HSBC 2003 Annual Report Download - page 59

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2003 2002
US$bn US$bn
Funds under management
At 1 January 2003 ............................... 306 284
Additions ............................................ 136 116
Withdrawals ....................................... (94) (86)
Value change ...................................... 25 (26)
Exchange and other ............................ 26 18
At 31 December 2003.......................... 399 306
Economic profit
HSBC’ s internal performance measures include
economic profit, a measure which compares the
return on the financial capital invested in HSBC by
its shareholders with the cost of that capital. HSBC
prices its cost of capital internally and the difference
between that cost and post-tax profit attributable to
ordinary shareholders represents the amount of
economic profit generated. Economic profit is used
by management as one of the measures to decide
where to allocate resources so that they will be most
productive. Internally HSBC emphasises the trend in
economic profit within business units rather than
absolute amounts in order to concentrate on external
factors rather than measurement bases. As a result of
this, HSBC has consistently used a benchmark cost
of capital of 12.5 per cent on a consolidated basis.
Given recent changes in interest rates and in the
composition of HSBC, HSBC believes that its true
cost of capital on a consolidated basis is now
approximately 10 per cent, and this rate will be
adopted from 2004 onwards within the Group’s new
strategic plan. HSBC has used the figure of 12.5 per
cent for the duration of the current five year strategic
plan period, which expired at the end of last year, in
order to ensure consistency and to help
comparability.
On this basis, economic profit increased fourfold
to US$934 million, compared with 2002, reflecting
the benefit of Household and HSBC Mexico in 2003
as well as organic improvement. Measurement of
economic profit involves a number of assumptions
and, therefore, management believes that the trend
over time is more relevant than the absolute
economic profit reported for a single period.
Year ended 31 December
2003 2002
US$m %1US$m4%1
Average shareholders' funds ................................................................................... 67,585 50,266
Add: cumulative goodwill written off and amortised .............................................. 8,172 6,554
dividends declared but not paid ...................................................................... 1,773 953
Less: property revaluation reserves ......................................................................... (1,824) (2,180)
Average invested capital2 ........................................................................................ 75,706 55,593
Profit after tax ......................................................................................................... 9,696 12.8 7,116 12.8
Add: goodwill amortisation .................................................................................... 1,585 2.1 863 1.6
depreciation charged on property revaluations ............................................... 38 – 80 0.1
Less: equity minority interest .................................................................................. (487) (0.6) (505) (0.9)
preference dividends ..................................................................................... (435) (0.6) (372) (0.7)
Return on invested capital3 ...................................................................................... 10,397 13.7 7,182 12.9
Benchmark cost of capital ....................................................................................... (9,463) (12.5) (6,949) (12.5)
Economic profit/spread ........................................................................................... 934 1.2 233 0.4
1Expressed as a percentage of average invested capital.
2Average invested capital is measured as shareholders’ funds after adding back goodwill amortised and goodwill previously written-off
directly to reserves and after deducting property revaluation reserves. This measure reflects capital initially invested and subsequent
profit (excluding goodwill amortisation).
3Return on invested capital is based on attributable profit excluding goodwill amortisation adjusted for depreciation attributable to
revaluation surpluses.
4Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240