31st Oct 2006 14:00
HSBC Holdings PLC31 October 2006 HSBC BANK CANADA THIRD QUARTER 2006 RESULTS^ - HIGHLIGHTS • Net income attributable to common shares was C$138 million for the quarter ended 30 September 2006, an increase of 22.1 per cent over the quarter ended 30 September 2005. • Net income attributable to common shares was C$369 million for the nine months ended 30 September 2006, an increase of 13.5 per cent over the same period in 2005. • Return on average common equity was 23.0 per cent and 21.2 per cent for the quarter and nine months ended 30 September 2006 compared with 20.9 per cent and 20.4 per cent, respectively, for the same periods in 2005. • The cost efficiency ratio was 48.2 per cent and 51.3 per cent for the quarter and nine months ended 30 September 2006 compared with 51.2 per cent and 52.9 per cent, respectively, for the same periods in 2005. • Total assets were C$55.9 billion at 30 September 2006 compared with C$49.4 billion at 30 September 2005. • Total funds under management were C$22.4 billion at 30 September 2006 compared with C$19.9 billion at 30 September 2005. ^ Results are prepared in accordance with Canadian generally acceptedaccounting principles. Financial Commentary Overview HSBC Bank Canada recorded net income attributable to common shares of C$138million for the quarter ended 30 September 2006, an increase of C$25 million, or22.1 per cent, from C$113 million for the same period in 2005. This increase wasdue to a broad-based growth in total revenue. In particular, a growth in loanvolumes drove net interest income and non-interest revenue upward, with thelatter also benefiting from higher securitisation and wealth management income. Net income attributable to common shares for the nine months ended 30 September2006 was C$369 million compared with C$325 million for the same period in 2005,an increase of C$44 million, or 13.5 per cent. Commenting on the results, Lindsay Gordon, President and Chief ExecutiveOfficer, said: "Results for the third quarter were robust. Investments in areassuch as wealth management and payments and cash management have helped to grownon-interest revenue on a year-on-year basis and throughout this year. The costefficiency ratio improved because we were able to make our business moreefficient without impacting our traditionally high customer service values. "We are, therefore, well placed to continue growth through the remainder of 2006and into next year. Our strategic focus remains on maintaining very highstandards of customer care while investing in expansion in carefully targetedsectors. "We will only be able to achieve our goals if we have the full support of ourstaff. Our people make this business a success and I am immensely proud thatHSBC Bank Canada has been named one of 'The Financial Post's 10 Best Companiesto Work For' in Canada and one of MediaCorp's 'Canada's Top 100 Employers'. Thiswill solidify our standing as an employer of choice, which will help serve ourcustomers and grow our business into the future." Net interest income Net interest income for the third quarter of 2006 was C$282 million comparedwith C$261 million for the same period in 2005, an increase of C$21 million, or8.0 per cent. Growth in loans and deposits across our customer groups continuesto benefit net interest income. Average loans for the third quarter were C$34.1billion compared with C$31.5 billion for the same period in 2005. Corporate andcommercial lending grew as Canadian customers continued to invest heavily indeveloping their businesses. Consumer spending remained strong, driving personallending and residential mortgage borrowing continued to grow. Average depositsin the third quarter were C$42.2 billion compared with C$38.6 billion for thesame period in 2005. Deposits grew in the third quarter due to the success ofnew products, such as the High Rate Savings Account and enhanced servicescreated by the Payments and Cash Management business. We also experienced highertrading activity in fixed income securities resulting in increased income fromthat business in the third quarter. While the prime lending rates in Canada and the US did not change in the thirdquarter of 2006, competitive forces continued to put pressure on the netinterest margin, particularly in personal products such as residential mortgagesand deposits. The net interest margin, as a percentage of average interestearning assets, was 2.31 per cent for the third quarter compared with 2.36 percent for the same period in 2005. Net interest income in the third quarter was C$6 million higher compared withthe previous quarter, due to there being one extra day in the quarter as well asgrowth in loans and deposits. Average loans for the third quarter were C$34.1billion compared with C$33.3 billion in the previous quarter, while averagedeposits grew from C$40.8 billion to C$42.2 billion through the quarter. The netinterest margin, as a percentage of average interest earning assets, was fourbasis points lower compared with the previous quarter. On a year-to-date basis, net interest income was C$824 million compared withC$741 million for the same period last year, an increase of C$83 million, or11.2 per cent. Year-to-date net interest income in 2006 benefited from continuedgrowth in assets and deposits. Average loans in the nine months to 30 September2006 were C$33.2 billion compared with C$30.1 billion in the same period lastyear, while average deposits were C$41.0 billion compared with C$36.8 billion inthe same period last year. The net interest margin, as a percentage of averageinterest earning assets, was 2.34 per cent compared with 2.38 per cent for thesame period in 2005. Non-interest revenue Non-interest revenue for the third quarter of 2006 was C$160 million comparedwith C$145 million in the same period of 2005, an increase of C$15 million, or10.3 per cent. Securitisation income rose due to increased recurring income fromprevious securitisations. Increased loan volumes and general customer activityhelped boost income from credit fees and deposits and payment service charges.Other non-interest revenue was impacted by lower immigrant investor programfees. Non-interest revenue was C$7 million lower than in the previous quarter. Thisfall was due to a C$10 million increase in the fair value of our investments inprivate equity funds, recorded in the second quarter of 2006, which increasedinvestment securities gains. On a year-to-date basis, non-interest revenue was C$483 million, C$54 million,or 12.6 per cent higher compared with C$429 million for the same period lastyear. Investment administration fees increased on continued growth in our wealthmanagement businesses and higher credit fees from increased customer activity.Non-interest revenue also benefited from an increase in the fair value of ourprivate equity fund investments and higher securitisation income. Theseincreases were partially offset by lower immigrant investor program fees. Non-interest expenses and operating efficiency Non-interest expenses for the third quarter of 2006 were C$213 million comparedwith C$208 million in the same quarter of 2005, an increase of C$5 million, or2.4 per cent. The cost efficiency ratio benefited from balancing a continuedfocus on operating efficiency with investment in our businesses and areallocation of resources to areas with identified growth potential. The costefficiency ratio in the third quarter was 48.2 per cent compared with 51.2 percent for the same period in 2005. Salaries and employee benefits expenses forthe nine months to 30 September 2006 were higher due primarily to expanding theworkforce to fulfil strategic growth initiatives. Other non-interest expenses were slightly lower as increased investment in our business was offset by lower fees paid on the guarantee of our customers' deposits. As a result of our significantgrowth since we became part of the HSBC Group, the guarantee of customer depositsby HSBC Holdings plc, for deposits taken after 30 June 2005, was discontinued. This growth has also contributed to several upgrades of our credit ratings as highlighted in the commentary on page 6. Non-interest expenses were C$20 million lower than the previous quarter dueprimarily to lower salaries and benefits expenses. Pension benefit costs werelower, and in the second quarter a charge of C$9 million was recognised arisingfrom the waiver of the total shareholder return-related performance condition inrespect of the 2003 awards under the HSBC Holdings Group Share Option Plan. On a year-to-date basis, non-interest expenses were C$670 million compared withC$619 million for the same period last year, an increase of C$51 million, or 8.2per cent. The cost efficiency ratio was 51.3 per cent compared with 52.9 percent for the same period in 2005. Salaries and benefits expenses were higher dueto an increased employee base, increased variable compensation, higher stockoption expense, and increased pension costs. Other non-interest expenses werehigher as recurring operating expenses and an increase in spending on brandawareness initiatives offset lower fees paid on the guarantee of our customers'deposits. Credit quality and provision for credit losses Credit quality continued to be stable in the third quarter. The provision forcredit losses of C$5 million for this quarter was in line with the previousquarter as well as the same period in 2005. On a year-to-date basis, theprovision for credit losses was C$17 million compared with C$21 million for thesame period last year. Defaults on consumer loans continue to be stable andcorporate default rates continue to be at historically low levels, in line withthe rest of the industry in Canada. Gross impaired credit exposures were C$166 million, C$34 million, or 25.8 percent, higher compared with C$132 million at the same time last year, and werehigher than the balance at the previous quarter end of C$159 million. Totalimpaired credit exposures, net of specific allowances for credit losses, wereC$117 million compared with C$105 million at the same time last year and C$78million at the previous quarter end. The general allowance for credit lossesremained at C$269 million compared with the previous quarter and was lower thanthe C$283 million at the same time last year, due to a C$14 million reversal inthe fourth quarter of 2005 to reflect the consistently low loss experience inWestern Canada over the past few years, and the strength of the economy. Thetotal allowance for credit losses, as a percentage of loans and acceptancesoutstanding, was 0.80 per cent compared with 0.84 per cent at the previousquarter end and 0.93 per cent at the same time last year. Income taxes The effective tax rate in the third quarter of 2006 was 34.9 per cent comparedwith 36.4 per cent in the same quarter of 2005 and 39.4 per cent in the previousquarter. The lower tax rate in third quarter of 2006 reflects increased incomethat is subject to a lower rate of tax. The income tax provision in the secondquarter of 2006 included a C$6 million charge to reflect the write-down offuture income tax assets resulting from tax rate decreases announced in thefederal budget. In addition, the expense related to stock options is notdeductible for income tax purposes and, therefore, increased the effective taxrate in the second quarter. On a year-to-date basis in 2006, the effective tax rate was 36.4 per centcompared with 34.8 per cent for the same period last year. The effective taxrate in 2005 benefited from a reduction in tax expense resulting fromadjustments to the net realizable values of certain future income tax assets.Excluding these impacts, the effective tax rate in 2006 was in line with thesame period last year. Balance sheet Total assets at 30 September 2006 were C$55.9 billion, an increase of C$6.5billion over the same time last year. The strong economy in Canada encouragedcontinued business investment by customers and consumer spending which was thekey driver of balance sheet growth. Commercial loans and bankers' acceptancesgrew C$3.4 billion, primarily in western Canada. Residential mortgages increasedC$2.7 billion, before securitisation of C$2.5 billion in the period, oncontinued strong activity in the residential housing markets across Canada.Consumer loans increased C$0.8 billion, which was before securitisation of C$0.9billion of personal lines of credit and consumer term loans in the period.Increased trading and balance sheet management activity increased the securitiesportfolio by C$0.7 billion and balances under reverse repurchase agreements byC$2.0 billion. Other assets were C$0.8 billion higher due mainly to largersettlement balances resulting from increased trading activity in our capitalmarkets businesses. Total deposits grew C$4.2 billion to C$42.8 billion at 30 September 2006 fromC$38.6 billion at the same time last year. Deposits from individuals benefitedfrom success of our new High Rate Savings Account and initiatives such as our25th Anniversary Sale campaign. Commercial deposits were higher due to growth interm products, driven by higher interest rates, and increased payments and cashmanagement balances. Other liabilities increased C$0.7 billion largely from anincrease in activities in our capital markets business. Compared with 31 December 2005, total assets were C$6.7 billion higher largelyfrom growth in loans and capital markets activities. Deposit growth benefitedfrom increased cash management balances from corporate customers as well ashigher personal balances. Total assets under administration Funds under management were C$22.4 billion at 30 September 2006 compared withC$19.9 billion at the same time last year. Including custody and administrationbalances, total assets under administration were C$31.3 billion compared withC$26.5 billion at 30 September 2005. Funds under management benefited from increased acquisition of mandates inmanaging institutional clients as well as the success of our Private Clientproducts. Despite the volatile equity markets in Canada and the US during 2006,we grew our retail investor base in our full service brokerage as well as in ouron-line division. Custodial balances grew C$2.4 billion due to growth in thecorporate custody business and increased securitised assets under management. Compared with the previous quarter, funds under management were higher by C$0.7billion, with growth in personal wealth management balances as well asinstitutional funds. Custodial balances increased C$0.5 billion due to growth inthe corporate custody business. Capital management The tier 1 capital ratio was 8.9 per cent and the total capital ratio was 11.1per cent at 30 September 2006. These compare with 9.0 per cent and 11.2 percent, respectively, at 30 June 2006 and 8.7 per cent and 10.9 per cent,respectively, at 30 September 2005. In addition to net income of C$382 million year-to-date, capital increased froman issuance of C$200 million in subordinated debentures in the first quarter of2006. This was partially offset by C$193 million in dividends declared on ourpreferred shares and common shares, and the redemption of C$60 million insubordinated debentures in the first quarter of 2006. Credit ratings On 19 June 2006, Standard & Poor's Ratings Services ("S&P") raised our short andlong-term counterparty credit ratings concurrent with an upgrade of its ratingsof our parent, HSBC Holdings plc. On 25 October 2006, S&P raised its ratings of our long-term counterparty credit,preferred shares, senior debt and subordinated debt. These ratings upgradesfollowed S&P's revision of our group status to core to the HSBC Group based onour growing integration with and increasing contribution to the HSBC Group. On 6 October 2006, Dominion Bond Rating Service ("DBRS") upgraded its ratings ofour deposits, debt instruments and preferred shares, as a result ofimplementation of a new support assessment methodology for banks. These ratings reflect the quality and success of our business in Canada and ofHSBC globally, as well as a strengthening of the financial services industry ingeneral in Canada. Our current ratings are as follows: S&P DBRS Short-term instruments A-1+ R-1 (high)Deposits and senior debt AA AASubordinated debt AA- AA (low)Preferred shares P-1 Pfd-1HSBC Canada Asset Trust Securities P-1 A (high) Dividends During the third quarter of 2006, we declared and paid C$60 million in dividendson our common shares. Regular quarterly dividends of 31.875 cents per share have been declared on ourClass 1 Preferred Shares - Series C and 31.25 cents per share on our Class 1Preferred Shares - Series D. The dividends will be payable on 31 December 2006,for shareholders of record on 15 December 2006. About HSBC Bank Canada HSBC Bank Canada, a subsidiary of HSBC Holdings plc, has more than 170 offices.With around 9,500 offices in 76 countries and territories and assets of US$1,738billion at 30 June 2006, the HSBC Group is one of the world's largest bankingand financial services organisations. Visit our website at hsbc.ca for moreinformation about HSBC Bank Canada and our products and services. Copies of HSBC Bank Canada's third quarter 2006 report will be sent toshareholders in November 2006. Caution regarding forward-looking financial statements This document may contain forward-looking statements, including statementsregarding the business and anticipated financial performance of HSBC BankCanada. These statements are subject to a number of risks and uncertainties thatmay cause actual results to differ materially from those contemplated by theforward-looking statements. Some of the factors that could cause suchdifferences include legislative or regulatory developments, technologicalchange, global capital market activity, changes in government monetary andeconomic policies, changes in prevailing interest rates, inflation level andgeneral economic conditions in geographic areas where HSBC Bank Canada operates.Canada is an extremely competitive banking environment and pressures on interestrates and our net interest margin may arise from actions taken by individualbanks acting alone. Varying economic conditions may also affect equity andforeign exchange markets, which could also have an impact on our revenues. Thefactors disclosed above may not be complete and there could be otheruncertainties and potential risk factors not considered here which may impactour results and financial condition. Summary Quarter ended Nine months endedFigures in C$ millions (except per share amounts) 30Sept06 30Jun06 30Sept05 30Sept06 30Sept05 EarningsNet income attributable to common shares 138 115 113 369 325Basic earnings per share 0.28 0.24 0.23 0.76 0.67 Performance ratios (%)Return on average common equity 23.0 19.9 20.9 21.2 20.4Return on average assets 1.01 0.88 0.92 0.94 0.93Net interest margin^ 2.31 2.35 2.36 2.34 2.38Cost efficiency ratio^^ 48.2 52.6 51.2 51.3 52.9Non-interest revenue:total revenue ratio 36.2 37.7 35.7 37.0 36.7 Credit informationGross impaired credit exposures 166 159 132 Allowance for credit losses 318 319 337- As a percentage of gross impaired credit exposures 192% 201% 255%- As a percentage of gross loans and acceptances 0.80% 0.84% 0.93% Average balancesAssets 53,945 52,573 48,754 52,512 46,502Loans 34,144 33,262 31,535 33,226 30,102Deposits 42,206 40,847 38,572 41,033 36,779Common equity 2,387 2,316 2,157 2,326 2,132 Capital ratios (%)Tier 1 8.9 9.0 8.7Total capital 11.1 11.2 10.9 Total assets under administrationFunds under management 22,372 21,659 19,872Custody accounts 8,973 8,494 6,585Total assets under administration 31,345 30,153 26,457 ^ Net interest margin is net interest income divided by average interest earningassets for the period.^^ The cost efficiency ratio is defined as non-interest expenses divided bytotal revenue. Consolidated Statement of Income (Unaudited) Quarter ended Nine months endedFigures in C$ millions (except per share amounts) 30Sept06 30Jun06 30Sept05 30Sept06 30Sept05 Interest and dividend incomeLoans 566 523 417 1,551 1,187Securities 47 46 31 136 80Deposits with regulated financial institutions 59 55 45 172 114 672 624 493 1,859 1,381 Interest expenseDeposits 383 341 226 1,015 621Debentures 7 7 6 20 19 390 348 232 1,035 640 Net interest income 282 276 261 824 741 Non-interest revenueDeposit and payment service charges 23 23 20 67 62Credit fees 28 27 23 80 69Capital market fees 27 26 25 85 81Investment administration fees 26 25 24 75 58Foreign exchange 8 8 7 23 20Trade finance 6 6 7 18 21Trading revenue 18 17 17 52 47Investment securities gains 5 13 3 23 14Securitisation income 10 11 5 29 18Other 9 11 14 31 39 160 167 145 483 429 Total revenue 442 443 406 1,307 1,170 Non-interest expensesSalaries and employee benefits 120 136 112 379 331Premises and equipment 26 27 26 82 80Other 67 70 70 209 208 213 233 208 670 619 Net operating income before provision for credit losses 229 210 198 637 551Provision for credit losses 5 6 7 17 21 Income before provision and non-controlling interest in income of trust 224 204 191 620 530Provision for income taxes 76 78 67 219 179Non-controlling interest in income of trust 6 6 7 19 16Net income 142 120 117 382 335Preferred share dividends 4 5 4 13 10Net income attributable to common shares 138 115 113 369 325 Average common shares outstanding (000) 488,668 488,668 488,668 488,668 488,668Basic earnings per share (C$) 0.28 0.24 0.23 0.76 0.67 ^ Certain prior period amounts have been reclassified to conform with thecurrent period presentation. Condensed Consolidated Balance Sheet (Unaudited) Figures in C$ millions At30Sept06 At31Dec05 At30Sept05 AssetsCash and deposits with Bank of Canada 386 409 340Deposits with regulated financial institutions 4,753 5,549 5,191 5,139 5,958 5,531 Investment securities 3,225 2,923 2,912Trading securities 1,821 1,418 1,459 5,046 4,341 4,371 Assets purchased under reverse repurchase agreements 3,843 1,752 1,821 Loans- Businesses and government 17,500 15,571 15,122- Residential mortgage 13,597 12,865 13,407- Consumer 3,855 3,734 3,999- Allowance for credit losses (318) (326) (337) 34,634 31,844 32,191 Customers' liability under acceptances 4,880 4,002 3,903Land, buildings and equipment 100 103 95Other assets 2,252 1,210 1,490 7,232 5,315 5,488Total assets 55,894 49,210 49,402 Liabilities and shareholders' equityDeposits- Regulated financial institutions 1,889 1,975 1,960- Individuals 16,648 15,300 15,267- Businesses and governments 24,278 21,333 21,353 42,815 38,608 38,580 Acceptances 4,880 4,002 3,903Assets sold under repurchase agreements 290 302 286Other liabilities 4,123 2,849 3,400Non-controlling interest in trust and subsidiary 430 430 430 9,723 7,583 8,019 Subordinated debentures 559 423 423 Shareholders' equity- Preferred shares 350 350 175- Common shares 1,125 1,125 1,125- Contributed surplus 199 187 184- Retained earnings 1,123 934 896 2,797 2,596 2,380Total liabilities and shareholders' equity 55,894 49,210 49,402 Condensed Consolidated Statement of Cash Flows (Unaudited) Quarter ended Nine months endedFigures in C$ millions 30Sept06 30Jun06 30Sept05 30Sept06 30Sept05 Cash flows provided by/ (used in):- operating activities 128 (69) 412 312 524- financing activities 1,677 706 1,174 4,082 4,990- investing activities (1,021) (1,128) (1,483) (4,652) (4,697) Increase (decrease) in cash and cash equivalents 784 (491) 103 (258) 817Cash and cash equivalents, beginning of period 4,158 4,649 4,721 5,200 4,007Cash and cash equivalents, end of period 4,942 4,158 4,824 4,942 4,824 Represented by:- Cash resources per balance sheet 5,139 4,571 5,531 - less non-operating deposits^ (197) (413) (707)- Cash and cash equivalents, end of period 4,942 4,158 4,824 ^ Non-operating deposits are comprised primarily of cash which reprices after 90 daysand cash restricted for recourse on securitisation transactions. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
HSBC Holdings