HSBC 2011 Annual Report Download - page 93

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
product launches, while higher overdraft balances
arose from increased utilisation rates. We also grew
our trade-related lending in response to strong
customer demand and our focus on sales to
customers with international connectivity. In
RBWM, increased average lending balances and
strong lending growth in 2011 led to higher net
interest income, mainly in Brazil and Argentina,
reflecting economic growth, lower unemployment
and increased household income. This was partly
offset by a compression of asset spreads in Mexico
and Brazil as an increased proportion of our lending
book comprised secured, lower-yielding products.
Net fee income declined marginally, driven by a
reduction in Mexico where regulatory changes
relating to ATM transactions resulted in a reduction
in the fees we were able to charge for use of our
network. Credit card fees in Mexico declined as a
result of lower balances. This was partly offset by
growth in fee income from our CMB business in
Brazil, mainly in Payments and Cash Management
and Account Services, reflecting increased volumes.
Net trading income was 82% higher than in
2010. The majority of the increase was in Brazil due
to a rise in net interest income earned on trading
activities resulting from an increase in reverse repos
and government bonds held for trading. The cost of
internally funding these assets also increased, but
the related interest expense is reported within ‘Net
interest income’. Additionally, trading income in
Brazil increased as a result of higher revenue from
sales of foreign exchange products reflecting market
volatility, while in Mexico higher trading income
was due to the completion of a small number of
individually large derivative transactions in GB&M.
Net income from financial instruments
designated at fair value was 26% higher than in
2010, mainly due to growth in premiums from unit-
linked pension products in Brazil which resulted in
an increase in the underlying financial assets. Since
investment income accruing from these assets was
largely attributable to policyholders, there was a
corresponding increase in ‘Net insurance claims
incurred and movement in liabilities to
policyholders’.
Gains less losses from financial investments
rose by 36%, mainly due to a gain on the sale of
shares in a Mexican listed company and increased
gains from the sale of debt securities in Argentina.
Net insurance premiums increased by 26% to
US$2.7bn. This was mainly in Brazil, reflecting
strong growth in sales of unit linked pension and life
and credit protection products, following an increase
in the sales force and targeted sales campaigns. In
Argentina, strong growth in net insurance premiums
was mainly attributable to volume growth and the
repricing of motor insurance policies in response to
inflationary pressures. In Mexico, a rise in net
insurance premiums was principally due to higher
sales of an endowment product and improved term
life lapse rates. The growth in net insurance
premiums, as well as the increase in policyholder
assets described above, resulted in corresponding
increases in ‘Net insurance claims incurred and
movement in liabilities to policyholders’.
Other operating income of US$244m was 74%
higher than in 2010 due to gains of US$61m
resulting from the sale and leaseback of branches in
Mexico. In addition, there was a net increase in the
PVIF in Brazil and Mexico as a result of higher life
insurance sales, partly offset by a net decrease from
experience and assumption updates in addition to a
higher unwind of cash flows from the growing in-
force book.
Loan impairment charges and other credit risk
provisions rose by 17% to US$1.9bn. The increase
was mainly in Brazil driven by strong lending
growth in RBWM and CMB, as well as worsening
delinquency in the second half of 2011, notably in
the credit card and Business Banking portfolios. In
addition, higher loan impairment charges included a
significant individually assessed loan impairment
charge related to a single commercial customer.
Loan impairment charges and other credit risk
provisions in Mexico declined by 28% reflecting the
continued managed decline of the higher risk sections
of the credit card portfolio, as well as improvements
to both the collections and credit quality of the
portfolio following targeted sales campaigns and
enhanced pre-screening.
Operating expenses were 10% higher than in
2010. In 2011, we incurred US$338m of
restructuring costs, the majority of which are
reported in ‘Other’, as we took steps to improve the
ongoing efficiency of our operations in the region,
including cancelling certain regional projects,
restructuring regional and country support functions
and consolidating the branch network in Mexico.
In addition, operating expenses were adversely
affected by inflationary pressures across the region,
as well as union agreed wage increases and a rise in
volume-driven transactional taxes in Brazil and
Argentina. Sustainable savings of about US$220m
resulting from the restructuring and organisational
effectiveness programmes enabled investment in
strategic initiatives, including the recruitment of
additional relationship managers.