HSBC 2007 Annual Report Download - page 96

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
North America > 2007
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credit lines and reducing the volume of balance
transfers in credit cards, and restructuring the
consumer lending branch network by closing some
400 branches of HSBC Finance to reflect expected
lower demand. These measures gave rise to
restructuring charges of US$103 million in the
US in 2007.
US pre-tax losses of US$1.8 billion were
predominantly due to higher loan impairment
charges, trading losses in the wholesale mortgage
origination business and lower income from fewer
receivables in the correspondent mortgage services
business. In line with industry trends, the credit
quality of loans weakened steadily throughout the
year, particularly those underwritten in 2005, 2006
and the first half of 2007.
In Canada, profit before tax rose by 2 per cent to
US$265 million, benefiting from the strong local
economy. Of this, the retail bank generated
US$116 million, including an US$8 million gain on
the sale of shares in the Montreal Exchange.
Consumer finance operations added US$149 million
through balance sheet expansion in the first part of
the year, prior to a fourth quarter restructuring to
align with changes in the US consumer finance
operation.
Net interest income grew by 1 per cent to
US$13.2 billion as growth in card and average
deposit balances marginally offset a fall in US
deposit margins. In the US, net interest income rose
by 1 per cent as the mix of business changed to
higher yielding activity and HSBC raised rates on
new consumer finance mortgages to reflect increased
risk. The beneficial effect on yields was, however,
more than offset by the impact of non-performing
assets and a higher cost of funds. Higher volumes of
non-performing loans constrained revenue. Fewer
mortgages repaid early as refinancing activity
declined substantially, and this also resulted in lower
prepayment penalties. These factors combined to
limit HSBC’s ability to pass on in full the increased
cost of funds in a higher average rate environment.
This led to an overall decline in spreads.
In the US, average deposit balances were 19 per
cent higher, reflecting growth in the online savings
account and certificate of deposit products. A
competitively priced special promotional rate offer
in the first quarter of 2007 led to 147,000 new
account openings and US$5 billion of new balances
during the year, offset in part by decreases in money
market term deposits. At 31 December 2007, online
savings balances with HSBC Direct stood at
US$11.5 billion, held by more than 620,000
customers. HSBC Premier customer numbers rose
by 16 per cent. Deposit spreads tightened, reflecting
a change in the product mix from lower-paying
savings accounts to the higher-paying offerings
available online and in branches. HSBC Bank USA
opened 26 new branches during the year.
The slowdown in the US housing market first
noted in 2006 accelerated in 2007, with further
deterioration in sales of new and existing homes and
lower new-build activity. Market surveys showed a
broad-based decline in house prices, especially for
larger loans and in states that had experienced the
fastest rates of house price appreciation in recent
years. Average US mortgage balances declined by
2 per cent to US$123 billion.
Average mortgage balances originated through
the consumer lending branch network rose by
18 per cent, primarily driven by lower levels of
repayments and the severe contraction in market
capacity, which drove qualifying borrowers to the
few remaining market participants. Actions taken by
HSBC to restrict the product range, increase
collateral requirements, raise prices and close or
consolidate about 400 branches of HSBC Finance
during 2007 combined to curb lending growth
towards the end of the year.
Yields on consumer lending mortgages declined
overall due to increases in delinquency, loan
modifications (which deferred scheduled moves to
higher rates) and levels of non-performing loans, and
decreases in repayments, which resulted in reduced
prepayment penalties. Interest spreads narrowed as
funding costs rose.
In the mortgage services business, average
balances declined by 14 per cent to US$43 billion,
reflecting HSBC’s decision to wind down this book
in response to the deterioration in market conditions.
Spreads fell, driven by higher non-performing loans
and increased funding costs.
HSBC Bank USA’s average mortgage balances
fell by 9 per cent to US$31 billion. HSBC continued
to sell down new loan originations to government-
sponsored enterprises and private investors and, with
the exception of certain products, did not replace the
existing portfolio being run-off. Interest rate spreads
on the prime mortgage portfolio declined, primarily
due to loan portfolio run off.
Average credit card balances increased by
14 per cent to US$29 billion. Volumes in the
sub-prime and near-prime portfolios rose due to
additional marketing to this segment in late 2006 and
the first half of 2007. Expansion slowed during the
second half of 2007 as HSBC restricted growth in
customer loans and advances in light of the