HSBC 2009 Annual Report Download - page 16

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Challenges and uncertainties
14
its links with the developed world provide it with the
platform to continue to grow, taking opportunities to
expand its operations in existing markets and
connect local customers internationally.
Europe
In the UK, the contraction in economic output
appears to have ceased with the country emerging
slowly from recession in the last quarter of 2009.
However, economic indicators remain weak and
the risk of the country slipping back into recession
in 2010 remains, thus delaying the recovery.
Government measures to tackle the record levels
of national debt, including taxation increases and
public spending cuts, are also likely to result in a
slower recovery than from other recessions. Political
involvement in the regulatory environment and the
major financial institutions in which the state has a
direct financial interest will continue. Government
demands for increased credit to support the
economic recovery coupled with regulatory actions
to diminish the banking sector’s reliance on short-
term wholesale funding will increase competition for
deposits, narrowing margins. The combination of
slow economic recovery, government intervention
and increased competition for deposits will maintain
pressure on profitability within HSBC’s retail
business model. Credit quality is expected to
improve in some sectors, however, as the economy
returns to growth but could suffer a reversal should
there be any further increase in unemployment in
2010.
In France, following government stimulus
measures, the economy has started recovering with
gross domestic product (‘GDP’) growing slightly
from the second quarter of 2009 and the number of
companies in default stabilising. Although
unemployment is rising and there are concerns about
the public deficit, household consumption remains
robust and continues to drive the economy. HSBC’s
retail business model depends on banking fees and
a consolidation of the recovery observed in the
financial markets in 2009 will help sustain
profitability. Credit quality is expected to remain
stable for personal customers due to the quality of
the client base, though the outlook for commercial
credit remains less certain.
Outside the UK and France, conditions are
likely to remain difficult in some of the countries in
which HSBC currently operates in Europe and
volatility is expected to continue, in particular as
markets focus on potential sovereign credit
deterioration.
Hong Kong and Rest of Asia-Pacific
In Asia-Pacific, Hong Kong remains HSBC’s key
market, and through the financial crisis has
continued to generate relatively high returns on
capital. HSBC will invest to maintain its competitive
position in Hong Kong while continuing to support
its growing franchises in other markets in the region.
The slowdown in commercial activity, which
precipitated the coordinated government stimulus
packages, affected fee-based businesses, and
continuing low interest rates have left deposit
spreads compressed. However, HSBC is now seeing
more lending demand as regional economies emerge
from recession and equity markets and cross-border
trade flows improve. HSBC attracted higher deposits
in 2009 despite intensified competition for liquidity,
and this added to the challenges of finding
opportunities to deploy the deposits where credit
demand remained muted. A recent increase in
lending has started to ease some of these pressures.
Emerging markets in Asia-Pacific currently offer the
brightest prospects, with GDP growth in mainland
China and India, in particular, expected to be strong
in 2010.
As the world’s fastest growing region, Asia is
expected to drive incremental growth in the global
recovery. Inflation triggered by rising output prices
and increased demand remains a concern which has
prompted regulatory interventions in the form of
‘cooling measures’ to manage asset growth and
prevent, as far as possible, asset bubbles emerging.
Mainland China has been prominent in taking a lead
in this area. HSBC’s strong liquidity position in the
region remains key to the Group’s ability to expand
as well as increase margins when interest rates begin
to rise again, the timing of which remains uncertain.
Regional markets are likely to remain competitive
due to the growing presence of large domestic and
regional banks, for example, the mainland Chinese
banks in Hong Kong.
Middle East
After a very difficult year, there are signs that the
conditions for a recovery in Middle East economic
activity have begun to emerge. Assuming an average
oil price in excess of US$70 a barrel, public finances
in the key oil producing states such as Saudi Arabia,
Qatar and the United Arab Emirates (‘UAE’) should
improve, allowing governments to maintain and
even accelerate fiscal stimulus programmes.
Investment spending is also likely to pick up
after last year’s slowdown, although ongoing
difficulty accessing funding will impede the pace of
capital spending growth for the public and private