HSBC 2006 Annual Report Download - page 82

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
North America > 2006
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consequently higher in the second half of 2006 as
these portfolios seasoned, coinciding with the
weakening housing market.
In Canada, loan impairment charges were 38 per
cent higher. This primarily reflected the non-
recurrence of loan impairment releases from core
banking operations, which occurred in 2005, as well
as growth in both secured and unsecured lending
balances and higher delinquency rates in the motor
vehicle finance business.
Operating expenses grew by 12 per cent
to US$7,379 million. In the US, costs of
US$6,706 million were 11 per cent higher than in
2005. In the consumer finance business, the rise
was driven by increased headcount to support
incremental collections activity, and greater
volumes. Higher costs were incurred in marketing
cards to support the launch of new co-branded
credit cards, greater levels of mailing and other
promotional campaigns in the cards and retail
services businesses. IT and administrative expenses
grew in support of higher asset balances. A lower
level of deferred origination costs in the mortgage
services business, due to a decline in volumes,
contributed further to the cost growth.
In HSBC Bank USA, expense growth was
primarily driven by branch staff costs from
additional headcount recruited to support investment
in business expansion and new branch openings.
Greater emphasis placed on increasing the quality
and number of branch staff dedicated to sales and
customer relationship activities, which changed the
staff mix, also contributed to cost growth. The
continued promotion of the on-line savings product,
new branch openings and branding initiatives at the
John F. Kennedy International and LaGuardia
airports in New York led to a rise in marketing costs.
IT costs also grew following significant investment
expenditure incurred on several key network
efficiency projects.
In Canada, costs rose by 19 per cent, mainly due
to higher staff and marketing costs. Staff costs grew
by 13 per cent, with increased headcount supporting
expansion of the consumer finance business and
bank distribution network. Continuing investment in
growing the wealth management business and higher
incentive costs reflecting improved revenues also
contributed to the increase. Marketing costs grew
following external campaigns to improve brand
awareness.
Commercial Banking’s pre-tax profits rose by
4 per cent to US$957 million, largely driven by
lending and deposit growth and higher fee income,
partly offset by increased loan impairment charges.
Costs rose mainly from geographical expansion in
the US and branch and business expansion in
Canada. The cost efficiency ratio worsened by
2.1 percentage points, as costs grew faster than
revenues.
Net interest income grew by 15 per cent to
US$1,362 million. In the US, net interest income
was 13 per cent higher, as HSBC continued to
expand its geographical presence, notably in Boston,
Connecticut, New Jersey, Philadelphia, Washington
D.C., Chicago and Los Angeles. Average deposit
balances rose by 30 per cent, aided by geographical
expansion and greater focus placed on generating
balances from commercial real estate companies and
middle market customers. In particular, there was an
increased emphasis on attracting high margin
balances from cash management sales activities.
Rising interest rates encouraged customers to
transfer funds to higher yielding products and the
resulting change in product mix led to a narrowing
of liability spreads.
The 7 per cent growth in average lending
balances was principally led by greater volumes
generated from small business and middle market
customers. This was achieved by a combination of
geographical expansion, increased marketing activity
and the recruitment of additional small-business
relationship managers. Asset spreads narrowed due
to competitive pricing pressures, particularly in the
middle market customer segment, which partly
offset the income benefits from higher lending
volumes.
In Canada, net interest income increased by
14 per cent. The strong economy encouraged
continued business investment by customers and
this, in conjunction with HSBC’s reputation for
customer service and relationship management,
helped generate a 15 per cent growth in average
lending balances. Loan spreads were broadly in line
with 2005. There was a 35 per cent improvement in
average deposit balances, driven by various factors
including the acquisition of new customers,
strengthening relationships with existing ones, and
enhancing payment and cash management products.
Deposit spreads widened as interest rates rose,
augmenting the income benefits from higher
balances.
Net interest income in Bermuda grew by
42 per cent, partly due to interest rate rises which
widened deposit spreads. Deposit balances increased
by 26 per cent, while increased cross-sales activity
contributed to a 26 per cent rise in average lending
balances.