HSBC 2009 Annual Report Download - page 95

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Review of business performance
HSBC’s European operations reported a pre-tax
profit of US$10.9 billion, compared with
US$8.6 billion in 2007, an increase of 26 per cent.
These results included gains of US$2.4 billion
on the disposal of seven regional banks in France in
July 2008, and of US$425 million on the sale of the
card acquiring business in the UK to a joint venture
with Global Payments, Inc. in June 2008. Excluding
these disposals and, in 2007, the acquisition of
HSBC Assurances and the disposal of Hamilton
Insurance Company Limited and Hamilton Life
Assurance Company Limited and substantial fair
value gains on own debt, underlying pre-tax profits
fell by 34 per cent. This primarily reflected a sharp
decline in Global Banking and Markets’ revenues,
which was mainly attributable to the deterioration in
credit markets, the continuing illiquidity in asset-
backed securities markets which led to further
write-downs, and a US$854 million charge within
the equities business following the alleged fraud at
Madoff Securities. Personal Financial Services and
Private Banking delivered underlying growth.
Net interest income increased by 33 per cent.
There was significant growth in Balance Sheet
Management revenues, which reflected favourable
interest rate risk positioning in expectation of
interest rate cuts by central banks. Net interest
income also benefited from necessarily selective
incremental lending as credit availability generally
contracted. In Global Banking, net interest income
was boosted by improved spreads.
Falling confidence in the UK banking sector
necessitated government intervention in a number of
competitor banks. HSBC experienced a strong
increase in customer numbers, with corresponding
growth in liability balances as the market turmoil
intensified. The volume benefit was partially offset
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.
A rise in the Net expense from financial
instruments designated at fair value was recorded as
a result of 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’.
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 mainly 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