HSBC 2005 Annual Report Download - page 91

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to higher volumes in Global Investment Banking,
reflecting positive momentum from an extension of
the product range, particularly in debt capital
markets, where earnings grew by 67 per cent. Equity
capital markets revenue improved from a low base
and higher income streams were generated from a
regular flow of new deals from asset-backed
securities. Global Transaction Banking fees rose,
reflecting higher customer volumes in payments and
cash management, particularly in Mexico.
Income from trading activities increased, due in
part to higher revenues in the US from credit
trading, following losses in 2004, and a tightening of
credit spreads. Business lines in which HSBC has
invested, such as equities and structured derivatives,
also showed strong year-on-year gains. In addition,
foreign exchange and derivatives trading was
facilitated by the introduction of the Group’s
standard derivatives system in Mexico.
There was a reduction of US$28 million in the
net release of loan impairment allowances, primarily
due to the non-recurrence of a number of large
releases. New impairment allowances against
corporate clients remained broadly in line with last
year.
Operating expenses increased by 45 per cent to
US$1,511 million. In 2005, the proportionately
greater investment in North America compared with
other regions reflected HSBC’s commitment to
strengthen global reach by developing its presence in
this region. HSBC continued to invest throughout the
year in expanding product capabilities, particularly
in structured derivatives, equities, research,
mortgage-backed securities and advisory, and the
build out of specialist sector teams in the US and
Mexico. Nearly half of the incremental cost was
attributable to this investment.
Staff costs rose by 43 per cent, reflecting the full
year of recruitment in the latter part of 2004 and
selective hiring in 2005, which resulted in an
increase of 870 staff in Corporate, Investment
Banking and Markets in North America.
Non-staff costs grew correspondingly and
included the expense incurred in building critical
infrastructure and investment in new technology.
Private Banking contributed a pre-tax profit of
US$104 million, an increase of 55 per cent on 2004,
driven by growth in client assets and the balance
sheet, and the expansion of Wealth and Tax
Advisory Services (‘WTAS’).
Net interest income increased by 13 per cent.
Lending balances rose by over 30 per cent as clients
borrowed on a secured basis to make alternative
investments. Mortgage lending also grew, supported
by the launch of a ‘Tailored Mortgage’ product
during the year. Spreads on current accounts
increased by 40 basis points, reflecting the benefit of
interest rate increases during the year.
A number of smaller trust accounts were sold in
2005, generating one-off income of US$9 million.
This was partly offset by the non-recurrence of gains
from financial investments arising from the sale of
seed capital investments in 2004. WTAS expanded
its presence in New York, Philadelphia, Los
Angeles, San Francisco and Virginia through the
recruitment of fee-generating staff, and grew
organically through referrals, contributing to an
increase of 15 per cent in fee income.
Client assets grew by 12 per cent to
US$46.2 billion, contributing to the rise in fee and
other operating income. US$4.2 billion of net new
money reflected client acquisition in the US and in
Mexico, following the launch of Private Banking
there in 2004. This was partly offset by the
divestment of trust accounts referred to above. The
‘Strategic Investment Solutions’ product, launched
in March 2004, was markedly successful in
attracting new funds. Discretionary managed assets
invested in this product reached US$0.9 billion.
Operating expenses of US$334 million were
13 per cent higher than last year. The recruitment of
front office staff in Private Banking, and new fee-
generating staff in WTAS, added to the cost base.
This was partly offset by headcount savings through
restructuring and the sale of the trust account
business referred to above.
Increased activity at HSBC’s North American
technology centre led to an increase in both costs
and net operating income in Other, as higher
network and systems maintenance costs and
development expenditure to meet increased
technological requirements were recharged to other
customer groups. Movements in the fair value of
own debt and the associated swaps designated at fair
value led to a US$401 million increase in total
operating income.