HSBC 2006 Annual Report Download - page 56

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Hong Kong > 2005
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Net fees fell by 6 per cent to US$740 million,
driven mainly by lower sales of unit trusts and
capital guaranteed funds, partly offset by higher
sales of structured deposit products and open-ended
funds. A 34 per cent fall in unit trust fee income was
driven by a change in market sentiment during 2005.
The combined effect of higher interest rates and a
flattening yield curve reduced customer demand for
capital guaranteed funds and longer-term equity-
related investment products. Investors preferred
shorter-term investment products which in turn
generated lower fees. Revenues from open-ended
fund sales reflected this, increasing by 32 per cent to
US$95 million with the introduction of 173 new
funds increasing the choice available to investors.
This was an important strategic initiative to position
HSBC as the leading investment service provider in
Hong Kong, where customers can now choose from
over 300 funds.
Revenues from structured deposit products
grew, with strong sales volumes aided by new
products launched. The success of the Exclusive
Placement Service, launched in 2004 for HSBC
Premier customers, continued with year-on-year
revenue growth of 178 per cent. The service offers
an extensive product range of yield enhancement
options, re-priced daily and linked to foreign
exchange or interest rates. IPO certificate of deposit
offerings doubled. These were partly offset by lower
revenues from ‘Deposit plus’ and ‘Equity linked
note’ products.
Fee income from credit cards grew by 9 per
cent, reflecting a 21 per cent increase in spending
along with a 15 per cent rise in the number of cards
in circulation to four million. In stockbroking and
custody services, new services were launched aimed
at facilitating securities management by customers.
Competitive pricing and a high quality of service on
the internet led to a 15 per cent growth in customers
holding securities with HSBC.
HSBC continued to place significant emphasis
on the growth and development of its insurance
business, and increased the range of products
offered. Insurance revenues grew by 20 per cent,
aided by new products launched which included the
‘Five year excel’ and the ‘Three year express wealth’
joint life insurance and wealth products. HSBC was
Hong Kong’s leading online insurance provider,
offering 12 insurance products. This, coupled with
competitive pricing, led to a 91 per cent growth in
online insurance revenues. Medical insurance
products were enhanced and heavily marketed in
response to the growing public demand for private
medical protection to complement new medical
reforms being introduced.
Improvements in credit conditions, which
benefited from economic growth, higher property
prices and lower bankruptcies, underpinned a net
release of loan impairment charges and other credit
risk provisions of US$11 million in 2005, compared
with a net charge of US$56 million in 2004. This
was mainly driven by continued improvement in
credit quality within the credit card portfolio, and a
collective provision release of US$23 million in
respect of prior year impairment allowances on the
restructured lending portfolio. The strong housing
market enabled individually assessed allowance
releases of US$24 million in the mortgage portfolio.
There was also a release of US$11 million in respect
of collective loan impairment allowances, benefiting
from the improved economic conditions highlighted
above.
Operating expenses fell by 4 per cent to
US$1,305 million. This was largely due to a change
in the method by which centrally incurred costs are
allocated to the customer groups. IT development
costs rose in support of future growth initiatives, and
higher marketing and advertising expenditure was
incurred to underpin organic growth. Staff costs
were marginally lower in 2005. Branch teams were
restructured to dedicate more staff to sales and
customer service, and significant improvements were
made to the reward structure to ensure retention of
high calibre individuals. Overall, headcount in the
branch network fell by 4 per cent, reflecting
operating efficiency improvements and higher
utilisation of the Group Service Centres.
Pre-tax profits in Commercial Banking
increased by 6 per cent to US$955 million. Increased
deposit spreads and a rise in lending and deposit
balances led to higher net interest income, though
this was partly offset by larger loan impairment
charges and the non-recurrence of loan allowance
releases.
Net interest income increased by 60 per cent as
a result of increased deposit spreads and asset and
liability growth. The appointment of a number of
experienced relationship managers to service key
accounts, together with the establishment of core
business banking centres, contributed to growth in
deposits and lending. Interest rate rises led to a
67 basis point increase in deposit spreads and,
together with active management of the deposit base,
contributed to increased customer demand for
savings products which resulted in a 6 per cent
increase in deposit balances to US$28.7 billion. The
introduction of a pre-approved lending programme
for SMEs, together with strong demand for credit in
the property, manufacturing, trading and retail
sectors, contributed to a 29 per cent increase in