HSBC 2003 Annual Report Download - page 73

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merger and advisory business as greater focus was
given to HSBC’s core customer sectors and regions.
Fees from debt capital markets activities were also
strong. Generally, fees benefited from the high level
of activity in the primary markets, as customers
sought long-term financing at low interest rates.
Staff costs rose, with higher bonuses reflecting
increased profitability in specific product lines.
Restructuring and research costs of US$24 million
were also incurred to build and reshape HSBC’s
investment banking and equities businesses.
Premises and equipment expenses were lower as a
result of savings in rental payments from the London
office move to Canary Wharf.
Credit experience was generally satisfactory
although new specific provisions were higher, mainly
due to a single name in the engineering sector which
was extensively restructured in the second half of the
year. Corporate weakness in the power generation
sector was also dealt with through raising additional
specific provisions, although these were partly
offset by recoveries in the transport and
telecommunications sectors, as balance sheets were
strengthened.
Gains on investment disposals were lower than
in 2002, mainly due to a reduction in profits from the
disposal of venture capital investments in CCF.
Against the background of a recovery from
recent lows in European stock markets, Private
Banking activities continued to grow during 2003.
Pre-tax profit, excluding goodwill amortisation,
increased by 48 per cent as a result of strong growth
in dealing income, lower costs and the
non-recurrence of contingencies and write downs
in 2002.
Net interest income was broadly in line with
2002. A 30 per cent increase in lending balances was
driven by clients seeking to maximise the overall
earnings potential of their investments by borrowing
to reinvest in higher returning securities. These
additional earnings were mostly offset by a decline in
yield on free funds as lower interest rates prevailed
throughout the year.
Net fees and commissions increased by 2 per
cent to US$556 million. The low interest rate
environment improved the attractiveness of
investment markets, particularly for sophisticated
investors with access to structured products which
offered potentially higher returns than from cash
deposits. Consequently, funds under management
increased by US$20 billion to US$91 billion, with a
move by clients away from liquid positions bringing
in some US$9 billion of new client funds. A strong
rise in discretionary mandates together with client
demand for structured products and Household’s
commercial paper contributed to the increase.
Transaction and safe custody fees rose in line with
the growth in client funds while an increased focus
on product enrichment produced strong growth in
income from structured products. In Germany, fee
income was boosted by the placement of two new
property funds. However, income in France was
weaker as stock market activity remained subdued.
Volatility in the major currencies resulted in
higher volumes of client transactions in the foreign
exchange markets, and combined with proprietary
equity gains in 2003, contributed to the 37 per cent
improvement in dealing profits to US$94 million.
Total operating expenses, before goodwill
amortisation, fell by 4 per cent to US$709 million.
This was achieved through cost savings realised
following the merger of three banks in Switzerland in
2002 and lower property expenses.
Provisions for contingent liabilities and
commitments were lower than in 2002, which
included amounts provided for litigation. Amounts
written off fixed asset investments were lower than
in 2002 following a specific write down of a debt
security in 2002. Gains on disposal of investments
and tangible fixed assets increased by 22 per cent to
US$61 million, principally reflecting a gain on a
long-term private placement transaction.
Year ended 31 December 2002 compared with
year ended 31 December 2001
The UK registered strong consumer-led GDP growth
of 1.7 per cent in 2002. Structural disparities within
the UK economy widened further as consumer and
government spending masked an industrial recession.
A combination of low interest rates, and a rising
incidence of equity withdrawal as house prices rose,
boosted consumer expenditure, particularly in the
latter half of the year. Unemployment remained low
as the jobs shake-out in manufacturing was absorbed
by growth in the public sector.
Economic activity slowed further in 2002, as
early indicators pointing to a standard cyclical
recovery in economic activity diminished and the