HSBC 2007 Annual Report Download - page 42

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Competitive environment
40
Middle East
The competitive environment in the Middle East
intensified during 2007 as the regional economy
prospered on the back of record oil prices, which
prompted a surge in infrastructure development and
construction activities. The Dubai International
Finance Centre and the Qatar Financial Centre
continued to attract a number of international
institutions to set up operations in the region,
particularly in the investment and private banking
sectors.
Islamic banking activities continued to grow as
a percentage of the market with the establishment of
two prominent banks during the year. A number of
competitor banks introduced innovative products and
launched reward programmes to attract and retain
customers.
Malaysia, South Korea, Indonesia and Taiwan
Competition in the Malaysian banking sector
remained high as average lending rates continued to
decline, despite no change to central bank policy.
Banks in South Korea faced increased funding costs
as they competed for deposits with securities firms
who offered competitive rates on cash management
accounts. Measures to cool the real estate sector also
resulted in deterioration of asset quality for loans
associated with real estate and construction. Loan
growth in Indonesia increased in late 2007, as the
central bank of Indonesia continued to ease
monetary policy. In Taiwan, loan demand increased
in 2007 although it remained relatively low.
North America
US
The Group’s principal US subsidiaries, HSBC Bank
USA and HSBC Finance, faced unprecedented shifts
and uncertainties in the credit environment as the US
housing market continued to deteriorate. This
precipitated significant changes in the competitor
landscape.
Increased payments on resetting adjustable-rate
mortgages (‘ARMs’), together with falling house
prices, led to turmoil in the mortgage industry as
deteriorating credit quality led to a loss of appetite
among buyers of securitised mortgages in the
secondary market. The contraction of this important
funding source undermined the business models of
many market participants and over 100 competitors
closed, declared bankruptcy or were taken over in
2007. Influences on the market for securitised
mortgages had consequential effects on broader
credit markets and resulted in a general tightening
of credit availability, with particular impact on
financial institutions exposed to sub-prime
residential mortgages. Illiquidity in the markets for
related credit derivatives impacted the valuation of
such instruments.
The remaining sub-prime mortgage providers
tightened underwriting standards and increased rates
to reduce volumes, as they were obligated to retain
originated loans. Previously, most of these loans had
been packaged and sold to third party investors on
the secondary market. Major market participants
acted to reduce the number of foreclosures resulting
from ARMs by offering modified loan terms to
customers in financial distress. These initiatives
were supported and encouraged by federal and state
regulators. HSBC was one of the first institutions to
take a lead in this respect.
Regulatory scrutiny of the credit card industry
increased in 2007 and, although no new major
legislation was announced, a number of institutions,
including HSBC, amended credit card terms and
changed certain charging practices, benefiting
customers but at a cost to lenders. Notwithstanding
this, credit card competition remained fierce
throughout 2007, with the launch of a number of
innovative new products including environmentally-
themed initiatives and online substitutes for
traditional cards.
Canada
In Canada, the six largest banks retained their
significant presence in the country’s financial
services industry. Markets remained competitive,
however, with largely equivalent products being
offered by banks, insurance companies and other
financial institutions. Canadian financial markets
felt the effects of the downturn in US residential
property markets as certain asset-backed commercial
paper conduits experienced difficulty funding their
obligations. A group of Canadian and international
banks established accords to support these vehicles.
Latin America
Mexico
In Mexico, the banking industry remained centred
around the five largest institutions (including
HSBC), which control 80 per cent of the banking
system’s assets. Penetration of the formal financial
system remained low compared with other
developing economies in the region, while
demographics indicated a young and growing
population. Bank financing to the private sector was
less than 20 per cent of GDP, indicating significant
room for growth. In this context, the overall banking