HSBC 2009 Annual Report Download - page 96

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe > 2008 / Profit/(loss) before tax by customer group
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contributed to 3 per cent growth in gross earned
premiums. However, net earned insurance premiums
fell following a significant reinsurance transaction
undertaken in the first half of 2008.
Other operating income increased by 33 per
cent. This was primarily due to recognition of the
gain in respect of the purchase of the subsidiary of
Metrovacesa which owned the property and long
leasehold land comprising 8 Canada Square,
London. See Note 23 on the Financial Statements for
further details. The growth in revenue also reflected
the non-recurrence of a decrease in the value of
PVIF business in 2007 following regulatory changes
to the rules governing the calculation of insurance
liabilities. In addition, there was a favourable
embedded value adjustment following HSBC’s
introduction of enhanced benefits to existing
commercial pension products in the first half of
2008. These benefits were partially offset by costs
associated with the support of money market funds
in the global asset management business.
Net insurance claims incurred and movement in
liabilities to policyholders decreased by 5 per cent as
a reduction in insurance liabilities reflected the fall
in value of market-linked funds. This was partially
offset by an increase in liabilities following
increased sales of the Guaranteed Income Bond and
the implementation of FSA rule changes in 2007
which lowered the liability valuation on life policies.
Loan impairment charges and credit risk
provisions rose by 59 per cent to US$3.8 billion; in
the UK, primarily in Global Banking and Markets.
The deteriorating credit environment resulted in a
rise in loan impairment charges, largely reflecting an
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.