HSBC 2004 Annual Report Download - page 173

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interest income for the 12 months to 31 December
2005 by US$495 million while a hypothetical 100
basis points parallel rise in all yield curves would
decrease planned net interest income by
US$908 million.
Instead of assuming that all interest rates move
together, HSBC groups its interest rate exposures
into currency blocs whose interest rates are
considered likely to move together. The sensitivity
of projected net interest income for 2005, on this
basis, is described as follows:
US dollar
bloc
Rest of
Americas
bloc
Hong Kong
dollar
bloc
Rest of
Asia
bloc
Sterling
bloc
Euro
bloc Total
US$m US$m US$m US$m US$m US$m US$m
Change in 2005 projected net
interest income
+ 100 basis points shift in yield
curves ..................................... (789) 98 74 (4) (13) (274) (908)
– 100 basis points shift in yield
curves ..................................... 643 (108) (300) (37) 15 282 495
Change in 2004 projected net
interest income
+ 100 basis points shift in yield
curves ..................................... (511) 92 (150) (1) (21) (228) (819)
– 100 basis points shift in yield
curves ..................................... 157 (115) (689) (2) (26) 212 (463)
The interest rate sensitivities set out in the table
above are illustrative only and are based on a single
simplified scenario. The figures represent the effect
of the pro forma movements in net interest income
based on the projected yield curve scenarios and the
Group’ s current interest rate risk profile. This effect,
however, does not incorporate actions that could be
taken by Global Markets or in the business units to
mitigate the impact of this interest rate risk. In
reality, Global Markets would seek to proactively
change the interest rate risk profile to minimise
losses and optimise net revenues. The projections
above also assume that rates of all maturities move
by the same amount and, therefore, do not reflect the
potential impact on net interest income of some rates
changing while others remain unchanged. The
projections also make other simplifying assumptions,
including that all positions run to maturity.
The Group’ s exposure to changes in its net
interest income arising from movements in interest
rates falls into three areas: core deposit franchises,
HSBC Finance Corporation and Global Markets.
• Core deposit franchises: these are exposed to
changes in the value of the deposits raised and
spreads against wholesale funds; in a low
interest rate environment, such as at present, the
value of core deposits increases as interest rates
rise and decreases as interest rates fall. This risk
is, however, asymmetrical as there is limited
room to lower deposit pricing in the event of
interest rate reductions in a low interest rate
environment. Although interest rates have risen
over the year, this risk is still particularly acute
in the case of Hong Kong dollar deposits.
• HSBC Finance Corporation’ s net interest
income sensitivity is such that it benefits in a
falling rate environment and its interest margins
decline in a rising rate environment. This arises
from having substantially fixed rate real estate
secured lending funded to an extent with
interest rate-sensitive short-term liabilities.
This feature is important from a Group
perspective because it provides a natural offset
to the effect of interest rate reductions on the
core deposit franchises.
• Global Markets: the residual interest rate risk is
managed within Global Markets. This reflects
the Group’ s policy of transferring all interest
rate risk, other than structural risk, to Global
Markets to be managed within defined limits
and with flexibility as to the instruments used.
The best way of illustrating the active
management of this interest rate risk is to highlight
the major drivers of the changes shown in the
projected effect of interest rate moves in the above
table.
• In Hong Kong, the rise in interest rates over the
year increases the room to lower deposit pricing
in the event of falling interest rates. In addition,
Global Markets are positioned to increase
revenue should rates fall. These two factors
have materially reduced the Group’ s exposure to
falling rates.