HSBC 2004 Annual Report Download - page 102

HSBC HOLDINGS PLC
Financial Review (continued)
100
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
appeared 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 had been established and was
expected to be maintained.
On 28 March 2003, HSBC completed its
acquisition of HSBC Finance Corporation for a
consideration of US$14.8 billion, expanding
significantly its existing North American business.
The addition of HSBC Finance Corporation’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 total Group.
The results of HSBC Finance Corporation’s
consumer finance business 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 HSBC Finance Corporation 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 HSBC Finance Corporation 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 HSBC Finance Corporation 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
year. On an underlying basis, pre-tax profit, before
goodwill amortisation, was 13 per cent lower than in
2002 mainly due to lower earnings from mortgage
servicing and higher staff costs.