HSBC 2004 Annual Report Download - page 115

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30 per cent increase in cards in circulation to
1.4 million. Other operating income also improved
in Argentina, reflecting a strong performance in the
insurance business.
Operating expenses, excluding goodwill
amortisation, were broadly in line with 2002. In
Brazil, costs increased by 15 per cent, largely due to
higher staff costs, notably labour claims, together
with higher costs from marketing initiatives taken in
2003 and an increase in the transactional taxation
charge on higher operating income. Costs in
Argentina were significantly lower than prior year,
mainly due to lower severance costs.
The provision for bad and doubtful debts of
US$138 million was 50 per cent higher than in 2002.
In Brazil, specific provisions increased,
predominantly in the first half of 2003, reflecting the
prevailing economic conditions. High inflation,
interest rates and unemployment reduced customers’
repayment capacity. However, credit quality began to
show signs of improvement in the second half of the
year.
Commercial Banking in South America
contributed pre-tax profit, before amortisation of
goodwill, of US$99 million, 23 per cent higher than
in 2002.
Net interest income increased by 39 per cent, to
US$168 million. In Argentina, net interest income
benefited from lower Argentine peso rates paid on
deposits and recoveries of interest suspended on
non-performing loans. In Brazil, successful
marketing campaigns led to a significant growth in
income from overdrafts and working capital
products. Other growth areas included discounted
receivables and vehicle leasing, supported by the
introduction of pre-approved facilities.
Other operating income increased by 23 per cent
to US$115 million. Credit related fee income in
Brazil increased, reflecting the expansion in the
current account customer base by 8 per cent. Fees
earned on foreign exchange rose from a higher
volume of transactions. In response to aggressive
pricing by competitors, the introduction of a new fee
pricing structure in the first half of 2003 stimulated
an increase in the volume of loan fees and funds
under management leading to higher fee income.
At US$173 million, total operating expenses,
before goodwill amortisation, were 25 per cent
higher than 2002. The cost increases partly reflected
increased business volumes as well as the impact of
various initiatives which had been delayed pending
evidence of improvement in economic conditions.
These included increased advertising, the
implementation of a sales structure to support
business development, and investment in new
products and delivery channels. These were partly
funded by the centralisation of support processes
which resulted in a reduction of associated costs and
reduced the administrative workload for relationship
managers, leaving them more time for their
customers.
Corporate, Investment Banking and Markets
reported a loss, before amortisation of goodwill, of
US$24 million, broadly in line with 2002, at constant
exchange rates. Profit before tax and amortisation of
goodwill in Brazil was US$49 million, compared
with US$104 million in 2002. Argentina recorded a
loss of US$72 million compared with a loss of
US$143 million in 2002.
Net interest expense was US$51 million, an
increase of 16 per cent compared with 2002. In
Brazil, net interest income decreased due to lower
spreads in Global Markets, partly offset by the
impact of downward yield curve movements which
allowed the funding of long positions at lower rates.
In corporate banking, a lack of attractive risks
restricted lending growth. In Argentina, the lower
cost of funding non-performing assets and a lower
level of suspended interest resulted in a decrease in
net interest expense.
Dealing profits were broadly in line with 2002.
In Brazil, higher dealing profits reflected gains
resulting from a fall in interest rates. Brokerage,
custody and clearing businesses also grew
significantly, taking advantage of market
opportunities. These factors were offset in part by
lower foreign exchange income in Argentina.
Staff costs were higher than in 2002, mainly in
Brazil, reflecting improved performance in specific
products.
Provisions for bad and doubtful debts rose in
difficult market conditions. Higher interest rates,
currency weakness, and a reduced availability of
foreign currency funding all contributed to problems
encountered by corporate customers in the first half
of 2003 in Brazil. Although the situation improved
during the year, new specific provisions were raised
against two sizeable corporate accounts as a
consequence of business failure in one case and
fraud in the other.
Private Banking’s pre-tax loss, before goodwill
amortisation, of US$2 million compared with a loss
of US$12 million in 2002. A lower bad debt charge
reflected an improvement in the overall credit
quality of the segment.