HSBC 2003 Annual Report Download - page 50

HSBC HOLDINGS PLC
Financial Review (continued)
48
Year ended 31 December 2003 compared with
year ended 31 December 2002
Growth in operating expenses of US$6,724 million,
or 43 per cent, principally reflected the acquisitions
of Household, US$3,787 million, and HSBC
Mexico, US$964 million. Excluding the impact of
these acquisitions and expressed in terms of constant
currency, underlying operating expenses, excluding
goodwill amortisation, were 5 per cent higher than in
2002. Virtually all of this growth was in staff costs,
reflecting restructuring costs, higher social taxes and
pension costs. In addition, Corporate, Investment
Banking and Markets incurred higher costs reflecting
expansion of the business and increased profitability.
Notwithstanding this growth, the cost:income ratio of
Corporate, Investment Banking and Markets
improved by 3 per cent to 48.9 per cent. HSBC’s
cost:income ratio excluding goodwill amortisation
was 51.3 per cent for 2003, compared with 56.2 in
2002. Excluding Household, the cost:income ratio
was 57.2 per cent.
In 2003, HSBC’ s Group Service Centre in
Malaysia became operational. Overall, the Group’ s
Global Resource centres now employ in excess of
8,000 employees.
In Europe, costs excluding goodwill
amortisation increased by US$1,651 million
compared with 2002, of which Household
contributed US$299 million. At constant exchange
rates and excluding Household and goodwill
amortisation, expenses were 5 per cent higher than in
2002. This increase in expenses was primarily due to
higher pension provision and employment costs,
particularly in the UK, where social taxes were
raised. Redundancy and property provisioning costs
also increased, as HSBC restructured and relocated
positions to the Group Service Centres in order to
reduce its long-term staff costs. In addition, higher
bonus accruals reflected stronger Global Markets
revenues.
Operating expenses in Hong Kong, excluding
goodwill amortisation, were marginally higher than
in 2002. Increased staff costs were mainly
attributable to higher performance-related bonuses,
reflecting strong Global Markets performance, and
provisions for restructuring costs. Marketing
expenses also rose in Personal Financial Services as
Hong Kong’s economy rebounded after SARS
abated. These increases were partly offset by
reductions in staff numbers in Hong Kong as HSBC
continued its policy of migrating back office
processing functions to the Group Service Centres.
In the rest of Asia-Pacific, costs in 2003,
excluding goodwill amortisation, increased by
US$213 million, or 14 per cent, compared with 2002.
At constant exchange rates, the increase was 9 per
cent, primarily from recruitment to support business
expansion, branch opening costs, acquisitions and
provisions for restructuring. In addition, the
continued migration of processing activities from
other regions to the Group Service Centres in India,
Malaysia and mainland China added to costs.
In North America, operating expenses, excluding
goodwill amortisation, increased by US$284 million,
or 11 per cent, in 2003 excluding Household and
HSBC Mexico. This increase was largely driven by
higher staff costs, namely pension and healthcare
provisions, performance-related incentives, and
expenses associated with long-term restructuring
programmes. In the US during 2003, severance costs
of US$47 million were recorded for expense
reduction initiatives, global resourcing moves and
Household integration efforts, a US$28 million
increase over the prior year. In addition, costs rose
from the first full year inclusion of HSBC’s high net
worth personal tax advisory business. These
increases were partly offset by the benefits obtained
from discontinuing certain of HSBC’s government
and agency securities arbitrage operations in the US,
and from business disposals.
In South America, operating expenses, excluding
goodwill amortisation, were broadly in line with
2002. At constant exchange rates and excluding
goodwill amortisation, costs were 6 per cent higher
than in 2002. The rise in Brazil was due to higher
staff costs, driven by increases in labour claims,
together with higher marketing costs and increased
transaction taxes on higher operating income as the
personal lending portfolio was expanded. In addition,
the Group’s newly acquired businesses in Brazil
added to cost growth. Costs in Argentina were down
on 2002, mainly because of lower severance costs.
Year ended 31 December 2002 compared with
year ended 31 December 2001
Operating expenses in 2002 were US$404 million, or
3 per cent, higher than in 2001. The increase
reflected organic growth, acquisitions made during
2002, and the full year effect of acquisitions and the
expansion of business activities in 2001, particularly