14th Feb 2006 13:20
HSBC Holdings PLC14 February 2006 HSBC BANK CANADA FOURTH QUARTER 2005 RESULTS^ - HIGHLIGHTS • Net income attributable to common shares was C$457 million for the year ended 31 December 2005, an increase of 32.5 per cent over 2004. • Net income attributable to common shares was C$132 million for the quarter ended 31 December 2005, an increase of 53.5 per cent over the same period in 2004. • Return on average common equity was 21.3 per cent for the year ended 31 December 2005 and 23.8 per cent for the quarter ended 31 December 2005 compared with 18.3 per cent and 16.6 per cent, respectively, for the same periods in 2004. • The cost:income ratio improved to 52.2 per cent for the year ended 31 December 2005 and 50.0 per cent for the quarter ended 31 December 2005 compared with 56.0 per cent and 55.6 per cent, respectively, for the same periods in 2004. • Total assets were C$49.2 billion at 31 December 2005, an increase of C$5.9 billion, or 13.6 per cent, from C$43.3 billion at 31 December 2004. • Total funds under management were C$20.5 billion at 31 December 2005, an increase of C$2.8 billion, or 15.8 per cent, from C$17.7 billion at 31 December 2004. ^ Results are prepared in accordance with Canadian generally accepted accountingprinciples. Financial Commentary Overview HSBC Bank Canada recorded net income attributable to common shares of C$457million for the year ended 31 December 2005, an increase of C$112 million, or32.5 per cent, from C$345 million for 2004. Net income attributable to commonshares for the quarter ended 31 December 2005 was C$132 million, an increase ofC$46 million, or 53.5 per cent, compared with C$86 million for the same periodin 2004. Net income in the fourth quarter of 2005 benefited from a C$14 million reversalfrom the general allowance for credit losses and a C$14 million adjustment toother expenses, both before income taxes. Excluding these items and the relatedincome tax adjustments, net income attributable to common shares would have beenC$432 million for the year ended 31 December 2005, an increase of C$87 million,or 25.2 per cent, over 2004. For the fourth quarter of 2005, net incomeattributable to common shares would have been C$107 million, an increase of C$21million, or 24.4 per cent, over the same period last year. Commenting on the results, Lindsay Gordon, President and Chief ExecutiveOfficer, said: "Results for the fourth quarter and for the year were good andreflected the robust Canadian economy and the strength of our customers. Each ofour customer groups contributed to a strong increase in revenues. Net interestincome was higher from continued growth in our balance sheet. Non-interestrevenues were higher on increased investment administration fees, credit fees,and foreign exchange revenue. Total non-interest expenses increased as ourbusiness grew, however, the rate of expense increase was less than the revenuegrowth, which resulted in a decrease in the non-interest expenses:total revenueratio. Lastly, the stable credit environment in Canada throughout much of 2005meant lower provisions for credit losses and resulted in a reversal in thefourth quarter from our general allowance for credit losses. "Our focus for next year will be to continue to achieve strong growth inrevenues and control of our costs, while continuing to reinvest in ourbusinesses. We expect to fully leverage our marketing efforts to help generateeven more awareness of the HSBC brand within Canada to deliver sustainableorganic growth." Net interest income Net interest income for the year ended 31 December 2005 was C$1,010 million, anincrease of C$114 million, or 12.7 per cent, from C$896 million for 2004. Forthe quarter ended 31 December 2005 net interest income was C$269 million, anincrease of C$40 million, or 17.5 per cent, from C$229 million for the samequarter in 2004. Higher net interest income throughout 2005 has resulted fromcontinued growth in the balance sheet across all our customer groups, and theimpact of a full year from the acquisition of Intesa Bank Canada. Economicgrowth in Canada continues to be strong and sentiment remains positive despitethe recent increases in interest rates in Canada during the fourth quarter of2005. Average interest earning assets were C$42.6 billion for 2005 compared withC$35.9 billion for 2004. For the fourth quarter of 2005, average interestearning assets were C$45.2 billion compared with C$38.2 billion for the fourthquarter of 2004. The net interest margin, as a percentage of average interest earning assets, was2.37 per cent for the year ended 31 December 2005 and 2.36 per cent for thefourth quarter of 2005. For the same periods in 2004, the net interest marginwas 2.49 per cent and 2.38 per cent, respectively. Net interest margins havebeen adversely impacted throughout 2005 by competitive pricing, which has beencompounded by increased balances in lower-spread products such as residentialmortgages. Net interest margins in our treasury and markets groups wereadversely impacted by a flatter yield curve throughout much of 2005. Non-interest revenue Non-interest revenue was C$570 million for the year ended 31 December 2005, anincrease of C$44 million, or 8.4 per cent, compared with C$526 million for 2004.For the quarter ended 31 December 2005, non-interest revenue was C$141 millioncompared with C$143 million in the fourth quarter of 2004. Credit fees were higher in 2005 as a result of increased activity in commercialand corporate lending, particularly in shorter-term facilities such as bankers'acceptances, guarantees, and letters of credit. Capital market fees were lowerin the fourth quarter of 2005 compared with the same period in 2004, ascommissions from customers' retail trading were lower. Investment administrationfees were higher in 2005 due to an increase in funds under management. Thevolatility of the Canadian dollar relative to the US dollar throughout 2005helped increase revenues from foreign exchange activities compared with 2004.Gains from investment securities in the fourth quarter of 2005 were lowercompared with the same quarter in 2004 as the previous year's quarter included again realised from our investment in a private equity fund managed by ourmerchant banking subsidiary. Other non-interest revenue was higher in 2005 dueto strong fee income from our Canadian Immigrant Investment Program ('CIIP'). Resolution of certain income tax issues Prior to 1 July 2005, an HSBC Group company ('Group') provided an unlimitedguarantee of our customers' deposits. As consideration for provision of thisguarantee, Group charged us a fee for the guarantee based on the guaranteeddeposit amounts. For income tax purposes, we deducted this fee in determiningour taxable income. Following agreement with the Canada Deposit InsuranceCorporation, and reflecting our significant growth since we became part of theHSBC Group, this guarantee was discontinued for customer deposits received after30 June 2005. In the fourth quarter of 2005, the Canadian Competent Authority of the CanadaRevenue Agency ('CRA') and the UK Competent Authority of the HM Revenue &Customs in the UK agreed, in principle, to a Bilateral Advance Pricing Agreement('BAPA'). The BAPA outlines the agreed upon rates to be used in determining theamount we can deduct as an expense for the Group guarantee, and Group includesas income, for income tax purposes for the years 2002 to 2007 inclusive. Therates in the BAPA are lower than the rate we had been using to calculate theguarantee fee expense. In the fourth quarter of 2005, Group reimbursed us C$40 million relating to 2002to 2004, representing the non-deductible amounts as determined in the BAPA. Wealso recorded a C$4 million receivable for excess withholding tax paid to CRArelating to this reimbursement. As this was a related party transaction, werecorded an offsetting C$44 million increase in retained earnings, reflectingthe gross amount of the reimbursement. Non-interest expenses Non-interest expenses were C$824 million for the year ended 31 December 2005, anincrease of C$28 million, or 3.5 per cent, compared with C$796 million for 2004.For the quarter ended 31 December 2005, non-interest expenses were C$205 millioncompared with C$207 million in the fourth quarter of 2004. Salaries and benefits expenses in 2005 were C$442 million compared with C$423million in 2004. For the fourth quarter of 2005, salaries and benefits expenseswere C$111 million compared with C$107 million for the same period in 2004.Salaries expenses were higher in 2005 due to a full year of costs from formerIntesa Bank Canada employees, and higher stock-based compensation, employeetermination and performance based incentive costs. These were partially offsetby lower defined benefit pension and other non-pension benefit costs. In thefourth quarter of 2005, salaries and benefits expenses were higher compared tothe same period in 2004 due to higher salary costs on a larger employee base,and higher stock-based compensation and employee termination costs. These werepartially offset by lower defined benefit pension and other non-pension benefitcosts. Premises and equipment expenses in 2005 were C$107 million compared with C$101million in 2004. For the fourth quarter of 2005, premises and equipment expenseswere C$27 million compared with C$22 million for the same period in 2004.Equipment expenses were higher in 2005 primarily from increased costs associatedwith maintaining our computer infrastructure, as well as increased ATM costsassociated with our agreement with Bank of Montreal. Other non-interest expenses in 2005 were C$275 million compared with C$272million in 2004. For the fourth quarter of 2005, other non-interest expenseswere C$67 million compared with C$78 million for the same period in 2004. Theagreement with CRA referred to above resulted in a C$14 million year-to-datereduction of the guarantee fee expense, which was recorded in the fourth quarterof 2005. Before the reduction, the guarantee fee expense for 2005 was lowercompared with 2004 as a result of a decrease in deposits guaranteed due to thediscontinuation of Group's guarantee effective close of business on 30 June2005. Marketing expenses were significantly higher in the fourth quarter of 2005as a result of increased media spends to increase awareness of the HSBC brand inCanada. Transaction costs in 2005 were higher as a result of increased volumesin our brokerage operations and activity in our CIIP. These increases werepartially offset by a net credit on successful resolution of certain commoditytax issues relating to prior years. Provision for income taxes The effective income tax rate for the fourth quarter of 2005 was 30.0 per centand for the year was 33.5 per cent compared with 36.7 per cent and 37.6 percent, respectively, for the same periods in 2004. The effective rate was lowerin 2005 primarily from the resolution of the deductibility of the guarantee feeexpense, as discussed above, which resulted in a net reduction of C$7 million inincome tax expense for the fourth quarter of 2005. Credit quality and provision for credit losses The provision for credit losses was C$27 million for the year ended 31 December2005 compared with C$66 million for 2004. For the quarter ended 31 December 2005the provision for credit losses was C$6 million compared with C$22 million forthe same period in 2004. The continued strong economic conditions in Canadathroughout 2005 resulted in favourable credit conditions leading to a lowerprovision for credit losses. During the fourth quarter of 2005 we reversed C$14million of our general allowance for credit losses, primarily reflecting theconsistently low loss experience in Western Canada over the past few years, andthe current strength of the economy. Gross impaired loans decreased to C$130 million at 31 December 2005 comparedwith C$182 million at 31 December 2004. Total impaired loans, net of specificallowances for credit losses, were C$73 million at 31 December 2005 comparedwith C$112 million at 31 December 2004. The general allowance for credit losseswas C$269 million at 31 December 2005 compared with C$279 million at 31 December2004. The total allowance for credit losses, as a percentage of loansoutstanding was 1.01 per cent at 31 December 2005 compared with 1.22 per cent at31 December 2004. Balance sheet Total assets at 31 December 2005 were C$49.2 billion, an increase of C$5.9billion from C$43.3 billion at 31 December 2004. Stable interest ratesthroughout 2005, strong economic conditions, and an active housing market inCanada helped spur loan growth across all customer groups. Commercial loans andbankers' acceptances increased C$2.4 billion in total to C$19.6 billion at 31December 2005 compared with C$17.2 billion at the same time in 2004. Residentialmortgages and consumer loans increased C$1.4 billion to C$16.6 billion in totalat 31 December 2005 compared with C$15.2 billion at 31 December 2004. Cashresources increased in 2005 by C$1.6 billion, primarily in deposits with otherbanks. Securities and assets purchased under reverse repurchase agreements wereC$0.8 billion higher at 31 December 2005 compared with the same time in 2004,primarily from increased trading activity. Total deposits at 31 December 2005 were C$38.6 billion, an increase of C$4.8billion from C$33.8 billion at 31 December 2004. Deposits from individualsincreased to C$15.3 billion at 31 December 2005 compared with C$14.8 billion atthe same time last year. Commercial deposits increased C$2.9 billion to C$21.3billion at 31 December 2005 and deposits from other banks increased to C$2.0billion at 31 December 2005 from C$0.6 billion at 31 December 2004 to fund thestrong asset growth experienced in 2005. Total assets under administration Funds under management were C$20.5 billion at 31 December 2005 compared withC$17.7 billion at 31 December 2004. Including custody and administrationbalances, total assets under administration were C$28.0 billion at 31 December2005 compared with C$22.8 billion at 31 December 2004. Growth in funds under management during 2005 resulted from continued investmentin our brokerage operations during the year and from success in our PrivateClient products. Additionally, Canadian equity markets, which were aided byhigher natural resource prices, performed substantially better in 2005 relativeto the US markets. Capital ratios The tier 1 capital ratio was 9.0 per cent and the total capital ratio was 11.2per cent at 31 December 2005. This compares with 8.6 per cent and 11.0 per cent,respectively, at 31 December 2004. In the fourth quarter of 2005, we issued C$175 million in Class 1 PreferredShares Series D. Total capital issues in 2005 amounted to C$350 million inpreferred shares and C$200 million in asset trust securities. During 2005, C$125million in previously issued preferred shares were redeemed. Dividends During the fourth quarter of 2005, we declared C$135 million in dividends on ourcommon shares of which C$60 million was payable at 31 December 2005. Dividendsdeclared on our common shares totalled C$330 million in 2005. Regular dividends of 31.875 cents per share have been declared on our Class 1Preferred Shares - Series C and 31.25 cents per share on our Class 1 PreferredShares - Series D. The dividends will be payable in cash on 31 March 2006, forshareholders of record on 15 March 2006. Dividends declared on our preferredshares totalled C$13 million in 2005. About HSBC Bank Canada HSBC Bank Canada, a subsidiary of HSBC Holdings plc, has more than 170 offices.With over 9,700 offices in 77 countries and territories and assets of US$1,467billion at 30 June 2005, the HSBC Group is one of the world's largest bankingand financial services organisations. For more information about HSBC BankCanada and our products and services, visit our website at hsbc.ca. Copies of our 2005 Annual Report will be sent to shareholders in March 2006. This document may contain forward-looking statements, including statementsregarding the business and anticipated financial performance of HSBC Bank Canada. These statements are subject to a number of risks and uncertainties that maycause actual results to differ materially from those contemplated by theforward-looking statements. Some of the factors that could cause suchdifferences include legislative or regulatory developments, competition,technological change, global capital market activity, changes in governmentmonetary and economic policies, changes in prevailing interest rates, inflationlevels and general economic conditions in geographic areas where HSBC BankCanada operates. Summary Figures in C$ millions Quarter ended Year ended(except per share amounts) 31DEC05 30SEP05 31DEC04 31DEC05 31DEC04 EarningsNet income attributable to common shares 132 113 86 457 345Basic earnings per share ^ 0.27 0.23 0.18 0.94 0.72 Performance ratios (per cent)Return on average common equity 23.8 20.9 16.6 21.3 18.3Return on average assets 1.06 0.92 0.80 0.97 0.85Net interest margin ^^ 2.36 2.36 2.38 2.37 2.49Non-interest expenses:total revenue ratio 50.0 51.2 55.6 52.2 56.0Non-interest revenue:total revenue ratio 34.4 35.7 38.4 36.1 37.0 Credit informationImpaired loans 130 132 182Allowance for credit losses- Balance at end of period 326 337 349- As a percentage of impaired loans 251 255 192- As a percentage of loans outstanding 1.01 1.04 1.22 Average balancesAssets 49,605 48,754 43,008 47,282 40,421Loans 32,387 31,535 28,235 30,678 26,922Deposits 39,006 38,572 32,640 37,340 30,823Common equity 2,204 2,157 2,070 2,150 1,886 Capital ratios (per cent)Tier 1 9.0 8.7 8.6Total capital 11.2 10.9 11.0 Total assets under administrationFunds under management 20,453 19,872 17,687Custodial accounts 7,594 6,585 5,077Total assets under administration 28,047 26,457 22,764 ^ Basic earnings per share are not materially different from basic earnings pershare from continuing operations.^ ^ Net interest income as a percentage of average interest earning assets for theperiod. Consolidated Statement of Income (Unaudited) Figures in C$ Quarter ended Year endedmillions(except per share 31DEC05 30SEP05 31DEC04 31DEC05 31DEC04amounts) ^ ^Interest and dividend income Loans 444 417 366 1,631 1,396Securities 40 31 22 120 82Deposits withregulated financial institutions 52 45 26 166 69 536 493 414 1,917 1,547 Interest expenseDeposits 261 226 177 882 617Debentures 6 6 8 25 34 267 232 185 907 651Net interest income 269 261 229 1,010 896 Non-interest revenueDeposit and payment service charges 22 20 20 84 81Credit fees 26 23 21 95 81Capital market fees 25 25 30 106 106Investment administration fees 22 24 17 80 65Foreign exchange 21 19 18 76 68Trade finance 6 7 6 27 28Trading revenue 1 4 3 11 10Investment securities gains 2 3 11 16 17Securitisation income 6 5 4 24 25Other 10 15 13 51 45 141 145 143 570 526Total revenue 410 406 372 1,580 1,422 Provision for credit losses 6 7 22 27 66 Non-interest expensesSalaries and employee benefits 111 112 107 442 423Premises and equipment 27 26 22 107 101Other 67 70 78 275 272 205 208 207 824 796Income before the undernoted 199 191 143 729 560Effect of accounting change - - - - 14Income before provision and non-controlling interest in income of trust 199 191 143 729 574Provision for income taxes 58 67 51 237 210Non-controlling interest in income of trust 6 7 4 22 16Income from continuing operations 135 117 88 470 348Income from discontinued operations - - - - 5Net income 135 117 88 470 353Preferred share dividends 3 4 2 13 8Net income attributable to common shares 132 113 86 457 345 Average common shares outstanding (000) 488,668 488,668 488,668 488,668 481,066Basic earnings per share (C$) 0.27 0.23 0.18 0.94 0.72 ^ Certain prior period amounts have been reclassified to conform with thecurrent year presentation.^ ^Reflects the sale of HSBC Canadian Direct Insurance Incorporated effective 30April 2004. Condensed Consolidated Balance Sheet (Unaudited) Figures in C$ millions At 31DEC05 At 31DEC04 AssetsCash and deposits with Bank of Canada 409 328Deposits with regulated 5,549 4,094 financial institutions 5,958 4,422 Investment securities 2,923 1,967Trading securities 1,418 1,055 4,341 3,022 Assets purchased underreverse repurchase agreements 1,752 2,264 Loans- Businesses and government 15,571 13,450- Residential mortgage 12,865 11,966- Consumer 3,734 3,252- Allowance for credit losses (326) (349) 31,844 28,319 Customers' liability under acceptances 4,002 3,754 Land, buildings and equipment 103 101Other assets 1,210 1,381 5,315 5,236Total assets 49,210 43,263 Liabilities and shareholders'equityDeposits- Regulated financial institutions 1,975 635- Individuals 15,300 14,818- Businesses and governments 21,333 18,395 38,608 33,848 Acceptances 4,002 3,754Assets sold under repurchase agreements 302 23Other liabilities 2,849 2,785Non-controlling interest in 430 230 trust and subsidary 7,583 6,792 Subordinated debentures 423 426 Shareholders' equity- Preferred shares 350 125- Common shares 1,125 1,125- Contributed surplus 187 177- Retained earnings 934 770 2,596 2,197Total liabilities and shareholders' equity 49,210 43,263 Condensed Consolidated Statement of Cash Flows (Unaudited) Quarter ended Year endedFigures in C$ 31DEC05 30SEP05 31DEC04 31DEC05 31DEC04millions Cash flows provided by/(used in):- Operating activities (100) 412 60 424 416- Financing activities 141 1,174 669 5,131 3,492- Investing activities 335 (1,483) (578) (4,362) (3,350) Increase in cash and cash equivalents 376 103 151 1,193 558Cash and cash equivalents, beginning of period 4,824 4,721 3,856 4,007 3,449Cash and cash equivalents, end of period 5,200 4,824 4,007 5,200 4,007 Represented by:- Cash resources per balance sheet 5,958 5,531 4,422- less non-operating deposits ^ (758) (707) (415)- Cash and cash equivalents, end of period 5,200 4,824 4,007 ^ Non-operating deposits are comprised primarily of cash which reprices after 90 days and cash restricted for recourse on securitisation transactions. 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