HSBC 2003 Annual Report Download - page 39

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In the following discussion, the phrase ‘on an
underlying basis’ is used to describe performance
excluding the acquisitions of Household and
HSBC Mexico.
HSBC made a profit on ordinary activities
before tax of US$12,816 million in 2003, an increase
of US$3,166 million, or 33 per cent, compared with
2002. Household and HSBC Mexico accounted for
over 70 per cent of this increase. Household
contributed US$1,827 million in its first nine
months, while HSBC Mexico contributed US$441
million in its first full year.
Excluding goodwill amortisation, Household
and HSBC Mexico contributed US$2,208 million
and US$534 million respectively to profit before tax,
which grew by US$3,888 million or 37 per cent to
US$14,401 million. Underlying growth, on a
constant currency basis, was 7 per cent. Goodwill
amortisation increased by US$722 million to
US$1,585 million in 2003, reflecting acquisitions,
currency movements and the write down of goodwill
attributed to a fund management company previously
acquired as part of the CCF acquisition.
Net interest income of US$25,598 million in
2003 was US$10,138 million, or 66 per cent, higher
than in 2002. Of this increase, Household contributed
US$8,305 million and HSBC Mexico
US$874 million. Excluding these acquisitions, and in
terms of constant currency, net interest income was
marginally higher. This reflected a number of
offsetting factors. The net interest margin benefited
from the change in asset mix, with growth of over
80 per cent in the year in personal lending, mainly in
the US (including Household) and in Europe.
However, deposit margins fell as interbank
placements matured and were redeployed at lower
yields. Growth in the volume of deposits raised only
partially compensated for this, while the impact of
the Competition Commission ruling on paying
interest on qualifying small business accounts in the
UK cost US$136 million. Net interest income
declined in Hong Kong, reflecting spread
compression on the value of deposits and continued
pressure on mortgage margins.
Other operating income of US$15,474 million
was US$4,339 million, or 39 per cent, higher than in
2002. Household contributed US$1,878 million and
HSBC Mexico US$599 million of this increase. The
acquisitions of Household and HSBC Mexico
reduced the proportion of fee revenues exposed to
stock market levels by bringing into the Group
significant levels of account service fees (HSBC
Mexico) and credit card fee income (Household).
Fees from credit cards now constitute close to 24 per
cent of total fees receivable compared with 13 per
cent in 2002. This will increase in 2004 as
Household is consolidated for a full year. On an
underlying basis, and at constant currency, the
increase was 9 per cent. Strong growth in dealing
profits in HSBC Markets benefited from investment
made in 2002 and 2003 to upgrade dealing room
capabilities in the major centres and broaden the
range of products offered to customers. Debt trading
benefited from favourable credit spread movements.
Foreign exchange revenues increased due to currency
volatility and increased levels of corporate sales. In
addition, higher income was earned from increased
demand from corporate customers for structured
tailored products. In constant currency, fees and
commission income increased by 4 per cent on an
underlying basis, reflecting growth in income from
card transactions, insurance and lending.
Operating expenses, excluding goodwill
amortisation, rose US$6,128 million, or 41 per cent,
of which Household contributed US$3,406 million
and HSBC Mexico US$881 million. Excluding the
effect of these acquisitions, and expressed in terms of
constant currency, operating expenses increased by
5 per cent, primarily due to increased employment
costs. Pension costs and social taxes, together with
restructuring costs, added over US$300 million to
employment costs in 2003. HSBC’s cost:income
ratio, excluding goodwill amortisation, decreased to
51.3 per cent from 56.2 per cent in 2002.
The charge for bad and doubtful debts was
US$6,093 million in 2003, US$4,772 million higher
than in 2002. This was essentially all attributable to
the acquisitions, with Household accounting for
US$4,575 million and HSBC Mexico
US$110 million. On an underlying basis, and in
constant currency, the increase in provisioning was
around 2 per cent. Credit charges increased in line
with the growth in personal lending, and the
commercial customer base continued to perform
well. New corporate provisions increased in Europe
in the engineering and power sectors, and in Hong
Kong in the electronics sector, but these were partly
offset by a lower charge in North America reflecting
the improved credit environment.
Other charges of US$44 million in 2003 were
US$63 million, or 59 per cent, lower than in 2002.