HSBC 2007 Annual Report Download - page 69

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Banking campaign to build market share. Cost
efficiency was improved by the continuing migration
of sales and transaction activity to lower-cost direct
channels.
Global Banking and Markets reported a
pre-tax profit of US$955 million, an increase of
3 per cent compared with 2005. Global Markets
performance remained robust, with encouraging
revenue growth in areas in which HSBC has
invested, complemented by strong income growth in
the securities services business. The cost efficiency
ratio increased slightly, primarily due to the first
full year effect of various growth initiatives taken
in 2005.
Total operating income of US$1.8 billion was
7 per cent higher. Although balance sheet
management reported an overall decline, revenues
recovered modestly in the second half of 2006 as
lower yielding positions matured. In Global
Banking, net interest income from payments and
cash management activity rose sharply as a 6 per
cent increase in deposits was complemented by
wider spreads. Revenues benefited from improved
customer flows following the launch of services
offered through HSBCnet in the latter part of 2005.
Income from lending activities decreased as the
benefit of higher lending balances was more than
offset by the effect of spread compression resulting
from an abundance of credit in a highly competitive
market.
Net fee income rose by 24 per cent. Securities
services reported a 28 per cent increase in fees as
buoyant stock markets drove higher customer
activity. Debt underwriting volumes increased as
tightening credit spreads encouraged issuers to lock
in to the favourable credit environment by extending
the term of finance or by raising new debt in local
markets. By contrast, equity underwriting fees
declined.
HSBC Global Asset Management used HSBC’s
extensive distribution network to take advantage of
the global trend of strong investment flows to
emerging markets. Higher fees reflected strong
performance fees from HSBC’s emerging market
funds. Client funds under management grew by
23 per cent to US$35 billion, as HSBC launched new
funds to capture increased demand for equity-based
investments. Fees from the asset and structured
finance business also rose.
Net trading income increased by 18 per cent.
HSBC retained its leadership position in foreign
exchange, with revenues strengthening as trading
activity increased in response to volatility in the
value of the US dollar and economic conditions in
certain local markets. Investments in equity sales and
trading operations in previous years led to higher
revenues. HSBC also benefited from internal
synergies linking product structuring and hedging
capabilities with distribution scale, as foreign
exchange option-linked deposits and other
instruments were offered to retail and corporate
customers.
Private Equity investments also performed
strongly. However, Credit and Rates were adversely
affected by lower volumes due to unfavourable
market conditions in a rising interest rate
environment.
The overall credit environment remained stable
with a net recovery of US$27 million.
Operating expenses increased by 12 per cent to
US$911 million, primarily due to the first full year
effect of initiatives implemented in the second half
of 2005 which extended the product range in Global
Markets and strengthened the regional investment
banking platform in Hong Kong.
Additional cost increase reflected a rise in
performance-related remuneration coupled with
higher operational costs in line with increased
volumes, particularly in payments and cash
management and securities services businesses.
Private Banking contributed a pre-tax profit of
US$201 million, an increase of 5 per cent compared
with 2005. Growth in client assets and rising sales of
higher fee-generating discretionary managed
products were partially offset by the adverse effect
of a flattening yield curve on income from the
investment of surplus liquidity. Demand for
experienced private banking staff in Hong Kong was
fierce as competitors built up their locally-based
operations and, despite strong revenue growth,
the resultant increase in staff costs led to a
5.2 percentage points deterioration in the cost
efficiency ratio to 49.5 per cent.
Net interest income was US$76 million, in line
with 2005. Steady growth in deposit balances was
offset by competitive pressure on deposit rates and
by a challenging interest rate environment for
treasury management activities. Loans and advances
to customers at 31 December 2006 were marginally
lower than at the same point in 2005 as higher
interest rates reduced clients’ appetite for credit.
There was excellent growth in fee income,
which increased to US$123 million, a rise of 31 per
cent. Growth in funds under management and
success in increasing the proportion of clients’ assets
invested in higher fee-earning discretionary managed
assets contributed towards increased fee revenue.