20th Jul 2005 09:13
HSBC Holdings PLC20 July 2005 HSBC BANK CANADA 2005 INTERIM RESULTS - HIGHLIGHTS • Net income attributable to common shares was C$212 million for the half-year ended 30 June 2005, an increase of 19.8 per cent over the same period in 2004. • Net income attributable to common shares was C$104 million for the quarter ended 30 June 2005, an increase of 19.5 per cent over the quarter ended 30 June 2004. • Return on average common equity was 20.3 per cent for the half-year ended 30 June 2005 and 19.7 per cent for the quarter ended 30 June 2005 compared with 20.5 per cent and 19.7 per cent respectively for the same periods in 2004. • The cost:income ratio was 53.8 per cent for the half-year ended 30 June 2005 and 54.6 per cent for the quarter ended 30 June 2005 compared with 55.0 per cent and 54.1 per cent respectively for the same periods in 2004. • Total assets were C$47.4 billion at 30 June 2005 compared with C$40.8 billion at 30 June 2004. • Total funds under management were C$18.8 billion at 30 June 2005 compared with C$15.8 billion at 30 June 2004. Financial Commentary Overview HSBC Bank Canada recorded net income attributable to common shares of C$212million for the half-year ended 30 June 2005, an increase of C$35 million, or19.8 per cent compared to the same period in 2004. Net income attributable tocommon shares for the quarter ended 30 June 2005 was C$104 million, an increaseof C$17 million, or 19.5 per cent compared to the same period in 2004. Net income for the half-year ended 30 June 2005 benefited from higher netinterest income due to growth in the balance sheet, growth in non-interestincome and a strong credit environment resulting in a significant reduction inthe provision for credit losses compared to the same period in the previousyear. The half-year ended 30 June 2005 included income of C$5 million before taxarising from the adoption of a new accounting standard for valuation ofinvestment company assets. The first half of 2004 benefited from a C$4 milliongain on sale of a subsidiary included in discontinued operations and income ofC$9 million relating to a change in accounting for mortgage loan prepaymentfees, both items on a net of tax basis. Commenting on the results, Lindsay Gordon, President and Chief ExecutiveOfficer, said: "Results for 2005 continue to be good. Our business initiativesand the strong economy have contributed to our growth. Our robust riskmanagement process, together with the impact of the good economy and the lowinterest rate environment, have also resulted in record low provisions forcredit losses. "Our focus will be to continue to build on the excellent relationships with ourcustomers by continuing to improve convenience and service. For example, all ourcustomers now have the convenience of surcharge-free access to the third largestATM network in Canada through our agreements with the Exchange Network and Bankof Montreal." Net interest income Net interest income for the half-year ended 30 June 2005 was C$480 million upC$43 million or 9.8 per cent over the same period in 2004. For the quarter ended30 June 2005, net interest income was C$243 million up C$22 million or 10.0 percent over the same period in 2004. Our business initiatives and the acquisitionof Intesa Bank Canada ("Intesa") together with a strong economy supported byincreasing business investment, consumer spending and housing demand resulted instrong growth in business and consumer loans and residential mortgages. The net interest margin, as a percentage of average interest earning assets, was2.38 per cent for the half-year ended 30 June 2005 compared with 2.55 per centfor the same period in 2004. For the quarter ended 30 June 2005 the net interestmargin was 2.34 per cent compared with 2.52 per cent for the same period in2004. Consistent with the trend experienced by the industry for the last twoyears, net interest margins continue to be impacted by very competitive pricingin all customer groups, but particularly in personal financial services, and thelow interest rate environment. Non-interest revenue Non-interest revenue was C$284 million for the half-year ended 30 June 2005 anincrease of C$27 million, or 10.5 per cent compared with the same period in2004. For the quarter ended 30 June 2005, non-interest revenue was C$140 millionan increase of C$10 million or 7.7 per cent compared with the same quarter in2004. Commercial credit fees were higher in 2005 due to continuing strong lendingactivity supported by the low interest rate environment and the continuedstrength of the economy. Investment administration fees were higher dueprimarily to continued growth in assets in our Portfolio Advantage and PrivateInvestment Management services. Our Chinese Equity, Monthly Income and MortgagePooled Funds launched last year also contributed to the growth in funds undermanagement. Other non-interest revenue increased due to higher income frominvestments in our private equity funds, stronger fee income from our CanadianImmigrant Investor Program and the benefit of C$5 million of income resultingfrom the adoption of a new accounting standard for the valuation of investmentcompany assets which are now required to be held at fair value, compared withhistorical cost and accumulated income. During the second quarter of 2005, we recognized C$2 million in gains on a $119million residential mortgage securitisation compared to gains of C$8 million onresidential mortgage securitisations of $317 million in the same period in 2004. Non-interest expenses Non-interest expenses were C$411 million for the half-year ended 30 June 2005compared with C$382 million for the same period in 2004. For the quarter ended30 June 2005 non-interest expenses were C$209 million compared with C$190million for the same quarter in 2004. Salaries and benefits in the first half of 2005 were higher than in the firsthalf of 2004 due largely to an increased employee base resulting from theacquisition of Intesa, from investments in our branch network, wealth managementbusinesses, and other delivery channels and increased compliance and regulatorycosts. Other non-interest expenses in 2005 included a net credit arising fromsuccessful resolution of certain commodity tax issues from previous years. Thiswas offset by higher administrative and information technology service fees fromincreased business activity. Credit quality and provision for credit losses The provision for credit losses was C$14 million for the half-year ended 30 June2005 compared with C$34 million in the same period in 2004. For the quarterended 30 June 2005 the provision for credit losses was C$6 million compared withC$20 million in the same period last year. The significant decrease in theyear-to-date provision reflects the Bank's strong risk management process,together with the good performance of the credit portfolio arising fromcontinued low corporate default rates and good economic conditions in Canada andthe United States. Gross impaired loans at 30 June 2005 were C$125 million, C$57 million, or 31.3per cent lower compared to 31 December 2004, and C$107 million, or 46.1 percent, lower compared to 30 June 2004. Total impaired loans, net of specificallowance for credit losses, were C$70 million at 30 June 2005 compared withC$112 million at 31 December 2004 and C$138 million at 30 June 2004. The generalallowance for credit losses was C$283 million compared with C$279 million at 31December 2004 and C$265 million at 30 June 2004. The total allowance for creditlosses, as a percentage of loans outstanding, was 1.09 per cent at 30 June 2005compared with 1.22 per cent at 31 December 2004 and 1.30 per cent at 30 June2004. Income taxes The effective tax rate in the quarter and half-year ended 30 June 2005 was 33.7per cent and 33.9 per cent respectively compared with 38.0 per cent and 37.8 percent respectively for the same periods in 2004. The reductions reflectadjustments in both the first and second quarters of 2005 to the net realizablevalues of certain future income tax assets. Excluding these adjustments, theeffective income tax rate would have been 36.8 per cent and 37.0 per cent forthe quarter and half-year ended 30 June 2005 respectively. Balance sheet Total assets at 30 June 2005 were C$47.4 billion, an increase of C$4.1 billionor 9.5 per cent from 31 December 2004, and C$6.6 billion, or 16.2 per cent from30 June 2004. The growth in assets was driven by growth in all asset categoriesand across all customer groups. Total deposits increased C$3.6 billion to C$37.4 billion at 30 June 2005compared to C$33.8 billion at 31 December 2004 and were C$5.3 billion highercompared with 30 June 2004. The increase in the first half of 2005 was drivenprimarily from increased activity in the commercial customer group. Total assets under administration Funds under management were C$18.8 billion at 30 June 2005 compared with C$17.7billion at 31 December 2004 and C$15.8 billion at 30 June 2004. Includingcustody and administration balances, total assets under administration wereC$24.7 billion compared with C$22.8 billion at 31 December 2004 and C$20.5billion at 30 June 2004. Although there were challenging equity marketconditions in the first part of the year, the recent increase in equity marketsand the impact of earlier recruitment of additional investment advisors, hascontributed to the increase in funds under management experienced during 2005.Assets managed in our Portfolio Advantage and Private Investment Managementproducts showed continued strong growth. Capital ratios The tier 1 capital ratio was 9.0 per cent and the total capital ratio was 11.2per cent at 30 June 2005. This compares with 8.6 per cent and 11.0 per cent,respectively, at 31 December 2004 and 8.7 per cent and 11.2 per cent,respectively, at 30 June 2004. The increase in the tier 1 capital ratio is dueto the issue of $175 million of Class 1 Preferred Shares Series C and $200million of HSBC Canada Asset Trust Securities Series 2015. Both of these issueswere completed during the second quarter of 2005. The Board of Directors has approved, subject to regulatory consent, theredemption for cash of C$25.00 of all the Bank's issued and outstanding Class 1Preferred Shares Series A at 30 September 2005. Formal notice of redemption isexpected to be sent to shareholders in August 2005. We declared and paid a C$60 million dividend on our common shares in both thefirst and second quarters of 2005. Preferred share dividends Regular dividends have been declared on the Class 1 Preferred Shares - Series Aof 39.0625 cents per share and on the Class 1 Preferred Shares - Series C of31.875 cents per share. The dividends will be payable in cash on 30 September2005, for shareholders of record on 15 September 2005. About HSBC Bank Canada HSBC Bank Canada (HSB.PR.A - TSX), a subsidiary of HSBC Holdings plc, has morethan 170 offices. With over 9,800 offices in 77 countries and territories andassets of US$1,280 billion at 31 December 2004, the HSBC Group is one of theworld's largest banking and financial services organisations. For moreinformation about HSBC Bank Canada and its products and services, visit ourwebsite at hsbc.ca. Copies of HSBC Bank Canada's Interim Report will be sent to shareholders duringAugust 2005. Forward-looking financial information This document contains forward-looking statements, including statementsregarding the business and anticipated financial performance of HSBC BankCanada. These statements are subject to a number of risks and uncertainties thatmay cause actual results to differ materially from those contemplated by theforward-looking statements. Some of the factors that could cause suchdifferences include legislative or regulatory developments, technologicalchange, global capital market activity, changes in government monetary andeconomic policies, changes in prevailing interest rates, inflation levels andgeneral economic conditions in geographic areas where HSBC Bank Canada operates.Canada is an extremely competitive banking environment and pressures on interestrates and our net margin may arise from actions taken by individual banks actingalone. Varying economic conditions may also affect equity and foreign exchangemarkets, which could also have an impact on our revenues. The factors disclosedabove may not be complete and there could be other uncertainties and potentialrisk factors not considered here which may impact our results and financialcondition. Summary Quarter ended Half-year ended Figures in C$ millions 30Jun05 31Mar05 30Jun04 30Jun05 30Jun04 (except per share ammounts) Earnings Net income attributable to common shares 104 108 87 212 177Basic earnings per share 0.21 0.22 0.18 0.43 0.37 Performance ratios (%)Return on average common equity 19.7 20.9 19.7 20.3 20.5Return on average assets 0.90 0.99 0.88 0.94 0.92Net interest margin 2.34 2.44 2.52 2.38 2.55Cost:income ratio 54.6 53.0 54.1 53.8 55.0Non-interest revenue: total revenue ratio 36.6 37.8 37.0 37.2 37.0 Credit informationImpaired loans 125 146 232Allowance for credit losses- Balance at end of period 338 343 359- As a percentage of impaired loans 270% 235% 155%- As a percentage of loans outstanding 1.09% 1.15% 1.30% Average balancesAssets 46,523 44,180 39,650 45,358 38,859Loans 29,901 28,841 26,280 29,374 25,851Deposits 37,028 34,704 30,668 35,867 29,897Common equity 2,411 2,098 1,772 2,119 1,742 Capital ratios (%)Tier 1 9.0 8.5 8.7Total capital 11.2 10.8 11.2 Total assets under administrationFunds under management 18,820 18,084 15,761Custody accounts 5,875 5,797 4,721Total assets under administration 24,695 23,881 20,482 Note:Financial Information on pages 6-9 prepared in accordance with CanadianGenerally Accepted Accounting Principles. Consolidated Statement of Income (Unaudited) Quarter ended Half-year ended Figures in C$ millions 30Jun05 31Mar05 30Jun04 30Jun05 30Jun04 (except per share amounts) Interest and dividend incomeLoans 396 374 338 770 678Securities 25 24 19 49 40Deposits with regulated financial institutions 39 30 12 69 26 460 428 369 888 744 Interest expenseDeposits 211 184 140 395 290Debentures 6 7 8 13 17 217 191 148 408 307Net interest income 243 237 221 480 437Provision for credit losses 6 8 20 14 34Net interest income after provision for credit losses 237 229 201 466 403 Non-interest revenue Deposit and payment service charges 22 20 21 42 41Credit fees 24 22 21 46 39Capital market fees 24 32 25 56 57Investment administration fees 17 17 15 34 29Foreign exchange 19 17 17 36 34Trade finance 7 7 8 14 14Trading revenue 2 5 4 7 6Securitisation income 5 8 9 13 15Other 20 16 10 36 22 140 144 130 284 257 Net interest and non-interest revenue 377 373 331 750 660 Non-interest expensesSalaries and employee benefits 110 109 103 219 203Premises and equipment 27 27 26 54 53Other 72 66 61 138 126 209 202 190 411 382 Income before the undernoted 168 171 141 339 278Effect of accounting change - - - - 14Income before provision for income taxes and non-controlling interest in income of trust 168 171 141 339 292Provision for income taxes 55 57 52 112 108Non-controlling interest in income of trust 5 4 4 9 8Income from continuing operations 108 110 85 218 176Income from discontinued operations ^ - - 4 - 5Net income 108 110 89 218 181Preferred share dividends 4 2 2 6 4Net income attributable to common shares 104 108 87 212 177 Average common shares outstanding (000) 488,668 488,668 475,591 488,668 473,380Basic earnings per share (C$) 0.21 0.22 0.18 0.43 0.37 ^ Reflects the sale of HSBC Canadian Direct Insurance Incorporated effective 30 April 2004. Condensed Consolidated Balance Sheet (Unaudited) Figures in C$ millions At30Jun05 At31Dec04 At30Jun04 AssetsCash and deposits with Bank of Canada 347 328 343Deposits with regulated financial institutions 4,997 4,094 4,041 5,344 4,422 4,384 Investment securities 2,489 1,967 1,986Trading securities 1,421 1,055 715 3,910 3,022 2,701Assets purchased under reverse repurchase agreements 2,475 2,264 2,050 Loans- Businesses and government 14,768 13,450 13,029- Residential mortgage 12,427 11,966 11,487- Consumer 3,714 3,252 3,100- Allowance for credit losses (338) (349) (359) 30,571 28,319 27,257 Customers' liability under acceptances 3,722 3,754 3,309Land, buildings and equipment 97 101 96Other assets 1,312 1,381 977 5,131 5,236 4,382Total assets 47,431 43,263 40,774 Liabilities and shareholders' equityDeposits- Regulated financial institutions 1.199 635 720- Individuals 15,343 14,818 14,895- Businesses and governments 20,845 18,395 16,495 37,387 33,848 32,110 Acceptances 3,722 3,754 3,309Assets sold under repurchase agreements 101 23 176Other liabilities 2,898 2,785 2,366Non-controlling interest in trust and subsidiary 430 230 230 7,151 6,792 6,081 Subordinated debentures 428 426 508 Shareholders' equity- Preferred shares 300 125 125- Common shares 1,125 1,125 1,125- Contributed surplus 182 177 173- Retained earnings 858 770 652 2,465 2,197 2,075Total liabilities and shareholders' equity 47,431 43,263 40,774 Condensed Consolidated Statement of Cash Flows (Unaudited) Quarter ended Half-year ended Figures in C$ millions 30Jun05 31Mar05 30Jun04 30Jun05 30Jun04 Cash flows (used in)/provided by:- operating activities (293) 405 (42) 112 384 - financing activities 2,154 1,662 1,390 3,816 1,982- investing activities (1,623) (1,591) (1,297) (3,214) (2,131) Increase in cash and cash equivalents 238 476 51 714 235Cash and cash equivalents, beginning of period 4,483 4,007 3,633 4,007 3,449Cash and cash equivalents,end of period 4,721 4,483 3,684 4,721 3,684 Represented by:- Cash resources per balance sheet 5,344 5,135 4,384- less non-operating deposits ^ (623) (652) (700)- Cash and cash equivalents, end of period 4,721 4,483 3,684 ^ Non-operating deposits are comprised primarily of cash which reprices after 90 daysand cash restricted for recourse on securitisation transactions. 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