HSBC 2004 Annual Report Download - page 44

HSBC HOLDINGS PLC
Financial Review (continued)
42
At 31 December 2004, assets held by HSBC as
custodian amounted to US$2,819 billion. Custody is
the safekeeping and administration of securities and
financial instruments on behalf of others, and the
inclusion of Bank of Bermuda was responsible for
much of the increase.
Debt securities and equity shares
Debt securities held on an accruals basis in the
investment book at 31 December 2004 showed an
aggregate unrecognised gain, net of off-balance
sheet hedges, of US$1,005 million compared with an
unrecognised gain of US$1,160 million at
31 December 2003. Equity shares included
US$4,709 million held on investment account,
compared with US$5,390 million at 31 December
2003, on which there was an unrecognised gain of
US$879 million, compared with US$827 million at
31 December 2003.
Funds under management
Funds under management of US$476 billion were
US$57 billion, or 14 per cent, higher than at 30 June
2004 and US$90 billion, or 23 per cent, higher than
at the end of 2003. The inclusion of US$22 billion of
funds relating to Bank of Bermuda, and continued
strong funds inflows from both the asset
management and private banking businesses, were
responsible for the increase. The weakening of the
US dollar benefited the translation of sterling and
euro-denominated funds, and contributed to the
positive market performance. At 31 December 2004,
HSBC’ s asset management business, including
affiliates, reported funds under management of
US$224 billion, and the private banking business
reported funds under management of
US$178 billion.
2004 2003
US$bn US$bn
Funds under management
At 1 January ..................................... 386 306
Net new money ................................ 64 42
– Bank of Bermuda ........................... 22 –
– Other ............................................. 42 42
Value change ................................... 19 25
Exchange and other .......................... 713
At 31 December ............................... 476 386
Economic profit
HSBC’ s internal performance measures include
economic profit, a measure which compares the
return on the financial capital invested in HSBC by
its shareholders with the cost of that capital. HSBC
prices its cost of capital internally and the difference
between that cost and post-tax profit attributable to
ordinary shareholders represents the amount of
economic profit generated. Economic profit is used
by management as one of the measures to decide
where to allocate resources so that they will be most
productive. In order to concentrate on external
factors rather than measurement bases, HSBC
emphasises the trend in economic profit within
business units rather than absolute amounts. In light
of the current levels of world interest rates, and
taking into account the Group’ s geographical and
customer group diversity, HSBC believes that its
true cost of capital on a consolidated basis is
approximately 10 per cent. HSBC plans to continue
using this cost until the end of the current five year
strategic plan, which expires at the end of 2008, in
order to ensure consistency and comparability. The
cost of capital under the previous strategic plan,
which expired at the end of 2003, was 12.5 per cent.
On this basis, economic profit increased by
US$3,773 million compared with 2003, reflecting
both the lower cost of capital rate and improved
profitability.