HSBC 2004 Annual Report Download - page 101

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in increased commissions from futures transactions,
while structured finance and HSBC Amanah
benefited from higher transaction fees and new
deals. In Global Transaction Banking, higher
payment and cash management revenues reflected an
increase in volumes. Dealing profits benefited from a
reduced level of losses in respect of mortgage
hedging activities transacted on behalf of other
HSBC customer groups. These transactions resulted
in an offsetting reduction in other income. Although
credit spread volatility was relatively low,
movements in individual corporate spreads,
primarily in the industrials sector, adversely affected
corporate bond trading revenues. Global Markets
continued to benefit from the previous year’ s
expansion of derivatives capabilities and higher
profits from improved marketing and delivery of
structured solutions. Proprietary trading revenues
increased, mainly through profits on long futures
positions and foreign exchange gains which arose
from successful positioning against the weakening
US dollar. Foreign exchange also benefited from a
higher volume of customer transactions.
In Mexico, earnings from debt trading fell as
interest rates rose during the year, while in Canada,
higher fees from securities sales and corporate
finance reflected improved market sentiment in local
equity markets. Foreign exchange income in Canada
grew by 10 per cent in response to the continued
volatility of the Canadian and US dollars.
Operating expenses, before goodwill
amortisation, of US$1,014 million rose by 31 per
cent, of which 12 per cent related to costs in Bank of
Bermuda. In New York, the significant expansion of
the Corporate Investment Banking and Markets’
business resulted in an increase of some 300 in
headcount and a corresponding rise in salary costs.
Incentive compensation also rose, largely due to the
costs of recruiting and retaining the high quality staff
needed to deliver the business strategy. Key hires
within the expanded complement included the
establishment of a mergers and acquisitions and
advisory group, and product teams to develop asset-
backed and mortgage-backed securitisation and
trading. Non-staff costs grew correspondingly and
included investment in technology to support the
new business streams and the related control
environment.
A net release of provisions for bad and doubtful
debts reflected a significant improvement in credit
quality as corporate restructuring and refinancing
was facilitated by the better economic conditions.
This resulted in releases and recoveries across a
number of sectors.
Private Banking contributed a pre-tax profit,
before goodwill amortisation, of US$66 million, an
increase of 6 per cent on the result achieved in 2003.
Good progress was made in the integration of Bank
of Bermuda’s Private Client Services business,
which added an onshore banking capability in
Bermuda, and complementary offshore and trust
products and services to HSBC’s North American
operations. In aggregate, Bank of Bermuda’s North
American Private Banking operations added
US$2 million to pre-tax profits, before goodwill
amortisation, in 2004.
Net interest income increased by 37 per cent,
due largely to balance sheet growth. Strong growth
in customer loans, which were 50 per cent higher
than in 2003, reflected the success of the insurance
premium financing business, an expanded customer
base, and growth in secured borrowing by clients to
invest in higher-yielding assets or funds. The larger
customer base resulted from an expansion of Private
Banking’s geographical presence, and cross-referrals
generated through the alignment of Private
Banking’ s operations with other customer groups.
This contributed to an increase in average customer
deposits.
Other operating income was 4 per cent below
that achieved in 2003 but was 23 per cent lower
excluding the Bank of Bermuda. The fall in other
operating income was mainly driven by client
anticipation of interest rate rises, which reduced
demand for interest-rate-linked structured products,
and sales of fixed interest bonds. WTAS increased
revenue despite subdued demand for tax planning
services. As a consequence of restrictions placed on
the personal tax practices in the major accounting
firms engaged in providing audit services, WTAS
increased both its customer base and the number of
fee-generating staff. Cross-referrals also grew.
Operating expenses, before goodwill
amortisation and excluding Bank of Bermuda, were
broadly flat compared with 2003. Savings were
generated from the continuing alignment of
international and domestic client servicing units and
from operational efficiencies in WTAS.
The gain on disposal of investments and
tangible fixed assets reflected the sale of seed capital
holdings.