HSBC 2004 Annual Report Download - page 112

HSBC HOLDINGS PLC
Financial Review (continued)
110
cent of GDP in 2004. This, together with the growth
in the economy and an appreciating currency,
reduced the ratio of debt to GDP, ushering in a
virtuous circle of declining risk spreads, growing
confidence and a return of investment. This was
despite the rekindling of inflationary pressures from
rising commodity prices early in 2004, adjustments
in administered prices and a very rapidly narrowing
output gap. Core inflation remained in excess of 7
per cent throughout the year, and the Central Bank
raised interest rates and tightened monetary policy in
an attempt to avert higher inflation in 2005. The
combined effect of the global slowdown and local
policy restrictions is slowing the Brazilian economy.
Nevertheless, the short-term outlook remains
encouragingly positive.
In Argentina, the recovery from the crisis of
2001 continued in 2004, helped by the favourable
external environment and the absence of effective
pressure to improve the exchange offer on defaulted
debt. Year-on-year GDP growth was 8.8 per cent.
Employment in the formal economy in October was
up by 6.8 per cent on the year before, continuing the
trend of the past two years. By the end of 2004, the
stock market index had surpassed the levels last
achieved in August 2001, and stood almost 12 per
cent above the minimum reached in September 2002,
when the economy began its current expansionary
phase. Inflation appeared to be under control and the
government, buoyed by revenues from exports, was
able to post large fiscal surpluses, with a primary
surplus in excess of 5 per cent of GDP. By contrast,
the progress on debt restructuring was slow. Though
the rate of investment returned to the pre-crisis level
of 20 per cent of GDP – arguably, too low to sustain
growth in excess of 3 to 4 per cent per annum – it is
likely that the re-investment cycle will falter without
a workable solution to the debt crisis. To that extent,
the outlook for Argentina remains uncertain.
HSBC’s operations in South America reported a
pre-tax profit of US$415 million, substantially ahead
of the US$115 million achieved in 2003. Excluding
goodwill amortisation, pre-tax profit was
US$444 million compared with US$126 million in
2003, and represented 2 per cent of HSBC’s total
pre-tax profit on this basis. The 2004 results include
the first full year’s contribution from the Brazilian
consumer finance company, Losango, acquired in
December 2003, along with contributions from
CreditMatone S.A., acquired in November 2004, and
Valeu Promotora de Vendas, the consumer finance
operations of Indusval Multistock Group, acquired in
August 2004. Together, these three businesses
contributed US$72 million to pre tax profits before
goodwill amortisation, representing 23 per cent of
the growth. There were no significant exchange rate
impacts in 2004.
The commentary that follows is based on
constant exchange rates.
Personal Financial Services’ pre-tax profit,
before goodwill amortisation, of US$47 million
predominantly reflected the Losango consumer
finance business acquired in December 2003, which
contributed US$72 million. It was pleasing to note
that, in its first full year in HSBC, Losango’s full-
year profitability doubled compared with 2003.
Excluding Losango at constant exchange rates, the
pre-tax loss before goodwill amortisation improved
by 50 per cent on the previous year.
The integration of Losango progressed
extremely well. There was strong growth across the
product portfolios during the period, notably in store
loans and personal lending products. Good progress
was made in delivering anticipated operational
synergies. Plans to embed Losango branches within
the HSBC Brazil network are well advanced. In the
second half of the year, Losango benefited from the
acquisition of the two consumer finance portfolios
noted above.
Excluding the impact of the acquired businesses,
net interest income grew by 15 per cent, reflecting
good asset growth in Brazil, partly offset by reduced
spreads on credit cards in Argentina.
Auto finance loans in Brazil grew by 69 per
cent, reflecting the success of a number of initiatives
taken to enhance the distribution channels in the
branch network, and effective marketing promotions
and incentive campaigns. Market share increased
from 3.1 per cent to 4.1 per cent. The income benefit
arising from the increase in balances was only partly
offset by narrower spreads.
Competitive pricing was used to grow the cards
business to take advantage of strong growth in
consumer spending: this generated an 11 per cent
increase in balances. Growth in demand deposits was
augmented by a widening of spreads. However, the
benefit was partly offset by narrower spreads on
savings accounts, where rates are set by the Brazilian
Government, and on time deposits.
Other operating income rose by 32 per cent, of
which 17 per cent came from Losango and its
consumer lending acquisitions. The remaining 15 per
cent arose principally from growth in fee income in
Brazil driven by increased lending activity and
higher revenues from the life insurance business in
Argentina.