HSBC 2007 Annual Report Download - page 99

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staffing to support business growth initiatives. Also
contributing was US$70 million of one-off costs
arising from the indemnification agreement with
Visa ahead of the company’s planned IPO.
Marketing costs to support the growth in
Personal Financial Services lending increased in
2007, but in the second half expenditure on credit
cards, co-branded credit cards and personal non-
credit card marketing declined following the
decision to slow loan growth in these portfolios. In
HSBC Bank USA, marketing costs rose as a result of
campaigns promoting the online savings product and
investment in the HSBC brand, including the
Newark Airport branding and the HSBC Premier
relaunch. The expansion of the bank branch network
in existing and new geographical areas also
increased premises and other branch operating costs.
In Canada, operating expenses increased by
13 per cent due to the strategic growth of the branch
network, marketing to support new products, related
investment in systems, and higher transaction costs
caused by the rise in customer numbers. Staff
numbers, premises and equipment costs rose, partly
due to the opening of five new branches. Marketing
costs rose too, principally due to direct savings and
brand awareness campaigns. The Canadian
consumer finance business restructured its business
model to align with changes in the US consumer
finance operations, reducing lending through its
branch network and closing the correspondent
mortgage business. A total of 29 consumer finance
branches were closed.
Commercial Banking’s pre-tax profits of
US$920 million declined by 6 per cent compared
with 2006. In the US, loan and deposit balances
grew with the continuing expansion of the branch
network outside its traditional base into 16 of the
top 25 business centres by the end of the year,
complemented by a restructuring of the branch sales
force. Despite this growth, overall performance
declined as business expansion costs, restructuring
costs, lower gains on asset disposals, a slowdown
in commercial and real estate activity and a
deterioration in the credit environment more
than offset the benefit of higher volumes.
In Canada, profit before tax was broadly flat at
US$466 million, driven by strong balance sheet
growth, notwithstanding the wider funding and
liquidity pressures which arose from the freezing of
the non-bank ABCP market in Canada in August.
In the US, net interest income rose by 10 per
cent to US$804 million, driven by average deposit
growth of 20 per cent and loan growth of 6 per cent.
Organic expansion underpinned the increase, with
recently opened offices in Chicago, Washington DC
and the West Coast contributing to growth. Net
interest income growth slowed as a result of
declining commercial real estate activity, with higher
repayments and slower replacement business
reflecting market conditions and credit appetite.
There were also narrower spreads on deposits, as
customers migrated to higher yielding products.
Average deposit balances in the US rose by
20 per cent, led by a 21 per cent increase in volumes
from small business customers. The expansion of the
network and targeted marketing initiatives were key
factors in the rise. Spreads narrowed as the product
mix changed towards higher yielding accounts,
particularly among small business customers, partly
offsetting the gains to income from higher balances.
Average loan balances in the US were 4 per cent
higher. Loan growth was primarily due to strong
activity in middle market lending, up 20 per cent,
with growth coming equally from existing branches
and geographic expansion. Overall loan growth was,
however, much lower as a result of a slowdown in
financing commercial real estate activity, where
lending volumes fell by 6 per cent. Competitive
pressures led to narrower spreads.
In Canada, net interest income rose by 14 per
cent, driven by strong loan growth, particularly in
Western Canada. Average deposit balances rose by
10 per cent, with volumes lifted by the success of the
payments and cash management business. Spreads
rose as repricing initiatives on key products offset
the effects of competitive pressures and increased
funding costs over the last four months of 2007, due
to the disruption caused to the ABCP market by
constrained liquidity, as described above.
Average lending balances rose by 17 per cent,
buoyed by the strong economic backdrop. There was
notable expansion in Western Canada, where the
resource economy continued to underpin
performance. Spreads were tighter due to spread
compression on floating rate loans.
In Bermuda, net interest income increased by
15 per cent. Average deposit balances fell by 6 per
cent, mainly due to lower than expected growth in
volumes of fixed term deposits.
Net fee income was broadly unchanged at
US$338 million. In the US, fee income was flat
compared with 2006. The growth in deposit accounts
and a focus on business debit cards for small and
micro businesses led to a rise in deposit service
charges and card fees. This was, however, offset by
lower fees on the syndication of commercial real
estate loans as balance activity declined. In Canada,