HSBC 2001 Annual Report Download - page 67

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communications and business activities were
resumed and the resilience of New York as a city and
its inhabitants was awe-inspiring to observe.
Although the direct impact on HSBC’s profitability
was small the effect of 11 September will remain
with our staff and the Group owes a large debt of
gratitude for the exemplary way they have continued
to deal with our customers and the broader
community in New York.
Unsurprisingly, given Canada’s extremely high
dependence on the US economy for trade and
investment flows, Canada also registered weaker
activity in 2001. Aggressive interest rate cuts limited
the extent of the downturn but rising unemployment
fed through into weaker consumer spending and poor
corporate profits which kept investment spending
weak. The Canadian dollar was slightly weaker
relative to the US dollar at the end 2001.
HSBC’s operations in North America
contributed US$1,510 million to cash basis profit
before tax; US$363 million, or 32 per cent, higher
than in 2000. Non-trading items most notably the
cost of the Princeton Note settlement and
development costs of US$164 million incurred on
HSBC’s ‘e’ commerce platform hsbc.com in its
development centre in New York caused reported
profit before tax to fall by US$369 million, or 43 per
cent, to US$481 million.
HSBC Bank USA’s operations in the United
States reported an increase of US$402 million, or 46
per cent, in cash basis profit before tax (excluding
the provision for Princeton Note settlement) in 2001,
due largely to increased levels of net interest income
and gains on disposal of securities, principally
mortgage-backed. HSBC’ s Canadian operations cash
basis pre-tax profit of US$230 million in 2001 was
US$6 million lower compared with 2000. At
constant exchange rates, HSBC’s Canadian
operations cash basis pre-tax profits were US$3
million higher than in 2000 as increased levels of net
interest income offset higher charges for bad and
doubtful debts and the losses incurred by the
Canadian operations of the Merrill Lynch HSBC
joint venture.
Net interest income increased by US$250
million, or 12 per cent to US$2,402 million when
compared to 2000. In the United States net interest
income was US$222 million higher than in 2000.
The increase in net interest income in HSBC Bank
USA’s domestic operations of US$269 million, or 15
per cent, was partly offset by a decline in HSBC
Markets USA. HSBC Bank USA’ s domestic
operations average interest-earning assets increased
by US$4.4 billion, of which US$2.6 billion reflected
strong growth in residential mortgages as home-
owners took the opportunity, as interest rates fell, to
re-mortgage at lower rates. Spreads on residential
mortgages however widened as the steeper yield
curve allowed the increase in average-interest
earning assets to be funded with low costing
customer deposits. In addition, spreads on treasury
investment operations widened due to higher levels
of available net free funds and the effects of the 11
interest rate cuts during the year. However, the net
interest income decline in HSBC Markets USA
reflected the impact of trading strategies during the
year where funding costs were incurred as part of
arbitrage operations. Net interest income was lower
by US$50 million while dealing profits rose by
US$86 million. Net interest income in Canada was
US$28 million, or 6 per cent, higher than in 2000
(10.6 per cent at constant exchange rates) and
reflected the effects of the combination of higher
levels of average interest-earning assets, primarily
residential mortgages, and a widening in interest
spread.
Other operating income was US$139 million
higher than in 2000 with a solid increase in dealing
profits. Dealing profits at US$324 million were
US$106 million, or 49 per cent, higher than in 2000.
As noted above HSBC Markets USA reported a
US$86 million, or 92 per cent, increase in profits on
debt securities and US treasury activities over 2000.
In addition, HSBC Bank USA reported increased
profits on foreign exchange trading. The dealing
profits in HSBC’s Canadian operations were lower
than in 2000 as operations were scaled back in the
unsettled market conditions.
Fee income at US$898 million was US$45
million higher than in 2000. In the United States, the
harmonisation of product lines between HSBC and
the former Republic Bank of New York, the volume
of annuities sold (a product which is especially
attractive in a low rate environment) and other
wealth management initiatives all contributed to a
15.2 per cent increase in fee income. There was also
a 44 per cent increase in insurance revenue when
compared to 2000. Fee income in Canada, excluding
the contribution to 2000 of HSBC Invest Direct
(Canada) Inc (which was transferred to the Merrill
Lynch HSBC joint venture in the fourth quarter of