HSBC 2004 Annual Report Download - page 66

HSBC HOLDINGS PLC
Financial Review (continued)
64
for bad debts also increased sharply, reflecting
growth in lending balances and a deterioration in
credit quality, particularly in the second half of the
year, driven by a rise in delinquencies and personal
bankruptcies, notably in the credit cards business.
Commercial Banking reported pre-tax profits,
before goodwill amortisation, of US$1,749 million,
an increase of 21 per cent over 2003, driven mainly
by strong revenue growth in the UK. Transfer of
business from Corporate Banking in Germany to this
segment contributed 2 per cent of the growth. In
aggregate, revenue grew by 10 per cent and costs by
2 per cent, a marked improvement in productivity
which reduced the cost:income ratio by over
4 percentage points. The performance in the UK was
even stronger where the cost:income ratio improved
by 7 percentage points.
Net interest income increased by 8 per cent as
new customer acquisition and a growth in demand
for credit increased loans and deposits during the
year. In the UK, liability growth contributed
US$82 million to net interest income. This, in part,
reflected the continued popularity of the business
money manager product, where deposit balances
grew by 16 per cent. Spreads achieved on customer
deposits were moderated as customers migrated to
this account from current accounts. In order to offset
this effect, a number of successful promotions were
launched, which increased current account customer
numbers in the UK by 8 per cent in 2004. A rise in
customer recommendations also contributed to the
increase.
HSBC attracted over 100,000 new customers in
2004 and now holds just under 20 per cent of start-
up business accounts in the UK. In addition to the
rise in customer numbers, average current account
balances increased by 17 per cent.
The UK saw renewed demand for lending
products in 2004. Commercial lending grew by
22 per cent to US$21.9 billion, reflecting an
increased share of a growing market, although
competitive pressure led to narrower spreads as new
business margins tightened. As the UK economy
improved and customer confidence returned, the
commercial mortgage product was updated and
relaunched, and HSBC’s return to a market segment
it had hitherto downplayed led to an increase in
commercial mortgages of 46 per cent. In aggregate,
growth in UK commercial lending added
US$50 million to the overall increase in net interest
income.
In France, net interest income fell by 4 per cent,
reflecting reduced demand for credit and a resulting
decrease in lending balances. In Turkey, net interest
income fell by 12 per cent, as a result of lower
earnings on free funds, partly offset by liability
growth.
Other operating income grew by 12 per cent to
US$2,062 million. In the UK, increased lending
activity, together with some targeted price increases
delivered a US$28 million, or 42 per cent, increase
in loan fee income. Credit card fee income increased
by 26 per cent as a result of a rise in transaction
volumes, reflecting higher consumer spending in the
UK, a reduction in the interchange rate and
recruitment of new merchant customers. Revised fee
structures and improved collection processes
contributed to a 14 per cent increase in overdraft fees
in the UK. A change in strategic focus to concentrate
on growing the commercial wealth management
business led to the recruitment of a number of
independent financial advisors. These advisors,
together with an increase in marketing activity,
contributed to an 18 per cent increase in income
from wealth management products to
US$138 million.
Operating expenses, excluding goodwill
amortisation, increased by 2 per cent. Outside the
UK processing and administrative costs rose in line
with increased business volumes, and system
development costs rose in France, again attributable
to the introduction of HUB. Lower costs in the UK
reflected headcount reductions in support functions,
despite US$55 million of redundancy expenses
incurred as part of continuing efficiency
improvements. In 2003, redundancy costs were
US$21million. UK operating expenses, excluding
redundancy costs, decreased by 3 per cent.
The charge for bad and doubtful debts,
US$305 million, rose by 35 per cent, compared with
the modest charge in 2003. Underlying credit quality
in the UK was stable and movements in provisions
across other European countries were minimal.
Contingent liability releases of US$34 million
mainly reflected a reduction in provisions against
legal claims in France.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$1,772 million, was broadly in line
with 2003. Bank of Bermuda contributed
US$17 million to the pre-tax profits. The transfer of
certain corporate customers to Commercial Banking
referred to above reduced pre-tax profits by 2 per
cent.
A 29 per cent decrease in operating profit before
provisions was driven by a modest fall in revenues
coupled with a significant increase in costs as part of