5th Dec 2006 08:15
HSBC Holdings PLC05 December 2006 HSBC HOLDINGS PLC - PRE-CLOSE TRADING UPDATE HSBC Holdings plc ("HSBC") will be conducting a trading update today withanalysts and investors ahead of its close period for the year ending 31 December2006. The meeting will take place by conference call at 10am local time in London.Details for participating in the call can be found at the end of this statement. The information that will be covered during the meeting relating to HSBC'soperating performance is as follows. Where reference is made to an 'underlyingbasis' comparative data have been adjusted to constant currency and for theimpact of acquisitions and disposals. Trading update commentary Financial performance in the third quarter of 2006 was ahead of the prior yearcomparative quarter. There were no material changes to the composition of theGroup and investment in organic growth opportunities continued to be strongestin our emerging markets personal and commercial banking businesses notably inMexico, India, Turkey, the Middle East, Brazil and across Asia, including inMainland China. Aggregate pre-tax profit growth in the third quarter in ouremerging markets businesses, as identified in our interim results, maintainedthe rate of progress achieved in the first half of the year against the prioryear comparable period. On a year-to-date basis, the underlying rate of growth in costs to the end ofthe third quarter was in line with that reported for the half year whileunderlying revenue growth slowed, attributable largely to the aggregate ofseasonal variations in fee income, a conscious decision to slow the rate oflending growth in more finely priced markets, fewer disposal gains and a weakertrading performance in CIBM in the third quarter versus that achieved in thefirst half of the year. Underlying risk adjusted revenue growth on a year-to-datebasis remained ahead of underlying cost growth. Loan impairment charges in the third quarter were modestly up on both thetrailing quarter and the prior year quarter. The following trends are highlighted in order to amplify the above commentary: Underlying revenue growth in Personal Financial Services moderated slightly inthe third quarter from that achieved in the first half of the year due toseasonal factors, slower loan growth and pressure on lending margins in manymarkets. Continuing buoyant stock market activity boosted wealth managementbusiness in Hong Kong and the Rest of Asia and the impact of higher interestrates boosted deposit margins and the value of free funds versus the prior yearcomparable period. Within the UK, continuing high levels of consumer indebtedness together with thecontinuing growth in personal bankruptcies and Individual Voluntary Arrangements'IVAs' have led to a more restricted credit appetite. This has led to slowerunsecured lending growth with consequentially lower revenues from credit relatedinsurance. The trend of rising personal bankruptcies and IVAs seen since thesecond half of 2005 looks unlikely to abate in the medium term and continues tobe the major influence on loan impairment charges in personal loans and creditcards. HSBC in the UK continued to grow strongly in the area of savings productsand in transactional accounts, within which fee bearing packaged accounts aregrowing on an accelerating basis. In the United States, the solid performance in Consumer Lending and Cards withinHSBC Finance continued. Loan delinquency and impairment trends remained in linewith recent historical experience but increased against the first half of theyear, principally as a result of a combination of factors, namely growth andseasoning of the portfolio, the declining beneficial impact derived from theacceleration of bankruptcy brought about by the change in bankruptcy law inOctober, 2005 and the impact of a weaker housing market. Challenges continue in the Mortgage Services operations, particularly in secondlien and stated income products purchased in 2005 and 2006, which continue to bemonitored. Tighter underwriting and pricing criteria have led to a significantreduction in the volume of higher risk mortgages purchased. Outstanding balanceswithin this operation were flat at the end of the third quarter compared to theposition at the half year. This slowdown in growth of the Mortgage Servicesportfolio will of itself lead to higher reported delinquency percentages as theportfolio seasons and will constrain revenue growth. Going forward, a stronger linkage between Mortgage Services and the MortgageBacked Securities Desk within HSBC's CIBM operations in New York is likely tolead to a lower volume of Mortgage Services production being retained. HSBC Finance 2+ delinquency at 30 September 2006 was 4.02 per cent compared with3.61 per cent at 30 June 2006. We expect this trend to continue in the fourthquarter and again to occur predominantly within the Mortgage Services portfoliowhere 2+ delinquency was 3.74 per cent at 30 September 2006 versus 2.95 per centat 30 June 2006^. Excluding Mortgage Services, HSBC Finance 2+ delinquency hasbeen relatively stable but is expected to increase in the fourth quarter as aconsequence of the factors set out above. In the Rest of Asia Pacific, the high level of loan impairment charges taken inthe second quarter of 2006 in respect of credit card lending in Taiwan andIndonesia did not repeat to anything like the same extent in the third quarterleading to substantially improved performances in these countries. HSBC's Commercial Banking businesses performed well across all geographicregions in the third quarter and continued to achieve revenue growth ahead ofcost growth. Profitability also continued to benefit from a benign commercialcredit environment. Growth continued to be driven from Asia, including HongKong, on the back of strong trade flows, lending growth to support, inter alia,infrastructure and project development in the Middle East and growing investmentfrom Hong Kong into mainland China, in particular the Pearl River Delta, as wellas higher value derived from transaction and deposit balances on higher interestrates. On a year-to-date basis, underlying pre-tax profits in Corporate, InvestmentBanking and Markets ('CIBM') were well ahead of the prior year, driven inparticular by revenue growth in the key product areas within the Global Marketsbusiness where investment has been made and by consistently strong performancesthroughout the period in Global Transaction Banking and Group InvestmentBusinesses. CIBM however delivered a weaker third quarter relative to its very strong firsthalf performance largely as a result of reduced trading revenues, reflecting theseasonal trend in lower volumes from institutional and corporate clients andless volatile market conditions as well as lower balance sheet managementrevenues in the continuing flat interest rate yield curve environment. However,the rate of decline in balance sheet management revenues slowed in the thirdquarter. Disposal gains were also lower in the third quarter due primarily tothe non-recurrence of the sale of specialist property and infrastructure fundinvestments by Group Investment Businesses. CIBM's success in gaining market share and recognition for its expanded productcapabilities remained evidenced by stable or improved rankings in core productareas during the third quarter in the global league tables which are nowpublished with each set of results. In addition, performance within emergingmarkets and delivering emerging market product to the developed marketscontinued to show strong growth. Private Banking maintained its strong momentum in Q3, in part through furthergains on a part disposal from its remaining interest in the Hermitage Fund. On ayear-to-date basis, Private Banking has surpassed the level of pre-taxprofitability achieved in the full year 2005. In October, HSBC Finance entered into an agreement to sell its entire residualinterest in Kanbay International, Inc a software house operating in India. Thetransaction closed in November and resulted in a pre-tax gain of approximatelyUS$123 million. HSBC completed the acquisition of 99.98 per cent of Grupo Banistmo S.A., theleading banking group in Central America, on 23 November. The acquisitioncomplements HSBC's existing operations in the region, in particular in Panamawhere the Group already provides services to personal and corporate customersthrough 19 branches, and establishes a presence in five new markets - Colombia,Costa Rica, El Salvador, Honduras and Nicaragua. The Group's tier 1 and total capital ratios remained broadly in line with thosedisclosed at the half year. The outlook for the rest of the year suggests a continuation of the broad trendsnoted above. In terms of credit experience, impairment in respect of corporatelending remains exceptionally benign and credit spreads remain near or at recordlow levels. Consequently, HSBC's corporate credit appetite in many marketsremains selective in light of this historically low risk pricing which couldreverse in the event of market disruption. The main risks in the near termremain in personal lending portfolios in the United States where progressiveincreases in short term interest rates will impact borrowers who have adjustablerate mortgages that are now resetting. In addition, further weakness in thehousing market, lower consumption and lower employment also pose potential risk. Asia, including Hong Kong, continues to offer the strongest growth prospects forHSBC in the near term, together with the resource rich economies of LatinAmerica and the Middle East, all linked in part to the strong growth in theChinese economy and its impact on its trading partners. The Group's capital strength and liquidity remain sound and the diversificationof revenues and risk across some 81 countries means that we remain well placedto respond to opportunities or deal with challenges as they arise. HSBC's results for the year ending 31 December 2006 will be announced on Monday5 March 2007. Conference call details The conference call is being hosted by Douglas Flint, Group Finance Director,and will be accessible by dialling the following local telephone numbers: UK: 020 7947 5061US: 1 866 432 7186Hong Kong: 800 933 370 (Hong Kong freephone) A recording of the conference call will be available for two days (until 7December 2006) shortly after the live event by dialling the following localreplay access telephone numbers: UK: 020 8196 1988UK 0800: 0800 633 8453Hong Kong: 800 901 878US: 1 866 583 1035 Replay Access Code: 789338# On 6 December 2006, the replay will also be accessible on HSBC's website byfollowing this link: http://www.hsbc.com/hsbc/investor_centre. Notes^ HSBC Finance and Mortgage Services 2+ delinquency rates are on IFRS Managementbasis. The equivalent US GAAP management basis ratios are 3.99 per cent at 30September 2006 and 3.57 per cent at 30 June 2006, and 3.67 per cent at 30September 2006 and 2.84 per cent at 30 June 2006 for Mortgages Services only. Forward-looking statementsThis presentation and subsequent discussion may contain certain forward-lookingstatements with respect to the financial condition, results of operations andbusiness of the Group. These forward-looking statements represent the Group'sexpectations or beliefs concerning future events and involve known and unknownrisks and uncertainties that could cause actual results, performance or eventsto differ materially from those expressed or implied in such statements.Additional detailed information concerning important factors that could causeactual results to differ materially is available in our Annual Report. Note to editors: HSBC Holdings plcHSBC Holdings plc serves over 125 million customers worldwide through some 9,500offices in 81 countries and territories in Europe, the Asia-Pacific region, theAmericas, the Middle East and Africa. With assets of US$1,738 billion at 30 June2006, HSBC is one of the world's largest banking and financial servicesorganisations. 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