HSBC 2007 Annual Report Download - page 56

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Europe > 2006
54
modest decline in UK impairment charges, as the
effect of lending growth was more than offset by
improved credit quality, particularly in relation to
HSBC’s larger exposures. In France, loan
impairment charges, while remaining low, returned
to a more normal level after relatively high
recoveries in 2005. In Turkey, higher loan
impairment charges reflected growth in lending.
Operating expenses decreased by 1 per cent.
Excluding the sale of the UK fleet management
activities referred to above, costs were 4 per cent
higher than in 2005, reflecting investment to drive
business growth throughout the region. As a result of
revenues growing significantly faster than costs,
there was a 3.1 percentage point improvement in the
cost efficiency ratio. In the UK, increased costs
reflected the recruitment of additional sales staff and
higher IT expenditure. Costs in France fell by 2 per
cent compared with 2005 as savings from cost
control offset increases from the recruitment of
additional sales staff and expenses associated with
the migration to common IT platforms. In Turkey,
recruitment and marketing costs incurred in support
of the growing small and micro businesses drove a
38 per cent rise in expenses.
Global Banking and Markets reported a pre-
tax profit of US$2.3 billion, an increase of 5 per
cent, compared with 2005. A reduction in recoveries
of loan impairment charges and lower private equity
gains masked strong growth in core operating
activities. Global Markets’ revenues were 36 per
cent higher than in 2005 as robust performances in
the global capital markets and securities services
businesses were complemented by strong trading
gains. The cost efficiency ratio improved modestly
compared with 2005.
Total operating income was US$6.6 billion,
17 per cent higher than in 2005. This was despite the
fact that in the UK, France and Turkey, balance
sheet management revenues continued to fall,
resulting in an overall decline of 56 per cent. This
shortfall was partly offset by higher net interest
income in securities services as customer volumes
grew in higher-value products such as securities
lending and foreign exchange. The lending business
delivered a 13 per cent increase in corporate
balances and corporate spreads remained broadly in
line with 2005.
Net interest income in the payments and cash
management business rose as deposit balances
increased by 18 per cent. Surplus liquidity in the
market fed higher business volumes. Increased
transaction volumes resulting from new client
acquisitions and recent expansion initiatives also
contributed to higher revenues.
Net fee income rose by 23 per cent, reflecting a
63 per cent fee increase in the global capital markets
business and fees more than doubling in the
securities services business. The financing and
advisory businesses benefited from a higher number
of deals mandated and a broader product range.
Assets under custody grew by 22 per cent with
notable increases in alternative fund assets,
particularly from Ireland and Luxembourg.
In HSBC Global Asset Management, revenues
increased significantly, boosted by a 4 per cent
increase in funds under management and higher
performance fees allied to revenues from disposals
of property and structured finance fund investments.
Trading income increased with positive revenue
trends in the key product areas where HSBC has
invested, notably Credit and Rates, foreign exchange
and structured derivatives. Revenues increased
substantially, particularly in the area of interest rate
derivatives, which benefited from opportunities
created by a relatively volatile market. Additional
gains were reported in emerging market bonds due to
higher volumes, as investors adjusted their risk
appetite and responded to a general improvement in
market sentiment towards developing economies.
Higher foreign exchange revenue was driven by
greater customer volumes and increased trading
opportunities offered by a combination of US dollar
volatility and more uncertain economic conditions in
emerging markets. Structured derivatives income
increased by 88 per cent as HSBC leveraged its
investment in this business to meet the needs of its
institutional clients.
Gains from sales of financial investments, at
US$413 million, were in line with 2005. Notable
among the investments realised in the year were the
sales of specialist property and structured finance
fund investments by HSBC Global Asset
Management.
Other income declined by 26 per cent as one-off
gains from restructuring and syndication of assets in
Global Investment Banking were not repeated.
The overall credit environment remained
favourable with market liquidity supporting debt
reconstruction as credit spreads tightened. As a
result, HSBC achieved net recoveries for the third
year in succession, albeit at a lower level than in
2005, when HSBC benefited from a release of
collective impairment allowances in the second half.
Operating expenses were 14 per cent higher at
US$4.2 billion, largely supporting volume growth