HSBC 2008 Annual Report Download - page 30

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance > Net trading income / Net income from financial instruments at FV
28
Net trading income
2008
US$m
2007
US$m
2006
US$m
Trading activities ............................................................................................. 2,988 4,521 5,465
Net interest income on trading activities ......................................................... 5,713 5,376 2,603
Other trading income – hedge ineffectiveness:
– on cash flow hedges ................................................................................. (40) (77) (122)
– on fair value hedges ................................................................................. 5 19 16
Non-qualifying hedges .................................................................................... (1,122) (5) 260
Losses on collapse of Madoff Securities.......................................................... (984) – –
Net trading income1,2 ....................................................................................... 6,560 9,834 8,222
1 The cost of internal funding of trading assets was US$5,547 million (2007: US$5,433 million; 2006: US$2,658 million) and is excluded
from the reported ‘Net trading income’ line and included in ‘Net interest income’. However, this cost is reinstated in ‘Net trading
income’ in HSBC’s customer group and global business reporting.
2 Net trading income includes US$529 million (2007: US$34 million), associated with changes in the fair value of issued structured notes
and other hybrid instrument liabilities derived from movements in HSBC issuance spreads.
2008 compared with 2007
Reported net trading income fell by 33 per cent
to US$6.6 billion, 32 per cent lower on an
underlying basis.
Net income from trading activities declined by
81 per cent, driven by the continuing effect of the
market turmoil which led to US$5.4 billion of write-
downs on legacy monoline credit exposures, credit
trading and leveraged and acquisition finance loans.
More information about the losses, the associated
assets and residual exposure is provided in ‘Impact
of Market Turmoil’ on pages 144 to 162.
Record foreign exchange trading income was
due to increased customer volumes and market
volatility across all regions, as investors sought to
reduce risk in the second half of 2008, driving
growth in global foreign exchange trading as
demand for assets denominated in US dollars
and Japanese Yen increased.
Rates trading income rose substantially, with
record revenues in the first half of 2008 due to
favourable positioning against movements in interest
rate yield curves as central banks responded to the
market turmoil by lowering short-term interest rates.
Revenues were also boosted by an increased number
of deals, widening spreads and increased customer
demand for trading and hedging products.
The decline in equities trading income reflected
weaker equity markets, particularly in Hong Kong,
where demand for structured equity products fell. In
addition, following the alleged fraud at Madoff
Securities, HSBC wrote off the value of units it held
in funds that had invested with the company and
took a US$984 million charge. The units had been
acquired in connection with various financing
transactions HSBC had entered into with
institutional clients.
The decline in non-qualifying hedges related to
mark-to-market losses on cross-currency swaps as
the US dollar appreciated and on interest rate swaps
as interest rates fell in late 2008.
Widening credit spreads led to further gains on
credit default swap transactions in parts of the
Global Banking portfolio.
2007 compared with 2006
Reported net trading income increased by 20 per cent
to US$9.8 billion, 13 per cent on an underlying basis.
Net interest income on trading activities more
than doubled, mainly due to increased holdings of
shorter maturity assets in the UK.
Net trading income was significantly affected by
a total of US$2.1 billion of write-downs on credit
trading, leveraged and acquisition financing
positions, and monoline credit exposures, resulting
from deterioration in the credit market in the second
half of 2007. The write-downs arose mainly in the
US and, to a lesser extent, the UK.
Income from foreign exchange trading increased
by 40 per cent to a record result. Revenues were
driven by higher customer volumes, against the
backdrop of a weakening US dollar and greater
market volatility.
Trading income from structured derivatives fell
by 26 per cent. The structured credit business
incurred losses in the second half of the year in the
difficult trading conditions. This was partly offset
by higher trading income from other structured
derivative products, following investment made in
technical expertise and systems in previous years.
Record results were achieved in the equities
business, reflecting strong growth across all regions,
particularly Europe.