HSBC 2007 Annual Report Download - page 122

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Latin America > 2006
120
in transactions from non-HSBC customers. Growth in
mutual fund fees was mainly driven by higher sales
volumes and expanded product offerings in the
stronger economic environment.
Fee income in Brazil rose by 25 per cent, largely
from increased current account fees, reflecting
growth in customer numbers, greater transaction
volumes and re-pricing initiatives. Higher payroll and
vehicle balances also led to increased fees from
lending activities. In Argentina, higher credit card
fees from balance growth, re-pricing initiatives on
savings accounts, and the discontinuance of a free
current account promotion led to an improvement in
fee income.
Across the region, HSBC’s insurance businesses
continued to perform well. Sales of insurance
products in Mexico remained strong, with increased
cross-selling through the branch network of simple
insurance products together with other Personal
Financial Services products containing insurance
components. This led to a 19 per cent rise in net
premiums, mainly in respect of individual life
insurance products. In Brazil, excluding the effect of
the property and casualty insurance business sold in
2005, insurance revenues rose, largely from life and
pension products. In Argentina, increased advertising,
partnerships with established local consumer brands
and internal cross-selling initiatives led to a rise in
motor, home and extended-warranty insurance
premium income. Life and annuity premiums also
increased in line with higher customer salaries. The
‘Maxima’ pension funds business delivered higher
revenues helped by improvements in the economic
climate and greater levels of employment.
Lower other operating income reflected the non-
recurrence of profit on the sale of HSBC’s Brazilian
property and casualty insurance business.
Loan impairment charges and other credit risk
provisions rose by 15 per cent to US$764 million as
lending grew and the loan book seasoned. In Mexico,
the higher charge was primarily driven by the growth
in credit card lending. In Brazil, loan impairment
charges increased modestly, driven by growth in
vehicle finance, instalment loans (credito parcelado)
and credit card lending. As the credit environment
weakened during the first half of the year, various
measures were taken to mitigate the effects. These
included tightening lending criteria, enhancing credit
analytics, revising the collection policy, prioritising
secured lending ahead of unsecured advances and
strengthening credit operations. Following
implementation of these measures, several key credit
indicators showed improvement.
Operating expenses rose by 10 per cent. In
Mexico, expense growth of 10 per cent was mainly
driven by increased staff costs. This largely reflected
the recruitment of 2,200 employees to improve
customer service levels in branches and grow sales.
Incentive costs increased as profits rose, and
marketing costs grew as a result of various
promotional campaigns. The continued expansion
of the branch network and ATM infrastructure,
together with the new HSBC headquarters building
in Mexico City, led to increases in IT, premises and
equipment costs.
In Brazil, expenses were 10 per cent higher. As
in Mexico, this reflected the cost of new employees
recruited to support business expansion, including the
strengthening of credit operations, and new branch
openings. This, together with annual pay rises and
increased incentive payments, triggered a 13 per cent
growth in staff costs. Advertising costs rose to
promote brand awareness, while an HSBC Premier
promotion led to higher marketing costs.
Costs grew by 26 per cent in Argentina, with
higher staff costs driven by union-agreed pay rises in
2005, and increased incentives and commissions paid
in light of revenue growth. Marketing costs also
increased to support the launch of various promotions
and campaigns.
Commercial Banking reported pre-tax profits of
US$451 million, 17 per cent higher than in 2005.
Growth in net operating income before loan
impairment charges was strong at 26 per cent as
domestic economies in the region grew and HSBC
built market share. Cost growth in support of this
expansion was held within revenue growth and the
cost efficiency ratio improved by 2.5 per cent.
Net interest income rose by 24 per cent, largely
driven by business expansion in Mexico and Brazil.
In Mexico, net interest income rose by 49 per
cent, reflecting asset and deposit growth, in part due
to the transfer of the 56,000 customers from Personal
Financial Services noted above. As HSBC extended
its presence in the small and middle market business
segments, average deposit balances increased by
65 per cent (31 per cent excluding the transferred
customer accounts), although the benefit of this
volume growth was partly mitigated by lower deposit
spreads in a falling rate environment.
Lending balances in Mexico were 41 per cent
higher, primarily driven by strong demand in the
rapidly growing real estate and residential
construction sectors. During the final quarter of the
year, HSBC opened an International Banking Centre
to develop cross-border business for global