HSBC 2007 Annual Report Download - page 52

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Europe > 2006
50
Reconciliation of reported and underlying profit before tax
Year ended 31 December 2006 compared with year ended 31 December 2005
Europe
2005
as
reported
US$m
Currency
translation1
US$m
2005
at 2006
exchange
rates
US$m
Acqui-
sitions and
disposals2
US$m
Underlying
change
US$m
2006
as
reported
US$m
Reported
change
%
Underlying
change
%
Net interest income .......... 8,221 7 8,228 – 61 8,289 1 1
Net fee income ................. 6,299 82 6,381 – 727 7,108 13 11
Other income3 .................. 6,284 189 6,473 (11) 1,213 7,675 22 19
Net operating income4 ..... 20,804 278 21,082 (11) 2,001 23,072 11 9
Loan impairment charges
and other credit risk
provisions .................... (1,929) (25) (1,954) – (201) (2,155) (12) (10)
Net operating income ...... 18,875 253 19,128 (11) 1,800 20,917 11 9
Operating expenses .......... (12,639) (131) (12,770) – (1,101) (13,871) (10) (9)
Operating profit ............... 6,236 122 6,358 (11) 699 7,046 13 11
Income from associates ... 120 6 126 (19) (179) (72) (160) (142)
Profit before tax ............... 6,356 128 6,484 (30) 520 6,974 10 8
For footnotes, see page 130.
Monetary Fund’s programme for Turkey remained
on track.
Review of business performance
European operations reported a pre-tax profit
of US$7.0 billion compared with US$6.4 billion in
2005, an increase of 10 per cent. On an underlying
basis, pre-tax profits grew by 8 per cent. Underlying
net operating income increased by 8 per cent, in line
with operating expenses. Commercial Banking
delivered a third successive year of growth, driven
by strong balance sheet growth in the UK and
organic expansion in Turkey. Record profits in
Private Banking were driven by strong client asset
inflows, a more sophisticated product mix and
lending growth. Global Banking and Markets made
encouraging gains in trading activities, and operating
expenses rose in line with net operating income. In
Personal Financial Services, net operating income
growth slowed as HSBC tightened its underwriting
criteria on unsecured credit. An emphasis on deposit,
wealth and insurance products contributed to an
increase in costs, which were driven by
infrastructure investment both in the physical
environment and direct channels.
The following commentary is on an underlying
basis.
Personal Financial Services reported a pre-tax
profit of US$1.9 billion, 2 per cent lower than in
2005. Net operating income rose by 4 per cent and
loan impairment charges increased by slightly more
than revenues as increasing numbers of debtors
sought formal protection from their obligations.
Costs grew by 7 per cent, reflecting investment in
infrastructure throughout the region, and the cost
efficiency ratio rose by 1.2 percentage points to
59.2 per cent.
In the UK, HSBC responded to concerns over
high levels of consumer indebtedness and the growth
in personal bankruptcies and individual voluntary
arrangements (‘IVAs’) by adopting more selective
underwriting criteria and reducing credit origination.
Revenues from credit-related insurance declined as a
consequence. In response, HSBC increased its focus
on non credit-related income streams, particularly
savings and high-value current accounts. Strong
balance growth in these products was achieved
through marketing initiatives, competitive pricing
and the success of innovative propositions such as
the packaged ‘Plus’ and ‘Passport’ current accounts,
the latter supported by the implementation during the
year of a more refined approach to customer
segmentation.
Considerable strategic attention was given to
enhancing product distribution and channel
management. The branch refurbishment programme
continued and improvements were made to direct
banking, notably the introduction of self-service
machines and the upgrading of cash machine service
offerings. HSBC’s internet offering was also
enhanced to offer personalised content and sales
capabilities, with improved customer accessibility.
In France, a marked improvement in brand
awareness after the 2005 rebranding to ‘HSBC
France’, supported by competitive pricing, aided the
recruitment of target customers and consequential