HSBC 2006 Annual Report Download - page 100

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Latin America > 2005
98
In Brazil, the cyclical slowdown which began in
late 2004 continued throughout 2005, with full-year
GDP growth of 2.3 per cent compared with 4.9 per
cent in 2004. This modest performance was the result
of tight monetary policy, political uncertainty and the
appreciation of the Brazilian real. External demand
provided support, with exports growing by 23 per
cent in 2005 to record levels, helping to create trade
and current account surpluses of US$45 billion and
US$14 billion respectively, and increasing net
international reserves by 96 per cent to
US$54 billion. The tight monetary policy, with real
interest rates among the highest in the world at
10.5 per cent, slowed inflation from 7.6 per cent in
2004 to 5.7 per cent in 2005, in line to achieve the
Central Bank’s 4.5 per cent inflation target for 2006.
Having established its anti-inflationary credentials,
the Central Bank cut interest rates by 175 basis points
between September and the end of 2005 in order to
stimulate growth and ease the pressure on the real.
In Argentina, the recovery from the crisis of
2001 continued in 2005, helped by a favourable
external environment and the success of the offer to
exchange replacement discount bonds issued in June
for defaulted debt. Average GDP growth was 9.1 per
cent in 2005. Fiscal performance remained strong,
with the public sector posting an overall surplus of
approximately 3.3 per cent of GDP. This surplus
helped to offset the expansionary effect on money
supply growth of the large foreign exchange
interventions of the Central Bank, which continued to
pursue a nominal rate policy of near stability against
the US dollar despite strong upward pressure on the
Argentine peso. This policy was supported by newly
introduced controls on capital inflows. Inflation
remained a concern, however, having accelerated to
12.3 per cent in December 2005. Following the
example of Brazil, at the end of the year the
authorities decided to make an early repayment of
Argentina’s US$9.8 billion debt owed to the IMF.
Review of business performance
HSBC’s operations in Latin America reported a pre-
tax profit of US$1,604 million, compared with
US$1,242 million in 2004, representing an increase
of 29 per cent. On an underlying basis, pre-tax profits
grew by 19 per cent and represented around
8 per cent of HSBC’s equivalent total profit. Growth
was achieved, in part, as a result of a US$89 million
gain on the sale of Brazil’s property and casualty
insurance business. In Mexico, robust balance sheet
growth drove higher profit before tax and HSBC in
Argentina benefited from a strong economic recovery
and certain one-off items including the receipt of
compensation bonds.
The commentary that follows is on an underlying
basis.
Personal Financial Services reported a pre-tax
profit of US$786 million, an increase of 13 per cent.
In Mexico, excluding the transfer of some customers
to the Commercial Banking segment, pre-tax profits
rose. This was driven by strong revenue growth from
higher deposit balances and widening spreads, strong
loan growth and higher fee income, partly offset by
the non-recurrence in 2005 of loan impairment
provision releases in 2004.
The rise in pre-tax profits in Brazil was partly as
a result of gains on the sale of the property and
casualty insurance business, with the remaining
increase driven by strong loan growth in vehicle
finance and personal lending, together with record
credit card sales. The cost efficiency ratio improved
by 2 percentage points as higher income was partly
offset by increased costs incurred in supporting
business expansion and developing alternative sales
channels. Loan impairment charges increased
reflecting, in Brazil, lending growth and an increase
in delinquency rates in the consumer finance business
and, in Mexico, higher charges from increased
lending and the non-recurrence in 2005 of loan
impairment provision releases in 2004. In 2005, the
Brazilian insurance business was transferred from
‘Other’ to Personal Financial Services. Profit before
tax increased by US$16 million as a result, though
individual account lines showed much larger
variances: where appropriate, the reasons are noted
below.
Net interest income rose by 27 per cent
compared with 2004. Consumer demand for credit
remained strong, fuelled by lower unemployment
across the region and declining inflation in Brazil and
Mexico. This contributed to significant growth in
personal lending, mortgages, vehicle finance loans
and credit cards.
In Mexico, net interest income rose, primarily
from strong deposit and loan growth and the
widening of deposit spreads. In 2005, HSBC in
Mexico widened its competitive funding advantage,
maintaining the lowest funding cost in the market.
There was strong growth in consumer lending,
although asset spreads declined, reflecting a
reduction in yields in an increasingly competitive
market. Funding costs rose, due to higher average
interest rates.
HSBC in Mexico continued to lead the market in
customer deposit growth, with a 1.5 per cent increase
in market share to 15.9 per cent despite a highly
competitive market place. This was largely due to the
success of ‘Tu Cuenta’, the only integrated financial