HSBC 2007 Annual Report Download - page 257

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between interbank interest rates and interest rates
linked to other bases (such as Central Bank rates or
product rates over which the entity has discretion in
terms of the timing and extent of rate changes). The
projections make other simplifying assumptions too,
including that all positions run to maturity.
HSBC’s exposure to the effect of movements in
interest rates on its net interest income arise in three
main areas: core deposit franchises, HSBC Finance
and Global Markets.
• Core deposit franchises: these are exposed to
changes in the cost of deposits raised and
spreads on wholesale funds. In a low interest
rate environment, the net interest income benefit
of core deposits increases as interest rates rise
and decreases as interest rates fall. This risk is
asymmetrical in a very low interest rate
environment, however, as there is limited room
to lower deposit pricing in the event of interest
rate reductions.
• HSBC Finance reduces the sensitivity of the
core deposit franchises to interest rate
reductions. This arises from the fact that HSBC
Finance has a substantial fixed rate, real estate
secured, lending portfolio which is primarily
funded with interest rate sensitive short-term
liabilities.
• Residual interest rate risk is managed within
Global Markets, under the Group’s policy of
transferring interest rate risk to Global Markets
to be managed within defined limits and with
flexibility as to the instruments used.
The main drivers of change in the sensitivity of
the Group’s net interest income to the changes in
interest rates tabulated above were:
• There has been an overall increase in benefit
from rising rates and an increase in exposure to
falling rates due to general growth in core
deposits.
• The average life of certain US mortgage assets
has increased due to a reduction in the predicted
rate of refinancing, increasing the benefit from
reducing US dollar rates.
• Global Markets increased euro-denominated
net trading asset positions leading to increased
sensitivity in this currency to both rising and
falling rates. The funding of net trading assets
is generally sourced from floating rate retail
deposits and recorded in ‘Net interest income’
whereas the income from such assets is recorded
in ‘Net trading income’. Additionally, balance
sheet management increased its exposure to
euro-denominated assets in non-trading
portfolios, adding to the increased sensitivity.
It can be seen from the above that projecting the
movement in net interest income from prospective
changes in interest rates is a complex interaction of
structural and managed exposures.
HSBC monitors the sensitivity of reported
reserves to interest rate movements on a monthly
basis by assessing the expected reduction in
valuation of available-for-sale portfolios and cash
flow hedges due to parallel movements of plus or
minus 100 basis points in all yield curves. The table
below describes the sensitivity of HSBC’s reported
reserves to these movements at the end of 2007 and
2006 and the maximum and minimum month-end
figures during these years:
Sensitivity of reported reserves to interest rate movements
(Unaudited)
US$m
Maximum
impact
US$m
Minimum
impact
US$m
At 31 December 2007
+ 100 basis point parallel move in all yield curves ......................................... (1,737) (1,738) (1,519)
As a percentage of total shareholders’ equity ................................................. (1.4%) (1.4%) (1.2%)
– 100 basis point parallel move in all yield curves ......................................... 1,977 2,048 1,430
As a percentage of total shareholders’ equity ................................................. 1.5% 1.6% 1.1%
At 31 December 2006
+ 100 basis point parallel move in all yield curves ......................................... (1,558) (2,015) (1,358)
As a percentage of total shareholders’ equity ................................................. (1.4%) (1.9%) (1.3%)
– 100 basis point parallel move in all yield curves ......................................... 1,456 1,944 1,270
As a percentage of total shareholders’ equity ................................................. 1.3% 1.8% 1.2%