HSBC 2007 Annual Report Download - page 103

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income as competition reduced both asset and
deposit spreads.
Average deposit balances in the US rose by
21 per cent to US$32.2 billion, mainly led by the
continued success of online savings. The HSBC
Premier investor product also continued to grow
strongly. During the year over 22,000 new accounts
were opened and balances rose by 139 per cent as
US$2.1 billion in incremental deposits were taken.
Customers migrated to higher yielding products
which led to a change in product mix, and the
consequent reduction in spreads partly offset the
benefits of balance growth.
There was a marked slowdown in the US
housing market during 2006, although towards the
end of the year demand for housing showed signs of
stabilising. However, the supply of houses for sale
remained high, with the overall outlook still
uncertain. Average mortgage balances rose by 9 per
cent to US$123.8 billion, with growth concentrated
in non-prime balances in the mortgage services
correspondent and branch-based consumer lending
businesses. Prime mortgage balances originated and
retained through the core banking network continued
to decline. This reflected an ongoing strategic
initiative to manage the balance sheet by selling the
majority of new prime loan originations to
government-sponsored enterprises and private
investors, along with planned securitisations and the
normal run-off of balances. Overall, yields improved
from the combined effects of a change in product
mix to higher-yielding non-prime mortgages and re-
pricing initiatives. Despite this improvement in
yields, spreads narrowed due to higher funding costs
as interest rates rose, and this reduced the positive
income benefit of the higher lending balances.
The following comments on mortgage lending
relate to HSBC Finance as mortgage lending growth
in 2006 was concentrated in this business.
In the branch-based consumer lending business,
average mortgage balances grew by 15 per cent to
US$41.2 billion as lending secured on real estate,
which included a near-prime product introduced in
2003, was pursued. This growth was augmented
by portfolio acquisitions, most notably the
US$2.5 billion Champion mortgage portfolio
purchased from KeyBank, NA in November 2006.
In the mortgage services correspondent
business, average balances of US$49.9 billion were
28 per cent higher than in 2005. During 2005 and the
first half of 2006, emphasis was placed on increasing
both first and second lien mortgages by expanding
sources for the purchase of loans from
correspondents. In the second quarter of 2006,
HSBC began to witness deterioration in the
performance of mortgages acquired in 2005,
particularly in the second lien and portions of the
first lien portfolios. This deterioration continued in
the third quarter and began to affect the equivalent
loans acquired in 2006. In the final quarter of 2006,
the deterioration worsened considerably, mainly in
first lien ARM balances and second lien loans.
A series of actions were initiated in the third
quarter to mitigate risk in the affected components
of the portfolio. These included revising pricing
in selected origination segments, tightening
underwriting criteria to eliminate or substantially
reduce higher risk products (especially in respect of
second lien, stated income (low documentation) and
lower credit scoring segments), and enhancing
segmentation and analytics to identify higher risk
portions of the portfolio and increase collections.
These initiatives led to a decline in overall portfolio
balances during the second half of 2006, mostly
attributable to lower purchases of second lien and
certain higher-risk products, along with the normal
run-off of balances.
Average credit card balances in the US rose by
6 per cent to US$26.8 billion. The market continued
to be highly competitive with many lenders placing
reliance on promotional rate offers to generate
growth. HSBC took a strategic decision to reduce the
amount of its equivalent offers and instead grew its
HSBC branded prime, Union Privilege and non-
prime portfolios largely from targeted marketing
campaigns. Margins widened, reflecting improved
yields as the product mix changed towards higher
levels of non-prime and lower levels of promotional
balances, coupled with other re-pricing initiatives
undertaken on variable rate products. This more than
offset the adverse effect of higher funding costs and
augmented the income benefits of the increased loan
book.
In the retail services business, average balances
rose by 6 per cent to US$15.8 billion. This was
mainly driven by newer merchants, changes in
product mix and the launch of three co-branded
programmes; the MasterCard and Visa partnerships
with Best Buy and Saks Fifth Avenue, and the
Neiman Marcus co-branded card with American
Express. The positive income benefits from higher
balances were more than offset by lower spreads, as
a large proportion of the loan book priced at fixed
rates was affected by higher funding costs. This was
further affected by changes in the product mix as
lower yielding department store card balances grew
more strongly, and by competitive downward pricing
pressures. Changes in merchant contractual
obligations also led to lower net interest income,