HSBC 2007 Annual Report Download - page 46

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Europe > 2007
44
Year ended 31 December 2007 compared
with year ended 31 December 2006
Economic briefing
In the UK, GDP growth accelerated in 2007 to
3.1 per cent from 2.9 per cent in 2006, mainly as
a result of buoyant consumer and investment
spending. Net trade depressed GDP growth through
2007, and the current account deficit reached a
record 5.7 per cent of GDP in the third quarter of the
year. Employment growth was fairly subdued, rising
by approximately 0.7 per cent during the year.
Consumer Price Index (‘CPI’) inflation reached
a decade-long high of 3.1 per cent in March but
subsequently fell back to 2.1 per cent by the year-
end, close to the Bank of England’s 2 per cent target.
After a strong start to the year, nominal house prices
declined and housing activity diminished in the final
months of 2007. The Bank of England raised interest
rates by 75 basis points during 2007 to a peak of
5.75 per cent, but subsequently reduced them to
5.5 per cent at the end of 2007.
The expansion of the eurozone economy
continued steadily in 2007, with GDP growth of
2.7 per cent. As in the UK, much of the momentum
came from strength in business investment and
exports as global demand remained strong,
particularly from emerging markets. Consumption
was relatively subdued, despite declining
unemployment, although fiscal reforms (particularly
in Germany) are believed to have depressed
household expenditure. Eurozone inflation increased
steadily during the second half of the year to an
annual rate of 3.1 per cent in December, driven
largely by rises in food and energy prices. The
European Central Bank (‘ECB’) raised interest rates
by 50 basis points during 2007, to finish the year at
4 per cent.
In Turkey, economic activity softened as the
year progressed, with GDP rising by 3.9 per cent
during the first three quarters of 2007 against the
comparable period of 2006. Headline inflation
remained under pressure from increases in energy
and food prices, though core indicators improved
markedly, prompting Turkey’s central bank to
cautiously ease monetary policy. The current
account deficit stabilised at about 7 per cent of GDP
with rising service sector receipts from tourism,
although high energy costs may cause the trade
balance to deteriorate.
Reconciliation of reported and underlying profit before tax
Year ended 31 December 2007 compared with year ended 31 December 2006
Europe
2006
as
reported
US$m
Currency
translation1
US$m
2006
at 2007
exchange
rates
US$m
Acquisitions,
disposals
and dilution
gains2
US$m
Underlying
change
US$m
2007
as
reported
US$m
Reported
change
%
Underlying
change
%
Net interest income .......... 8,289 635 8,924 416 (1,594) 7,746 (7) (18)
Net fee income ................. 7,108 586 7,694 (80) 817 8,431 19 11
Other income3 .................. 7,675 576 8,251 (143) 3,282 11,390 48 40
Net operating income4 .... 23,072 1,797 24,869 193 2,505 27,567 19 10
Loan impairment charges
and other credit risk
provisions .................... (2,155) (147) (2,302) – (240) (2,542) (18) (10)
Net operating income .... 20,917 1,650 22,567 193 2,265 25,025 20 10
Operating expenses .......... (13,871) (1,076) (14,947) (49) (1,529) (16,525) (19) (10)
Operating profit ............. 7,046 574 7,620 144 736 8,500 21 10
Income from associates ... (72) (6) (78) (50) 223 95 232 286
Profit before tax ............. 6,974 568 7,542 94 959 8,595 23 13
For footnotes, see page 130.
Review of business performance
European operations reported a pre-tax profit
of US$8.6 billion, compared with US$7.0 billion in
2006, an increase of 23 per cent. On an underlying
basis, pre-tax profits improved by 13 per cent.
In March 2007, HSBC acquired its partner’s
shares in life, property and casualty insurer, HSBC
Assurances. The results of HSBC Assurances are
excluded from the underlying commentary below.
In Commercial Banking, growth in deposit and
lending balances in the UK and ongoing business
expansion in Turkey and Malta led to steady growth
in revenues. This was partly offset by increased loan
impairment charges and higher costs associated with