HSBC 2002 Annual Report Download - page 82

HSBC HOLDINGS PLC
Financial Review (continued)
80
shareholding in Banco Santiago S.A.
Year ended 31 December 2001 compared with
year ended 31 December 2000
The main focus in South America has been
Argentina, where following the inability to secure
a financing package from the International
Monetary Fund (‘IMF’ ), the Argentine
government introduced measures to restrict the
withdrawal of US dollar denominated deposits and
the transfer of monies abroad. Following the
declaration of a state of siege by the Argentine
government, in late December, the president and
the three subsequent incumbents resigned within a
space of two weeks. In January 2002 the new
president, Eduardo Dulhalde, formally announced
that Argentina would default on its sovereign debt
and at the same time announced the “pesification” of
certain in-country US dollar denominated assets and
liabilities. In addition, after a brief period of dual
exchange rates (with a floating rate for financial
transactions and a fixed rate for trade), the fixed
exchange rate policy of one-to-one parity with the
US dollar was abandoned and the peso moved to a
freely floating basis. Against this background of
uncertainty and turmoil the Argentine economy
contracted by around 5 per cent in 2001, the third
successive year of recession. This economic
downturn is forecast to worsen during 2002.
Encouragingly, despite the Argentine crisis, the
Brazilian economy remained relatively stable.
Initially the Argentine crisis prompted a sharp
devaluation of the real which prompted the Central
bank to raise interest rates by 375 basis points,
between January 2001 and July 2001, to control
inflationary pressures and dampen domestic demand.
In the fourth quarter, a combination of sharp cuts in
US interest rates and an improved Brazilian current
account balance resulted in the real recovering to be
only 15.6 per cent lower against the US dollar over
the course of 2001. It is anticipated that GDP growth
in 2001 was around 2 per cent (compared to forecast
growth of 4 per cent) with inflation slightly higher at
7.7 per cent compared with 5.97 per cent in 2000.
HSBC’s operations in South America reported a
cash basis pre-tax loss of US$1,002 million in 2001
compared with a cash basis pre-tax profit of US$313
million in 2000. In view of the continuing unsettled
and deteriorating economic environment in
Argentina, the bad debt charge arising on HSBC’ s
Argentine exposure was US$723 million higher than
that in 2000 and included a US$600 million
additional general provision charge raised against
this exposure. In addition, the 2001 pre-tax loss
included a loss of US$520 million arising from the
pesification of HSBC Argentina’s US dollar assets
and liabilities at mandatory differing rates of
exchange which destroyed capital in the Argentine
banking system. In Brazil, cash basis profit before
tax of US$136 million, US$72 million lower than in
2000, reflected curtailment in the rate of credit
expansion during 2001 as a consequence of volatility
in foreign exchange and interest rate markets
reflecting concerns over the Argentine economy,
energy shortages and political uncertainties. At
constant exchange rates, cash basis pre-tax profits in
Brazil were only US$28 million lower than in 2000.
The following commentary on South America’s
results is based on constant exchange rates.
Net interest income in South America at
US$1,065 million was US$71 million higher than in
2000. In Brazil net interest income was US$98
million, or 14 per cent, higher than in 2000 reflecting
increased levels of corporate and retail lending
(principally arising from the full years contribution
from CCF’s Brazilian operations) and holdings of US
dollar linked securities to take advantage of wider
spreads from lower funding costs. This was partly
offset by a decline in HSBC Bank Brasil’s net
interest margin reflecting a change in asset mix to an
increase in the proportion of less risky but lower-
yielding assets. In Argentina, net interest income was
US$17 million lower than in 2000 and reflected
higher funding costs on rising interest rates.
Other operating income of US$880 million was
US$71 million, or 9 per cent, higher than in 2000
with an increase of US$103 million in fee income.
In Brazil, fee income increased by US$79 million, or
27.6 per cent, as the HSBC Brazilian operation
continued to develop wealth management business,
particularly asset management activities, and the
successful cross-sales of products to existing
customers through the retail branch network. Fees
from asset management grew by 48 per cent