HSBC 2004 Annual Report Download - page 98

HSBC HOLDINGS PLC
Financial Review (continued)
96
products, including a range of adjustable rate
mortgages, were launched during the year
contributing to an overall increase in gross new
lending of 3 per cent to US$32.6 billion. The income
benefit of this growth, however, was partly offset by
pressure on spreads. Competitive pricing in a
contracting market forced a general downward trend
in mortgage yields in 2004 compared with the levels
seen in 2003.
Other operating income rose by US$164 million
or 20 per cent to US$979 million, of which
US$82 million came from acquisitions. Growth was
largely attributable to the strong performance in
Mexico, where expansion of the pension funds
business, acquired in the last quarter of 2003,
complemented higher fee income from credit cards,
deposit-related services and international
remittances. Sales of pension and bancassurance
products grew strongly, attracting some 270,000 new
customers, following an expansion of the sales force.
An enhanced customer relationship management
system and the employment of WHIRL helped the
number of credit cards in circulation in Mexico to
rise by 29 per cent to 568,000. Fee income from
credit cards rose by 20 per cent compared with 2003.
Operations in Canada benefited from a rise in retail
broking volumes, as market activity revived. In the
US, a revised fee structure and improved collection
processes produced a 9 per cent increase in fee
income from cards and deposit-related services.
The US mortgage banking business contributed
a pre-tax profit of US$270 million, in line with 2003,
despite a fall in other operating income. Lower
origination and sales-related income in the secondary
market was only partly offset by a reduction in net
servicing expenses. There was a net loss of
US$4 million from sale of mortgage loans in 2004
compared with a net gain of US$117 million in
2003. This was mainly driven by lower gains on
sales of mortgages, as narrower spreads combined
with a fall in the volume of loans originated for sale.
As interest rates increased in 2004 from the
historically low levels experienced in 2003,
prepayments of residential mortgages, mostly in the
form of loan refinancing, reduced significantly and
residential mortgages originated for sale declined by
64 per cent compared with 2003, despite an overall
increase in mortgage lending. Loan refinancing
activity represented 50 per cent of the total loan
originations, compared with 74 per cent in 2003.
Pricing also fell from the unusually high levels seen
in 2003 and, as a result, HSBC earned lower returns
on loans sold.
The net cost of servicing mortgages fell,
improved primarily as a result of lower amortisation
expenses on mortgage servicing rights (‘MSR’ ) and
increased income associated with the derivatives
used to offset the changes in the economic value of
the MSRs. The reduction in amortisation expenses
was also partly affected by lower MSR balances in
2004. The cost reduction was partly offset by higher
temporary impairment reserves.
Operating expenses, excluding goodwill
amortisation, were 16 per cent higher than in 2003.
This was due mainly to a 15 per cent increase in
costs in Mexico, where the expansion of the pension
funds business and the inclusion of the insurance
business acquired in the last quarter of 2003
contributed to generally higher salaries and
performance-related bonuses. Staff numbers
increased in the Mexican branch network to support
growth in business volumes, improve customer
service, and support the rollout of HSBC Premier.
The introduction of the WHIRL credit card system in
Mexico and the US, at a cost of US$23 million, was
completed by the end of October. In the US,
expansion in the mortgage sales force and higher
performance-related bonuses led to higher staff
costs, while the launch of advertising campaigns for
mortgages and deposits added to marketing costs.
Additional staff were recruited in the branch network
to support business expansion and to improve
customer service. Costs in Canada increased by 4 per
cent, principally due to higher performance-related
staff costs in the brokerage business and
restructuring expenses arising from the integration of
Intesa Bank Canada, acquired in May.
The net bad debts charge fell by 29 per cent to
US$99 million. Recoveries of amounts previously
written-off in Mexico more than offset the
US$11 million increase in new specific provisions in
the US, predominantly for the credit cards portfolio
within HSBC Bank USA. There was also a
US$28 million release of general provisions in
Mexico following a review of historical loss
experience, reflecting a general improvement in the
credit quality of consumer loan portfolios, and the
improved market environment.
Consumer Finance contributed a pre-tax profit,
before goodwill amortisation, of US$3,576 million
in 2004, an increase of US$1,508 million of which
US$1,097 million was an additional quarter’s
contribution. On an underlying basis, pre-tax profit,
before goodwill amortisation, grew by 20 per cent to
US$2,479 million.
The integration of HSBC Finance Corporation
into HSBC continued to deliver funding benefits in
line with those anticipated. Since December 2003,
HSBC Finance Corporation has sold US$3.7 billion