HSBC 2006 Annual Report Download - page 52

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Hong Kong > 2006
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sales of unit trusts rose by 61 per cent and fee
income from the sale of investment products, and
custody and broking activities increased by 39 per
cent.
The increase in cards in issue led to a 24 per
cent rise in credit card fees. Expansion of the current
account base, partly due to higher sales of packaged
products, led to increased remittance and account
servicing fees. HSBC focused on attracting
additional funds from existing Premier customers
during 2006 and deposits managed on their behalf
increased by 29 per cent, reflecting the success of
marketing campaigns and enhanced customer
benefits.
Insurance fee income increased by 21 per cent
and insurance premiums rose by 13 per cent. The
development of HSBC’s retirement planning
proposition was reflected in the launch of new
savings, protection and medical insurance products,
supported by increased promotional and marketing
activity and the successful development of internet
and telephone distribution channels. As a result,
sales of life and non-life insurance products rose.
Gains less losses from financial investments
increased to US$14 million, reflecting proceeds from
the MasterCard Incorporated IPO. In July 2006,
HSBC transferred most of its Asian card acquiring
business into a joint venture with Global Payments
Inc. HSBC retained a 44 per cent stake in the new
venture and recognised an overall gain on transfer of
US$55 million, of which US$12 million was
allocated to the Hong Kong Personal Financial
Services business and reported in ‘Other operating
income’.
Following a net release in 2005, loan
impairment charges of US$119 million reflected
asset growth and lower releases and recoveries. In
2005, rising property prices led to the release of
impairment allowances against HSBC’s mortgage
lending portfolio and against restructured lending
facilities, neither of which were repeated in 2006.
Increased staff numbers, additional marketing
activity and higher IT expenditure led to a 9 per cent
rise in operating expenses. Staff recruited to support
extended opening hours, together with higher
performance-related remuneration and annual pay
rises, led to increased employment costs. These were
mitigated by a reduction in branch back-office staff
numbers as customers utilised lower-cost
distribution channels for an increasing proportion of
their banking business. Rising Hong Kong
commercial property rental yields in 2006 coincided
with the expansion of certain branches with high
growth potential and resulted in higher premises
costs. Marketing costs rose in support of promotional
activity related to credit cards, insurance and wealth
management products. Similarly, IT expenditure
rose as improved portfolio management systems and
enhanced channel capabilities were delivered in
order to drive revenue growth.
In Commercial Banking, pre-tax profits
increased significantly by 38 per cent to
US$1,321 million. Net operating income grew by
32 per cent, driven by higher deposit balances and
fee income, increased liability spreads and lower
loan impairment charges. Cost growth was
comfortably within the growth in revenues, and the
cost efficiency ratio improved by 1.1 percentage
points to 26.1 per cent.
During 2006, HSBC launched a number of
initiatives designed to further its position in the small
business banking market, including customer service
enhancements, improvements to account opening
procedures and targeted promotional activity. As a
result, Commercial Banking customer numbers
increased (by 13,000 to 377,000), as did the number
of products sold per customer. Investments to
enhance the attractiveness of HSBC’s distribution
channels improved customer service, facilitated
customer acquisition and encouraged the migration
of routine transactions to automated channels.
Net interest income rose by 23 per cent to
US$1,344 million. Deposit and current account
balances increased by 10 per cent, partly due to the
deployment of a team dedicated to attracting
deposits from small businesses, and other service
enhancements. BusinessVantage, HSBC’s market
leading integrated account for business, reinforced
its leadership position through increased promotional
activity, including a new referral programme. HSBC
opened over 25,000 new BusinessVantage accounts
in 2006, 21 per cent more than in 2005. Interest rate
rises led to a 30 basis point widening of deposit and
current account spreads and contributed to increased
demand for savings products.
Non-trade lending balances increased by 16 per
cent to US$16.8 billion. The continued strength of
the Hong Kong economy and, most importantly, its
proximity to the strongly growing mainland Chinese
market, led to increased business activity among
mid-market clients, resulting in higher demand for
credit. Lending to the property and retail sectors was
particularly strong, while manufacturers with
operations in mainland China raised borrowings to
fund further expansion and take advantage of both
the growing Chinese domestic market and the strong
export climate. HSBC’s regional alignment
programme, which is designed to identify and