HSBC 2008 Annual Report Download - page 125

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HSBC USA, loan impairment charges rose by 76 per
cent to US$2.6 billion driven by credit quality
deterioration across the Home Equity line of credit,
Home Equity loan, prime first lien residential
mortgage and private label card portfolios.
Loan impairment charges in US card and retail
services rose, driven by portfolio seasoning and
rising unemployment, particularly in the second half
of 2008, higher levels of personal bankruptcy filings
and lower recovery rates. As with mortgages, this
was most notable in parts of the country most
affected by house price falls and unemployment.
Vehicle finance loan impairment charges rose as
delinquencies rose and lower prices resulted in lower
recoveries when repossessed vehicles were sold at
auction.
Loan impairment charges in Commercial
Banking grew to US$449 million from a low base,
primarily driven by higher impairment losses due to
deterioration across the middle market, commercial
real estate and corporate banking portfolios in the
US and among firms in the manufacturing, export
and commercial real estate sectors in Canada. Higher
loan impairment charges and other credit risk
provisions in Global Banking and Markets reflected
weaker credit fundamentals in the US in 2008.
Operating expenses increased by 90 per cent,
driven by US$10.6 billion of impairment charge
recognised in respect of North America Personal
Financial Services in 2008 to fully write off
goodwill. Excluding the goodwill impairment
charge, expenses were US$1.1 billion or 11 per cent
lower. Staff costs declined, primarily in HSBC
Finance, following decisions taken in 2007 to close
the acquisition channels for new business in
Mortgage Services and a number of consumer
lending branches, and integrate the operations of the
card businesses. HSBC USA made the decision to
close its wholesale and third-party correspondent
mortgage business in November 2008, while HSBC
Finance took the decision to cease originations in the
dealer and direct-to-consumer channels in the
vehicle finance business in July 2008. Staff costs
in Global Banking and Markets also fell as
performance-related compensation and staff
numbers both declined.
Other administrative costs decreased as
origination activity declined, marketing costs in card
and retail services reduced and branch costs in
consumer lending fell as tightened underwriting
criteria curtailed business and led to branch closures.
This was partly offset by higher marketing and
occupancy costs in the retail bank reflecting a
continued expansion of the branch network,
increased community investment activities and
higher deposit insurance, collection, payments and
cash management and asset management costs in
support of business growth.
2007 compared with 2006
Economic briefing
In the US, GDP growth in 2007 was 2.2 per cent,
0.7 percentage points less than that recorded in 2006
as the housing-led downturn gathered pace.
Consumer spending in 2007 grew by 2.9 per cent,
the weakest annual expansion since 2003. Housing
activity continued to weaken in 2007, with
residential investment falling by 17 per cent during
the year. Both new and existing home sales also
declined to new lows in 2007. The unemployment
rate averaged 4.6 per cent in 2007, with the average
in the second half of the year slightly higher at
4.8 per cent. The trade deficit narrowed in 2007 as
export growth strengthened. Consumer price
inflation averaged around 4 per cent in the final
quarter of 2007. This was largely due to higher
energy prices; excluding food and energy, consumer
price inflation averaged 2.3 per cent in the fourth
quarter. The Federal Reserve lowered short-term
interest rates by 100 basis points in the second half
of 2007, from 5.25 per cent to 4.25 per cent, as
policymakers attempted to mitigate the worst effects
of the sub-prime related credit squeeze upon
economic activity. 10-year note yields reached a
high of 5.3 per cent in June 2007, before falling to
4 per cent by the year-end. Declines in the final
months of 2007 left the S&P 500 stock market index
practically unchanged compared with the end of 2006.
Canadian GDP increased by 2.4 per cent during
the first eleven months of 2007 compared with the
equivalent period of 2006. Domestic demand
remained strong despite tighter credit conditions in
the latter part of the year, supported by the robust
labour market. The unemployment rate averaged
6 per cent for the year, reaching a historical low of
5.8 per cent in October. After hitting a high of
2.5 per cent in April, core consumer price inflation
slowed to 1.5 per cent by the end of 2007. The
Canadian dollar appreciated during the year,
particularly in the second half. In July, the Bank of
Canada raised its overnight interest rate from
4.25 per cent to 4.5 per cent before reversing this
move in the final weeks of 2007.
Review of business performance
HSBC’s operations in North America experienced a
significant fall in pre-tax profits of 98 per cent in
2007, on both reported and underlying bases.