HSBC 2006 Annual Report Download - page 83

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Net fee income improved by 13 per cent to
US$329 million. In the US, the 11 per cent rise was
primarily due to an increase in syndication
capabilities, which led to higher commercial
mortgage fees, and from business expansion into
new geographical markets. In Canada, growth in
new lending business led to higher levels of service
charges, and credit fees increased following the rise
in customer numbers. Product enhancements and
additions to the sales force helped grow fee income
from payment and cash management services.
There was a small reduction in other operating
income, largely due to the net effects of lower gains
on asset disposals in the US.
Also in the US, the redemption of bonds
issued by the Venezuelan government led to a
US$19 million gain from financial instruments.
Loan impairment charges were US$74 million
compared with a net release of US$21 million in
2005. In the US, the increase reflected strong growth
in lending balances to small and middle market
customers, higher write-offs in the small business
segment and the exceptionally low charges recorded
in 2005 compared with historical levels. Loan
impairment charges rose in Canada following the
non-recurrence of releases which occurred in 2005
and, in Bermuda, net releases compared with charges
in 2005.
Operating expenses grew by 21 per cent to
US$814 million. The 27 per cent rise in the US was
driven by a combination of increased costs incurred
in support of geographical expansion and the
recruitment of additional sales staff to drive revenue
growth. In Canada, operating expenses were 14 per
cent higher from additional headcount recruited to
support branch and network expansion and increased
salary and bonus costs, which reflected improved
revenues. Expenditure incurred in order to develop
the business, largely due to HSBC brand campaigns,
contributed further to cost growth.
Income from associates rose by US$34 million,
including HSBC’s share from an equity investment
in Wells Fargo HSBC Trade Bank N.A. of
US$11 million in the US. Income from associates of
US$22 million in Canada was attributable to higher
gains and distributions from private equity fund
investments. These funds, in which HSBC has
maintained a minority interest, were established to
provide institutional investors with access to private
equity investment opportunities.
Corporate, Investment Banking and Markets
reported a pre-tax profit of US$423 million, 28 per
cent lower than in 2005. The result in 2005 benefited
from a US$106 million favourable movement on
ineffective hedges on HSBC’s own debt and,
excluding this, profit before tax decreased by 12 per
cent. The fall in profits was primarily due to a
decline in balance sheet management revenues.
Balance sheet management activity continued to be
constrained by compressed spreads in a flat interest
rate yield curve environment, with a resultant
decrease of US$347 million. Operating expenses
were higher by 19 per cent with a significant portion
of the increase driven by the first full year effect of
recruitment and business expansion in 2005, and by
specific initiatives taken in early 2006. This
investment in extending the trading platform,
notably in mortgage-backed securities, structured
derivatives, metals and foreign exchange, produced
record trading revenues.
Net fee income and trading income also grew,
reflecting the measures taken to strengthen HSBC’s
presence in the region.
In Global Banking, net interest income in
payments and cash management rose by 66 per cent,
largely due to an over 50 per cent growth in
balances.
Net fee income rose by 13 per cent to
US$656 million. Increases in fee income within the
newly expanded mortgage-backed securities and
equity underwriting businesses were driven by
higher volumes. The securities services business
benefited from a combination of new client volumes
and market-driven asset growth. However, income
from debt underwriting activity declined due to
fewer deals, particularly in the second half of the
year. In Global Banking, higher transaction volumes
in the recently enhanced payments and cash
management business, and an increase in customer
volumes driven by a wider product offering, led to
higher net fee income.
HSBC’s operation in Canada reported a 31 per
cent increase in fees, reflecting a growth in funds
under management within Group Investment
Businesses, coupled with higher fees from the
lending business and HSBC Securities Services.
Net trading income more than doubled to
US$818 million. In Global Markets, a wider product
offering and improved sales capabilities drove
significant gains across all major client-related
activities. Revenues were further boosted by the first
full year contribution from the mortgage-backed
securities trading business. Credit and Rates
benefited from tightening credit spreads and
increased customer flows. Structured derivatives
income more than doubled, reflecting successful
product launches as well as increased sales of