HSBC 2004 Annual Report Download - page 114

HSBC HOLDINGS PLC
Financial Review (continued)
112
There was a small net release for bad and
doubtful debts compared with a net charge in 2003,
mainly due to lower provisions in the consumer
brands sector and higher releases in the energy and
utilities sector in Brazil.
Amounts written-off fixed assets fell, mainly
due to lower provisions for certain Argentine
government bonds which rose in value as the timing
and nature of the external debt exchange offer were
clarified.
Private Banking reported a pre-tax profit,
before goodwill amortisation, of US$1 million,
compared with a small loss of US$2 million in 2003.
An increase in net interest income was driven by
higher time deposits in Brazil, while operating
expenses, excluding goodwill amortisation, reduced
following a reorganisation of the business.
Other includes the ongoing impact of the
pesification in Argentina. In 2004, higher earnings
from compensation bonds, lower litigation
provisions and increased gains on the sale of
government securities were largely offset by lower
general provision releases.
Year ended 31 December 2003 compared
with year ended 31 December 2002
2003 was a year of recovery across the region
following the economic and political uncertainty
experienced during 2002.
In Brazil, the turnaround in 2003 was
noteworthy. After a difficult start, the new
Government demonstrated prudent control of
macroeconomic policy including, importantly,
inflation. A difficult and costly disinflationary
programme was put into effect with the central
bank’ s reference rate reaching 26.5 per cent in June.
The programme was successful within a surprisingly
short time horizon. Inflation fell from 17.3 per cent
to 9.3 per cent, and reference interest rates ended the
year at 16.5 per cent. Actions to reduce Brazil’ s two
key vulnerabilities, its fiscal and external deficits,
were effective. On the fiscal front, Brazil’s Congress
approved public sector social security reforms and
2003 was the fifth consecutive year IMF fiscal
targets were achieved. On the external front, Brazil
is expected to register its first current account
surplus in over a decade.
Buoyed by a surge in exports and large trade
surpluses, the Argentinian economy recovered at a
fast pace. Inflation remained under control and the
Argentine peso appreciated from 3.60 to the US
dollar in May 2002 to 2.93 at December 2003.
Unemployment fell and tax revenues and collections
increased.
Fundamental legal uncertainty persists,
particularly regarding the position of pension fund
assets following pesification, the ability of utilities to
raise prices, and the position of holders of pesified
and defaulted government bonds. Although the
financial system is emerging slowly from near
collapse, questions about the sustainability of the
recovery persist and a resolution of the historic
sovereign debt default is a pre-condition for stability
and sustained new investment.
HSBC’s operations in South America reported a
pre-tax profit of US$115 million, compared with a
loss of US$58 million in 2002. Excluding goodwill
amortisation, pre-tax profit was US$126 million,
compared with a loss of US$34 million in 2002. Key
to this improvement was a turnaround in Argentina,
from a loss of US$210 million to a modest profit of
US$48 million. This followed the release of part of
the general provision previously raised against
customer advances, as the economy improved and,
in December 2003, compensation bonds with a face
value of US$109 million were received from the
Argentine government. These have been included at
an estimated fair value of US$63 million in the
results of the Other segment. Goodwill amortisation
at US$11 million was US$13 million lower than in
2002, which included a goodwill write-off relating to
the purchase of insurance subsidiaries.
The commentaries that follow are based on
constant exchange rates.
In Personal Financial Services there was a pre-
tax loss, before goodwill amortisation, of
US$27 million, an improvement against the loss
suffered in 2002. The acquisition of Lloyds TSB
Group’s businesses and assets in Brazil contributed
US$7 million to this overall improvement. Lending
growth was stronger in Brazil, while higher bad debt
recoveries benefited operations in Argentina.
Net interest income was broadly in line with last
year. The benefit from higher personal lending
balances in Brazil was offset by lower interest
income from the insurance businesses in Argentina,
largely due to lower CER, an inflation adjustment
applied to all pesified loans.
Other operating income of US$316 million was
51 per cent higher than in 2002, largely due to a
strong performance in Brazil. Growth in customer
lending volumes generated an increase in credit-
related fee income and account service fees.
Following strong marketing support, fee income
from cards in Brazil grew by 24 per cent, driven by a