HSBC 2006 Annual Report Download - page 38

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Europe > 2006
36
to raising deposits through transactional and savings
accounts and, as a result, deposit balances rose by
37 per cent and current account balances by 8 per
cent. The benefit of this volume growth was partly
offset by spread compression on sterling-
denominated accounts as customers were offered
more attractive pricing.
HSBC boosted the recruitment of small and
micro business customers in the UK by holding
commercial theme weeks and increasing client
contact by embedding business specialists in selected
branches. These initiatives delivered increases in the
number of start-up accounts and the number of
customers who switched their business from other
banks to HSBC. Higher-value international and
foreign currency accounts rose as a consequence.
Net interest income in France was broadly in
line with 2005 as the benefit of strong balance sheet
growth, driven by the acquisition of new customers
and improved levels of customer retention, was
offset by narrowing spreads from competitive market
pressures and lower earnings from free funds.
Net interest income in Turkey increased by
41 per cent, driven by a doubling in lending
balances. HSBC extended its geographic coverage
through expansion of the branch network, including
the launch of eight new centres dedicated to smaller
commercial customers, and these boosted customer
recruitment. The introduction of pre-approved credit
limits for existing customers also contributed to
lending growth, and the focus on attracting liability
products helped more than double deposit balances.
Net fee income increased by 4 per cent to
US$1,707 million. Current account and money
transmission fees rose as a result of customer
recruitment and higher transaction volumes in most
countries. In the UK, client workshops and other
promotional activities were deployed to support
increased sales of treasury products, boosting
treasury revenue as foreign exchange volumes grew.
In France a 2 per cent increase in income was largely
in transactional current account fees, reflecting
growth in the customer base.
Other operating income was 41 per cent lower
than in 2005 and reflected lower asset finance
revenues following the sale of the UK fleet
management business referred to above. This was
partly offset by the inclusion of Commercial
Banking’s share of the gain on the sale of
HSBC’s stake in The Cyprus Popular Bank
(US$38 million), and the income from UK branch
sale and lease-back transactions.
Credit quality in Commercial Banking was
stable in most countries. In the UK, loan impairment
charges and other credit risk provisions fell by
16 per cent, largely due to the non-recurrence of an
individual loan impairment allowance against a
single customer in 2005. Excluding this, there was a
modest decline in UK impairment charges, as the
effect of lending growth was more than offset by
improved credit quality, particularly in relation to
HSBC’s larger exposures. In France, loan
impairment charges, while remaining low, returned
to a more normal level after relatively high
recoveries in 2005. In Turkey, higher loan
impairment charges reflected growth in lending.
Operating expenses decreased by 1 per cent.
Excluding the sale of the UK fleet management
activities referred to above, costs were 4 per cent
higher than in 2005, reflecting investment to drive
business growth throughout the region. As a result of
revenues growing significantly faster than costs,
there was a 3.1 percentage point improvement in the
cost efficiency ratio. In the UK, increased costs
reflected the recruitment of additional sales staff and
higher IT expenditure. Costs in France fell by 2 per
cent compared with 2005 as savings from cost
control offset increases from the recruitment of
additional sales staff and expenses associated with
the migration to common IT platforms. In Turkey,
recruitment and marketing costs incurred in support
of the growing small and micro businesses drove a
38 per cent rise in expenses.
Corporate, Investment Banking and Markets
reported a pre-tax profit of US$2,304 million, an
increase of 5 per cent, compared with 2005. A
reduction in recoveries of loan impairment charges
and lower private equity gains masked strong growth
in core operating activities. Global Markets’
revenues were 36 per cent higher than in 2005 as
robust performances in the global capital markets
and securities services businesses were
complemented by strong trading gains. The cost
efficiency ratio improved modestly compared with
2005.
Total operating income was US$6,560 million,
17 per cent higher than in 2005. This was despite the
fact that in the UK, France and Turkey, balance
sheet management revenues continued to fall,
resulting in an overall decline of 56 per cent. This
shortfall was partly offset by higher net interest
income in HSBC Securities Services as customer
volumes grew in higher-value products such as
securities lending and foreign exchange. The lending
business delivered a 13 per cent increase in corporate
balances and corporate spreads remained broadly in
line with 2005.