HSBC 2009 Annual Report Download - page 27

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In Europe, HSBC reported an increase in profit
before tax on an underlying basis, driven by Global
Banking and Markets in London and Paris. This
resulted from a strong performance in Rates and
Balance Sheet Management, coupled with the
benefit of stabilisation of asset prices and general
tightening of credit spreads and lower write-downs
in the credit trading business. This was partly offset
by a reduction in deposit spreads in Personal
Financial Services and Commercial Banking as
interest rates fell, and an increase in loan impairment
charges in Global Banking, reflecting a deterioration
in the credit position of a small number of clients.
The increase in profit before tax was driven
by strong growth in Global Banking and
Markets.
In Latin America, the decline in pre-tax profits
was driven by an increase in loan impairment
charges in Personal Financial Services and
Commercial Banking and lower revenues in Personal
Financial Services, partly offset by a strong
performance in trading and Balance Sheet
Management in Global Banking and Markets. The
lower revenues in Personal Financial Services were
in part due to the continued curtailment of personal
unsecured credit exposures, following the Group’s
adverse experience in 2008, with net interest income
also adversely affected by declining interest rates
and narrowing spreads.
With the exception of Personal Financial
Services, which continued to be heavily affected by
the consumer finance losses in North America, all
customer groups remained profitable.
The following items are significant to a
comparison of reported results with 2008:
• the non-recurrence of the US$10.6 billion
goodwill impairment charge in North America
recorded in 2008;
• the non-recurrence of a US$2.4 billion gain on
the sale of French regional banks in 2008;
• fair value losses relating to own credit spreads
of US$6.5 billion in 2009 compared with gains
of US$6.6 billion in 2008;
• a US$72 million fraud loss relating to Bernard
L Madoff Investment Securities LLC (‘Madoff
Securities’) in 2009, which was in addition to
the US$984 million charge reported in 2008;
• loss from write-downs in legacy securities and
structured credit positions amounting to
US$0.3 billion in 2009 compared with
US$5.4 billion in 2008;
• the acquisition in 2008 of the subsidiary, Project
Maple II B.V., which owned the Group’s
headquarters at 8 Canada Square, and the
subsequent sale of the company and leaseback
of the property in 2009, resulting in gains of
US$0.6 billion in 2009 and US$0.4 billion in
2008;
• the sale of the card merchant-acquiring business
in the UK, resulting in gains of US$0.3 billion
in 2009 and US$0.4 billion in 2008;
• the change in the basis of delivering long-term
employee benefits in the UK, which generated a
one-off accounting gain of US$0.5 billion in
2009; and
• the tax expense of US$0.3 billion in 2009,
which was lower than in previous years as a
result of the geographic distribution of income.
The Group generated profits in low tax rate
jurisdictions, principally Asia, and incurred
losses in high tax rate jurisdictions, principally
the US, which when mixed produced a low
overall rate.
2008 compared with 2007
Reported pre-tax profits in 2008 fell by 62 per cent
to US$9.3 billion and earnings per share declined to
US$0.47. In a year characterised by a significant
deterioration in the credit markets and by
unprecedented illiquidity in most asset classes,
return on average total shareholders’ equity fell to
4.7 per cent.
The fall in profit before tax was exacerbated by
recognition of a US$10.6 billion impairment charge
which wrote off in full the goodwill carried on the
balance sheet in respect of the Group’s investment in
its North America Personal Financial Services
business. This non-cash charge arose substantially in
the second half of 2008 as heightened risk premia in
the market increased discount rates and cash flows
estimated from ongoing activities fell as the US
economy continued to decline and the outlook for
the business deteriorated.
On an underlying basis, profit before tax
declined by 102 per cent compared with 2007. The
difference between the reported and underlying
results is explained on page 21. Except where stated
otherwise, the commentaries in the Financial
Summary are on an underlying basis.
Performance in Asia was strong, generating
profit before tax of US$11.9 billion, broadly in line
with results excluding the dilution gains which arose
in 2007 when HSBC did not participate in share
offerings by its mainland China associates. Within