HSBC 2003 Annual Report Download - page 84

HSBC HOLDINGS PLC
Financial Review (continued)
82
free funds and the investment portfolio reflected
falling interest rates while the flattening of the yield
curve during the year meant that the significant
income earned on longer dated assets in 2002 was
not repeated. This more than offset the impact of an
increase in lending balances as clients borrowed on
margin against their investments to reinvest in higher
returning securities.
A general improvement in investment markets in
the second half of the year saw greater client activity
across a range of products. Brokerage, trust services
and safekeeping all benefited from the upturn in the
markets, and associated fee and commission income
increased by 19 per cent to US$87 million. Greater
market activity also stimulated higher sales of
tailored structured products for clients and higher
volumes of debt securities and derivatives
transactions, resulting in a 68 per cent increase in
dealing profits. Overall, other operating income
increased by 31 per cent to US$164 million.
Total operating expenses grew by US$9 million
or 8 per cent, reflecting a rise in headcount to support
increased client activity and the migration of regional
support from Singapore to Hong Kong during the
year. There was also higher performance-related
remuneration in line with increased profits.
Year ended 31 December 2002 compared with
year ended 31 December 2001
Hong Kong continued to suffer from deflation in
2002 and domestic demand remained subdued. An
improvement in trade failed to stimulate demand, as
unemployment increased and salaries fell.
Against this backdrop, HSBC’s operations in
Hong Kong reported an operating profit, before
provisions, of US$3,911 million, an increase of
US$34 million, or 1 per cent, compared with 2001,
largely through income growth from wealth
management products. Pre-tax profit of
US$3,710 million was US$173 million, or 4 per cent,
lower than in 2001 due to a higher bad debt charge
and lower investment disposal gains and represented
35 per cent of HSBC’s pre-tax profit on this basis.
There was no goodwill amortisation in Hong Kong
during 2002 and 2001.
Personal Financial Services reported pre-tax
profit, before goodwill amortisation, of US$1,705
million, US$74 million, or 5 per cent, higher than
2001. The improvement was driven by growth in
revenues from wealth management products and
increased card fee income. Significantly higher
personal bankruptcy filings during the year resulted
in additional provisions for credit card accounts
compared with 2001.
Net interest income at US$2,364 million was
broadly in line with 2001. The benefits of increased
credit card and mortgage lending together with
improved spreads from lower funding costs were
largely offset by competitive pricing on residential
mortgages and a lower benefit from free funds.
In another year of fierce competition for quality
assets and increasing consumer loan write-offs in
Hong Kong, HSBC maintained a strong
performance. Including cards issued by Hang Seng
Bank, HSBC remained the largest personal credit
card issuer in Hong Kong with 2.8 million cards in
circulation and led the market in cardholder spending
and balances. The implementation in 2001 of an
enhanced card processing system and continued
migration of work to HSBC’s Group Service Centres
in Guangzhou enabled operational efficiency to be
further improved.
Other operating income at US$1,048 million
grew by 19 per cent, compared with 2001, driven by
growth in revenues from initiatives related to
investment products and the insurance business.
Sales of unit trusts and capital guaranteed funds were
strong, including the sale of over US$4.9 billion of
funds during the year, a rise of 36 per cent compared
with 2001. Revenues from insurance and
underwriting also increased significantly.
HSBC had grown to be one of the leading
distributors of retail funds in Hong Kong by the end
of the year. In 2002’s uncertain investment market,
HSBC achieved significant growth in the sale of unit
trusts through the promotion of 14 guaranteed/capital
secured funds designed to meet customers’ demands
for capital protection. In the low interest rate
environment, HSBC also introduced a range of
alternative deposit products. There was strong
growth in funds under management, which rose
68 per cent compared with 2001.
The insurance business remained a key focus in
HSBC’s strategy in Hong Kong. Significant growth
in personal insurance was achieved, outpacing
market growth and giving HSBC a larger market
share of new business.
Costs in Hong Kong were in line with 2001. The
increased cost of continuing marketing initiatives and