HSBC 2003 Annual Report Download - page 83

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goodwill, of US$711 million, a fall of US$22
million, or 3 per cent.
Net interest income declined by 7 per cent
largely due to lower recoveries of suspended interest
and the effect of lower spreads on deposits. There
was good volume growth in the loan book, despite
the impact of SARS and the war in Iraq. This was
offset by narrower spreads caused by limited local
investment and market pressure as banks competed
for quality business. Loan growth was driven by
increased demand for finance to support record trade
flows between mainland China and the rest of the
world, especially in the US. This was particularly
evidenced in the manufacturing and transportation
sectors. Several new business banking/trade service
centres were opened to focus on the business needs
of small and medium-sized customers and start-ups.
Other operating income rose by US$57 million,
or 14 per cent, reflecting growth in cash management
and trade services. Both benefited from the increase
in trade flows and closer liaison between branches of
the bank in Hong Kong and mainland China. This
was developed in order to service the growth of
investment in the Pearl River delta by Hong
Kong-based customers. Additionally, Hang Seng
Bank opened its first branch in Macau aimed at
assisting customers setting-up offices in the territory.
Results of this alignment were particularly
successful, with referrals significantly higher than
anticipated. Trade finance benefited from a campaign
specifically aimed at the increase in export trade
business which occurs during the peak summer
season. Insurance income rose as a consequence of
business expansion, increasing by 36 per cent.
Operating expenses were in line with 2002. Staff
costs increased marginally as headcount rose to
support the insurance business expansion. This was
offset by lower legal and professional fees.
Overall, credit quality remained stable reflecting
improved economic conditions in the latter part of
the year. There was a lower release in general
provisions in 2003 as last year benefited from a
reduction in latent losses.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$1,275 million, 4 per cent higher
than in 2002. Exceptional Global Markets
performance was partly offset by a shift from net
recovery to net charge for bad and doubtful debts.
Net interest income of US$1,157 million was
broadly in line with last year. Reduced corporate
lending spreads, which remained under pressure
throughout the year, and weak loan demand, were
mitigated by a strong Global Markets performance.
Global Markets benefited from successful interest
rate positioning and an increased value of funds was
switched to debt securities from interbank
placements in order to enhance yields.
Other operating income grew strongly to
US$648 million, an increase of US$184 million or
40 per cent. This was achieved through a significant
increase in dealing profits to US$205 million. HSBC
significantly expanded its derivatives capabilities and
higher income was earned from both successful
positioning and a growing demand from corporate
customers for structured tailored solutions. Increased
sales of structured transactions, offering yield
enhancement products to retail clients, generated
further revenue. Debt securities trading achieved a
strong turnaround in income during the year, as
losses caused by widening credit spreads in 2002 did
not recur. Foreign exchange profits rose compared
with 2002, with a significant increase in corporate
sales. Trading profits were generated as the bank
took advantage of US dollar volatility, and the
general weakening of the US dollar during the year.
This was partly offset by lower Corporate and
Investment Banking fees and commissions reflecting
a decrease in income from credit facilities.
Operating expenses, before goodwill
amortisation, increased by 5 per cent to US$491
million, with the significant increase in Global
Markets’ profitability reflected in higher
performance-related staff costs.
There was a net charge for bad and doubtful
debts of US$52 million compared with a release of
US$68 million in 2002. This was primarily due to
new specific provisions raised against two corporate
accounts.
HSBC’s Private Banking activities in Hong
Kong reported pre-tax profit, before goodwill
amortisation, of US$127 million, an increase of
19 per cent over 2002. Funds under management
grew by 12 per cent to US$56 billion, benefiting
from US$7 billion of net new funds as clients moved
away from liquid positions into the investment
markets.
Net interest income declined by US$7 million,
or 8 per cent, to US$84 million. Lower margins from