HSBC 2009 Annual Report Download - page 130

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Geographical regions >North America > 2009
128
Services, balances declined due to lower consumer
spending and steps taken by management to mitigate
risk and reduce originations, including tightening
initial credit-line sales authorisation criteria, closing
inactive accounts, decreasing credit lines, restricting
underwriting criteria, restricting cash access and
reducing marketing expenditure. In the second half
of the year, direct marketing mailings and new
customer account originations were resumed for
portions of the sub-prime credit card portfolio which
had held up well through the economic downturn.
In November 2009, HSBC entered into an
agreement to sell the vehicle finance loan servicing
operation and US$1.0 billion of associated loans.
This transaction is expected to close in the first
quarter of 2010.
On an underlying basis and excluding
goodwill impairment in 2008, the pre-tax
loss in North America halved.
In December 2009, HSBC Finance revised the
write-off period for its real estate secured and other
personal lending portfolios in order to reflect
changed customer behaviour, aligning it with the
policy used across the Group. As a consequence
of this, real estate secured loan balances are now
written down to net realisable value generally no
later than the end of the month in which the account
becomes 180 days delinquent, and personal lending
products balances are now written off no later than
the end of the month in which the account becomes
180 days delinquent. This change did not have a
material effect on financial results as write-offs
were offset with releases of related impairment
allowances. However, the write-offs resulted in a
US$3.3 billion reduction in gross balances in
Mortgage Services and Consumer Lending.
Asset spreads narrowed slightly in the Mortgage
Services and Consumer Lending portfolios as the
effect of credit quality deterioration and increased
loan modifications were partly offset by lower
funding costs. Vehicle finance spreads widened due
to lower funding costs. In Card and Retail Services,
spreads widened due to lower funding costs, re-
pricing initiatives, lower levels of promotional
balances and interest rate floors on portions of the
portfolio. In Global Banking and Markets and
Commercial Banking, asset spreads widened,
primarily due to loan repricing and lower funding
costs.
Customer deposit balances were broadly
unchanged. In Global Banking and Markets, reduced
deposits reflected the decline in assets being funded.
This reduction was partly offset in both Personal
Financial Services and Commercial Banking, which
were successful in increasing deposits through
Premier, the expanded branch network and various
internet-based propositions. Liability spreads
tightened as base rates declined, although spreads
widened in the second half of 2009 as rates paid to
customers decreased in line with major competitors.
Net interest income from Balance Sheet
Management fell, despite strong performance in the
first half of the year, affected by risk management
initiatives which included selling higher yielding
assets and reinvesting the proceeds in assets with a
reduced risk profile, resulting in lower yield.
Net fee income declined by 7 per cent to
US$4.8 billion, driven by lower late, overlimit,
interchange and cash advance fees in the US credit
cards business. This was mainly due to a reduction in
cards in issue, lower transaction volumes and
changes in customer behaviour. Fee income from
enhancement services also decreased due to lower
balances and fewer accounts, and the discontinuance
of all but one partner relationship and a change in
product mix to lower revenue products led to a
decline in fee income from Taxpayer Financial
Services. In Global Banking and Markets, fee
income from underwriting increased, driven by
higher debt origination volumes.
Net trading income of US$331 million
compared with a net trading loss of US$3.1 billion in
2008, primarily due to significantly lower write-
downs on exposures in Global Banking and Markets,
as the effect of downgrades of monoline insurers and
mortgage-backed securities were far less marked
than in 2008. Revenue from foreign exchange fell,
following a record performance in 2008 in which
there had been unprecedented levels of market
volatility and wider spreads. In Global Banking, fair
value losses were recorded on certain credit default
swap transactions used to hedge corporate loan
exposures following the tightening of credit spreads,
compared with gains in 2008.
Net income from financial instruments
designated at fair value declined by 35 per cent to
US$192 million, as income from ineffective interest
rate hedges related to long-term debt issued by the
Group’s subsidiaries in North America reduced.
Gains less losses from financial investments
were US$296 million, compared with a net loss of
US$123 million in 2008. Gains in the current year
were largely attributable to the sale of mortgage-
backed securities, compared with losses on the sale
of US government agency securities in 2008. Gains
from the sale of Visa shares in 2008 did not recur.