HSBC 2003 Annual Report Download - page 105

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expenditure but was partly funded by lower costs in
the securities trading and debt capital markets
business, elements of which were wound down.
Credit experience on major corporate customers
in the US was better in 2003. Many accounts which
were potentially problematic at the end of 2002 were
successfully refinanced and restructured in the strong
debt market at the start of 2003. Elsewhere, credit
quality remained satisfactory and consequently, on
an underlying basis, there was a net release of
US$7 million for bad and doubtful debts.
Profits on disposal of investments, on an
underlying basis, were US$57 million, a decline of
53 per cent compared with 2002, which included a
higher level of securities disposals arising from the
restructuring of investment portfolios.
HSBC’s Private Banking operations in North
America contributed US$63 million to pre-tax
profits, before goodwill amortisation, an increase of
11 per cent compared with 2002.
During the year the North American business
continued its evolution from a deposit-based
business to broader wealth advisory service, with a
resulting shift from net interest income to fees and
commissions. Despite this, net interest income was
3 per cent higher than 2002, reflecting an improved
funding environment in 2003.
An increase in net fees and commissions and
other income of US$52 million, or 37 per cent,
mainly reflected the benefit from increased
investment activity by clients and a greater emphasis
on fee-based non-discretionary advisory and
structured products. In addition, WTAS (HSBC’s tax
advisory service for high net-worth clients), in its
first full year of operation, contributed to this
increase.
The inclusion of WTAS was the principal
contributor to the US$48 million increase in
operating expenses, before goodwill amortisation.
Cost savings from the alignment of international and
domestic client servicing units offset higher staff and
restructuring costs. Excluding this operating
expenses were essentially flat year-on-year.
Year ended 31 December 2002 compared with
year ended 31 December 2001
The United States economy showed signs of
improvement in 2002 following a deterioration in
2001, as low interest rates and fiscal stimulus helped
to boost the housing, manufacturing and consumer
sectors. GDP growth was 2.4 per cent compared with
1.1 per cent in 2001. However, growth prospects
remained unclear, as equity markets remained
subdued, and levels of corporate and consumer debt
remained high. The dollar weakened throughout the
year, reflecting investor concerns about investment
returns from the US.
The Canadian economy continued to outperform
its fellow G7 members, with GDP growth of 3.3 per
cent in 2002. This was driven by strong growth in
employment, and increased levels of retail sales.
However, in response to fears about strong consumer
spending and increasing inflation, interest rates
showed upward pressure. It was expected that the
Canadian economy would be slowed by the
performance of the US economy during 2003.
Economic growth in Mexico also remained
subdued, relying on the US economy for 25 per cent
of its GDP. However, growth in industrial output was
an encouraging sign for Mexico’s future prospects.
Although the devaluation in the value of the peso had
increased inflationary pressures, the economic
indicators in 2002 did not appear to present cause for
concern with regard to Mexico’s creditworthiness.
HSBC’s operations in North America
contributed US$1,413 million to operating profit
before provisions, up US$153 million, or 12 per cent,
compared with 2001. Profit before tax increased by
US$735 million to US$1,238 million. Goodwill
amortisation at US$146 million was in line with
2001. Operating performance was driven by strong
growth in net interest income in 2002, which
benefited from low funding costs as interest rates
remained at historically low levels. The 2001 results
bore the exceptional costs of the Princeton Note
Settlement.
The commentaries that follow are based on
constant exchange rates.
Personal Financial Services in North America
reported a pre-tax profit, before goodwill
amortisation, of US$605 million, 3 per cent higher
than in 2001. The continued growth in the mortgage
business and higher brokerage and insurance sales
contributed to a significant increase in operating
income. This was partially offset by higher IT costs
reflecting increased business volumes and systems
development.