HSBC 2006 Annual Report Download - page 36

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Europe > 2006
34
M&S branded cards, which represented 4 percentage
points of the increase, driven by an increased sales
focus which included extensive media advertising.
This was partly offset by declining balances within
the store cards business and the cards business of
HFC Bank Ltd (‘HFC’), reflecting HSBC’s more
restricted credit appetite. Spreads increased modestly
compared with 2005.
Average UK mortgage balances rose by 11 per
cent to US$68.9 billion, primarily in fixed rate
mortgages. Growth was achieved through
competitive pricing and targeted marketing
strategies, including the launch of new fixed,
discount and tracker-rate mortgages during the year.
A slight narrowing of spreads reflected a change in
mix away from variable rate mortgages to fixed rate
mortgages, and the competitive positioning referred
to above.
Average unsecured lending balances in the UK
declined by 4 per cent, reflecting HSBC’s decision
to contain growth through stricter underwriting
criteria. Spreads narrowed, following the
introduction in 2005 of preferential pricing for
lower-risk customers, and a change in mix towards
higher-value but lower-yielding loans.
In France, net interest income fell by 8 per cent.
Spreads narrowed as older higher-yielding
investments matured, while competitive pricing
reduced lending yields, particularly in the residential
mortgage market. These pressures on margin were
only partially offset by strong balance sheet growth.
Marketing campaigns building on the ‘HSBC
France’ brand aided strong sales and customer
recruitment, most notably in residential property
lending and current accounts and also increased
future cross-selling opportunities.
In Turkey, net interest income rose by 14 per
cent. Lending grew strongly, substantially funded by
deposit growth. Overall, deposit balances rose by
over 50 per cent, largely driven by customer
recruitment aided by the branch network expansion
referred to above. Spreads widened following
increases in overnight interest rates and the value of
funds rose as a consequence. Marketing initiatives
and cross-sales with credit card customers helped
more than double average unsecured lending
balances. Mortgage lending was also strong, with a
60 per cent increase in balances. Credit card
balances rose by 22 per cent, with growth dampened
by credit calming measures imposed by government
regulation.
Net fee income increased by 8 per cent to
US$2,533 million. In the UK, rising sales of fee-
earning packaged current accounts, travel money and
investment products drove fee growth. Fees from
unsecured lending also rose. These benefits were
partly offset by lower creditor protection income,
reflecting the steps taken by HSBC to constrain
lending growth. Reduced loan sales and smaller
average loans (the result of this initiative) led to both
lower insurance sales and a reduction in average
premiums.
In France, banking fees rose through higher
sales of packaged current accounts. Transactional
and overdraft fees and insurance distribution fees
also increased, reflecting growth in the customer
base. In Turkey, strong growth in lending volumes
and, to a lesser extent, credit cards, helped drive fee
income growth. Additional sales staff were recruited
to reinforce the emphasis on wealth management,
and the launch of new pension products also helped
boost fees.
In 2006, MasterCard became publicly listed
through an IPO, and the US$37 million gain from
financial investments mainly reflected Personal
Financial Services’ share of the proceeds of the IPO.
Responding to changes in work and shopping
patterns among its customers and the increasing
acceptance of direct channels. HSBC appraised its
UK property portfolio during the year, and higher
other operating income reflected Personal Financial
Services’ share of revenue from branch sale and
lease-back transactions. Personal Financial Services’
US$37 million share of income on the sale of
HSBC’s stake in The Cyprus Popular Bank was also
included within other operating income.
Lower sales of life and creditor repayment
protection, which were driven by the constraints on
personal lending growth referred to above, and a
change in reinsurance arrangements at the end of
2005, contributed to the decrease in net earned
insurance premiums. Lower sales of investment-
linked insurance products, together with the effect of
market movements on related insurance and
investment assets, contributed to the decline in net
income from financial instruments designated at fair
value. This was largely offset by a corresponding
decrease in net insurance claims and movements in
policyholders’ liabilities.
Loan impairment charges and other credit risk
provisions of US$1,838 million were 6 per cent
higher than in 2005, largely reflecting lending
growth in the region.
In the UK, the 8 per cent rise in loan impairment
charges was broadly in line with lending growth.
Actions taken on underwriting and collection
activities mitigated a continuation of the rising trend