HSBC 2008 Annual Report Download - page 97

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UK following regulatory intervention by the OFT in
2006. Broking income increased in the UK,
Germany and Switzerland, mainly driven by growth
in client assets and transaction volumes. Funds under
management fell on lower income from the
Hermitage Fund following the part sale of HSBC’s
investment in it.
Trading income rose by 41 per cent, driven by
the equities business and foreign exchange trading,
where income increased strongly, with volume and
profitability reflecting market volatility. The increase
was partly offset by write-downs in credit, structured
derivatives and leveraged and acquisition finance.
Net trading income increased following the strategic
decision to expand the collateralised lending and
structured derivatives businesses, the funding costs
of which are reported in net interest income.
Credit spreads, primarily on certain fixed-rate
long-term debt issued by HSBC Holdings and its
subsidiaries, widened significantly in the second half
of 2007, leading to a sevenfold increase in net
income from financial instruments designated at fair
value compared with 2006. These cumulative gains
will fully reverse over the life of the debt.
The sale of shareholdings and various equity
investments in the UK and France, including
Euronext (the European stock exchange), contributed
to gains from financial investments of
US$1.3 billion, an increase of 101 per cent on 2006.
Net earned insurance premiums increased by
50 per cent to US$4.0 billion, including growth of
the Guaranteed Income Bond and motor insurance,
and the introduction of enhanced death benefits to
pension contracts in the UK. Premiums also grew in
the UK because of a higher retention of risk in the
non-life business compared with 2006, when a
greater proportion of risk and corresponding
premiums were ceded to reinsurers. There were also
significant contributions from the reinsurance
business in Ireland and the life assurance business in
Malta.
Other operating income declined by 25 per cent.
This largely resulted from a fall in the value of in-
force business in UK insurance, driven by a change
in the calculation methodology of the PVIF business
in the first half of 2007 when HSBC implemented
regulatory changes to the rules governing the
calculation of insurance liabilities. This had a
marginally positive effect on profit as there was a
corresponding reduction in policyholder liabilities.
Net insurance claims incurred and movement in
liabilities to policyholders grew by 121 per cent to
US$3.5 billion. This growth, which paralleled the
growth in net earned insurance premiums, included
the effect of higher risk retention in the non-life
business, although it was offset by FSA rule changes
which led to lower claims valuations on life policies.
There was also a rise in flood-related claims in the
UK after record rainfalls during the summer.
Loan impairment charges rose by 10 per cent to
US$2.5 billion. Overall credit quality remained
broadly stable. In the UK, loan impairment charges
rose, primarily in consumer finance lending outside
HSBC Bank; within HSBC Bank, steps taken in
2006 to tighten underwriting standards led to an
improvement in loan impairment trends. Corporate
loan impairment charges remained low in absolute
terms, although they were 23 per cent higher than in
2006, principally reflecting the effect of Individual
Voluntary Arrangements on micro businesses and
impairments on two large corporate accounts in the
UK.
Operating costs increased by 10 per cent to
US$16.5 billion, in line with the growth in net
operating income before loan impairment charges. In
the UK, a change in actuarial assumptions regarding
the principal staff defined benefit pension scheme
led to increased costs. Ex-gratia payments were
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 was raised which totalled
US$396 million. Cost increases also reflected
investments in technology, higher payments and
cash management transaction volumes, investments
in the French structured derivatives business to
support revenue growth and, in Turkey, technical
infrastructure and additional headcount in support
of business expansion.
Share of profit in associates and joint ventures
rose by US$167 million, largely as a result of a
US$73 million adjustment to the embedded value of
HSBC Assurances in France prior to the acquisition
of its remaining share capital, following which it was
accounted for as a subsidiary.