HSBC 2003 Annual Report Download - page 70

HSBC HOLDINGS PLC
Financial Review (continued)
68
Year ended 31 December 2003 compared with
year ended 31 December 2002
The UK economy expanded by 2.3 per cent in 2003.
After a slow first six months, growth accelerated in
the third quarter and that momentum continued into
the final months of the year. Growth in consumer
spending slowed during the course of the year but
nevertheless remained robust and, in particular, the
housing market and household appetite to borrow
remained strong. However, low real income growth,
together with the expectation of further rises in
interest rates, are expected to dampen household
activity in the forthcoming months. Elsewhere, there
are a few encouraging signs that industrial activity in
particular and corporate confidence in general is
starting to improve from a low base. Going forward,
stronger global demand, if maintained, should
provide a boost to the corporate sector.
Having slipped into recession in the first half of
the year, the eurozone economy returned to growth in
the second half, expanding by 0.4 per cent
quarter-on-quarter in the third quarter and by 0.3 per
cent in the fourth quarter. Once again, however, it
was stronger exports that drove the third quarter
improvement, while the domestic economies
remained subdued. Consumer spending was flat and
investment contracted for the third consecutive
quarter. The pick-up in exports occurred despite the
appreciating euro, which rose more than 16 per cent
against the US dollar during the course of the year. In
the fourth quarter, growth seemed to have been
largely the result of inventory build up, with exports
falling back after the strength of the third quarter,
and with limited growth in consumer spending.
Interest rates were cut twice during 2003, with the
European Central Bank’s repo rate dropping by 75
basis points to 2 per cent. By contrast, however,
longer-term interest rates have moved higher, rising
by about 80 basis points between June and the end of
December, as the bond market anticipated economic
recovery.
In 2003, personal credit expansion in the UK
was the major growth area as consumers took
advantage of historically low interest rates, enabling
HSBC to generate strong growth in mortgages and
consumer lending. Conversely, sales of investment
and pension products fell, reflecting a lack of
confidence in equity markets. In this environment,
HSBC grew its deposit base as customers sought
flexibility and security for their savings,
notwithstanding the low interest rates available. The
low interest rate environment also meant that the
value of HSBC’s maturing liquidity reduced as it was
redeployed in lower yielding assets.
The same factors, low interest rates and weak
equity markets, increased the cost of pension
provision by US$96 million in the UK. Employment
costs also grew, notably in the UK, as social taxes
were raised. In order to adjust for this higher cost
environment, HSBC took steps to reduce its staff
costs, announcing both 1,400 redundancies in the UK
and the shift over the next three years of 4,000
positions to the Group Service Centres. In the short
term these actions incurred both redundancy and
excess property provisioning costs totalling over
US$176 million.
European operations contributed pre-tax profit
of US$3,969 million in 2003 compared with
US$3,500 million last year. Excluding goodwill
amortisation, European operations contributed
pre-tax profit of US$4,862 million and represented
around one-third of HSBC’s total profit on this basis.
At constant exchange rates, and excluding the
US$157 million contribution from HFC, which was
the only major change in the composition of the
Group in Europe, pre-tax profit, excluding goodwill
amortisation, was 2 per cent higher than last year.
Goodwill amortisation of US$893 million increased
by US$233 million compared with 2002, mainly
reflecting a goodwill write-down in respect of a UK
fund management company previously acquired as
part of the CCF acquisition, and exchange rate
movements.
The commentaries that follow are based on
constant exchange rates.
Pre-tax profit, before goodwill amortisation, of
US$1,267 million in Personal Financial Services,
excluding Consumer Finance, was 16 per cent higher
than in 2002, reflecting strong growth in UK
mortgage and consumer lending, and in deposit-
taking activities.
Net interest income increased by 10 per cent,
driven by strong growth in mortgages and personal
lending in the UK and, to a lesser extent, in France.
The net interest margin fell modestly as rates
remained at historically low levels. However,
balance sheet growth more than compensated for
this. UK mortgage balances increased by 25 per cent
to US$37.4 billion, as borrowers continued to take
advantage of the low interest rate environment to
refinance their mortgages. In France, a similar