HSBC 2009 Annual Report Download - page 103

101
A rise in unemployment and in bankruptcy
petitions led to increased impairment charges against
unsecured lending in Personal Financial Services,
though bankruptcy levels improved in the second
half of the year. Property prices increased during
2009 and mortgage lending remained well secured
with conservative loan-to-value ratios and
origination subject to tight internal and regulatory
guidelines.
Operating expenditure was held in line with
2008 as higher staff costs were offset by lower
general and administrative costs. The increase in
staff costs, driven by higher performance-related
pay, was partly offset by reduced staff numbers.
Non-staff costs fell as marketing expenditure was
reduced and operational efficiencies improved as a
result of the increased use of direct channels.
2008 compared with 2007
Economic briefing
Hong Kong’s GDP growth slowed to 2.5 per cent in
2008 from 6.4 per cent in 2007. After performing
strongly during the early months of the year, the
economy slowed sharply and a technical recession
was confirmed with the release of the third quarter
GDP statistics. External demand proved especially
weak during the second half of 2008 and the growth
in private consumption also slowed sharply. The
unemployment rate rose from a ten-year low of
3.2 per cent in August 2008 to 4.1 per cent by the
year-end. Consumer price inflation proved volatile
during the year, rising to a ten-year high of 6.3 per
cent in July before slowing to 2.1 per cent by
December 2008, although this movement largely
reflected the trends in food and energy prices. In
response to interest rate cuts in the US, Hong Kong
cut its base interest rate on seven occasions during
2008, finishing the year at 0.5 per cent compared
with 5.75 per cent at the end of 2007. The Hang
Seng Index fell by 48 per cent during 2008.
Review of business performance
Hong Kong reported pre-tax profits of
US$5.5 billion, a 26 per cent decline compared with
record profits of US$7.3 billion in 2007. Lower
revenues largely reflected a decline in wealth
management and insurance income as economic
conditions deteriorated. Revenue decline was
compounded by impairment charges recognised on
certain investments, which arose as a consequence of
significant falls in equity market prices. Offsetting
this, in part, was considerably stronger Balance
Sheet Management income from treasury positions
which correctly anticipated the decline in interest
rates.
Net interest income rose by 4 per cent, driven by
the strong Balance Sheet Management performance
in Global Banking and Markets mainly driven by
liquidity generated by retail banking in the
environment of falling short-term interest rates.
Savings and deposit balances grew strongly,
particularly in Personal Financial Services, as
customers revealed a preference for security and
liquidity following declines in equity markets.
Deposit growth was augmented by the launch of
campaigns offering both preferential time deposit
rates and an enhanced HSBC online platform. The
significant decline in interest rates during 2008 led to
a narrowing of deposit spreads.
Customer lending volumes were 11 per cent
higher, due in part to an 11 per cent rise in mortgage
balances. Lending margins narrowed, however, due
to interest rate cuts, particularly affecting mortgage
lending and other loans linked to HIBOR. Balances
outstanding on credit cards rose, driven by increased
cardholder spending, and spreads on this business
increased due to lower funding costs. Nearly one
million new cards were issued in the year, bringing
the total cards in circulation to 5.3 million. Volumes
of trade finance grew strongly, driven by demand
from corporates with international trade
requirements, and commercial lending balances rose,
particularly during the first half of the year.
Fee income declined by 23 per cent, driven by
lower equity market-related revenues. Weak market
sentiment led to lower volumes of retail brokerage
and a decrease in income from wealth management
activity. This was partly offset by a rise in fees from
cards following increases in both cards in circulation
and cardholder spending. Fees from account services
rose due to greater customer activity and there were
higher fees generated from bundled products.
Trading income was 4 per cent lower, driven by
further write-downs of US$0.2 billion in Global
Banking and Markets on a legacy monoline
exposure. Excluding these write-downs, trading
income grew due to a rise in foreign exchange and
rates income as continuing market volatility
generated increased trading opportunities and
demand for active hedging products.
The net loss of US$1.2 billion on financial
instruments designated at fair value compared with
income of US$676 million in 2007. The loss
reflected a decline in the value of assets linked to the
insurance business. To a large extent, these losses
are attributable to policyholders, with an equivalent
reduction in net insurance claims and movement in
liabilities to policyholders. While the decline in the
value of assets which relate to unit-linked products is