3rd Mar 2008 08:15
HSBC Holdings PLC03 March 2008 HSBC HOLDINGS PLC 2007 FINAL RESULTS - HIGHLIGHTS • Total operating income up 25 per cent to US$87,601 million (US$70,070 million in 2006). For the year: • Net operating income up 13 per cent to US$61,751 million (US$54,793 million in 2006). • Group pre-tax profit up 10 per cent to US$24,212 million (US$22,086 million in 2006). • Profit attributable to shareholders of the parent company up 21 per cent to US$19,133 million (US$15,789 million in 2006). • Return on average invested capital of 15.3 per cent (14.9 per cent in 2006). • Earnings per share up 17.9 per cent to US$1.65 (US$1.40 in 2006). Dividend and capital position: • Total dividends declared in respect of 2007 of US$0.90 per share, an increase of 11.1 per cent over 2006; fourth interim dividend for 2007 of US$0.39 per share, an increase of 8.3 per cent. • Tier 1 capital ratio of 9.3 per cent and total capital ratio of 13.6 per cent. HSBC HOLDINGS REPORTS PRE-TAX PROFIT OF US$24,212 MILLION HSBC made a profit before tax of US$24,212 million, an increase of US$2,126million, or 10 per cent, over 2006. Net interest income of US$37,795 million was US$3,309 million, or 10 per cent,higher than 2006. Net operating income before loan impairment charges and other credit riskprovisions of US$78,993 million was US$13,627 million, or 21 per cent, higherthan 2006. Total operating expenses of US$39,042 million rose by US$5,489 million, or 16 percent, compared with 2006. HSBC's cost efficiency ratio was 49.4 per cent compared with 51.3 per cent in2006. Loan impairment charges and other credit risk provisions were US$17,242 millionin 2007, US$6,669 million higher than 2006. The tier 1 capital and total capital ratios for the Group remained strong at 9.3per cent and 13.6 per cent, respectively, at 31 December 2007. The Group's total assets at 31 December 2007 were US$2,354 billion, an increaseof US$494 billion, or 27 per cent, since 31 December 2006. The consolidated financial statements of HSBC have been prepared in accordancewith International Financial Reporting Standards ('IFRSs') as endorsed by theEU. EU-endorsed IFRSs may differ from IFRSs as published by the InternationalAccounting Standards Board ('IASB') if, at any point in time, new or amendedIFRSs have not been endorsed by the EU. At 31 December 2007, there were nounendorsed standards effective for the year ended 31 December 2007 affectingthese consolidated financial statements, and there was no difference betweenIFRSs endorsed by the EU and IFRSs issued by the IASB in terms of theirapplication to HSBC. Accordingly, HSBC's financial statements for the year ended31 December 2007 are prepared in accordance with IFRSs as issued by the IASB. Geographical distribution of results Profit before tax Year ended Year ended 31Dec07 31Dec06 US$m % US$m % Europe 8,595 35.5 6,974 31.5Hong Kong 7,339 30.3 5,182 23.5Rest of Asia-Pacific 6,009 24.8 3,527 16.0North America 91 0.4 4,668 21.1Latin America 2,178 9.0 1,735 7.9 24,212 100.0 22,086 100.0 Tax expense (3,757) (5,215) Profit for the year 20,455 16,871 Profit attributable toshareholders of the parent company 19,133 15,789Profit attributable to minority interests 1,322 1,082 Distribution of results by customer group and global business Profit before tax Year ended Year ended 31Dec07 31Dec06 US$m % US$m % Personal Financial Services 5,900 24.4 9,457 42.8Commercial Banking 7,145 29.5 5,997 27.2Global Banking and Markets 6,121 25.3 5,806 26.3Private Banking 1,511 6.2 1,214 5.5Other 3,535 14.6 (388) (1.8) 24,212 100.0 22,086 100.0 Statement by Stephen Green, Group Chairman 2007 was a year when large parts of the international financial system cameunder extraordinary strain. For HSBC to achieve another new high in earnings,despite these conditions and the exceptionally weak performance of our USbusiness, underscores the value of the strategic focus we announced early lastyear to drive sustainable growth by concentrating on the faster growing marketsof the world. Pre-tax profits in 2007 increased by 10 per cent to US$24 billion and earningsper share rose by 18 per cent to US$1.65. Excluding the dilution gains arisingfrom our strategic investments in mainland China, which I highlighted at theinterim stage, profits grew by 5 per cent. Consistent with our strategy offocusing on emerging markets where we are the world's leading internationalbank, profits from those businesses, excluding dilution gains, grew by 41 percent to US$15 billion. Our return on shareholders' equity exceeded 15 per cent, revenue growth was indouble digits for the fifth year running, our cost efficiency ratio improved andour capital ratios remained strong. HSBC's financial strength in terms of bothcapital and liquidity is a powerful driver of sustainable growth and helpsensure continued resilience. Strong operating performance in 2007 We produced exceptionally strong results in Asia-Pacific, Latin America and theMiddle East while facing considerable business challenges in North America. Inour customer groups, we also achieved record results in Commercial Banking andPrivate Banking, and a strong performance in Global Banking and Markets, despitewrite-downs arising from market turbulence in the second half of the year. Inaddition, Personal Financial Services produced record profits in emergingmarkets. Within these customer groups, our insurance operations made furtherprogress. Our North American results continue to be adversely affected by high loanimpairment charges as we respond to the impact on our portfolio of creditdeterioration arising largely from housing market weakness in the US. Themanagement team has taken vigorous action to address and mitigate the problem.In Europe, excluding the positive effect of movements in the fair value ofHSBC's own debt, performance was broadly in line with 2006. In the UK,Commercial Banking generated pre-tax profits of over US$2 billion for the firsttime and, in Turkey, further expansion of the branch network helped drive strongorganic growth in numbers of personal and business customers. Financial strength underpins our progressive dividend policy The Directors have declared a fourth interim dividend for 2007 of US$0.39 perordinary share (in lieu of a final dividend) which, together with the firstthree interim dividends for 2007 of US$0.17 already paid, will make a totaldistribution in respect of the year of US$0.90 per share (US$0.81 per share inrespect of 2006), an increase of 11.1 per cent. The dividend will be payable on7 May 2008 with a scrip dividend alternative, to shareholders on the register on25 March 2008. HSBC's dividend has increased by 10 per cent or more every yearfor 15 years. A clear and compelling strategy playing to our strengths At the beginning of 2007, we refreshed our strategy, considering how we shouldshape HSBC for the future. Our deliberations were influenced by some fundamentallong-term trends that will shape tomorrow's world: emerging markets willcontinue to grow faster than mature ones; world trade will continue to grow faster than world output; and people are living longer than ever before with all the implications that has for long-term savings and pensions. Our thinking was also informed by a clear appreciation of HSBC's strengths. Webelieve that the global leadership we have built in emerging markets and intrade, and our international perspective are compelling advantages that set HSBCapart for our customers, our shareholders and our people. As we explained in March 2007, our conclusion was that the Group should placerenewed emphasis on investing in fast moving emerging markets in Asia-Pacific,the Middle East and Latin America. We believe we can grow strongly andsustainably. We achieved our position as the number one international bank inAsia-Pacific and the Middle East over many years; by contrast, we have built oneof Latin America's largest financial services businesses in little more than adecade. In mature markets, we are determined to focus our businesses on areas where wecan build on our unique global franchise, so as to benefit from the long-termtrend of increasing international connectivity. We have international customerbases across many of our businesses, from the largest corporates, through to small or medium-sized enterprises, to the internationally mobile mass affluent and other personal customers with specific international requirements. We havedeveloped a clear approach which is enabling our business to focus strongly onthese groups of customers now and in the years ahead. Where opportunities arise, we shall seek to redeploy capital towards emergingmarkets through divestment of assets of greater strategic value to others. InFrance, we have received a firm cash offer of US$3.1 billion for our seven,separately branded, regional banks and have entered into exclusive discussions. This potential transaction, which is subject to necessary approvals and consultation, could complete in mid-2008. We remain committed to France throughour HSBC-branded network serving retail and commercial customers and through ouractivities in Global Banking and Markets, Private Banking, asset management andinsurance. During 2007, we acquired the 50 per cent of Erisa, our Frenchinsurance business, which we did not own. We will also build businesses, in both our emerging and mature markets, thathelp our customers with their long-term savings needs, as demographics andwealth creation trends around the world make this ever more important to them. Finally, we will shape our business operations so that we use our scale todeliver better, more efficient services to our customers. Their use oftechnology increasingly dictates how they interact with us. We increasinglyemploy technology to create better products which we can deliver globally atlower cost. As we grow our direct banking business, we will create opportunitiesto meet more of our customers' financial needs. Building on our position as the world's leading international emerging marketsbank During 2007, we continued to build our businesses in emerging marketsorganically. For example, on a like-for-like basis, risk-weighted assets inthese areas grew by 42 per cent compared with 16 per cent for the Group as awhole. As the leading international bank in the country of our birth, China, we weredelighted to be among the first to incorporate locally in the mainland. We havebuilt the largest branch network of any international bank and we havesignificant and profitable strategic investments in our Chinese associates. In mainland China, through our own businesses and in conjunction with ourassociates, we achieved for the first time in our history a profit before tax ofover US$1 billion, in addition to over US$7 billion generated in Hong Kong. As China continues to reshape itself as a 21st century powerhouse, HSBC seeks toplay a constructive role in its continued progressive economic and socialdevelopment. We were the first international bank to establish and open a ruralbank. Hang Seng Bank has agreed to acquire 20 per cent of Yantai City CommercialBank in the fast growing Bohai region of China. Elsewhere in Asia-Pacific, we have sought to further strengthen our positionthrough a series of investments in faster-growing economies. In South Korea, wehave agreed to acquire 51 per cent of Korea Exchange Bank for US$6.5 billion,subject to regulatory approvals. In Taiwan, we acquired Chailease CreditServices, a factoring company serving commercial customers, and agreed toacquire the assets, liabilities and operations of The Chinese Bank, which willextend our network by 39 branches and bring us many new customers. As foreign investment rules are eased, we have made significant investments toexpand our business in Vietnam with the acquisition of a further 5 per centinterest in Techcombank, bringing our stake to 15 per cent, and the purchase forsome US$255 million of a 10 per cent interest in Bao Viet, the leading insurancecompany in the country. The latter investment reflects our determination to increase the contribution ofinsurance to Group earnings. We also entered into agreements to invest in a 26per cent interest in a new life insurance joint venture in India, in partnershipwith two of the larger state-owned banks, and to acquire just under 50 per centof Hana Life Insurance Company in South Korea. We have entered a number ofstrategic alliances to ensure that we have the best products for our customersand the support to grow our activities. A fifth consecutive year of rising oil prices facilitated growth in public andprivate investment in the Middle East. As a result, infrastructure developmentaccelerated and consumption and employment rose. Our businesses in the MiddleEast were well positioned to benefit from this and have had an excellent year. Our acquisition of Grupo Banistmo in Central America and Banco Nazionale inArgentina in 2006 strengthened our existing business. 2007 has been a year ofintegrating these operations. It is a testimony to the strength of our LatinAmerican businesses that we have been able to grow profits by 26 per cent toover US$2 billion while investing in the integration and despite the increase inloan impairment charges in Mexico as our loan portfolio began to mature. A people business It is people, of course, who define an organisation; and any business's successis dependent on the calibre of its staff. 2007 was a demanding year in manyrespects and it is testament to the talent and professionalism of my 330,000colleagues around the world that HSBC successfully met its challenges andexcelled in so many areas. I would like to take this opportunity to extend mypersonal thanks to my colleagues - their commitment and expertise have greatlybenefited the Group and our shareholders. Measuring the results of our strategy Today we are publishing, for the first time, the key metrics which we will useto measure our performance in future. These include a number of measures thatcover financial performance, customer recommendation and employee engagement. In financial terms we are aiming for a return on equity in a range over theinvestment cycle of 15-19 per cent; a cost efficiency ratio in the rangeof 48-52 per cent; Tier 1 capital under the Basel II framework of 7.5-9.0 percent; and total shareholder return in the top half of that achieved by ourpeers. Financial measures are important but not sufficient: it is our people and ourrelationship with customers that will drive our business and ultimatelydetermine our success. For the first time, in 2007, 290,000 HSBC colleaguescompleted our new global people survey, allowing us to benchmark ourselves and,over time, raise our game. Similarly, we have established customer engagementmetrics which enable us to measure and improve our service to them. We have setourselves challenging targets to increase both employee and customer engagement.They will help us build on our position as the world's number one global bankingbrand. Changes to your Board Independent oversight of our company and of the execution of strategy is theresponsibility of one of the most experienced and international Boards in theworld. I am delighted that we will benefit from international business leadersof the calibre of Jose Luis Duran and Sam Laidlaw, who joined the Board asindependent non-executive Directors on 1 January, 2008. We also welcome twoother global business leaders, Safra Catz and Narayana Murthy, who will join asindependent non-executive Directors on 1 May 2008. The Board will be further strengthened by the appointment of three executivedirectors: Vincent Cheng, effective 1 February 2008; and Sandy Flockhart andStuart Gulliver, who will join the Board, effective 1 May 2008. These are threeof our most talented and experienced executives - all emerging marketspecialists. Baroness Dunn, Sir Brian Moffat and Lord Butler will retire as non-executiveDirectors at HSBC's Annual General Meeting on 30 May 2008 and will not seekre-election. I would like to pay tribute to their tremendous contribution toHSBC. We have been privileged to enjoy their counsel and stewardship for so manyyears. HSBC's core strength in uncertain times The outlook for the rest of 2008 is uncertain. The economic slowdown and thecredit outlook in the US may well get worse before they get better. Withsignificant parts of the international financial system in developed marketsstill in difficulties, HSBC's emphasis on faster growing emerging markets meansthat we are better positioned than many of our competitors. Emerging markets have only partly decoupled from the US. Hence, while theseeconomies are exhibiting more domestic momentum, they will not be entirelyimmune from the impact of a US slowdown. However, the major long-term trends arestill intact. Emerging markets will continue to outperform mature economies; andworld growth, even in this year of relative weakness for the US economy, will bereasonable - albeit slower than in 2007. Meanwhile, trade and investmentpatterns will continue to evolve to reflect a more interconnected world,notwithstanding some signs of protectionist sentiment in several key maturemarkets. In particular, we will see further strategic investments from emergingmarkets into mature markets, as well as into other emerging markets, a trendfrom which we are well placed to benefit. 2008 is likely to be a year of caution in the financial sector until liquidity,transparency and the proper pricing of risk return to financial markets. Weexpect to be able to improve margins on the use of our capital and we willcontinue to invest in building market presence at a time when others with weakercapital positions are constrained. The fundamentals of HSBC are very strong. The deleveraging of the financialsystem clearly plays to HSBC's strengths, given our conservative balance sheetand international presence. There can be few banks in the world that are betterpositioned to withstand market turbulence and grasp strategic opportunities. Wewill continue to focus HSBC on the parts of the global economy that promise thebest prospects for higher growth over the long term. We will continue to investfor profitable growth in line with our strategy, and we will do so whilemaintaining HSBC's financial strength, which is at the heart of our success. S K Green, Group Chairman03Mar08 Review by Michael Geoghegan, Group Chief Executive Officer Robust performance in a challenging year The Group Chairman's statement sets out the clear and compelling strategy forHSBC, and one which very much plays to our strengths. It is my job to lead thesenior management team in executing that strategy. 2007 was a year in which wemade significant progress in shaping and building our existing businesses forthe future, while managing through the particular challenges arising in globalfinancial markets. Our profits of US$24 billion demonstrate the resilience ofour business model which, notwithstanding the continuing disappointing resultsfrom our US operations, generated a broad spread of earnings by customer group -Commercial Banking (30 per cent), Personal Financial Services (24 per cent),Global Banking and Markets (25 per cent), Private Banking (6 per cent) andothers (15 per cent). We are well-diversified by geography, with a broad spread of earnings comingfrom developing markets in Asia-Pacific, Middle East, and Latin America and frommature markets in Europe and North America. Our investment approach is a balancebetween growing our physical presence with investing to increase efficiency inour existing operations. In support of our strategy to increase earnings fromdeveloping markets, we continued to invest significantly in existing businesseswhere we saw opportunities to grow, for instance with new branch programmes inmainland China, Turkey, Indonesia and India. In developed markets, we investedin technology-led initiatives to grow in our targeted customer segments. Ourbusiness highlights and results show that we had successes in both developed anddeveloping markets in 2007. Our investments in 2008 will be consistent with ourstrategy. Taking each of our customer groups and businesses in turn: Delivering a global and technology-driven offering to our Commercial Bankingclients Commercial Banking had another strong year with a profit before tax of US$7.1billion, an increase of 19 per cent over 2006. This growth was powered by verystrong results in Asia-Pacific, the Middle East, and Latin America. As a result,the proportion of Commercial Banking's profits arising in faster-growingeconomies increased from 47 per cent in 2006 to 52 per cent in 2007.Our focus is twofold: to be the world's leading international business bank andworking to become the best bank for small businesses in target markets. This issupported by our continued investment in both technology and people. HSBC'stechnology and global network are key to our position as the leadinginternational business bank. In 2007, we extended our network of International Banking Centres - which helpcustomers expand their international businesses - across a further 38 countries,bringing the total to 54. These services are now available to 99 per cent ofHSBC's commercial customers. Our Global Links referral system is now availableto Relationship Managers in 63 countries. We launched our new SmartFormsinitiative in 16 countries, making cross-border account opening easier for ourcustomers. We experienced strong growth in our payments and cash management, and trade andsupply chain businesses, with income growth of 18 per cent, and in receivablesfinancing, where we increased the number of operating countries from 12 to 19.Cross-sales of Global Markets' foreign exchange products also grew verystrongly, particularly in emerging markets. HSBC delivered technology-led banking for business, winning awards in both HongKong and the UK for Business Internet Banking. Almost a quarter of new customersin the UK came to us through our Business Direct proposition. We invested toexpand our receivables financing and business cards platforms, and continue togrow by building on existing relationships - over 50 per cent of new customersin the first half of 2007 in key markets had existing Personal FinancialServices relationships. In total, our Commercial Banking customer base grew by 8 per cent to 2.8 millionin 2007, with particular growth in small businesses in Hong Kong, UK and Turkey,where we have been investing. Consumer Finance challenges offset Personal Financial Services growth Our Personal Financial Services business achieved profit before tax of US$5.9billion, a decline of 38 per cent from 2006. This was largely driven by exposurein the US. However, we experienced strong Asian and Latin American growth by 48per cent and 12 per cent, respectively. Excluding US consumer finance, profitbefore tax in our Personal Financial Services business grew by 18 per cent. Elsewhere, we have had success with three key offerings where our global scalegives us real competitive advantage. First, we have seen solid growth in the market-leading HSBC Premier offering.Premier is designed for mass-affluent customers who are often internationallymobile. In 2007, we had a very successful international re-launch of HSBCPremier that incorporated a number of truly global, joined-up features. Theseincluded worldwide customer recognition, a single emergency help line, a unifiedview of all accounts, and a single worldwide Premier brand. We added a net340,000 new Premier customers of which more than 50 per cent were new to thebank, for a total of over 2.1 million. Premier customers represent a valuableclient base, each averaging over US$2,000 of revenue annually. We will continueto expand Premier in target markets in 2008, with a focus on wealth management,which has already worked so successfully in Hong Kong. We believe that we canincrease our Premier customer base to six million over the next four years. Second, our global card platform, One HSBC Cards, continues to grow, with aspecific focus on developing markets. With three quarters of cards in force on asingle platform, we can use scale to reduce costs. In 2007, we launched new cardbusinesses in Vietnam and Pakistan, while growing in other markets, includingIndia and the United Arab Emirates. With over 120 million cards in force,including those with Bank of Communications in China, 26 per cent are now indeveloping markets, up from 20 per cent in 2006. Third, we continue to grow our HSBC Direct business. In 2007, US depositsreached US$11.5 billion with 620,000 customers, and Asian deposits reachedUS$1.2 billion with more than 240,000 customers in Taiwan and South Korea. HSBCDirect most recently launched in Canada in June 2007, with an enhanced localonline savings account. 45,000 customers, three quarters of whom were new toHSBC, had deposited over US$800 million by the end of the year. We are puttingthe entire HSBC Direct offering onto a common transaction platform and intendentering new markets in 2008. Repositioning in the US consumer finance market We continue to face challenges as a result of the deterioration of the UShousing market; loan impairment charges and other credit risk provisions rose by79 per cent to US$11.7 billion in our Personal Financial Services business. Wewere one of the first to highlight the problem and we have actively managed ourbusiness to mitigate our position. Our actions have shown our commitment to dealresponsibly and resolutely with the issues. We will continue to manage thisbusiness so as to preserve the long-term value of our consumer finance platform,which we will use to grow profitable businesses in developing markets. Our US-based consumer finance business comprises four key portfolios: mortgages,credit cards, vehicle finance and other personal loans. In 2007, we saw aprogressive decline in profitability across all portfolios, as the housingmarket suffered from slower appreciation (and, in some markets, depreciation)and unemployment increased. While we have a geographically diverse book, with nosingle area over-represented across our key portfolios, most markets areexperiencing some decline in credit quality. However, those states in whichhouse prices have declined are experiencing a faster deterioration indelinquency levels. In our mortgage business, we have a retail branch-based origination channel anda wholesale portfolio, mortgage services, which is running off. This higher riskmortgage services portfolio has been reduced from US$49.5 billion toUS$36.2 billion in the last 12 months. In the second half of 2007, we also beganto see deterioration of performance in our retail branch-based consumer lendingportfolio as credit availability through equity withdrawal was no longeravailable to deal with unforeseen financial needs. We have taken vigorous action to position our business for the currentenvironment. We have discontinued mortgage services correspondent and brokeroriginations. We have restructured our retail operations in the US closing about400 branches and leaving a network of approximately 1,000. We have tightened ourlending criteria, tailored our credit appetite in specific geographies, reducedproduct offerings and eliminated the small volume of adjustable-rate mortgageproducts we offered. We have also strengthened our risk management and controls.We shall continue to develop strategic responses to changes in marketconditions. We continue to work responsibly with customers, governments and communityleaders to implement loan modifications and foreclosure avoidance programmes. Wehave improved our collections programme so that we can work to help ourcustomers. In 2007, we modified more than 8,500 loans with an aggregate balanceof US$1.4 billion in 2007. In 2007, we took the decision to integrate retail and credit card services toprovide a single management structure. In 2007, we saw a rise in overalldelinquency rates among credit card customers, in part due to a change inproduct mix and historically low levels of bankruptcies in 2006. We modified feepractices in our cards portfolio, which reduced income by approximately US$55million in 2007, and is expected to have a full year effect of approximatelyUS$250 million in 2008. In addition, to improve the profitability of the creditcard business in the long term, we slowed loan and account growth by decreasingcredit lines and tightening the criteria for authorising initial credit lines. Overall delinquency rates in vehicle finance also rose as the US economyweakened. We are taking steps to improve the profitability of new originationsand have already seen reduced volume from the dealer channel. We expect thislower origination activity to continue in 2008 as we seek higher credit quality. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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