HSBC 2011 Annual Report Download - page 65

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
lower adverse foreign exchange movements on
foreign currency debt designated at fair value, issued
as part of our overall funding strategy, with an offset
reported in ‘Net trading income’.
Gains less losses from financial investments were
broadly in line with 2010. Net gains from the
disposal of available-for-sale debt securities
increased as part of normal portfolio management
activities. These were offset by lower gains from the
disposal of available-for-sale equity securities as a
deterioration in market confidence resulted in fewer
disposal opportunities and lower gains from the
disposal of private equity investments. In addition,
there were write-downs of our equity investments in
real estate companies.
Net earned insurance premiums decreased by
3%, resulting from the non-renewal and transfer to
third parties of certain contracts in our Irish business
and the continued run-off and subsequent disposal of
our motor insurance business in the UK. This was
partly offset by an increase in premiums as we
launched targeted sales campaigns, notably for
investment contracts with DPF in France, and
expanded distribution channels for unit-linked
products in the UK.
Other operating income decreased by 15%,
driven by the non-recurrence of a gain on the sale
and leaseback of our Paris headquarters in 2010. In
addition, there was a reduction in the PVIF asset
from net experience and assumption updates and a
higher unwind of cash flows related to the growing
in-force book, compared with 2010. This reduction
was partly offset by a rise in the PVIF asset as a
result of higher life insurance sales and a positive
impact from a refinement to the PVIF calculation
during 2011.
Net insurance claims incurred and movement
in liabilities to policyholders decreased by 28% as a
result of investment losses experienced in 2011 on
unit-linked insurance policies and insurance and
investment contracts with DPF as equity markets
declined, which contrasted with investment gains in
2010. Also, the non-renewal and transfer to third
parties of certain contracts in the Irish business
and the continued run-off and subsequent disposal
of our legacy motor business in the UK resulted in
a decrease in net insurance claims incurred and
movement in liabilities to policyholders. Partly
offsetting these declines were increases in liabilities
to policyholders established for new business
written.
Loan impairment charges and other credit
risk provisions decreased by 20% to US$2.5bn. This
mainly reflected a range of successful initiatives
taken to mitigate credit risk within RBWM including
a focus on monitoring and identifying customers
facing financial hardship. This resulted in lower
delinquency rates across both the secured and
unsecured lending portfolios. In CMB, loan
impairment charges declined as the non-recurrence
of specific provisions in the UK was partly offset by
higher specific provisions related to a small number
of customers in Greece. In GB&M, we recorded a
charge of US$145m to write down to market value
available-for-sale Greek sovereign debt now judged
to be impaired. In addition, impairments of US$46m
were included in our GPB and insurance businesses
in relation to Greek available-for-sale debt securities.
These were partly offset by lower credit risk
provisions on ABSs as the losses arising in the
underlying collateral pools generated lower charges
on ABSs.
Operating expenses increased by 9%. This
included provisions of US$898m relating to UK
customer redress programmes, including a charge in
respect of possible mis-selling of PPI in previous
years, a cost of US$570m in respect of the UK bank
levy and restructuring provisions of US$404m.
These were partly offset by a credit of US$587m
resulting from a change in the inflation measure used
to calculate the defined benefit obligation for
deferred pensions in the UK. Costs in 2010 included
one-off payroll and bonus taxes of US$354m
(US$324m as reported) in the UK and France.
Excluding these items, operating expenses rose as
we incurred higher regulatory and compliance costs,
along with an increase in expenses as a result of the
strengthening of the Swiss franc, which accounts for
a significant proportion of the GPB cost base. In
GB&M, performance-related awards were
substantially lower than in 2010, reflecting the
decline in revenues, although this was mostly offset
by higher amortisation charges for previous years'
performance shares and an acceleration in the
expense recognition of current-year deferred bonus
awards. Notwithstanding these factors, we have
achieved about US$300m of sustainable savings
during 2011. This has enabled the funding of
investment in strategic initiatives, including the
development of Prime Services and equity market
capabilities and the expansion of the Rates and
Foreign Exchange e-commerce platforms.