HSBC 2004 Annual Report Download - page 78

HSBC HOLDINGS PLC
Financial Review (continued)
76
trade finance activity and trade-related income.
Economic expansion in mainland China, the
consumer spending recovery in the US and an
increase in commodity prices contributed to strong
regional trade flows. Business activity with mainland
China benefited from the secondment of key
relationship managers to HSBC offices there, and a
regional advertising campaign demonstrating
HSBC’s ability to offer integrated solutions across
Greater China.
Increased lending to middle market customers,
together with the launch of several new lending
products for SMEs and related marketing campaigns,
boosted credit facility fee income. Continued
investment in sales resources and training, marketing
and incentive campaigns led to higher insurance
income. The introduction of income protection, unit
trust and structured investment products to HSBC’ s
range of commercial wealth management products
also contributed to the increase in non-funds income,
resulting in a 20 per cent rise in investment and
protection income.
Operating expenses, before goodwill
amortisation, were 7 per cent higher than in 2003.
The increase reflected growth in headcount, higher
recruitment-related costs, and training costs.
Marketing spend also rose in support of business
development initiatives with mainland China, and to
increase sales to existing customers and raise
insurance income. Further costs arose from the
launch of a number of efficiency initiatives,
including a new Customer Relationship Management
System, which is expected to lead to both improved
sales and cost savings. As part of an ongoing
process, credit support and trade services processes
were migrated to the Group Service Centre in
Shanghai.
The net release for bad and doubtful debts
increased by US$87 million. There were specific
provision releases reflecting the improved economic
environment and stronger property market, and a
release of general provisions following a review of
the impact of the improved economic conditions and
historical loan loss experience.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$1,584 million, 24 per cent higher
than in 2003, driven by strong growth in dealing
profits, a significant increase in fees and
commissions and a net release of provisions for bad
and doubtful debts. In January, management
responsibility for a corporate trust business was
transferred from Private Banking, contributing
US$18 million to pre-tax profits. While comparative
numbers have not been restated, the comments that
follow exclude the impact of this business transfer
unless stated.
Net interest income was 14 per cent lower than
in 2003, reflecting continued pressure on corporate
spreads and lower treasury income resulting from the
run-off of higher yielding assets, coupled with
limited reinvestment opportunities against a flat
Hong Kong dollar yield curve. This shortfall in
revenue was partly mitigated by growth in corporate
loan balances and higher deposit balances, driven by
the roll-out of an upgraded payments and cash
management product set.
Other operating income grew by 67 per cent, of
which 9 per cent came from the inclusion of Bank of
Bermuda’ s operations in Hong Kong. Underlying
growth reflected a significant increase in fees and
commissions and dealing income. Foreign exchange
profits increased, benefiting from strong customer
flows and growing cross-sales opportunities to
corporate clients. These gains were further amplified
by the non-recurrence of losses resulting from a
strengthening Hong Kong dollar in the latter part of
2003. Derivatives trading reported higher profits as
Global Markets provided structured investment
solutions to support the growth in the sale of wealth
management products to personal and commercial
customers. A combination of successful positioning
and improved customer flows also contributed to
profitability as clients sought to lock in funding
requirements at historically low rates. Fee income
increased from structured solutions and yield
enhancement products, and sales of securities and
unit trusts. Structured finance also generated an
increased contribution compared with 2003. Equity
capital markets benefited from an active IPO market,
while private equity revenues were boosted by an
improvement in management fees, as the launch of a
US$700 million regional fund was completed. In
asset management, higher sales of investment
products and strong growth in funds under
management generated increases in distribution
revenues and advisory fees, as customers pursued
higher returns in a low interest rate environment.
Operating expenses, excluding goodwill
amortisation, increased by 36 per cent, of which
10 per cent arose in Bank of Bermuda. Staff costs
were 18 per cent higher, driven by the recruitment of
additional staff, and higher performance-related
incentives in line with strong Global Markets results.
In Global Markets, staff were recruited to support the
increased product range, while in Global Investment
Banking, further expenditure was incurred in
recruiting corporate finance executives and a number
of senior relationship managers to extend coverage