HSBC 2012 Annual Report Download - page 36

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance by income and expense item
34
The commentary in the following sections is on a
constant currency basis unless otherwise stated.
Reported net interest income decreased by 7%.
On a constant currency basis, it declined by 5%.
On an underlying basis, excluding net interest
income earned by the businesses sold during 2012
(see page 29) from all periods presented (2012:
US$1.6bn; 2011: US$4.8bn) and currency translation
movements of US$1.2bn, net interest income rose by
4%. This reflected strong balance sheet growth in
Hong Kong and Rest of Asia-Pacific, together with a
lower cost of funds in Latin America driven by a
decline in interest rates in Brazil.
The decrease in both net interest spread and net
interest margin compared with 2011 was attributable
to significantly lower yields on customer lending and
on our surplus liquidity, partly offset by a reduction
in our cost of funds, notably on customer accounts.
Interest income was lower than in 2011. This
was driven by lower interest income on customer
lending, including loans classified within ‘Assets
held for sale’, due in part to the loss of interest
income from disposals during 2012, principally in
the US. These disposals also led to a change in the
composition of our lending book as the decline in
higher yielding card balances was replaced by
volume growth in relatively lower yielding products,
mainly residential mortgages and term lending, in
Hong Kong, Rest of Asia-Pacific and Europe.
Growth in average residential mortgage balances
reflected the success of marketing campaigns and
competitive pricing in the UK, the continued strength
in the property market in Hong Kong and the
expansion of our distribution network in Rest of
Asia-Pacific. Average term lending balances
increased in Hong Kong and Rest of Asia-Pacific as
we capitalised on trade and capital flows, while the
rise in Europe was in spite of muted demand for
credit. As a result of the change in composition of the
lending book, the gross yield on customer lending
fell.
Revenue in Balance Sheet Management also
decreased, principally in Europe as yield curves
continued to flatten and liquidity arising from
maturities and sales of available-for-sale debt
securities was re-invested at lower prevailing rates.
In addition, we placed a greater portion of our
liquidity with central banks. This was partly offset by
higher revenue in Rest of Asia-Pacific, notably
mainland China, as strong customer deposit growth
led to a rise in the size of the available-for-sale debt
securities portfolio.
The decline in interest income was partly offset
by lower interest expense, notably on customer
accounts. This was driven by a reduction in the cost
of funds on customer accounts in Latin America,
notably in Brazil, and in Europe due to the downward
movement in interest rates during the year, together
with deposit repricing initiatives in the US and
Europe. The reduction in average customer account
balances due to the disposal of non-strategic branches
in the US was largely offset by significant volume
growth in other parts of the business, notably in Hong
Kong, reflecting more conservative customer
behaviour during the year in RBWM, and in Rest of
Asia-Pacific, as a result of new mandates and deposit
acquisition in Payments and Cash Management in
CMB and GB&M.
Interest expense on deposits by banks decreased,
mainly in Europe. This was due to lower placements
by other financial institutions with HSBC, in part due
to lower interest rates offered, together with a
reduction in the cost of sale and repurchase (‘repo’)
funding as market rates fell. Lower average balances
and interest rates in Brazil also contributed to the
decline.
There was also a decrease in interest expense on
debt securities issued by the Group, driven by a net
reduction in average balances outstanding, mainly in
North America and, to a lesser extent, in Europe.
Funding requirements in the US fell as a result of the
business disposals and continued reduction of the
CML portfolio in run-off and, as a consequence,
maturing debt was not replaced and some of the
outstanding debt was repaid with the proceeds from
the sales. In addition, maturing debt was not replaced
in Europe. These decreases were partly offset by
higher interest expense in Latin America, as a result
of new debt issued, principally in 2011. The Group’s
cost of funds on debt securities rose as the new
issuances in Latin America were at a higher effective
interest rate than that paid in other parts of the
Group. The replacement of short-term debt by the
issuance of medium-term notes in Europe also
contributed to the rise in the cost of funds of debt
securities in issue.
‘Net interest income’ includes the expense
of internally funding trading assets, while related
revenue is reported in ‘Net trading income’. The
internal cost of funding of these assets declined,
reflecting the reduction in average trading assets
during the year. In reporting our global business
results, this cost is included within ‘Net trading
income’.