HSBC 2007 Annual Report Download - page 104

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
North America > 2006
102
though this was offset by reduced partnership
payments to those merchants.
Growth opportunities in the motor vehicle
financing industry were particularly challenging in
2006, driven by a reduction in incentive programmes
offered by manufacturers and a rising interest rate
environment. Notwithstanding these factors, average
balances rose by 12 per cent. This was led by strong
organic growth in the near-prime portfolio from an
increased emphasis on strengthening relationships
with active dealers, and greater volumes generated
from the consumer direct programme. Refinancing
volumes rose, directly attributable to the successful
consumer refinance programme, which recorded a
48 per cent increase in originations.
In Canada, net interest income rose by 16 per
cent due to lending and deposit growth. Average
mortgage balances grew as a result of the continued
strength of the housing market and ongoing branch
expansion in the consumer finance business. The
strong economy drove higher levels of unsecured
lending as consumer spending rose. Expansion of the
consumer finance motor vehicle proposition and the
launch of a MasterCard programme in 2005
contributed further to asset growth, while increased
marketing activity led to a rise in personal non-credit
card lending balances. Asset spreads narrowed,
largely from lower yields which reflected changes in
product mix and competitive market conditions.
Average deposit balances grew by 6 per cent
compared with 2005, with the notable success of a
new high rate savings account and a sale campaign
celebrating HSBC’s 25th anniversary in Canada.
Deposit spreads widened as interest rates rose,
contributing further to the increase in net interest
income.
Net fee income grew by 13 per cent to
US$3.7 billion, with increases in both the US and
Canada. The 13 per cent rise in the US was largely
led by higher fees from the credit card and retail
services businesses. Credit card fee income from the
consumer finance business increased by 8 per cent,
primarily from balance growth in the non-prime
portfolio, improved interchange rates and lower fee
charge-offs. Revenues from credit card partnership
enhancement services rose due to greater sales
volumes, expansion into new customer segments and
balance growth.
Within the US retail services business, net fee
income rose, reflecting lower merchant payments, in
part due to changes in contract obligations with
certain merchants. A rise in late fees from growth in
customer account balances and higher fees on
overdue payments contributed further to the
increase.
In the US mortgage-banking business, net fee
income declined. Although mortgage loan service
volumes grew in 2006, contributing additional fee
income from the greater proportion of mortgages
originated and then sold with mortgage servicing
rights (‘MSRs’) retained, these benefits were more
than offset by higher amortisation charges and lower
releases of temporary impairment provisions on
MSRs. The taxpayer financial services business
generated higher fee income from increased loan
volumes during the 2006 tax season.
In Canada, net fee income rose by 5 per cent to
US$217 million. Continued growth in the wealth
management business resulted in higher investment
administration fees, and credit card fee income rose,
driven by increased lending.
Trading income fell by 17 per cent, due to lower
income on HSBC Finance’s Decision One mortgage
balances held for resale to secondary market
purchasers. This primarily reflected additional losses
incurred following the repurchase of certain
mortgages previously sold to external third parties
which had subsequently gone into default. Higher
losses on derivatives that did not meet the criteria for
hedge accounting contributed further to the decrease.
A US$20 million gain from the MasterCard
Incorporated IPO was the key reason for the increase
in gains from financial instruments.
Other operating income also rose, primarily
driven by gains on various asset disposals. Most
notably, a US$123 million profit was achieved on
disposal of HSBC’s investment in Kanbay
International Inc, a worldwide information
technology services firm. Income from overnight
and short-term money market investments also rose.
These benefits were partly offset by greater losses
incurred on sales of repossessed properties,
following a 42 per cent rise in such properties as
customers defaulted on their mortgage payments.
Loan impairment charges and other credit risk
provisions of US$6.7 billion were 28 per cent higher
than in 2005. In the US, loan impairment charges
rose by 28 per cent despite the non-recurrence of
significant charges which arose in 2005 following
hurricane Katrina and increased levels of bankruptcy
filings in the final quarter of the year. Loan
impairment charges were also higher in the second
half of 2006 compared with both the preceding half
and the second half of 2005. The increase was
primarily driven by significantly higher
delinquencies and losses in the mortgage services