HSBC 2003 Annual Report Download - page 106

HSBC HOLDINGS PLC
Financial Review (continued)
104
Net interest income rose by 8 per cent to
US$1,352 million of which US$60 million reflected
the inclusion of HSBC Mexico for the period
following its acquisition. Excluding HSBC Mexico,
the rise in net interest income reflected growth in
deposits and record mortgage banking activity.
Customers sought to minimise risks from volatile
equity markets, while homeowners took advantage of
the low interest rate environment to re-mortgage at
lower rates. The increase in spreads arising from
lower funding costs was partly offset by a lower
benefit from net free funds.
Excluding HSBC Mexico, which contributed
US$40 million, other operating income was 15 per
cent higher than in 2001, driven by growth in
brokerage and wealth management products and
successful re-pricing of account service charges.
Brokerage revenues increased by 32 per cent over
2001, due in part to sales of annuity products and
increased transaction volumes. Insurance revenue
also grew strongly. By the end of 2002, more than
1,500 professionals were licensed to sell insurance
and a number of annuity products through the retail
network in the US.
HSBC in Canada was rated highest for overall
quality of customer service among the banks
included in the ‘2002 Customer Service Index’ , an
independent study conducted annually by Market
Facts of Canada. HSBC Bank Canada introduced
‘clientCONNECT’ , a sales and service initiative
designed to improve client relationships. The bank
also completed the rollout of a Call Management
programme designed to remove routine tasks from
branches and enable staff to concentrate on
deepening relationships with customers.
Operating expenses, before goodwill
amortisation, increased by 19 per cent to US$1,172
million, of which US$72 million reflected the impact
of HSBC Mexico. The underlying increase of 11 per
cent was mainly due to increased revenue-related
staff costs and higher IT and marketing expenses. As
part of its strategy of providing customers with
multiple choices for product and service delivery,
HSBC offered a comprehensive internet banking
service in the US. By the end of the year, more than
405,000 customers had registered, up from
approximately 275,000 at the end of 2001. The
HSBC Bank USA website, us.hsbc.com, where
customers can apply for accounts, conduct financial
planning and link to online services, received
approximately 50,000 visits every day during 2002.
Commercial Banking in North America
reported pre-tax profit, before goodwill amortisation,
of US$435 million, an increase of 6 per cent,
compared with 2001. HSBC Mexico accounted for
US$6 million of this increase.
Net interest income was broadly in line with
2001. The effect of including HSBC Mexico was
offset by reduced net interest income in the US,
reflecting lower lending levels. On an underlying
basis, other operating income rose 8 per cent to
US$287 million, as a result of higher fees from
deposit services, credit and trade finance activity. A
repricing initiative on deposit account services
resulted in higher fee income in both the US and
Canada. Dealing profits fell in HSBC’s Mexican
operation following a decline in gains on exchange
valuations on the loan portfolio.
Operating expenses, on an underlying basis,
were slightly lower than in 2001 in both the US and
Canada, mainly due to operating cost controls and
one-off costs incurred in 2001. Provisions for bad
and doubtful debts were broadly in line with last
year. Despite the uncertain economic climate, the US
and Canada experienced fewer problem credits for
larger companies, though this was partly offset by
higher provisions in Panama.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$494 million, an increase of 15 per
cent, compared with 2001. This was primarily driven
by improved spreads in Global Markets in the low
interest rate environment. HSBC’s US securities
trading and debt capital markets business reported a
pre-tax loss of US$100 million. A significant
widening of credit spreads in the first half of the year
resulted in losses on bond holdings.
Net interest income increased by 53 per cent to
US$539 million. The principal driver of growth was
significantly reduced funding costs as the steeper
yield curve led to a 54 basis point increase in spread.
Global Markets benefited from the lower funding
costs. Net interest income in the debt capital markets
business weakened due to increased funding costs on
corporate bond trading portfolios.
Other operating income at US$557 million was
17 per cent lower than in 2001, mainly due to dealing
losses. Difficult conditions in the capital markets
prevented a recurrence of 2001’s strong dealing
profits and profits on domestic US dollar trading fell.
Partially offsetting the dealing losses were higher