HSBC 2004 Annual Report Download - page 71

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income earnings showed a strong year-on-year
growth reflecting a combination of tightening credit
spreads and strong investor demand for yield in the
low interest rate environment, which boosted sales of
corporate bonds. In line with a greater business focus
on risk management products, revenues from trading
increased, reflecting the benefit successful interest
rate positioning and continued growth in customer
mandates from corporate customers. Additional
growth in revenue resulted from a strong presence in
each of the euro vanilla and structured derivatives
markets.
Fees and commission income decreased by 6 per
cent. Difficult operating conditions in equity markets
resulted in lower commissions and new-issue fees,
but these were partly offset by higher fees from
merger and advisory business as greater focus was
given to HSBC’s core customer sectors and regions.
Fees from debt capital markets activities were also
strong. Generally, fees benefited from the high level
of activity in the primary markets, as customers
sought long-term financing at low interest rates.
Staff costs rose, with higher bonuses reflecting
increased profitability in specific product lines.
Restructuring and research costs of US$24 million
were also incurred to build and reshape HSBC’s
investment banking and equities businesses.
Premises and equipment expenses were lower as a
result of savings in rental payments from the London
office move to Canary Wharf.
Credit experience was generally satisfactory
although new specific provisions were higher,
mainly due to a single name in the engineering
sector which was extensively restructured in the
second half of the year. Corporate weakness in the
power generation sector was also dealt with through
raising additional specific provisions, although these
were partly offset by recoveries in the transport and
telecommunications sectors, as balance sheets were
strengthened.
Gains on investment disposals were lower than
in 2002, mainly due to a reduction in profits from the
disposal of venture capital investments in CCF.
Against the background of a recovery from
recent lows in European stock markets, Private
Banking activities continued to grow during 2003.
Pre-tax profit, excluding goodwill amortisation,
increased by 48 per cent as a result of strong growth
in dealing income, lower costs and the non-
recurrence of contingencies and write downs
in 2002.
Net interest income was broadly in line with
2002. A 30 per cent increase in lending balances was
driven by clients seeking to maximise the overall
earnings potential of their investments by borrowing
to reinvest in higher returning securities. These
additional earnings were mostly offset by a decline
in yield on free funds as lower interest rates
prevailed throughout the year.
Net fees and commissions increased by 2 per
cent to US$556 million. The low interest rate
environment improved the attractiveness of
investment markets, particularly for sophisticated
investors with access to structured products which
offered potentially higher returns than from cash
deposits. Consequently, funds under management
increased by US$20 billion to US$91 billion, with a
move by clients away from liquid positions bringing
in some US$9 billion of new client funds. A strong
rise in discretionary mandates together with client
demand for structured products and HSBC Finance
Corporation’s commercial paper contributed to the
increase. Transaction and safe custody fees rose in
line with the growth in client funds while an
increased focus on product enrichment produced
strong growth in income from structured products. In
Germany, fee income was boosted by the placement
of two new property funds. However, income in
France was weaker as stock market activity
remained subdued.
Volatility in the major currencies resulted in
higher volumes of client transactions in the foreign
exchange markets, and combined with proprietary
equity gains in 2003, contributed to the 37 per cent
improvement in dealing profits to US$94 million.
Total operating expenses, before goodwill
amortisation, fell by 4 per cent to US$709 million.
This was achieved through cost savings realised
following the merger of three banks in Switzerland
in 2002 and lower property expenses.
Provisions for contingent liabilities and
commitments were lower than in 2002, which
included amounts provided for litigation. Amounts
written off fixed asset investments were lower than
in 2002 following a specific write down of a debt
security in 2002. Gains on disposal of investments
and tangible fixed assets increased by 22 per cent to
US$61 million, principally reflecting a gain on a
long-term private placement transaction.