26th Feb 2008 09:30
HSBC Holdings PLC26 February 2008 HSBC BANK CANADA RESULTS^ FOR THE FOURTH QUARTER AND YEAR ENDED 31 DECEMBER 2007 - HIGHLIGHTS • Net income attributable to common shares was C$530 million for the year ended 31 December 2007, an increase of 6.6 per cent over the year ended 31 December 2006. • Net income attributable to common shares was C$111 million for the quarter ended 31 December 2007, a decrease of 13.3 per cent compared to the same period in 2006. • Return on average common equity was 19.8 per cent for the year ended 31 December 2007 and 15.6 per cent for the quarter ended 31 December 2007 compared with 21.1 per cent and 20.6 per cent, respectively, for the same periods in 2006. • The cost efficiency ratio was 51.7 per cent for the year ended 31 December 2007 and 54.5 per cent for the quarter ended 31 December 2007 compared with 51.3 per cent and 51.4 per cent, respectively, for the same periods in 2006. • Total assets were C$62.9 billion at 31 December 2007, an increase of C$6.1 billion, or 10.7 per cent, from C$56.8 billion at 31 December 2006. • Total funds under management were C$26.2 billion at 31 December 2007, an increase of C$2.9 billion, or 12.4 per cent, from C$23.3 billion at 31 December 2006. ^ Results are prepared in accordance with Canadian generally accepted accounting principles. Financial Commentary Overview HSBC Bank Canada ("the bank") recorded net income attributable to common sharesfor the year ended 31 December 2007 of C$530 million compared with C$497 millionfor 2006, an increase of C$33 million, or 6.6 per cent. Net income attributableto common shares was C$111 million for the fourth quarter ended 31 December2007, a decrease of C$17 million, or 13.3 per cent, from C$128 million for thefourth quarter of 2006. During the year, the bank took a charge in respect of its holdings of Canadiannon-bank sponsored Asset Backed Commercial Paper ("non-bank ABCP") of C$47million (C$30 million net of related income taxes). In 2007 the bank alsorecorded a gain of C$21 million after related income taxes on disposal of itsshares in the Montreal Stock Exchange. Commenting on the results, Lindsay Gordon, President and Chief ExecutiveOfficer, said: "The bank's underlying business remains strong and investments in key businesses and markets are delivering growth in revenues. The liquidity problems which emerged in the Canadian Asset Backed Commercial Paper market in August posed a challenge to our industry and HSBC joined with other domestic and international banks in engaging constructively to pursue an orderly market solution to the situation. HSBC Bank Canada subsequently took some exposure onto its own balance sheet and our charge represents impairments on such positions; these positions include a very small element of exposure to the US sub-prime mortgage market which is the bank's only exposure to that market. "The outlook for 2008 is mixed. The Canadian economy remains resilient withstrong growth in Western Canada. Both personal and commercial segments of thebank's business remain very competitive with ongoing pressure on margins,particularly in the personal segment. The bank will stay focused on building itsbusiness for sustained growth. We see opportunities for growth across all thebank's key business lines, and we will re-engineer key processes to furtherimprove the quality and consistency of customer service to achieve this." Net interest income Net interest income was C$302 million for the quarter ended 31 December 2007compared with C$291 million for the same quarter in 2006, an increase of C$11million, or 3.8 per cent. The increase was partially driven by growth in assetsin all businesses with average interest-earning assets increasing by C$8.0billion or 16.5 per cent compared with the same period in 2006. As a result ofwidening credit spreads both in Canada and internationally that began in thethird quarter, the cost of funds, particularly wholesale deposits has increasedby almost 20 basis points. This resulted in a reduction in net interest marginto 2.13 per cent for the quarter compared with 2.30 per cent for the same periodin 2006. Net interest income in the fourth quarter of 2007 was C$17 million lower thanthe third quarter of 2007. While customer loans continued to grow during thequarter, increased interest income from this source was eroded by a reduction innet interest margin, from 2.33 per cent in the third quarter to 2.13 per cent,driven by the higher cost of wholesale deposits. For the year ended 31 December 2007, net interest income was C$1,222 millioncompared with C$1,115 million for 2006, an increase of C$107 million, or 9.6 percent. Again, for the year as a whole, the increases derived from the growth inassets were partially offset by the decrease in net interest margin to 2.26 percent compared with 2.33 per cent in 2006. Canadian non-bank sponsored Asset Backed Commercial Paper As at 31 December 2007, the bank held C$230 million of non-bank ABCP, net ofprovisions, in available for sale ("AFS") securities and C$50 million, net ofwrite-downs, in trading securities. During the year, the bank took a charge inrespect of its holdings of Canadian non-bank sponsored Asset Backed CommercialPaper ("non-bank ABCP") of C$47 million. Non-interest revenue Non-interest revenue was C$162 million for the fourth quarter of 2007 comparedwith C$168 million in the same quarter of 2006, a decrease of C$6 million, or3.6 per cent. Excluding the impact of a C$42 million reduction relating tonon-bank ABCP, non-interest revenues were C$204 million, or 21.4 per cent higherthan the same period in 2006. Investment administration fees were higher as thebank's funds under management in the wealth management business continued todeliver good growth. Deposit and payment service charges and credit feesincreased as a result of increased customer activity. Capital markets fees werelower due to curtailed activity resulting from market uncertainty, particularlyfrom new issue underwriting and advisory mandates. Trading income was higher dueto a C$11 million increase in foreign exchange trading arising from thevolatility of Canadian and United States currency movements in the fourthquarter of 2007. There was also a positive impact of C$7 million arising fromchanges in the carrying values of certain debt obligations recorded at fairvalue, offset by a C$8 million mark-to-market adjustment on non-bank ABCP heldin the trading portfolio. The losses on AFS securities in 2007, compared torealized investment gains in 2006, were due to the C$34 million write-down ofnon-bank ABCP held in the AFS securities portfolio, together with a lowerincrease in the fair value of investments in private equity funds in the fourthquarter of 2007, compared to the fourth quarter of 2006. In the fourth quarter of 2007, non-interest revenue was C$22 million lowercompared with the previous quarter, mainly as a result of the losses on non-bankABCP within AFS securities of C$34 million. Trading revenue in the quarter wasalso lower due to the C$8 million mark-to-market adjustment on non-bank ABCPheld in the trading portfolio and a C$4 million lower positive effect fromchanges in the fair value of certain debt obligations. However, these werepartially offset by increases in capital markets fees, deposit and paymentservice charges and investment administration fees, as well as increasedrevenues from foreign exchange. Foreign exchange trading revenues increasedconsiderably in the fourth quarter due to greater exchange rate volatility. For the year ended 31 December 2007, non-interest revenue was C$708 million,C$57 million, or 8.8 per cent, higher compared with C$651 million for 2006.Excluding the impact of non-bank ABCP and gains on sale of Montreal StockExchange shares, the year-on-year increase is 12.0 per cent. Trading income washigher, arising from strong gains recorded from foreign exchange tradingtogether with a positive impact of C$23 million arising from changes in the fairvalue of certain debt obligations. However, this was partially offset by the C$8 million mark-to-market adjustment of trading non-bank ABCP. Investmentadministration fees were strongly ahead together with increases in deposit andpayment service charges and credit fees. Other income increased mainly due tohigher activity in the bank's investor immigration programme. Capital marketsfees were lower arising from lower activity as a result of uncertainties in themarkets. Losses on AFS securities in 2007 compared to gains on investmentsecurities recorded in 2006 resulted from the write-down in non-bank ABCP andlower increases in the fair value of private equity funds, offset by the gainson the sale of Montreal Stock Exchange shares in 2007. Non-interest expenses and operating efficiency Non-interest expenses were C$253 million for the fourth quarter of 2007 comparedwith C$236 million in the same quarter of 2006, an increase of C$17 million, or7.2 per cent. Salaries and employee benefits expenses were higher in the fourthquarter of 2007 due to an increase in the employee base. This resulted fromgrowth in new branches in Alberta and the Greater Toronto Area, together withinvestments in the Direct Bank, Private Banking and Wealth Management and thePayments and Cash Management businesses. Pension plan and post-retirement costswere also higher than in the comparative period, although this was partiallyoffset by a reduction in stock-based compensation. Premises and equipmentexpenses were largely unchanged, although depreciation was lower compared to thefourth quarter of 2006 which was impacted by a change in estimate of the usefullife of improvements to leasehold properties. Marketing expenses also increasedas the bank continued to build the HSBC brand in Canada. Operating losses werehigher compared to the fourth quarter of 2006, mainly due to increased debitcard fraud. Technology costs also increased as the bank invested further in newsystems to support strategic initiatives. Although the cost efficiency ratio forthe fourth quarter of 2007 increased to 54.5 per cent compared to 51.4 per centfor 2006, excluding the impact of the write-down of non-bank ABCP, the ratio was50.0 per cent. Non-interest expenses for the fourth quarter of 2007 were slightly highercompared with the third quarter of 2007. Salaries and benefits were affected byincreased variable compensation driven by higher capital markets revenuescompared to the prior quarter, although partially offset by lower stock-basedcompensation. Other expenses increased due mainly to increased marketingexpenses. For the year ended 31 December 2007, non-interest expenses were C$997 millioncompared with C$906 million for 2006, an increase of C$91 million, or 10.0 percent. Salaries and benefits expenses were higher due to an increased employeebase, increased variable compensation, and higher pension and otherpost-retirement benefits costs. Other expenses were higher due to continuedinvestment in the business, higher costs arising from increased customertransactions, and increased marketing costs supporting the development of theHSBC brand. The cost efficiency ratio was 51.7 per cent compared with 51.3 percent for 2006. Excluding the impact of non-bank ABCP and the sale of MontrealStock Exchange shares, the cost efficiency ratio for 2007 improved marginally to51.1 per cent. Credit quality and provision for credit losses The provision for credit losses was C$24 million for the fourth quarter of 2007,compared with C$17 million in the fourth quarter of 2006, and C$21 million forthe third quarter of 2007. The provision for the year ended 31 December 2007 wasC$67 million compared to C$34 million for 2006. Overall credit quality remainssound, reflecting prudent lending standards and strong economic conditions inCanada. The increased charge in the fourth quarter of 2007 and for the yearended 31 December 2007 compared to the same periods in 2006 was due to increasesin provisions in certain resource sectors with weaker industry conditions giventhe strength of the Canadian dollar. However, 2006 was an exceptionally benign credit environment, resulting in a low level of provisions. The same factors impacted movement in impaired credit exposures. Gross impairedcredit exposures were C$272 million, C$66 million higher compared with C$206million at 30 September 2007, and C$95 million higher compared with C$177million at 31 December 2006. Total impaired exposures, net of specificallowances for credit losses, were C$188 million at 31 December 2007 comparedwith C$139 million at 30 September 2007 and C$119 million at 31 December 2006. The general allowance for credit losses of C$269 million remained unchanged from30 September 2007 and 31 December 2006. The total allowance for credit losses,as a percentage of loans and acceptances outstanding, was 0.79 per cent at 31December 2007 compared with 0.75 per cent at 30 September 2007 and 0.80 per centat 31 December 2006. The bank considers the total allowance for credit losses tobe appropriate given the credit quality of its portfolios and the current creditenvironment. The bank's loan portfolio has no exposure to the US sub-primemarket. Income taxes The effective tax rate in the fourth quarter of 2007 was 35.6 per cent, whichcompares to 33.2 per cent in the same quarter of 2006 and 35.2 per cent in thethird quarter of 2007. The increase in tax rate in the fourth quarter of 2007was primarily due to a write-down of future income tax assets of C$11 millionresulting from the lower corporate income tax rates enacted by the federalgovernment in the quarter. The effective tax rate for the full year in 2007 was 34.8 per cent compared with35.6 per cent in 2006 primarily due to a higher level of gains subject to alower tax rate in 2007 compared to the previous year. Balance sheet Total assets at 31 December 2007 were C$62.9 billion, an increase of C$6.1billion from 31 December 2006. The loan portfolio continues to be a major driverof balance sheet growth. Commercial loans and bankers' acceptances grew C$4.1billion from 31 December 2006 on the continued strong economy, particularly inWestern Canada. Residential mortgages increased C$1.4 billion during 2007, butas a result of securitisation, there was a net decrease of C$1.1 billion.Balance sheet management activity in the Treasury and Markets business hasincreased the securities portfolio by C$2.2 billion, and there were increases inbalances under reverse repurchase agreements of C$1.4 billion, as a result ofthe tightening of liquidity in the markets. Total deposits increased C$4.7 billion to C$48.9 billion at 31 December 2007from C$44.2 billion at 31 December 2006. Growth in personal deposits resultedlargely from the new High Rate and Direct Savings accounts. Commercial depositswere higher due to growth in term products, driven by improved product offeringsin the Payments and Cash Management business and growth in commercial bankingrelationships. Total assets under administration Funds under management were C$26.2 billion at 31 December 2007 compared withC$27.1 billion at 30 September 2007 and C$23.3 billion at 31 December 2006.Including custody and administration balances, total assets under administrationwere C$37.1 billion compared with C$36.4 billion at 30 September 2007 and C$31.9billion at 31 December 2006. Growth in funds under management in 2007 benefited from strong acquisitions ofnew clients, strong investment sales and the success of Private Client productsassisted by growth in equity markets, although a slight reduction in thosemarkets was experienced in the final quarter of 2007. Capital management The tier 1 capital ratio was 8.8 per cent and the total capital ratio was 11.3per cent at 31 December 2007. These compare with 8.5 per cent and 10.9 per cent,respectively, at 30 September 2007 and 9.0 per cent and 11.1 per cent,respectively, at 31 December 2006. In addition to net income, regulatory capital increased from an issue of C$100million of common shares during the fourth quarter of 2007 and an issue of C$400million in subordinated debentures in the second quarter of 2007. These issueswere partially offset by dividends declared on preferred and common shares andthe redemption of C$100 million and C$25 million in subordinated debentures inthe second and third quarters of 2007 respectively. Accounting policies adopted in 2007 Effective 1 January 2007, the bank adopted new Canadian Institute of CharteredAccountants (CICA) Handbook Standards relating to the recognition, measurementand disclosure of financial instruments including hedges and comprehensiveincome. Although these standards were adopted prospectively, without restatement of prior year comparatives, the impact on initial adoption as well as the effects of certain transitional adjustments have been recorded as adjustments to opening retained earnings and opening accumulated other comprehensive income. Although there was no material impact on the results for the fourth quarterarising from the adoption of these new standards, more detailed information onthe impact of adopting these standards was included in HSBC Bank Canada's firstquarter 2007 report to shareholders and will be included in the bank's annualreport and consolidated financial statements for 2007. Dividends During the fourth quarter of 2007, C$65 million in dividends were declared andpaid on the bank's common shares. Regular quarterly dividends of 31.875 cents per share have been declared on HSBCBank Canada Class 1 Preferred Shares - Series C and 31.25 cents per share onClass 1 Preferred Shares - Series D. The dividends will be payable on 30 March2008, to shareholders of record on 14 March 2008. About HSBC Bank Canada HSBC Bank Canada, a subsidiary of HSBC Holdings plc, has more than 170 offices.With around 10,000 offices in 83 countries and territories and assets ofUS$2,150 billion at 30 June 2007, the HSBC Group is one of the world's largestbanking and financial services organisations. Visit the bank's website athsbc.ca for more information about HSBC Bank Canada and its products andservices. Copies of HSBC Bank Canada's Annual Report for 2007 will be sent to shareholdersin March 2008. Caution regarding forward-looking financial statements This document may contain forward-looking statements, including statementsregarding the business and anticipated financial performance of HSBC BankCanada. These statements are subject to a number of risks and uncertainties thatmay cause actual results to differ materially from those contemplated by theforward-looking statements. Some of the factors that could cause suchdifferences include legislative or regulatory developments, technologicalchange, global capital market activity, changes in government monetary andeconomic policies, changes in prevailing interest rates, inflation level andgeneral economic conditions in geographic areas where HSBC Bank Canada operates.Canada is an extremely competitive banking environment and pressures on interestrates and the bank's net interest margin may arise from actions taken byindividual banks acting alone. Varying economic conditions may also affectequity and foreign exchange markets, which could also have an impact on thebank's revenues. In addition, there may be a number of factors relating to thevaluation of non-bank ABCP. The factors disclosed above may not be complete andthere could be other uncertainties and potential risk factors not consideredhere which may impact the bank's results and financial condition. Summary Quarter ended Year endedFigures in C$ millions (except per share amounts) 31Dec07 30Sep07 31Dec06 31Dec07 31Dec06 EarningsNet income attributable to common shares 111 145 128 530 497Basic earnings per share 0.22 0.30 0.26 1.08 1.02 Performance ratios (%)Return on average common equity 15.6 21.3 20.6 19.8 21.1Return on average assets 0.66 0.91 0.87 0.84 0.91Net interest margin^ 2.13 2.33 2.30 2.26 2.33Cost efficiency ratio^^ 54.5 48.9 51.4 51.7 51.3Non-interest revenue:total revenue ratio 34.9 36.6 36.6 36.7 36.9 Credit informationGross impaired credit exposures 272 206 177Allowance for credit losses 353 336 327 - As a percentage of gross impaired credit exposures 130% 163% 185% - As a percentage of gross loans and acceptances 0.79% 0.75% 0.80% Average balancesAssets 66,158 62,934 58,883 63,273 54,118Loans 39,032 38,405 34,943 37,635 33,659Deposits 49,755 47,588 44,491 47,483 41,904Common equity 2,827 2,693 2,464 2,674 2,360 Capital ratios (per cent)Tier 1 8.8 8.5 9.0Total capital 11.3 10.9 11.1 Total assets under administrationFunds under management 26,213 27,129 23,340Custodial accounts 10,914 9,279 8,574Total assets under administration 37,127 36,408 31,914 ^ Net interest margin is net interest income divided by average interest earning assets for the period.^^ The cost efficiency ratio is defined as non-interest expenses divided by total revenue. Consolidated Statement of Income (Unaudited) Quarter ended Year endedFigures in C$ millions (except per share amounts) 31Dec07 30Sep07 31Dec06 31Dec07 31Dec06 Interest and dividend incomeLoans 678 663 593 2,554 2,144Securities 74 70 49 273 186Deposits with regulated financial institutions 55 61 62 237 234 807 794 704 3,064 2,564 Interest expenseDeposits 495 464 406 1,803 1,422Debentures 10 11 7 39 27 505 475 413 1,842 1,449 Net interest income 302 319 291 1,222 1,115 Non-interest revenueDeposit and payment service charges 27 25 23 100 90Credit fees 29 30 26 114 106Capital market fees 27 21 30 109 115Investment administration fees 35 33 28 131 103Foreign exchange 12 10 9 40 32Trade finance 5 6 6 23 24Trading revenue 32 40 17 102 69(Losses) gains on available for sale (2006 - investment) securities (34) (5) 2 (13) 3Gains on other securities 2 - 5 11 27Securitisation income 13 10 13 42 42Other 14 14 9 49 40 162 184 168 708 651 Total revenue 464 503 459 1,930 1,766 Non-interest expensesSalaries and employee benefits 134 132 124 548 503Premises and equipment 28 31 34 122 116Other 91 83 78 327 287 253 246 236 997 906 Net operating income before provision for credit losses 211 257 223 933 860Provision for credit losses 24 21 17 67 34 Income before taxes and non- controlling interest in income of trust 187 236 206 866 826Provision for income taxes 64 81 66 292 285Non-controlling interest in income of trust 7 6 7 26 26Net income 116 149 133 548 515Preferred share dividends 5 4 5 18 18Net income attributable to common shares 111 145 128 530 497 Average common shares outstanding (000) 493,668 488,668 488,668 489,918 488,668Basic earnings per share (C$) 0.22 0.30 0.26 1.08 1.02 Condensed Consolidated Balance Sheet (Unaudited) Figures in C$ millions At 31Dec07 At 31Dec06 AssetsCash and non-interest bearing deposits with the Bank of Canada and other banks 510 368Deposits with regulated financial institutions 3,063 4,346 3,573 4,714 Available for sale securities 5,639 -Investment securities - 3,554Trading securities 1,227 1,162Other securities 60 50 6,926 4,766 Securities purchased under reverse repurchase agreements 6,122 4,760 Loans - Businesses and government 21,322 17,819 - Residential mortgage 12,920 14,016 - Consumer 4,826 3,728 - Allowance for credit losses (353) (327) 38,715 35,236 Customers' liability under acceptances 5,727 5,130Derivatives 623 308Land, buildings and equipment 149 121Other assets 1,096 1,735 7,595 7,294Total assets 62,931 56,770 Liabilities and shareholders' equityDeposits - Regulated financial institutions 1,535 1,469 - Individuals 18,291 17,039 - Businesses and governments 29,051 25,665 48,877 44,173 Acceptances 5,727 5,130Securities sold under repurchase agreements 320 162Derivatives 649 316Securities sold short 623 715Other liabilities 2,256 2,413Non-controlling interest in trust and subsidiary 430 430 10,005 9,166 Subordinated debentures 801 563 Shareholders' equity - Preferred shares 350 350 - Common shares 1,225 1,125 - Contributed surplus 206 202 - Retained earnings 1,462 1,191 - Accumulated other comprehensive income 5 - 3,248 2,868Total liabilities and shareholders' equity 62,931 56,770 Condensed Consolidated Statement of Cash Flows (Unaudited) Quarter ended Year ended Figures in C$ millions 31Dec07 30Sep07 31Dec06 31Dec07 31Dec06 Cash flows provided by (used in): - operating activities (30) 205 361 1,013 673 - financing activities 1,006 1,867 1,165 4,959 5,247 - investing activities (847) (2,136) (1,541) (5,835) (5,964) (Decrease) increase in cash and cash equivalents 129 (64) (15) 137 (44)Cash and cash equivalents, beginning of period 355 419 362 347 391Cash and cash equivalents, end of period 484 355 347 484 347 Represented by: - Cash and non-interest bearing deposits with the Bank of Canada and other banks 510 384 368 - less non-operating deposits with regulated financial institutions^ (26) (29) (21) - Cash and cash equivalents, end of period 484 355 347 ^ Non-operating deposits comprise cash restricted for recourse on securitisation transactions. 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