HSBC 2008 Annual Report Download - page 134

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Latin America > 2008 / 2007
132
deposit products and payments and cash
management.
Trading income rose by 22 per cent largely
reflecting favourable positioning against foreign
exchange movements and increased foreign
exchange sales volumes. Trading losses were
registered on certain transactions where an offsetting
benefit is reported in net income from financial
instruments designated at fair value. Losses from
defaults on derivative contracts were registered,
primarily in Mexico.
Gains less losses from financial investments
declined by 24 per cent as gains on the redemption
of VISA shares, following its global IPO, and the
sale of shares in both Brazil and Mexico were lower
than the gains achieved on the sale of shares in a
number of companies in Brazil in 2007.
Net earned insurance premiums rose, driven by
higher prices and increased sales in the general
insurance business, primarily in Argentina. Sales of
life assurance products remained strong.
Increased net insurance claims incurred and
movements in liabilities to policyholders in
Argentina were more than offset by a decrease in
liabilities to policyholders in Brazil following a
decline in the equity market where the investment
losses were passed on to unit-linked policyholders.
This was compensated for by a similar decrease in
net income from financial instruments designated at
fair value.
Other operating income was broadly in line
with 2007. A refinement of the income recognition
methodology used in respect of long-term insurance
contracts in Brazil in 2008 was offset by a similar
adjustment in Mexico in 2007.
Loan impairment charges and other credit risk
provisions rose by 42 per cent, mainly relating to
credit cards, as organically grown portfolios in
Mexico seasoned following market share growth and
credit quality deteriorated in Mexico and Brazil. The
personal unsecured, vehicle finance and small and
medium-sized commercial loan portfolios in Brazil
also experienced increased levels of loan
impairment. Specific focus was placed on improving
the quality of new business, based on underwriting
experience and relationship management, and steps
were taken to improve collection strategies.
Operating expenses increased by 7 per cent. An
increase in staff costs was primarily driven by higher
salaries following union-agreed pay rises and
redundancy payments following reductions in staff
numbers, partly offset by cost savings from the
reduced headcount. Administrative expenses rose
following an increase in the use of a credit card
cashback promotional facility in Mexico which was
terminated at the end of 2008. Costs also grew in
support of improved operational processes in the
region. HSBC benefited in 2008 from the
recognition of a tax credit following a court ruling
in Brazil granting the right to recover excess taxes
paid on insurance transactions and changes in
transactional tax legislation. As economic conditions
weakened towards the second half of 2008, strategic
cost saving measures were implemented throughout
the region.
2007 compared with 2006
Economic briefing
In response to fluctuations in export demand from
the US, economic growth in Mexico moderated
during the course of 2007, with GDP rising an
estimated 3.1 per cent during the year, compared
with 4.8 per cent in 2006. Inflationary pressures
remained significant throughout 2007, with
consumer price inflation averaging 4 per cent, driven
by increases in international prices of commodities,
which affected domestic food prices in the core
index. As a result, the Bank of Mexico raised its
overnight interest rate by a total of 50 basis points,
and has maintained its restrictive monetary policy
despite reductions in interest rates by the US Federal
Reserve.
The Brazilian economy expanded strongly in
2007, with GDP expected to have grown by 5.4 per
cent compared with 3.7 per cent in 2006. As in 2006,
growth was driven by domestic demand, with private
consumption rising considerably. As a consequence,
the average unemployment rate fell to 9.3 per cent in
2007 from 10 per cent in 2006. After declining to
3.1 per cent at the end of 2006, the annual rate of
consumer price inflation climbed to 4.5 per cent by
December 2007, mainly from higher food prices.
The cycle of monetary easing which began in the
third quarter of 2005 paused in October 2007 with
the overnight rate at 11.25 per cent, the lowest level
in several decades. After nine years of steady
expansion, the trade balance surplus fell slightly in
2007, and is expected to decrease further in 2008.
Balance of payments fundamentals, however,
remained robust and, as a result, the Brazilian
economy seemed less vulnerable to external shocks
than in previous years.
The Argentine economy also performed
strongly in 2007, with GDP expected to have risen
by 8.7 per cent. This strength was a consequence of
several factors such as a competitive exchange rate,
spare capacity in the economy and a generally