HSBC 2008 Annual Report Download - page 95

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exposure to a single European property company,
and additional credit risk provisions on debt
securities held within the Group’s available-for-sale
portfolio, mainly in Solitaire Funding Limited
(‘Solitaire’), a special purpose entity managed by
HSBC. A modest improvement in the UK personal
finance sector reflected the non-recurrence of a
change in the methodology in the consumer finance
business which resulted in a higher charge in 2007.
Excluding this factor, delinquency rates in cards
were marginally higher and there was a rise in
impairments in the consumer finance business driven
by worsening economic conditions and credit quality
deterioration, partly offset by action taken to
mitigate risk through the continued application of
strict lending criteria and the sale of non-core credit
card portfolios.
Credit conditions weakened in the commercial
business and specific loan impairment charges
increased in the UK and France due to the
deteriorating credit environment in the second half
of 2008. In Turkey, credit card and personal loan
delinquency rates were significantly higher, resulting
in the implementation of tighter underwriting
criteria, reduced credit limits and revised account
management policies throughout 2008.
Operating costs increased by 3 per cent to
US$16.1 billion. Costs in the UK were in line with
2007, which included ex-gratia payments expensed
in respect of overdraft fees applied in previous years
and a provision for reimbursement of certain charges
on historic will trusts and other related services.
Excluding these items, costs rose as a result of an
increase in the Financial Services Compensation
Scheme levy, restructuring costs and increased rental
charges following the sale and leaseback of branch
properties, partially offset by lower performance-
related pay and a reduction in defined benefit
pension scheme costs due to a change in actuarial
assumptions.
Operating costs in France decreased slightly
with lower performance-related pay and a reduction
in pension and retirement healthcare costs following
the transfer of certain obligations to a third-party
offsetting the higher costs of a voluntary retirement
programme.
There was investment in premises and new staff
to support business expansion in Turkey, Russia and
central and eastern Europe. In 2008, 112 new
branches opened and staff numbers increased by
30 per cent in these markets.
Share of profit in associates and joint ventures
declined by 84 per cent to US$16 million with 2007
benefiting from an adjustment to the embedded
value of HSBC Assurances. The absence of this gain
was partially offset by increased joint venture profits
following the sale of the card acquiring business in
the UK.
2007 compared with 2006
Economic briefing
In the UK, GDP growth accelerated in 2007 to
3.1 per cent from 2.9 per cent in 2006, mainly as
a result of buoyant consumer and investment
spending. Net trade depressed GDP growth through
2007, and the current account deficit reached a
record 5.7 per cent of GDP in the third quarter of the
year. Employment growth was fairly subdued, rising
by approximately 0.7 per cent during the year. CPI
inflation reached a decade-long high of 3.1 per cent
in March but subsequently fell back to 2.1 per cent
by the year-end, close to the Bank of England’s 2 per
cent target. After a strong start to the year, nominal
house prices declined and housing activity
diminished in the final months of 2007. The Bank of
England raised interest rates by 75 basis points
during 2007 to a peak of 5.75 per cent, but
subsequently reduced them to 5.5 per cent at the end
of 2007.
The expansion of the eurozone economy
continued steadily in 2007, with GDP growth of
2.7 per cent. As in the UK, much of the momentum
came from strength in business investment and
exports as global demand remained strong,
particularly from emerging markets. Consumption
was relatively subdued, despite declining
unemployment, although fiscal reforms (particularly
in Germany) are believed to have depressed
household expenditure. Eurozone inflation increased
steadily during the second half of the year to an
annual rate of 3.1 per cent in December, driven
largely by rises in food and energy prices. The
European Central Bank (‘ECB’) raised interest rates
by 50 basis points during 2007, to finish the year at
4 per cent.
Review of business performance
European operations reported a pre-tax profit
of US$8.6 billion, compared with US$7.0 billion in
2006, an increase of 23 per cent. On an underlying
basis, pre-tax profits improved by 13 per cent.
In March 2007, HSBC acquired its partner’s
shares in life, property and casualty insurer, HSBC
Assurances. The results of HSBC Assurances are
excluded from the commentary below, which is on
an underlying basis.