HSBC 2005 Annual Report Download - page 71

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account net interest income. The ‘BusinessVantage’
all-in-one account continued to perform strongly,
with customers increasing by 23 per cent, which led
to income more than doubling in 2005.
Net fee income increased by 10 per cent to
US$402 million as a result of efforts to encourage
cross-sales, which led to an increase in average
products per customer. Investment in HSBC’s
insurance business, including the establishment of a
new Commercial Banking insurance division in
October 2005, delivered a 10 per cent increase in
insurance income. Enhanced product offerings and
focused sales efforts in the areas of currency and
interest rate management products more than
doubled income. Growth in the number of merchant
customers following targeted marketing campaigns,
together with higher consumer spending, led to a
22 per cent increase in card income. However, these
increases were partly offset by a reduced
contribution from investment products, even though
sales increased by 20 per cent, reflecting changes in
the product mix, as demand for capital protected
funds decreased in the rising interest rate
environment.
Loan impairment charges and other credit risk
provisions of US$168 million contrasted with net
recoveries in 2004, and included a significant charge
against a client in the manufacturing sector. Releases
and recoveries in 2005 were lower, although
impaired loans as a proportion of lending balances
decreased.
Operating expenses were 3 per cent higher,
principally as a result of staff recruitment to support
business development and expansion. This was
particularly true with respect to business with
mainland China, where additional resources were
focused on increasing cross-sales and insurance
income. Expenditure on new marketing campaigns
promoted HSBC’s lower-cost delivery channels.
These campaigns, together with additional
investment to increase customer access to ATMs and
cheque deposit machines, grew the proportion of
transactions using low cost channels to 35 per cent
from 25 per cent in 2004. This released staff to
concentrate on increasing sales and offering
enhanced customer service.
Corporate, Investment Banking and Markets
reported a pre-tax profit of US$922 million,
43 per cent lower than in 2004, primarily driven by a
decline in net interest income in Global Markets and
lower recoveries and releases of loan impairment
allowances. In addition, operating expenses
increased in line with initiatives taken to extend the
product range in Global Markets and to strengthen
the Global Investment Banking advisory platform for
Asia in Hong Kong.
A 19 per cent decline in total operating income
was driven by a 74 per cent fall in balance sheet
management and money market revenues due to
rising short-term US and Hong Kong interest rates
and flattening yield curves.
In Corporate and Institutional Banking, deposit
spreads increased in line with higher local interest
rates, although this was offset by lending spreads
which fell amidst fierce local competition. In Global
Transaction Banking revenues increased, benefiting
from the improvement in deposit spreads, together
with higher deposit balances as business volumes
grew from the upgraded cash management service
delivered through HSBCnet.
Net fees fell by 19 per cent, driven primarily by
a reduction in structured finance revenues. However,
a number of significant equity related transactions
were concluded. Fee income from Group Investment
Businesses was boosted by sales of investment
products and a US$3.7 billion growth in funds under
management.
Income from trading activities rose as new
structured product capabilities were added in respect
of credit, equities, interest rate and foreign exchange
trading. Higher foreign exchange derivatives
revenues reflected an increased focus on sales and
execution. These gains were partly offset by a
decline in sales of structured product solutions to the
personal and commercial businesses, as retail
investors switched to shorter deposit products in the
higher interest rate environment. Losses were also
incurred on the trading of Asian high-yield bonds,
where revenues fell following the downgrading of
the automobile sector in the first half of 2005.
The overall credit environment remained
favourable and there was a small net release of loan
impairment charges, although this was below levels
seen in 2004 when HSBC benefited from corporate
restructuring and refinancing in the property,
industrial and telecommunications sectors.
A 20 per cent rise in operating expenses was due
to the first full-year impact of the investment made
in Hong Kong’s Corporate, Investment Banking and
Markets businesses. Employee compensation and
benefits rose by 24 per cent, in part driven by an
increase in senior relationship managers recruited to
extend coverage along industry sector lines. In total,
over 90 people were recruited to support the
expansion. Technology and infrastructure costs rose
as support and control functions added new