HSBC 2009 Annual Report Download - page 31

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2009 compared with 2008
Reported net trading income increased by 50 per
cent to US$9.9 billion, 83 per cent higher on an
underlying basis.
Reported trading income excludes the interest
expense of the internal funding of trading assets. As
noted in ‘Net interest income’, the cost of internally
funding these assets declined significantly as a result
of the low interest rate environment.
The Credit business benefited from a general
tightening of credit spreads following a return of
liquidity to much of the market, and the write-downs
on legacy positions in Credit trading declined
significantly following the stabilisation of asset
prices.
Net trading income rose by 83 per cent on
an underlying basis.
An increase in Rates revenues, particularly in
the first half of the year, reflected increased market
share and client trading volumes, wider bid-offer
spreads and early positioning for interest rate
movements. Partly offsetting these gains, fair value
losses were recorded on HSBC structured liabilities
as a result of credit spreads tightening, compared
with gains in this area in 2008.
Equities benefited from the non-recurrence of
the US$984 million charge reported in 2008 in
respect of Madoff Securities. The core Equities
business also took advantage of a changed
competitive landscape to capture a greater share of
business in strategic markets from key institutional
clients.
Foreign exchange trading revenues were well
ahead of 2007, but fell short of the record year in
2008. This reflected a combination of reduced
customer volumes from lower trade flows and
investment activity, and relatively lower market
volatility.
Tightening credit spreads led to losses of
US$429 million on credit default swap transactions
in parts of the Global Banking portfolio. In 2008,
gains of US$912 million were reported on these
credit default swaps as a result of widening credit
spreads.
A reduction in net interest income on trading
activities reflected the sharp fall in interest rates at
the end of 2008 but was partly compensated for by a
reduction in the internal funding cost of trading
activities, which is reported in ‘Net interest income’.
Income from non-qualifying hedges related to
mark-to-market gains on cross-currency swaps as the
US dollar depreciated against sterling, and on
interest rate swaps as US dollar long and medium
term interest rates increased over the year. In 2008,
appreciation of the US dollar and a fall in interest
rates led to mark-to-market losses on these
instruments.
During the second half of 2008, HSBC
reclassified US$17.9 billion of assets from ‘held for
trading’ to ‘loans and receivables’ and ‘available for
sale’ following the IASB’s amendment to
International Accounting Standard (‘IAS’) 39. Had
these reclassifications not taken place and the assets
had continued to be accounted for on a fair value
basis, additional gains of US$1.5 billion would have
been recorded in 2009 (2008: losses of
US$3.5 billion). See ‘Impact of Market Turmoil’,
pages 151 to 195.
2008 compared with 2007
Reported net trading income fell by 33 per cent
to US$6.6 billion, 32 per cent lower on an
underlying basis.
Net income from trading activities declined by
81 per cent, driven by the continuing effect of the
market turmoil which led to US$5.4 billion of write-
downs on legacy monoline credit exposures, credit
trading and leveraged and acquisition finance loans.
More information about the losses, the associated
assets and residual exposure is provided in ‘Impact
of Market Turmoil’ on pages 151 to 195.
Record foreign exchange trading income was
due to increased customer volumes and market
volatility across all regions, as investors sought to
reduce risk in the second half of 2008, driving
growth in global foreign exchange trading as
demand for assets denominated in US dollars
and Japanese Yen increased.
Rates trading income rose substantially, with
record revenues in the first half of 2008 due to
favourable positioning against movements in interest
rate yield curves as central banks responded to the
market turmoil by lowering short-term interest rates.
Revenues were also boosted by an increased number
of deals, widening spreads and increased customer
demand for trading and hedging products.
The decline in equities trading income reflected
weaker equity markets, particularly in Hong Kong,
where demand for structured equity products fell.
In addition, following the alleged fraud at Madoff
Securities, HSBC wrote off the value of units it held
in funds that had invested with the company and
took a US$984 million charge. The units had been
acquired in connection with various financing