HSBC 2008 Annual Report Download - page 94

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe > 2008 / 2007
92
by narrowing deposit spreads, as base rates were cut
in the UK, and increased funding costs, principally
for trading activities, in France. Higher net interest
income from the expansion of credit card lending
and commercial loan portfolio growth in the small
and mid-market customer segments in Turkey was
partially offset by narrower spreads following credit
card interest rate cap reductions by the central bank.
Net fee income fell by 7 per cent, with lower
fees from mergers and acquisitions and equity
capital markets due to origination and execution
difficulties, coupled with a rise in brokerage
expenses in line with increased trading activity in
France. Lower performance and management fees
in the UK and France as the value of funds under
management reduced, reflected the decline in global
equity markets. Increased customer acquisition
partly offset this, with higher fees derived from
growth in packaged accounts and transaction
volumes in France and credit card fees in Turkey.
Trading income was 20 per cent lower than in
2007, falling significantly in Global Banking and
Markets due to further write-downs on legacy
exposures in credit, structured credit derivatives and
leveraged and acquisition finance caused by the
ongoing turmoil in the credit markets. In addition,
a US$854 million charge was taken in equities in
respect of the alleged fraud at Madoff Securities.
US$11.4 billion and US$2.4 billion of held-for-
trading financial assets were reclassified under
revised IFRS rules as loans and receivables and
available for sale, respectively, preventing any
further mark-to-market trading losses on these
assets. If these reclassifications had not been
made, the profit before tax would have been
US$2.6 billion lower.
Excluding the write-downs on legacy exposures
and the charge relating to Madoff Securities, trading
income grew by 11 per cent, driven by a significant
increase in foreign exchange revenues against the
backdrop of greater market volatility, and robust
revenues in the Rates business, which was positioned
to take advantage of falling interest rates. The
widening of credit spreads, particularly in the second
half of 2008, contributed to fair value gains on
structured liabilities and on credit protection bought
in the form of credit default swaps.
Net income from financial instruments
designated at fair value increased by 36 per cent,
primarily due to fair value gains from the effect of
widening credit spreads on certain fixed-rate long-
term debt issued by HSBC Holdings. This movement
was partly offset by a reduction in the value of assets
held to meet liabilities under insurance and
investment contracts. The reduction in fair value of
assets held to meet liabilities under unit-linked
insurance contracts is offset by a corresponding
reduction in ‘Net insurance claims and liabilities to
policyholders’. The fair value gains on HSBC’s own
debt will fully reverse over the life of the debt.
Gains less losses from financial investments of
US$418 million were US$915 million lower than in
2007 as there were fewer disposal opportunities in
2008 and the significant realisations from equity
investments in the UK and France in 2007 did not
recur. Gains largely reflected the sale of MasterCard
shares in 2008.
Net earned insurance premiums increased by
22 per cent, largely due to growth in the Guaranteed
Income Bond launched in June 2007 and the
introduction of enhanced death benefits to certain
pension products in the UK. In France, HSBC
Assurances performed well in a declining market,
as the launch of new guaranteed rate products
contributed to 3 per cent growth in gross earned
premiums. However, net earned insurance premiums
fell following a significant re-insurance transaction
undertaken in the first half of 2008.
Other operating income increased by 33 per
cent. This was primarily due to recognition of the
gain in respect of the purchase of the subsidiary of
Metrovacesa which owned the property and long
leasehold land comprising 8 Canada Square,
London. See Note 23 on the Financial Statements for
further details. The growth in revenue also reflected
the non-recurrence of a decrease in the value of
PVIF business in 2007 following regulatory changes
to the rules governing the calculation of insurance
liabilities. In addition, there was a favourable
embedded value adjustment following HSBC’s
introduction of enhanced benefits to existing
commercial pension products in the first half of
2008. These benefits were partially offset by costs
associated with the support of money market funds
in the global asset management business.
Net insurance claims incurred and movement in
liabilities to policyholders decreased by 5 per cent as
a reduction in insurance liabilities reflected the fall
in value of market-linked funds. This was partially
offset by an increase in liabilities following
increased sales of the Guaranteed Income Bond and
the implementation of FSA rule changes in 2007
which lowered the liability valuation on life policies.
Loan impairment charges and credit risk
provisions rose by 59 per cent to US$3.8 billion; in
the UK, primarily in Global Banking and Markets.
The deteriorating credit environment resulted in a
rise in loan impairment charges, largely reflecting an