Markets' revenues, which was mainly attributable to the deterioration in credit markets, the continuing illiquidity in asset-backed securities markets which led to further writeߛdowns, and a US$854 million charge within the equities business following the alleged fraud at Madoff Securities. Personal Financial Services and Private Banking delivered underlying growth.
Net interest income increased by 33 per cent. There was significant growth in Balance Sheet Management revenues, which reflected favourable interest rate risk positioning in expectation of interest rate cuts by central banks. Net interest income also benefited from necessarily selective incremental lending as credit availability generally contracted. In Global Banking, net interest income was boosted by improved spreads.
Falling confidence in the UK banking sector necessitated government intervention in a number of competitor banks. HSBC experienced a strong increase in customer numbers, with corresponding growth in liability balances as the market turmoil intensified. The volume benefit was partially offset by narrowing deposit spreads, as base rates were cut in the UK, and increased funding costs, principally for trading activities, in France. Higher net interest income from the expansion of credit card lending and commercial loan portfolio growth in the small and mid-market customer segments in Turkey was partially offset by narrower spreads following credit card interest rate cap reductions by the central bank.
Net fee income fell by 7 per cent, with lower fees from mergers and acquisitions and equity capital markets due to origination and execution difficulties, coupled with a rise in brokerage expenses in line with increased trading activity in France. Lower performance and management fees in the UK and France as the value of funds under management reduced, reflected the decline in global equity markets. Increased customer acquisition partly offset this, with higher fees derived from growth in packaged accounts and transaction volumes in France and credit card fees in Turkey.
Trading income was 20 per cent lower than in 2007, falling significantly in Global Banking and Markets due to further write-downs on legacy exposures in credit, structured credit derivatives and leveraged and acquisition finance caused by the ongoing turmoil in the credit markets. In addition, a US$854 million charge was taken in equities in respect of the alleged fraud at Madoff Securities. US$11.4 billion and US$2.4 billion of held-for-trading financial assets were reclassified under revised IFRS rules as loans and receivables and available for sale, respectively, preventing any further mark-to-market trading losses on these assets. If these reclassifications had not been made, the profit before tax would have been US$2.6 billion lower.
Excluding the write-downs on legacy exposures and the charge relating to Madoff Securities, trading income grew by 11 per cent, driven by a significant increase in foreign exchange revenues against the backdrop of greater market volatility, and robust revenues in the Rates business, which was positioned to take advantage of falling interest rates. The widening of credit spreads, particularly in the second half of 2008, contributed to fair value gains on structured liabilities and on credit protection bought in the form of credit default swaps.
Net income from financial instruments designated at fair value increased by 36 per cent, primarily due to fair value gains from the effect of widening credit spreads on certain fixed-rate long-term debt issued by HSBC Holdings. This movement was partly offset by a reduction in the value of assets held to meet liabilities under insurance and investment contracts. The reduction in fair value of assets held to meet liabilities under unit-linked insurance contracts is offset by a corresponding reduction in 'Net insurance claims and liabilities to policyholders'. The fair value gains on HSBC's own debt will fully reverse over the life of the debt.
Gains less losses from financial investments of US$418 million were US$915 million lower than in 2007 as there were fewer disposal opportunities in 2008 and the significant realisations from equity investments in the UK and France in 2007 did not recur. Gains largely reflected the sale of MasterCard shares in 2008.
Net earned insurance premiums increased by 22 per cent, largely due to growth in the Guaranteed Income Bond launched in June 2007 and the introduction of enhanced death benefits to certain pension products in the UK. In France, HSBC Assurances performed well in a declining market, as the launch of new guaranteed rate products contributed to 3 per cent growth in gross earned premiums. However, net earned insurance premiums fell following a significant re-insurance transaction undertaken in the first half of 2008.
Other operating income increased by 33 per cent. This was primarily due to recognition of the gain in respect of the purchase of the subsidiary of Metrovacesa which owned the property and long leasehold land comprising 8 Canada Square, London. See Note 23 on the Financial Statements for further details. The growth in revenue also reflected the non-recurrence of a decrease in the value of PVIF business in 2007 following regulatory changes to the rules governing the calculation of insurance liabilities. In addition, there was a favourable embedded value adjustment following HSBC's introduction of enhanced benefits to existing commercial pension products in the first half of 2008. These benefits were partially offset by costs associated with the support of money market funds in the global asset management business.
Net insurance claims incurred and movement in liabilities to policyholders decreased by 5 per cent as a reduction in insurance liabilities reflected the fall in value of market-linked funds. This was partially offset by an increase in liabilities following increased sales of the Guaranteed Income Bond and the implementation of FSA rule changes in 2007 which lowered the liability valuation on life policies.
Loan impairment charges and credit risk provisions rose by 59 per cent to US$3.8 billion; in the UK, primarily in Global Banking and Markets. The deteriorating credit environment resulted in a rise in loan impairment charges, largely reflecting an exposure to a single European property company, and additional credit risk provisions on debt securities held within the Group's available-for-sale portfolio, mainly in Solitaire Funding Limited ('Solitaire'), a special purpose entity managed by HSBC. A modest improvement in the UK personal finance sector reflected the non-recurrence of a change in the methodology in the consumer finance business which resulted in a higher charge in 2007. Excluding this factor, delinquency rates in cards were marginally higher and there was a rise in impairments in the consumer finance business driven by worsening economic conditions and credit quality deterioration, partly offset by action taken to mitigate risk through the continued application of strict lending criteria and the sale of non-core credit card portfolios.
Credit conditions weakened in the commercial business and specific loan impairment charges increased in the UK and France due to the deteriorating credit environment in the second half of 2008. In Turkey, credit card and personal loan delinquency rates were significantly higher, resulting in the implementation of tighter underwriting criteria, reduced credit limits and revised account management policies throughout 2008.
Operating costs increased by 3 per cent to US$16.1 billion. Costs in the UK were in line with 2007, which included ex-gratia payments expensed in respect of overdraft fees applied in previous years and a provision for reimbursement of certain charges on historic will trusts and other related services. Excluding these items, costs rose as a result of an increase in the Financial Services Compensation Scheme levy, restructuring costs and increased rental charges following the sale and leaseback of branch properties, partially offset by lower performance-related pay and a reduction in defined benefit pension scheme costs due to a change in actuarial assumptions.
Operating costs in France decreased slightly with lower performance-related pay and a reduction in pension and retirement healthcare costs following the transfer of certain obligations to a third-party offsetting the higher costs of a voluntary retirement programme.
There was investment in premises and new staff to support business expansion in Turkey, Russia and central and eastern Europe. In 2008, 112 new branches opened and staff numbers increased by 30 per cent in these markets.
Share of profit in associates and joint ventures declined by 84 per cent to US$16 million with 2007 benefiting from an adjustment to the embedded value of HSBC Assurances. The absence of this gain was partially offset by increased joint venture profits following the sale of the card acquiring business in the UK.
2007 compared with 2006
Economic briefing
In the UK, GDP growth accelerated in 2007 to 3.1 per cent from 2.9 per cent in 2006, mainly as a result of buoyant consumer and investment spending. Net trade depressed GDP growth through 2007, and the current account deficit reached a record 5.7 per cent of GDP in the third quarter of the year. Employment growth was fairly subdued, rising by approximately 0.7 per cent during the year. CPI inflation reached a decade-long high of 3.1 per cent in March but subsequently fell back to 2.1 per cent by the year-end, close to the Bank of England's 2 per cent target. After a strong start to the year, nominal house prices declined and housing activity diminished in the final months of 2007. The Bank of England raised interest rates by 75 basis points during 2007 to a peak of 5.75 per cent, but subsequently reduced them to 5.5 per cent at the end of 2007.
The expansion of the eurozone economy continued steadily in 2007, with GDP growth of 2.7 per cent. As in the UK, much of the momentum came from strength in business investment and exports as global demand remained strong, particularly from emerging markets. Consumption was relatively subdued, despite declining unemployment, although fiscal reforms (particularly in Germany) are believed to have depressed household expenditure. Eurozone inflation increased steadily during the second half of the year to an annual rate of 3.1 per cent in December, driven largely by rises in food and energy prices. The European Central Bank ('ECB') raised interest rates by 50 basis points during 2007, to finish the year at 4 per cent.
Review of business performance
European operations reported a pre-tax profit of US$8.6 billion, compared with US$7.0 billion in 2006, an increase of 23 per cent. On an underlying basis, pre-tax profits improved by 13 per cent.
In March 2007, HSBC acquired its partner's shares in life, property and casualty insurer, HSBC Assurances. The results of HSBC Assurances are excluded from the commentary below, which is on an underlying basis.
Reconciliation of reported and underlying profit before tax
|
2007 compared with 2006 |
|||||||||||||||||
|
Europe |
2006 as reported US$m |
2006 acquisitions and disposals1 US$m |
Currency translation2 US$m |
2006 at 2007 exchange rates6 US$m |
2007 acquisitions, disposals & dilution gains1 US$m |
Under- lying change US$m |
|
2007 as reported US$m |
Re- ported change % |
|
Under- lying change % |
||||||
|
Net interest income |
8,289 |
(3) |
635 |
8,921 |
419 |
(1,594) |
7,746 |
(7) |
(18) |
||||||||
|
Net fee income |
7,108 |
53 |
586 |
7,747 |
(133) |
817 |
8,431 |
19 |
11 |
||||||||
|
Other income4 |
7,675 |
(53) |
576 |
8,198 |
(90) |
3,282 |
11,390 |
48 |
40 |
||||||||
|
Net operating income5 |
23,072 |
(3) |
1,797 |
24,866 |
196 |
2,505 |
27,567 |
19 |
10 |
||||||||
|
Loan impairment charges and other credit risk provisions |
(2,155) |
- |
(147) |
(2,302) |
- |
(240) |
(2,542) |
(18) |
(10) |
||||||||
|
Net operating income |
20,917 |
(3) |
1,650 |
22,564 |
196 |
2,265 |
25,025 |
20 |
10 |
||||||||
|
Operating expenses |
(13,871) |
2 |
(1,076) |
(14,945) |
(51) |
(1,529) |
(16,525) |
(19) |
(10) |
||||||||
|
Operating profit |
7,046 |
(1) |
574 |
7,619 |
145 |
736 |
8,500 |
21 |
10 |
||||||||
|
Income/(expense) from associates |
(72) |
- |
(6) |
(78) |
(50) |
223 |
95 |
232 |
286 |
||||||||
|
Profit before tax |
6,974 |
(1) |
568 |
7,541 |
95 |
959 |
8,595 |
23 |
13 |
||||||||
For footnotes, see page 143.
In Commercial Banking, growth in deposit and lending balances in the UK and ongoing business expansion in Turkey and Malta led to steady growth in revenues. This was partly offset by increased loan impairment charges and higher costs associated with business expansion. In Global Banking and Markets, higher income from most businesses was offset by trading losses in Credit and Rates and increased costs. Strong profit growth in Private Banking was driven by an increased client appetite for discretionary portfolios, a rise in lending volumes and further improvements in cross-referrals. In Personal Financial Services, a fall in pre-tax profits reflected ex gratia payments expensed in respect of overdraft fees applied in previous years and a provision for reimbursement of certain charges on historic will trusts and other related services. The 'Other' segment benefited from a US$1.3 billion fair value gain in HSBC's own debt.
Net interest income declined by 18 per cent, mainly because the expansion of trading activities in both the UK and France resulted in higher funding costs, with the related revenues reported in the trading income line. This was partly offset by higher net interest income in the personal and commercial businesses.
In the UK, Personal Financial Services' spreads widened in a rising interest rate environment and competitive pricing attracted higher balances. This was mitigated by lower spreads on mortgages as customers switched to fixed rate products. In Commercial Banking, higher net interest income was largely driven by growth in the UK, Turkey, Germany and Malta. In the UK, a negotiated rate deposit product launched in previous years continued to be instrumental in driving higher deposit balances. Strong growth in corporate and structured banking for micro customers, together with expansion in lending to small and mid-market customers, contributed to higher lending balances although this benefit was partially constrained by spread compression in the competitive market.
Revenues from transactional balances held within the payments and cash management business increased by 13 per cent, as credit market dislocation in the second half of the year caused customers to hold higher cash balances. After several years of decline, balance sheet management revenues in Europe increased.
In Turkey, higher net interest income was driven by new customer acquisition. In Switzerland, the Private Banking business earned higher net interest income from lending to existing clients as they further leveraged their portfolios.
Net fee income rose by 11 per cent. Account services increased on higher customer balances and volumes of transactions in the UK and France, supported by sales of fee-earning packaged accounts. Card fees increased in the UK, mainly on interchange and acquiring fees, and in Turkey, on interchange and cash advance fees. This was partly offset by a reduction in credit card default fees in the UK following regulatory intervention by the OFT in 2006. Broking income increased in the UK, Germany and Switzerland, mainly driven by growth in client assets and transaction volumes. Funds under management fell on lower income from the Hermitage Fund following the part sale of HSBC's investment in it.
Trading income rose by 41 per cent, driven by the equities business and foreign exchange trading, where income increased strongly, with volume and profitability reflecting market volatility. The increase was partly offset by write-downs in credit, structured derivatives and leveraged and acquisition finance. Net trading income increased following the strategic decision to expand the collateralised lending and structured derivatives businesses, the funding costs of which are reported in net interest income.
Credit spreads, primarily on certain fixed-rate long-term debt issued by HSBC Holdings and its subsidiaries, widened significantly in the second half of 2007, leading to a sevenfold increase in net income from financial instruments designated at fair value compared with 2006. These cumulative gains will fully reverse over the life of the debt.
The sale of shareholdings and various equity investments in the UK and France, including Euronext (the European stock exchange), contributed to gains from financial investments of US$1.3 billion, an increase of 101 per cent on 2006.
Net earned insurance premiums increased by 50 per cent to US$4.0 billion, including growth of the Guaranteed Income Bond and motor insurance, and the introduction of enhanced death benefits to pension contracts in the UK. Premiums also grew in the UK because of a higher retention of risk in the non-life business compared with 2006, when a greater proportion of risk and corresponding premiums were ceded to reinsurers. There were also significant contributions from the reinsurance business in Ireland and the life assurance business in Malta.
Other operating income declined by 25 per cent. This largely resulted from a fall in the value of in-force business in UK insurance, driven by a change in the calculation methodology of the PVIF business in the first half of 2007 when HSBC implemented regulatory changes to the rules governing the
calculation of insurance liabilities. This had a marginally positive effect on profit as there was a corresponding reduction in policyholder liabilities.
Net insurance claims incurred and movement in liabilities to policyholders grew by 121 per cent to US$3.5 billion. This growth, which paralleled the growth in net earned insurance premiums, included the effect of higher risk retention in the non-life business, although it was offset by FSA rule changes which led to lower claims valuations on life policies. There was also a rise in flood-related claims in the UK after record rainfalls during the summer.
Loan impairment charges rose by 10 per cent to US$2.5 billion. Overall credit quality remained broadly stable. In the UK, loan impairment charges rose, primarily in consumer finance lending outside HSBC Bank; within HSBC Bank, steps taken in 2006 to tighten underwriting standards led to an improvement in loan impairment trends. Corporate loan impairment charges remained low in absolute terms, although they were 23 per cent higher than in 2006, principally reflecting the effect of Individual Voluntary Arrangements on micro businesses and impairments on two large corporate accounts in the UK.
Operating costs increased by 10 per cent to US$16.5 billion, in line with the growth in net operating income before loan impairment charges. In the UK, a change in actuarial assumptions regarding the principal staff defined benefit pension scheme led to increased costs. Ex-gratia payments were expensed in respect of overdraft fees applied in previous years and a provision for reimbursement of certain charges on historic will trusts and other related services was raised which totalled US$396 million. Cost increases also reflected investments in technology, higher payments and cash management transaction volumes, investments in the French structured derivatives business to support revenue growth and, in Turkey, technical infrastructure and additional headcount in support of business expansion.
Share of profit in associates and joint ventures rose by US$167 million, largely as a result of a US$73 million adjustment to the embedded value of HSBC Assurances in France prior to the acquisition of its remaining share capital, following which it was accounted for as a subsidiary.
Analysis by customer group and global business
Profit/(loss) before tax
|
2008 |
|||||||||||||
|
Europe |
Personal Financial Services US$m |
Commercial Banking US$m |
Global Banking & Markets US$m |
Private Banking US$m |
Other US$m |
|
Inter- segment elimination 21 US$m |
Total US$m |
|||||
|
Net interest income/(expense) |
6,464 |
3,435 |
3,488 |
1,046 |
(459) |
(4,278) |
9,696 |
||||||
|
Net fee income |
2,612 |
2,025 |
1,763 |
1,020 |
72 |
- |
7,492 |
||||||
|
Trading income/(expense) excluding net interest income |
47 |
71 |
1,513 |
198 |
(138) |
- |
1,691 |
||||||
|
Net interest income/(expense) on trading activities |
- |
12 |
(655) |
14 |
17 |
4,278 |
3,666 |
||||||
|
Net trading income/(expense)16 |
47 |
83 |
858 |
212 |
(121) |
4,278 |
5,357 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
2,939 |
- |
2,939 |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
(1,634) |
(214) |
(611) |
- |
633 |
- |
(1,826) |
||||||
|
Net income/(expense) from financial instruments designated at fair value |
(1,634) |
(214) |
(611) |
- |
3,572 |
- |
1,113 |
||||||
|
Gains less losses from financial investments |
281 |
132 |
(30) |
62 |
(27) |
- |
418 |
||||||
|
Dividend income |
35 |
74 |
25 |
5 |
(9) |
- |
130 |
||||||
|
Net earned insurance premiums |
4,927 |
391 |
- |
- |
(19) |
- |
5,299 |
||||||
|
Gains on disposal of French regional banks |
- |
- |
- |
- |
2,445 |
- |
|
2,445 |
|||||
|
Other operating income |
230 |
620 |
398 |
16 |
832 |
- |
2,096 |
||||||
|
Total operating income |
12,962 |
6,546 |
5,891 |
2,361 |
6,286 |
- |
34,046 |
||||||
|
Net insurance claims17 |
(3,224) |
(143) |
- |
- |
- |
- |
(3,367) |
||||||
|
Net operating income5 |
9,738 |
6,403 |
5,891 |
2,361 |
6,286 |
- |
30,679 |
||||||
|
Loan impairment charges and other credit risk provisions |
(1,971) |
(867) |
(875) |
(38) |
(3) |
(3,754) |
|||||||
|
Net operating income |
7,767 |
5,536 |
5,016 |
2,323 |
6,283 |
- |
26,925 |
||||||
|
Total operating expenses |
(6,107) |
(2,830) |
(4,823) |
(1,325) |
(987) |
- |
(16,072) |
||||||
|
Operating profit |
1,660 |
2,706 |
193 |
998 |
5,296 |
- |
10,853 |
||||||
|
Share of profit/(loss) in associates and joint ventures |
(2) |
16 |
2 |
- |
- |
- |
16 |
||||||
|
Profit before tax |
1,658 |
2,722 |
195 |
998 |
5,296 |
- |
10,869 |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
17.8 |
29.2 |
2.1 |
10.7 |
56.9 |
116.7 |
|||||||
|
Cost efficiency ratio |
62.7 |
44.2 |
81.9 |
56.1 |
15.7 |
52.4 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
126,909 |
87,245 |
185,818 |
25,722 |
497 |
426,191 |
|||||||
|
Total assets |
171,962 |
107,495 |
1,131,721 |
84,485 |
64,423 |
(217,075) |
1,343,011 |
||||||
|
Customer accounts |
145,411 |
91,188 |
199,687 |
66,007 |
183 |
502,476 |
|||||||
For footnotes, see page 143.
|
2007 |
|||||||||||||
|
Europe |
Personal Financial Services US$m |
Commercial Banking US$m |
Global Banking & Markets US$m |
Private Banking US$m |
Other US$m |
|
Inter- segment elimination 21 US$m |
Total US$m |
|||||
|
Net interest income |
6,604 |
3,419 |
1,361 |
793 |
86 |
(4,517) |
7,746 |
||||||
|
Net fee income/(expense) |
3,060 |
2,194 |
2,316 |
1,032 |
(171) |
- |
8,431 |
||||||
|
Trading income excluding net interest income |
60 |
36 |
2,657 |
161 |
89 |
- |
3,003 |
||||||
|
Net interest income/(expense) on trading activities |
(7) |
30 |
(610) |
9 |
1 |
4,517 |
3,940 |
||||||
|
Net trading income16 |
53 |
66 |
2,047 |
170 |
90 |
4,517 |
6,943 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
1,059 |
- |
1,059 |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
126 |
31 |
(185) |
- |
195 |
- |
167 |
||||||
|
Net income/(expense) from financial instruments designated at fair value |
126 |
31 |
(185) |
- |
1,254 |
- |
1,226 |
||||||
|
Gains less losses from financial investments |
50 |
36 |
1,100 |
115 |
25 |
- |
1,326 |
||||||
|
Dividend income |
1 |
4 |
155 |
7 |
4 |
- |
171 |
||||||
|
Net earned insurance premiums |
3,511 |
521 |
- |
- |
(22) |
- |
4,010 |
||||||
|
Other operating income/ (expense) |
54 |
(35) |
853 |
8 |
301 |
12 |
1,193 |
||||||
|
Total operating income |
13,459 |
6,236 |
7,647 |
2,125 |
1,567 |
12 |
31,046 |
||||||
|
Net insurance claims17 |
(3,214) |
(265) |
- |
- |
- |
- |
(3,479) |
||||||
|
Net operating income5 |
10,245 |
5,971 |
7,647 |
2,125 |
1,567 |
12 |
27,567 |
||||||
|
Loan impairment (charges)/ recoveries and other credit risk provisions |
(2,044) |
(515) |
26 |
(4) |
(5) |
- |
(2,542) |
||||||
|
Net operating income |
8,201 |
5,456 |
7,673 |
2,121 |
1,562 |
12 |
25,025 |
||||||
|
Total operating expenses |
(6,635) |
(2,941) |
(5,150) |
(1,208) |
(579) |
(12) |
(16,525) |
||||||
|
Operating profit |
1,566 |
2,515 |
2,523 |
913 |
983 |
- |
8,500 |
||||||
|
Share of profit in associates and joint ventures |
15 |
1 |
4 |
2 |
73 |
- |
95 |
||||||
|
Profit before tax |
1,581 |
2,516 |
2,527 |
915 |
1,056 |
- |
8,595 |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
6.5 |
10.4 |
10.4 |
3.8 |
4.4 |
35.5 |
|||||||
|
Cost efficiency ratio |
64.8 |
49.3 |
67.3 |
56.8 |
36.9 |
59.9 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
151,687 |
106,846 |
163,066 |
30,195 |
481 |
452,275 |
|||||||
|
Total assets |
240,361 |
168,846 |
892,712 |
83,740 |
96,346 |
(245,372) |
1,236,633 |
||||||
|
Customer accounts |
178,757 |
99,704 |
163,713 |
62,055 |
725 |
504,954 |
|||||||
For footnotes, see page 143.
Analysis by customer group and global business (continued)
Profit/(loss) before tax
|
2006 |
|||||||||||||
|
Europe |
Personal Financial Services US$m |
Commercial Banking US$m |
Global Banking & Markets US$m |
Private Banking US$m |
Other US$m |
|
Inter- segment elimination21 US$m |
Total US$m |
|||||
|
Net interest income |
5,653 |
2,923 |
1,222 |
675 |
14 |
(2,198) |
8,289 |
||||||
|
Net fee income |
2,533 |
1,707 |
1,673 |
869 |
326 |
- |
7,108 |
||||||
|
Trading income/(expense) excluding net interest income |
119 |
27 |
2,636 |
99 |
(39) |
- |
2,842 |
||||||
|
Net interest income/(expense) on trading activities |
(6) |
15 |
(523) |
2 |
1 |
2,198 |
1,687 |
||||||
|
Net trading income/(expense)16 |
113 |
42 |
2,113 |
101 |
(38) |
2,198 |
4,529 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
28 |
- |
28 |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
80 |
27 |
11 |
- |
(2) |
- |
116 |
||||||
|
Net income/(expense) from financial instruments designated at fair value |
80 |
27 |
11 |
- |
26 |
- |
144 |
||||||
|
Gains less losses from financial investments |
37 |
22 |
413 |
149 |
3 |
- |
624 |
||||||
|
Dividend income |
2 |
3 |
171 |
5 |
2 |
- |
183 |
||||||
|
Net earned insurance premiums |
979 |
110 |
- |
- |
209 |
- |
1,298 |
||||||
|
Other operating income |
128 |
103 |
957 |
13 |
256 |
(29) |
1,428 |
||||||
|
Total operating income |
9,525 |
4,937 |
6,560 |
1,812 |
798 |
(29) |
23,603 |
||||||
|
Net insurance claims17 |
(331) |
(19) |
- |
- |
(181) |
- |
(531) |
||||||
|
Net operating income5 |
9,194 |
4,918 |
6,560 |
1,812 |
617 |
(29) |
23,072 |
||||||
|
Loan impairment (charges)/ recoveries and other credit risk provisions |
(1,838) |
(386) |
64 |
2 |
3 |
- |
(2,155) |
||||||
|
Net operating income |
7,356 |
4,532 |
6,624 |
1,814 |
620 |
(29) |
20,917 |
||||||
|
Total operating expenses |
(5,447) |
(2,298) |
(4,224) |
(1,010) |
(921) |
29 |
(13,871) |
||||||
|
Operating profit/(loss) |
1,909 |
2,234 |
2,400 |
804 |
(301) |
- |
7,046 |
||||||
|
Share of profit/(loss) in associates and joint ventures |
- |
- |
(96) |
1 |
23 |
- |
(72) |
||||||
|
Profit/(loss) before tax |
1,909 |
2,234 |
2,304 |
805 |
(278) |
- |
6,974 |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
8.6 |
10.1 |
10.4 |
3.6 |
(1.2) |
31.5 |
|||||||
|
Cost efficiency ratio |
59.2 |
46.7 |
64.4 |
55.7 |
149.3 |
60.1 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
147,507 |
81,430 |
140,277 |
23,283 |
2 |
392,499 |
|||||||
|
Total assets |
227,609 |
111,510 |
526,468 |
68,380 |
85,183 |
(152,118) |
867,032 |
||||||
|
Customer accounts |
152,411 |
80,312 |
139,416 |
47,223 |
3 |
419,365 |
|||||||
For footnotes, see page 143.
Related Shares:
HSBC Holdings