HSBC 2006 Annual Report Download - page 143

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initiatives. Cost growth in Canada followed higher
revenues. The first full year effect of the expansion
of various Corporate, Investment Banking and
Markets businesses that commenced last year,
together with higher performance-linked pay
contributed further to the expense growth.
In Latin America, operating expenses rose by
12 per cent. Staff costs grew as additional staff were
recruited to support business expansion and pay rises
were agreed with the unions. Marketing expenditure
was higher as a consequence of advertising
campaigns run by Personal Financial Services and
Commercial Banking. The continued expansion of
the branch network and ATM infrastructure in
Mexico, in conjunction with construction of the new
headquarters, also contributed to the overall cost
growth in the region. Costs rose in Corporate,
Investment Banking and Markets in line with higher
transactional volumes, increased headcount and
union-agreed pay rises.
Year ended 31 December 2005 compared
with year ended 31 December 2004
Operating expenses of US$29,514 million were
US$3,027 million, or 11 per cent, higher than in
2004. On an underlying basis, cost growth was 9 per
cent, trailing net operating income growth before
impairment charges by 3 percentage points. This
resulted in a slight improvement in the cost
efficiency ratio to 51 per cent. The three main
drivers of cost growth were as follows:
• volume expansion in many markets drove both
revenue and costs. In Personal Financial
Services and Commercial Banking, business
expansion drove cost growth of 6 per cent and
4 per cent respectively, though this was
exceeded by growth in net operating income
before loan impairment charges of 11 per cent
and 15 per cent respectively. In Mexico, Turkey
and Brazil, cost increases contributed over half
of the overall increase, but were significantly
exceeded by income growth;
• HSBC continued to improve productivity in
mature markets. In the UK, reorganisations in
Personal Financial Services and Commercial
Banking in 2004 resulted, in aggregate, in
broadly flat costs compared with growth of
10 per cent in net operating income before loan
impairment charges. This was delivered through
greater utilisation of direct channels, improved
training and increased incentives. In Hong
Kong, the promotion of cost-efficient delivery
channels and greater utilisation of the Group
Service Centres contributed to a 6 percentage
point improvement in the cost efficiency ratios
in Personal Financial Services and Commercial
Banking; and
• following a number of senior hires in 2004 in
Corporate, Investment Banking and Markets,
subsequent investment was focused on
operations and technology, to support revenue
growth. Non-staff costs increased by 23 per cent
in 2005, with staff costs growing by 14 per cent.
The rate of cost growth peaked during the year
and the cost efficiency ratio was 2 percentage
points better in the second half of the year than
the first half, as net operating income before
loan impairment charges grew faster than costs.
The following points are also of note. In Europe,
costs included the rebranding of the Group’s
operations in France, the refurbishment of 60 UK
branches and increased marketing costs. These
increases were offset by lower costs in Commercial
Banking in the UK following restructuring activity
in 2004. Costs in Corporate, Investment Banking and
Markets increased by 9 per cent, reflecting increased
staff numbers and investments in technology and
infrastructure.
In Hong Kong, higher operating expenses
reflected business expansion in Corporate,
Investment Banking and Markets, supported by
increased staff in the investment banking division
and the recruitment of senior relationship managers.
This was partly offset by the effect of branch
restructuring and increased utilisation of the Group
Service Centres in Personal Financial Services,
which led to a 4 per cent fall in branch headcount.
Underlying operating expenses in the Rest of
Asia-Pacific increased by 31 per cent, reflecting
investment in broadening the customer base and the
distribution platform. HSBC’s branch network was
extended in mainland China, South Korea, and India,
and additional sales and support staff were recruited
in Personal Financial Services and Commercial
Banking. Staff numbers also increased in response to
the migration of call centre activities to the Group
Service Centres in the region. Growth initiatives
required investment in infrastructure and technology,
and accordingly non-staff costs increased by 39 per
cent.
In North America, costs bore a particularly large
share of the investment in Corporate, Investment
Banking and Markets, reflecting HSBC’s
commitment to growing its presence in the region.
Costs also reflected the expansion of the network,
with the opening of 27 new branches in 2005 and the
launch of HSBC’s online savings account in the US.