HSBC 2002 Annual Report Download - page 42

HSBC HOLDINGS PLC
Financial Review (continued)
40
Year ended 31 December 2002 compared with
year ended 31 December 2001
Net interest income in 2002 was US$735 million, or
5 per cent, higher than 2001, at US$15,460 million.
At constant exchange rates, net interest income was 6
per cent higher than 2001 reflecting growth in
HSBC’s operations in Europe, North America and
the rest of Asia Pacific regions, as well as the
acquisition of GFBital at the end of November 2002.
In Europe, net interest income was US$780
million, or 14 per cent, higher than in 2001, mainly
reflecting the growth in average interest-earning
assets and the benefits of lower funding costs. In
constant currency, growth was 10 per cent. In North
America net interest income increased by US$282
million, or 12 per cent, due to a combination of the
increased level of average interest-earning assets,
primarily residential mortgages, and wider margins
on treasury activities as a steeper yield curve led to
reduced funding costs. In addition, GFBital
contributed US$85 million of net interest income to
the North American region. In Hong Kong,
notwithstanding modest loan growth and a reduced
contribution from net free funds, net interest income
was largely maintained as a strong treasury
performance, together with growth in credit card
lending and in low cost deposits, offset continuing
margin compression in the mortgage business.
In the rest of Asia-Pacific net interest income
growth of 8 per cent was driven by higher credit card
and personal lending together with the full year
impact of the acquisition of NRMA Building Society
in Australia in 2001.
In South America the impact of the unsettled
economic environment caused net interest income to
fall by US$420 million to US$645 million. In Brazil,
underlying net interest income was in line with 2001
as the benefit from higher levels of customer lending
was offset by the impact of HSBC’s decision to
reduce the level of local debt securities and to move
to a more conservative positioning of the balance
sheet. In Argentina, the combination of narrower
spreads and the high cost of local funding of the
non-performing loan portfolio resulted in net interest
expense in 2002.
Average interest-earning assets at US$609
billion increased by US$29 billion, or 5 per cent.
Adjusting for the impact of foreign exchange
translation and acquisitions, underlying growth was 3
per cent, driven principally by the placement of
customer deposits in the United Kingdom, Taiwan,
India, Korea, mainland China and the Middle East,
together with personal lending growth in the United
Kingdom, France, United States, Canada, Singapore,
Malaysia, Korea, Taiwan and India. The increase in
average interest-earning assets from acquisitions was
US$4 billion.
HSBC was able to maintain its net interest
margin at 2.54 per cent, unchanged from that for
2001, as an 18 basis point widening in interest spread
was offset by a similar reduction in the contribution
from net free funds. Interest spreads benefited from a
change in asset mix with a higher proportion of
personal lending and with surplus liquidity
increasingly invested in higher yielding investment
grade corporate debt securities as opposed to
interbank placements. In addition, the fall in short-
term interest rates benefited margins in our treasury
activities as the historical deployment of liquidity
into longer dated assets benefited from the effects of
the steeper yield curve. A reduced benefit from a
higher level of net free funds mitigated this impact
on the net interest margin.
In the United Kingdom, net interest margin fell
as a reduced benefit from net free funds more than
offset an improved contribution from treasury
activities and the benefit of a higher level of
personal customer lending. In Hong Kong, the
Hongkong and Shanghai Banking Corporation was
able to maintain its margin through improved
treasury performance, higher net recoveries of
suspended interest and an increased proportion of
higher yielding credit card advances. These factors
offset the impact of reduced spreads on deposits, a
lower contribution from net free funds and narrower
spreads in the competitive mortgage market. Hang
Seng Bank suffered a fall in net interest margin
resulting primarily from a combination of a lower
benefit from net free funds as interest rates fell and
the narrower spreads on mortgages. For Hang Seng
Bank these drivers are much more significant than
for the Hongkong and Shanghai Banking
Corporation. In the United States, a strong
performance in treasury activities as a steeper yield
curve reduced funding costs, and a growth in average
mortgage balances, drove an improvement in net
interest margin.
HSBC is moving increasingly to differentiated
product pricing. This competitive approach reflects