HSBC 2003 Annual Report Download - page 74

HSBC HOLDINGS PLC
Financial Review (continued)
72
momentum from rate cuts in 2001 was lost.
Industrial production and investment contracted in all
major economies, although this was offset to varying
degrees by consumer and government expenditure.
Initial optimism that the fourth quarter of 2001
marked the low point in the eurozone’ s economic
cycle was largely misplaced as constraints imposed
by the EMU’ s growth and stability pact limited the
degree of fiscal loosening available to members.
European operations contributed
US$3,500 million to HSBC’s pre-tax profit in 2002.
Europe’s pre-tax profits, before goodwill
amortisation, were US$4,160 million, and
represented 40 per cent of HSBC’s profits on this
basis. Goodwill amortisation of US$660 million was
broadly in line with 2001. Operating performance
was strong with pre-provision profit rising 9 per cent
to US$4,737 million before goodwill amortisation. In
constant currency terms, the growth was 6 per cent.
This growth was driven essentially by the core
personal and commercial banking businesses in the
UK and France and by Global Markets UK’s
performance. There was no material benefit in 2002
from disposal gains as after making provisions for
amounts to be written off fixed asset investments, the
net gain was only US$21 million. The comparable
figure in 2001 was US$351 million, a result
dominated by the sale of the Group’s stake in British
Interactive Broadcasting.
The impact of acquisitions on the 2002 profit
before tax was modest at US$51 million. The
acquisitions of Demirbank in October 2001 and
Benkar in September 2002, however, represented a
major expansion of HSBC’s business in Turkey.
These businesses were successfully integrated during
2002, and by the end of the year over 500,000
customers in Turkey were being served through a
combination of call centres, internet banking and a
network of 163 branches.
Internal restructuring took place to enhance
operational efficiency. In June 2002, HSBC acquired
Merrill Lynch’s 50 per cent share of the Merrill
Lynch HSBC joint venture. The business was
integrated into HSBC Bank in December 2002.
The commentaries on the Europe results that
follow are based on constant exchange rates.
In Personal Financial Services, pre-tax profit,
before goodwill amortisation, of US$987 million was
13 per cent lower than in 2001. However, after
adjusting for the US$200 million profit from the sale
of the Group’s stake in British Interactive
Broadcasting in 2001, profit increased by 6 per cent.
The underlying increase was driven by strong growth
in lending and savings products and increased
spreads, as funding costs reflected the low interest
rate environment across Europe. Higher operating
expenses, due in part to the full year impact of
acquisitions, one-off property costs and vacant space
provisions, partly offset the growth in income.
Net interest income, at US$2,541 million, was
14 per cent higher than in 2001. UK mortgage
balances increased by 24 per cent and gross new
lending by 57 per cent as HSBC increased its market
share from 4 per cent to 6 per cent in a buoyant
housing market. HSBC’s UK mortgage balances
have almost doubled over the past five years through
a combination of innovative products and
competitive pricing. ‘HomeStart’ , an innovative
mortgage allowing first time buyers to pay only the
interest costs during the first three years, was a major
contributor to growth during the year.
In the UK, personal current account balances
increased by 11 per cent as customers preferred to
hold cash in the uncertain investment climate. The
launch of a new Bonus Savings Account, and
improved utilisation of customer relationship
management systems, contributed to growth of
19 per cent in personal savings balances and 16 per
cent in personal lending balances.
In France, CCF’s net interest income of US$386
million was 7 per cent higher than in 2001. Net
interest income grew strongly, driven by growth in
personal lending and sight deposits as customers
preferred liquidity and security in the face of falling
equity markets. In Turkey, net interest income
increased substantially reflecting the full year’s
contribution of Demirbank and the acquisition of
Benkar in September 2002.
Other operating income at US$1,767 million
was 3 per cent lower than in 2001. This reflected
lower income from equity market-related activity and
sales of investment products, largely offset by strong
growth in sales of life, critical illness and income
protection products. Credit card income particularly
benefited from the inclusion of a full year’s income
for Demirbank, and three months contribution from
Benkar.
In the UK, sales of HSBC branded life, critical
illness and income protection products, through the
tied sales-force, were 7 per cent higher than in 2001.