HSBC 2003 Annual Report Download - page 101

99
Year ended 31 December 2003 compared with
year ended 31 December 2002
Fuelled by fiscal stimuli and a further interest rate
reduction, the US economy steadily gained
momentum in 2003. GDP expanded at an annualised
rate of 8.2 per cent in the third quarter, the strongest
rate since 1984. A strong revival in profits growth
boosted investment spending while consumer
spending remained strong, supported by tax cuts, a
buoyant housing market, and equity releases from
refinancing mortgages at record low interest rates.
By the end of the year there was some evidence of
the long-awaited recovery in the labour market, with
the economy adding jobs, albeit modestly. In June
the Federal Reserve cut its Fed Funds rate by 25
basis points to 1 per cent. Subsequently, 10-year
bond yields rose by 100 basis points from their
mid-June low of 3.1 per cent. Equity markets
recovered strongly following the end of the Iraq war:
by the end of December the S&P 500 had risen by
39 per cent from its March low and was at its highest
level since July 2002. This supported consumer
confidence. However, with the US current account
deficit continuing to deteriorate, the US dollar
remained under downward pressure, falling to
US$1.26 against the euro by the end of the year.
Canada’s central bank was the first of the G7
countries to embark on a policy of raising interest
rates in 2003. In response to inflationary pressures in
the early part of the year, overnight lending rates
were raised on two occasions, by a total of 50 basis
points. However, with the Canadian dollar
strengthening against the US dollar, inflation worries
easing, and concerns about subdued GDP growth, the
Central Bank reversed the earlier interest rate rises to
take the overnight rate back down to 2.75 per cent in
September. Many of the reasons for the
disappointing growth were temporary, such as
SARS, BSE, forest fires and the Ontario power
blackout, and their immediate impact abated.
Consumer spending growth remained robust all year,
but the ongoing impact of the strong Canadian dollar
appears set to continue, restraining export growth.
The Mexican economy continued to lag behind
the US recovery, largely because, apart from
technology, the US manufacturing sector remained
subdued. However, the impact of stronger US growth
is expected to benefit Mexico in the near term,
boosting exports and growth. Meanwhile, political
conflicts delayed the passage of critical reform
legislation, threatening approval of the 2004 budget.
This notwithstanding, a solid macro-economic
foundation has been established and is expected to be
maintained.
On 28 March 2003, HSBC completed its
acquisition of Household for a consideration of
US$14.8 billion, expanding significantly its existing
North American business. The addition of
Household’s substantial consumer lending portfolio
increased the proportion of HSBC’s assets in North
America from 19 per cent to 28 per cent of the
Group.
Household’s results for the period from
29 March to 31 December 2003 are tabulated
separately under Consumer Finance in order to
highlight their significance to HSBC’s overall
performance in North America. HSBC’s results at the
pre-tax level and before amortising goodwill also
benefited from a US$534 million contribution from
HSBC Mexico in its first full year. The integration of
both Household and HSBC Mexico progressed well,
with synergy benefits and business opportunities
generally meeting or exceeding expectations.
The following discussion of HSBC’ s North
American performance highlights the impact of the
additions of Household and HSBC Mexico. The
phrase ‘on an underlying basis’ is used to describe
performance excluding these acquisitions.
HSBC’s operations in North America
contributed US$3,613 million to HSBC’s profit
before tax, an increase of US$2,375 million,
compared with 2002. Excluding goodwill
amortisation, pre-tax profit was US$4,257 million,
compared with US$1,384 million in 2002, which was
equivalent to 30 per cent of HSBC’s total pre-tax
profit on this basis. On an underlying basis, HSBC’s
pre-tax profit, before goodwill amortisation, of
US$1,672 million was US$320 million, or 24 per
cent, higher than in 2002. Goodwill amortisation was
US$644 million in 2003, compared with
US$146 million last year, predominantly reflecting
the acquisition of Household and, to a lesser extent,
HSBC Mexico.
The commentaries that follow are based on
constant exchange rates.
Personal Financial Services, excluding
Consumer Finance, generated pre-tax profit, before
goodwill amortisation, of US$870 million in 2003,
40 per cent higher than last year. HSBC Mexico
contributed US$350 million to pre-tax profit for the