HSBC Holdings Regulatory News (HSBA)

5 Mar 2007 08:21

HSBC Holdings PLC05 March 2007 Additional Information 1. Net interest income Year ended Year endedFigures in HK$m 31Dec06 31Dec05 Net interest income 51,099 43,491Average interest-earning assets 2,212,521 2,031,314Net interest spread 1.92% 1.89%Net interest margin 2.31% 2.14% Net interest income of HK$51,099 million was HK$7,608 million, or 17.5 per cent,higher than in 2005. The contribution from balance sheet growth and improveddeposit spreads throughout the region was partially offset by significantlylower balance sheet management income. Net interest income in Personal Financial Services rose by HK$3,289 million, or12.3 per cent, partly due to improved liability spreads earned in the higherinterest rate environment, coupled with strong growth in the deposit base.Lending growth also contributed to the increase in interest income, particularlypersonal loans in India and Korea, credit cards in the Philippines, India andIndonesia, and mortgages in Singapore, Taiwan and at Hang Seng Bank. Inaddition, strong returns were also generated on investments held by the group'sinsurance companies, benefiting from higher yields and growth in portfolio size.Net interest income in Commercial Banking was HK$2,917 million, or 26.3 percent, ahead of the prior period due to balance sheet growth, notably in HongKong, India, Singapore and mainland China, and improved deposit spreads. InCorporate, Investment Banking and Markets, net interest income from GlobalTransaction Banking increased significantly, due to higher deposit balances andspreads, notably in Hong Kong and India. Global Markets saw a decline in balancesheet management revenues, which were impacted by higher funding costs and flatyield curves. Average interest-earning assets rose by HK$181.2 billion, or 8.9 per cent, toHK$2,212.5 billion. Average advances to customers grew by HK$82.4 billion, or8.5 per cent, with strong increases in corporate loans in Hong Kong, India,mainland China and Australia, and rises in mortgage lending in Hong Kong,Singapore, Korea, Taiwan and India. Average credit card balances rose in allareas, notably Hong Kong, the Philippines, Indonesia and India, and personalinstalment loans grew, most significantly in Korea. Average placements withbanks were HK$56.2 billion higher, and holdings of financial investments rose byHK$43.4 billion, reflecting the deployment of the commercial surplus. The group's net interest margin of 2.31 per cent for 2006 was 17 basis pointshigher than in 2005. The reduction in balance sheet management income negativelyaffected margin by 11 basis points when compared to 2005. However, net interestspread improved by three basis points overall, attributable to tactical depositpricing. The contribution from net free funds increased by 14 basis pointsreflecting higher interest rates and an increase in free funds from retainedearnings and trading book structured deposits, although other net tradingliabilities decreased. For the bank in Hong Kong, net interest margin increased by nine basis points to2.26 per cent for 2006. Spread rose by three basis points, benefiting fromhigher interest rates. Spreads on Hong Kong dollar and foreign currency currentand savings accounts improved as the value of funds rose, whilst increases ininterest rates paid to customers were contained. This was partly offset by thenegative impact of lower balance sheet management income as fixed rate assetpositions faced an increase in funding costs. Spreads on mortgages and creditcards were also affected by a higher cost of funds, and competitive pressures onpricing affected corporate lending margins. The contribution from net free fundsincreased by six basis points due to the increase in market interest rates. At Hang Seng Bank, net interest margin improved by 23 basis points as theincrease in contribution from net free funds outweighed the fall in spread. Netinterest spread declined by 11 basis points as returns on treasury balance sheetmanagement portfolios were affected by rising funding costs and flat yieldcurves, and spreads narrowed on mortgages and corporate loans due to competitivepressures on pricing. These outweighed the favourable impact of the growth inadvances and a wider spread between the bank's best lending rate ('BLR') andHIBOR. The contribution from net free funds increased by 34 basis points,benefiting from the rise in market interest rates and from higher balances ofstructured deposits which are classified as trading liabilities, the relatedinterest expense being included within 'Net trading income'. In the rest of Asia-Pacific, net interest margin at 2.16 per cent was 16 basispoints higher than in 2005. Spread increased by nine basis points to 1.94 percent. All major sites faced an increase in funding costs due to higher interestrates across the region, but spreads rose in several countries, notably in Indiadue to an increase in higher-yielding personal loans and credit cards and a risein low cost current account balances from custody and clearing customers.Margins also rose in mainland China from higher spreads on corporate lending asdeposit rate rises lagged lending rate increases, in Singapore due to rises inmortgage lending rates, and in Australia from higher yields on corporate bonds.These increases were partially offset by lower spreads on credit card advancesin Taiwan and competitive pressures on mortgage lending rates in Korea. Thecontribution from net free funds rose by seven basis points, benefiting fromhigher market interest rates. 2. Net fee income Figures in HK$m 2006 2005 Account services 1,501 1,314Credit facilities 1,245 1,159Import/export 2,956 2,777Remittances 1,437 1,248Securities/stockbroking 5,267 3,402Cards 4,335 4,231Insurance 315 280Unit trusts 2,326 1,627Funds under management 2,974 2,233Other 4,198 3,400 Fee income 26,554 21,671 Fee expense (4,150) (3,574) 22,404 18,097 Net fee income was HK$4,307 million, or 23.8 per cent, higher than in 2005.Securities broking and custody fees rose by 54.8 per cent, reflecting higherstock market turnover in Hong Kong and the region, with increases from bothpersonal and corporate customers. The buoyant equity markets also stimulatedcustomer demand for unit trusts and structured products. Funds under managementand related fees increased, in part due to institutional business transferredfrom another HSBC Group entity in the second quarter of 2005. Fee income alsoincludes significant fund advisory and performance fees, reflecting the successof certain emerging markets funds. Trade finance income and remittance and otheraccount fees grew, reflecting the group's strong transactional capabilities.Hong Kong Mandatory Provident Fund management fees increased by 34 per cent dueto new business and improved investment performance. Gross fee income fromcredit cards was impacted by a loss of revenues in Taiwan as credit cardactivity fell in the wake of the country's curbs on consumer credit growth, anddue to the transfer of the majority of the merchant acquiring business to ajoint venture company set up with Global Payments Inc. However, there was stronggrowth elsewhere in the region due to an increase in the number of cards incirculation and higher cardholder spending. 'Other' fees include an increase insales credits received from fellow HSBC group companies in respect of treasurybusiness. Fee expense rose due to increased brokerage fees paid by Global Markets onaccount of higher trading activity, and higher investment management advisoryfees paid to another HSBC Group company. 3. Net trading income Figures in HK$m 2006 2005 Dealing profits 10,001 8,560 Gain/(loss) from hedging activities 16 (1) Net interest expense (1,307) (1,484) Dividend income from trading securities 208 105 8,918 7,180 Trading income rose by 24.2 per cent to HK$8,918 million. Foreign exchangeprofits benefited from an increase in trading activity against a backdrop ofincreasing demand for local currency assets as foreign investors sought toparticipate in local stock markets, coupled with favourable positioning as theUS dollar weakened. Revenues grew strongly in the equities and equityderivatives business, reflecting business expansion and buoyant stock markets.Strong gains were also made on the revaluation of private equity investments.However, the contribution from structured derivatives trading declined, and therising interest rate environment negatively impacted corporate bond tradingrevenues. Net interest expense decreased due to higher interest income fromincreased holdings of trading assets, but was largely offset by a rise ininterest expense from the increase in structured deposit products issued toretail customers. 4. Gains less losses from financial investments Figures in HK$m 2006 2005 Profit on disposal of available-for-sale securities 1,466 762 Other - (6) 1,466 756 The profit on the disposal of available-for-sale securities largely comprisesthe gain on the disposal of part of the group's stake in UTI Bank, reducing thegroup's interest to 4.99 per cent. Profits were also made on the sale ofPhilippine government securities and other operational investments. 5. Other operating income Figures in HK$m 2006 2005 Rental income from investment properties 196 215Movement in present value of in-force insurance business 1,124 1,185Gains on investment properties 475 1,167Profit on disposal of property, plant and equipment, and assets held for sale 981 111Profit on disposal of subsidiaries, associates and business portfolios 904 53Surplus arising on property revaluation 70 370Other 1,903 1,796 5,653 4,897 Other operating income for 2006 included gains on the disposal of thestockbroking, margin lending and broker originated mortgage businesses inAustralia, a gain on the transfer of the credit card merchant acquiring businessto a joint venture company set up with Global Payments Inc., and profits on thesale of property in Hong Kong and Japan. Gains on investment properties comprise unrealised revaluation gains, togetherwith realised profits on disposals. Gains were lower than in 2005 as valuationswere affected by a slowdown in property price rises in Hong Kong. The surplus arising on property revaluation represents reversals of prior yearrevaluation deficits that had arisen when the value of certain premises fellbelow depreciated historical cost. This was lower than in 2005 as the number ofproperties with revaluation deficits decreased. 'Other' largely comprises recoveries from fellow HSBC group companies of IT andother operating costs incurred on their behalf. 6. Insurance income Included in the consolidated income statement are the following revenues earnedby the group's insurance businesses: Figures in HK$m 2006 2005 Net interest income 2,328 1,715Net fee income 636 484Net income from financial instruments designated at fair value 2,980 16Gains less losses from financial investments 29 53Dividend income 1 2Net earned insurance premiums 21,846 19,340Movement in present value of in-force business 1,124 1,185Other operating income 72 90 29,016 22,885Net insurance claims incurred and movement in policyholders' liabilities (22,480) (17,291) Net operating income 6,536 5,594 Premium income rose by HK$2,506 million, or 13.0 per cent, over 2005, primarilyattributable to growth in the life assurance business in Hong Kong. The productrange was expanded with the launch of new retirement and other investment-linkedproducts. Investment income was higher, reflecting the growing portfolio size,higher interest yields and improved equity returns. Fee income rose due to theincreased portfolio size and improved investment performance of the Hong KongMandatory Provident Fund business. The movement in the present value of in-forcebusiness fell, despite a rise in premium income, due to a change in product mixwhich comprised an increase in shorter-term policies. Claims and movement inpolicyholders' liabilities comprise returns owed to investment policyholders aswell as general insurance claims. The increase is largely in line with the risein premium income and investment income. 7. Loan impairment charges and other credit risk provisions Figures in HK$m 2006 2005 Net charge for impairment of customer advances - Individually assessed impairment allowances: New allowances 1,314 2,129 Releases (869) (1,755) Recoveries (212) (267) 233 107- Net charge for collectively assessed impairment allowances 4,468 1,961 4,701 2,068 Net charge/(release) of other credit risk provisions 108 (4) Net charge for loan impairment and other credit risk provisions 4,809 2,064 The net charge for loan impairment and other credit risk provisions was HK$2,745million higher than in 2005. The environment for corporate credit remainedstable in contrast to more difficult credit conditions for personal lending insome parts of the region. The charge for new individually assessed allowances was lower, attributable to adecrease in charges against corporate lending, as the prior period included asignificant one-time charge. Releases and recoveries were also lower, largelyrelating to corporates in Hong Kong and the region, and against mortgage lendingin Hong Kong. The net charge for collectively assessed allowances rose significantly, due tohigher charges against credit card lending, most notably in Taiwan andIndonesia. Delinquency rates and write-offs rose in Taiwan largely as a resultof government measures to curb excessive consumer credit growth. These includedincreasing the minimum monthly repayment amount, while at the same timeintroducing a debt renegotiation scheme which offers extended repayment periodsat substantially reduced rates. Indonesia was also affected by higher minimumrepayment rules, coupled with rises in inflation largely as a result of thereduction of government fuel price subsidies. Elsewhere, volume growth in creditcards and other personal lending, coupled with the non-recurrence of releases in2005, also contributed to the increase. Other credit risk provisions include an impairment charge against anavailable-for-sale equity investment in Taiwan. 8. Employee compensation and benefits Figures in HK$m 2006 2005 Wages, salaries and other costs 14,302 12,311Performance-related pay 5,501 4,117Social security costs 283 238Retirement benefit costs 956 1,070 21,042 17,736 Staff numbers by region^ At 31Dec06 At 31Dec05 Hong Kong 26,496 24,842Rest of Asia-Pacific 27,518 25,956Americas/Europe 17 18Total 54,031 50,816 ^ Full-time equivalent Staff costs increased by HK$3,306 million, or 18.6 per cent, compared with 2005.Salaries rose by 16.2 per cent, reflecting increased headcount and annual salaryincrements. Staff numbers rose in Hong Kong in support of the implementation ofthe five-day working week and extended weekend opening hours. In the rest ofAsia-Pacific region, headcount grew in support of new branch openings,establishment of the consumer finance business, and expansion of the sales forceand call centres. Ownership of the group service centre in Guangdong wastransferred to another HSBC Group entity with a resultant decrease in headcountof around 3,500 in the rest of Asia-Pacific region. Performance-related pay inHong Kong and the rest of Asia-Pacific increased in line with improved operatingrevenues, higher dealing income and the increase in headcount. 9. General and administrative expenses Figures in HK$m 2006 2005 Premises and equipment- Rental expenses 1,557 1,243- Amortisation of prepaid operating lease payments 58 56- Other premises and equipment 2,463 2,089 4,078 3,388 Marketing and advertising expenses 3,587 2,840 Other administrative expenses 7,268 5,554 Litigation and other provisions 16 313 14,949 12,095 The increase in general and administrative expenses of HK$2,854 million, or 23.6per cent, reflected additional costs incurred in business expansion throughoutthe region. Premises costs rose due to new branch openings, expansion of officespace and rent increases. Advertising and marketing expenditure was higher,notably in Hong Kong, India, Korea and mainland China, and comprised specificproduct campaigns, particularly in Personal Financial Services, and other drivesto increase brand awareness. Technology costs also increased as the groupcontinued to invest in enhanced channel capabilities and improved portfoliomanagement systems. 10. Share of profit in associates and joint venture Share of profit in associates and joint venture principally included the group'sshare of post-tax profits from Bank of Communications and Industrial Bank, andamortisation of intangible assets arising on acquisition. 11. Tax expense The tax expense in the consolidated income statement comprises: Figures in HK$m 2006 2005 Current income tax- Hong Kong profits tax 5,506 4,974- Overseas taxation 3,955 2,598Deferred taxation (50) 479 9,411 8,051 The effective rate of tax for 2006 was 18.1 per cent compared with 17.8 per centin 2005. The increase was attributable to a higher proportion of the group'staxable profits being generated in higher tax rate jurisdictions, particularlyIndia, Japan and Australia. 12. Dividends 2006 2005 HK$ HK$m HK$ HK$m per share per share Dividends paid on ordinary share capital- in respect of the previous financial year, approved and paid during the year 0.50 4,500 0.53 4,800- in respect of the current financial year 1.58 14,257 1.76 15,800 2.08 18,757 2.29 20,600 The Directors have declared a fourth interim dividend in respect of thefinancial year ending 31 December 2006 of HK$6,500 million (HK$0.72 per ordinaryshare). 13. Advances to customers Figures in HK$m At 31Dec06 At 31Dec05 Gross advances to customers 1,050,625 1,005,902 Impairment allowances- Individually assessed (2,118) (2,976)- Collectively assessed (4,725) (3,600) (6,843) (6,576) 1,043,782 999,326 Allowances as a percentage of gross advances to customers:Individually assessed 0.20% 0.29%Collectively assessed 0.45% 0.36%Total allowances 0.65% 0.65% 14. Impairment allowances against advances to customers Individually Collectively assessed assessedFigures in HK$m allowances allowances Total At 1Jan06 2,976 3,600 6,576Amounts written off (1,196) (3,830) (5,026)Recoveries of advances written off in previous years 212 498 710Net charge to income statement (Note 7) 233 4,468 4,701Unwinding of discount of loan impairment (85) (111) (196)Exchange and other adjustments (22) 100 78 At 31Dec06 2,118 4,725 6,843 15. Impaired advances to customers and allowances The geographical information shown below, and in notes 16, 17, 18 and 20, hasbeen classified by location of the principal operations of the subsidiarycompany or, in the case of the bank, by location of the branch responsible foradvancing the funds. Rest of Americas/Figures in HK$m Hong Kong Asia-Pacific Europe Total Year ended 31Dec06 Impairment allowance charge 1,228 3,473 - 4,701 At 31Dec06 Advances to customers which are considered to be impaired are as follows: Gross impaired advances 3,530 5,071 - 8,601 Individually assessed allowances (1,016) (1,102) - (2,118) 2,514 3,969 - 6,483 Individually assessed allowances as a percentage of gross impaired advances 28.8% 21.7% - 24.6% Gross impaired advances as a percentage of gross advances to customers 0.6% 1.2% - 0.8% Year ended 31Dec05 Impairment allowance charge/(release) 1,156 924 (12) 2,068 At 31Dec05 Advances to customers which are considered to be impaired are as follows: Gross impaired advances 3,920 3,079 - 6,999 Individually assessed allowances (1,345) (1,631) - (2,976) 2,575 1,448 - 4,023 Individually assessed allowances as a percentage of gross impaired advances 34.3% 53.0% - 42.5% Gross impaired advances as a percentage of gross advances to customers 0.6% 0.8% - 0.7% Impaired advances to customers are those advances where objective evidenceexists that full repayment of principal or interest is considered unlikely. The individually assessed allowances are made after taking into account thevalue of collateral in respect of such advances. 16. Overdue advances to customers Rest ofFigures in HK$m Hong Kong Asia-Pacific Total At 31Dec06 Gross advances to customers which have been overdue with respect to either principal or interest for periods of: - three to six months 938 1,287 2,225 - six months to one year 384 595 979 - over one year 1,238 859 2,097 2,560 2,741 5,301 Overdue advances to customers as a percentage of gross advances to customers: - three to six months 0.1% 0.3% 0.2% - six months to one year 0.1% 0.1% 0.1% - over one year 0.2% 0.2% 0.2% 0.4% 0.6% 0.5% At 31Dec05 Gross advances to customers which have been overdue with respect to either principal or interest for periods of: - three to six months 1,073 891 1,964 - six months to one year 272 430 702 - over one year 1,053 1,071 2,124 2,398 2,392 4,790 Overdue advances to customers as a percentage of gross advances to customers: - three to six months 0.2% 0.2% 0.2% - six months to one year - 0.1% 0.1% - over one year 0.2% 0.3% 0.2% 0.4% 0.6% 0.5% 17. Rescheduled advances to customers Rest ofFigures in HK$m Hong Kong Asia-Pacific Total At 31Dec06 Rescheduled advances to customers 1,730 2,307 4,037 Rescheduled advances to customers as a percentage of gross advances to customers 0.3% 0.6% 0.4% At 31Dec05 Rescheduled advances to customers 1,941 623 2,564 Rescheduled advances to customers as a percentage of gross advances to customers 0.3% 0.2% 0.3% Rescheduled advances to customers are those advances which have beenrestructured or renegotiated because of a deterioration in the financialposition of the borrower or because of the inability of the borrower to meet theoriginal repayment schedule. Rescheduled advances to customers are stated net of any advances which havesubsequently become overdue for more than three months and which are included in'Overdue advances to customers' (Note 16). The increase in rescheduled advances since the end of 2005 was largelyattributable to the credit card and personal loan balances under thegovernment's debt negotiation scheme in Taiwan. 18. Analysis of advances to customers based on categories used by the HSBC Group The following analysis of advances to customers is based on categories used bythe HSBC Group, including The Hongkong and Shanghai Banking Corporation Limitedand its subsidiary companies, to manage associated risks. Rest of Americas/Figures in HK$m Hong Kong Asia-Pacific Europe Total At 31Dec06 Residential mortgages 191,522 112,900 5 304,427 Hong Kong SAR Government's Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme mortgages 31,708 - - 31,708 Credit card advances 31,315 19,999 - 51,314 Other personal 30,778 35,908 1 66,687Total personal 285,323 168,807 6 454,136 Commercial, industrial and international trade 130,994 133,560 - 264,554 Commercial real estate 94,706 36,052 - 130,758 Other property-related lending 53,832 15,627 - 69,459 Government 4,283 6,727 - 11,010 Other commercial 43,186 38,781 - 81,967Total corporate and commercial 327,001 230,747 - 557,748 Non-bank financial institutions 18,138 16,471 - 34,609 Settlement accounts 3,774 358 - 4,132Total financial 21,912 16,829 - 38,741 Gross advances to customers 634,236 416,383 6 1,050,625 Impairment allowances (2,838) (4,005) - (6,843) Net advances to customers 631,398 412,378 6 1,043,782 At 31Dec05 Residential mortgages 182,257 117,211 4 299,472 Hong Kong SAR Government's Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme mortgages 36,291 - - 36,291 Credit card advances 29,882 16,539 - 46,421 Other personal 27,480 31,316 1 58,797Total personal 275,910 165,066 5 440,981 Commercial, industrial and international trade 129,774 110,668 - 240,442 Commercial real estate 97,364 32,615 - 129,979 Other property-related lending 47,661 17,340 - 65,001 Government 2,347 5,891 - 8,238 Other commercial 53,681 37,851 - 91,532Total corporate and commercial 330,827 204,365 - 535,192 Non-bank financial institutions 15,246 11,987 - 27,233 Settlement accounts 2,173 323 - 2,496Total financial 17,419 12,310 - 29,729 Gross advances to customers 624,156 381,741 5 1,005,902 Impairment allowances (3,092) (3,484) - (6,576) Net advances to customers 621,064 378,257 5 999,326 Net advances to customers increased by HK$44.5 billion, or 4.4 per cent, sincethe end of 2005. Net advances in Hong Kong rose by HK$10.3 billion, or 1.7 per cent. Mortgagelending increased by 5.1 per cent due to successful campaigns by the bank inHong Kong and Hang Seng Bank. This excludes the impact of the fall in lendingunder the Government Home Ownership Scheme which remained suspended throughout2006. Credit card and other personal lending rose following extensive marketingactivity. Corporate and commercial loan balances decreased, primarily due to therepayment of advances by large corporate customers towards the year end,although advances to smaller businesses in the property and manufacturingsectors grew, boosted by increased demand from manufacturers with operations inmainland China, and trade finance balances increased at Hang Seng Bank. In the rest of Asia-Pacific, net advances increased by HK$34.1 billion, or 9.0per cent. The broker-originated mortgage portfolio in Australia was sold inDecember 2006 and part of the mortgage book in New Zealand was reclassified asheld for sale and included within 'Other assets'. Excluding these portfolios,gross advances grew by HK$51.1 billion, or 14.0 per cent, reflecting successfulbusiness expansion across the region. Mortgage lending increased by 12.0 percent, principally in Australia (non-broker business), India and Taiwan. Creditcard receivables grew by 20.9 per cent, largely in India, Australia, thePhilippines and Thailand, and the consumer finance business expanded followingits successful launch in India, Indonesia and Australia. Lending to commercialand corporate customers rose by 12.9 per cent, notably in mainland China, India,Mauritius and Australia, as the group focused on capturing cross-border businessand the provision of trade finance. 19. Analysis of advances to customers by geographic areas according to thelocation of counterparties, after risk transfer Rest of Americas/Figures in HK$m Hong Kong Asia-Pacific Europe Others Total At 31Dec06 Gross advances to customers 581,443 396,781 66,971 5,430 1,050,625Overdue advances to customers 2,320 2,668 309 4 5,301 At 31Dec05 Gross advances to customers 570,329 354,626 73,959 6,988 1,005,902Overdue advances to customers 2,337 2,222 223 8 4,790 This information is provided by RNS The company news service from the London Stock Exchange