HSBC 2006 Annual Report Download - page 85

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robust, rising 11 per cent. Unemployment fell by
0.5 per cent to 4.9 per cent in 2005, with 2 million
new jobs created. The Federal Reserve’s favoured
inflation measure, the core personal consumption
expenditure deflator, was contained, rising 2 per cent
in 2005. Headline inflation in 2005 was higher due
to increased energy prices, as the full year consumer
price index rose 3.4 per cent. The Federal Reserve
raised interest rates eight times during the year, from
2.25 per cent to 4.25 per cent. 10-year bond yields
and equity markets rose moderately during 2005 as
the US dollar strengthened, ending the year at
US$1.18 to the euro compared with US$1.35 at the
end of 2004.
Canada’s growth was 2.9 per cent in 2005, as
strong employment growth and, late in the year,
rising earnings, boosted consumer spending. The
unemployment rate fell to 6.4 per cent, the lowest
level since 1976. In the second half of the year,
exports rose, boosted by strong global demand. In
the energy sector, investment and profits rose
strongly as oil prices soared, with the positive
economic impact being most pronounced in Western
Canada. Gasoline prices lifted headline inflation to a
peak of 3.4 per cent in September, but it fell back
sharply and core inflation was 1.6 per cent by the
year-end. Having been kept on hold for much of the
year, interest rates were raised by 75 basis points
between September and December. The BoC has
indicated that further increases may be required.
Review of business performance
HSBC’s operations in North America reported a pre-
tax profit of US$5,915 million, compared with
US$5,268 million in 2004, representing an increase
of 12 per cent. On an underlying basis, pre-tax
profits grew by 11 per cent and represented around
28 per cent of HSBC’s equivalent total profit. In the
US, the benefits from strong deposit growth in
Personal Financial Services were partly negated by
narrowing spreads on lending in the rising interest
rate environment. In Commercial Banking, growth in
pre-tax profits was largely driven by lending and
deposit balance growth and improved liability
interest margins. In Corporate, Investment Banking
and Markets, growth in revenues was offset by
investment expenditure to build the platform and
infrastructure required for future growth.
The commentary that follows is on an
underlying basis.
Personal Financial Services, including the
consumer finance business, generated a pre-tax
profit of US$4,181 million, 9 per cent higher than in
2004. Under IFRSs, from 1 January 2005, HSBC
changed the accounting treatment for certain debt
issued and related interest rate swaps. This did not
change the underlying economics of the transactions.
The resulting revenues of US$618 million in 2004
are excluded from the following commentary. In
addition, interest income earned on mortgage
balances held on HSBC’s balance sheet pending sale
into the US secondary mortgage market was reported
under trading income. In 2004 this was reported in
net interest income. This difference in treatment is
also excluded from the following commentary.
In the US, profit before tax rose 28 per cent to
US$3,853 million. The rise in profit was largely
driven by widening deposit spreads, strong deposit
and customer loan growth and higher fee income,
partly offset by lower asset spreads due to higher
funding costs. Loan impairment charges fell,
notwithstanding the higher charges due to the
combined effects of hurricane Katrina and changes
in bankruptcy legislation. Profit before tax in Canada
rose 93 per cent as net interest income increased due
to strong asset and liability growth and widening
deposit spreads.
Net interest income grew by 3 per cent to
US$11,636 million, mainly from increases in both
the US and Canada. In the US, net interest income
rose by 3 per cent, largely driven by higher deposit
balances and widening deposit spreads. Average
loan balances grew strongly, in particular from prime
and non-prime residential mortgages. With ongoing
strong demand for unsecured lending, the credit
card, private label card and personal non-credit card
portfolios continued to grow. The benefits of strong
asset growth were largely offset by lower spreads as
interest rates rose.
Additional resources were focused on the core
retail banking business in the US as high priority
was given to growing the deposit base. Investment in
the retail branch network continued, to ensure a
presence in locations with high growth potential.
During the year, 27 new branches were opened, each
tailored to meet the needs of the local market. The
launch of two new deposit products, HSBC’s first
national savings product, ‘Online Savings’, and
‘HSBC Premier Savings’, augmented by a 45 per
cent rise in new personal account openings, led to a
4 per cent growth in average deposit balances to
US$26.7 billion.
Overall, average mortgage balances, including
US$3.3 billion held for resale, rose by 27 per cent to
US$112.1 billion. This was due to the significant
expansion of ARMs originated during 2004 in the
US bank and strong growth within the mortgage
services and branch-based consumer lending