HSBC 2004 Annual Report Download - page 68

HSBC HOLDINGS PLC
Financial Review (continued)
66
interest rate environment, and rising equity markets
increased the value of the extant book. Net new
money invested was US$8.6 billion. A number of
new funds were launched in 2004, including several
hedge funds, and the Household European
Commercial Paper and Floating Rate Notes
programmes attracted over US$2.5 billion of client
investments. Higher transaction and portfolio fees, in
line with this growth, were partly offset by weaker
income in France, where transaction volumes and
funds under management both fell during the year.
Operating expenses, before goodwill
amortisation, increased by 5 per cent, reflecting front
office recruitment, the acquisition of Bank of
Bermuda, and higher performance-related
remuneration. In France, lower costs reflected the
merger of HSBC’ s four private banks in 2003.
A US$33 million net provision for bad debts in
France, arising from a small number of specific
accounts, was offset by net releases in the UK and
Switzerland, following a review of historic loss
trends and current economic conditions, which led to
release of general provisions.
Profits on disposal in 2004 included a gain on
sale of a former head office building following the
restructuring of HSBC’ s four private banks in
France. In 2003 there was a gain on a long-term
private placement transaction.
Included in Other are interest earnings on cash
held and interest costs of debt issued by HSBC
Holdings, and the effect of corporate items not
allocated to customer groups, including gains on the
sale of an insurance company and releases of
centrally managed litigation provisions.
Year ended 31 December 2003 compared
with year ended 31 December 2002
The UK economy expanded by 2.3 per cent in 2003.
After a slow first six months, growth accelerated in
the third quarter and that momentum continued into
the final months of the year. Growth in consumer
spending slowed during the course of the year but
nevertheless remained robust and, in particular, the
housing market and household appetite to borrow
remained strong. However, low real income growth,
together with the expectation of further rises in
interest rates, was expected to dampen household
activity in the forthcoming months. Elsewhere, there
were a few encouraging signs that industrial activity
in particular and corporate confidence in general was
starting to improve from a low base. Stronger global
demand, if maintained, was expected to provide a
boost to the corporate sector.
Having slipped into recession in the first half of
the year, the eurozone economy returned to growth
in the second half, expanding by 0.4 per cent
quarter-on-quarter in the third quarter and by 0.3 per
cent in the fourth quarter. Once again, however, it
was stronger exports that drove the third quarter
improvement, while the domestic economies
remained subdued. Consumer spending was flat and
investment contracted for the third consecutive
quarter. The pick-up in exports occurred despite the
appreciating euro, which rose more than 16 per cent
against the US dollar during the course of the year.
In the fourth quarter, growth seemed to have been
largely the result of inventory build up, with exports
falling back after the strength of the third quarter,
and with limited growth in consumer spending.
Interest rates were cut twice during 2003, with the
European Central Bank’ s repo rate dropping by 75
basis points to 2 per cent. By contrast, however,
longer-term interest rates moved higher, rising by
about 80 basis points between June and the end of
December, as the bond market anticipated economic
recovery.
In 2003, personal credit expansion in the UK
was the major growth area as consumers took
advantage of historically low interest rates, enabling
HSBC to generate strong growth in mortgages and
consumer lending. Conversely, sales of investment
and pension products fell, reflecting a lack of
confidence in equity markets. In this environment,
HSBC grew its deposit base as customers sought
flexibility and security for their savings,
notwithstanding the low interest rates available. The
low interest rate environment also meant that the
value of HSBC’s maturing liquidity reduced as it
was redeployed in lower yielding assets.
The same factors, low interest rates and weak
equity markets, increased the cost of pension
provision by US$96 million in the UK. Employment
costs also grew, notably in the UK, as social taxes
were raised. In order to adjust for this higher cost
environment, HSBC took steps to reduce its staff
costs, announcing both 1,400 redundancies in the
UK and the shift over the next three years of 4,000
positions to the Group Service Centres. In the short
term these actions incurred both redundancy and
excess property provisioning costs totalling over
US$176 million.
European operations contributed pre-tax profit
of US$3,969 million in 2003 compared with
US$3,500 million in 2002. Excluding goodwill
amortisation, European operations contributed
pre-tax profit of US$4,862 million and represented
around one-third of HSBC’s total profit on this basis.
At constant exchange rates, and excluding the