HSBC 2004 Annual Report Download - page 70

HSBC HOLDINGS PLC
Financial Review (continued)
68
In Commercial Banking, pre-tax profits, before
amortisation of goodwill, declined by 13 per cent
compared with 2002, mainly reflecting lower net
interest income and a higher cost base.
Net interest income decreased by 3 per cent to
US$1,961 million. Following the recommendations
of the UK’s Competition Commission, HSBC
applied credit interest to all qualifying small and
medium-sized customer accounts, increasing interest
expense by US$136 million. The move did, however,
lead HSBC to strengthen its product proposition
within those market segments in the UK, and
business current account balances consequently rose
by 21 per cent to just over US$10 billion. In
addition, HSBC’ s popular ‘Start-up Stars’
competition continued to raise the profile of the
bank’s small business proposition in the UK and
helped to attract over 102,000 new business start-ups
and over 23,000 customer transfers. Enhanced
customer targeting and the introduction of risk-based
relationship pricing improved HSBC’s competitive
position in the UK market, increasing lending
balances by over US$2.2 billion and net interest
income by 10 per cent.
Overall, deposit balances in the UK grew by
9 per cent to just over US$9 billion, increasing
market share and partly offsetting the effects of
reduced deposit book spreads. Balances grew as a
consequence of the introduction of the new Business
Money Manager account, launched in response to
customer demand for flexible savings accounts. The
new product attracted an average of 1,700 new
accounts per week and generated US$95 million of
net interest income.
In France, overall net interest income was
broadly in line with 2002. The subdued economic
climate saw businesses adopt a more conservative
investment policy that was reflected in a 3 per cent
rise in sight deposits. Short-term higher spread
lending fell by 8 per cent, but was partly offset by
growth in medium and longer-term lending, which
increased by 4 per cent.
In the UK, other operating income was
marginally higher than 2002. Overdraft fees rose by
12 per cent, or US$19 million, reflecting the further
benefit of improved account management initiatives
introduced last year, whilst loan fees increased
significantly in line with the growth in customer
numbers.
In France, higher income was generated through
a volume-led increase in banking transaction fees
and the introduction of a variety of guaranteed
investment funds during the year. The former was
achieved after specific initiatives directed towards
middle market enterprises (‘MMEs’ ). The successful
launch of several structured financial products led to
higher trading fees within CCF and the take-up of
Asset Management products increased by 9 per cent.
Overall, wealth management income declined as
continued uncertainty in equity markets led to a fall
in sales of savings and investment products.
Operating expenses, excluding goodwill
amortisation, were 7 per cent higher than last year at
US$2,113 million. This was largely due to an
increase in staff costs in the UK. Pension costs rose
to compensate for the scheme deficit and one-off
redundancy costs were incurred as migration was
planned to the Group Service Centres’ capabilities.
The costs of distributing and supporting business
services and products within the UK increased in
line with the growth in volumes and continued
investment was made in electronic delivery channels
across Europe.
At US$204 million, the overall charge for bad
and doubtful debts was 9 per cent lower than in
2002. In the UK there was a release of general
provision which recognised the gradual
improvement in the economic outlook for businesses
over the year. Offsetting this there was a higher
specific charge, reflecting a number of large
provisions across various industries. Additionally,
the charge in France increased due to lower
recoveries in two of the regional banks. Underlying
credit quality in France remained stable.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$1,623 million, an increase of 2 per
cent compared with last year. In Global Markets
Europe, performance was strong. This reflected
income growth in foreign exchange, derivatives and
debt securities, partly offset by higher bad debt
provisions in Corporate Banking. HSBC also
absorbed the costs of restructuring and repositioning
the equities and investment banking businesses.
In Global Markets UK, earnings from deploying
the excess liquidity of the bank declined as long-
term assets matured and proceeds were reinvested at
lower rates. Overall, net interest income was 5 per
cent lower than in 2002.
Other operating income increased by 9 per cent,
reflecting a substantial growth in dealing profits that
more than offset lower fee and commission income.
Foreign exchange revenues remained strong as
volatility in the major currency pairs prompted
customers to hedge their currency exposures.
Continued weakening of the US dollar provided a
clear trend in the markets for position taking. Fixed