HSBC 2004 Annual Report Download - page 79

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along industry sector lines. Business expansion and
new front office initiatives in Global Markets
resulted in the recruitment of an additional 45
people. Other general cost increases reflected higher
technology expenditure, including a US$10 million
charge for the development of HSBCnet and, a rise
in travel and communication spending, all driven by
business expansion and increased sophistication of
the product range.
There was a net recovery of bad and doubtful
debts, particularly from the property, industrial and
telecommunications sectors, following a number of
successful restructurings and refinancings, reflecting
an improved economic environment in Hong Kong
and across the region.
Private Banking contributed a pre-tax profit,
before goodwill amortisation, of US$135 million, an
increase of 6 per cent compared with 2003. A trust
business was reclassified as Rest of Asia Pacific
during the year, and Corporate, Investment Banking
and Markets took over management responsibility
for the corporate trust business from Private
Banking. These transfers reduced growth in profit
before tax by 17 per cent.
Excluding the corporate trust transfer mentioned
above, funds under management increased by 19 per
cent. Growth benefited from the introduction of new
products, expansion of the client base, and continued
strong growth in Strategic Investment Solutions,
which was launched in July 2003 and contributed to
a US$2.9 billion inflow in net new funds. The
recruitment of front office staff, and a general
improvement in market conditions, also contributed
to growth in funds under management.
Total revenue was 5 per cent higher than last
year. Underlying growth of US$57 million, including
US$10 million from the Bank of Bermuda, was
largely offset by the changes noted above.
Recovering equity markets, coupled with historically
low interest rates, encouraged a marked increase in
client investment activity. Fees and commissions
benefited from a higher volume of equity
transactions, unit trust sales, and portfolio
management fees on increased funds under
discretionary management. Higher client volumes
also boosted dealing income from foreign exchange,
options, and structured products. Revenue from sales
of structured products increased by nearly 70 per
cent compared with 2003, while commissions on
sales of unit trusts rose by over 90 per cent, and from
funds under discretionary management by over
120 per cent.
Operating expenses, excluding goodwill
amortisation, increased by 8 per cent, including 6 per
cent growth attributable to Bank of Bermuda and a
25 per cent decrease resulting from the changes
noted above. Underlying growth of 27 per cent
mainly reflected the recruitment of 49 front office
staff. Performance-related remuneration increased as
a result of the strong growth in revenue, while a rise
in marketing expenditure reflected the new brand
advertising campaign.
A US$4 million net release of bad debts
reflected a release of general provisions, following a
review of historical loss trends and current economic
conditions.
Gains on the exchange of an investment in
World Finance International Limited, an associated
company, for a 7 per cent stake in Bergesen
Worldwide, contributed to an improved performance
in Other. Gains on equity sales and profits on the
disposal of a residential property also contributed to
the increase.
Year ended 31 December 2003 compared
with year ended 31 December 2002
The Hong Kong economy faced challenging
conditions during the first half of 2003. Slower
growth in major export markets, rising
unemployment and a weak property market
dampened consumer demand, whilst the outbreak of
the SARS virus had a significant adverse impact on
the entertainment, leisure and tourism sectors.
However, by the third quarter there was clear
evidence of a bounce-back with GDP growing
6.4 per cent quarter-on-quarter, more than reversing
the 3.7 per cent dip in the second quarter of 2003.
The growth rate benefited significantly from the
release of demand deferred during the SARS period.
Growth also drew support from stronger export
demand and improving sentiment after the central
government unveiled a series of economic measures
to help Hong Kong, including the relaxation of
controls on mainland residents travelling to Hong
Kong. Local consumer spending grew for the first
time in two years and even more encouraging was a
pick-up in investment reflecting an improved
business outlook.
HSBC’s operations in Hong Kong performed
well in these circumstances and reported a pre-tax
profit of US$3,728 million, broadly in line with
2002. Excluding goodwill amortisation, profit before
tax was US$3,730 million and represented 26 per
cent of HSBC’s total profit on that basis. Goodwill
amortisation was US$2 million in 2003. Of this
growth, just under 4 per cent arose from acquisitions
during the period.