31st Mar 2009 16:42
North America
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 |
|||||||||||
|
United States23 |
(17,364) |
226 |
(2,899) |
67 |
3,427 |
(16,543) |
|||||
|
Canada |
106 |
380 |
252 |
5 |
96 |
839 |
|||||
|
Bermuda |
31 |
51 |
72 |
11 |
9 |
174 |
|||||
|
Other |
(1) |
1 |
- |
- |
2 |
2 |
|||||
|
(17,228) |
658 |
(2,575) |
83 |
3,534 |
(15,528) |
||||||
|
2007 |
|||||||||||
|
United States |
(1,824) |
377 |
(1,243) |
156 |
1,468 |
(1,066) |
|||||
|
Canada |
265 |
466 |
239 |
8 |
5 |
983 |
|||||
|
Bermuda |
13 |
77 |
39 |
10 |
34 |
173 |
|||||
|
Other |
- |
- |
- |
- |
1 |
1 |
|||||
|
(1,546) |
920 |
(965) |
174 |
1,508 |
91 |
||||||
|
2006 |
|||||||||||
|
United States |
3,128 |
442 |
199 |
107 |
(264) |
3,612 |
|||||
|
Canada |
253 |
437 |
189 |
- |
17 |
896 |
|||||
|
Bermuda |
10 |
78 |
31 |
7 |
29 |
155 |
|||||
|
Other |
- |
- |
4 |
- |
1 |
5 |
|||||
|
3,391 |
957 |
423 |
114 |
(217) |
4,668 |
For footnote, see page 143.
Loans and advances to customers (net) by country
|
At 31 December |
|||||
|
2008 US$m |
2007 US$m |
2006 US$m |
|||
|
United States |
208,834 |
233,706 |
236,188 |
||
|
Canada |
44,866 |
53,891 |
39,584 |
||
|
Bermuda |
2,514 |
2,263 |
2,215 |
||
|
256,214 |
289,860 |
277,987 |
|||
Customer accounts by country
|
At 31 December |
|||||
|
2008 US$m |
2007 US$m |
2006 US$m |
|||
|
United States |
101,963 |
100,034 |
84,560 |
||
|
Canada |
33,905 |
37,061 |
28,668 |
||
|
Bermuda |
7,664 |
8,078 |
7,694 |
||
|
143,532 |
145,173 |
120,922 |
|||
2008 compared with 2007
Economic briefing
Economic conditions proved very difficult in the US during 2008 as the economy entered a period of recession. Overall GDP growth slowed to just 1.1 per cent for the year, down from 2 per cent in 2007. In common with many other economies, much of this weakness was concentrated in the final months of 2008 as fourth quarter GDP registered the largest quarterly decline for 26 years. Economic weakness proved broad-based across most areas of the economy, with the notable exception of net exports. Housing sales and residential construction activity both declined from already depressed levels, with house prices continuing to fall in most regions and mortgage delinquencies continuing to rise. Labour market conditions weakened throughout the course of the year as the unemployment rate rose from 4.9 per cent in January to a 15-year high of 7.2 per cent in December 2008. The annual rate of
Profit/(loss) before tax
|
2008 |
2007 |
2006 |
|||
|
North America |
US$m |
US$m |
US$m |
||
|
Net interest income |
15,218 |
14,847 |
14,268 |
||
|
Net fee income |
5,227 |
5,810 |
4,766 |
||
|
Net trading income/(expense) |
(3,135) |
(542) |
1,358 |
||
|
Changes in fair value of long-term debt issued and related derivatives |
3,736 |
1,750 |
(63) |
||
|
Net income from other financial instruments designated at fair value |
1 |
- |
- |
||
|
Net income/(expense) from financial instruments designated at fair value |
3,737 |
1,750 |
(63) |
||
|
Gains less losses from financial investments |
(120) |
245 |
58 |
||
|
Dividend income |
77 |
105 |
85 |
||
|
Net earned insurance premiums |
390 |
449 |
492 |
||
|
Other operating income |
23 |
360 |
922 |
||
|
Total operating income |
21,417 |
23,024 |
21,886 |
||
|
Net insurance claims incurred and movement in liabilities to policyholders |
(238) |
(241) |
(259) |
||
|
Net operating income before loan impairment charges and other credit risk provisions |
21,179 |
22,783 |
21,627 |
||
|
Loan impairment charges and other credit risk provisions |
(16,795) |
(12,156) |
(6,796) |
||
|
Net operating income |
4,384 |
10,627 |
14,831 |
||
|
Operating expenses (excluding goodwill impairment) |
(9,359) |
(10,556) |
(10,193) |
||
|
Goodwill impairment |
(10,564) |
- |
- |
||
|
Operating profit/(loss) |
(15,539) |
71 |
4,638 |
||
|
Share of profit in associates and joint ventures |
11 |
20 |
30 |
||
|
Profit/(loss) before tax |
(15,528) |
91 |
4,668 |
||
|
% |
% |
% |
|||
|
Share of HSBC's profit before tax |
(166.8) |
0.4 |
21.1 |
||
|
Cost efficiency ratio |
94.1 |
46.3 |
47.1 |
||
|
Year-end staff numbers (full-time equivalent) |
44,725 |
52,722 |
55,642 |
||
|
Balance sheet data15 |
|||||
|
At 31 December |
|||||
|
2008 |
2007 |
2006 |
|||
|
US$m |
US$m |
US$m |
|||
|
Loans and advances to customers (net) |
256,214 |
289,860 |
277,987 |
||
|
Loans and advances to banks (net) |
11,458 |
16,566 |
17,865 |
||
|
Trading assets, financial assets designated at fair value, and financial investments20 |
119,634 |
133,998 |
145,700 |
||
|
Total assets |
552,612 |
549,285 |
505,638 |
||
|
Deposits by banks |
18,181 |
16,618 |
11,484 |
||
|
Customer accounts |
143,532 |
145,173 |
120,922 |
||
For footnotes, see page 143.
All commentaries on North America are on an underlying basis unless stated otherwise.
consumer price inflation reached a 17-year high of 5.6 per cent in July 2008 before moderating sharply to stand at just 0.1 per cent by the year-end. A combination of falling asset values and weak employment conditions undermined consumer confidence and household spending growth turned negative during the second half of 2008. The Standard & Poor's S&P 500 stock market index fell by 38 per cent during the year. Faced with this deterioration in economic activity and financial conditions, the Federal Reserve lowered short-term interest rates by 425 basis points during the course of 2008, leaving the Funds' target rate within a narrow range of between zero and 25 basis points, while a number of liquidity initiatives were also introduced.
Canadian GDP increased by 0.4 per cent during the first eleven months of 2008 compared with the equivalent period of 2007, with growth slowing markedly during the second half of the year, due predominantly to weaker external demand. Labour market conditions deteriorated as the unemployment rate rose from a historical low of 5.8 per cent in January 2008 to finish the year at 6.6 per cent. After rising to a level of 3.5 per cent in August 2008, the headline rate of consumer price inflation slowed to 1.2 per cent by the year-end. The core rate of inflation remained below 2.0 per cent throughout the year. Responding to the deteriorating economic outlook, the Bank of Canada cut its overnight interest rate from 4.25 per cent at the end of 2007 to 1.5 per cent in December 2008.
Reconciliation of reported and underlying profit/(loss) before tax
|
2008 compared with 2007 |
|||||||||||||||||
|
North America |
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 |
14,847 |
1 |
7 |
14,855 |
- |
363 |
15,218 |
2 |
2 |
||||||||
|
Net fee income |
5,810 |
(105) |
1 |
5,706 |
- |
(479) |
5,227 |
(10) |
(8) |
||||||||
|
Other income4 |
2,126 |
(18) |
(1) |
2,107 |
- |
(1,373) |
734 |
(65) |
(65) |
||||||||
|
Net operating income5 |
22,783 |
(122) |
7 |
22,668 |
- |
(1,489) |
21,179 |
(7) |
(7) |
||||||||
|
Loan impairment charges and other credit risk provisions |
(12,156) |
- |
12 |
(12,144) |
- |
(4,651) |
(16,795) |
(38) |
(38) |
||||||||
|
Net operating income |
10,627 |
(122) |
19 |
10,524 |
- |
(6,140) |
4,384 |
(59) |
(58) |
||||||||
|
Operating expenses (excluding goodwill impairment) |
(10,556) |
98 |
(6) |
(10,464) |
- |
1,105 |
(9,359) |
11 |
11 |
||||||||
|
Goodwill impairment |
- |
- |
- |
- |
- |
(10,564) |
(10,564) |
n/a |
n/a |
||||||||
|
Operating profit/(loss) |
71 |
(24) |
13 |
60 |
- |
(15,599) |
(15,539) |
(21,986) |
(25,998) |
||||||||
|
Income from associates |
20 |
- |
- |
20 |
- |
(9) |
11 |
(45) |
(45) |
||||||||
|
Profit/(loss) before tax |
91 |
(24) |
13 |
80 |
- |
(15,608) |
(15,528) |
(17,164) |
(19,510) |
||||||||
For footnotes, see page 143.
Review of business performance
HSBC's operations in North America reported a pre-tax loss of US$15.5 billion in 2008, compared with a pre-tax profit of US$91 million in 2007.
Net interest income in North America increased by 2 per cent to US$15.2 billion, driven by Balance Sheet Management activities in Global Banking and Markets which more than offset the decline in Personal Financial Services as lending reduced.
The significant increase in net interest income in the Balance Sheet Management business resulted from correct positioning in anticipation of lower interest rates. Net interest income was also boosted by higher balances within certain loan portfolios in Global Banking and Markets.
Net interest income fell in Personal Financial Services as asset balances declined and deposit spreads narrowed. Deposit spread compression was driven by the competitive environment for retail deposits in which HSBC refrained from passing on the full effects of interest rate cuts to customers. Asset spreads widened, particularly in vehicle finance and credit cards and, to a lesser extent, the real estate secured portfolios as yields declined by less than funding costs in the lower interest rate environment, and the credit card portfolio benefited from APR floors. This was partly offset by a rise in non-performing loans, lower loan prepayments, increased volumes of loan modifications, and lower fees from reduced loan origination volumes. Funding costs declined as a result of lower base rates during the year.
Lending balances declined as the mortgage services portfolio continued to run-off, originations ceased during the year within the dealer and direct-to-consumer channels in vehicle finance, and tighter underwriting criteria in consumer lending constrained customer eligibility for finance. In addition, US$8.2 billion of mortgages were sold from the US real estate secured portfolios during the year. These factors were partly offset by a change in mix towards higher-yielding credit card loans and reduced levels of prepayments that resulted in loans remaining on the balance sheet longer. At the end of February 2009, HSBC authorised the discontinuation as soon as practicable of all new receivable originations of all products by the branch-based consumer lending business of HSBC Finance in North America (see page 70).
Net fee income declined by 8 per cent, driven by reductions in US credit card fees following changes in fee practices implemented since the fourth quarter of 2007 and lower cash advance and interchange fees as a result of reduced volumes. Partly offsetting the decline were increased income from enhancement services due to higher customer acceptance rates of Account Secure Plus and Identity Protection Plan, a rise in syndication, credit and service fees in Commercial Banking and increased fees from asset management.
Trading losses were dominated by write-downs in Global Banking and Markets on legacy exposures as continuing turmoil in credit markets adversely affected valuations of credit and structured credit trading positions, monoline exposures and leveraged and acquisition finance loans. Continued deterioration in the fair value of the run-off portfolio of sub-prime residential mortgage loans held for sale also contributed to the loss. US$3.6 billion in leveraged loans, high yield notes and securities held for balance sheet management were reclassified in 2008 under revised IFRS rules from trading assets to loans and receivables and available for sale, preventing any further mark-to-market trading losses on these assets. If these reclassifications had not been made, the loss before tax would have been US$0.9 billion higher.
The losses on legacy assets were partly offset by strong performances in other trading areas as foreign exchange trading benefited from pronounced market volatility, Rates trading correctly anticipated central bank rate cuts and gains were generated on credit default swaps in Global Banking. Revenues from emerging markets trading and precious metals trading also rose as a result of ongoing market volatility and increased transaction volumes as prices of gold and platinum rose during 2008. Losses on non-qualifying hedge positions in interest rate swaps generated further trading losses. In 2007, the Decision One business, which was closed that year, recorded trading losses of US$263 million.
Net income from financial instruments designated at fair value rose by US$2.0 billion to US$3.7 billion, primarily on HSBC's fixed-rate long-term debt as credit spreads widened significantly in the second half of 2008 in the ongoing market turmoil. These gains, together with those booked in previous years, will fully reverse over the life of the debt.
Gains less losses from financial investments declined, mainly due to losses on US government agency securities in 2008 and the non-recurrence of the sale of MasterCard shares, partly offset by gains from the Visa IPO in 2008.
Net earned insurance premiums decreased by 13 per cent to US$390 million, driven by lower credit related premiums in HSBC Finance due to declining loan volumes.
Other operating income declined due to losses on sale of the Canadian vehicle finance businesses and other loan portfolios in 2008, in addition to the non-recurrence of gains on disposal of fixed assets and a small portfolio of private equity investments in 2007.
Net insurance claims incurred and movement in liabilities to policyholders were broadly in line with 2007 at US$238 million.
Loan impairment charges and other credit risk provisions rose sharply, by 38 per cent to US$16.8 billion, reflecting substantially higher impairment charges in HSBC Finance across all portfolios and, in HSBC USA, the deterioration of credit quality in prime residential mortgages, second lien portfolios and private label cards. The main factors driving this deterioration were the continued weakening of the US economy, which led to rising levels of unemployment and personal bankruptcy filings: higher early-stage delinquency and increased roll rates in consumer lending: the ageing of portfolios: and further declines in house prices which increased loss severity and reduced customers' ability to refinance and access equity in their homes. Partly offsetting these factors was a reduction in overall lending as HSBC continued to actively reduce its balance sheet and lower its risk profile in the US.
In the Mortgage Services business, loan impairment charges rose by 14 per cent to US$3.5 billion as the 2005 and 2006 vintages continued to season and experience rising delinquency. Run-off of the portfolio slowed in light of continued house price depreciation which, along with the constrained credit environment, restricted refinancing options for personal customers. In consumer lending, loan impairment charges rose by 39 per cent to US$5.7 billion. In the second half of 2008, delinquency rates began to accelerate particularly in the first lien portfolios in the parts of the country most affected by house price depreciation and rising unemployment rates. In HSBC USA, loan impairment charges rose by 76 per cent to US$2.6 billion driven by credit quality deterioration across the Home Equity line of credit, Home Equity loan, prime first lien residential mortgage and private label card portfolios.
Loan impairment charges in US card and retail services rose, driven by portfolio seasoning and rising unemployment, particularly in the second half of 2008, higher levels of personal bankruptcy filings and lower recovery rates. As with mortgages, this was most notable in parts of the country most affected by house price falls and unemployment. Vehicle finance loan impairment charges rose as delinquencies rose and lower prices resulted in lower recoveries when repossessed vehicles were sold at auction.
Loan impairment charges in Commercial Banking grew to US$449 million from a low base, primarily driven by higher impairment losses due to deterioration across the middle market, commercial real estate and corporate banking portfolios in the US and among firms in the manufacturing, export and commercial real estate sectors in Canada. Higher loan impairment charges and other credit risk provisions in Global Banking and Markets reflected weaker credit fundamentals in the US in 2008.
Operating expenses increased by 90 per cent, driven by US$10.6 billion of impairment charge recognised in respect of North America Personal Financial Services in 2008 to fully write off goodwill. Excluding the goodwill impairment charge, expenses were US$1.1 billion or 11 per cent lower. Staff costs declined, primarily in HSBC Finance, following decisions taken in 2007 to close the acquisition channels for new business in Mortgage Services and a number of consumer lending branches, and integrate the operations of the card businesses. HSBC USA made the decision to close its wholesale and third-party correspondent mortgage business in November 2008, while HSBC Finance took the decision to cease originations in the dealer and direct-to-consumer channels in the vehicle finance business in July 2008. Staff costs in Global Banking and Markets also fell as performance-related compensation and staff numbers both declined.
Other administrative costs decreased as origination activity declined, marketing costs in card and retail services reduced and branch costs in consumer lending fell as tightened underwriting criteria curtailed business and led to branch closures. This was partly offset by higher marketing and occupancy costs in the retail bank reflecting a continued expansion of the branch network, increased community investment activities and higher deposit insurance, collection, payments and cash management and asset management costs in support of business growth.
2007 compared with 2006
Economic briefing
In the US, GDP growth in 2007 was 2.2 per cent, 0.7 percentage points less than that recorded in 2006 as the housing-led downturn gathered pace. Consumer spending in 2007 grew by 2.9 per cent, the weakest annual expansion since 2003. Housing activity continued to weaken in 2007, with residential investment falling by 17 per cent during the year. Both new and existing home sales also declined to new lows in 2007. The unemployment rate averaged 4.6 per cent in 2007, with the average in the second half of the year slightly higher at 4.8 per cent. The trade deficit narrowed in 2007 as export growth strengthened. Consumer price inflation averaged around 4 per cent in the final quarter of 2007. This was largely due to higher energy prices; excluding food and energy, consumer price inflation averaged 2.3 per cent in the fourth quarter. The Federal Reserve lowered short-term interest rates by 100 basis points in the second half of 2007, from 5.25 per cent to 4.25 per cent, as policymakers attempted to mitigate the worst effects of the sub-prime related credit squeeze upon economic activity. 10-year note yields reached a high of 5.3 per cent in June 2007, before falling to 4 per cent by the year-end. Declines in the final months of 2007 left the S&P 500 stock market index practically unchanged compared with the end of 2006.
Canadian GDP increased by 2.4 per cent during the first eleven months of 2007 compared with the equivalent period of 2006. Domestic demand remained strong despite tighter credit conditions in the latter part of the year, supported by the robust labour market. The unemployment rate averaged 6 per cent for the year, reaching a historical low of 5.8 per cent in October. After hitting a high of 2.5 per cent in April, core consumer price inflation slowed to 1.5 per cent by the end of 2007. The Canadian dollar appreciated during the year, particularly in the second half. In July, the Bank of Canada raised its overnight interest rate from 4.25 per cent to 4.5 per cent before reversing this move in the final weeks of 2007.
Review of business performance
HSBC's operations in North America experienced a significant fall in pre-tax profits of 98 per cent in 2007, on both reported and underlying bases.
Reconciliation of reported and underlying profit before tax
|
2007 compared with 2006 |
|||||||||||||||||
|
North America |
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 |
14,268 |
- |
65 |
14,333 |
- |
514 |
14,847 |
4 |
4 |
||||||||
|
Net fee income |
4,766 |
- |
26 |
4,792 |
- |
1,018 |
5,810 |
22 |
21 |
||||||||
|
Other income4 |
2,593 |
- |
10 |
2,603 |
20 |
(497) |
2,126 |
(18) |
(19) |
||||||||
|
Net operating income5 |
21,627 |
- |
101 |
21,728 |
20 |
1,035 |
22,783 |
5 |
5 |
||||||||
|
Loan impairment chargesand other credit riskprovisions |
(6,796) |
- |
(3) |
(6,799) |
- |
(5,357) |
(12,156) |
(79) |
(79) |
||||||||
|
Net operating income |
14,831 |
- |
98 |
14,929 |
20 |
(4,322) |
10,627 |
(28) |
(29) |
||||||||
|
Operating expenses |
(10,193) |
- |
(47) |
(10,240) |
(26) |
(290) |
(10,556) |
(4) |
(3) |
||||||||
|
Operating profit |
4,638 |
- |
51 |
4,689 |
(6) |
(4,612) |
71 |
(98) |
(98) |
||||||||
|
Income from associates |
30 |
- |
1 |
31 |
- |
(11) |
20 |
(33) |
(35) |
||||||||
|
Profit before tax |
4,668 |
- |
52 |
4,720 |
(6) |
(4,623) |
91 |
(98) |
(98) |
||||||||
For footnotes, see page 143.
The US economy began to slow in the fourth quarter of 2007 and, increasingly, evidence suggested that some parts of the country were already in recession. As the housing market slump affected the real economy, the deterioration in credit quality that began in the mortgage services business extended to include other consumer finance businesses in the US. In HSBC, this was reflected in a 79 per cent rise in loan impairment charges and a loss before tax of US$1.5 billion in Personal Financial Services. In response to this, management took actions to manage exposure and realign the business, including stopping new mortgage purchases in mortgage services, tightening underwriting criteria, restricting the product range in consumer lending, decreasing credit lines and reducing the volume of balance transfers in credit cards, and restructuring the consumer lending branch network by closing some 400 branches of HSBC Finance to reflect expected lower demand. A loss of US$965 million in Global Banking and Markets arose from credit-related and liquidity event write-downs as asset-backed securities markets became illiquid and credit spreads widened markedly.
Net interest income rose by 4 per cent, as higher revenues from payments and cash management, commercial lending and cards were offset by lower mortgage balances, spread compression and higher non-performing balances.
Overall, average lending balances were 5 per cent higher, as growth in credit and private label cards and vehicle finance offset lower mortgage balances. The benefits of higher volumes were largely offset as asset spreads narrowed due to higher funding costs. Also, although deposit balances rose, spreads reduced as the product mix shifted to higher yielding products. Business expansion and higher customer volumes drove growth in loans and deposits in Commercial Banking. A 43 per cent increase in revenue from payments and cash management was due to higher customer balances.
Net fee income rose as a result of higher personal card balances attracting late and over-limit fees. Fees from card services also rose, due to enhancement services on cards such as debt protection and identity protection. The Intellicheck service, which allows customers to pay their credit card balances over the telephone for a fee, proved popular with customers. Payments and cash management fees also increased on higher volumes generated. In the fourth quarter of 2007, HSBC changed fee practices on credit cards to ensure they fully reflected HSBC's brand principles. This reduced income by US$55 million in 2007.
HSBC incurred a trading loss following write-downs in credit and structured derivatives, including US$282 million relating to monoline exposures, and in leveraged and acquisition finance, driven by deterioration in the credit market in the second half of the year. The write-downs were compounded by trading losses on purchased loans in the mortgage services' wholesale business, in response to which HSBC closed the Decision One business. By contrast, foreign exchange trading performance was strong, supported by activity generated by a weakening dollar and volatile markets.
Net income from financial instruments designated at fair value rose to US$1.8 billion, driven by significant fair value movements on HSBC's own debt as a result of the widening of credit spreads and related derivatives in the second half of the year.
Gains less losses from financial investments of US$245 million were primarily attributable to the sale of shares in MasterCard.
Net earned insurance premiums decreased by 9 per cent to US$449 million, as the decline in loan volumes led to a fall in credit insurance sales and HSBC stopped reinsuring credit insurance for other lenders.
Other operating income decreased significantly, as higher losses were recorded on foreclosed properties due to the combined effect of an increase in the stock of such properties and a reduction in their value due to falling prices. In addition, there were lower gains on the sale of investments, mainly due to a significant one-off gain in the latter part of 2006.
Net insurance claims incurred and movement in liabilities to policyholders decreased by 7 per cent to US$241 million, in line with the change in net earned insurance premiums.
Loan impairment charges posted a steep rise, increasing by 79 per cent to US$12.2 billion, reflecting substantially higher charges in the US consumer finance loan book, primarily in mortgage lending but also in the credit cards portfolio in the final part of the year. The main factor driving this deterioration was the effect of the weaker housing market on both economic activity and the ability of borrowers to extend or refinance debt. In addition, seasoning and mix change within the credit cards portfolio and increases in bankruptcy filings after the exceptionally low levels seen in 2006, following changes in legislation, added to loan impairment charges.
The real estate secured portfolios experienced continuing deterioration in credit quality as a lack of demand for securitised sub-prime mortgages and falls in house prices severely restricted refinancing options for many customers. Loan impairment charges rose by 41 per cent to US$3.1 billion and by 139 per cent to US$4.1 billion in the mortgage services business and consumer lending, respectively. Delinquency rates exceeded recent historical trends, particularly for those loans originated in 2005 and 2006. Performance was weakest in housing markets which had previously experienced the steepest home price appreciation, second lien products and stated income products.
US card services experienced a rise in loan impairment charges from a combination of factors, primarily a growth in balances, higher losses in the final part of the year as the economy slowed, a rise in bankruptcy rates to levels approaching those seen historically, and a shift in portfolio mix towards non-prime loans.
Loan impairment charges in Commercial Banking rose by 151 per cent to US$191 million, reflecting growth in the loan book, the increasing probability of default among commercial real estate loans in the US and a change in methodology for determining loan impairment allowances on a portfolio of revolving loans to small businesses. In addition, in Canada, loan impairment charges increased due to exposure to certain sectors affected by the strength of the Canadian dollar and an impairment charge for non-bank asset-backed commercial paper was also taken.
Operating expenses increased by 3 per cent, compared with growth in net operating income before loan impairment charges of 5 per cent. The retail bank branch network was extended both within and beyond the Group's traditional spheres of operation to support the expansion of the Personal Financial Services and Commercial Banking businesses in the US and Canada. Premises and equipment expenses rose as a consequence. The consumer finance business incurred restructuring charges from the discontinuation of the wholesale and correspondent channels in mortgage services and the closing of branch offices in consumer lending. There were corresponding benefits in origination costs. The Canadian consumer finance business was also restructured in a similar fashion to the US. The business incurred US$70 million of one-off costs arising from the indemnification agreement with Visa ahead of Visa's planned IPO. In the cards and consumer lending businesses, communication expenses increased due to higher mailing volumes on cards and consumer lending as credit collection policies were tightened. In the third quarter, however, expenditure on card marketing declined in line with a decision to slow lending growth.
Share of profit in associates and joint ventures declined to US$20 million.
Analysis by customer group and global business
Profit/(loss) before tax
|
2008 |
|||||||||||||
|
North America |
Personal Financial Services US$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 |
12,632 |
1,480 |
1,064 |
224 |
22 |
(204) |
15,218 |
||||||
|
Net fee income/(expense) |
3,896 |
391 |
818 |
181 |
(59) |
- |
5,227 |
||||||
|
Trading income/(expense) excluding net interest income |
(250) |
5 |
(3,516) |
10 |
(128) |
- |
(3,879) |
||||||
|
Net interest income/(expense) on trading activities |
66 |
- |
584 |
- |
(110) |
204 |
744 |
||||||
|
Net trading income/(expense)16 |
(184) |
5 |
(2,932) |
10 |
(238) |
204 |
(3,135) |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
3,736 |
- |
3,736 |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
(2) |
- |
(1) |
- |
4 |
- |
1 |
||||||
|
Net income/(expense) from financial instruments designated at fair value |
(2) |
- |
(1) |
- |
3,740 |
- |
3,737 |
||||||
|
Gains less losses from financial investments |
65 |
5 |
(209) |
- |
19 |
- |
(120) |
||||||
|
Dividend income |
36 |
11 |
27 |
3 |
- |
- |
77 |
||||||
|
Net earned insurance premiums |
390 |
- |
- |
- |
- |
- |
390 |
||||||
|
Other operating income/(expense) |
(426) |
140 |
240 |
20 |
1,419 |
(1,370) |
23 |
||||||
|
Total operating income/(expense) |
16,407 |
2,032 |
(993) |
438 |
4,903 |
(1,370) |
21,417 |
||||||
|
Net insurance claims17 |
(238) |
- |
- |
- |
- |
- |
(238) |
||||||
|
Net operating income/(expense)5 |
16,169 |
2,032 |
(993) |
438 |
4,903 |
(1,370) |
21,179 |
||||||
|
Loan impairment charges and other credit risk provisions |
(16,132) |
(449) |
(198) |
(16) |
- |
- |
(16,795) |
||||||
|
Net operating income/ (expense) |
37 |
1,583 |
(1,191) |
422 |
4,903 |
(1,370) |
4,384 |
||||||
|
Operating expenses (excluding goodwill impairment) |
(6,701) |
(937) |
(1,384) |
(339) |
(1,368) |
1,370 |
(9,359) |
||||||
|
Goodwill impairment |
(10,564) |
- |
- |
- |
- |
- |
(10,564) |
||||||
|
Operating profit/(loss) |
(17,228) |
646 |
(2,575) |
83 |
3,535 |
- |
(15,539) |
||||||
|
Share of profit/(loss) in associates and joint ventures |
- |
12 |
- |
- |
(1) |
- |
11 |
||||||
|
|
|||||||||||||
|
Profit/(loss) before tax |
(17,228) |
658 |
(2,575) |
83 |
3,534 |
- |
(15,528) |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
(185.1) |
7.1 |
(27.7) |
0.9 |
38.0 |
(166.8) |
|||||||
|
Cost efficiency ratio |
106.8 |
46.1 |
(139.4) |
77.4 |
27.9 |
94.1 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
179,663 |
35,725 |
35,583 |
5,243 |
- |
256,214 |
|||||||
|
Total assets |
192,240 |
42,211 |
318,139 |
7,054 |
3,323 |
(10,355) |
552,612 |
||||||
|
Customer accounts |
65,830 |
39,105 |
23,844 |
14,657 |
96 |
143,532 |
|||||||
For footnotes, see page 143.
|
2007 |
|||||||||||||
|
North America |
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) |
13,175 |
1,558 |
378 |
273 |
(17) |
(520) |
14,847 |
||||||
|
Net fee income/(expense) |
4,571 |
338 |
701 |
279 |
(79) |
- |
5,810 |
||||||
|
Trading income/(expense) excluding net interest income |
(349) |
(2) |
(871) |
11 |
(78) |
- |
(1,289) |
||||||
|
Net interest income/(expense) on trading activities |
134 |
- |
137 |
- |
(44) |
520 |
747 |
||||||
|
Net trading income/(expense)16 |
(215) |
(2) |
(734) |
11 |
(122) |
520 |
(542) |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
1,750 |
- |
1,750 |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
- |
- |
11 |
- |
(11) |
- |
- |
||||||
|
Net income from financial instruments designated at fair value |
- |
- |
11 |
- |
1,739 |
- |
1,750 |
||||||
|
Gains less losses from financial investments |
176 |
(1) |
65 |
2 |
3 |
- |
245 |
||||||
|
Dividend income |
47 |
1 |
57 |
- |
- |
- |
105 |
||||||
|
Net earned insurance premiums |
449 |
- |
- |
- |
- |
- |
449 |
||||||
|
Other operating income/ (expense) |
(5) |
88 |
167 |
34 |
1,480 |
(1,404) |
360 |
||||||
|
Total operating income |
18,198 |
1,982 |
645 |
599 |
3,004 |
(1,404) |
23,024 |
||||||
|
Net insurance claims17 |
(241) |
- |
- |
- |
- |
- |
(241) |
||||||
|
Net operating income5 |
17,957 |
1,982 |
645 |
599 |
3,004 |
(1,404) |
22,783 |
||||||
|
Loan impairment charges and other credit risk provisions |
(11,909) |
(191) |
(46) |
(10) |
- |
- |
(12,156) |
||||||
|
Net operating income |
6,048 |
1,791 |
599 |
589 |
3,004 |
(1,404) |
10,627 |
||||||
|
Total operating expenses |
(7,594) |
(893) |
(1,562) |
(415) |
(1,496) |
1,404 |
(10,556) |
||||||
|
Operating profit/(loss) |
(1,546) |
898 |
(963) |
174 |
1,508 |
- |
71 |
||||||
|
Share of profit/(loss) in associates and joint ventures |
- |
22 |
(2) |
- |
- |
- |
20 |
||||||
|
Profit/(loss) before tax |
(1,546) |
920 |
(965) |
174 |
1,508 |
- |
91 |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
(6.4) |
3.8 |
(4.0) |
0.7 |
6.3 |
0.4 |
|||||||
|
Cost efficiency ratio |
42.3 |
45.1 |
242.2 |
69.3 |
49.8 |
46.3 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
218,676 |
38,930 |
26,186 |
6,068 |
- |
289,860 |
|||||||
|
Total assets |
237,475 |
46,247 |
252,804 |
20,073 |
1,095 |
(8,409) |
549,285 |
||||||
|
Customer accounts |
61,824 |
36,306 |
30,732 |
16,187 |
124 |
145,173 |
|||||||
For footnotes, see page 143.
Analysis by customer group and global business (continued)
Profit/(loss) before tax
|
2006 |
|||||||||||||
|
North America |
Personal Financial Services US$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) |
12,964 |
1,362 |
266 |
212 |
(52) |
(484) |
14,268 |
||||||
|
Net fee income/(expense) |
3,675 |
329 |
656 |
240 |
(134) |
- |
4,766 |
||||||
|
Trading income/(expense) excluding net interest income |
66 |
13 |
746 |
12 |
(220) |
- |
617 |
||||||
|
Net interest income/(expense) on trading activities |
208 |
- |
72 |
- |
(23) |
484 |
741 |
||||||
|
Net trading income/(expense)16 |
274 |
13 |
818 |
12 |
(243) |
484 |
1,358 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
(63) |
- |
(63) |
||||||
|
Net income/(expense) from other financial instruments designated at fair value |
- |
- |
(11) |
- |
11 |
- |
- |
||||||
|
Net expense from financial instruments designated at fair value |
- |
- |
(11) |
- |
(52) |
- |
(63) |
||||||
|
Gains less losses from financial investments |
14 |
19 |
12 |
9 |
4 |
- |
58 |
||||||
|
Dividend income |
23 |
1 |
61 |
- |
- |
- |
85 |
||||||
|
Net earned insurance premiums |
492 |
- |
- |
- |
- |
- |
492 |
||||||
|
Other operating income |
270 |
87 |
269 |
31 |
1,536 |
(1,271) |
922 |
||||||
|
Total operating income |
17,712 |
1,811 |
2,071 |
504 |
1,059 |
(1,271) |
21,886 |
||||||
|
Net insurance claims17 |
(259) |
- |
- |
- |
- |
- |
(259) |
||||||
|
Net operating income5 |
17,453 |
1,811 |
2,071 |
504 |
1,059 |
(1,271) |
21,627 |
||||||
|
Loan impairment charges and other credit risk provisions |
(6,683) |
(74) |
(3) |
(35) |
(1) |
- |
(6,796) |
||||||
|
Net operating income |
10,770 |
1,737 |
2,068 |
469 |
1,058 |
(1,271) |
14,831 |
||||||
|
Total operating expenses |
(7,379) |
(814) |
(1,641) |
(355) |
(1,275) |
1,271 |
(10,193) |
||||||
|
Operating profit/(loss) |
3,391 |
923 |
427 |
114 |
(217) |
- |
4,638 |
||||||
|
Share of profit/(loss) in associates and joint ventures |
- |
34 |
(4) |
- |
- |
- |
30 |
||||||
|
Profit/(loss) before tax |
3,391 |
957 |
423 |
114 |
(217) |
- |
4,668 |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
15.4 |
4.3 |
1.9 |
0.5 |
(1.0) |
21.1 |
|||||||
|
Cost efficiency ratio |
42.3 |
44.9 |
79.2 |
70.4 |
120.4 |
47.1 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
220,517 |
34,651 |
17,215 |
5,604 |
- |
277,987 |
|||||||
|
Total assets |
252,725 |
43,665 |
203,639 |
7,334 |
1,898 |
(3,623) |
505,638 |
||||||
|
Customer accounts |
54,099 |
31,066 |
23,711 |
11,938 |
108 |
120,922 |
|||||||
For footnotes, see page 143.
Latin America
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 |
|||||||||||
|
Argentina |
- |
111 |
113 |
- |
- |
224 |
|||||
|
Brazil |
250 |
348 |
298 |
8 |
6 |
910 |
|||||
|
Mexico |
360 |
157 |
190 |
7 |
- |
714 |
|||||
|
Panama |
51 |
37 |
33 |
- |
- |
121 |
|||||
|
Other |
7 |
53 |
7 |
1 |
- |
68 |
|||||
|
668 |
706 |
641 |
16 |
6 |
2,037 |
||||||
|
2007 |
|||||||||||
|
Argentina |
36 |
75 |
90 |
- |
- |
201 |
|||||
|
Brazil |
293 |
286 |
297 |
9 |
(6) |
879 |
|||||
|
Mexico |
514 |
333 |
113 |
11 |
9 |
980 |
|||||
|
Panama |
45 |
18 |
16 |
7 |
- |
86 |
|||||
|
Other |
5 |
28 |
1 |
(2) |
- |
32 |
|||||
|
893 |
740 |
517 |
25 |
3 |
2,178 |
||||||
|
2006 |
|||||||||||
|
Argentina |
35 |
51 |
68 |
- |
3 |
157 |
|||||
|
Brazil |
121 |
185 |
218 |
6 |
(4) |
526 |
|||||
|
Mexico |
628 |
197 |
177 |
7 |
- |
1,009 |
|||||
|
Panama |
16 |
13 |
10 |
- |
- |
39 |
|||||
|
Other |
- |
5 |
2 |
1 |
(4) |
4 |
|||||
|
800 |
451 |
475 |
14 |
(5) |
1,735 |
Loans and advances to customers (net) by country
|
At 31 December |
|||||
|
2008 US$m |
2007 US$m |
2006 US$m |
|||
|
Argentina |
2,356 |
2,485 |
1,912 |
||
|
Brazil |
18,255 |
18,491 |
11,469 |
||
|
Mexico |
12,211 |
18,059 |
14,294 |
||
|
Panama |
4,538 |
4,158 |
4,178 |
||
|
Other |
4,927 |
4,730 |
3,938 |
||
|
42,287 |
47,923 |
35,791 |
|||
Customer accounts by country
|
At 31 December |
|||||
|
2008 US$m |
2007 US$m |
2006 US$m |
|||
|
Argentina |
2,988 |
2,779 |
2,470 |
||
|
Brazil |
27,857 |
26,231 |
19,946 |
||
|
Mexico |
17,652 |
22,307 |
19,775 |
||
|
Panama |
5,185 |
5,062 |
5,031 |
||
|
Other |
5,761 |
4,913 |
3,639 |
||
|
59,443 |
61,292 |
50,861 |
|||
Profit before tax
|
2008 |
2007 |
2006 |
|||
|
Latin America |
US$m |
US$m |
US$m |
||
|
Net interest income |
6,458 |
5,576 |
4,197 |
||
|
Net fee income |
2,167 |
2,153 |
1,630 |
||
|
Net trading income |
701 |
548 |
537 |
||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
||
|
Net income from other financial instruments designated at fair value |
364 |
320 |
237 |
||
|
Net income from financial instruments designated at fair value |
364 |
320 |
237 |
||
|
Gains less losses from financial investments |
176 |
253 |
84 |
||
|
Gains arising from dilution of interests in associates |
- |
11 |
- |
||
|
Dividend income |
20 |
9 |
6 |
||
|
Net earned insurance premiums |
1,717 |
1,594 |
1,076 |
||
|
Other operating income |
300 |
228 |
91 |
||
|
Total operating income |
11,903 |
10,692 |
7,858 |
||
|
Net insurance claims incurred and movement in liabilities to policyholders |
(1,390) |
(1,427) |
(1,023) |
||
|
Net operating income before loan impairment charges and other credit risk provisions |
10,513 |
9,265 |
6,835 |
||
|
Loan impairment charges and other credit risk provisions |
(2,492) |
(1,697) |
(938) |
||
|
Net operating income |
8,021 |
7,568 |
5,897 |
||
|
Total operating expenses |
(5,990) |
(5,402) |
(4,166) |
||
|
Operating profit |
2,031 |
2,166 |
1,731 |
||
|
Share of profit in associates and joint ventures |
6 |
12 |
4 |
||
|
Profit before tax |
2,037 |
2,178 |
1,735 |
||
|
% |
% |
% |
|||
|
Share of HSBC's profit before tax |
21.9 |
9.0 |
7.9 |
||
|
Cost efficiency ratio |
57.0 |
58.3 |
61.0 |
||
|
Year-end staff numbers (full-time equivalent) |
58,559 |
64,404 |
64,900 |
||
|
Balance sheet data15 |
|||||
|
At 31 December |
|||||
|
2008 |
2007 |
2006 |
|||
|
US$m |
US$m |
US$m |
|||
|
Loans and advances to customers (net) |
42,287 |
47,923 |
35,791 |
||
|
Loans and advances to banks (net) |
14,572 |
12,675 |
12,634 |
||
|
Trading assets, financial assets designated at fair value, and financial investments |
18,753 |
24,715 |
20,497 |
||
|
Total assets |
97,944 |
101,088 |
82,169 |
||
|
Deposits by banks |
5,598 |
4,092 |
5,267 |
||
|
Customer accounts |
59,443 |
61,292 |
50,861 |
||
For footnote, see page 143.
All commentaries on Latin America are on an underlying basis unless stated otherwise.
2008 compared with 2007
Economic briefing
Inflationary pressures developed in Mexico during the course of 2008, mostly due to rising commodity prices, as consumer price inflation accelerated from 3.7 per cent in January to 6.5 per cent by the year-end. In response, the Bank of Mexico raised its overnight interest rate by 75 basis points to 8.25 per cent by the end of the year, although a variety of economic indicators pointed to a sharp loss of momentum during the final quarter as global growth slowed.
The Brazilian economy performed strongly during the first half of 2008, driven by domestic demand, with the annual rate of consumer price inflation rising from 4.6 per cent in January to 6.4 per cent in July, towards the upper limit of the central banks' tolerance range. Conditions within the labour market improved, with the rate of unemployment well below levels observed a year earlier. In line with many other economies within the region, however, conditions weakened markedly towards the end of 2008, with industrial production falling by close to 20 per cent during the fourth quarter.
In Argentina, economic activity held at a reasonably robust level for much of the year, although measures of industrial production growth slowed noticeably during the final months of 2008. Declines in commodity prices during the second half of 2008 and the reduced value of exports raised concerns over the level of capital outflow from the country, while domestic currency interest rates increased sharply. The official headline rate of consumer price inflation rose during the first half of 2008, reaching 9.3 per cent in June 2008 before slowing to 7.2 per cent in December, although methodological changes make comparisons over year difficult.
Reconciliation of reported and underlying profit before tax
|
2008 compared with 2007 |
|||||||||||||||||
|
Latin America |
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 |
5,576 |
- |
155 |
5,731 |
- |
727 |
6,458 |
16 |
13 |
||||||||
|
Net fee income |
2,153 |
- |
58 |
2,211 |
- |
(44) |
2,167 |
1 |
(2) |
||||||||
|
Other income4 |
1,536 |
(11) |
23 |
1,548 |
71 |
269 |
1,888 |
23 |
17 |
||||||||
|
Net operating income5 |
9,265 |
(11) |
236 |
9,490 |
71 |
952 |
10,513 |
13 |
10 |
||||||||
|
Loan impairment charges and other credit risk provisions |
(1,697) |
- |
(64) |
(1,761) |
- |
(731) |
(2,492) |
(47) |
(42) |
||||||||
|
Net operating income |
7,568 |
(11) |
172 |
7,729 |
71 |
221 |
8,021 |
6 |
3 |
||||||||
|
Operating expenses |
(5,402) |
- |
(190) |
(5,592) |
- |
(398) |
(5,990) |
(11) |
(7) |
||||||||
|
Operating profit |
2,166 |
(11) |
(18) |
2,137 |
71 |
(177) |
2,031 |
(6) |
(8) |
||||||||
|
Income from associates |
12 |
- |
- |
12 |
- |
(6) |
6 |
(50) |
(50) |
||||||||
|
Profit before tax |
2,178 |
(11) |
(18) |
2,149 |
71 |
(183) |
2,037 |
(6) |
(9) |
||||||||
For footnotes, see page 143.
Review of business performance
In Latin America, HSBC reported a pre-tax profit of US$2.0 billion compared with US$2.2 billion in 2007, a decrease of 6 per cent. On an underlying basis, pre-tax profits decreased by 9 per cent as increased revenues were offset by higher loan impairment charges, largely in Mexico and Brazil, and increased operating costs across the region.
Net interest income increased by 13 per cent. Growth in average personal lending volumes was mainly driven by vehicle finance and payroll loans in Brazil, and credit cards and personal loans in Mexico. Average credit card balances increased as a result of significant organic growth in 2007 which was not repeated in 2008. Commercial loan volume growth was driven by increased lending for working capital and trade finance loans in Brazil, and medium-sized businesses and the real estate sector in Mexico. Increased income on customer liabilities, which was driven by volume growth, particularly in time deposits, was largely offset by a contraction in deposit spreads, primarily on US dollar denominated accounts. Active repricing strategies were deployed to mitigate spread compression in the region and to better reflect the credit risk on the loan portfolio. Lower overall spreads on lending products were partly offset by increases in cards in the region, small business loans in Mexico and overdrafts in Brazil. In Argentina, spreads on most products widened.
Net fee income decreased by 2 per cent following a ruling by the Brazilian Central Bank reducing or eliminating certain fees such as charges on early loan repayments and returned cheques. Lower transaction volumes in Personal Financial Services in Brazil also reduced fee income. These were partly offset by product repricing, the introduction of new fees and volume growth, particularly in cards, personal loans, packaged deposit products and payments and cash management.
Trading income rose by 22 per cent largely reflecting favourable positioning against foreign exchange movements and increased foreign exchange sales volumes. Trading losses were registered on certain transactions where an offsetting benefit is reported in net income from financial instruments designated at fair value. Losses from defaults on derivative contracts were registered, primarily in Mexico.
Gains less losses from financial investments declined by 24 per cent as gains on the redemption of VISA shares, following its global IPO, and the sale of shares in both Brazil and Mexico were lower than the gains achieved on the sale of shares in a number of companies in Brazil in 2007.
Net earned insurance premiums rose, driven by higher prices and increased sales in the general insurance business, primarily in Argentina. Sales of life assurance products remained strong.
Increased net insurance claims incurred and movements in liabilities to policyholders in Argentina were more than offset by a decrease in liabilities to policyholders in Brazil following a decline in the equity market where the investment losses were passed on to unit-linked policyholders. This was compensated for by a similar decrease in net income from financial instruments designated at fair value.
Other operating income was broadly in line with 2007. A refinement of the income recognition methodology used in respect of long-term insurance contracts in Brazil in 2008 was offset by a similar adjustment in Mexico in 2007.
Loan impairment charges and other credit risk provisions rose by 42 per cent, mainly relating to credit cards, as organically grown portfolios in Mexico seasoned following market share growth and credit quality deteriorated in Mexico and Brazil. The personal unsecured, vehicle finance and small and medium-sized commercial loan portfolios in Brazil also experienced increased levels of loan impairment. Specific focus was placed on improving the quality of new business, based on underwriting experience and relationship management, and steps were taken to improve collection strategies.
Operating expenses increased by 7 per cent. An increase in staff costs was primarily driven by higher salaries following union-agreed pay rises and redundancy payments following reductions in staff numbers, partly offset by cost savings from the reduced headcount. Administrative expenses rose following an increase in the use of a credit card cashback promotional facility in Mexico which was terminated at the end of 2008. Costs also grew in support of improved operational processes in the region. HSBC benefited in 2008 from the recognition of a tax credit following a court ruling in Brazil granting the right to recover excess taxes paid on insurance transactions and changes in transactional tax legislation. As economic conditions weakened towards the second half of 2008, strategic cost saving measures were implemented throughout the region.
2007 compared with 2006
Economic briefing
In response to fluctuations in export demand from the US, economic growth in Mexico moderated during the course of 2007, with GDP rising an estimated 3.1 per cent during the year, compared with 4.8 per cent in 2006. Inflationary pressures remained significant throughout 2007, with consumer price inflation averaging 4 per cent, driven by increases in international prices of commodities, which affected domestic food prices in the core index. As a result, the Bank of Mexico raised its overnight interest rate by a total of 50 basis points, and has maintained its restrictive monetary policy despite reductions in interest rates by the US Federal Reserve.
The Brazilian economy expanded strongly in 2007, with GDP expected to have grown by 5.4 per cent compared with 3.7 per cent in 2006. As in 2006, growth was driven by domestic demand, with private consumption rising considerably. As a consequence, the average unemployment rate fell to 9.3 per cent in 2007 from 10 per cent in 2006. After declining to 3.1 per cent at the end of 2006, the annual rate of consumer price inflation climbed to 4.5 per cent by December 2007, mainly from higher food prices. The cycle of monetary easing which began in the third quarter of 2005 paused in October 2007 with the overnight rate at 11.25 per cent, the lowest level in several decades. After nine years of steady expansion, the trade balance surplus fell slightly in 2007, and is expected to decrease further in 2008. Balance of payments fundamentals, however, remained robust and, as a result, the Brazilian economy seemed less vulnerable to external shocks than in previous years.
The Argentine economy also performed strongly in 2007, with GDP expected to have risen by 8.7 per cent. This strength was a consequence of several factors such as a competitive exchange rate, spare capacity in the economy and a generally favourable external environment, which helped Argentina extend its fiscal and external surpluses into a fourth successive year. Less encouraging was the fact that inflation accelerated to about 13 per cent, up from 10 per cent in 2006. Although food inflation was part of the explanation, rapid demand growth was also a factor. 2007 was an election year, and as a result the rate of growth of fiscal spending doubled to 45 per cent on an annual basis. As a consequence, the primary surplus fell by around 1.2 per cent of GDP.
Throughout the region as a whole, GDP growth roughly matched that of 2006. The slowdown in Mexico provided a contrast to better performances elsewhere in Central and Southern America. Central America grew by an estimated 6.3 per cent, up from 5.9 per cent in 2006 while, in South America, growth was an estimated 5.8 per cent, up from 5.3 per cent in 2006. The most dynamic economies in Central America were Panama (10.0 per cent growth in GDP) and the Dominican Republic (8.0 per cent), followed by Costa Rica (6.2 per cent) and Honduras (6.2 per cent). In South America, the fastest growing countries after Argentina were Peru (7.2 per cent growth in GDP), Venezuela (7.0 per cent) and Colombia (6.5 per cent). In general, inflation appears to be under control in Latin America, averaging around 5 per cent over the past three years. Only Venezuela and Argentina have experienced double-digit inflation, while the US dollar-based economies of Panama, Ecuador and El Salvador have better inflationary records.
Reconciliation of reported and underlying profit before tax
|
2007 compared with 2006 |
|||||||||||||||||
|
Latin America |
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 |
4,197 |
- |
261 |
4,458 |
375 |
743 |
5,576 |
33 |
17 |
||||||||
|
Net fee income |
1,630 |
- |
86 |
1,716 |
86 |
351 |
2,153 |
32 |
20 |
||||||||
|
Other income4 |
1,008 |
- |
60 |
1,068 |
102 |
366 |
1,536 |
52 |
34 |
||||||||
|
Net operating income5 |
6,835 |
- |
407 |
7,242 |
563 |
1,460 |
9,265 |
36 |
20 |
||||||||
|
Loan impairment charges and other credit risk provisions |
(938) |
- |
(81) |
(1,019) |
(133) |
(545) |
(1,697) |
(81) |
(53) |
||||||||
|
Net operating income |
5,897 |
- |
326 |
6,223 |
430 |
915 |
7,568 |
28 |
15 |
||||||||
|
Operating expenses |
(4,166) |
- |
(258) |
(4,424) |
(320) |
(658) |
(5,402) |
(30) |
(15) |
||||||||
|
Operating profit |
1,731 |
- |
68 |
1,799 |
110 |
257 |
2,166 |
25 |
14 |
||||||||
|
Income from associates |
4 |
- |
- |
4 |
9 |
(1) |
12 |
200 |
(25) |
||||||||
|
Profit before tax |
1,735 |
- |
68 |
1,803 |
119 |
256 |
2,178 |
26 |
14 |
||||||||
For footnotes, see page 143.
Review of business performance
HSBC's operations in Latin America reported a preߛtax profit of US$2.2 billion compared with US$1.7 billion in 2006, representing an increase of 26 per cent. The Group's acquisitions of HSBC Bank Panama and Banca Nazionale in 2006 strengthened the existing business platform and geographical representation. On an underlying basis, pre-tax profits rose by 14 per cent as increased revenues were partly offset by higher loan impairment charges, largely from Mexico, and a rise in operating costs.
Notable contributions to Commercial Banking's pre-tax profits, which were 64 per cent higher than in 2006, arose in Brazil from small and mid-market enterprises and in Mexico from larger corporates. In Personal Financial Services, profit before tax increased by 12 per cent as strong growth in revenues was partly offset by increased loan impairment charges in Mexico. Profit before tax in Global Banking and Markets increased as strong growth in net fee and net interest income was partly offset by a decrease in trading income and higher costs related to business expansion.
Notwithstanding continuing investment and integration costs throughout the region, the cost efficiency ratio improved by 2.7 percentage points to 58.3 per cent.
Net interest income increased by 17 per cent. Growth was strong across the region, with net interest income rising by 22 per cent and 11 per cent in Mexico and Brazil, respectively.
In Mexico, net interest income rose despite a fall in balance sheet management revenues due to growth in both assets and liabilities. In particular, credit card balances increased, driven by marketing and portfolio management initiatives designed to improve customer retention and card usage. Volume growth was achieved in mortgages, commercial real estate lending, trade and factoring. Customer relationship management campaigns resulted in new customer acquisitions and increased cross-selling. Net interest income in Brazil increased as the sound economic outlook and falling interest rates resulted in strong demand for credit.
Fee income rose by 20 per cent, primarily driven by robust business growth across the region. In Mexico, the use of debit and credit cards grew, in part because of the growing ATM network and the number of cards in force, which drove commissions from ATM cash withdrawals and point of sale billing. Stricter guidelines on the imposition of late payment fees also led to higher income.
A strategy to migrate more transactions to internet-based services resulted in higher payment and cash management transactions as the number of active customers rose.
Current account income increased as a result of a re-pricing exercise and a rise in volumes. Fees from loans and funds under management also grew on higher volumes. Strong growth in customer accounts delivered higher transactional fees and the continuing success of the Tu Cuenta product in Mexico led to increased take-up with higher product fees charged to customers.
Net income from trading activities decreased by 4 per cent, mainly due to reduced trading opportunities in Credit and Rates. This was partly offset by income growth from foreign exchange trading, driven by continuing market volatility.
Net gains from financial investments rose significantly following a gain on sale of shares held in a credit bureau, a stock exchange and a derivatives exchange in Brazil.
The continued growth of insurance operations in the region, achieved by increasing HSBC's product offerings and expanding its distribution channels, along with targeted sales initiatives, led to higher net insurance claims incurred and movements in liabilities to policyholders.
A 97 per cent increase in other operating income reflected the recognition of the embedded value calculation on the PVIF life assurance business in Mexico. The improvement on 2006 was also aided by the non-recurrence of a loss on sale of a portfolio of assets during that year and sundry gains on foreclosed assets in 2007.
Loan impairment charges rose sharply, by 53 per cent to US$1.7 billion, mainly driven by portfolio growth, normal seasoning and higher delinquency rates on credit cards in Mexico, following a targeted expansion in market share. Loan impairment charges for small and medium-sized businesses lending and delinquencies on loans to the self-employed also increased in Mexico. Partly offsetting these developments was an improvement in personal and commercial delinquency rates in Brazil.
Continuing investment and business expansion resulted in an increase in operating expenses of 15 per cent. This compared favourably with growth in net operating income before loan impairment charges of 20 per cent. Staff costs rose, primarily on higher salaries and bonuses in the region, driven by the need to support business growth, union-agreed pay rises and one-off costs incurred in Brazil to improve operational efficiencies. These were partially offset by a curtailment and settlement gain in Mexico from staff transferring from the Group's defined benefit healthcare scheme to a new defined contribution scheme.
Increases in non-staff costs included higher marketing expenditure in support of growth in credit card operations, continued investment in infrastructure to support business growth and a rise in telecommunication costs and transactional taxes. Four additional months of Banca Nazionale expenses also increased costs.
Analysis by customer group and global business
Profit/(loss) before tax
|
2008 |
|||||||||||||
|
Latin America |
Personal Financial Services US$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 |
4,582 |
1,637 |
579 |
22 |
(35) |
(327) |
6,458 |
||||||
|
Net fee income |
1,339 |
536 |
248 |
35 |
9 |
- |
2,167 |
||||||
|
Trading income excluding net interest income |
123 |
27 |
200 |
3 |
4 |
- |
356 |
||||||
|
Net interest income/(expense) on trading activities |
7 |
4 |
8 |
- |
(2) |
327 |
345 |
||||||
|
Net trading income16 |
130 |
31 |
208 |
3 |
2 |
327 |
701 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
- |
- |
- |
||||||
|
Net income from other financial instruments designated at fair value |
187 |
- |
139 |
- |
38 |
- |
364 |
||||||
|
Net income from financial instruments designated at fair value |
187 |
- |
139 |
- |
38 |
- |
364 |
||||||
|
Gains less losses from financial investments |
132 |
21 |
21 |
2 |
- |
- |
176 |
||||||
|
Dividend income |
16 |
1 |
3 |
- |
- |
- |
20 |
||||||
|
Net earned insurance
premiums |
1,547 |
82 |
88 |
- |
- |
- |
1,717 |
||||||
|
Other operating income |
244 |
57 |
39 |
3 |
8 |
(51) |
300 |
||||||
|
Total operating income |
8,177 |
2,365 |
1,325 |
65 |
22 |
(51) |
11,903 |
||||||
|
Net insurance claims17 |
(1,281) |
(42) |
(68) |
- |
1 |
- |
(1,390) |
||||||
|
Net operating income5 |
6,896 |
2,323 |
1,257 |
65 |
23 |
(51) |
10,513 |
||||||
|
Loan impairment charges and other credit risk provisions |
(2,120) |
(340) |
(29) |
- |
(3) |
- |
(2,492) |
||||||
|
Net operating income |
4,776 |
1,983 |
1,228 |
65 |
20 |
(51) |
8,021 |
||||||
|
Total operating expenses |
(4,114) |
(1,277) |
(587) |
(49) |
(14) |
51 |
(5,990) |
||||||
|
Operating profit |
662 |
706 |
641 |
16 |
6 |
- |
2,031 |
||||||
|
Share of profit in associates and joint ventures |
6 |
- |
- |
- |
- |
- |
6 |
||||||
|
Profit before tax |
668 |
706 |
641 |
16 |
6 |
- |
2,037 |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
7.2 |
7.6 |
6.9 |
0.2 |
- |
21.9 |
|||||||
|
Cost efficiency ratio |
59.7 |
55.0 |
46.7 |
75.4 |
60.9 |
57.0 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
18,523 |
15,460 |
8,273 |
31 |
- |
42,287 |
|||||||
|
Total assets |
30,320 |
19,382 |
48,868 |
391 |
361 |
(1,378) |
97,944 |
||||||
|
Customer accounts |
27,564 |
14,367 |
15,384 |
2,128 |
- |
59,443 |
|||||||
For footnotes, see page 143.
Analysis by customer group and global business (continued)
Profit/(loss) before tax
|
2007 |
|||||||||||||
|
Latin America |
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 |
3,983 |
1,407 |
410 |
20 |
3 |
(247) |
5,576 |
||||||
|
Net fee income |
1,372 |
485 |
250 |
40 |
6 |
- |
2,153 |
||||||
|
Trading income excluding net interest income |
67 |
39 |
164 |
2 |
- |
- |
272 |
||||||
|
Net interest income on trading activities |
10 |
1 |
18 |
- |
- |
247 |
276 |
||||||
|
Net trading income16 |
77 |
40 |
182 |
2 |
- |
247 |
548 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
- |
- |
- |
||||||
|
Net income from other financial instruments designated at fair value |
314 |
- |
6 |
- |
- |
- |
320 |
||||||
|
Net income from financial instruments designated at fair value |
314 |
- |
6 |
- |
- |
- |
320 |
||||||
|
Gains less losses from financial investments |
120 |
51 |
82 |
1 |
(1) |
- |
253 |
||||||
|
Gains arising from dilution of interests in associates |
- |
- |
- |
- |
11 |
- |
11 |
||||||
|
Dividend income |
5 |
2 |
2 |
- |
- |
- |
9 |
||||||
|
Net earned insurance premiums |
1,448 |
66 |
80 |
- |
- |
- |
1,594 |
||||||
|
Other operating income |
145 |
69 |
31 |
8 |
12 |
(37) |
228 |
||||||
|
Total operating income |
7,464 |
2,120 |
1,043 |
71 |
31 |
(37) |
10,692 |
||||||
|
Net insurance claims17 |
(1,330) |
(37) |
(60) |
- |
- |
- |
(1,427) |
||||||
|
Net operating income5 |
6,134 |
2,083 |
983 |
71 |
31 |
(37) |
9,265 |
||||||
|
Loan impairment (charges)/ recoveries and other credit risk provisions |
(1,492) |
(212) |
13 |
- |
(6) |
- |
(1,697) |
||||||
|
Net operating income |
4,642 |
1,871 |
996 |
71 |
25 |
(37) |
7,568 |
||||||
|
Total operating expenses |
(3,758) |
(1,132) |
(481) |
(46) |
(22) |
37 |
(5,402) |
||||||
|
Operating profit |
884 |
739 |
515 |
25 |
3 |
- |
2,166 |
||||||
|
Share of profit in associates and joint ventures |
9 |
1 |
2 |
- |
- |
- |
12 |
||||||
|
Profit before tax |
893 |
740 |
517 |
25 |
3 |
- |
2,178 |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
3.7 |
3.1 |
2.1 |
0.1 |
- |
9.0 |
|||||||
|
Cost efficiency ratio |
61.3 |
54.3 |
48.9 |
64.8 |
71.0 |
58.3 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
21,680 |
16,243 |
9,935 |
65 |
- |
47,923 |
|||||||
|
Total assets |
35,181 |
21,049 |
45,045 |
302 |
261 |
(750) |
101,088 |
||||||
|
Customer accounts |
30,628 |
15,524 |
13,950 |
1,190 |
- |
61,292 |
|||||||
For footnotes, see page 143.
|
2006 |
|||||||||||||
|
Latin America |
Personal Financial Services US$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) |
3,057 |
1,037 |
325 |
13 |
(2) |
(233) |
4,197 |
||||||
|
Net fee income |
1,053 |
387 |
167 |
23 |
- |
- |
1,630 |
||||||
|
Trading income excluding net interest income |
61 |
21 |
218 |
1 |
- |
- |
301 |
||||||
|
Net interest income/(expense) on trading activities |
14 |
5 |
(16) |
- |
- |
233 |
236 |
||||||
|
Net trading income16 |
75 |
26 |
202 |
1 |
- |
233 |
537 |
||||||
|
Changes in fair value of long-term debt issued and related derivatives |
- |
- |
- |
- |
- |
- |
- |
||||||
|
Net income from other financial instruments designated at fair value |
227 |
- |
11 |
- |
(1) |
- |
237 |
||||||
|
Net income/(expense) from financial instruments designated at fair value |
227 |
- |
11 |
- |
(1) |
- |
237 |
||||||
|
Gains less losses from financial investments |
11 |
1 |
72 |
- |
- |
- |
84 |
||||||
|
Dividend income |
5 |
1 |
- |
- |
- |
- |
6 |
||||||
|
Net earned insurance premiums |
992 |
27 |
59 |
- |
(2) |
- |
1,076 |
||||||
|
Other operating income |
74 |
7 |
10 |
4 |
14 |
(18) |
91 |
||||||
|
Total operating income |
5,494 |
1,486 |
846 |
41 |
9 |
(18) |
7,858 |
||||||
|
Net insurance claims17 |
(957) |
(16) |
(51) |
- |
1 |
- |
(1,023) |
||||||
|
Net operating income5 |
4,537 |
1,470 |
795 |
41 |
10 |
(18) |
6,835 |
||||||
|
Loan impairment (charges)/ recoveries and other credit risk provisions |
(764) |
(197) |
26 |
- |
(3) |
- |
(938) |
||||||
|
Net operating income |
3,773 |
1,273 |
821 |
41 |
7 |
(18) |
5,897 |
||||||
|
Total operating expenses |
(2,977) |
(822) |
(346) |
(27) |
(12) |
18 |
(4,166) |
||||||
|
Operating profit/(loss) |
796 |
451 |
475 |
14 |
(5) |
- |
1,731 |
||||||
|
Share of profit in associates and joint ventures |
4 |
- |
- |
- |
- |
- |
4 |
||||||
|
Profit/(loss) before tax |
800 |
451 |
475 |
14 |
(5) |
- |
1,735 |
||||||
|
% |
% |
% |
% |
% |
% |
||||||||
|
Share of HSBC's profit before tax |
3.6 |
2.0 |
2.2 |
0.1 |
- |
7.9 |
|||||||
|
Cost efficiency ratio |
65.6 |
55.9 |
43.5 |
65.9 |
120.0 |
61.0 |
|||||||
|
Balance sheet data15 |
|||||||||||||
|
US$m |
US$m |
US$m |
US$m |
US$m |
US$m |
||||||||
|
Loans and advances to customers (net) |
16,165 |
11,463 |
8,147 |
16 |
- |
35,791 |
|||||||
|
Total assets |
28,237 |
16,599 |
37,564 |
90 |
344 |
(665) |
82,169 |
||||||
|
Customer accounts |
25,200 |
13,754 |
11,685 |
222 |
- |
50,861 |
|||||||
For footnotes, see page 143.
Related Shares:
HSBC Holdings