31st Mar 2009 16:41
Hong Kong
Profit/(loss) before tax by customer group and global business
|
2008 US$m |
2007 US$m |
2006 US$m |
|||
|
Personal Financial Services |
3,428 |
4,212 |
2,880 |
||
|
Commercial Banking |
1,315 |
1,619 |
1,321 |
||
|
Global Banking and Markets |
1,436 |
1,578 |
955 |
||
|
Private Banking |
237 |
305 |
201 |
||
|
Other |
(955) |
(375) |
(175) |
||
|
5,461 |
7,339 |
5,182 |
Profit before tax
|
2008US$m |
2007 US$m |
2006 US$m |
|||
|
Net interest income |
5,698 |
5,483 |
4,685 |
||
|
Net fee income |
2,580 |
3,362 |
2,056 |
||
|
Net trading income |
1,193 |
1,242 |
617 |
||
|
Changes in fair value of long-term debt issued and related derivatives |
3 |
2 |
- |
||
|
Net income/(expense) from other financial instruments designated at fair value |
(1,194) |
674 |
260 |
||
|
Net income/(expense) from financial instruments designated at fair value |
(1,191) |
676 |
260 |
||
|
Gains less losses from financial investments |
(309) |
94 |
162 |
||
|
Dividend income |
41 |
31 |
61 |
||
|
Net earned insurance premiums |
3,247 |
2,797 |
2,628 |
||
|
Other operating income |
817 |
845 |
834 |
||
|
Total operating income |
12,076 |
14,530 |
11,303 |
||
|
Net insurance claims incurred and movement in liabilities to policyholders |
(1,922) |
(3,208) |
(2,699) |
||
|
Net operating income before loan impairment charges and other credit risk provisions |
10,154 |
11,322 |
8,604 |
||
|
Loan impairment charges and other credit risk provisions |
(765) |
(231) |
(172) |
||
|
Net operating income |
9,389 |
11,091 |
8,432 |
||
|
Total operating expenses |
(3,943) |
(3,780) |
(3,269) |
||
|
Operating profit |
5,446 |
7,311 |
5,163 |
||
|
Share of profit in associates and joint ventures |
15 |
28 |
19 |
||
|
Profit before tax |
5,461 |
7,339 |
5,182 |
||
|
% |
% |
% |
|||
|
Share of HSBC's profit before tax |
58.7 |
30.3 |
23.5 |
||
|
Cost efficiency ratio |
38.8 |
33.4 |
38.0 |
||
|
Year-end staff numbers (full-time equivalent) |
29,330 |
27,655 |
27,586 |
||
|
Balance sheet data15
|
|
||||
|
At 31 December |
|||||
|
2008 |
2007 |
2006 |
|||
|
US$m |
US$m |
US$m |
|||
|
Loans and advances to customers (net) |
100,220 |
89,638 |
84,282 |
||
|
Loans and advances to banks (net) |
29,646 |
63,737 |
50,359 |
||
|
Trading assets, financial assets designated at fair value, and financial investments |
122,602 |
102,180 |
103,734 |
||
|
Total assets |
407,151 |
356,894 |
318,857 |
||
|
Deposits by banks |
11,769 |
6,420 |
4,799 |
||
|
Customer accounts |
250,517 |
234,488 |
196,691 |
||
For footnote, see page 143.
All commentaries on Hong Kong are on an underlying basis unless stated otherwise.
2008 compared with 2007
Economic briefing
Hong Kong's GDP growth slowed to 2.5 per cent in 2008 from 6.4 per cent in 2007. After performing strongly during the early months of the year, the economy slowed sharply and a technical recession was confirmed with the release of the third quarter GDP statistics. External demand proved especially weak during the second half of 2008 and the growth in private consumption also slowed sharply. The unemployment rate rose from a ten-year low of 3.2 per cent in August 2008 to 4.1 per cent by the year-end. Consumer price inflation proved volatile during the year, rising to a ten-year high of 6.3 per cent in July before slowing to 2.1 per cent by December 2008, although this movement largely reflected the trends in food and energy prices. In response to interest rate cuts in the US, Hong Kong cut its base interest rate on seven occasions during 2008, finishing the year at 0.5 per cent compared with 5.75 per cent at the end of 2007. The Hang Seng Index fell by 48 per cent during 2008.
Reconciliation of reported and underlying profit before tax
|
2008 compared with 2007 |
|||||||||||||||||
|
Hong Kong |
2007 as reported US$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 |
5,483 |
- |
15 |
5,498 |
- |
200 |
5,698 |
4 |
4 |
||||||||
|
Net fee income |
3,362 |
- |
9 |
3,371 |
- |
(791) |
2,580 |
(23) |
(23) |
||||||||
|
Other income4
|
2,477
|
(1)
|
3
|
2,479
|
-
|
(603)
|
1,876
|
(24)
|
(24)
|
||||||||
|
Net operating income5
|
11,322
|
(1)
|
27
|
11,348
|
-
|
(1,194)
|
10,154
|
(10)
|
(11)
|
||||||||
|
Loan impairment charges and other credit risk provisions |
(231) |
1 |
(1) |
(231) |
- |
(534) |
(765) |
(231) |
(231) |
||||||||
|
Net operating income |
11,091 |
- |
26 |
11,117 |
- |
(1,728) |
9,389 |
(15) |
(16) |
||||||||
|
Operating expenses |
(3,780) |
- |
(9) |
(3,789) |
- |
(154) |
(3,943) |
(4) |
(4) |
||||||||
|
Operating profit |
7,311 |
- |
17 |
7,328 |
- |
(1,882) |
5,446 |
(26) |
(26) |
||||||||
|
Income from associates |
28 |
- |
- |
28 |
- |
(13) |
15 |
(46) |
(46) |
||||||||
|
Profit before tax |
7,339 |
- |
17 |
7,356 |
- |
(1,895) |
5,461 |
(26) |
(26) |
||||||||
For footnotes, see page 143.
Review of business performance
Hong Kong reported pre-tax profits of US$5.5 billion, a 26 per cent decline compared with record profits of US$7.3 billion in 2007. Lower revenues largely reflected a decline in wealth management and insurance income as economic conditions deteriorated. Revenue decline was compounded by impairment charges recognised on certain investments, which arose as a consequence of significant falls in equity market prices. Offsetting this, in part, was considerably stronger balance sheet management income from treasury positions which correctly anticipated the decline in interest rates.
Net interest income rose by 4 per cent, driven by the strong Balance Sheet Management performance in Global Banking and Markets mainly driven by liquidity generated by retail banking in the environment of falling short-term interest rates.
Savings and deposit balances grew strongly, particularly in Personal Financial Services, as customers revealed a preference for security and liquidity following declines in equity markets. Deposit growth was augmented by the launch of campaigns offering both preferential time deposit rates and an enhanced HSBC online platform. The significant decline in interest rates during 2008 led to a narrowing of deposit spreads.
Customer lending volumes were 11 per cent higher, due in part to an 11 per cent rise in mortgage balances. Lending margins narrowed, however, due to interest rate cuts, particularly affecting mortgage lending and other loans linked to HIBOR. Balances outstanding on credit cards rose, driven by increased cardholder spending, and spreads on this business increased due to lower funding costs. Nearly one million new cards were issued in the year, bringing the total cards in circulation to 5.3 million. Volumes of trade finance grew strongly, driven by demand from corporates with international trade requirements, and commercial lending balances rose, particularly during the first half of the year.
Fee income declined by 23 per cent, driven by lower equity market-related revenues. Weak market sentiment led to lower volumes of retail brokerage and a decrease in income from wealth management activity. This was partly offset by a rise in fees from cards following increases in both cards in circulation and cardholder spending. Fees from account services rose due to greater customer activity and there were higher fees generated from bundled products.
Trading income was 4 per cent lower, driven by further write-downs of US$0.2 billion in Global Banking and Markets on a legacy monoline exposure. Excluding these write-downs, trading income grew due to a rise in foreign exchange and rates income as continuing market volatility generated increased trading opportunities and demand for active hedging products.
The net loss of US$1.2 billion on financial instruments designated at fair value compared with income of US$676 million in 2007. The loss reflected a decline in the value of assets linked to the insurance business. To a large extent, these losses are attributable to policyholders, with an equivalent reduction in net insurance claims and movement in liabilities to policyholders. While the decline in the value of assets which relate to unit-linked products is allocated to policyholders in full, the portion of decline in the value passed on to clients who have products with discretionary participation features and guarantees may be restricted.
Losses from financial investments of US$309 million reflected impairments required on investments which have experienced significant falls in equity market prices. These equity investments are classified as available for sale, are not held for trading, and remain part of the strategic positioning of HSBC's businesses in Asia. These losses were partly offset by an aggregate gain of US$203 million from the redemption of shares in the Visa initial public offering ('IPO') and the disposal of MasterCard shares.
Net earned insurance premiums increased by 16 per cent to US$3.2 billion, largely due to growth in the life insurance business, in particular for policies with discretionary participation features.
Net insurance claims and movement in liabilities to policyholders fell by 40 per cent, reflecting the decline in asset values noted above partly offset by increases due to growth in premiums.
Loan impairment charges and other credit risk provisions rose markedly from the previously low level to US$765 million as economic conditions deteriorated. Within these charges were exposures to financial institutions held within Global Banking and Markets, which resulted in other credit risk provisions. In Commercial Banking, the combination of an absence of significant recoveries recorded in 2007 and weakness among certain exporters in Hong Kong, who were affected by reduced demand from the US and other developed countries, raised loan impairment charges. As local businesses responded to the economic environment, unemployment rose in the second half of 2008. Credit policies were consequently adjusted across certain products as delinquency and bankruptcy increased in Hong Kong. Although property market declines reduced equity levels for residential mortgage customers, the impact on loan impairment charges was limited as this lending was well-secured and regulatory restrictions constrained origination loan-to-value ratios to below 70 per cent.
Operating expenses rose by 4 per cent. Staff costs declined by 3 per cent despite wage increases and a rise in the number of customer-facing staff, largely due to lower performance-related costs in Global Banking and Markets. Staff numbers were higher than in 2007 notwithstanding reductions within the branch network for lower business volumes in the latter part of 2008. IT costs rose as investment in systems continued. Marketing costs were lower following active management of costs while property rental costs increased due to higher market rental rates. Overall, cost growth was curtailed in response to the more difficult economic climate.
2007 compared with 2006
Economic briefing
Hong Kong's economy remained robust during 2007, with the annual rate of growth of 6.3 per cent. Domestic consumption was the major contributor to economic expansion, supported by the strong labour market. The unemployment rate fell to 3.4 per cent, a nine year low, as the supply of labour remained very tight. Global increases in food and oil prices affected Hong Kong, but the territory also experienced wage inflation, rising import prices and growth in property rental costs. Inflation increased as a result, exceeding 3 per cent in the final quarter of the year.
In response to interest rate cuts in the US and capital inflows into the local market, Hong Kong's main interest rate was cut on three separate occasions during the final months of 2007, with the prime rate ending the year at 6.75 per cent, down by one per cent from its high for the year. Local asset markets benefited accordingly. The previously very strong levels of export growth slowed in the second half of 2007, as demand from the US moderated and the reduction in mainland China's export tax rebate in July temporarily affected Hong Kong's re-exports. Despite relatively modest trade growth, external demand for Hong Kong's services remained strong due to the buoyant tourism sector and increasing cross-border business activities, especially within the financial sector.
Reconciliation of reported and underlying profit before tax
|
2007 compared with 2006 |
|||||||||||||||||
|
Hong Kong |
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 |
4,685 |
- |
(15) |
4,670 |
- |
813 |
5,483 |
17 |
17 |
||||||||
|
Net fee income |
2,056 |
- |
(6) |
2,050 |
- |
1,312 |
3,362 |
64 |
64 |
||||||||
|
Other income4
|
1,863 |
- |
(6) |
1,857 |
- |
620 |
2,477 |
33 |
33 |
||||||||
|
Net operating income5
|
8,604 |
- |
(27) |
8,577 |
- |
2,745 |
11,322 |
32 |
32 |
||||||||
|
Loan impairment chargesand other credit risk provisions |
(172) |
- |
1 |
(171) |
- |
(60) |
(231) |
(34) |
(35) |
||||||||
|
Net operating income |
8,432 |
- |
(26) |
8,406 |
- |
2,685 |
11,091 |
32 |
32 |
||||||||
|
Operating expenses |
(3,269) |
- |
9 |
(3,260) |
- |
(520) |
(3,780) |
(16) |
(16) |
||||||||
|
Operating profit |
5,163 |
- |
(17) |
5,146 |
- |
2,165 |
7,311 |
42 |
42 |
||||||||
|
Income from associates |
19 |
- |
- |
19 |
- |
9 |
28 |
47 |
47 |
||||||||
|
Profit before tax |
5,182 |
- |
(17) |
5,165 |
- |
2,174 |
7,339 |
42 |
42 |
||||||||
For footnotes, see page 143.
Review of business performance
HSBC's operations in Hong Kong reported a record pre-tax profit of US$7.3 billion, an increase of 42 per cent compared with US$5.2 billion in 2006. The underlying change was in line with the reported change. Net operating income increased by 32 per cent, double the rate of growth in operating expenses.
In Personal Financial Services, record results reflected increased fee income, particularly from retail brokerage and investment products, as well as growth in net interest income from higher deposit balances and lending. In Commercial Banking, results were driven by balance sheet growth from customer acquisition, increased trade flows and the expansion of supporting businesses into mainland China. In Global Banking and Markets, income growth reflected improved performance in balance sheet management and strong results from the trading businesses and securities services in the buoyant economic environment. Higher demand for structured products and mutual funds drove the increase in Private Banking profits. Cost efficiency ratios improved in all customer groups.
Net interest income rose by 17 per cent, driven by growth in asset and liability products in the personal, commercial and corporate businesses. Net interest income from Global Banking and Markets increased by 79 per cent as balance sheet management revenues recovered and deposits grew strongly with higher spreads. A rise in liabilities to fund trading activities reduced net interest income, with a corresponding rise in trading income. Personal Financial Services' net interest income grew by 16 per cent as wider spreads were recorded on higher deposit balances, with the relaunch of HSBC Premier contributing to the growth in deposit balances. Card balances were also higher following a number of promotional programmes during the year. In Commercial Banking, strong economic growth helped generate demand for savings products and this, combined with strong customer acquisition, resulted in higher net interest from the investment of deposits.
Buoyant stock market activity drove an increase in fee income. Broking and global custody income rose as larger trading volumes were registered on higher stock exchange daily turnover. This was enhanced by the launch of new investment schemes, awareness campaigns and the adoption of a new portfolio wealth management sales tool in the branch network. An increase in IPO activity in Hong Kong, mainly derived from mainland China, had a positive effect on underwriting fees. Life insurance commission income increased, boosted by new product offerings. Credit card fee income also rose, driven by increased cards in circulation and a rise in cardholder balances.
Trading income growth was achieved throughout the Global Markets business and particularly in foreign exchange, assisted by investments made in recent years to extend the product range and customer base. Structured equity growth continued, driven by the bank's product offering linked to the Hong Kong Stock Exchange, which rose significantly. HSBC had only very limited exposure to asset-based securities and structured credit products in Hong Kong.
Net earned insurance premiums increased by 7 per cent to US$2.8 billion, as the life assurance business expanded with the launch of new products.
Other operating income was largely in line with 2006, notwithstanding the non-recurrence of income on the sale of the former head office building of Hang Seng Bank and the transfer of the credit card
acquiring business into a joint venture with Global Payments Inc.
Net insurance claims incurred and movement in liabilities to policyholders increased by 19 per cent to US$3.2 billion. The increase was more significant than premium growth because many of the liabilities were related to life policies. Policyholders participate in the investment performance of assets supporting these liabilities and the investment return on these assets is shown in 'Net income from financial instruments designated at fair value'.
Loan impairment charges continued at a low level and in line with 2006 at US$231 million, despite strong balance sheet growth. This reflected good credit quality and robust economic conditions.
Operating expenses increased by 16 per cent. Staff costs rose by 23 per cent on wage inflation and the recruitment of additional staff, mainly in Commercial Banking and Global Banking and Markets. Performance-related bonuses grew in response to revenue growth. Higher marketing and IT costs reflected business growth and the launch of new initiatives. As commercial rents rose in Hong Kong's dynamic economy, property rental costs increased, the effect magnified by the sale and leaseback agreement on Hang Seng Bank's head office in 2006.
Analysis by customer group and global business
Profit/(loss) before tax
|
2008 |
|||||||||||||
|
Hong Kong |
Personal Financial Services US$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/(expense) |
3,381 |
1,498 |
1,524 |
214 |
(669) |
(250) |
5,698 |
||||||
|
Net fee income |
1,441 |
548 |
414 |
163 |
14 |
- |
2,580 |
||||||
|
Trading income excluding net interest income |
143 |
79 |
483 |
120 |
30 |
- |
855 |
||||||
|
Net interest/(expense) income on trading activities |
11 |
1 |
244 |
- |
(168) |
250 |
338 |
||||||
|
Net trading income/(expense)16 |
154 |
80 |
727 |
120 |
(138) |
250 |
1,193 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
3 |
- |
3 |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
(1,291) |
(10) |
39 |
- |
68 |
- |
(1,194) |
||||||
|
Net income/(expense) from financial instruments designated at fair value |
(1,291) |
(10) |
39 |
- |
71 |
- |
(1,191) |
||||||
|
Gains less losses from financial investments |
156 |
32 |
(109) |
- |
(388) |
- |
(309) |
||||||
|
Dividend income |
3 |
2 |
17 |
- |
19 |
- |
41 |
||||||
|
Net earned insurance premiums |
3,047 |
181 |
17 |
- |
2 |
- |
3,247 |
||||||
|
Other operating income |
132 |
38 |
101 |
8 |
906 |
(368) |
817 |
||||||
|
Total operating income |
7,023 |
2,369 |
2,730 |
505 |
(183) |
(368) |
12,076 |
||||||
|
Net insurance claims17 |
(1,773) |
(136) |
(11) |
- |
(2) |
- |
(1,922) |
||||||
|
Net operating income5 |
5,250 |
2,233 |
2,719 |
505 |
(185) |
(368) |
10,154 |
||||||
|
Loan impairment (charges)/recoveries and other credit risk provisions |
(134) |
(335) |
(284) |
(13) |
1 |
- |
(765) |
||||||
|
Net operating income/(expense) |
5,116 |
1,898 |
2,435 |
492 |
(184) |
(368) |
9,389 |
||||||
|
Total operating expenses |
(1,691) |
(584) |
(1,000) |
(255) |
(781) |
368 |
(3,943) |
||||||
|
Operating profit/(loss) |
3,425 |
1,314 |
1,435 |
237 |
(965) |
- |
5,446 |
||||||
|
Share of profit in associates and joint ventures |
3 |
1 |
1 |
- |
10 |
- |
15 |
||||||
|
Profit/(loss) before tax |
3,428 |
1,315 |
1,436 |
237 |
(955) |
- |
5,461 |
||||||
|
% |
% |
% |
% |
% |
|
% |
|||||||
|
Share of HSBC's profit before tax |
36.9 |
14.1 |
15.4 |
2.6 |
(10.3) |
58.7 |
|||||||
|
Cost efficiency ratio |
32.2 |
26.2 |
36.8 |
50.5 |
(422.2) |
38.8 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
41,447 |
30,331 |
23,042 |
3,605 |
1,795 |
100,220 |
|||||||
|
Total assets |
75,419 |
36,428 |
225,853 |
28,800 |
66,192 |
(25,541) |
407,151 |
||||||
|
Customer accounts |
145,002 |
54,869 |
30,866 |
19,416 |
364 |
250,517 |
|||||||
For footnotes, see page 143.
|
2007 |
|||||||||||||
|
Hong Kong |
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/(expense) |
3,342 |
1,540 |
986 |
70 |
(767) |
312 |
5,483 |
||||||
|
Net fee income |
1,973 |
526 |
682 |
179 |
2 |
- |
3,362 |
||||||
|
Trading income excluding net interest income |
188 |
63 |
553 |
280 |
186 |
- |
1,270 |
||||||
|
Net interest income on trading activities |
5 |
- |
241 |
- |
38 |
(312) |
(28) |
||||||
|
Net trading income16 |
193 |
63 |
794 |
280 |
224 |
(312) |
1,242 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
2 |
- |
2 |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
820 |
(13) |
7 |
- |
(140) |
- |
674 |
||||||
|
Net income/(expense) from financial instruments designated at fair value |
820 |
(13) |
7 |
- |
(138) |
- |
676 |
||||||
|
Gains less losses from financial investments |
- |
- |
38 |
1 |
55 |
- |
94 |
||||||
|
Dividend income |
2 |
1 |
6 |
- |
22 |
- |
31 |
||||||
|
Net earned insurance premiums |
2,654 |
130 |
13 |
- |
- |
- |
2,797 |
||||||
|
Other operating income |
153 |
28 |
114 |
6 |
881 |
(337) |
845 |
||||||
|
Total operating income |
9,137 |
2,275 |
2,640 |
536 |
279 |
(337) |
14,530 |
||||||
|
Net insurance claims17 |
(3,116) |
(82) |
(10) |
- |
- |
- |
(3,208) |
||||||
|
Net operating income5 |
6,021 |
2,193 |
2,630 |
536 |
279 |
(337) |
11,322 |
||||||
|
Loan impairment charges and other credit risk provisions |
(175) |
(28) |
(28) |
- |
- |
- |
(231) |
||||||
|
Net operating income |
5,846 |
2,165 |
2,602 |
536 |
279 |
(337) |
11,091 |
||||||
|
Total operating expenses |
(1,639) |
(547) |
(1,025) |
(231) |
(675) |
337 |
(3,780) |
||||||
|
Operating profit/(loss) |
4,207 |
1,618 |
1,577 |
305 |
(396) |
- |
7,311 |
||||||
|
Share of profit in associates and joint ventures |
5 |
1 |
1 |
- |
21 |
- |
28 |
||||||
|
Profit/(loss) before tax |
4,212 |
1,619 |
1,578 |
305 |
(375) |
- |
7,339 |
||||||
|
% |
% |
% |
% |
% |
|
% |
|||||||
|
Share of HSBC's profit before tax |
17.4 |
6.7 |
6.5 |
1.3 |
(1.6) |
|
30.3 |
||||||
|
Cost efficiency ratio |
27.2 |
24.9 |
39.0 |
43.1 |
241.9 |
|
33.4 |
||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
38,197 |
25,890 |
19,171 |
4,329 |
2,051 |
89,638 |
|||||||
|
Total assets |
66,002 |
32,059 |
215,801 |
17,484 |
53,227 |
(27,679) |
356,894 |
||||||
|
Customer accounts |
129,159 |
51,562 |
37,364 |
15,649 |
754 |
234,488 |
|||||||
For footnotes, see page 143.
Analysis by customer group and global business (continued)
Profit/(loss) before tax
|
2006 |
|||||||||||||
|
Hong Kong |
Personal Financial Services US$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/(expense) |
2,882 |
1,344 |
553 |
76 |
(646) |
476 |
4,685 |
||||||
|
Net fee income/(expense) |
977 |
454 |
534 |
123 |
(32) |
- |
2,056 |
||||||
|
Trading income excluding net interest income |
84 |
57 |
573 |
176 |
34 |
- |
924 |
||||||
|
Net interest income on trading activities |
4 |
- |
88 |
- |
77 |
(476) |
(307) |
||||||
|
Net trading income16 |
88 |
57 |
661 |
176 |
111 |
(476) |
617 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
- |
- |
- |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
373 |
(53) |
5 |
1 |
(66) |
- |
260 |
||||||
|
Net income/(expense) from financial instruments designated at fair value |
373 |
(53) |
5 |
1 |
(66) |
- |
260 |
||||||
|
Gains less losses from financial investments |
14 |
- |
(1) |
9 |
140 |
- |
162 |
||||||
|
Dividend income |
1 |
1 |
2 |
- |
57 |
- |
61 |
||||||
|
Net earned insurance premiums |
2,519 |
95 |
14 |
- |
- |
- |
2,628 |
||||||
|
Other operating income |
202 |
33 |
81 |
13 |
781 |
(276) |
834 |
||||||
|
Total operating income |
7,056 |
1,931 |
1,849 |
398 |
345 |
(276) |
11,303 |
||||||
|
Net insurance claims17 |
(2,638) |
(50) |
(11) |
- |
- |
- |
(2,699) |
||||||
|
Net operating income5 |
4,418 |
1,881 |
1,838 |
398 |
345 |
(276) |
8,604 |
||||||
|
Loan impairment (charges)/ recoveries and other credit risk provisions |
(119) |
(69) |
27 |
- |
(11) |
- |
(172) |
||||||
|
Net operating income |
4,299 |
1,812 |
1,865 |
398 |
334 |
(276) |
8,432 |
||||||
|
Total operating expenses |
(1,422) |
(491) |
(911) |
(197) |
(524) |
276 |
(3,269) |
||||||
|
Operating profit/(loss) |
2,877 |
1,321 |
954 |
201 |
(190) |
- |
5,163 |
||||||
|
Share of profit in associates and joint ventures |
3 |
- |
1 |
- |
15 |
- |
19 |
||||||
|
Profit/(loss) before tax |
2,880 |
1,321 |
955 |
201 |
(175) |
- |
5,182 |
||||||
|
% |
% |
% |
% |
% |
|
% |
|||||||
|
Share of HSBC's profit before tax |
13.0 |
6.0 |
4.3 |
0.9 |
(0.7) |
23.5 |
|||||||
|
Cost efficiency ratio |
32.2 |
26.1 |
49.6 |
49.5 |
151.9 |
38.0 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
35,445 |
23,520 |
20,270 |
3,081 |
1,966 |
84,282 |
|||||||
|
Total assets |
57,977 |
30,137 |
182,540 |
22,492 |
49,866 |
(24,155) |
318,857 |
||||||
|
Customer accounts |
118,201 |
41,493 |
24,530 |
11,991 |
476 |
196,691 |
|||||||
For footnotes, see page 143.
Rest of Asia-Pacific (including the Middle East)
Profit/(loss) before tax by country within customer groups and global businesses
|
Personal Financial Services US$m |
Commercial Banking US$m |
Global Banking & Markets US$m |
Private Banking US$m |
Other US$m |
Total US$m |
||||||
|
2008 |
|||||||||||
|
Australia |
19 |
68 |
102 |
- |
(13) |
176 |
|||||
|
India |
(155) |
118 |
578 |
2 |
123 |
666 |
|||||
|
Indonesia |
(22) |
17 |
126 |
- |
- |
121 |
|||||
|
Japan |
(88) |
(1) |
88 |
1 |
4 |
4 |
|||||
|
Mainland China |
284 |
622 |
688 |
(5) |
16 |
1,605 |
|||||
|
Associates |
393 |
558 |
335 |
- |
- |
1,286 |
|||||
|
Other mainland China |
(109) |
64 |
353 |
(5) |
16 |
319 |
|||||
|
Malaysia |
94 |
96 |
171 |
- |
8 |
369 |
|||||
|
Middle East |
289 |
558 |
816 |
4 |
79 |
1,746 |
|||||
|
Egypt |
16 |
68 |
90 |
- |
49 |
223 |
|||||
|
United Arab Emirates |
133 |
330 |
388 |
4 |
6 |
861 |
|||||
|
Other Middle East |
80 |
125 |
161 |
- |
1 |
367 |
|||||
|
Middle East (excluding Saudi Arabia) |
229 |
523 |
639 |
4 |
56 |
1,451 |
|||||
|
Saudi Arabia |
60 |
35 |
177 |
- |
23 |
295 |
|||||
|
Singapore |
104 |
83 |
337 |
110 |
(37) |
597 |
|||||
|
South Korea |
(16) |
(13) |
304 |
- |
38 |
313 |
|||||
|
Taiwan |
(41) |
45 |
179 |
- |
(8) |
175 |
|||||
|
Other |
32 |
200 |
397 |
1 |
66 |
696 |
|||||
|
500 |
1,793 |
3,786 |
113 |
276 |
6,468 |
||||||
|
2007 |
|||||||||||
|
Australia |
41 |
37 |
42 |
- |
4 |
124 |
|||||
|
India |
(70) |
88 |
429 |
(1) |
83 |
529 |
|||||
|
Indonesia |
(7) |
29 |
86 |
- |
(4) |
104 |
|||||
|
Japan |
(34) |
(3) |
75 |
- |
5 |
43 |
|||||
|
Mainland China |
494 |
397 |
369 |
- |
1,101 |
2,361 |
|||||
|
Associates |
516 |
351 |
220 |
- |
1,093 |
2,180 |
|||||
|
Other mainland China |
(22) |
46 |
149 |
- |
8 |
181 |
|||||
|
Malaysia |
81 |
90 |
146 |
- |
13 |
330 |
|||||
|
Middle East |
245 |
482 |
495 |
3 |
82 |
1,307 |
|||||
|
Egypt |
10 |
46 |
65 |
- |
32 |
153 |
|||||
|
United Arab Emirates |
108 |
262 |
242 |
3 |
2 |
617 |
|||||
|
Other Middle East |
83 |
101 |
116 |
- |
- |
300 |
|||||
|
Middle East (excluding Saudi Arabia) |
201 |
409 |
423 |
3 |
34 |
1,070 |
|||||
|
Saudi Arabia |
44 |
73 |
72 |
- |
48 |
237 |
|||||
|
Singapore |
101 |
112 |
240 |
90 |
7 |
550 |
|||||
|
South Korea |
(44) |
(20) |
159 |
- |
28 |
123 |
|||||
|
Taiwan |
(52) |
27 |
144 |
- |
4 |
123 |
|||||
|
Other |
5 |
111 |
279 |
- |
20 |
415 |
|||||
|
760 |
1,350 |
2,464 |
92 |
1,343 |
6,009 |
Profit/(loss) before tax by country within customer groups and global businesses (continued)
|
Personal Financial Services US$m |
Commercial Banking US$m |
Global Banking & Markets US$m |
Private Banking US$m |
Other US$m |
Total US$m |
||||||
|
2006 |
|||||||||||
|
Australia |
76 |
32 |
46 |
- |
- |
154 |
|||||
|
India |
(24) |
46 |
277 |
2 |
92 |
393 |
|||||
|
Indonesia |
(22) |
46 |
69 |
- |
(22) |
71 |
|||||
|
Japan |
(3) |
(2) |
49 |
(1) |
80 |
123 |
|||||
|
Mainland China |
276 |
241 |
167 |
- |
24 |
708 |
|||||
|
Associates |
274 |
210 |
86 |
- |
5 |
575 |
|||||
|
Other mainland China |
2 |
31 |
81 |
- |
19 |
133 |
|||||
|
Malaysia |
77 |
87 |
99 |
(1) |
12 |
274 |
|||||
|
Middle East |
235 |
356 |
396 |
2 |
46 |
1,035 |
|||||
|
Egypt |
9 |
41 |
41 |
- |
20 |
111 |
|||||
|
United Arab Emirates |
70 |
209 |
145 |
3 |
(2) |
425 |
|||||
|
Other Middle East |
59 |
67 |
70 |
(1) |
(1) |
194 |
|||||
|
Middle East (excluding Saudi Arabia) |
138 |
317 |
256 |
2 |
17 |
730 |
|||||
|
Saudi Arabia |
97 |
39 |
140 |
- |
29 |
305 |
|||||
|
Singapore |
73 |
90 |
145 |
68 |
(11) |
365 |
|||||
|
South Korea |
(55) |
(20) |
115 |
- |
19 |
59 |
|||||
|
Taiwan |
(179) |
37 |
118 |
- |
1 |
(23) |
|||||
|
Other |
23 |
121 |
168 |
10 |
46 |
368 |
|||||
|
477 |
1,034 |
1,649 |
80 |
287 |
3,527 |
Loans and advances to customers (net) by country
|
At 31 December |
|||||
|
2008 US$m |
2007 US$m |
2006 US$m |
|||
|
Australia |
9,321 |
11,339 |
8,775 |
||
|
India |
6,244 |
7,220 |
4,915 |
||
|
Indonesia |
1,904 |
1,642 |
1,337 |
||
|
Japan |
5,839 |
4,258 |
3,391 |
||
|
Mainland China |
11,440 |
11,647 |
6,065 |
||
|
Malaysia |
9,404 |
8,856 |
7,747 |
||
|
Middle East (excluding Saudi Arabia) |
27,295 |
21,607 |
15,622 |
||
|
Egypt |
2,473 |
1,853 |
965 |
||
|
United Arab Emirates |
17,537 |
14,103 |
10,148 |
||
|
Other Middle East |
7,285 |
5,651 |
4,509 |
||
|
Singapore |
13,441 |
11,505 |
9,610 |
||
|
South Korea |
5,336 |
7,124 |
6,260 |
||
|
Taiwan |
4,329 |
3,658 |
3,974 |
||
|
Other |
13,403 |
12,996 |
9,878 |
||
|
107,956 |
101,852 |
77,574 |
|||
Customer accounts by country
|
At 31 December |
|||||
|
2008 US$m |
2007 US$m |
2006 US$m |
|||
|
Australia |
9,201 |
11,418 |
8,491 |
||
|
India |
9,767 |
12,021 |
7,936 |
||
|
Indonesia |
2,896 |
2,574 |
2,082 |
||
|
Japan |
6,204 |
4,657 |
4,186 |
||
|
Mainland China |
19,171 |
14,537 |
6,941 |
||
|
Malaysia |
11,963 |
11,701 |
9,640 |
||
|
Middle East (excluding Saudi Arabia) |
35,166 |
30,937 |
21,196 |
||
|
Egypt |
5,363 |
4,056 |
2,703 |
||
|
United Arab Emirates |
19,808 |
18,455 |
11,166 |
||
|
Other Middle East |
9,995 |
8,426 |
7,327 |
||
|
Singapore |
32,748 |
28,962 |
23,517 |
||
|
South Korea |
4,383 |
5,760 |
3,890 |
||
|
Taiwan |
9,689 |
9,426 |
7,675 |
||
|
Other |
18,171 |
18,240 |
13,441 |
||
|
159,359 |
150,233 |
108,995 |
|||
2008 compared with 2007
Economic briefing
Growth in mainland China was steady during 2008, although lower than in previous years. Overall GDP growth totalled 9 per cent in 2008, down from 13 per cent in 2007, as weakness in key export markets led to a slowdown in industrial activity during the final months of the year. The tightening of monetary conditions in 2007 and early 2008 also contributed to the slowdown, although interest rates and reserve requirements were both reduced significantly during the final months of the year and a significant fiscal stimulus package was also announced. Consumer spending continued to advance at a strong pace with retail spending increasing by 21.6 per cent over the course of 2008. After accelerating to an eleven year high of 8.7 per cent in February 2008, consumer price inflation slowed to 1.2 per cent by the year-end, largely reflecting the movements in food and energy prices. The renminbi appreciated by more than 6 per cent against the US dollar during 2008, although the exchange rate was little changed during the second half of the year.
Japan's economy slowed sharply during the course of 2008, with industrial activity declining rapidly during the final quarter of the year in response to much weaker external demand. Contractions were registered in both second and third quarter GDP data, confirming a technical recession, while the unemployment rate rose from 3.8 per cent in January 2008 to 4.4 per cent by the year-end. Inflationary pressures increased during the first half before subsiding during the final months of 2008, while measures of business confidence also fell sharply.
The economies of the Middle East performed strongly for much of 2008, although inflationary concerns were a feature for much of the year, driven by the surge in oil prices to record levels and private and public investment expenditure. High oil revenues continued to boost fiscal and current account surpluses throughout the region during 2008, although the impact of the decline in oil prices during the final months of the year, together with the OPEC-mandated production cuts, are expected to lead to slower growth in 2009.
Elsewhere in Asia, most economies followed an uneven pattern of growth during 2008. Policymakers focused on the rise in inflation during the first half of the year, but the sharp slowdown in growth during the final months of 2008 came to dominate, with a series of monetary and fiscal policy measures being introduced across the region to stimulate activity. The sustained rise in inflation prompted the Reserve Bank of India to tighten policy by raising both interest rates and reserve requirements during the first half of 2008, before then cutting the cash reserve ratio by 350 basis points and the repo rate by 250 basis points during the final quarter of the year. A recession was confirmed in Singapore after GDP contracted for three consecutive quarters in 2008, as an economic slowdown initially focused on specific industries turned more pervasive. After rising to a 26-year high of 7.5 per cent in June 2008, the annual rate of inflation slowed to 4.3 per cent by the year-end.
Inflation also proved the predominant concern in Vietnam during the first half of 2008 as the annual rate of consumer price inflation more than doubled to 28.3 per cent, prompting the State Bank of Vietnam to sanction substantial interest rate
Profit before tax
|
2008 |
2007 |
2006 |
|||
|
Rest of Asia-Pacific (including the Middle East) |
US$m |
US$m |
US$m |
||
|
Net interest income |
5,493 |
4,143 |
3,047 |
||
|
Net fee income |
2,558 |
2,246 |
1,622 |
||
|
Net trading income |
2,444 |
1,643 |
1,181 |
||
|
Changes in fair value of long-term debt issued and related derivatives |
1 |
1 |
- |
||
|
Net income/(expense) from other financial instruments designated at fair value |
(172) |
110 |
79 |
||
|
Net income/(expense) from financial instruments designated at fair value |
(171) |
111 |
79 |
||
|
Gains less losses from financial investments |
32 |
38 |
41 |
||
|
Gains arising from dilution of interests in associates |
- |
1,081 |
- |
||
|
Dividend income |
4 |
8 |
5 |
||
|
Net earned insurance premiums |
197 |
226 |
174 |
||
|
Other operating income |
1,064 |
798 |
765 |
||
|
Total operating income |
11,621 |
10,294 |
6,914 |
||
|
Net insurance claims incurred and movement in liabilities to policyholders |
28 |
(253) |
(192) |
||
|
Net operating income before loan impairment charges and other credit risk provisions |
11,649 |
10,041 |
6,722 |
||
|
Loan impairment charges and other credit risk provisions |
(1,131) |
(616) |
(512) |
||
|
Net operating income |
10,518 |
9,425 |
6,210 |
||
|
Total operating expenses |
(5,663) |
(4,764) |
(3,548) |
||
|
Operating profit |
4,855 |
4,661 |
2,662 |
||
|
Share of profit in associates and joint ventures |
1,613 |
1,348 |
865 |
||
|
Profit before tax |
6,468 |
6,009 |
3,527 |
||
|
% |
% |
% |
|||
|
Share of HSBC's profit before tax |
69.5 |
24.8 |
16.0 |
||
|
Cost efficiency ratio |
48.6 |
47.4 |
52.8 |
||
|
Year-end staff numbers (full-time equivalent) |
98,159 |
88,573 |
72,265 |
||
|
Balance sheet data15
|
|||||
|
At 31 December |
|||||
|
2008US$m |
2007 US$m |
2006 US$m |
|||
|
Loans and advances to customers (net) |
107,956 |
101,852 |
77,574 |
||
|
Loans and advances to banks (net) |
36,141 |
39,861 |
27,517 |
||
|
Trading assets, financial assets designated at fair value, and financial investments |
61,223 |
64,381 |
41,585 |
||
|
Total assets |
262,305 |
243,205 |
175,010 |
||
|
Deposits by banks |
13,689 |
17,560 |
10,323 |
||
|
Customer accounts |
159,359 |
150,233 |
108,995 |
||
For footnote, see page 143.
All commentaries on Rest of Asia-Pacific are on an underlying basis unless stated otherwise.
increases, before these measures were rapidly reversed during the final months of the year. Interest rate increases were also forthcoming in Indonesia between May and October 2008, although with growth levels maintaining a relatively robust level during much of the year, a tentative easing cycle was only initiated during the final weeks of 2008. Bank Negara Malaysia proved the exception by refraining from interest rate increases during the year, even as consumer price inflation accelerated to 8.5 per cent in July 2008, before cutting the policy rate to 3.25 per cent in November. The outlook for the South Korean economy was affected by the open nature of the economy and the relatively high levels of household and corporate sector indebtedness. Full year GDP rose by 2.5 per cent in 2008, down from 5.0 per cent in 2007 and the weakest performance for ten years, while fourth quarter GDP fell by 3.4 per cent on a year-on-year basis. Rising food prices proved particularly problematic for the Philippines during the first half of the year as inflation moved
well above the central bank's targeted range, although the earlier tightening of monetary policy was partially reversed at the end of 2008. Growth slowed sharply in Taiwan during the course of the year, driven by deteriorating conditions overseas.
Reconciliation of reported and underlying profit before tax
|
2008 compared with 2007 |
|||||||||||||||||
|
Rest of Asia-Pacific (including the Middle East) |
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 |
4,143 |
- |
43 |
4,186 |
31 |
1,276 |
5,493 |
33 |
30 |
||||||||
|
Net fee income |
2,246 |
- |
24 |
2,270 |
3 |
285 |
2,558 |
14 |
13 |
||||||||
|
Other income4
|
3,652
|
(1,081)
|
18
|
2,589
|
70
|
939
|
3,598
|
(1)
|
36
|
||||||||
|
Net operating income5
|
10,041
|
(1,081)
|
85
|
9,045
|
104
|
2,500
|
11,649
|
16
|
28
|
||||||||
|
Loan impairment charges and other credit risk provisions |
(616) |
- |
14 |
(602) |
- |
(529) |
(1,131) |
(84) |
(88) |
||||||||
|
Net operating income |
9,425 |
(1,081) |
99 |
8,443 |
104 |
1,971 |
10,518 |
12 |
23 |
||||||||
|
Operating expenses |
(4,764) |
- |
(17) |
(4,781) |
(110) |
(772) |
(5,663) |
(19) |
(16) |
||||||||
|
Operating profit |
4,661 |
(1,081) |
82 |
3,662 |
(6) |
1,199 |
4,855 |
4 |
33 |
||||||||
|
Income from associates |
1,348 |
- |
93 |
1,441 |
- |
172 |
1,613 |
20 |
12 |
||||||||
|
Profit before tax |
6,009 |
(1,081) |
175 |
5,103 |
(6) |
1,371 |
6,468 |
8 |
27 |
||||||||
For footnotes, see page 143.
Review of business performance
HSBC's operations in Rest of Asia-Pacific performed strongly, reporting a pre-tax profit of US$6.5 billion compared with US$6.0 billion in 2007, an increase of 8 per cent. HSBC continued to increase its presence in key markets, augmenting organic growth with the integration of the operations of The Chinese Bank in Taiwan and the purchase of IL&FS Investsmart Ltd in India, which was completed in September. On an underlying basis, excluding the dilution gains on Chinese associates of US$1.1 billion recorded in 2007 and the acquisitions noted above, profit before tax increased by 27 per cent, with notable growth in the Middle East, South Korea, mainland China, India, and an increased contribution from associates in the region. Branches were added in mainland China, Indonesia, Japan, Malaysia and Bangladesh.
Net interest income increased by 30 per cent, with growth across most major countries and all customer groups. Deposit acquisition and related asset deployment across the region drove net interest income, though this volume growth was partly offset by deposit spread compression in the second half of the year due to declining interest rates, compounded by strong competition to acquire deposits.
In the Middle East, net interest income increased by 42 per cent, with deposit growth, notably in Personal Financial Services. This supported a strong rise in corporate lending balances aligned to trade and infrastructure investments, as well as increased personal lending, in particular credit cards. Asset spreads benefited from declines in local base rates following US dollar interest rate cuts, which resulted in a lower cost of funds.
In India, net interest income increased by 44 per cent as deposit balances in Personal Financial Services and Commercial Banking rose due to customer acquisition, notably among small businesses following the launch of the HSBC Direct for Business product. These deposits were deployed in increasing lending, where spreads improved on the corporate lending and credit card portfolios and mortgage spreads widened following a re-pricing in the second half of the year.
In mainland China, net interest income also rose due to deposit growth, as investors increasingly preferred deposits over market-led investments as market sentiment deteriorated. This facilitated an increase in personal lending balances following branch network expansion and successful re-pricing initiatives on corporate and commercial loans.
There was strong growth in net interest income from Balance Sheet Management within Global Banking and Markets, due to lower funding costs and steeper yield curves, notably in Singapore, mainland China, India, Japan and the Middle East.
Net fee income rose by 13 per cent, driven by a growth in fees from personal credit cards and trade and supply chain services. Credit card fees rose, particularly in the Middle East and India, driven by increases in interchange fees from higher cardholder spending and late payment and over-limit fees from higher delinquencies (see below). Trade and supply chain services contributed strongly to fee income growth with an increase of 34 per cent in the Middle East, in part reflecting the significant rise in commodity prices in the first half of the year, demonstrably in the construction and infrastructure industries in the UAE. There were lower fees from investment products and broking across the region, driven by a decline in equity markets and weakened investor sentiment.
Fee income from credit facilities rose, notably in the Middle East, India, Australia and Singapore, reflecting increases in the number of customers.
Net trading income rose by 51 per cent, predominantly due to strong Rates and foreign exchange trading across the region as volatile market conditions continued, encouraging increased corporate hedging activity.
Growth was particularly strong in South Korea, mainland China and Australia due to strategic positioning of HSBC's balance sheet to benefit from the interest rate cuts and foreign exchange volatility in 2008, and increased activity in these local markets. In the Middle East, market uncertainty regarding possible currency revaluations drove volatility and, together with robust client demand, led to growth in foreign exchange income. In India, foreign exchange and, to a lesser extent, Rates revenues rose, driven mainly by increased customer activity and high levels of market volatility.
A net loss from financial instruments designated at fair value of US$171 million was recorded compared with income of US$111 million in 2007. Declines in equity markets affected unit-linked insurance products, particularly in Singapore. This was largely offset by a corresponding decrease in
liabilities to policyholders reflected in net insurance claims incurred and movement in liabilities to policyholders.
Net earned insurance premiums decreased by 17 per cent to US$197 million, mainly in Singapore and Malaysia due to lower sales of single premium unit-linked products. This was partly offset by an increase in the sale of general insurance products.
Loan impairment charges rose sharply, increasing by 88 per cent to US$1.1 billion, following a marked deterioration in credit quality across the region in the final quarter of the year. These charges rose most significantly in India, the Middle East and, to a lesser extent, in Australia.
In India, the rise was attributable to increased delinquency across personal lending portfolios, in response to which HSBC took action to restrict mortgage and personal lending. However, HSBC continued to extend credit to selected cards customers, which resulted in volume growth and also contributed to higher loan impairment charges.
In the Middle East, higher loan impairment charges were the result of volume growth and increased delinquency rates on personal lending. In Australia, higher delinquencies arose from the maturing of the cards portfolio and, to a lesser extent, volume growth, in addition to a credit risk provision related to an exposure to an Icelandic Bank. Partly offsetting this, loan impairment charges declined by 41 per cent in Taiwan due to an improvement in asset quality. Similarly, in Thailand, loan impairment charges were 69 per cent lower due to the non-recurrence of charges attributable to the down-grading of certain corporate customers.
Operating expenses increased by 16 per cent to US$5.7 billion. Significant investment in the region continued, notably in mainland China where 29 new outlets were opened and staff numbers increased. Related premises and equipment costs rose accordingly. Expansion was also pursued in Indonesia with the addition of new branches, and in Japan with the rollout of seven HSBC Premier centres. In the Middle East, operating expenses were 22 per cent higher in line with substantially increased levels of operating volumes and related headcount growth. In India, the rise in operating expenses was driven mainly by investment in IT, premises costs and an increase in collection activities as default rates rose. Business growth contributed to higher operating expenses in Australia. Litigation costs in the region rose.
Growth in operating expenses at the Group Service and Software Development Centres was driven by increased volumes of activity as HSBC continued to implement a global resourcing strategy to minimise costs throughout the Group. All related costs are recharged to other Group entities and the income is reported within Other operating income.
Profit from associates and joint ventures in the region increased by 12 per cent, notwithstanding a significant impairment recorded in Ping An Insurance in respect of its stake in Fortis Bank. Growth was strong across HSBC's other principal associates, the Bank of Communications, Industrial Bank, and the Saudi British Bank.
2007 compared with 2006
Economic briefing
Mainland China's economy continued to grow strongly, with GDP rising by 11.4 per cent in 2007, the fifth consecutive year of double-digit growth; this was despite a combination of measures aimed at curbing investment, such as increases in interest rates and reserve ratios required for banks. Economic performance remained primarily dependent on investment and exports. Bank loan growth also remained very strong. Export growth slowed from very high levels as the year progressed, reflecting the mild downturn in global trade. Consumer spending grew steadily in 2007, with retail sales rising by about 16 per cent. Inflationary pressures increased, with consumer price inflation exceeding 6 per cent towards the end of the year, mainly due to higher food prices. Mainland China's foreign exchange reserves rose further, to more than US$1.5 trillion, while the renminbi appreciated by over 5 per cent against the US dollar in 2007.
Japan's economy, the largest in the region, expanded modestly in 2007. Private capital investment decelerated after five years of firm growth but a rise in exports, especially to Asia, drove overall growth. Private consumption also made a positive contribution, helped by a gradual increase in employees' income. Core consumer price inflation remained around zero throughout the course of the year.
In the Middle East, economies continued to grow, although growth rates slowed slightly on those recorded in 2006, largely as a result of OPEC-mandated cuts in oil production. Underlying economic performance was robust, however, led by continued non-oil sector growth. The catalyst for expansion was a fifth consecutive year of rising oil prices, which facilitated continued growth in public and private investment. Consumption rose as employment levels increased and low interest rates supported an ongoing expansion in credit. Strong population growth, accelerated in parts of the region by high levels of immigration, also boosted demand for credit. High oil revenues resulted in a further year of fiscal and current account surpluses throughout the Middle East, boosting reserves and holdings of overseas assets. Rapid economic growth, low interest rates and currency weakness increased inflation, however, fuelling demands in some quarters for adjustments to the long-standing dollar pegs. Regional equity markets recovered from their 2005-06 downturns to perform strongly in 2007.
Elsewhere in the region, the Indian economy expanded by 8.7 per cent in 2007, although there was evidence that recent interest rate rises and the strength of the rupee were slowing some areas of the economy, and inflationary pressures eased in 2007. The economies of Vietnam and Singapore recorded strong performances too, expanding by 8.5 per cent and 7.7 per cent, respectively in 2007. Growth was approximately 6 per cent in Indonesia and Malaysia. Domestic demand in all these countries has become an increasingly important source of GDP growth with investment, particularly in the construction sector, expanding rapidly. Inflationary pressures intensified in 2007, largely as a result of higher oil and food prices, but remained under control. The South Korean economy accelerated in 2007 as exports continued to flourish and household spending recovered from levels recorded in 2006. Concerns over liquidity growth prompted the central bank to increase interest rates by 50 basis points to 5 per cent during the year. A gradual cooling of demand and concerns over rapid exchange rate appreciation are expected to limit the scope for further interest rate rises in 2008. Buoyant exports supported economic growth in Taiwan, while domestic demand remained lacklustre due to a lack of government initiatives which is expected to continue beyond the presidential and parliamentary elections scheduled for 2008. Generally robust economic performances in the Philippines, Thailand, and Pakistan in 2007 were overshadowed to varying degrees by political risks.
Reconciliation of reported and underlying profit before tax
|
2007 compared with 2006 |
|||||||||||||||||
|
Rest of Asia-Pacific (including the Middle East) |
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 |
3,047 |
- |
140 |
3,187 |
- |
956 |
4,143 |
36 |
30 |
||||||||
|
Net fee income |
1,622 |
- |
58 |
1,680 |
- |
566 |
2,246 |
38 |
34 |
||||||||
|
Other income4 |
2,053 |
- |
108 |
2,161 |
1,081 |
410 |
3,652 |
78 |
19 |
||||||||
|
Net operating income5
|
6,722 |
- |
306 |
7,028 |
1,081 |
1,932 |
10,041 |
49 |
27 |
||||||||
|
Loan impairment charges and other credit risk provisions |
(512) |
- |
(13) |
(525) |
- |
(91) |
(616) |
(20) |
(17) |
||||||||
|
Net operating income |
6,210 |
- |
293 |
6,503 |
1,081 |
1,841 |
9,425 |
52 |
28 |
||||||||
|
Operating expenses |
(3,548) |
- |
(179) |
(3,727) |
- |
(1,037) |
(4,764) |
(34) |
(28) |
||||||||
|
Operating profit |
2,662 |
- |
114 |
2,776 |
1,081 |
804 |
4,661 |
75 |
29 |
||||||||
|
Income from associates |
865 |
- |
25 |
890 |
- |
458 |
1,348 |
56 |
51 |
||||||||
|
Profit before tax |
3,527 |
- |
139 |
3,666 |
1,081 |
1,262 |
6,009 |
70 |
34 |
||||||||
For footnotes, see page 143.
Review of business performance
HSBC's operations in Rest of Asia-Pacific reported a pre-tax profit of US$6.0 billion compared with US$3.5 billion in 2006, an increase of 70 per cent. On an underlying basis, excluding dilution gains of US$1.1 billion, profit before tax increased by 34 per cent, bolstered by sustained growth and business expansion across the region.
In Global Banking and Markets, profit before tax increased significantly, driven by an enhanced product offering combined with buoyant local markets. Commercial Banking revenue benefited from increased customer volumes as a result of new and enhanced banking services. In Personal Financial Services, profit before tax rose as a result of strong balance sheet growth and increased contributions from associates. Private Banking delivered a solid performance, underpinned by robust stock markets and increasing wealth in the region.
HSBC's three associates in mainland China, Ping An Insurance, Bank of Communications and Industrial Bank, all raised new capital in 2007 in the 'A' share market in Shanghai in which HSBC, as a foreign investor, was unable to participate. The dilution of the Group's interests was considerably less than its share of the new monies, resulting in gains of US$1.1 billion which should be regarded as exceptional.
Net interest income rose by 30 per cent. Continued expansion of the branch network, particularly in the populous markets of mainland China, Indonesia and India, together with increased marketing expenditure and greater brand awareness, accelerated customer acquisition and growth in loans and deposits.
In the Middle East, the significant increase in net interest income was driven by balance sheet growth across all customer groups and augmented by improved spreads. The growth was underpinned by strong local economies, higher oil prices and demand for credit for infrastructure investment and trade.
In Global Banking and Markets, the rise in net interest income was driven by the recovery in Balance Sheet Management revenues and, as trade and investment flows increased, by higher transactional balances in the payments and cash management businesses.
In Personal Financial Services, net interest income rose by 23 per cent, driven by higher personal lending, credit cards and deposit balances. Growth was broad-based across the region. Commercial Banking net interest income grew by 29 per cent due to volume growth in both loans and deposits following an increase in customer numbers.
Fee income increased by 34 per cent. Buoyant stock markets stimulated customer appetite for unit trusts and other investment products. Strong investment sales were recorded in India, Philippines, South Korea, Singapore and mainland China. Security services increased, driven by a sustained level of transaction volumes and investment flows. In the Middle East, increases were registered in cards, global custody, credit facilities and insurance. Increased trade services income in the region reflected higher intra-regional trade flows, which were driven by the favourable economic conditions.
Strong trading income growth was delivered, led by foreign exchange trading, where higher volumes were driven by increased volatility which, in turn, increased customer demand for risk management products.
Net earned insurance premiums rose by 24 per cent to US$226 million. This growth was mainly generated in Malaysia by the HSBC Amanah Takaful business which was launched in late 2006, offering shariah-compliant insurance products.
Other operating income decreased by 2 per cent, partly because gains on disposals of certain businesses in Australia were recorded in 2006. Similarly, profits from the disposal of assets held for sale decreased due to the non-recurrence of profits on sale of properties in Japan and India.
Net insurance claims incurred and movement in liabilities to policyholders rose by 25 per cent to US$253 million, in line with the increase in premiums, mainly in Malaysia.
Loan impairment charges rose by 17 per cent to US$616 million as corporate loan impairment charges increased in several countries. In addition, loan impairment charges in India rose due to balance sheet growth and higher loss rates on credit cards. Partly offsetting these factors, loan impairment charges were significantly lower in Taiwan due to the non-recurrence of impairment charges in 2006 which resulted from regulatory intervention in the card market and the imposition of a government debt negotiation scheme. In Indonesia, performance improved on 2006 when loan impairment charges were affected by the introduction of minimum repayment terms.
Operating expenses increased by 28 per cent in line with the rise in net operating income before loan impairment charges. Business expansion continued throughout the region. Staff costs in India, mainland China and the Middle East rose on increases in volume-driven headcount and performance-related bonuses, the latter due to higher revenue generation. Business expansion initiatives were taken in mainland China, where an additional 27 new branches or sub-branches were opened. In India, the branch network and the consumer finance and credit card businesses were all expanded. Marketing, technology and infrastructure costs were incurred in support of business expansion.
Share of profit in associates and joint ventures in the region rose by 51 per cent, mainly due to increased contributions from HSBC's strategic investments in mainland China, Bank of Communications, Ping An Insurance and Industrial Bank. HSBC's share of profit from Ping An Insurance rose by 101 per cent to US$518 million as a result of robust growth, notably from life insurance products, and the realisation of synergistic gains across Ping An Insurance's other business offerings. Profit from the Bank of Communications rose by 64 per cent to US$445 million as a result of improved performance across the associate's various product offerings. Increased income from credit and treasury products and significant growth in fee income contributed to the rise in profits. HSBC's share of profits from the Saudi British Bank decreased by 22 per cent to US$216 million. This was largely due to the effects of a significant correction to the local stock market in the second half of 2006.
Analysis by customer group and global business
Profit before tax
|
2008 |
|||||||||||||
|
Rest of Asia-Pacific (including the Middle East) |
Personal Financial Services US$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 |
2,360 |
1,444 |
1,886 |
106 |
185 |
(488) |
5,493 |
||||||
|
Net fee income |
819 |
597 |
1,048 |
77 |
17 |
- |
2,558 |
||||||
|
Trading income/(expense) excluding net interest income |
112 |
187 |
1,477 |
77 |
(30) |
- |
1,823 |
||||||
|
Net interest income/(expense) on trading activities |
(5) |
- |
143 |
- |
(5) |
488 |
621 |
||||||
|
Net trading income/(expense)16 |
107 |
187 |
1,620 |
77 |
(35) |
488 |
2,444 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
1 |
- |
1 |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
(172) |
- |
(4) |
- |
4 |
- |
(172) |
||||||
|
Net income/(expense) from financial instruments designated at fair value |
(172) |
- |
(4) |
- |
5 |
- |
(171) |
||||||
|
Gains less losses from financial investments |
29 |
3 |
- |
- |
- |
- |
32 |
||||||
|
Dividend income |
- |
- |
4 |
- |
- |
- |
4 |
||||||
|
Net earned insurance premiums |
172 |
25 |
- |
- |
- |
- |
197 |
||||||
|
Other operating income |
79 |
84 |
90 |
2 |
1,096 |
(287) |
1,064 |
||||||
|
Total operating income |
3,394 |
2,340 |
4,644 |
262 |
1,268 |
(287) |
11,621 |
||||||
|
Net insurance claims17 |
42 |
(14) |
- |
- |
- |
- |
28 |
||||||
|
Net operating income5 |
3,436 |
2,326 |
4,644 |
262 |
1,268 |
(287) |
11,649 |
||||||
|
Loan impairment charges and other credit risk provisions |
(863) |
(182) |
(85) |
(1) |
- |
- |
(1,131) |
||||||
|
Net operating income |
2,573 |
2,144 |
4,559 |
261 |
1,268 |
(287) |
10,518 |
||||||
|
Total operating expenses |
(2,527) |
(953) |
(1,298) |
(148) |
(1,024) |
287 |
(5,663) |
||||||
|
Operating profit |
46 |
1,191 |
3,261 |
113 |
244 |
- |
4,855 |
||||||
|
Share of profit in associates and joint ventures |
454 |
602 |
525 |
- |
32 |
- |
1,613 |
||||||
|
Profit before tax |
500 |
1,793 |
3,786 |
113 |
276 |
- |
6,468 |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
5.4 |
19.3 |
40.7 |
1.2 |
2.9 |
69.5 |
|||||||
|
Cost efficiency ratio |
73.5 |
41.0 |
28.0 |
56.5 |
80.8 |
48.6 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
34,860 |
35,188 |
34,590 |
2,989 |
329 |
107,956 |
|||||||
|
Total assets |
44,478 |
43,702 |
172,049 |
12,486 |
702 |
(11,112) |
262,305 |
||||||
|
Customer accounts |
56,531 |
36,350 |
50,605 |
14,475 |
1,398 |
159,359 |
|||||||
For footnotes, see page 143.
|
2007 |
|||||||||||||
|
Rest of Asia-Pacific (includingthe Middle East) |
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 |
1,965 |
1,131 |
1,295 |
60 |
153 |
(461) |
4,143 |
||||||
|
Net fee income |
766 |
429 |
952 |
85 |
14 |
- |
2,246 |
||||||
|
Trading income/(expense) excluding net interest income |
72 |
129 |
1,000 |
71 |
(70) |
- |
1,202 |
||||||
|
Net interest income/(expense) on trading activities |
(2) |
- |
(22) |
- |
4 |
461 |
441 |
||||||
|
Net trading income/(expense)16 |
70 |
129 |
978 |
71 |
(66) |
461 |
1,643 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
1 |
- |
1 |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
73 |
4 |
(3) |
(1) |
37 |
- |
110 |
||||||
|
Net income/(expense) from financial instruments designated at fair value |
73 |
4 |
(3) |
(1) |
38 |
- |
111 |
||||||
|
Gains less losses from financial investments |
5 |
4 |
28 |
- |
1 |
- |
38 |
||||||
|
Gains arising from dilution of interests in associates |
- |
- |
- |
- |
1,081 |
- |
1,081 |
||||||
|
Dividend income |
- |
- |
2 |
- |
6 |
- |
8 |
||||||
|
Net earned insurance premiums |
209 |
16 |
- |
- |
1 |
- |
226 |
||||||
|
Other operating income |
40 |
15 |
53 |
2 |
849 |
(161) |
798 |
||||||
|
Total operating income |
3,128 |
1,728 |
3,305 |
217 |
2,077 |
(161) |
10,294 |
||||||
|
Net insurance claims17 |
(246) |
(7) |
- |
- |
- |
- |
(253) |
||||||
|
Net operating income5 |
2,882 |
1,721 |
3,305 |
217 |
2,077 |
(161) |
10,041 |
||||||
|
Loan impairment charges and other credit risk provisions |
(552) |
(61) |
(3) |
- |
- |
- |
(616) |
||||||
|
Net operating income |
2,330 |
1,660 |
3,302 |
217 |
2,077 |
(161) |
9,425 |
||||||
|
Total operating expenses |
(2,131) |
(739) |
(1,140) |
(125) |
(790) |
161 |
(4,764) |
||||||
|
Operating profit |
199 |
921 |
2,162 |
92 |
1,287 |
- |
4,661 |
||||||
|
Share of profit in associates and joint ventures |
561 |
429 |
302 |
- |
56 |
- |
1,348 |
||||||
|
Profit before tax |
760 |
1,350 |
2,464 |
92 |
1,343 |
- |
6,009 |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
3.1 |
5.6 |
10.2 |
0.4 |
5.5 |
24.8 |
|||||||
|
Cost efficiency ratio |
73.9 |
42.9 |
34.5 |
57.6 |
38.0 |
47.4 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
34,486 |
32,159 |
32,106 |
2,955 |
146 |
101,852 |
|||||||
|
Total assets |
42,337 |
39,743 |
155,106 |
9,294 |
4,756 |
(8,031) |
243,205 |
||||||
|
Customer accounts |
49,703 |
34,891 |
54,120 |
11,116 |
403 |
150,233 |
|||||||
For footnotes, see page 143.
Analysis by customer group and global business (continued)
Profit before tax
|
2006 |
|||||||||||||
|
Rest of Asia-Pacific (including the Middle East) |
Personal Financial Services US$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 |
1,520 |
848 |
802 |
35 |
61 |
(219) |
3,047 |
||||||
|
Net fee income |
524 |
330 |
688 |
68 |
12 |
- |
1,622 |
||||||
|
Trading income/(expense) excluding net interest income |
61 |
86 |
717 |
74 |
(3) |
- |
935 |
||||||
|
Net interest income on trading activities |
- |
- |
- |
- |
27 |
219 |
246 |
||||||
|
Net trading income16 |
61 |
86 |
717 |
74 |
24 |
219 |
1,181 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
- |
- |
- |
||||||
|
Net income from other financial instruments designated at fair value |
59 |
4 |
4 |
- |
12 |
- |
79 |
||||||
|
Net income from financial instruments designated at fair value |
59 |
4 |
4 |
- |
12 |
- |
79 |
||||||
|
Gains less losses from financial investments |
2 |
2 |
38 |
(1) |
- |
- |
41 |
||||||
|
Dividend income |
- |
- |
1 |
- |
4 |
- |
5 |
||||||
|
Net earned insurance premiums |
148 |
26 |
- |
- |
- |
- |
174 |
||||||
|
Other operating income |
108 |
20 |
61 |
- |
667 |
(91) |
765 |
||||||
|
Total operating income |
2,422 |
1,316 |
2,311 |
176 |
780 |
(91) |
6,914 |
||||||
|
Net insurance claims17 |
(180) |
(11) |
- |
- |
(1) |
- |
(192) |
||||||
|
Net operating income5 |
2,242 |
1,305 |
2,311 |
176 |
779 |
(91) |
6,722 |
||||||
|
Loan impairment (charges)/ recoveries and other credit risk provisions |
(545) |
29 |
5 |
- |
(1) |
- |
(512) |
||||||
|
Net operating income |
1,697 |
1,334 |
2,316 |
176 |
778 |
(91) |
6,210 |
||||||
|
Total operating expenses |
(1,593) |
(554) |
(869) |
(96) |
(527) |
91 |
(3,548) |
||||||
|
Operating profit |
104 |
780 |
1,447 |
80 |
251 |
- |
2,662 |
||||||
|
Share of profit in associates and joint ventures |
373 |
254 |
202 |
- |
36 |
- |
865 |
||||||
|
Profit before tax |
477 |
1,034 |
1,649 |
80 |
287 |
- |
3,527 |
||||||
|
% |
% |
% |
% |
% |
|
% |
|||||||
|
Share of HSBC's profit before tax |
2.2 |
4.7 |
7.5 |
0.4 |
1.2 |
16.0 |
|||||||
|
Cost efficiency ratio |
71.1 |
42.5 |
37.6 |
54.5 |
67.7 |
52.8 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
28,911 |
21,912 |
24,311 |
2,313 |
127 |
77,574 |
|||||||
|
Total assets |
35,794 |
26,757 |
109,535 |
7,882 |
- |
(4,958) |
175,010 |
||||||
|
Customer accounts |
38,557 |
24,228 |
36,623 |
8,929 |
658 |
108,995 |
|||||||
For footnotes, see page 143.
Related Shares:
HSBC Holdings