HSBC Holdings Regulatory News (HSBA)

19 Feb 2007 09:00

HSBC Holdings PLC19 February 2007 HSBC BANK CANADA FOURTH QUARTER 2006 RESULTS^ - HIGHLIGHTS • Net income attributable to common shares was C$497 million for the year ended 31 December 2006, an increase of 8.8 per cent over the year ended 31 December 2005. • Net income attributable to common shares was C$128 million for the quarter ended 31 December 2006, a decrease of 3 per cent over the same period in 2005. • Return on average common equity was 21.1 per cent for the year ended 31 December 2006 and 20.6 per cent for the quarter ended 31 December 2006 compared with 21.3 per cent and 23.8 per cent, respectively, for the same periods in 2005. • The cost efficiency ratio was 51.3 per cent for the year ended 31 December 2006 and 51.4 per cent for the quarter ended 31 December 2006 compared with 52.2 per cent and 50.0 per cent, respectively, for the same periods in 2005. • Total assets were C$56.8 billion at 31 December 2006, an increase of C$7.6 billion, or 15.4 per cent, from C$49.2 billion at 31 December 2005. • Total funds under management were C$31.9 billion at 31 December 2006, an increase of C$3.9 billion, or 13.9 per cent, from C$28.0 billion at 31 December 2005. ^ Results are prepared in accordance with Canadian generally accepted accountingprinciples. Financial Commentary Overview HSBC Bank Canada recorded net income attributable to common shares of C$497million for the year ended 31 December 2006, an increase of C$40 million, or 8.8per cent, from C$457 million for 2005. Net income attributable to common sharesfor the quarter ended 31 December 2006 was C$128 million, a decrease of C$4million, or 3 per cent, compared with C$132 million for the same period in 2005.The fourth quarter of 2005 included a recovery of C$14 million in our generalallowance for credit losses and a one time reduction of C$14 million in depositguarantee fees following a transfer pricing settlement with the Canada RevenueAgency. Excluding the impact of these items and the related income tax effects,net income attributable to common shares for the fourth quarter of 2006 was 19.6per cent higher than the same quarter in 2005. Commenting on the results, Lindsay Gordon, President and Chief ExecutiveOfficer, said: "Results for the fourth quarter and for the year were good,reflecting strong growth in our commercial banking business and good momentum inour wealth management businesses. Net interest income was higher from strongloan growth, despite a competitive pricing environment. Non-interest revenueswere higher on increased investment administration fees, higher credit fees andhigher investment gains. Total non-interest expenses for the year increased aswe continued to invest in our businesses, while our efficiency ratio alsoimproved. "Our focus for 2007 will be to continue this momentum and build for sustainedgrowth by continuing to reinvest in key businesses and leveraging the Group'sglobal distribution network and systems platforms. Business transformationinitiatives will be undertaken to further improve efficiency, while continuingto deliver excellent service to our customers. We will also continue ourmarketing efforts to build on the significant progress made on the awareness ofthe HSBC brand within Canada." Net interest income Net interest income for the fourth quarter of 2006 was C$291 million, anincrease of C$22 million, or 8.2 per cent, from the same quarter in 2005, drivenprimarily by growth in the balance sheet across all our customers groups.Average interest earning assets were C$50.1 billion, compared with C$45.2billion for the fourth quarter of 2005. Net interest margin, as a percentage ofaverage interest earning assets decreased modestly to 2.30 per cent from 2.36per cent. Net interest income for the fourth quarter of 2006 was C$9 million higher thanthe previous quarter, primarily due to growth in deposits and loans. Averageinterest earning assets were C$1.7 billion higher than the previous quarter.Average deposits were C$2.3 billion higher than the previous quarter and averageloans were C$0.8 billion higher. Net interest income for the year ended 31 December 2006 was C$1,115 million, anincrease of C$105 million, or 10.4 per cent, from C$1,010 million for 2005driven by growth in the balance sheet, partially offset by lower net interestmargins due to the competitive pricing environment. Average interest earningassets were C$47.9 billion for 2006 compared with C$42.6 billion for2005. Although prime rates increased during the year, net interest margins as apercentage of average interest earning assets decreased from 2.37 per cent in2005 to 2.33 per cent in 2006. This was primarily as a result of competitivepricing, particularly in personal products such as residential mortgages anddeposits. Non-interest revenue Non-interest revenue for the fourth quarter of 2006 was C$168 million, C$27million or 19.2 per cent higher, compared with the fourth quarter of 2005.Growth in non-interest revenue benefited from higher investment administrationfees as a result of growth in our wealth management businesses as well as anappreciation in equity markets. Higher securitization income, increases in thevalue of our investments in private equity funds and higher capital markets feesin our Global Investment Banking business also benefited non-interest revenue. Non-interest revenue for the fourth quarter of 2006 was C$8 million higher thanthe previous quarter due to higher capital markets fees and increases in thevalue of our investments in private equity funds as well as highersecuritization income. For the year ended 31 December 2006, non-interest revenue was C$651 million,C$81 million or 14.2 per cent higher, compared with the same period in 2005.Non-interest revenue in 2006 benefited from higher investment administrationfees, higher securitization income, higher credit fees as a result of highervolumes in Acceptances, higher Global Investment Banking revenues and increasesin the value of our investments in private equity funds. These were partiallyoffset by lower immigrant investor program fees, which are dependant on thenumber of approvals from government agencies. Non-interest expenses and operating efficiency Non-interest expenses for the fourth quarter of 2006 were C$236 million, anincrease of C$31 million or 15.1 per cent compared with the fourth quarter of2005. Excluding the C$14 million reduction of deposit guarantee fees made in thefourth quarter of 2005, non-interest expenses increased by 7.8 per cent in thefourth quarter of 2006 compared with the fourth quarter of 2005. Salaries andbenefits in the fourth quarter of 2006 increased by C$13 million from the sameperiod in 2005 due to an expanding workforce to meet growth initiatives,particularly in our wealth management businesses. Also, higher incentivecompensation reflected higher revenues. Non-interest expenses in the fourth quarter of 2006 were C$23 million higherthan the previous quarter primarily due to higher premises costs, arising fromthe change in estimate of the useful life of improvements made to leasedproperties, and higher marketing expenditure on the HSBC brand. For the year ended 31 December 2006, non-interest expenses were C$906 million,an increase of C$82 million, or 10.0 per cent, compared with C$824 million for2005. Salaries and benefits expenses were C$61 million higher due to a largerwork force and higher stock based compensation resulting from a C$9 millioncharge in the second quarter 2006, arising from the waiver of the totalshareholders return-related performance condition in respect of the 2003 awardsunder the HSBC Holdings Group Share Option Plan. Incentive compensation was alsohigher due to higher revenues. Other expenses were C$12 million higher due toincreased marketing spend on further developing the HSBC brand and a higherbusiness tax expense due to a recovery in 2005 on the successful resolution ofcertain commodity tax issues. These were partially offset by a lower deposit guarantee fee expense due to the discontinuation of the HSBC Group's guarantee on new deposits subsequent to June 2005. Income taxes The effective income tax rate for the fourth quarter of 2006 was 33.2 per cent,compared with 30.0 per cent, for the fourth quarter in 2005. The tax rate in thefourth quarter of 2005 was lower due to a year-to-date tax expense reductionrecorded on the resolution of the deductibility of the deposit guarantee feeexpense for the years 2002 to 2005. The effective income tax rate for the fourth quarter of 2006 decreased by 1.7per cent from the previous quarter due to a decrease in certain non-deductibleexpenses. The effective income tax rate for the year ended 31 December 2006 was 35.6 percent, compared with 33.5 percent in 2005. The effective rate was lower in 2005due to benefits from changes in the net realizable value of certain futureincome tax assets and the resolution of the amount of the deductibility of thedeposit guarantee fee expense for certain years. Also, lower corporate incometax rates enacted by the federal government budget in 2006 resulted in a writedown of our future income tax asset and the expense related to the 2003 optionawards for stock based compensation recognized in 2006 is not deductible fortax, thereby increasing the 2006 effective income tax rate. Credit quality and provision for credit losses The credit environment remained stable in the fourth quarter of 2006 with a lowlevel of corporate default rates. The provision for credit losses in the fourthquarter of 2006 was C$17 million compared with C$6 million for the same periodin 2005, which benefited from a reversal of C$14 million of our generalallowance for credit losses due to favourable economic conditions. The provision for credit losses for the fourth quarter of 2006 increased by C$12million from the previous quarter, largely due to provisions in two specificcommercial exposures. For the year ended 31 December 2006, the provision for credit losses was C$34million, compared with C$27 million for 2005. Gross impaired loans increased toC$164 million at 31 December 2006 compared with C$130 million at 31 December2005. Total impaired loans, net of specific allowances for credit losses, wereC$106 million at 31 December 2006 compared with C$73 million at 31 December2005. The total allowance for credit losses, as a percentage ofloans outstanding was 0.92 per cent at 31 December 2006 compared with 1.01 percent at 31 December 2005. Balance sheet Total assets at 31 December 2006 were C$56.8 billion, an increase of C$7.6billion from C$49.2 billion at 31 December 2005. Strong economic conditionshelped drive growth in commercial loans and deposits. Commercial loans andbankers' acceptances increased C$3.3 billion in total to C$22.9 billion at 31December 2006 compared with C$19.6 billion at 31 December 2005.Continued strength in the housing market across Canada and the strong economyhelped residential mortgages and consumer loans to increase C$1.1 billion toC$17.7 billion in total at 31 December 2006 compared with C$16.6 billion at 31December 2005. Increased trading and balance sheet management activity increasedassets purchased under reverse repurchase agreements by C$3.0 billion at 31 December 2006 compared with 31 December 2005 while cash resources decreasedby C$1.2 billion. Total deposits at 31 December 2006 were C$44.2 billion, an increase of C$5.6billion from C$38.6 billion at 31 December 2005. Launch of our High Rate SavingsAccount and growth of our wealth management businesses helped increase depositsfrom individuals to C$17.0 billion at 31 December 2006 from C$15.3 billion atthe same time last year. Investments in our payments and cash managementservices contributed to a C$4.4 billion increase in commercial deposits toC$25.7 billion at 31 December 2006. As a result of the growth in core customerdeposits, less reliance was placed on deposits from other banks, which decreasedto C$1.5 billion at 31 December 2006 from C$2.0 billion at 31 December 2005. Total assets under administration Funds under management were C$23.3 billion at 31 December 2006 compared withC$20.5 billion at 31 December 2005. Including custody and administrationbalances, total assets under administration were C$31.9 billion at 31 December2006 compared with C$28.0 billion at 31 December 2005. Growth in funds under management during 2006 resulted from continued investmentin our brokerage operations during the year and from success in our PrivateClient products. Additionally, Canadian equity markets, which were aided byhigher natural resource prices, performed strongly in 2006. Capital management and Dividends The tier 1 capital ratio was 9.0 per cent and the total capital ratio was 11.1per cent at 31 December 2006. This is little changed from 9.0 per cent and 11.2per cent, respectively, at 31 December 2005. In addition to net income, regulatory capital increased in 2006 as subordinateddebentures increased C$140 million as a redemption of a C$60 million issue wasoffset by a new C$200 million issue. During the fourth quarter of 2006, we declared and paid C$60 million individends on our common shares. Dividends declared on our common shares totalledC$240 million in 2006. Regular dividends of 31.875 cents per share have been declared on our Class 1Preferred Shares - Series C and 31.25 cents per share on our Class 1 PreferredShares - Series D. The dividends will be payable in cash on 31 March 2007, forshareholders of record on 15 March 2007. Dividends declared on our preferredshares totalled C$18 million in 2006. Credit ratings On 19 June 2006, Standard & Poor's Ratings Services ("S&P") raised our short andlong-term counterparty credit ratings concurrent with an upgrade of its ratingsof our parent, HSBC Holdings plc. On 25 October 2006, S&P raised its ratings of our long-term counterparty credit,preferred shares, senior debt and subordinated debt. These ratings upgradesfollowed S&P's revision of our group status to a 'core" holding within the HSBCGroup based on our growing integration with and increasing contribution to theHSBC Group. On 6 October 2006, Dominion Bond Rating Service ("DBRS") upgraded its ratings ofour deposits, debt instruments and preferred shares, as a result ofimplementation of a new support assessment methodology for banks. Our current ratings are as follows: S&P DBRS Short-term instruments A-1+ R-1 (high)Deposits and senior debt AA AASubordinated debt AA- AA (low)Preferred shares P-1 Pfd-1HSBC Canada Asset Trust Securities P-1 A (high) About HSBC Bank Canada HSBC Bank Canada, a subsidiary of HSBC Holdings plc, has more than 170 offices.With over 9,500 offices in 76 countries and territories and assets of US$1,738billion at 30 June 2006, the HSBC Group is one of the world's largest bankingand financial services organisations. For more information about HSBC BankCanada and our products and services, visit our website at hsbc.ca. Copies of our 2006 Annual Report will be sent to shareholders in March 2007. Caution regarding forward-looking financial statements This document may contain forward-looking statements, including statementsregarding the business and anticipated financial performance of HSBC Bank Canada.These statements are subject to a number of risks and uncertainties that may causeactual results to differ materially from those contemplated by theforward-looking statements. Some of the factors that could cause suchdifferences include legislative or regulatory developments, technologicalchange, global capital market activity, changes in government monetary andeconomic policies, changes in prevailing interest rates, inflation level andgeneral economic conditions in geographic areas where HSBC Bank Canada operates.Canada is an extremely competitive banking environment and pressures on interestrates and our net interest margin may arise from actions taken by individualbanks acting alone. Varying economic conditions may also affect equity andforeign exchange markets, which could also have an impact on our revenues. Thefactors disclosed above may not be complete and there could be otheruncertainties and potential risk factors not considered here which may impactour results and financial condition. Summary Figures in C$ millions (except per share Quarter ended Year ended amounts) 31Dec06 30Sep06 31Dec05 31Dec06 31Dec05 EarningsNet income attributable to common shares 128 138 132 497 457Basic earnings per share 0.26 0.28 0.27 1.02 0.94 Performance ratios (per cent)Return on average common equity 20.6 23.0 23.8 21.1 21.3Return on average assets 0.87 1.01 1.06 0.91 0.97Net interest margin ^ 2.30 2.31 2.36 2.33 2.37Cost efficiency ratio ^^ 51.4 48.2 50.0 51.3 52.2Non-interest revenue: total revenue ratio 36.6 36.2 34.4 36.9 36.1 Credit informationImpaired loans 164 166 130Allowance for credit losses- Balance at end of period 327 318 326- As a percentage of impaired loans 199% 192% 251%- As a percentage of loans outstanding 0.92% 0.80% 1.01% Average balancesAssets 58,883 53,945 49,605 54,118 47,282Loans 34,943 34,144 32,387 33,659 30,678Deposits 44,491 42,206 39,006 41,904 37,340Common equity 2,464 2,387 2,204 2,360 2,150 Capital ratios (per cent)Tier 1 9.0 8.9 9.0Total capital 11.1 11.1 11.2 Total assets under administrationFunds under management 23,340 22,372 20,453Custodial accounts 8,574 8,973 7,594Total assets under administration 31,914 31,345 28,047 ^ Net interest margin is net interest income divided by average interest earning assets for the period. ^ ^ The cost efficiency ratio is defined as non-interest expenses divided by total revenue. Consolidated Statement of Income (Unaudited) Figures in C$ millions Quarter ended Year ended(except per share amounts) 31Dec06 30Sep06 31Dec05 31Dec06 31Dec05 ^ ^Interest and dividend incomeLoans 593 566 444 2,144 1,631Securities 49 47 40 186 120Deposits with regulated financial institutions 62 59 52 234 166 704 672 536 2,564 1,917 Interest expenseDeposits 406 383 261 1,422 882Debentures 7 7 6 27 25 413 390 267 1,449 907 Net interest income 291 282 269 1,115 1,010 Non-interest revenueDeposit and payment service charges 23 23 22 90 84Credit fees 26 28 26 106 95Capital market fees 30 27 25 115 106Investment administration fees 28 26 22 103 80Foreign exchange 9 8 8 32 27Trade finance 6 6 6 24 27Trading revenue 17 18 14 69 60Investment securities gains 7 5 2 30 16Securitisation income 13 10 6 42 24Other 9 9 10 40 51 168 160 141 651 570 Total revenue 459 442 410 1,766 1,580 Non-interest expensesSalaries and employee benefits 124 120 111 503 442Premises and equipment 34 26 27 116 107Other 78 67 67 287 275 236 213 205 906 824 Net operating income before provision for credit losses 223 229 205 860 756Provision for credit losses 17 5 6 34 27 Income before taxes and non-controlling interest in income of trust 206 224 199 826 729Provision for income taxes 66 76 58 285 237Non-controlling interest in income of trust 7 6 6 26 22Net income 133 142 135 515 470Preferred share dividends 5 4 3 18 13Net income attributable to common shares 128 138 132 497 457 Average common shares outstanding (000) 488,668 488,668 488,668 488,668 488,668Basic earnings per share (C$) 0.26 0.28 0.27 1.02 0.94 ^ Certain prior period amounts have been reclassified to conform with thecurrent year presentation. Condensed Consolidated Balance Sheet (Unaudited) Figures in C$ millions At 31Dec06 At 31Dec05 AssetsCash and deposits with Bank of Canada 368 409Deposits with regulated financial institutions 4,346 5,549 4,714 5,958 Investment securities 3,604 2,923Trading securities 1,162 1,418 4,766 4,341 Assets purchased under reverse repurchase agreements 4,760 1,752 Loans- Businesses and government 17,819 15,571- Residential mortgage 14,016 12,865- Consumer 3,728 3,734- Allowance for credit losses (327) (326) 35,236 31,844 Customers' liability under acceptances 5,130 4,002Land, buildings and equipment 121 103Other assets 2,043 1,210 7,294 5,315Total assets 56,770 49,210 Liabilities and shareholders' equityDeposits- Regulated financial institutions 1,469 1,975- Individuals 17,039 15,300- Businesses and governments 25,665 21,333 44,173 38,608 Acceptances 5,130 4,002Assets sold under repurchase agreements 162 302Other liabilities 3,444 2,849Non-controlling interest in trust and subsidiary 430 430 9,166 7,583 Subordinated debentures 563 423 Shareholders' equity- Preferred shares 350 350- Common shares 1,125 1,125- Contributed surplus 202 187- Retained earnings 1,191 934 2,868 2,596Total liabilities and shareholders' equity 56,770 49,210 Condensed Consolidated Statement of Cash Flows (Unaudited) Quarter ended Year endedFigures in C$ millions 31Dec06 30Sep06 31Dec05 31Dec06 31Dec05 Cash flows provided by (used in):- operating activities 361 128 (100) 673 384- financing activities 1,165 1,677 141 5,247 5,171- investing activities (2,430) (1,021) 335 (7,082) (4,362) (Decrease) increase in cash and cash equivalents (904) 784 376 (1,162) 1,193 Cash and cash equivalents, beginning of period 4,942 4,158 4,824 5,200 4,007Cash and cash equivalents, end of period 4,038 4,942 5,200 4,038 5,200 Represented by:- Cash resources per balance sheet 4,714 5,139 5,958 - less non-operating deposits ^ (676) (197) (758)- Cash and cash equivalents, end of period 4,038 4,942 5,200 ^ Non-operating deposits are comprised primarily of cash which reprices after 90days and cash restricted for recourse on securitisation transactions. 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