HSBC 2007 Annual Report Download - page 160

HSBC HOLDINGS PLC
Report of the Directors: Financial Review (continued)
Operating expenses / Share of profit in associates and joint ventures
158
cent. Staff costs rose, mainly on higher salaries and
bonuses in the region and one-off costs incurred to
improve operational efficiencies in Brazil. These
were partially offset by a curtailment and settlement
gain from staff transferring from the bank’s defined
benefit healthcare scheme to a new defined
contribution scheme in Mexico. Increases in non-
staff costs included higher marketing expenditure,
costs relating to growth in credit card operations,
higher telecommunication costs and transactional
taxes. Four additional months of Banca Nazionale
also increased total costs.
Year ended 31 December 2006 compared
with year ended 31 December 2005
Operating expenses of US$33.6 billion were
US$4.0 billion, or 14 per cent, higher than in 2005,
and 11 per cent higher on an underlying basis.
The commentary that follows is on an
underlying basis.
The main drivers of cost growth were as
follows:
• various business expansion initiatives were
undertaken during the year. The retail banking
operation in the US was enhanced in the form of
new branches and improved geographical
coverage of Commercial Banking. In the UK,
major work was undertaken to refurbish the
branch network, improve and increase the
number of self-service machines and extend
opening hours in certain branches. Across the
Rest of the Asia-Pacific region, the branch
network expanded, the rollout of the consumer
finance business continued, and Commercial
Banking’s operations were further developed. In
Latin America, improvements were made to
HSBC’s operations in Mexico through the
continued expansion of the branch and ATM
network;
• the higher costs incurred in Global Banking and
Markets reflected the first full year effect of
investments made in 2005, together with
volume-driven growth in transactional banking
and securities services activities and
performance-related pay, which rose as
revenues grew. The cost efficiency ratio of
Global Banking and Markets improved by 40
basis points as net operating income before loan
impairment charges grew faster than costs; and
• HSBC’s expenditure on marketing continued in
order to increase brand awareness, grow market
share in key products and support the launch of
new products. Notable successes included the
online savings product in the US, strong growth
in credit card acquisition across the Group, and
an innovative new online mortgage product
offered in Mexico.
The following points are also of note.
In Europe, the cost growth of 9 per cent was
concentrated in Personal Financial Services and
Global Banking and Markets. In Personal Financial
Services, business expansion across the region drove
the expenditure. In the UK, costs rose as the branch
network refurbishment programme proceeded,
additional staff were recruited to support longer
opening hours in certain branches and IT costs
increased. In France and Turkey, costs rose from the
recruitment of additional sales staff and higher
marketing expenditure. Costs in Global Banking and
Markets increased, reflecting higher performance-
related staff costs and the full year effect of the
investment in 2005 in the business, especially in
structured derivatives and Global Transaction
Banking, where significant revenue growth was
seen. These cost increases were partly offset by a
reduction in Commercial Banking expenses
following the sale of vehicle finance fleet
management activities in the UK.
In Hong Kong, the increase in operating
expenses of 14 per cent was mainly due to higher
staff and marketing costs. Additional staff recruited
to support longer opening hours in the branch
network and the expansion of Commercial
Banking, and an increase in revenue-driven
performance-related awards drove staff costs higher.
Marketing expenditure incurred on advertising and
promotional activities rose in support of credit card
and investment fund products in Personal Financial
Services and the launch of Commercial Banking’s
global campaign. The full year effect of the
enhancement in the second half of 2005 of Global
Banking and Markets’ business contributed further
to the cost growth.
The 27 per cent rise in operating expenses in the
Rest of Asia-Pacific region was primarily incurred
in supporting retail business expansion. Staff costs
rose from increased recruitment to support new
business initiatives and incentive payments grew in
response to improved revenues. Marketing expenses
rose as advertising and promotional activity aimed at
enlarging HSBC’s market share in cards, mortgages
and other unsecured lending grew, and Commercial
Banking marketing activity across several countries
increased. In Global Banking and Markets, cost
growth reflected higher revenue-driven performance-
related costs and increased expenditure in Global