HSBC 2007 Annual Report Download - page 147

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This was partly offset by higher trading income from
other structured derivative products, following
investment made in technical expertise and systems
in previous years.
Record results were achieved in the equities
business reflecting strong growth across all regions
particularly in Europe, which benefited from
effective product differentiation, notably in
emerging market products.
In Europe, trading income increased by 41 per
cent, driven by the equities business and foreign
exchange trading, where income increased strongly,
with volume and profitability driven by market
volatility. This was partly offset by the write-downs
in credit, structured derivatives and leveraged and
acquisition finance.
Net trading income in Europe increased
following the strategic decision to expand the
collateralised lending and structured derivatives
businesses, the funding costs of which are reported
in ‘Net interest income’.
Income growth in Hong Kong was achieved
throughout the Global Markets business, assisted by
investments made in recent years to grow the
product range and customer base. HSBC had only
very limited exposure to asset-based securities and
structured credit products in Hong Kong.
Strong growth was delivered in Rest of Asia-
Pacific, led by foreign exchange trading, with higher
volumes driven by increased volatility which, in
turn, increased customer demand for risk
management products.
HSBC’s operations in North America incurred
a trading loss following write-downs in credit,
structured derivatives, and leveraged and acquisition
finance for the reasons noted above. This was
compounded by trading losses on purchased loans
in the mortgage services wholesale business in
response to which, HSBC closed the business.
By contrast, foreign exchange recorded a strong
performance, supported by activity generated by
the declining US dollar and volatile markets.
Year ended 31 December 2006 compared
with year ended 31 December 2005
Net trading income increased significantly in
comparison with 2005, reflecting the investment
made in widening Global Markets’ product range
and developing its sales and execution capabilities.
Positive revenue trends were recorded in key product
areas, although the rate of income growth slowed in
the second half of the year, principally due to lower
market volatility and a decrease in deal volumes in
the third quarter.
Income from structured derivatives grew by
74 per cent, as investments in technical expertise and
systems enabled HSBC to address a broader
spectrum of client needs. Increased market volatility,
together with expansion in the provision of
structured fund products, resulted in higher customer
volumes. As the business matured and markets
deepened and became more transparent, revenues
were boosted by a rise of US$193 million in the
recognition of income deferred in previous periods.
Foreign exchange income remained strong
throughout 2006, principally driven by an increase in
customer activity encouraged by US dollar weakness
and volatility in emerging markets. In the metals
trading business, revenues doubled, primarily due to
the underlying strength in precious metals and
increased price volatility.
Within the credit and rates business, higher
gains from interest rate derivatives and emerging
market bonds reflected increased volumes of new
deals, a tightening of credit spreads and greater
interest rate volatility.
In Europe, a significant increase in trading
income was driven by higher foreign exchange flows
and a greater focus on emerging market products.
Overall, customer volumes rose, as increased
hedging activity and a change in risk appetite among
investors drove a general improvement in market
sentiment towards developing economies.
On an underlying basis trading income in Rest
of Asia-Pacific grew by 35 per cent, driven by
HSBC’s strong distribution network and experience
in developing markets activity, which contributed to
particularly strong increases reported in India the
Middle East and mainland China.
Performance in HSBC’s operations in the US
remained robust benefiting, in part, from the first full
year contribution from the US residential mortgage-
backed securities business and successful product
launches in structured derivatives.