HSBC 2006 Annual Report Download - page 37

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in personal bankruptcies and IVAs seen since the
legislative change in 2004. In 2006, IVAs became
the main driver of loan impairment growth across the
industry as the availability and marketing of third-
party debt reduction services increased.
Within the UK, loan impairment was most
pronounced in consumer finance unsecured
portfolios, in which delinquency also rose as the
effect of interest rate increases on relatively high
levels of indebtedness put pressure on household
cash flows. In HSBC’s other portfolios, action
undertaken by HSBC during 2005 and early 2006,
predominantly tightening underwriting criteria and
collections procedures, proved successful in
improving credit quality indicators on more recently
written debt. In the second half of 2006, HSBC
strengthened the measures available to manage
insolvencies and impaired debt including, inter alia,
the further development of predictive modelling to
enhance underwriting decisions.
In France, credit quality was sound
notwithstanding strong growth in customer
advances, and the loan impairment charge remained
low. In Turkey, overall credit quality was also
sound, and delinquency on credit cards improved
following enhanced collections efforts and changes
in government regulation. This was reflected in a
36 per cent reduction in loan impairment charges.
Operating expenses increased by 7 per cent.
A US$57 million write-down of intangibles was
attributed to card portfolios acquired in the UK
which were written off in the light of the higher
impairment charges being experienced. Excluding
this item, the increase was 6 per cent, primarily
reflecting investment in upgrading and expanding
capacity and infrastructure across the region.
In the UK, 104 branches were refurbished
during 2006. Responding to changing customer
preferences and upgrading its customer service,
HSBC extended its opening hours in certain
branches, necessitating the recruitment of additional
counter staff, and increased its IT investment in self-
service machines and other direct banking channels,
in the process improving cost efficiency.
In France, there was a 4 per cent rise in
operating expenses, driven by the recruitment of
additional sales staff, higher marketing expenditure
to attract new customers, and the migration to a
common IT infrastructure. In Turkey, the opening of
37 new branches and associated growth in numbers
of sales staff and infrastructure costs drove a 26 per
cent rise in costs. Marketing expenditure also
increased in support of the growing consumer
lending, insurance and pensions businesses.
Commercial Banking reported a pre-tax profit
of US$2,234 million, an increase of 14 per cent
compared with 2005. Adjusting for the sale of the
UK fleet management and vehicle finance leasing
business, which was sold in the autumn of 2005,
profit before tax grew by 17 per cent, driven by
growth of 10 per cent in net operating income
compared with just 4 per cent in costs. Revenues
increased by 9 per cent through balance sheet
growth, customer recruitment and improved
cross-sales in the UK, and expansion of the middle
market, small and micro businesses in Turkey. The
4 per cent growth in operating expenses primarily
reflected investment to support business expansion
throughout the region. Credit quality was stable.
In the UK, HSBC invested to expand sales
capacity and improve service through recruitment
and the opening of commercial centres. To support
HSBC’s strategic intention to lead the market in
international commercial banking, a dedicated
International Banking Centre was created which, as
part of a global network, simplified cross-border
account opening. HSBC also simplified and
launched new foreign currency accounts. Significant
progress was made in enhancing the functionality of
HSBC’s award-winning internet banking, including
the implementation of the UK’s first same-day high-
value payments offering and the launch of HSBC’s
first commercial direct banking proposition,
Business Direct, which attracted over 19,000 small
and micro business accounts during the year.
In France, HSBC increased customer
recruitment by approximately one third by
concentrating on improving brand awareness among
commercial businesses. HSBC became the principal
banker for the majority of new customers recruited.
In Turkey, the establishment of eight centres, the
recruitment of additional relationship management
staff and a focus on maintaining high service levels
contributed to a 40 per cent increase in the number
of active customers as HSBC successfully sustained
its efforts to grow its share of middle market, small
and micro-business banking.
Net interest income increased by 8 per cent,
largely driven by increases in the UK and Turkey. In
France, the benefit of strong balance sheet growth
was more than offset by competitive pressure on
margins.
HSBC slowed the rate of growth in lending in
the UK during 2006 by refining underwriting criteria
and emphasising non-lending related revenue
streams and, consequently, average lending balances
rose by 8 per cent during the year and spreads
remained broadly flat. Increased priority was given