HSBC Holdings Regulatory News (HSBA)

24 Jul 2006 11:53

HSBC Holdings PLC24 July 2006 HSBC BANK CANADA SECOND QUARTER 2006 RESULTS^ - HIGHLIGHTS • Net income attributable to common shares was C$115 million for the quarter ended 30 June 2006, an increase of 10.6 per cent over the quarter ended 30 June 2005. • Net income attributable to common shares was C$231 million for the half-year ended 30 June 2006, an increase of 9.0 per cent over the same period in 2005. • Return on average common equity was 19.9 per cent for the quarter ended 30 June 2006 and 20.3 per cent for the half-year ended 30 June 2006 compared with 19.7 per cent and 20.3 per cent respectively for the same periods in 2005. • The cost efficiency ratio was 52.6 per cent for the quarter ended 30 June 2006 and 52.8 per cent for the half-year ended 30 June 2006 compared with 54.6 per cent and 53.8 per cent respectively for the same periods in 2005. • Total assets were C$53.1 billion at 30 June 2006 compared with C$47.4 billion at 30 June 2005. • Total funds under management were C$21.7 billion at 30 June 2006 compared with C$18.8 billion at 30 June 2005. ^ Results are prepared in accordance with Canadian generally accepted accounting principles. Financial Commentary Overview HSBC Bank Canada recorded net income attributable to common shares of C$115million for the quarter ended 30 June 2006, an increase of C$11 million, or 10.6per cent, from C$104 million for the same period in 2005. This increase was dueto strong growth in net interest income and non-interest revenue. Net income inthe quarter was impacted by a few significant items within non-interest expensesand income tax expense, which held back reported growth in net income, ashighlighted in the following commentary. Partially offsetting these items was anincrease in the fair value of our investments in private equity funds. Net income attributable to common shares for the first half of 2006 was C$231million compared with C$212 million for the same period in 2005, an increase ofC$19 million, or 9.0 per cent. Commenting on the results, Lindsay Gordon, President and Chief ExecutiveOfficer, said: "Our results for the second quarter continue to show goodmomentum. Underlying revenue growth for the quarter and half-year continues tobe strong. "We are well positioned to invest in areas of growth while continuing to improveour operating efficiency. We will also leverage the success of new products,like the High Rate Savings Account, and enhanced services, such as those createdby the Payments and Cash Management business, to help acquire new customers anddeepen relationships with our existing customers. "As we celebrate the 25th anniversary of HSBC Bank Canada, I would like to takethis opportunity to thank our customers and our colleagues at HSBC. They havehelped us achieve this milestone. Canada is one of the greatest countries in theworld, full of promise and opportunity, and one of the best examples of howpeople from diverse backgrounds and perspectives can build something special. Ithas been a great quarter century and we look forward to great things to come inthe next 25 years and beyond!" Net interest income Net interest income for the second quarter of 2006 was C$276 million comparedwith C$243 million for the same period in 2005, an increase of C$33 million, or13.6 per cent. This increase was driven by loan and deposit growth across all ofour customer groups. Average loans for the quarter were C$33.3 billion comparedwith C$29.9 billion for the same period in 2005. Residential mortgages continuedto grow, fuelled by a healthy housing market across Canada. Corporate andcommercial loans were higher due to increased activity by clients resulting fromthe stable economic conditions in Canada and the United States. Average depositswere C$40.8 billion compared with C$37.0 billion for the same period in 2005.Income from securities was higher due partially to rising interest rates andhigher average balances from increased trading activities and liquidity. Competitive pressures and the interest rate environment are still a risk factor.However, the net interest margin, as a percentage of average interest earningassets, was 2.35 per cent for the quarter compared with 2.34 per cent for thesame period in 2005. The net interest margin benefited from higher depositspreads in the rising interest rate environment. Net interest income was C$10 million higher compared with the previous quarter,due partly to one extra day in the quarter and from growth in loans anddeposits. Average loans for the quarter were C$33.3 billion compared with C$32.3billion last quarter, while average deposits grew C$0.8 billion to C$40.8billion in the quarter. The net interest margin, as a percentage of averageinterest earning assets, was one basis point lower compared with the previousquarter. On a year-to-date basis, net interest income was C$542 million compared withC$480 million for the same period last year, an increase of C$62 million, or12.9 per cent. Year-to-date net interest income in 2006 benefited from continuedgrowth in assets and deposits. However, the growth was negatively effected bysecuritisations of residential mortgages and personal lines of credit totallingC$1.2 billion in the latter part of the fourth quarter of 2005 and C$0.7 billionearly in the first quarter of 2006. Average loans in 2006 were C$32.8 billioncompared with C$29.4 billion in the same period last year, while averagedeposits were C$40.4 billion compared with C$35.9 billion in the same periodlast year. The net interest margin, as a percentage of average interest earningassets, was 2.35 per cent compared with 2.38 per cent for the same period in2005. Non-interest revenue Non-interest revenue for the second quarter of 2006 was C$167 million comparedwith C$140 million in the same quarter of 2005, an increase of C$27 million, or19.3 per cent. In the current quarter, we recorded a C$10 million increase inthe fair value of our investments in private equity funds, which increasedinvestment securities gains. The continued volatility in the exchange ratebetween the Canadian and US dollars resulted in higher trading and foreignexchange revenue. The success of our Private Client products and services helpedgrow personal funds under management, which increased investment administrationfees. Securitisation income was higher due to increased recurring income fromprevious securitisations and from gains on sales of C$800 million in residentialmortgages in the current quarter. An increase in capital market fees was drivenprimarily from higher underwriting and advisory activities in the quarter. Othernon-interest revenue was lower due largely to immigrant investor program feesarising from timing of approvals by the government agencies. Non-interest revenue was C$11 million higher compared with the previous quarter.Securitisation income and fair value increases in our private equity fundinvestments were higher. This was partially offset by lower commissions fromtrading activities by our retail customers, due largely to the increasedvolatility of the equity markets in the latter part of the second quarter. On a year-to-date basis, non-interest revenue was C$323 million, C$39 million,or 13.7 per cent higher compared with C$284 million for the same period lastyear. The main drivers were growth in our wealth management businesses, whichincreased investment administration fees, and higher credit fees from increasedbusiness activity. Non-interest revenue also benefited from larger fair valueincreases in our private equity fund investments and higher securitisationincome. Non-interest expenses and operating efficiency Non-interest expenses for the second quarter of 2006 were C$233 million comparedwith C$209 million in the same quarter of 2005, an increase of C$24 million, or11.5 per cent. We have maintained our focus on operating efficiency whilecontinuing to invest in our businesses and reallocate resources to areas ofgrowth. As a result, the cost efficiency ratio was 52.6 per cent compared with54.6 per cent for the same period in 2005. Salaries and employee benefitsexpenses were higher in 2006 due to an increased employee base from continuedinvestments in our businesses and increased defined benefit pension plan costs.Additionally, a charge of C$9 million was recognised arising from the waiver ofthe TSR-related performance condition in respect of the 2003 awards under theHSBC Holdings Group Share Option Plan. Other non-interest expenses were slightlylower as increased investments in our business were offset by lower fees paid onthe guarantee of our customers' deposits, due to the termination of theguarantee by HSBC Holdings plc for deposits taken after 30 June 2005. Non-interest expenses were C$9 million higher than the previous quarter duelargely to the incremental expense on stock options. On a year-to-date basis, non-interest expenses were C$457 million compared withC$411 million for the same period last year, an increase of C$46 million, or11.2 per cent. The cost efficiency ratio was 52.8 per cent compared with 53.8per cent for the same period in 2005. Salaries and benefits expenses were higherdue to an increased employee base, increased variable compensation, higher stockoption expense, and increased pension costs. Other non-interest expenses werehigher due to continued investments in our business, including higher brandawareness initiatives. These were partially offset by lower fees paid on theguarantee of our customers' deposits. Credit quality and provision for credit losses Credit quality was stable in the second quarter. The provision for credit lossesof C$6 million this quarter was in line with the previous quarter and the sameperiod a year ago. On a year-to-date basis, the provision for credit losses wasC$12 million compared with C$14 million for the same period last year. Corporatedefault rates continue to be at historically low levels and result from stableeconomic conditions in Canada and the United States. We continue to proactivelymanage our risks and level of exposure to companies in industry sectors that maybe at risk due to adverse changes in economic conditions. Gross impaired credit exposures were C$159 million, C$34 million, or 27.2 percent, higher compared with C$125 million at the same time last year, and were inline with the balance at the previous quarter end of C$161 million. Totalimpaired credit exposures, net of specific allowances for credit losses, wereC$109 million compared with C$70 million at the same time last year, and wereslightly higher compared to the C$104 million balance at the previous quarterend. The general allowance for credit losses remained at C$269 million comparedwith the previous quarter and was down from C$283 million at the same time lastyear. The total allowance for credit losses, as a percentage of loans andacceptances outstanding, was 0.84 per cent compared with 0.87 per cent at theprevious quarter end and 0.98 per cent at the same time last year. Income taxes The effective tax rate in the second quarter of 2006 was 39.4 per cent comparedwith 33.7 per cent in the same quarter of 2005 and 35.1 per cent in the previousquarter. On a year-to-date basis in 2006, the effective tax rate was 37.3 percent compared with 33.9 per cent for the same period last year. The income tax provision in the second quarter of 2006 included a C$6 millioncharge to reflect the write-down of future income tax assets resulting from taxrate decreases announced in the federal budget. In addition, the expense relatedto stock options is not deductible for income tax purposes and, therefore,increased the effective tax rate. The effective tax rate in the comparativeperiods in 2005 benefited from a reduction in tax expense resulting fromadjustments to the net realizable values of certain future income tax assets.Excluding these impacts, the effective tax rate in the second quarter of 2006was in line with the same period last year. Balance sheet Total assets at 30 June 2006 were C$53.1 billion, an increase of C$5.7 billionover the same time last year. Our loan portfolio continues to be the key driverof balance sheet growth. Commercial loans and bankers' acceptances grew C$2.9billion on the continued strong economy, primarily in western Canada.Residential mortgages increased C$2.9 billion, before securitisation of C$2.2billion in the period, on continued buoyancy in housing markets. Consumer loansincreased C$0.8 billion, which was before securitisation of C$0.9 billion ofpersonal lines of credit and consumer term loans in the period. Increasedactivity in our markets business has increased the securities portfolio by C$1.8billion and balances under reverse repurchase agreements by C$1.0 billion. Total deposits increased C$3.6 billion to C$41.0 billion at 30 June 2006 fromC$37.4 billion at the same time last year. Growth in deposits from individualsresulted from higher interest rates and initiatives such as our 25th AnniversarySale campaign, which highlighted term savings products as well as our new HighRate Savings Account. Commercial deposits were higher due to growth in termproducts, driven by higher interest rates, and in an increase in payments andcash management balances. Other liabilities increased C$0.7 billion largely froman increase in short positions in securities resulting from an increase inactivities in our markets business. Compared with the balance at 31 December 2005, total assets were C$3.9 billionhigher largely from growth in loans and markets activities. Deposit growthbenefited from increased cash management balances from corporate customers aswell as personal deposit growth from the High Rate Savings Account. Total assets under administration Funds under management were C$21.7 billion at 30 June 2006 compared with C$18.8billion at the same time last year. Including custody and administrationbalances, total assets under administration were C$30.2 billion compared withC$24.7 billion at 30 June 2005. Growth in funds under management benefited from strong acquisition of newclients and the success of our Private Client products. The buoyant equitymarkets had a positive impact on retail investor activity, particularly inCanada, which was driven by large increases in commodity prices. Custodialaccounts grew C$2.6 billion due to growth in institutional and corporate custodybusiness and an increase in securitised assets under management. Compared with the previous quarter, funds under management were lower by C$0.1billion. Despite the drop in the equity markets in the latter part of the secondquarter of 2006, personal funds increased by C$0.1 billion. Institutional fundsaccounted for the decrease due to maturity of various mandates. Capital management The tier 1 capital ratio was 9.0 per cent and the total capital ratio was 11.2per cent at 30 June 2006. These compare with 9.0 per cent and 11.3 per cent,respectively, at 31 March 2006 and 9.0 per cent and 11.2 per cent, respectively,at 30 June 2005. In addition to net income, regulatory capital increased from an issuance ofC$200 million in subordinated debentures in the first quarter of 2006. This waspartially offset by dividends declared on our preferred shares and common sharesand the redemption of C$60 million in subordinated debentures in the firstquarter of 2006. Credit ratings In the second quarter of 2006, the counterparty credit rating on our depositswas raised to AA-/Stable/A-1+ from A+/positive/A-1 by Standard & Poor's RatingsServices. This upgrade is a reflection of the quality and success of ourbusiness in Canada. Dividends During the second quarter of 2006, we declared and paid C$60 million individends on our common shares. Regular quarterly dividends of 31.875 cents per share have been declared on ourClass 1 Preferred Shares - Series C and 31.25 cents per share on our Class 1Preferred Shares - Series D. The dividends will be payable on 30 September 2006,for shareholders of record on 15 September 2006. About HSBC Bank Canada HSBC Bank Canada, a subsidiary of HSBC Holdings plc, has more than 170 offices.With around 9,500 offices in 76 countries and territories and assets of US$1,502billion at 31 December 2005, the HSBC Group is one of the world's largestbanking and financial services organisations. Visit our website at hsbc.ca formore information about HSBC Bank Canada and our products and services. Copies of HSBC Bank Canada's interim 2006 report will be sent to shareholders inAugust 2006. Caution regarding forward-looking financial statements This document may contain forward-looking statements, including statementsregarding the business and anticipated financial performance of HSBC Bank Canada.These statements are subject to a number of risks and uncertainties that maycause actual results to differ materially from those contemplated by theforward-looking statements. Some of the factors that could cause suchdifferences include legislative or regulatory developments, technologicalchange, global capital market activity, changes in government monetary andeconomic policies, changes in prevailing interest rates, inflation level andgeneral economic conditions in geographic areas where HSBC Bank Canada operates.Canada is an extremely competitive banking environment and pressures on interestrates and our net interest margin may arise from actions taken by individualbanks acting alone. Varying economic conditions may also affect equity andforeign exchange markets, which could also have an impact on our revenues. Thefactors disclosed above may not be complete and there could be otheruncertainties and potential risk factors not considered here which may impactour results and financial condition. Summary Quarter ended Half-year endedFigures in C$ millions 30Jun06 31Mar06 30Jun05 30Jun06 30Jun05(except per share amounts) EarningsNet income attributable to common shares 115 116 104 231 212Basic earnings per share 0.24 0.24 0.21 0.47 0.43 Performance ratios (%)Return on average common equity 19.9 20.7 19.7 20.3 20.3Return on average assets 0.88 0.92 0.90 0.90 0.94Net interest margin^ 2.35 2.36 2.34 2.35 2.38Cost efficiency ratio^^ 52.6 53.1 54.6 52.8 53.8Non-interest revenue:total revenue ratio 37.7 37.0 36.6 37.3 37.2 Credit informationGross impaired credit exposures 159 161 125 Allowance for credit losses 319 325 338- As a percentage of gross impaired credit exposures 201% 202% 270%- As a percentage of gross loans and acceptances 0.84% 0.87% 0.98% Average balancesAssets 52,573 50,986 46,523 51,784 45,358Loans 33,262 32,252 29,901 32,760 29,374Deposits 40,847 40,022 37,028 40,437 35,867Common equity 2,316 2,276 2,141 2,296 2,119 Capital ratios (%)Tier 1 9.0 9.0 9.0Total capital 1.2 11.3 11.2 Total assets under administrationFunds under management 21,659 21,796 18,820Custody accounts 8,494 8,564 5,875Total assets under administration 30,153 30,360 24,695 ^ 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) Quarter ended Half-year endedFigures in C$ millions 30Jun06 31Mar06 30Jun05 30Jun06 30Jun05 (except per share amounts) ^ ^ ^ Interest and dividend incomeLoans 523 462 396 985 770Securities 46 43 25 89 49Deposits with regulated financial institutions 55 58 39 113 69 624 563 460 1,187 888 Interest expenseDeposits 341 291 211 632 395Debentures 7 6 6 13 13 348 297 217 645 408 Net interest income 276 266 243 542 480 Non-interest revenueDeposit and payment service charges 23 21 22 44 42Credit fees 27 25 24 52 46Capital market fees 26 32 24 58 56Investment administration fees 25 24 17 49 34Foreign exchange 8 7 6 15 13Trade finance 6 6 7 12 14Trading revenue 17 17 15 34 30Investment securities gains 13 5 4 18 11Securitisation income 11 8 5 19 13Other 11 11 16 22 25 167 156 140 323 284 Total revenue 443 422 383 865 764 Non-interest expensesSalaries and employee benefits 136 123 110 259 219Premises and equipment 27 29 27 56 54Other 70 72 72 142 138 233 224 209 457 411 Net operating income before provision for credit losses 210 198 174 408 353 Provision for credit losses 6 6 6 12 14 Income before provision and non-controlling interest in income of trust 204 192 168 396 339Provision for income taxes 78 65 55 143 112Non-controlling interest in income of trust 6 7 5 13 9Net income 120 120 108 240 218Preferred share dividends 5 4 4 9 6Net income attributable to common shares 115 116 104 231 212 Average common shares outstanding(000) 488,668 488,668 488,668 488,668 488,668Basic earnings per share (C$) 0.24 0.24 0.21 0.47 0.43 ^ Certain prior period amounts have been reclassified to conform with the current period presentation. Condensed Consolidated Balance Sheet (Unaudited) Figures in C$ millions At 30Jun06 At 31Dec05 At 30Jun05 Assets Cash and deposits with Bank of Canada 378 409 347Deposits with regulated financial institutions 4,193 5,549 4,997 4,571 5,958 5,344 Investment securities 3,576 2,923 2,489Trading securities 2,120 1,418 1,421 5,696 4,341 3,910 Assets purchased under reverse repurchase agreements 3,473 1,752 2,475 Loans- Businesses and government 16,979 15,571 14,768- Residential mortgage 13,130 12,865 12,427- Consumer 3,638 3,734 3,714- Allowance for credit losses (319) (326) (338) 33,428 31,844 30,571 Customers' liability under acceptances 4,454 4,002 3,722Land, buildings and equipment 99 103 97Other assets 1,411 1,210 1,312 5,964 5,315 5,131Total assets 53,132 49,210 47,431 Liabilities and shareholders' equityDeposits- Regulated financial institutions 1,709 1,975 1,199- Individuals 16,108 15,300 15,343- Businesses and governments 23,172 21,333 20,845 40,989 38,608 37,387 Acceptances 4,454 4,002 3,722Assets sold under repurchase agreements 375 302 101Other liabilities 3,606 2,849 2,898Non-controlling interest in trust and subsidiary 430 430 430 8,865 7,583 7,151 Subordinated debentures 559 423 428 Shareholders' equity- Preferred shares 350 350 300- Common shares 1,125 1,125 1,125- Contributed surplus 199 187 182- Retained earnings 1,045 934 858 2,719 2,596 2,465 Total liabilities and shareholders' equity 53,132 49,210 47,431 Condensed Consolidated Statement of Cash Flows (Unaudited) Quarter ended Half-year endedFigures in C$ millions 30Jun06 31Mar06 30Jun05 30Jun06 30Jun05 Cash flows provided by/(used in):- operating activities (69) 253 (293) 184 112- financing activities 706 1,699 2,154 2,405 3,816- investing activities (1,128) (2,503) (1,623) (3,631) (3,214) Increase (decrease) in cash and cash equivalents (491) (551) 238 (1,042) 714 Cash and cash equivalents, beginning of period 4,649 5,200 4,483 5,200 4,007Cash and cash equivalents, end of period 4,158 4,649 4,721 4,158 4,721 Represented by:- Cash resources per balance sheet 4,571 5,182 5,344 - less non-operating deposits^ (413) (533) (623)- Cash and cash equivalents, end of period 4,158 4,649 4,721 ^ Non-operating deposits are comprised primarily of cash which reprices after 90 days and cash restricted for recourse on securitisation transactions. 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