HSBC 2007 Annual Report Download - page 106

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
North America > 2006
104
expansion and greater focus placed on generating
balances from commercial real estate companies and
middle market customers. In particular, there was an
increased emphasis on attracting high margin
balances from cash management sales activities.
Rising interest rates encouraged customers to
transfer funds to higher yielding products and the
resulting change in product mix led to a narrowing
of liability spreads.
The 7 per cent growth in average lending
balances was principally led by greater volumes
generated from small business and middle market
customers. This was achieved by a combination of
geographical expansion, increased marketing activity
and the recruitment of additional small-business
relationship managers. Asset spreads narrowed due
to competitive pricing pressures, particularly in the
middle market customer segment, which partly
offset the income benefits from higher lending
volumes.
In Canada, net interest income increased by
14 per cent. The strong economy encouraged
continued business investment by customers and
this, in conjunction with HSBC’s reputation for
customer service and relationship management,
helped generate a 15 per cent growth in average
lending balances. Loan spreads were broadly in line
with 2005. There was a 35 per cent improvement in
average deposit balances, driven by various factors
including the acquisition of new customers,
strengthening relationships with existing ones, and
enhancing payment and cash management products.
Deposit spreads widened as interest rates rose,
augmenting the income benefits from higher
balances.
Net interest income in Bermuda grew by
42 per cent, partly due to interest rate rises which
widened deposit spreads. Deposit balances increased
by 26 per cent, while increased cross-sales activity
contributed to a 26 per cent rise in average lending
balances.
Net fee income improved by 13 per cent to
US$329 million. In the US, the 11 per cent rise was
primarily due to an increase in syndication
capabilities, which led to higher commercial
mortgage fees, and from business expansion into
new geographical markets. In Canada, growth in
new lending business led to higher levels of service
charges, and credit fees increased following the rise
in customer numbers. Product enhancements and
additions to the sales force helped grow fee income
from payment and cash management services.
There was a small reduction in other operating
income, largely due to the net effects of lower gains
on asset disposals in the US.
Also in the US, the redemption of bonds
issued by the Venezuelan government led to a
US$19 million gain from financial instruments.
Loan impairment charges were US$74 million
compared with a net release of US$21 million in
2005. In the US, the increase reflected strong growth
in lending balances to small and middle market
customers, higher write-offs in the small business
segment and the exceptionally low charges recorded
in 2005 compared with historical levels. Loan
impairment charges rose in Canada following the
non-recurrence of releases which occurred in 2005
and, in Bermuda, net releases compared with charges
in 2005.
Operating expenses grew by 21 per cent to
US$814 million. The 27 per cent rise in the US was
driven by a combination of increased costs incurred
in support of geographical expansion and the
recruitment of additional sales staff to drive revenue
growth. In Canada, operating expenses were 14 per
cent higher from additional headcount recruited to
support branch and network expansion and increased
salary and bonus costs, which reflected improved
revenues. Expenditure incurred in order to develop
the business, largely due to HSBC brand campaigns,
contributed further to cost growth.
Income from associates rose by US$34 million,
including HSBC’s share from an equity investment
in Wells Fargo HSBC Trade Bank N.A. of
US$11 million in the US. Income from associates of
US$22 million in Canada was attributable to higher
gains and distributions from private equity fund
investments. These funds, in which HSBC has
maintained a minority interest, were established to
provide institutional investors with access to private
equity investment opportunities.
Global Banking and Markets reported a pre-
tax profit of US$423 million, 28 per cent lower than
in 2005. The result in 2005 benefited from a
US$106 million favourable movement on ineffective
hedges on HSBC’s own debt and, excluding this,
profit before tax decreased by 12 per cent. The fall in
profits was primarily due to a decline in balance
sheet management revenues. Balance sheet
management activity continued to be constrained
by compressed spreads in a flat interest rate
yield curve environment, with a resultant decrease of
US$347 million. Operating expenses were higher by
19 per cent with a significant portion of the increase
driven by the first full year effect of recruitment
and business expansion in 2005, and by specific