6th May 2008 09:30
HSBC Holdings PLC06 May 2008 HSBC BANK CANADA FIRST QUARTER 2008 RESULTS^ - HIGHLIGHTS • Net income attributable to common shares was C$155 million for the quarter ended 31 March 2008, an increase of 11.5 per cent over the same period in 2007. • Return on average common equity was 21.2 per cent for the quarter ended 31 March 2008 compared with 22.0 per cent for the same period in 2007. • The cost efficiency ratio was 48.7 per cent for the quarter ended 31 March 2008 compared with 52.2 per cent for the same period in 2007. • Total assets were C$66.5 billion at 31 March 2008 compared with C$60.9 billion at 31 March 2007. • Total funds under management were C$26.3 billion at 31 March 2008 compared with C$25.1 billion at 31 March 2007. ^ Results are prepared in accordance with Canadian generally accepted accounting principles. Financial Commentary Overview HSBC Bank Canada recorded net income attributable to common shares of C$155million for the quarter ended 31 March 2008, an increase of C$16 million, or11.5 per cent, from C$139 million for the first quarter of 2007. Compared to thefourth quarter of 2007, net income attributable to common shares was C$44million, or 39.6 per cent, higher in the first quarter of 2008. Results for thequarter ended 31 December 2007 were impacted by a charge of C$27 million, afterrelated income taxes, relating to the bank's holdings of Canadian non-banksponsored Asset Backed Commercial Paper ("non-bank ABCP"). Excluding thischarge, net income attributable to common shares in the quarter ended 31 March2008 was 12.3 per cent higher than the fourth quarter of 2007. Commenting on the results, Lindsay Gordon, President and Chief ExecutiveOfficer, said: "HSBC Bank Canada has made a satisfactory start to 2008 in lightof a difficult market. Uncertain conditions continue to affect the bankingindustry resulting in a reduction in interest margins, although trading revenueshave increased due to market volatility. Despite the economic uncertainty, ourcustomer franchise remains very strong and drives the majority of our revenuestreams. The impact of our brand building activities, including HSBC's recentadvertising campaign at Toronto's Pearson International Airport, together withour customer focused service propositions, is demonstrated by the success of ourDirect Savings Account and the continued growth in the number of HSBC PremierCustomers. For the remainder of 2008, we will focus on increasing our customer base bycontinuing to enhance our HSBC Premier and HSBC Direct customer servicepropositions while growing our commercial business in a focused mannerconsistent with economic uncertainty." Net interest income Net interest income of C$298 million for the quarter ended 31 March 2008 waslittle changed from C$294 million in the same quarter of 2007. Average interestearning assets for the quarter were C$5.6 billion, or 10.7 per cent, higher thanthe same period in 2007. However, continuing competitive pressures and achallenging interest rate environment impacted the net interest margin, whichdecreased to 2.08 per cent for the quarter ended 31 March 2008 from 2.29 percent for the same period in 2007. Reductions in the prime rate in November 2007as well as January and March 2008 resulted in an immediate reduction in interestincome on our floating rate loans without a corresponding reduction in interestexpense as deposits re-priced less quickly. In addition, widening credit spreadsexperienced across the banking industry adversely impacted the cost of wholesaledeposits. Net interest income in the first quarter of 2008 was also largely unchangedcompared with the fourth quarter of 2007. Although average interest earningassets increased by C$1.3 billion compared to the fourth quarter of 2007, thiswas offset by a lower net interest margin. Non-interest revenue Non-interest revenue was C$219 million for the first quarter of 2008 comparedwith C$185 million in the same quarter of 2007, an increase of C$34 million, or18.4 per cent. Trading revenues increased C$37 million as a result of volatileforeign exchange and credit markets experienced in the first quarter of 2008 andbenefited from a positive impact of C$19 million arising from changes in thefair value of certain debt obligations. Securitization income was C$17 millionhigher due to increased activity as well as higher gains on securitizations ofloans arising from a reduction in the cost of funds. Deposit and payment servicecharges and credit fees were also higher due to continued business growth. Theseincreases were partially offset by a reduction in capital market fees of C$10 million due to lower capital market activity in the first quarter of 2008. In addition, gains on available for sale securities were C$17 million lower than in the same period last year due to a gain recorded in the first quarter of 2007 from the sale of part of the bank's shares in the Montreal Exchange and gains on other securities were C$7 million lower due to a sale of investments within Private Equity Funds in the first quarter of 2007. The increase in non-interest revenue from the fourth quarter of 2007 was C$57million, or 35.2 per cent. Trading revenue was C$19 million higher as thepositive impact of changes in the value of certain debt obligations recorded atfair value increased by C$13 million compared to the fourth quarter of 2007, dueto a further widening of credit spreads. The fourth quarter of 2007 includedcharges for non-bank ABCP of C$8 million in trading and C$34 million write-downrecorded as a loss on available for sale securities. Securitization incomeincreased by C$14 million compared to the fourth quarter of 2007, mainly due toincreased activity as well as a reduction in the cost of funds. These increaseswere partially offset by a C$5 million reduction in capital market fees. Non-interest expenses Non-interest expenses of C$252 million for the first quarter of 2008 werelargely unchanged compared to the same quarter of 2007. The cost efficiencyratio of 48.7 per cent for the first quarter of 2008 improved from 52.2 per centfor the same period in 2007, reflecting both strong control of expenses, whichwere flat, together with increases in non-interest revenues. Salary expensesgrew reflecting increased staff following investments in expanding the branchnetwork, the direct bank and the payments and cash management businesses. Thiswas partially offset by lower variable compensation as a result of reductions incapital market revenue. Non-interest expenses were also largely unchanged compared to the fourth quarterof 2007. Salaries and benefits were C$8 million higher primarily due toincreased benefit costs. Premises and equipment expenses increased by C$7million arising from increased IT costs and higher occupancy expenses as thebank continued to open new branches. These increases were offset by a reductionin other expenses of C$16 million, mainly due to lower marketing expensesimpacted by the timing of certain marketing campaigns together with smalldecreases in a number of other expense categories. Credit quality and provision for credit losses The provision for credit losses was C$25 million for the first quarter of 2008,compared with C$10 million in the first quarter of 2007, and C$24 million forthe fourth quarter of 2007. The previous benign credit environment combined with reversal of certainprovisions resulted in a very low level of provisions for the first quarter of2007. However, in the second half of 2007, the credit environment deterioratedand provisions for the first quarter of 2008 were at a similar level to thatexperienced in the third and fourth quarters of 2007. An increase in retailprovisions and two specific manufacturing sector provisions in the first quarterof 2008 resulted in an increase from the same quarter of 2007. Overall creditquality remains strong, reflecting prudent lending standards. The same factors impacted movements in impaired credit exposures. Gross impairedcredit facilities were C$314 million, $42 million higher than 31 December 2007,and C$161 million, or 105 per cent, higher compared with C$153 million at 31March 2007. Total impaired credit facilities, net of specific allowances forcredit losses, were C$213 million at 31 March 2008 compared with C$188 millionat 31 December 2007 and C$95 million at 31 March 2007. The general allowance forcredit losses remained unchanged at C$269 million compared with 31 December 2007and at 31 March 2007. The total allowance for credit losses, as a percentage ofloans and acceptances outstanding, was 0.81 per cent at 31 March 2008 comparedwith 0.79 per cent at 31 December 2007 and 0.77 per cent at 31 March 2007. Income taxes The effective tax rate in the first quarter of 2008 was 32.1 per cent comparedwith 32.9 per cent in the first quarter of 2007 and 35.6 per cent in the fourthquarter of 2007. The lower tax rate in the quarter ended 31 March 2008 comparedto the fourth quarter of 2007 was largely due to a write-down of future incometax assets recorded in the fourth quarter of 2007 resulting from lower corporatetax rates enacted by the Federal Government. Balance sheet Total assets at 31 March 2008 were C$66.5 billion, an increase of C$3.6 billionfrom 31 December 2007, and C$5.6 billion from 31 March 2007. Commercial loansand bankers' acceptances increased by C$1.2 billion since the end of 2007, ascommercial activity continued to be strong. Although residential mortgageoriginations increased, this was offset by securitizations of C$0.9 billionresulting in a net decrease of C$0.6 billion and consumer lending grew by C$0.5billion. The securities portfolio and securities purchased under reverserepurchase arrangements increased by C$1.7 billion in the quarter, improving thebank's liquidity position. Total deposits increased by C$1.1 billion to C$50.0 billion at 31 March 2008from C$48.9 billion at 31 December 2007 and were C$4.0 billion higher comparedwith C$46.0 billion at 31 March 2007. Personal deposits grew by C$1.2 billionover 31 December 2007 driven by growth in High Rate and Direct Savings Accountswhile in the same period commercial deposits decreased marginally. Total assets under administration Funds under management were C$26.3 billion at 31 March 2008 compared with C$26.2billion at 31 December 2007 and C$25.1 billion at 31 March 2007. Although fundsunder management in the first quarter of 2008 benefited from good investmentsales, reductions in equity markets adversely impacted fund values. Includingcustody and administration balances, total assets under administration wereC$37.3 billion compared with C$37.1 billion at 31 December 2007 and C$34.0billion at 31 March 2007. Capital management and regulatory capital ratios On 1 January 2008 the bank adopted a revised Basel Capital Framework commonlyknown as "Basel II" to comply with new regulations issued by the Office of theSuperintendent of Financial Institutions Canada. The bank's tier 1 and overallcapital ratios calculated in accordance with the new framework were 9.1 per centand 11.3 percent respectively. Capital Adequacy ratios calculated in accordance with the previous "Basel I"framework were 8.8 per cent for tier 1 and 11.3 per cent overall, at 31 December2007 and 8.9 per cent and 11.0 per cent, respectively at 31 March 2007. Furtherdetails of the bank's capital management process, including details of thecalculation of capital adequacy under the new "Basel II" framework will beincluded in the bank's first quarter 2008 report to shareholders. Dividends During the first quarter of 2008, the bank declared and paid C$65 million individends on HSBC Bank Canada 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 June2008, for shareholders of record on 13 June 2008. Accounting policies adopted in 2008 Effective 1 January 2008, the bank adopted new Canadian Institute of CharteredAccountants (CICA) Handbook Standards requiring additional disclosuresparticularly relating to the management of risk associated with Capital andFinancial Instruments. There was no impact on the results for the first quarterof 2008 arising from the adoption of these new presentation and disclosurestandards, which will be reflected in HSBC Bank Canada's first quarter 2008report to shareholders. Certain prior period amounts have been reclassified toconform to the current year's presentation. About HSBC Bank Canada HSBC Bank Canada, a subsidiary of HSBC Holdings plc, has more than 180 offices.With around 10,000 offices in 83 countries and territories and assets ofUS$2,354 billion at 31 December 2007, the HSBC Group is one of the world'slargest banking and financial services organisations. Visit the bank's websiteat hsbc.ca for more information about HSBC Bank Canada and its products andservices. Copies of HSBC Bank Canada's first quarter 2008 report will be sent toshareholders in May 2008. Caution regarding forward-looking financial statements This document may contain forward-looking statements, including statementsregarding the business and anticipated financial performance of HSBC Bank Canada. These statements are subject to a number of risks and uncertainties that maycause actual results to differ materially from those contemplated by theforward-looking statements. Some of the factors that could cause suchdifferences include legislative or regulatory developments, technologicalchange, global capital market activity, changes in government monetary andeconomic policies, changes in prevailing interest rates, inflation level andgeneral economic conditions in geographic areas where HSBC Bank Canada operates.Canada is an extremely competitive banking environment and pressures on interestrates and the bank's net interest margin may arise from actions taken byindividual banks acting alone. Varying economic conditions may also affectequity and foreign exchange markets, which could also have an impact on thebank's revenues. In addition, there may be a number of factors relating to thevaluation of non-bank ABCP. The factors disclosed above may not be complete andthere could be other uncertainties and potential risk factors not consideredhere which may impact the bank's results and financial condition. Summary Quarter endedFigures in C$ millions 31Mar08 31Dec07 31Mar07(except per share amounts) EarningsNet income attributable to common shares 155 111 139Basic earnings per share 0.31 0.22 0.28 Performance ratios (%)Return on average common equity 21.2 15.6 22.0Return on average assets 0.92 0.66 0.93Net interest margin^ 2.08 2.13 2.29Cost efficiency ratio^^ 48.7 54.5 52.2Non-interest revenue:total revenue ratio 42.4 34.9 38.6 Credit informationGross impaired credit exposures 314 272 153Allowance for credit losses- Balance at end of period 370 353 327- As a percentage of gross impaired credit exposures 118% 130% 214%- As a percentage of gross loans and acceptances 0.81% 0.79% 0.77% Average balancesAssets 67,897 66,158 60,656Loans 38,850 39,032 35,994Deposits 50,972 49,755 45,855Common equity 2,964 2,827 2,558 Capital ratios^^^ (%)Tier 1 9.1 8.8 8.9Total capital 11.3 11.3 11.0 Total assets under administrationFunds under management 26,283 26,213 25,083Custodial accounts 11,006 10,914 8,868Total assets under administration 37,289 37,127 33,951 ^ 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.^^^ The capital ratios for the quarter ended 31 March 2008 have been calculated in accordance with the new Basel II capital adequacy framework, while those for previous periods were calculated in accordance with the previous Basel I framework. Consolidated Statement of Income (Unaudited) Quarter endedFigures in C$ millions 31Mar08 31Dec07 31Mar07(except per share amounts) Interest and dividend incomeLoans 642 678 597Securities 73 74 58Deposits with regulated financial institutions 36 55 59 751 807 714Interest expenseDeposits 443 495 413Debentures 10 10 7 453 505 420 Net interest income 298 302 294 Non-interest revenueDeposit and payment service charges 27 27 23Credit fees 31 29 27Capital market fees 22 27 32Investment administration fees 33 35 30Foreign exchange 10 12 9Trade finance 5 5 6Trading revenue 51 32 14(Losses) gains on available for sale securities - (34) 17Gains on other securities 1 2 8Securitization income 27 13 10Other 12 14 9 219 162 185 Total revenue 517 464 479 Non-interest expensesSalaries and employee benefits 142 134 143Premises and equipment 35 28 31Other 75 91 76 252 253 250 Net operating income before provision for credit losses 265 211 229 Provision for credit losses 25 24 10 Income before taxes and non-controlling interest in income of trust 240 187 219Provision for income taxes 75 64 70Non-controlling interest in income of trust 6 7 6Net income 159 116 143Preferred share dividends 4 5 4Net income attributable to common shares 155 111 139 Average common shares outstanding (000) 498,668 493,668 488,668Basic earnings per share (C$) 0.31 0.22 0.28 Condensed Consolidated Balance Sheet (Unaudited) Figures in C$ millions At 31Mar08 At 31Dec07 At 31Mar07 AssetsCash and deposits with Bank of Canada 520 510 457Deposits with regulated financial institutions 2,944 3,063 4,380 3,464 3,573 4,837 Available for sale securities 6,349 5,639 5,572Trading securities 1,630 1,227 2,211Other securities 42 60 25 8,021 6,926 7,808 Securities purchased under reverse repurchase agreements 6,700 6,122 3,592 Loans- Businesses and government 21,940 21,322 19,059- Residential mortgage 12,292 12,920 14,170- Consumer 5,361 4,826 3,870- Allowance for credit losses (370) (353) (327) 39,223 38,715 36,772 Customers' liability under acceptances 6,265 5,727 5,314Derivatives 905 623 313Land, buildings and equipment 149 149 122Other assets 1,784 1,096 2,153 9,103 7,595 7,902Total assets 66,511 62,931 60,911 Liabilities and shareholders' equityDeposits- Regulated financial institutions 1,646 1,535 2,162- Individuals 19,454 18,291 17,248- Businesses and governments 28,891 29,051 26,551 49,991 48,877 45,961 Acceptances 6,265 5,727 5,314Securities sold under repurchase agreements 712 320 467Derivatives 692 649 290Securities sold short 906 623 1,919Other liabilities 3,342 2,256 3,011Non-controlling interest in trust and subsidiary 430 430 430 12,347 10,005 11,431 Subordinated debentures 805 801 560 Shareholders' equity- Preferred shares 350 350 350- Common shares 1,225 1,225 1,125- Contributed surplus 207 206 203- Retained earnings 1,552 1,462 1,266- Accumulated other comprehensive income 34 5 15 3,368 3,248 2,959Total liabilities and shareholders' equity 66,511 62,931 60,911 Condensed Consolidated Statement of Cash Flows (Unaudited) Quarter endedFigures in C$ millions 31Mar08 31Dec07 31Mar07 Cash flows provided by/(used in):- operating activities 264 (30) 466- financing activities 1,437 1,006 2,024- investing activities (1,691) (847) (2,407) Increase in cash and cash equivalents 10 129 83Cash and cash equivalents, beginning of period 484 355 347Cash and cash equivalents, end of period 494 484 430 Represented by:- Cash resources per balance sheet 520 510 457 - less non-operating deposits^ (26) (26) (27)- Cash and cash equivalents, end of period 494 484 430 ^ Non-operating deposits are comprised primarily of cash restricted for recourse on securitization transactions. 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