HSBC 2008 Annual Report Download - page 93

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England reduced interest rates by 350 basis points
during 2008, to finish the year at 2 per cent, as
policymakers sought to mitigate the worst effects of
the economic slowdown.
The expansion of the eurozone economy
slowed sharply in 2008, with GDP growth of 0.7 per
cent following a 2.6 per cent expansion in 2007. As
in the UK, conditions deteriorated markedly as the
year progressed and three successive quarterly
declines in GDP were recorded during 2008,
confirming that the economy had entered a period
of recession. Consumer spending growth proved
subdued following the sharp rise in oil prices during
the first of half of 2008 and a progressive increase in
the unemployment rate towards the year-end.
Inflation remained a concern for much of 2008,
hitting a peak of 4.0 per cent in July before falling
rapidly to 1.6 per cent in December. The European
Central Bank, having initially raised interest rates by
25 basis points in July, cut them by 175 basis points
to finish the year at 2.5 per cent.
Reconciliation of reported and underlying profit before tax
2008 compared with 2007
Europe
2007
as
reported
US$m
2007
acquisitions,
disposals
& dilution
gains1
US$m
Currency
translation2
US$m
2007
at 2008
exchange
rates3
US$m
2008
acquisitions
and
disposals1
US$m
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change
%
Under-
lying
change
%
Net interest income .......... 7,746 (390) (224) 7,132 219 2,345 9,696 25 33
Net fee income ................. 8,431 (134) (244) 8,053 15
(576) 7,492 (11) (7)
Other income4 .................. 11,390 (121) (380) 10,889 3,007 (405) 13,491 18 (4)
Net operating income5 ... 27,567 (645) (848) 26,074 3,241 1,364 30,679 11 5
Loan impairment charges
and other credit risk
provisions .................... (2,542) 30 152 (2,360) (6) (1,388) (3,754) (48) (59)
Net operating income .... 25,025 (615) (696) 23,714 3,235 (24) 26,925 8 –
Operating expenses .......... (16,525) 416 531 (15,578) (88) (406) (16,072) 3 (3)
Operating profit ............. 8,500 (199) (165) 8,136 3,147 (430) 10,853 28 (5)
Income from associates ... 95 (12) 14 97 – (81) 16 (83) (84)
Profit before tax ............. 8,595 (211) (151) 8,233 3,147 (511) 10,869 26 (6)
For footnotes, see page 143.
Review of business performance
HSBC’s European operations reported a pre-tax
profit of US$10.9 billion, compared with
US$8.6 billion in 2007, an increase of 26 per cent.
These results included gains of US$2.4 billion
on the disposal of seven regional banks in France in
July 2008, and of US$425 million on the sale of the
card acquiring business in the UK to a joint venture
with Global Payments, Inc. in June 2008. Excluding
these disposals and, in 2007, the acquisition of
HSBC Assurances and the disposal of Hamilton
Insurance Company Limited and Hamilton Life
Assurance Company Limited and substantial fair
value gains on own debt, underlying pre-tax profits
fell by 33 per cent. This primarily reflected a sharp
decline in Global Banking and Markets’ revenues,
which was mainly attributable to the deterioration in
credit markets, the continuing illiquidity in asset-
backed securities markets which led to further
write-downs, and a US$854 million charge within
the equities business following the alleged fraud at
Madoff Securities. Personal Financial Services and
Private Banking delivered underlying growth.
Net interest income increased by 33 per cent.
There was significant growth in Balance Sheet
Management revenues, which reflected favourable
interest rate risk positioning in expectation of
interest rate cuts by central banks. Net interest
income also benefited from necessarily selective
incremental lending as credit availability generally
contracted. In Global Banking, net interest income
was boosted by improved spreads.
Falling confidence in the UK banking sector
necessitated government intervention in a number of
competitor banks. HSBC experienced a strong
increase in customer numbers, with corresponding
growth in liability balances as the market turmoil
intensified. The volume benefit was partially offset