HSBC 2004 Annual Report Download - page 30

HSBC HOLDINGS PLC
Financial Review (continued)
28
Year ended 31 December 2004 compared
with year ended 31 December 2003
Net interest income was US$5,426 million, or 21 per
cent higher than 2003, at US$31,024 million.
US$2,745 million of this increase was attributable to
an additional quarter of HSBC Finance compared
with 2003, while Bank of Bermuda contributed
US$154 million in the ten months since acquisition.
On an underlying basis and in terms of constant
currency, net interest income increased by 5 per cent,
as the impact of strong growth in interest-earning
assets was partly offset by continuing margin
compression in major markets and lower returns on
treasury assets.
In Europe, net interest income was
US$1,522 million, or 20 per cent, higher than in
2003, with US$158 million of the increase coming
from an additional quarter of HFC Bank in the UK
and US$35 million from the acquisition of
M&S Money in November 2004. On an underlying
basis and expressed in constant currency, net interest
income increased by 6 per cent, reflecting strong
growth in mortgages and consumer lending (funded
by corresponding growth in lower-costing deposits
and current accounts), particularly in the UK. This
was partly offset by competitive pricing pressure,
particularly in UK mortgages, and the redeployment
of liquidity at lower yields as assets matured.
In North America, net interest income increased
by US$3,136 million, with HSBC Finance
contributing US$2,587 million of the increase. On an
underlying basis, the rise was US$393 million, or
3 per cent, primarily from a strong performance in
Mexico, which benefited from growth in low cost
deposits. In the US, an increase in mortgage lending
flowed through to net interest income, though the
benefit was partly offset by competitive pressure on
pricing, a change in asset mix towards lower
yielding but higher quality assets, and the effect of
funding costs on larger trading positions.
In Hong Kong, net interest income declined by
7 per cent, largely due to spread compression on the
value of deposits and pressure on lending margins,
particularly in mortgages. Foreign funds investing in
the buoyant stock market, and inflows from investors
anticipating an upward realignment of the currency
as US dollar weakened, boosted liquidity in the
market, depressing Hong Kong dollar interest rates
and reducing spreads on deposits. Net interest
income was further reduced by competitive pressure
on mortgage yields and corporate spreads, a fall in
average mortgage balances and the run-off of higher
yielding treasury assets with less attractive
reinvestment opportunities, given the flat Hong
Kong dollar yield curve. These adverse
developments were partly offset by a 10 per cent rise
in average interest-earning assets, and continued
growth in customer deposits.
In the Rest of Asia-Pacific, net interest income
increased by 18 per cent. In constant currency terms,
the rise was 15 per cent, driven by growth in
mortgages, consumer lending and international trade
across the region, offset partly by competitive
pressure on pricing.
In South America, net interest income rose
sharply, reflecting the full-year benefit of acquiring
Losango in December 2003 and the effect of falls in
Brazilian interest rates in the latter part of 2003 and
early 2004, which translated into lower funding costs
on large fixed rate positions and widening spreads on
deposits. The effect was accentuated by strong
growth in both personal and commercial lending in
Brazil. Argentina similarly benefited from growth in
consumer lending as the economy grew and the
outcome of the external debt restructuring became
increasingly apparent.
Overall, average interest-earning assets
increased by US$185.9 billion, or 24 per cent,
compared with 2003. At constant exchange rates,
underlying average interest-earning assets increased
by 13 per cent. This growth was driven principally
by higher mortgage balances and personal lending in
the US, the UK, and across Asia-Pacific.
HSBC’s net interest margin was 3.22 per cent in
2004, compared with 3.29 per cent in 2003.
Year ended 31 December 2003 compared
with year ended 31 December 2002
Net interest income in 2003 was US$10,138 million,
or 66 per cent higher than 2002, at
US$25,598 million. Of this increase, HSBC Finance
contributed US$8,305 million, and HSBC Mexico
US$874 million. Excluding these acquisitions, and at
constant exchange rates, net interest income was
only marginally higher than in 2002, as the impact of
growth in interest-earning assets was offset by
continuing margin compression from the effect of
low interest rates worldwide. This effect was
expected to continue in 2004 unless interest rates
rose ahead of market expectations.
In Europe, net interest income was
US$1,197 million, or 19 per cent, higher than in
2002. HFC Bank contributed US$438 million of this
increase. Excluding this acquisition and at constant
exchange rates, net interest income was slightly
higher than in 2002, reflecting strong growth in
average interest-earning assets. This was partly