HSBC 2010 Annual Report Download - page 55

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Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Net trading income decreased by 47% to
US$2.9bn. Less favourable market conditions caused
by the impact of the European sovereign debt crisis
adversely affected Credit and Rates income. Spread
compression from increased competition similarly
affected foreign exchange revenues. In addition, net
interest income earned on trading activities
decreased, driven by reduced holdings of debt
securities. These decreases were offset in part by
lower net adverse fair value movements
on structured liabilities.
Net trading income also included adverse fair
value movements of US$304m on non-qualifying
hedges used to economically hedge fixed-rate
long-term debt issued by HSBC Holdings. These
movements were driven by the decline in long-term
US dollar interest rates relative to sterling and euro
rates in 2010, and compared with favourable fair
value movements of US$748m on these instruments
in 2009.
Within our legacy Credit book, a net release of
previous write-downs on ABSs and monoline
exposures as asset prices improved was more than
offset by the non-recurrence of gains in other parts
of the business.
Net income from financial instruments
designated at fair value fell by US$808m. The
growth in equity markets in 2010 was lower than in
2009, resulting in lower investment gains recognised
on the fair value of assets held to meet liabilities
under insurance and investment contracts. To the
extent that these gains accrued to policyholders
holding unit-linked insurance policies and insurance
or investment contracts with DPF, there was
a corresponding decrease in ‘Net insurance
claims incurred and movement in liabilities to
policyholders’. In addition, adverse foreign
exchange movements were reported in the year on
foreign currency debt designated at fair value, issued
as part of our overall funding strategy with an offset
from trading assets held as economic hedges
reported in ‘Net trading income’.
Gains less losses from financial investments
increased by US$455m as improved market
conditions led to gains on sale of private equity
investments and lower impairment charges on
certain available-for-sale investments.
Net earned insurance premiums were in line
with 2009. The decision in 2009 to place our UK
motor insurance business into run-off resulted in no
new premiums being written in 2010. In addition, a
decision was taken during 2010 not to renew certain
contracts in the Irish business. By contrast, we
generated strong sales activity in the UK life and
French insurance businesses.
Other operating income decreased by US$193m
because the gain on the sale and leaseback of our
Paris headquarters building in 2010 was exceeded by
the gain on the sale and leaseback of the Group’s
London headquarters building in 2009.
Net insurance claims incurred and movement in
liabilities to policyholders decreased by 11%. This
was driven by lower investment gains compared
with 2009 and by the non-recurrence of the
strengthening of reserves in 2009 on the now-closed
UK motor insurance book which reflected the rising
incidence and severity of claims at that time. The
decision not to renew certain contracts in the Irish
business resulted in a further decrease in claims.
Loan impairment charges and other credit risk
provisions decreased by 45% to US$3.0bn, reflecting
the more stable credit environment and helped by
mitigating actions taken by management. In GB&M,
the improved credit outlook, loan restructuring
activity, a release of previous collective impairments
and lower specific impairment charges in 2010
contributed to a decline in loan impairment charges
and other credit risk provisions. Credit risk
provisions on certain available-for-sale ABSs also
reduced due to a slowing in the rate of anticipated
losses in the underlying collateral pools.
In CMB, the reduction in loan impairment
charges and other credit risk provisions was largely
due to an improvement in the UK property, retail
and services sectors, with reductions also seen in our
Continental European businesses. The improvement
in economic conditions across the region and the
effect of low interest rates also resulted in lower
delinquencies in the PFS portfolios.
Operating expenses in 2010 included one-off
payroll and bonus taxes in the UK and France on
certain bonuses paid in respect of 2009 totalling
US$324m, primarily in GB&M. Operating expenses
in 2009 included an accounting gain of US$480m
(US$499m as reported) related to a change in the
delivery of certain staff benefits in the main UK
pension scheme. Excluding these items, operating
expenses were 8% higher than in 2009. This was
driven by continued strategic investments in people
and infrastructure to support our customers, drive
future growth and deliver sustainable long-term
reductions in our cost base by re-engineering
business processes. In addition, rental expenses
increased following the sale and leaseback of our
headquarters buildings in London and Paris.