HSBC 2003 Annual Report Download - page 115

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Year ended 31 December 2002 compared with
year ended 31 December 2001
2002 was a year of uncertainty in both Brazil and
Argentina. Although the Argentine government had
been in talks with the International Monetary Fund
and World Bank for over a year, an agreement on the
resumption of lending had yet to be reached. The
Argentine economy experienced its fourth successive
year of recession with a large contraction in GDP,
falling 12 per cent, and unemployment continuing to
rise. However, some stability was introduced
towards the end of 2002, as the peso began to
appreciate from its lows as fears of hyperinflation
began to recede and a significant trade surplus
emerged. Elections were expected to take place in
the second quarter of 2003.
Brazil avoided major fall-out from the collapse
of the Argentine economy and steadily improved its
current account position by growing its trade surplus
with the rest of the world. Uncertainty over the
outcome of presidential elections held in the second
half of 2002 led to a sharp depreciation in the value
of the real and upward pressure on interest rates in
the first half of the year. The newly elected
government quickly stated its commitment to fiscal
discipline, leading to improved stability, lower
interest rates and a stronger currency towards the end
of 2002.
HSBC’s operations in South America reported
an operating profit before provisions, of
US$157 million, compared with US$434 million in
2001. Excluding goodwill amortisation, operating
profit before provisions was US$181 million,
compared with US$448 million in 2001. At constant
exchange rates, operating profit before provisions
and excluding goodwill amortisation was 43 per cent
lower than in 2001. Losses before tax excluding
goodwill amortisation improved substantially to
US$34 million, compared with a loss of
US$1,002 million in 2001. Goodwill amortisation
was US$24 million compared with US$14 million.
The increase reflects the write-off by HSBC of the
remaining goodwill that arose on the purchase of its
insurance subsidiaries.
The commentaries that follow are based on
constant exchange rates.
In Personal Financial Services there was a
pre-tax loss, before goodwill amortisation, of
US$33 million, compared with a profit of
US$62 million in 2001.
Net interest income of US$539 million was
31 per cent higher than in 2001. Competitive pricing
initiatives and targeted marketing campaigns led to
strong growth in personal lending products in Brazil,
particularly personal overdrafts and credit cards. In
Argentina, margins deteriorated reflecting the effect
of the severe economic conditions and the impact of
non-performing loans.
Other operating income decreased by 12 per
cent compared with 2001. In Brazil, the decline in
fee income reflected competitive pricing initiatives
and the loss of revenue from account fees, as the
Brazilian government had outlawed the levying of
fees on certain accounts. This was partly offset by
strong growth in credit-related fee income. Net
revenues from the insurance businesses in Argentina
fell considerably as HSBC was obliged to
renegotiate a number of contracts as a result of the
mismatch between premiums and claims arising
from the pesification of assets and liabilities.
Operating expenses, before goodwill
amortisation, rose by 33 per cent to US$691 million,
as savings from a reduction in headcount were offset
by related severance payments. Staff costs were
higher in Brazil, partly due to an increase in
inflation-linked pension costs and an industry-wide
union-agreed salary increase. Other administration
expenses increased as a result of higher levels of
transactional taxation, including an additional tax
imposed on foreign companies.
The provision for bad and doubtful debts of
US$100 million was slightly lower than in 2001.
New provisions raised in Brazil to reflect the
increased level of personal lending were more than
offset by a number of releases, particularly in the
credit card portfolio, reflecting the bank’s pro-active
management of its personal loan book.
Commercial Banking in South America
contributed pre-tax profit, excluding goodwill
amortisation, of US$79 million, compared with a
small reported loss in 2001.
Net interest income was broadly in line with
2001. Other operating income increased, reflecting
strong growth in credit-related fee income in Brazil.
Total operating expenses before goodwill
amortisation rose by 36 per cent, to US$147 million,
in 2002. Staff costs increased, mainly due to higher
pension and salary costs in Brazil and severance
payments in Argentina.