HSBC 2012 Annual Report Download - page 109

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
RBWM as long-term interest rates declined to a
lesser extent than in 2011. This was partly offset by
an increase from US$92m in 2011 to US$134m in
2012 of loss provisions for mortgage loan repurchase
obligations related to loans previously sold.
Net trading income increased in GB&M during
2012 as a result of the improved performance of
economic hedges used to manage interest rate risk,
which benefited from a more stable interest rate
environment. Rates revenue was higher due to
increased trading volumes. In addition, credit market
conditions generally reflected tighter credit spreads,
which led to higher income from our credit-related
products. These factors were partly offset by adverse
fair value movements on structured liabilities as own
credit spreads tightened, together with the closure of
our bank notes business in 2011, and a reduction in
foreign exchange revenue as a result of lower trading
volumes in less volatile markets.
Net loss from financial instruments designated
at fair value was US$1.2bn compared with net gains
of US$964m in 2011. We recognised adverse fair
value movements on our own debt designated at fair
value as credit spreads tightened during 2012, having
widened in 2011. In addition, there were adverse fair
value movements from interest rate ineffectiveness
in the economic hedging of our long-term debt
during the year.
Gains on disposal of US branch network and
cards business included a gain of US$3.1bn from the
sale of the Card and Retail Services business and
US$864m from the sale of 195 retail branches in
upstate New York.
Other operating income increased by US$176m
to US$405m, reflecting lower losses on foreclosed
properties due to the reduction in foreclosure
activity, less deterioration in housing prices during
2012 and, in some markets, improvements in pricing
compared with 2011.
Loan impairment charges and other credit risk
provisions decreased by 51% to US$3.5bn, mainly in
the US, reflecting lower lending balances in CML as
we continued to run off the portfolio, and lower
delinquency levels. Loan impairment charges
remained adversely affected by delays in expected
cash flows from mortgage loans due, in part, to
delays in foreclosure processing and the higher costs
to obtain and realise collateral, although the effects
were less pronounced than in 2011. In addition, loan
impairment charges declined by US$1.3bn due to the
sale of the Card and Retail Services business. These
decreases were partly offset by an adjustment made
following a review completed in the fourth quarter of
2012 which concluded that the estimated average
period of time from current status to write-off was
ten months for real estate loans (previously a period
of seven months was used).
In CMB and GB&M, loan impairment charges
increased, mainly in Bermuda, due to individually
assessed impairments on a small number of
exposures. Credit quality in Canada remained
broadly unchanged.
Operating expenses increased by less than 1% to
US$8.9bn, primarily due to a US$1.5bn charge for
the settlement of investigations noted above.
Compliance costs increased by US$307m, mainly
due to investment in process enhancements and
infrastructure related to anti-money laundering and
Bank Secrecy Act consent orders, along with actions
to address the regulatory consent orders relating to
foreclosure activities. In addition, following a review
of our mortgage foreclosure process, we entered into
an agreement in principle with US regulators to pay
into a fund and provide other customer assistance to
help eligible borrowers who were active in
foreclosure during 2009 and 2010 and were
financially disadvantaged during the process, for
which we recognised a US$104m expense in 2012.
These increases were partly offset by the effect of
the sale of the Card and Retail Services business and
organisational effectiveness initiatives to reduce
costs as we achieved approximately US$230m of
additional sustainable cost savings primarily derived
from operational efficiencies. Average employee
numbers decreased from organisational effectiveness
initiatives and business disposals. In addition,
marketing costs fell and costs of holding foreclosed
properties declined, while software impairment
charges in 2011 did not recur.