HSBC 2008 Annual Report Download - page 126

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > North America > 2007
124
Reconciliation of reported and underlying profit before tax
2007 compared with 2006
North America
2006
as
reported
US$m
2006
acquisitions
and
disposals1
US$m
Currency
translation2
US$m
2006
at 2007
exchange
rates6
US$m
2007
acquisitions,
disposals
& dilution
gains1
US$m
Under-
lying
change
US$m
2007
as
reported
US$m
Re-
ported
change
%
Under-
lying
change
%
Net interest income .......... 14,268 – 65 14,333 – 514 14,847 4 4
Net fee income ................. 4,766 – 26 4,792 – 1,018 5,810 22 21
Other income4................... 2,593 – 10 2,603 20 (497) 2,126 (18) (19)
Net operating income5...... 21,627 – 101 21,728 20 1,035 22,783 5 5
Loan impairment charges
and other credit risk
provisions .................... (6,796) – (3) (6,799) – (5,357) (12,156) (79) (79)
Net operating income ...... 14,831 – 98 14,929 20 (4,322) 10,627 (28) (29)
Operating expenses .......... (10,193) – (47) (10,240) (26) (290) (10,556) (4) (3)
Operating profit ............... 4,638 – 51 4,689 (6) (4,612) 71 (98) (98)
Income from associates ... 30 – 1 31 – (11) 20 (33) (35)
Profit before tax ............... 4,668 – 52 4,720 (6) (4,623) 91 (98) (98)
For footnotes, see page 143.
The US economy began to slow in the fourth
quarter of 2007 and, increasingly, evidence
suggested that some parts of the country were
already in recession. As the housing market slump
affected the real economy, the deterioration in credit
quality that began in the mortgage services business
extended to include other consumer finance
businesses in the US. In HSBC, this was reflected in
a 79 per cent rise in loan impairment charges and a
loss before tax of US$1.5 billion in Personal
Financial Services. In response to this, management
took actions to manage exposure and realign the
business, including stopping new mortgage
purchases in mortgage services, tightening
underwriting criteria, restricting the product range in
consumer lending, decreasing credit lines and
reducing the volume of balance transfers in credit
cards, and restructuring the consumer lending branch
network by closing some 400 branches of HSBC
Finance to reflect expected lower demand. A loss of
US$965 million in Global Banking and Markets
arose from credit-related and liquidity event write-
downs as asset-backed securities markets became
illiquid and credit spreads widened markedly.
Net interest income rose by 4 per cent, as higher
revenues from payments and cash management,
commercial lending and cards were offset by lower
mortgage balances, spread compression and higher
non-performing balances.
Overall, average lending balances were 5 per
cent higher, as growth in credit and private label
cards and vehicle finance offset lower mortgage
balances. The benefits of higher volumes were
largely offset as asset spreads narrowed due to
higher funding costs. Also, although deposit
balances rose, spreads reduced as the product mix
shifted to higher yielding products. Business
expansion and higher customer volumes drove
growth in loans and deposits in Commercial
Banking. A 43 per cent increase in revenue from
payments and cash management was due to higher
customer balances.
Net fee income rose as a result of higher
personal card balances attracting late and over-limit
fees. Fees from card services also rose, due to
enhancement services on cards such as debt
protection and identity protection. The Intellicheck
service, which allows customers to pay their credit
card balances over the telephone for a fee, proved
popular with customers. Payments and cash
management fees also increased on higher volumes
generated. In the fourth quarter of 2007, HSBC
changed fee practices on credit cards to ensure they
fully reflected HSBC’s brand principles. This
reduced income by US$55 million in 2007.
HSBC incurred a trading loss following write-
downs in credit and structured derivatives, including
US$282 million relating to monoline exposures, and
in leveraged and acquisition finance, driven by
deterioration in the credit market in the second half
of the year. The write-downs were compounded by
trading losses on purchased loans in the mortgage
services’ wholesale business, in response to which
HSBC closed the Decision One business. By