HSBC 2005 Annual Report Download - page 98

HSBC HOLDINGS PLC
Financial Review (continued)
96
as a proportion of assets increased by 3 percentage
points in the SME portfolio, in line with overall
market performance, and MME credit quality also
declined slightly. In Argentina, net recoveries
decreased as significant releases from amounts
recognised at the time of the sovereign debt default
and pesification were not repeated. However,
underlying credit quality improved substantially and
impaired loans as a percentage of assets more than
halved.
Operating expenses of US$368 million were
19 per cent higher than in 2004, though the cost
efficiency ratio improved by 3 percentage points as
income grew faster than costs. Staff numbers in
Brazil increased by 34 per cent following a
recruitment drive initiated in the second half of 2004
to support expansion of the SME business. Higher
incentive payments, reflecting increased income, and
union agreed pay increases also contributed to an
increase in staff costs. New marketing campaigns,
including the award winning ‘30, 60, 90 Dias de
Apuros’ campaign focusing on invoice financing,
increased advertising and marketing costs. Expenses
in Argentina increased by 24 per cent, driven by
higher staff costs, reflecting pay rises agreed with
local unions, together with a 9 per cent increase in
headcount in support of business expansion.
Corporate, Investment Banking and Markets
reported a pre-tax profit of US$146 million, an
increase of 12 per cent, driven by higher net interest
income in Argentina and a decline in loan impairment
charges in Brazil.
Total operating income at US$313 million
decreased by 7 per cent compared with 2004. In
Argentina, a reduction in funding costs in Global
Markets was augmented by the positive impact of an
appreciating CER (an inflation-linked index) on
holdings of government bonds. Continuing economic
growth and improved market confidence stimulated
demand for credit, resulting in a 67 per cent growth
in balances. Brazil reported a decrease in balance
sheet management and money market revenues as a
result of high short-term interest rates and an inverted
yield curve.
Trading activities generated higher income as
Global Markets in Brazil benefited from a wider
product range and the addition of new delivery
capabilities. This investment and the relatively
buoyant local market resulted in higher business
volumes, particularly in foreign exchange. In
Argentina, Global Markets income rose in line with
increased trading activity in response to the sovereign
debt swap.
In Brazil, a US$15 million net release of loan
impairment charges compared favourably with a net
charge in 2004. A recovery in the energy sector was
accompanied by the non-recurrence of allowances
raised against two specific corporate accounts in
2004.
Operating expenses of US$138 million were
8 per cent lower than in 2004, primarily due to a
reduction in profit share and bonus payments in
Brazil. This was partly offset by higher centralised
support function staff costs, driven by pay rises
agreed with local unions. In Argentina, operating
expenses were broadly in line with 2004.
Private Banking reported a pre-tax profit of
US$1 million, a modest increase on 2004. The
business was reorganised in 2005, with the transfer of
smaller accounts to Personal Financial Services in
Brazil, following a resegmentation of the customer
base.
In Brazil, HSBC’s insurance business was
reclassified from Other to Personal Financial
Services. As a result, operating income decreased by
US$106 million and operating expenses were
US$90 million lower. In Argentina, the receipt of
compensation bonds and other items related to the
pesification in 2002 led to a US$17 million increase
in profit before tax.