HSBC 2004 Annual Report Download - page 105

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HSBC Mexico contributed US$325 million to
total operating income in the Commercial Banking
segment in North America, reflecting a strong
position in customer deposits. In addition, a growing
level of fee income was generated from payments
and cash management, loan and credit card fees.
Of the total increase in operating expenses,
US$163 million was attributable to HSBC Mexico.
Underlying operating expenses, excluding goodwill
amortisation, increased by 9 per cent to
US$614 million. This was driven by higher pension
and incentive compensation expenses. In Canada,
staff costs increased, primarily due to increased
variable incentive payments.
Credit quality remained satisfactory. On an
underlying basis, provisions for bad and doubtful
debts fell by 40 per cent to US$88 million, reflecting
the improved credit environment in North America
in 2003. Low interest rates, declining credit spreads
and positive economic sentiment all contributed to
this improvement.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$837 million, an increase of 70 per
cent, compared with 2002. On an underlying basis,
the Corporate, Investment Banking and Markets
business generated pre-tax profit, before
amortisation of goodwill, of US$772 million, 58 per
cent higher than in 2002. In generally favourable
trading conditions, Global Markets achieved higher
customer sales from structured finance and hedging
products as institutional and corporate borrowers
took advantage of low interest rates to raise finance
or fix the cost of existing facilities.
HSBC’s North American securities trading and
debt capital markets business was substantially
restructured and refocused towards the end of 2002
and this was reflected positively in its 2003 financial
performance. Government and agency securities
arbitrage activities were wound down. Corporate
bond trading returned to profitability, contrasting
with the heavy losses suffered in 2002 as a result of
widening credit spreads, particularly in the
telecommunications and auto sectors. The
turnaround in performance added US$67 million to
profit before tax. Investment in relationship
management generated new business from major
institutional and corporate clients. Global Markets
also expanded its structured credit derivatives
trading in response to the evolving requirements of
its institutional customer base, allowing these clients
to risk manage their portfolios more actively, thereby
generating fees and trading revenues for HSBC.
Underlying net interest income of
US$685 million, increased by 28 per cent, compared
with 2002. This was partly attributable to the
restructuring initiatives in the securities trading and
debt capital markets business. As part of this
restructuring, large arbitrage trading portfolios,
which had historically contributed dealing profits but
incurred significant funding costs, were eliminated.
Net interest income further benefited from good
balance sheet management and effective interest rate
positioning in the US and Canada.
Underlying total other operating income, at
US$738 million improved by 32 per cent. Strong
foreign exchange and domestic dollar book trading
activity contributed to increased revenues, driven by
historically low interest rates and volatile currency
markets. Derivatives trading revenues increased,
reflecting the growth in demand for the structuring
of tailored products for corporate and institutional
customers.
HSBC Mexico generated other operating
income of US$90 million, of which US$64 million
was accounted for by dealing profits. Volatility in the
Mexican markets enabled the Group to increase
trading volumes and capitalise on favourable market
movements. These positive market conditions led to
increased profits from foreign exchange and fixed
income.
Underlying operating expenses, before goodwill
amortisation, of US$706 million, increased by 9 per
cent. Investment in the core business added to the
expenditure but was partly funded by lower costs in
the securities trading and debt capital markets
business, elements of which were wound down.
Credit experience on major corporate customers
in the US was better in 2003. Many accounts which
were potentially problematic at the end of 2002 were
successfully refinanced and restructured in the strong
debt market at the start of 2003. Elsewhere, credit
quality remained satisfactory and consequently, on
an underlying basis, there was a net release of
US$7 million for bad and doubtful debts.
Profits on disposal of investments, on an
underlying basis, were US$57 million, a decline of
53 per cent compared with 2002, which included a
higher level of securities disposals arising from the
restructuring of investment portfolios.
HSBC’s Private Banking operations in North
America contributed US$63 million to pre-tax
profits, before goodwill amortisation, an increase of
11 per cent compared with 2002.
During the year the North American business
continued its evolution from a deposit-based