HSBC 2006 Annual Report Download - page 123

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segment see Report of the Directors: Business
Review on page 31.
Year ended 31 December 2005 compared
with year ended 31 December 2004
HSBC made a profit before tax of
US$20,966 million, a rise of US$2,023 million or
11 per cent compared with 2004. Of this increase,
US$267 million was attributable to additional
contributions of ten and two months from M&S
Money and Bank of Bermuda respectively, one
month’s contribution from Metris, and the first full
year effect of HSBC’s investments in Bank of
Communications and Industrial Bank.
As a result of the transition to full IFRSs, the
format of the income statement changed. In
particular, US$685 million of what would,
previously, have been included in non-equity
minority interest, moved within the income
statement and was classified as ‘Interest expense’ in
2005, rather than ‘Profit attributable to minority
interests’. As the applicable IFRSs requiring these
changes only came into effect from 1 January 2005,
the comparative 2004 figures are presented on the
previous basis.
On an underlying basis, which is described on
page 111, profit before tax increased by 13 per cent.
Total operating income of US$61,704 million
was US$5,716 million or 10 per cent higher than in
2004. On an underlying basis, total operating income
also rose by 10 per cent. This reflected organic
lending growth in all regions and expansion in
transactional banking revenues from increased trade,
funds under management, administration and
custody activities. Strong growth was also seen in
fixed income and credit trading. Operating income
performance was well spread geographically with
particularly strong growth in HSBC’s operations in
Latin America, the Middle East and the Rest of Asia-
Pacific.
Loan impairment and other credit risk
provisions as a percentage of gross average advances
to customers was moderately higher in 2005 at
1.16 per cent than in 2004, 0.99 per cent. There was
also a small rise in the percentage ratio of new loan
impairment charges to gross average advances to
customers from 1.41 in 2004 to 1.50 in 2005. The
charge of US$7,801 million was US$1,610 million
or 26 per cent higher than in 2004 and on an
underlying basis 23 per cent higher. Of this increase,
approximately half was driven by growth in lending,
with the remainder attributable to the higher rate of
new provisions and the non-recurrence of general
provision releases benefiting 2004. Underlying credit
conditions in the UK were adversely affected by
slower economic growth and changes in bankruptcy
legislation. This was offset by improved credit
experience in the US, notwithstanding the impact of
hurricane Katrina and an acceleration of bankruptcy
filings ahead of legislative changes in the fourth
quarter of 2005. In Brazil, HSBC also experienced
higher charges as increased credit availability,
particularly in the consumer segment, led to over-
indebtedness.
Total operating expenses of US$29,514 million
were US$3,027 million or 11 per cent higher than in
2004, 9 per cent higher on an underlying basis.
Much of the growth reflected investment to expand
the Group’s geographic presence and adding product
expertise and sales support. This expansion was most
marked in Personal Financial Services in the Rest of
Asia-Pacific and in Corporate, Investment Banking
and Markets, where investment spend peaked during
2005. In addition, business expansion in the Middle
East and Latin America contributed to cost growth.
Productivity improvements achieved in the UK
and Hong Kong allowed the Group to continue
building its Personal Financial Services and
Commercial Banking businesses in the Rest of Asia-
Pacific, and expanding its capabilities in Corporate,
Investment Banking and Markets, without
deterioration in the Group’s cost efficiency ratio. In
the UK, the focus on improving utilisation of the
existing infrastructure led to broadly flat costs in
Personal Financial Services and Commercial
Banking compared with underlying combined
revenue growth of 10 per cent.
HSBC’s cost efficiency ratio, which is
calculated as total operating expenses divided by net
operating income before loan impairment charges
and other credit risk provisions, improved slightly to
51.2 per cent in 2005 from 51.6 per cent in 2004.
HSBC’s share of profit in associates and joint
ventures increased by US$376 million, boosted by
full year contributions from Bank of
Communications and Industrial Bank in mainland
China, and increased income from The Saudi British
Bank, which reported a record performance on the
back of a vibrant economy and a strong oil price.