HSBC 2006 Annual Report Download - page 10

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Group Chairman’s statement
8
conduct Takaful business in both Malaysia and Saudi
Arabia during 2006.
Creating advantage from scale, technology
and process engineering
We continue to make progress in streamlining our
operations by focusing on straight through
processing and simplifying our products.
During 2006, among other things, we introduced
2,300 advanced self-service terminals, added
13 countries to HSBCnet, which is our strategic
internet platform for corporate and institutional
clients and made over 900,000 online insurance
sales.
HSBC in Mexico was the first bank to offer pre-
approved online mortgages in 2006, allowing
customers to apply and obtain details about amounts,
duration and monthly payments within minutes.
In Hong Kong in the past four years, processing
has been moved from the branches in favour of
sales-related activities, with the result that less than
5 per cent of transactions are now being handled
physically in the branches.
In the UK retail network, product simplification
has reduced the range of products by two-thirds over
the last two years which, together with branch
relocation and refurbishment and adopting retail
store hours, is having a positive impact on sales
volumes.
Credit environment
The global credit environment, particularly in the
corporate and commercial segments, remained
generally favourable throughout 2006. In part, this
continued to reflect a general abundance of liquidity
and the prevalence of historically low nominal
interest rates. A significant proportion of the trade
surpluses of the major Asian exporting countries and
the oil producers continued to be recycled into
government debt in developed markets.
Consequently, risk premia remained at record
low levels. This encouraged increasing interest in
structured products and the acceptance of greater
leverage as fixed income investors sought higher
yielding assets. The risks arising from this activity
were widely distributed using a range of market
techniques.
The major credit issue affecting the Group in
2006 arose in the US in the sub-prime mortgage
market. A slowdown in the rate of growth in US
house prices accelerated delinquency trends in the
US sub-prime mortgage market. Deterioration was
marked in the more recent loans, as the absence of
equity appreciation reduced customers’ options for
refinancing. Reduced refinancing options also
highlighted the fact that, as adjustable rate mortgages
reset over the next few years at higher interest rates
than their original rates, the effect of the greater
contractual payment obligations will lead to further
delinquency.
We took these factors into account in
determining the appropriate level of impairment
allowances at 31 December 2006 against the
Mortgage Services loan book. We factored into our
allowances the most recent trends in delinquency
and loss severity and estimated the effect of the
higher payments due on adjustable rate mortgages as
they reset, in particular where we hold a second lien
mortgage behind an adjusting first mortgage. Going
forward, the level of future impairment allowances
will be sensitive to economic conditions and, in
particular, to the state of the housing market, the
level of interest rates and the availability of
financing options for sub-prime borrowers.
Elsewhere in consumer finance in the US, the
delinquency rate rose during the year, in large part
due to the unusually low levels of delinquency at the
end of 2005. This resulted from the effect of changes
in bankruptcy law in the fourth quarter of 2005,
portfolio ageing and the mix of the Metris portfolio
acquired at the end of that year.
In UK Personal Financial Services, loan
impairment charges as a percentage of lending
remained broadly in line with last year, as actions
taken on underwriting and collections mitigated the
increasing trend of indebted customers to seek
recourse in debt management services. Similarly, in
Taiwan, measures taken to deal with the effect of
mandatory regulatory relief from credit card debt,
which increased impairment charges in the first half
of 2006, reduced the charge in the second half of the
year.
In the context of HSBC’s financial strength and
operating profitability, the areas of current weakness
are well covered and they will not restrict our ability
to develop our business opportunities as planned, or
maintain our progressive dividend policy. They have,
however, brought additional focus on the uncertain
longevity of today’s generally benign conditions and
on the credit risks inherent in economies where asset
prices are accelerating ahead of real wage rises and
cash flows are being leveraged using financial
products designed to support higher levels of debt.
We will ensure that our credit appetite reflects these
risks.