HSBC 2007 Annual Report Download - page 86

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Rest of Asia-Pacific > 2006
84
The robust performance of regional stock
markets during 2006 contributed to strong demand
for investment products and led to the launch of new
investment funds, which together generated a 27 per
cent increase in investment fee income, including
custody and broking fees. Growth was particularly
strong in South Korea, Taiwan, India and Singapore.
Sales of investment products, including unit trusts,
bonds and structured products, increased by 19 per
cent to US$8.0 billion and funds under management
grew by 19 per cent to US$8.6 billion.
HSBC continued to develop its regional
insurance business by launching medical insurance in
Singapore and establishing a Takaful joint venture in
Malaysia, offering shariah-compliant insurance
products. In the Middle East, cardholder credit
insurance was launched in the fourth quarter of
2006. These product launches were supported by
increased marketing activity and targeted investment
to increase HSBC’s presence and market share.
Consequently, the number of policies in force at the
end of 2006 rose by 89 per cent to 800,000 and
insurance fee income and insurance premiums rose
by 12 per cent and 4 per cent respectively.
Other operating income increased by
US$71 million due to gains on the sale of HSBC’s
Australian stockbroking, margin lending and
mortgage broker businesses. Additionally, HSBC
established a joint venture with Global Payments Inc.
to manage the majority of the bank’s Asian card
acquiring business. This was transferred to the
joint venture in July 2006, realising a gain of
US$10 million in the region’s Personal Financial
Services business.
Loan impairment charges and other credit risk
provisions more than doubled to US$545 million,
mainly due to higher charges for personal lending in
Taiwan and Indonesia. In Taiwan, regulatory changes
restricted collection activities and eased repayment
terms for delinquent borrowers. These changes,
coupled with a deteriorating credit environment, led
to a US$160 million increase in loan impairment
charges related mainly to the credit card portfolio,
most of which were realised in the first half of 2006.
In Indonesia, changes in minimum repayment
amounts, along with hardship following a significant
reduction in the government subsidy of fuel prices,
led to increased delinquency rates on credit cards,
also mainly in the first half of 2006. Elsewhere in the
region, credit quality was broadly stable and growth
in impairment charges followed increases in credit
card and personal lending balances.
Operating expenses increased by 26 per cent to
US$1.6 billion, largely tracking revenue growth.
Expansion of the branch network and development of
sales and support functions led to higher staff
numbers and, together with higher performance-
related incentive payments, contributed to a rise in
staff costs. The new branch openings increased
premises and equipment costs. The establishment of
a number of consumer finance businesses and HSBC
Direct’s introduction in Taiwan were also factors in
the rise of operating expenses.
Marketing costs rose as HSBC increased
advertising and promotional activity directed to
attracting new customers, enlarging HSBC’s share of
the credit card, mortgage and unsecured personal
lending markets and increasing deposit balances. In
the Middle East, IT expenditure rose as HSBC
introduced a new internet banking infrastructure,
implemented HSBC’s WHIRL credit card system
and made major updates to customer relationship
management software.
Largely driven by a strong performance in
HSBC’s strategic investment in Ping An Insurance,
which reported record results in 2006, income from
associates rose by 59 per cent. In Saudi Arabia there
were buoyant revenues from stock trading and
investment business, particularly in the first half of
2006 although, subsequently, turbulent local stock
markets affected investor sentiment and contributed
to lower income in the second half of the year.
Commercial Banking reported a pre-tax
profit of US$1.0 billion, 25 per cent higher than in
2005. Pre-provision operating income increased by
25 per cent, driven by higher deposit and lending
balances and widening liability spreads. The
migration of routine activities to lower-cost channels
helped to mitigate business expansion costs, and
operating expenses consequently increased by 21 per
cent. The cost efficiency ratio improved by
1.4 percentage points.
During 2006, HSBC focused on developing its
cross-border business banking activities and
increasing its presence in the small business market,
supported by investment in delivery channels and
increased promotional activity. International business
banking benefited from the strong performance of
HSBC’s two regional alignment programmes,
centred on mainland China and the Middle East,
together with the establishment of International
Business Centres in seven sites including Australia,
mainland China, India and Taiwan. In addition, new
branches in mainland China, India, Malaysia,
Bangladesh and Sri Lanka were complemented by
enhancements to internet banking services in
Malaysia and India and improved self-service
terminals in a number of countries. The launch of