HSBC 2003 Annual Report Download - page 114

HSBC HOLDINGS PLC
Financial Review (continued)
112
interest rates and unemployment reduced customers’
repayment capacity. However, credit quality began to
show signs of improvement in the second half of the
year.
Commercial Banking in South America
contributed pre-tax profit, before amortisation of
goodwill, of US$99 million, 23 per cent higher than
in 2002.
Net interest income increased by 39 per cent, to
US$168 million. In Argentina, net interest income
benefited from lower Argentine peso rates paid on
deposits and recoveries of interest suspended on non-
performing loans. In Brazil, successful marketing
campaigns led to a significant growth in income
from overdrafts and working capital products. Other
growth areas included discounted receivables and
vehicle leasing, supported by the introduction of pre-
approved facilities.
Other operating income increased by 23 per cent
to US$115 million. Credit related fee income in
Brazil increased, reflecting the expansion in the
current account customer base by 8 per cent. Fees
earned on foreign exchange rose from a higher
volume of transactions. In response to aggressive
pricing by competitors, the introduction of a new fee
pricing structure in the first half of 2003 stimulated
an increase in the volume of loan fees and funds
under management leading to higher fee income.
At US$173 million, total operating expenses,
before goodwill amortisation, were 25 per cent
higher than 2002. The cost increases partly reflected
increased business volumes as well as the impact of
various initiatives which had been delayed pending
evidence of improvement in economic conditions.
These included increased advertising, the
implementation of a sales structure to support
business development, and investment in new
products and delivery channels. These were partly
funded by the centralisation of support processes
which resulted in a reduction of associated costs and
reduced the administrative workload for relationship
managers, leaving them more time for their
customers.
Corporate, Investment Banking and Markets
reported a loss, before amortisation of goodwill, of
US$24 million, broadly in line with 2002, at constant
exchange rates. Profit before tax and amortisation of
goodwill in Brazil was US$49 million, compared
with US$104 million in 2002. Argentina recorded a
loss of US$72 million compared with a loss of
US$143 million in 2002.
Net interest expense was US$51 million, an
increase of 16 per cent compared with 2002. In
Brazil, net interest income decreased due to lower
spreads in Global Markets, partly offset by the
impact of downward yield curve movements which
allowed the funding of long positions at lower rates.
In corporate banking, a lack of attractive risks
restricted lending growth. In Argentina, the lower
cost of funding non-performing assets and a lower
level of suspended interest resulted in a decrease in
net interest expense.
Dealing profits were broadly in line with 2002.
In Brazil, higher dealing profits reflected gains
resulting from a fall in interest rates. Brokerage,
custody and clearing businesses also grew
significantly, taking advantage of market
opportunities. These factors were offset in part by
lower foreign exchange income in Argentina.
Staff costs were higher than in 2002, mainly in
Brazil, reflecting improved performance in specific
products.
Provisions for bad and doubtful debts rose in
difficult market conditions. Higher interest rates,
currency weakness, and a reduced availability of
foreign currency funding all contributed to problems
encountered by corporate customers in the first half
of 2003 in Brazil. Although the situation improved
during the year, new specific provisions were raised
against two sizeable corporate accounts as a
consequence of business failure in one case and
fraud in the other.
Private Banking’s pre-tax loss, before goodwill
amortisation, of US$2 million compared with a loss
of US$12 million in 2002. A lower bad debt charge
reflected an improvement in the overall credit quality
of the segment.
Within the Other customer group, there was a
US$113 million release of general provision raised in
respect of Argentina. This release followed a period
of improved market conditions and collections
within the lending portfolios.
Provisions for contingent liabilities and
commitments reflected court decisions (amparos)
relating to formally frozen US dollar denominated
customer deposits required to be settled at the
prevailing market rate.