HSBC 2008 Annual Report Download - page 124

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > North America > 2008 / 2007
122
February 2009, HSBC authorised the discontinuation
as soon as practicable of all new receivable
originations of all products by the branch-based
consumer lending business of HSBC Finance in
North America (see page 70).
Net fee income declined by 8 per cent, driven by
reductions in US credit card fees following changes
in fee practices implemented since the fourth quarter
of 2007 and lower cash advance and interchange fees
as a result of reduced volumes. Partly offsetting the
decline were increased income from enhancement
services due to higher customer acceptance rates of
Account Secure Plus and Identity Protection Plan,
a rise in syndication, credit and service fees in
Commercial Banking and increased fees from asset
management.
Trading losses were dominated by write-downs
in Global Banking and Markets on legacy exposures
as continuing turmoil in credit markets adversely
affected valuations of credit and structured credit
trading positions, monoline exposures and leveraged
and acquisition finance loans. Continued
deterioration in the fair value of the run-off portfolio
of sub-prime residential mortgage loans held for sale
also contributed to the loss. US$3.6 billion in
leveraged loans, high yield notes and securities held
for balance sheet management were reclassified in
2008 under revised IFRS rules from trading assets
to loans and receivables and available for sale,
preventing any further mark-to-market trading losses
on these assets. If these reclassifications had not
been made, the loss before tax would have been
US$0.9 billion higher.
The losses on legacy assets were partly offset
by strong performances in other trading areas as
foreign exchange trading benefited from pronounced
market volatility, Rates trading correctly anticipated
central bank rate cuts and gains were generated on
credit default swaps in Global Banking. Revenues
from emerging markets trading and precious metals
trading also rose as a result of ongoing market
volatility and increased transaction volumes as
prices of gold and platinum rose during 2008.
Losses on non-qualifying hedge positions in interest
rate swaps generated further trading losses. In 2007,
the Decision One business, which was closed that
year, recorded trading losses of US$263 million.
Net income from financial instruments
designated at fair value rose by US$2.0 billion to
US$3.7 billion, primarily on HSBC’s fixed-rate
long-term debt as credit spreads widened
significantly in the second half of 2008 in the
ongoing market turmoil. These gains, together with
those booked in previous years, will fully reverse
over the life of the debt.
Gains less losses from financial investments
declined, mainly due to losses on US government
agency securities in 2008 and the non-recurrence of
the sale of MasterCard shares, partly offset by gains
from the Visa IPO in 2008.
Net earned insurance premiums decreased by
13 per cent to US$390 million, driven by lower
credit related premiums in HSBC Finance due to
declining loan volumes.
Other operating income declined due to losses
on sale of the Canadian vehicle finance businesses
and other loan portfolios in 2008, in addition to the
non-recurrence of gains on disposal of fixed assets
and a small portfolio of private equity investments in
2007.
Net insurance claims incurred and movement in
liabilities to policyholders were broadly in line with
2007 at US$238 million.
Loan impairment charges and other credit
risk provisions rose sharply, by 38 per cent to
US$16.8 billion, reflecting substantially higher
impairment charges in HSBC Finance across all
portfolios and, in HSBC USA, the deterioration of
credit quality in prime residential mortgages, second
lien portfolios and private label cards. The main
factors driving this deterioration were the continued
weakening of the US economy, which led to rising
levels of unemployment and personal bankruptcy
filings: higher early-stage delinquency and increased
roll rates in consumer lending: the ageing of
portfolios: and further declines in house prices which
increased loss severity and reduced customers’
ability to refinance and access equity in their homes.
Partly offsetting these factors was a reduction in
overall lending as HSBC continued to actively
reduce its balance sheet and lower its risk profile in
the US.
In the Mortgage Services business, loan
impairment charges rose by 14 per cent to
US$3.5 billion as the 2005 and 2006 vintages
continued to season and experience rising
delinquency. Run-off of the portfolio slowed in light
of continued house price depreciation which, along
with the constrained credit environment, restricted
refinancing options for personal customers. In
consumer lending, loan impairment charges rose by
39 per cent to US$5.7 billion. In the second half
of 2008, delinquency rates began to accelerate
particularly in the first lien portfolios in the parts
of the country most affected by house price
depreciation and rising unemployment rates. In