HSBC 2009 Annual Report Download - page 134

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > North America > 2008 / Profit/(loss) before tax by customer group
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Other operating income declined due to losses
on sale of the Canadian vehicle finance businesses
and other loan portfolios in 2008, in addition to the
non-recurrence of gains on disposal of fixed assets
and a small portfolio of private equity investments in
2007.
Net insurance claims incurred and movement in
liabilities to policyholders were broadly in line with
2007 at US$238 million.
Loan impairment charges and other credit
risk provisions rose sharply, by 38 per cent to
US$16.8 billion, reflecting substantially higher
impairment charges in HSBC Finance across all
portfolios and, in HSBC USA, the deterioration of
credit quality in prime residential mortgages, second
lien portfolios and private label cards. The main
factors driving this deterioration were the continued
weakening of the US economy, which led to rising
levels of unemployment and personal bankruptcy
filings: higher early-stage delinquency and increased
roll rates in consumer lending: the ageing of
portfolios: and further declines in house prices which
increased loss severity and reduced customers’
ability to refinance and access equity in their homes.
Partly offsetting these factors was a reduction in
overall lending as HSBC continued to actively
reduce its balance sheet and lower its risk profile in
the US.
In the Mortgage Services business, loan
impairment charges rose by 14 per cent to
US$3.5 billion as the 2005 and 2006 vintages
continued to season and experience rising
delinquency. Run-off of the portfolio slowed in light
of continued house price depreciation which, along
with the constrained credit environment, restricted
refinancing options for personal customers. In
consumer lending, loan impairment charges rose by
39 per cent to US$5.7 billion. In the second half
of 2008, delinquency rates began to accelerate
particularly in the first lien portfolios in the parts
of the country most affected by house price
depreciation and rising unemployment rates. In
HSBC USA, loan impairment charges rose by 76 per
cent to US$2.6 billion driven by credit quality
deterioration across the Home Equity line of credit,
Home Equity loan, prime first lien residential
mortgage and private label card portfolios.
Loan impairment charges in US card and retail
services rose, driven by portfolio seasoning and
rising unemployment, particularly in the second half
of 2008, higher levels of personal bankruptcy filings
and lower recovery rates. As with mortgages, this
was most notable in parts of the country most
affected by house price falls and unemployment.
Vehicle finance loan impairment charges rose as
delinquencies rose and lower prices resulted in lower
recoveries when repossessed vehicles were sold at
auction.
Loan impairment charges in Commercial
Banking grew to US$449 million from a low base,
primarily driven by higher impairment losses due to
deterioration across the middle market, commercial
real estate and corporate banking portfolios in the
US and among firms in the manufacturing, export
and commercial real estate sectors in Canada. Higher
loan impairment charges and other credit risk
provisions in Global Banking and Markets reflected
weaker credit fundamentals in the US in 2008.
Operating expenses increased by 90 per cent,
driven by US$10.6 billion of impairment charge
recognised in respect of North America Personal
Financial Services in 2008 to fully write off
goodwill. Excluding the goodwill impairment
charge, expenses were US$1.1 billion or 11 per cent
lower. Staff costs declined, primarily in HSBC
Finance, following decisions taken in 2007 to close
the acquisition channels for new business in
Mortgage Services and a number of consumer
lending branches, and integrate the operations of the
card businesses. HSBC USA made the decision to
close its wholesale and third-party correspondent
mortgage business in November 2008, while HSBC
Finance took the decision to cease originations in the
dealer and direct-to-consumer channels in the
vehicle finance business in July 2008. Staff costs
in Global Banking and Markets also fell as
performance-related compensation and staff
numbers both declined.
Other administrative costs decreased as
origination activity declined, marketing costs in card
and retail services reduced and branch costs in
consumer lending fell as tightened underwriting
criteria curtailed business and led to branch closures.
This was partly offset by higher marketing and
occupancy costs in the retail bank reflecting a
continued expansion of the branch network,
increased community investment activities and
higher deposit insurance, collection, payments and
cash management and asset management costs in
support of business growth.