HSBC 2007 Annual Report Download - page 95

93
4 per cent by the year-end. Declines in the final
months of 2007 left the Standard & Poor’s S&P500
stock market index practically unchanged compared
with the end of 2006.
Canadian GDP increased by 2.4 per cent during
the first eleven months of 2007 compared with the
equivalent period of 2006. Domestic demand
remained strong despite tighter credit conditions in
the latter part of the year, supported by the robust
labour market. The unemployment rate averaged
6 per cent for the year, reaching a historical low of
5.8 per cent in October. After hitting a high of
2.5 per cent in April, core consumer price inflation
slowed to 1.5 per cent by the end of 2007. The
Canadian dollar appreciated during the year,
particularly in the second half. In July, the Bank of
Canada raised its overnight interest rate from
4.25 per cent to 4.5 per cent before reversing this
move in the final weeks of 2007.
Reconciliation of reported and underlying profit before tax
Year ended 31 December 2007 compared with year ended 31 December 2006
North America
2006
as
reported
US$m
Currency
translation1
US$m
2006
at 2007
exchange
rates
US$m
Acquisitions,
disposals
and dilution
gains2
US$m
Underlying
change
US$m
2007
as
reported
US$m
Reported
change
%
Underlying
change
%
Net interest income .......... 14,268 65 14,333 – 514 14,847 4 4
Net fee income ................. 4,766 26 4,792 – 1,018 5,810 22 21
Other income3 .................. 2,593 10 2,603 20 (497) 2,126 (18) (19)
Net operating income4 …. 21,627 101 21,728 20 1,035 22,783 5 5
Loan impairment charges
and other credit risk
provisions .................... (6,796) (3) (6,799) – (5,357) (12,156) (79) (79)
Net operating income .... 14,831 98 14,929 20 (4,322) 10,627 (28) (29)
Operating expenses .......... (10,193) (47) (10,240) (26) (290) (10,556) (4) (3)
Operating profit ............. 4,638 51 4,689 (6) (4,612) 71 (98) (98)
Income from associates ... 30 1 31 – (11) 20 (33) (35)
Profit before tax ............. 4,668 52 4,720 (6) (4,623) 91 (98) (98)
For footnotes, see page 130.
Review of business performance
HSBC’s operations in North America experienced a
significant fall in pre-tax profits of 98 per cent in
2007, on both reported and underlying bases.
It is now clear that the US housing market is
undergoing a significant correction and recovery is
not likely in 2008. The US economy began to slow
in the fourth quarter and recent evidence suggests
that some parts of the country may already be in
recession. As the housing market slump has affected
the real economy, the deterioration in credit quality
that began in the mortgage services business has
extended to include other consumer finance
businesses in the US. In HSBC, this was reflected in
a 79 per cent rise in loan impairment charges and a
loss before tax of US$1.5 billion in Personal
Financial Services.
A loss of US$965 million in Global Banking
and Markets arose from credit-related and liquidity
event write-downs as asset-backed securities markets
became illiquid and credit spreads widened
markedly. Increased revenues in Commercial
Banking were the result of balance sheet growth
achieved from the continued expansion of the
business, although this revenue growth only partially
offset rises in expenses and loan impairment charges.
Private Banking profits rose significantly as a result
of the launch of services in Canada, improved
performances in the US and Bermuda and the
non-recurrence of a significant loan impairment
charge in 2006.
The commentary that follows is on an
underlying basis.
Personal Financial Services reported a
pre-tax loss of US$1.5 billion, a decline of
US$4.9 billion from 2006. Performance was
significantly affected by rising loan impairment
charges in the consumer finance business in
mortgage lending, cards and branch personal
lending. Actions taken to manage exposure and
realign the business in response to changes in the
market included stopping new purchases in mortgage
services, tightening underwriting criteria, restricting
the product range in consumer lending, decreasing