HSBC 2007 Annual Report Download - page 84

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Rest of Asia-Pacific > 2006
82
particularly on capital projects. Private investment,
from both domestic and foreign sources, was also
high while abundant liquidity, rising employment and
rapid population growth supported further increases
in private consumption. Although interest rates rose,
tracking those in the US over the course of the year,
credit growth continued to be strong. Robust
domestic demand and the weakness of the US dollar
boosted inflationary pressures. Following corrections
in the first half of 2006, the major regional stock
exchange indices continued to trade at significant
discounts to the record levels registered in late 2005,
with markets remaining generally sluggish.
Elsewhere in the region, most economies
continued to perform impressively, particularly India,
Singapore and Vietnam. The main drivers of growth
were exports, demand for technology, and domestic
consumption, with investment demand lagging
behind. India was among the strongest performing
economies in the world, with GDP growth of about
9 per cent in 2006. This led to some signs of
overheating, with inflation rising during the year. The
Reserve Bank of India responded by raising interest
rates, and there may be more increases to come. GDP
in Singapore grew by 8 per cent in 2006, in Vietnam
by over 7 per cent and in Malaysia by approximately
6 per cent, their economies benefiting from generally
low inflation and strong domestic and external
demand. Most Asian currencies ended 2006 stronger
than the US dollar. A US slowdown is a risk for the
region.
Reconciliation of reported and underlying profit before tax
Year ended 31 December 2006 compared with year ended 31 December 2005
Rest of Asia-Pacific
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 .......... 2,412 30 2,442 – 605 3,047 26 25
Net fee income ................. 1,340 1 1,341 – 281 1,622 21 21
Other income3 .................. 1,265 21 1,286 – 767 2,053 62 60
Net operating income4 ..... 5,017 52 5,069 – 1,653 6,722 34 33
Loan impairment charges
and other credit risk
provisions .................... (134) (3) (137) – (375) (512) (282) (274)
Net operating income ...... 4,883 49 4,932 – 1,278 6,210 27 26
Operating expenses .......... (2,762) (22) (2,784) – (764) (3,548) (28) (27)
Operating profit ............... 2,121 27 2,148 – 514 2,662 26 24
Income from associates ... 453 4 457 159 249 865 91 54
Profit before tax ............... 2,574 31 2,605 159 763 3,527 37 29
For footnotes, see page 130.
Review of business performance
HSBC’s operations in Rest of Asia-Pacific delivered
a pre-tax profit of US$3.5 billion compared with
US$2.6 billion in 2005, an increase of 37 per cent.
On an underlying basis, pre-tax profits grew by
29 per cent, with the major change in composition of
the Group being the additional 10 per cent stake
purchased in Ping An Insurance in August 2005
which made that company a 19.9 per cent owned
associate of HSBC.
Pre-tax profits in the region have nearly doubled
in the past two years, justifying HSBC’s strategy of
investing in emerging markets. Momentum in 2006
was strong, with underlying net operating income
increasing by 26 per cent, notwithstanding a
significant rise in loan impairment charges arising
primarily from industry-wide credit deterioration in
the credit card portfolio in Taiwan, mainly in the first
half of 2006. Significant increases in total operating
income and pre-tax profits were reported in the
Middle East, India, Singapore and Malaysia. In
Taiwan, HSBC launched the direct savings
proposition which had been received very positively
in the US. HSBC’s strategic investments in mainland
China, Bank of Communications and Industrial
Bank, contributed to a 54 per cent underlying
increase in income from associates.
The commentary that follows is on an underlying
basis.