HSBC 2003 Annual Report Download - page 103

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the integration with Household, long-term
restructuring programmes, including the
rationalisation of staff functions, were initiated,
adding US$20 million of costs in the year.
Operations in Mexico contributed
US$67 million to the overall net charge for bad and
doubtful debts of US$142 million. On an underlying
basis, credit provisions in Personal Financial
Services were broadly in line with the prior year, a
good performance in view of strong growth in
personal lending. Overall credit quality improved,
reflecting the improved economic environment.
Consumer Finance contributed
US$2,068 million to pre-tax profit, before goodwill
amortisation, in the nine months since Household
became a member of HSBC. The integration of
Household into HSBC delivered anticipated benefits
in improved funding costs, and technology and
administrative cost savings. Significant progress has
been made in exporting Household’s core skills,
particularly in the areas of credit risk management,
sales-focused organisation and customer-centred
technology, to other parts of the Group. Further
synergies are planned in card processing, IT
contingency rationalisation, purchasing, call-centre
operations and the shared use of HSBC’s Group
Service Centres. Household’s business model is
being taken to selected markets overseas and
established alongside existing HSBC operations to
meet the growing global demand for consumer
finance.
Net interest margin benefited by US$531 million
from purchase accounting adjustments relating to the
acquisition of Household in the nine months in
which Household was part of the HSBC Group. This
comprised of a US$946 million benefit in respect of
debt funding, offset by the amortisation of purchase
accounting adjustments relating to loans and
advances to customers totalling US$415 million.
Purchase accounting adjustments restated the book
value of debt to fair value at that date and, therefore,
reflected the improvement in spread already in the
market as well as falling interest rates. They are
being amortised in line with the residual maturity of
the debt. Assuming credit spreads remain consistent,
savings on future debt issues will replace the fair
value adjustments relating to credit spreads. Since
acquisition, Household’s funding costs on new issues
have, in fact, fallen as the credit spreads sought by
the market decreased, reflecting the improvement in
Household’s credit rating on joining the HSBC
Group. During 2003, net interest income benefited
by US$124 million as a result of such savings.
All consumer portfolios grew during the year,
except for personal unsecured loans, with the
strongest growth in the real estate secured and
private label portfolios. The secured real estate
portfolio growth was driven by the correspondent
business while the private label portfolio benefited
from a number of new relationships added during the
year. Growth in MasterCard and Visa loans benefited
from portfolio acquisitions made during the year in
advantageous circumstances and growth in the
General Motors portfolio. The motor vehicle finance
business also benefited from new originations from
strategic alliances during the year.
Included within operating expenses were one-off
retention payments arising on the change of control
amounting to US$52 million. Headcount increased to
support business expansion, particularly in the
consumer lending and mortgage services businesses.
The charge for bad and doubtful debts in 2003
reflected receivables growth, increases in personal
bankruptcy filings and the weak US economy.
However, in the second half of the year credit quality
stabilised and improvement was seen in a number of
key indicators, including early stage delinquency,
charge-offs, bankruptcy filings and collection
activities. The improvement reflected resumed
domestic economic growth which is forecast to
continue into 2004.
Commercial Banking in North America
reported pre-tax profit, before goodwill amortisation,
of US$595 million, an increase of 32 per cent,
compared with 2002. On an underlying basis, HSBC
generated pre-tax profit, before goodwill
amortisation, of US$498 million, 12 per cent higher
than last year.
Net interest income on an underlying basis was
marginally lower than 2002. In Canada, income
growth was generated from increased balances on
loans and deposits. There were increases in
commercial real estate lending where growth in
market share was concentrated primarily in New
York. Service delivered to SMEs was enhanced as
part of the strategy to focus on that market. Notably,
the credit application process was re-engineered to
make it easier for customers and the number of
relationship managers doubled. As a result, lending
to SMEs increased by 17 per cent. Net interest
income further benefited from steady growth in