HSBC 2007 Annual Report Download - page 62

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Hong Kong > 2007
60
Year ended 31 December 2007 compared
with year ended 31 December 2006
Economic briefing
Hong Kong’s economy remained robust during
2007, with the annual rate of growth of 6.3 per cent.
Domestic consumption was the major contributor to
economic expansion, supported by the strong labour
market. The unemployment rate fell to 3.4 per cent, a
nine year low, as the supply of labour remained very
tight. Global increases in food and oil prices affected
Hong Kong, but the territory also experienced wage
inflation, rising import prices and growth in property
rental costs. Inflation increased as a result, exceeding
3 per cent in the final quarter of the year.
In response to interest rate cuts in the US and
capital inflows into the local market, Hong Kong’s
main interest rate was cut on three separate
occasions during the final months of 2007, with the
prime rate ending the year at 6.75 per cent, down by
one per cent from its high for the year. Local asset
markets benefited accordingly. The previously very
strong levels of export growth slowed in the second
half of 2007, as demand from the US moderated and
the reduction in mainland China’s export tax rebate
in July temporarily affected Hong Kong’s re-exports.
Despite relatively modest trade growth, external
demand for Hong Kong’s services remained strong
due to the buoyant tourism sector and increasing
cross-border business activities, especially within the
financial sector.
Reconciliation of reported and underlying profit before tax
Year ended 31 December 2007 compared with year ended 31 December 2006
Hong Kong
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 .......... 4,685 (15) 4,670 – 813 5,483 17 17
Net fee income ................. 2,056 (6) 2,050 – 1,312 3,362 64 64
Other income3 .................. 1,863 (6) 1,857 – 620 2,477 33 33
Net operating income4 ... 8,604 (27) 8,577 – 2,745 11,322 32 32
Loan impairment charges
and other credit risk
provisions .................... (172) 1 (171) – (60) (231) (34) (35)
Net operating income .... 8,432 (26) 8,406 – 2,685 11,091 32 32
Operating expenses .......... (3,269) 9 (3,260) – (520) (3,780) (16) (16)
Operating profit ............. 5,163 (17) 5,146 – 2,165 7,311 42 42
Income from associates ... 19 - 19 – 9 28 47 47
Profit before tax ............. 5,182 (17) 5,165 – 2,174 7,339 42 42
For footnotes, see page 130.
Review of business performance
HSBC’s operations in Hong Kong reported a record
pre-tax profit of US$7.3 billion, an increase of
42 per cent compared with US$5.2 billion in 2006.
The underlying change was in line with the reported
change. Net operating income increased by 32 per
cent, double the rate of growth in operating
expenses.
In Personal Financial Services, performance was
driven by increased fee income, particularly from
retail brokerage and investment products, as well as
growth in net interest income following higher
deposit balances and lending. In Commercial
Banking, balance sheet growth was driven by
customer acquisition, increased trade flows and
supporting businesses expanding into mainland
China. In Global Banking and Markets, income
growth reflected improved performance in balance
sheet management, and strong results from the
trading businesses and securities services in the
buoyant economic environment. Higher demand for
structured products and mutual funds drove the
increased Private Banking profits. Cost efficiency
ratios improved in all customer groups.
The commentary that follows is on an
underlying basis.
Personal Financial Services reported a record
pre-tax profit of US$4.2 billion, an increase of
47 per cent compared with 2006, largely driven by
an increase in fee income in a year in which buoyant
stock markets encouraged high volumes of share
trading. The higher fee income, combined with