HSBC 2007 Annual Report Download - page 66

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Hong Kong >2006
64
Year ended 31 December 2006 compared
with year ended 31 December 2005
Economic briefing
Hong Kong experienced sustained economic
expansion in the second half of 2006 with growth,
particularly in exports, regaining momentum
following a mild slowdown in the second quarter.
Domestic demand underpinned the economy
throughout 2006 despite volatility in the stock
market, which suffered a correction in the second
quarter but recovered strongly in the second half of
the year. Falling unemployment, improved
household incomes and positive longer-term
economic prospects were the key elements
supporting domestic consumption. Hong Kong’s
unemployment rate fell to a six-year low of 4.4 per
cent towards the end of 2006, and the labour market
began to tighten in certain sectors, with wage
pressure increasingly evident. Despite this, inflation
remained low, averaging 2 per cent in 2006.
Investment growth surged in the second half of the
year as the local interest rate cycle peaked. The
residential property market divided, with prices of
luxury property exceeding levels last seen in the
boom in 1997 while, elsewhere in the sector, activity
and prices remained flat. At the same time,
investment in the construction sector was weak in
the absence of large-scale infrastructure projects and
general uncertainty. Externally, trade performance
improved in the second half of 2006 following
difficulties in the first half of the year due to volatile
external demand from western markets.
Reconciliation of reported and underlying profit before tax
Year ended 31 December 2006 compared with year ended 31 December 2005
Hong Kong
2005
as
reported
US$m
Currency
translation1
US$m
2005
at 2006
exchange
rates
US$m
Acqui-
sitions and
disposals2
US$m
Underlying
change
US$m
2006
as
reported
US$m
Reported
change
%
Underlying
change
%
Net interest income .......... 4,064 5 4,069 – 616 4,685 15 15
Net fee income ................. 1,674 2 1,676 – 380 2,056 23 23
Other income3 .................. 1,769 1 1,770 – 93 1,863 5 5
Net operating income4 ..... 7,507 8 7,515 – 1,089 8,604 15 14
Loan impairment charges
and other credit risk
provisions .................... (146) – (146) – (26) (172) (18) (18)
Net operating income ...... 7,361 8 7,369 – 1,063 8,432 15 14
Operating expenses .......... (2,867) (3) (2,870) – (399) (3,269) (14) (14)
Operating profit ............... 4,494 5 4,499 – 664 5,163 15 15
Income from associates ... 23 – 23 – (4) 19 (17) (17)
Profit before tax ............... 4,517 5 4,522 – 660 5,182 15 15
For footnotes, see page 130.
Review of business performance
HSBC’s operations in Hong Kong reported a
pre-tax profit of US$5.2 billion compared with
US$4.5 billion in 2005, an increase of 15 per cent.
On an underlying basis, pre-tax profit also grew by
15 per cent. Underlying net operating income
increased by 14 per cent, driven by widening deposit
spreads in Personal Financial Services and
Commercial Banking and strong net fee income
growth in all customer groups. In Global Banking
and Markets, an increase in trading income offset the
negative impact of lower balance sheet management
income. Underlying operating expenses rose by
14 per cent.
The following commentary is on an underlying
basis.
Personal Financial Services pre-tax profits
increased by 9 per cent to US$2.9 billion. Net
operating income before impairment charges grew
by 13 per cent, driven by higher income from
savings and current accounts and increased fee
income. Marketing activities were successful,
helping HSBC enlarge its share of the credit card
and mortgage markets and attract higher deposit
balances. As a result, customer numbers increased
by over 100,000. The cost efficiency ratio improved
by 1.1 percentage points as cost growth of 9 per cent
was restricted to less than the increase in net
revenue. Credit quality remained favourable and