HSBC 2010 Annual Report Download - page 75

73
Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Net fee income fell by 25% to US$3.7bn. Lower
transaction volumes, a reduction in customer
spending and customers actively seeking to reduce
credit card debt improved delinquency trends, and
the effects of changes required by the CARD Act led
to lower late and overlimit fees in our Card and
Retail Services business.
Net trading income of US$314m was 8% lower
than in 2009, primarily because of US$353m adverse
fair value movements in non-qualifying hedges due
to the decrease in long-term US interest rates. This
compared with US$184m in favourable fair value
movements on these instruments in 2009. The
majority of these instruments were interest rate
swaps used to economically hedge floating rate debt
issued by HSBC Finance. The debt was issued to
offset the increase in the duration of the company’s
mortgage portfolio resulting from lower prepayment
rates and the corresponding rise in interest rate risk.
In 2010, we increased our estimates of exposure
on repurchase obligations associated with loans
previously sold, primarily to Government-sponsored
enterprises (‘GSE’s), which reduced our trading
income by US$341m compared with US$65m in
2009. This related mainly to mortgages originated
through broker channels. These trading losses were
partly offset by a rise in GB&M, despite lower
revenue from Rates, as write-backs on legacy
positions in Credit trading compared with write-
downs in 2009.
Net expense from financial instruments
designated at fair value of US$31m compared with
net income of US$192m in 2009. This was due to
adverse fair value movements from interest rate
ineffectiveness in the economic hedging of our
long-term debt. In 2009, fair value movements
on economic hedges resulted in net income.
Gains less losses from financial investments
declined by 52% due to lower gains from asset sales
in the available-for-sale portfolio, undertaken to
reduce the overall level of balance sheet risk.
Net earned insurance premiums and Net
insurance claims incurred and movement in
liabilities to policyholders both declined. Lower
premiums reflected a fall in sales of payment
protection products following the discontinuance of
mortgage originations in HSBC Finance. Claims and
reserves declined as the lending balances and
associated in-force insurance contracts reduced.
Other operating income declined by 70% to
US$167m as we recognised a loss of US$207m on
the sale of our vehicle finance loan portfolio and
loan servicing platform. In addition, gains in 2009
from the sale of residential mortgages and the
refinement of the income recognition methodology
of long-term insurance contracts did not recur. This
was partly offset by a gain on the sale of our New
York headquarters building in 2010.
Loan impairment charges and other credit risk
provisions decreased by 47% to US$8.3bn, the
lowest level since 2006. Although most significant
in PFS, the decline was across all businesses as the
economy generally improved in 2010.
Loan impairment charges in Card and Retail
Services declined by 57%, reflecting lower lending
balances and an increased focus by our customers
on reducing outstanding credit card debt. There was
also an overall improvement in the credit quality of
the portfolio, with lower delinquency levels and
better delinquency roll rates.
Loan impairment charges in our Mortgage
Services and Consumer Lending businesses fell
by 29% as balances continued to run-off and
delinquent balances reduced. Loss severity also
improved reflecting an increase in deed-in-lieu and
short sales agreements, both of which result in lower
losses than foreclosed loans.
As a result of investigations into the foreclosure
practices of certain mortgage service providers, there
could be additional delays in the processing of
foreclosures. See page 83 for more information.
In GB&M, a net release of loan impairment
charges and other credit risk provisions of US$184m
compared with a reported net charge of US$621m in
2009. This reflected an improvement in the credit
environment and a release of impairments on
available-for-sale ABSs. In CMB, loan impairment
charges declined as the improved economic
conditions resulted in credit upgrades on certain
accounts and fewer downgrades across all business
lines. Further commentary on delinquency trends in
the US PFS portfolios is provided on page 110.
Operating expenses fell by 2% to US$8.3bn,
reflecting the non-recurrence of restructuring costs
following the closure of the Consumer Lending
branch network in 2009 and the reduced scope of our
business operations in the US as we ran off the
legacy portfolios in HSBC Finance. In addition, we
recorded a pension curtailment gain in 2010 and
deposit insurance costs declined as a 2009 special
assessment did not recur. These reductions were
partly offset by a rise in marketing expenses in
Card and Retail Services, an increase in litigation
provisions and higher regulatory and compliance
costs.