HSBC Holdings Regulatory News (HSBA)

5 Mar 2007 08:24

HSBC Holdings PLC05 March 2007 Financial Review Net interest income 2006 2005Figures in HK$m (restated) Net interest income/(expense) arising from:- financial assets and liabilities that are not at fair value through profit and loss 13,689 11,068- trading assets and liabilities (2,039) (306)- financial instruments designated at fair value 44 34 11,694 10,796 Average interest-earning assets 578,588 522,922 Net interest spread 1.66% 1.85%Net interest margin 2.02% 2.06% With effect from 2006 (and as restated for 2005), interest income and interestexpense for all interest-bearing financial instruments are reported in 'Interestincome' and 'Interest expense' respectively in the income statement. The changefrom the HSBC Group presentation described in page 22 has been made principallyto match the interest expense arising from trading liabilities with the interestincome from non-trading assets. This facilitates the comparison of Hang Seng'snet interest income and net interest margin with peer banks in Hong Kong. Theimpact of the change in accounting presentation is set out in note 1 under'Additional information' on page 56. Net interest income rose by HK$898 million, or 8.3 per cent, to HK$11,694million with a 10.6 per cent increase in average interest-earning assets. Average customer advances rose 4.5 per cent, driven by encouraging growth inhigher yielding card advances, personal loans, trade finance and mainland loans.BLR-based lending - mainly residential mortgages and certain trade finance,overdraft and SME loans - benefited from a wider BLR/HIBOR gap. The pricing ofresidential mortgages and corporate lending, however, was still under pressuredue to intense market competition. Overall, the total loan portfolio contributedHK$419 million to the growth in net interest income. Benefiting from the rise in both interest rate and funds balance, net free fundsadded HK$867 million to net interest income. Of this, HK$302 million wasattributable to non-interest-bearing HK dollar current accounts. Netshareholders' funds increased due to the growth in retained profits and theproceeds from the disposal of properties, contributing HK$565 million. The debt securities portfolio of life insurance fund investments grew by 50.9per cent, adding HK$264 million to net interest income. Average customer deposits rose by 11.3 per cent, mainly reflecting increases intime and structured deposits. However, the favourable impact of the growth indeposits was more than offset by the narrower deposit spread on HK dollarsavings and the change in average deposit mix from savings and current accountdeposits to time and structured deposits. Net interest income from depositproducts fell by HK$138 million. For structured deposits, the bank earns aspread on the derivatives embedded in the structured deposits, which wasreported as trading income. Thus, there was no deposit spread on structureddeposits reported under net interest income. Yields in treasury balance sheet management portfolios were further compressedby the rise in funding costs and flattened yield curves, and this resulted in afall of HK$514 million in net interest income. Net interest margin fell by four basis points to 2.02 per cent. Net interest spreadfell 19 basis points to 1.66 per cent, mainly due to the treasury balance sheetmanagement portfolios and deposit spreads on HK dollar savings and structureddeposits as mentioned above, outweighing the impact of loan growth and marginenhancement. The fall in net spread was largely offset by the contribution fromnet free funds which rose 15 basis points to 0.36 per cent. The HSBC Group reports interest income and interest expense arising fromfinancial assets and financial liabilities held for trading as 'Net tradingincome' and arising from financial instruments designated at fair value throughprofit and loss as 'Net income from financial instruments designated at fairvalue' (other than for debt securities in issue and subordinated liabilities,together with derivatives managed in conjunction with them). The table below presents the net interest income of Hang Seng, as includedwithin the HSBC Group accounts: Figures in HK$m 2006 2005 Net interest income 13,639 11,046Average interest-earning assets 564,027 505,221 Net interest spread 1.83% 1.94%Net interest margin 2.42% 2.19% Net fee income 2006 2005Figures in HK$m (restated) - Stockbroking and related services 805 493- Retail investment products and funds under management 891 916- Insurance 108 116- Account services 274 225- Private banking 336 174- Remittances 161 141- Cards 860 705- Credit facilities 111 117- Trade services 380 375- Other 148 132Fee income 4,074 3,394Fee expense (577) (438) 3,497 2,956 Net fee income rose by HK$541 million, or 18.3 per cent, compared with 2005.Stockbroking and related services rose 63.3 per cent, driven by an 86.6 per centgrowth in turnover with a 20.1 per cent growth in customer base. Benefiting fromthe favourable investment environment, income from private banking investmentservices rose 93.1 per cent. Card services income rose by 22.0 per cent,supported by a rise of 10.5 per cent in the number of cards in issue and an 11.7per cent increase in cardholder spending. Deposit services and payment and cashmanagement business also showed good progress, reporting growth in accountservices fees and remittances of 21.8 per cent and 14.2 per cent respectively. Trading income 2006 2005Figures in HK$m (restated) Trading income:- foreign exchange 1,178 785- securities, derivatives and other trading activities 152 100 1,330 885 Trading income reached HK$1,330 million, a rise of HK$445 million, or 50.3 percent, over 2005. Foreign exchange income increased by HK$393 million, or 50.1per cent, attributable to active position taking and increased customeractivity. The increase in spreads earned on foreign exchange option-linkedproducts offered to retail and corporate customers also contributed to foreignexchange income growth. Securities, derivatives and other trading rose by HK$52million, attributable to the improvement in trading results and the growth intrading volume and profit earned on equity-linked products provided tocustomers. With effect from 2006 reporting, interest income and expense from trading assetsand liabilities are reported under 'Net interest income'. Details of the changein accounting presentation are set out in note 1 under 'Additional information'on page 56. Net income/(expense) from financial instruments designated at fair value 2006 2005Figures in HK$m (restated) Net income/(expense) on assets designated at fair value which back insurance and investment contracts 910 (25) Net change in fair value of other financial instruments designated at fair value (11) (7) 899 (32) Financial instruments designated at fair value reported a net income of HK$899million, compared with a net expense of HK$32 million last year, reflecting theoutstanding investment performance of the life insurance fund portfolios. With effect from 2006 reporting, interest income and expense from financialinstruments designated at fair value are reported under 'Net interest income'.Details of the change in accounting presentation are set out in note 1 under'Additional information' on page 56. Other operating income Figures in HK$m 2006 2005 Rental income from investment properties 186 207Movement in present value of in-force long-term insurance business 363 316Other 296 275 845 798 Analysis of income from wealth management business Figures in HK$m 2006 2005Investment income:- retail investment products and funds under management 891 916- structured investment products in issue 419 283- private banking^ 345 188- stockbroking and related services 805 493- margin trading 59 63 2,519 1,943Insurance income:- life insurance 1,476 1,256- general insurance and others 286 289 1,762 1,545Total 4,281 3,488 ^ Income from private banking includes income reported under net fee income onthe investment services and profit generated from selling of structuredinvestment products in issue, reported under trading income. Wealth management income gained strong growth momentum in 2006, reporting a riseof 22.7 per cent over 2005. Investment services income rose by 29.6 per cent, benefiting from the buoyantstock market and positive investment sentiment. Our efficient and conveniente-banking and phone trading channels played key roles in the expansion of oursecurities broking business, which grew its customer base and market share. Withthe success of campaigns to acquire new accounts and promote active trading aswell as offers such as special packages for IPO subscriptions, stockbrokingturnover rose 86.6 per cent and income increased by 63.3 per cent. Privatebanking continued to expand its customer base and product range. Assets undermanagement rose 39.6 per cent and private banking income grew 83.5 per cent.Retail investment fund sales grew by 40.6 per cent over 2005, supported by a broad range of fund offerings from high-growth China and emerging market equityfunds to capital-guaranteed and fixed-income funds. Equity, foreign exchange and other market-linked investment and deposit products also reached record highs in terms of issue volume and income earned, which were up by 68.6 per cent and 48.1 per cent respectively. Life insurance recorded satisfactory income growth of 17.5 per cent to reachHK$1,476 million (as analysed in the table below). During the year, we continuedto launch new products catering for customers' investment and protection needs.The Monthly Income Retirement Plan was successful in capturing a section of thelucrative retirement plan market and the MediCash Lifetime Insurance Plan, whichtargets mid-market pre-retirees, was also well received. Figures in HK$m 2006 2005 Net interest income and fee income 665 411Investment return on life insurance funds 910 (25)Net earned insurance premiums 7,534 7,483Net insurance claims incurred and movement in policyholders' liabilities (7,996) (6,929)Movement in present value of in-force long-term insurance business 363 316 1,476 1,256 Income from general insurance and others maintained at the same level as theprevious year. Loan impairment charges and other credit risk provisions Figures in HK$m 2006 2005 Loan impairment (charges)/releases:- individually assessed (107) (309)- collectively assessed (145) (309) (252) (618)of which:- new and additional (423) (1,070)- releases 106 351- recoveries 65 101 (252) (618) Other provision (12) _ Loan impairment charges and other credit risk provisions (264) (618) Loan impairment charges and other credit risk provisions decreased by HK$354million, or 57.3 per cent, to HK$264 million, reflecting the benign creditenvironment. There was a decrease of HK$202 million in individually assessedprovisions, mainly due to a substantial reduction in new and additional chargesfor commercial banking customers. Releases from commercial banking accountsincreased but those from mortgages and personal lending were substantiallylower. Of the collectively assessed charges, HK$139 million was made on card andpersonal loan portfolios, a rise of 13.9 per cent over last year. A charge ofHK$6 million was made on advances not identified individually as impaired,compared with a charge of HK$187 million made in 2005. The reduction inhistorical loss rates used at the end of 2006 for calculation of this type ofcollectively assessed impairment provisions reflects the continued improvementin credit conditions in recent years. Operating expenses Figures in HK$m 2006 2005Employee compensation and benefits:- salaries and other costs 2,470 2,074- retirement benefit costs 124 137- share-based payments 100 70 2,694 2,281General and administrative expenses:- rental expenses 267 207- other premises and equipment 829 751- other operating expenses 1,118 1,018 2,214 1,976Depreciation of business premises and equipment 323 280Amortisation of intangible assets 10 9 5,241 4,546 Cost efficiency ratio 29.0% 28.0% Staff numbers^ by region 2006 2005 Hong Kong 7,748 7,425Mainland 661 377Others 55 43Total 8,464 7,845 ^ Full-time equivalent Operating expenses rose by HK$695 million, or 15.3 per cent, compared with 2005.Employee compensation and benefits increased by 18.1 per cent, due to the annualsalary increment, the increase in number of staff, and performance-basedincentives and bonuses. General and administrative expenses were up 12.0 percent. Rental expenses increased due to increases in rents for branches in HongKong and new branches on the Mainland. Other premises and equipment expensesincreased by 10.4 per cent, attributable to IT systems development andenhancement for business expansion and regulatory related projects. The rise inmarketing expenditure was attributable mainly to the launch of the bank's newbrand image and increased promotion of investment and insurance products andcredit cards. Depreciation charges rose by 15.4 per cent as a result of theincrease in fair value of business premises. The bank's mainland operations,which expanded its network from 12 to 15 outlets and increased its staff forcefrom 377 to 661 during 2006, also accounted for the bank's increase in operatingexpenses. The number of full-time equivalent staff increased by 619 compared with theprevious year-end. New staff in Hong Kong were hired to further expand privatebanking's financial advisory team and CMB's relationship management andcorporate wealth management teams, as well as to support IT systems developmentand enhancement. The number of staff at mainland branches rose by 75.3 per cent,mainly to support the network expansion, building up sales and marketing forcefor personal banking business, and strengthening of the corporate and commercialrelationship management and trade services teams. The cost efficiency ratio for 2006 was 29.0 per cent, compared with 28.0 percent in 2005. Profit on disposal of fixed assets and financial investments Figures in HK$m 2006 2005 Profit on disposal of available-for-sale securities:- realisation of amounts previously recognised in reserves at 1 January 137 611- net gains/(losses) arising in the year 201 (153) 338 458 Profit less loss on disposal of fixed assets 505 19 843 477 Profit on disposal of fixed assets and financial investments amounted to HK$843million, an increase of 76.7 per cent over last year. Profit on disposal offixed assets, mainly properties, rose by HK$486 million to HK$505 million.During the year, the group sold properties for a total value of HK$3.1 billion,including the property at 77 Des Voeux Road Central, to rationalise the bank'sproperty portfolio and enhance shareholders' return. Profit on the disposal ofequity investments fell to HK$338 million. Tax expense Taxation in the consolidated income statement represents: Figures in HK$m 2006 2005 Current tax - provision for Hong Kong profits taxTax for the year 2,188 1,501 Current tax - taxation outside Hong KongTax for the year 36 12 Deferred taxOrigination and reversal of temporary differences (175) 282 Total tax expense 2,049 1,795 The current tax provision is based on the estimated assessable profit for 2006,and is determined for the bank and its subsidiaries operating in Hong Kong byusing the Hong Kong profits tax rate of 17.5 per cent (the same rate as in2005). For subsidiaries and branches operating in other jurisdictions, theappropriate tax rates prevailing in the relevant countries are used. Deferred tax is calculated at the tax rates that are expected to apply in theyear when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsorecorded in equity. The carrying amount of deferred tax assets/liabilitiesis reviewed at each balance sheet date and is reduced to the extent that it isno longer probable that sufficient taxable profit will be available to allow therelated tax benefit to be utilised. Earnings per share The calculation of earnings per share in 2006 is based on earnings of HK$12,038million (HK$11,342 million in 2005) and on the weighted average number ofordinary shares in issue of 1,911,842,736 shares (unchanged from 2005). Dividends per share 2006 2005 HK$ HK$m HK$ HK$m per share per share First interim 1.10 2,103 1.10 2,103Second interim 1.10 2,103 1.10 2,103Third interim 1.10 2,103 1.10 2,103Fourth interim 1.90 3,633 1.90 3,633 5.20 9,942 5.20 9,942 Segmental analysis Segmental information is presented in respect of business and geographicalsegments. Business by customer group information, which is more relevant to thegroup in making operating and financial decisions, is chosen as the primaryreporting format. For the purpose of segmental analysis, the allocation of revenue reflects thebenefits of capital and other funding resources allocated to the customer groupsor geographical segments by way of internal capital allocation and fundstransfer pricing mechanisms. Cost allocation is based on the direct costsincurred by the respective customer groups and apportionment of managementoverheads. Rental charges at market rate for usage of premises are reflected asinter-segment income for the 'Other' customer group and inter-segment expensesfor the respective customer groups. (a) By customer group The group's business comprises five customer groups. Personal Financial Servicesprovides banking (including deposits, credit cards, mortgages and other retaillending) and wealth management services (including private banking, investmentand insurance) to personal customers. Commercial Banking manages middle marketand smaller corporate relationships and specialises in trade-related financialservices. Corporate Banking handles relationships with large corporate andinstitutional customers. Treasury engages in balance sheet management andproprietary trading. Treasury also manages the funding and liquidity positionsof the group and other market risk positions arising from banking activities.'Other' mainly represents management of shareholders' funds and investments inpremises, investment properties and equity shares. Profit before tax contributed by the customer groups in 2006 compared with 2005is set out in the table below. More customer group analysis and discussions areset out in the 'Customer group performance' section on page 8. Personal Financial Commercial CorporateFigures in HK$m Services Banking Banking Treasury Other Total Year ended 31Dec06 Profit before tax 7,730 2,262 557 1,051 2,795 14,395Share of profit before tax^ 52.9% 16.4% 3.8% 7.6% 19.3% 100.0% Year ended 31Dec05 Profit before tax 7,686 1,078 507 1,072 3,015 13,358Share of profit before tax^ 56.8% 8.8% 3.7% 8.3% 22.4% 100.0% ^ Share of profits from associates is adjusted to pre-tax basis for the purposeof calculating the Customer Groups' share of profit before tax. (b) By geographical region The geographical regions in this analysis are classified by the location of theprincipal operations of the subsidiary companies or, in the case of the bankitself, by the location of the branches responsible for reporting the results oradvancing the funds. Figures in HK$m Hong Kong Americas Mainland and Total other Year ended 31Dec06 Income and expenseTotal operating income 24,449 1,295 414 26,158Profit before tax 12,380 1,262 753 14,395Capital expenditure incurred during the year 335 _ 44 379 At 31Dec06Total assets 573,067 65,997 30,000 669,064Total liabilities 603,636 4,180 12,550 620,366Contingent liabilities and commitments 165,541 _ 8,701 174,242 Year ended 31Dec05 Income and expenseTotal operating income 21,377 1,644 225 23,246Profit before tax 11,253 1,614 491 13,358Capital expenditure incurred during the year 206 _ 25 231 At 31Dec05Total assets 497,406 60,845 22,569 580,820Total liabilities 520,260 9,395 7,435 537,090Contingent liabilities and commitments 137,536 _ 3,973 141,509 This information is provided by RNS The company news service from the London Stock Exchange