HSBC 2007 Annual Report Download - page 51

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higher lending balances as existing clients increased
their leverage.
Net fee income increased by 15 per cent to
US$1.0 billion, mainly due to a 10 per cent increase
in funds under management in Switzerland with
discretionary and advisory funds generating higher
annual fees. Client investments in structured
products and brokerage fees also contributed to the
rise in fee income. In the UK, fees increased by
10 per cent, driven by a rise in wealth and loan fees.
Trading income was 63 per cent higher at
US$170 million, mainly driven by foreign exchange
trading by clients in Switzerland.
Gains from financial investments decreased by
23 per cent to US$115 million. This primarily related
to a gain from a partial disposal of a seed capital
investment in the Hermitage Fund which was lower
than that recognised from an earlier disposal in 2006.
Client assets, which include deposits and funds
under management, grew by 19 per cent to
US$258.4 billion. The large growth in client assets
was driven by positive market performance and
US$20.2 billion of net new money, with Switzerland
contributing US$7.1 billion and the UK and Monaco
contributing US$3.7 billion and US$3.6 billion each.
The growth in cross-referrals continued, with inward
referrals from other customer groups contributing
US$3.9 billion to total client assets.
Operating expenses were 15 per cent higher than
in 2006, driven by business expansion. More
front-office staff, higher performance-related
bonuses, IT and marketing costs all contributed to
the rise. The overall increase in operating expenses
was partially offset by the effect of a change in
pension arrangements.
Within Other, fair value movements in HSBC’s
own debt and related derivatives resulted in gains of
US$1.3 billion, largely as a consequence of
movements in credit spreads. These movements will
reverse through the income statement over the life of
the debt unless the debt is repaid before its
contractual maturity. This segment also benefited
from a US$73 million adjustment to the embedded
value of HSBC’s associate, HSBC Assurances, prior
to the acquisition of its remaining capital, from
which date it was accounted for as a subsidiary.
Year ended 31 December 2006 compared
with year ended 31 December 2005
Economic briefing
UK GDP growth increased in 2006 to 2.9 per cent
from 1.8 per cent in 2005. This followed a recovery
in both household and company spending. CPI
inflation increased through the year from 1.9 per
cent in January to 3 per cent in December, following
large increases in the price of petrol and gas. The
Bank of England raised interest rates from 4.5 per
cent to 5 per cent, citing concerns about spare
capacity, rapid money growth and the possibility of
inflation staying above target for some time. House
price inflation remained strong but consumer
spending appeared unaffected. Secured lending
continued to increase although unsecured lending
plateaued. There was evidence that a number of
households were struggling with the burden of debt
as personal insolvencies and repossessions increased.
Employment rose, although by less than the increase
in available workers as migrant inflows remained
strong and the participation rate of UK residents in
the labour force increased. As a result, the
unemployment rate increased, contributing to
constrained wage growth throughout the year despite
relatively high rates of headline inflation.
The recovery in the eurozone economy gathered
momentum through the course of 2006. GDP rose by
approximately 2.7 per cent, the fastest rate since
2000. Much of the improvement reflected increases
in exports and investment, as global demand
remained strong and corporate activity and profits
rose. Consumer spending remained subdued, despite
a gradual rise in employment. German growth
improved sharply, while growth in France and Italy
was less impressive. Eurozone inflation was heavily
affected by rises in energy and food prices. Inflation,
excluding energy and food, remained contained at
just 1.7 per cent. The ECB increased the key policy
interest rate from 2.25 per cent at the beginning of
2006 to 3.5 per cent in December. The ECB
continued to describe monetary policy as
‘accommodative’, thereby effectively ending the
year with a bias towards tightening.
Turkey’s economy slowed markedly in the
third quarter, with year-on-year GDP growth of
3.4 per cent, down from 7.8 per cent in the second
quarter. The current account deficit continued to
widen, reaching 8 per cent of GDP in December,
partly from high-energy prices but also from the
increasing substitution of imported materials for
local ones due to the overvalued currency. More than
half of the deficit was financed by healthy foreign
direct investment inflows. The International