HSBC Holdings Regulatory News (HSBA)

6 Mar 2006 08:15

HSBC Holdings PLC06 March 2006 1. Net interest income Year ended Year ended 31Dec05 31Dec04Figures in HK$m restated Net interest income 43,491 36,970Average interest-earning assets 2,031,314 1,925,044Net interest spread 1.89% 1.82%Net interest margin 2.14% 1.92% Net interest income of HK$43,491 million was HK$6,521 million, or 17.6 per cent,higher than in 2004. Net interest income from the Personal Financial Services business rose byHK$6,016 million, or 28.9 per cent, primarily due to improved deposit spreadsresulting from rises in Hong Kong dollar and US dollar interest rates this year.This was coupled with strong growth in net interest income in the rest ofAsia-Pacific, driven by increased mortgage lending in Australia, Korea,Singapore, Taiwan and India, and significant growth in credit card receivablesparticularly in Hong Kong, Taiwan and Indonesia. Net interest income from theCommercial Banking business was HK$4,024 million, or 57.0 per cent, higher thanlast year, mainly due to growth in lending and deposits and improved depositspreads in Hong Kong. Net interest income from Corporate, Investment Banking andMarkets fell by HK$2,533 million, or 22.5 per cent, largely due to the maturityof high yielding treasury assets in Hong Kong, and flat yield curves that gavelimited opportunity for position-taking. This was partly offset by the effect ofthe reclassification this year of net interest expense of HK$1,484 million ontrading assets and liabilities to 'Trading income', which was made on adoptionof the new accounting standards. Corporate lending grew in Hong Kong, mainlandChina, Korea and India, while deposit balances increased and spreads improvedthroughout the region. Included in net interest income this year is incomeearned on held-to-maturity investments in the insurance businesses of HK$1,692million, which last year was classified as 'Net investment income on assetsbacking policyholder liabilities', and there has been a reclassification ofHK$505 million of net interest income to 'Net income from financial instrumentsdesignated at fair value'. Both of these reclassifications were made on adoptionof the new accounting standards. Average interest-earning assets rose by HK$106 billion, or 5.5 per cent, toHK$2,031 billion. Average advances to customers grew by HK$103 billion, or 11.9per cent, with strong growth in mortgage lending in Australia, Korea, Singapore,Taiwan and India, and increases in commercial lending and trade finance in HongKong. Credit card receivables rose in most countries, notably Hong Kong, Taiwanand Indonesia. Average loans to banks were HK$91 billion higher, principally inthe bank in Hong Kong, and lending to fellow subsidiaries rose by HK$18 billion,but these increases were offset by the reclassification of certaininterest-earning assets to 'Trading assets' on adoption of the new accountingstandards. The Group's net interest margin of 2.14 per cent for 2005 was 22 basis pointshigher than 2004. The benefit to margin of the reclassification in 2005 of thenet interest expense on trading assets and liabilities and net interest incomefrom financial instruments designated at fair value was 24 basis points, and theinclusion of net interest income on held-to-maturity investments in theinsurance businesses increased margin by four basis points. These benefits were,however, partly offset by higher funding costs as the rise in the number ofpreference shares issued and higher funding costs thereon, impacted margin byseven basis points. For the banking operations in Hong Kong (excluding Hang Seng Bank), net interestmargin increased by 46 basis points to 2.20 per cent for 2005. Spread improvedby 28 basis points to 1.92 per cent. This increase was principally due to thereclassification of net interest expense on net trading liabilities to tradingincome. Wholesale rates increased significantly during the year as the surplusliquidity, which had kept rates depressed in prior years, was withdrawn from thesystem. Spreads on Hong Kong dollar and foreign currency current, savings anddeposit accounts benefited, with an increase in the value of funds, although theeffect was partly offset by a smaller increase in interest paid to customers.Spreads on mortgages, credit cards and corporate lending were adversely impactedby a higher cost of funds and competitive pressures on margins. The averageyield on the residential mortgage portfolio, excluding Government Home OwnershipScheme ('GHOS') and staff loans, declined to 239 basis points below BLR in 2005compared with 201 basis points below BLR in 2004. The contribution from net freefunds rose by 18 basis points compared with the same period last year. At Hang Seng Bank, net interest margin improved by 11 basis points to 2.19 percent, reflecting the rise in deposit spreads resulting from higher interestrates and the inclusion of interest income from the held-to-maturity investmentportfolios held by life assurance funds. Spread fell by six basis points, asreturns on treasury products were affected by the rise in funding costs and flatyield curves, and mortgage portfolio yields continued to be affected by marketcompetition. The average yield on the residential mortgage portfolio, excludingGHOS and staff loans, fell to 225 basis points below BLR for 2005, compared with202 basis points last year. The contribution from net free funds rose by 17basis points, benefiting from the rise in market interest rates. In the rest of Asia-Pacific, net interest margin at 2.00 per cent for 2005 was 4basis points higher than in 2004. Spread improved by 4 basis points to 1.85 percent. All major sites faced an increase in funding costs, but margins rose inseveral countries, notably mainland China and Indonesia from higher yields oncorporate lending, in India due to higher mortgage yields and an increase in lowcost current account balances from custody and clearing customers, and inAustralia from higher margins on personal lending. These increases were partlyoffset by lower margins on mortgage advances in Taiwan and Korea, and highertreasury funding costs in Singapore. The contribution from net free funds wasunchanged at 15 basis points. 2. Net fee income 2005 2004Figures in HK$m restated Account services 1,314 1,206Credit facilities 1,159 1,447Import/export 2,777 2,676Remittances 1,248 1,103Securities/stockbroking 3,402 2,842Cards 4,231 3,439Insurance 280 217Unit trusts 1,627 2,488Funds under management 2,233 1,216Other 3,400 2,842 Fee income 21,671 19,476 Fee expense (3,574) (3,195) 18,097 16,281 Net fee income was HK$1,816 million, or 11.2 per cent, higher than 2004. Creditcard fee income rose by 23.0 per cent, reflecting the increase in the number ofcards in issue and higher cardholder spending. Customer demand for wealthmanagement products slowed this year in Hong Kong, although the fall in demandfor unit trusts was partially offset by increased sales of structured depositproducts. The increase in contribution from the Bank of Bermuda businesses,following their integration into the group during the second half of last year,was HK$967 million, principally from funds under management and securities/stockbroking, which also benefited from higher stock market turnover in HongKong and throughout the region. Credit facility fees decreased due to a changein accounting treatment whereby certain fees are now included as part of theeffective interest rate and amortised through net interest income, rather thanthrough net fee income as in prior years. 3. Net trading income 2005 2004Figures in HK$m restated Dealing profits- Foreign exchange 5,548 4,680- Interest rate derivatives 2,442 2,380- Debt securities 278 (260)- Equities and other trading 292 203 8,560 7,003 Loss from hedging activities Fair value hedges- Net loss on hedged items attributable to the hedged risk (1,085) -- Net gain on hedging instruments 1,085 - Cash flow hedges- Net hedging loss (1) - (1) - Interest on trading assets and liabilities- Interest income 4,989 -- Interest expense (6,473) - (1,484) - Dividend income from trading securities 105 - 7,180 7,003 Net trading income rose by 2.5 per cent to HK$7,180 million. Foreign exchangeprofits benefited from higher exchange rate volatility and the group's growingcustomer franchise across the region. Debt securities trading benefited fromcorrect positioning as short-term spreads on Hong Kong dollar bonds contractedin the low interest rate environment in the earlier part of 2005, but this waspartly offset by losses on certain high yield bonds following the downgrading ofcompanies in the automobile sector during the second quarter, and low volatilityin credit spreads made for a difficult credit trading environment later in theyear. Interest rate derivatives trading performed satisfactorily, reflecting anenhanced capability in structured products in Hong Kong, Korea and Singapore,which more than offset the fall in demand for wealth management products in HongKong as customers switched to deposit products in the higher interest rateenvironment. Equity and structured credit derivatives revenues also grew despitenarrow credit spreads and low volatility in the market, and realised gains weremade on the disposal of certain private equity investments. Net interest expense on trading assets and liabilities largely representsinterest payable on the group's own debt and structured deposits managed in thetrading book, partly offset by interest income on debt securities. All suchinterest was classified under 'Net interest income' in prior years. 4. Gains less losses from financial investments 2005 2004Figures in HK$m restated Profit on disposal of available-for-sale securities 762 - Profit on disposal of long-term investments - 1,311 Reversal of impairment of long-term investments - 186 Other (6) - 756 1,497 The profit on disposal of available-for-sale securities primarily comprisesgains on the sale of equity securities, partly offset by losses on the disposalof US dollar bonds. The profit on disposal of long-term investments in 2004 comprised gains from thesale of equity investments in Hong Kong. In 2004, there was a partial write-back of a provision against an equityinvestment. 5. Dividend income 2005 2004Figures in HK$m restated Listed investments 102 100Unlisted investments 266 63 368 163 6. Net earned insurance premiums 2005 2004Figures in HK$m restated Gross insurance premium income 19,850 14,610Less: reinsurance premiums (510) (525) 19,340 14,085 Premium income was HK$5,255 million, or 37.3 per cent, higher than 2004,attributable to an enhanced range of life assurance and general insuranceproducts, coupled with successful sales and marketing initiatives. 7. Other operating income 2005 2004Figures in HK$m restated Rental income from investment properties 215 211Movement in present value of in force insurance business 1,185 833Profit on disposal of property, plant and equipment 104 192Profit on disposal of subsidiaries and associates 53 342Surplus arising on property revaluation 1,537 1,038Other 1,803 1,498 4,897 4,114 Profit on disposal of subsidiaries and associates for 2005 comprises a gain madeon the sale of HSBC Asset Management (Australia) Limited. Profit for 2004included a gain on the exchange of the group's interest in World FinanceInternational Limited, an associated company, for an interest in BergesenWorldwide. The surplus arising on property revaluation comprises gains on the revaluationof investment properties and the reversal of previous revaluation deficits thathad arisen when the value of certain premises fell below depreciated historicalcost. As permitted by the revised Hong Kong Accounting Standard 40, prior yearprofit and loss figures have not been restated to include revaluation gains oninvestment properties. 'Other' includes profits on the sale of a residential property in Hong Kong heldon an operating lease, and miscellaneous income from fellow HSBC Groupsubsidiary companies representing recoveries of shared operating costs. 8. Loan impairment charges and other credit risk provisions 2005 2004Figures in HK$m restated Net charge/(release) for impairment provisions Advances to customers- Individually assessed impairment provisions^New provisions 2,127 4,016Releases (1,755) (2,450)Recoveries (267) (617) 105 949- Net charge/(release) for collectively assessed impairment provisions^^ 1,961 (1,723) - Country risk provisions 2 - 2,068 (774) Placings with banks maturing after one month- Net release of individually assessed provisions^ - (1) 2,068 (775) Net release of other credit risk provisions (4) (87) Net charge/(release) for loan impairment and other credit risk provisions 2,064 (862) ^ Individually assessed impairment provisions in 2004 refer to specific provisions.^^ Collectively assessed impairment provisions in 2004 refer to general provisions. There was a net charge for loan impairment and other credit risk provisions ofHK$2,064 million compared with a net release of HK$862 million in 2004. Thecharge for new individually assessed provisions was lower as credit cardprovisions were classified as individual in 2004, but collective in 2005. Newindividually assessed provisions against mortgages and other personal lendingfell, in line with the improving economy in Hong Kong, with lower bankruptcies,falling unemployment and a rise in property prices, although new provisionsagainst commercial banking customers in Hong Kong increased. Releases andrecoveries were lower, largely relating to corporates in Hong Kong, Singaporeand Thailand, but this was partly offset by higher releases against personallending in Hong Kong and against lending to commercial banking customers inmainland China. There was a net charge for collectively assessed provisions,reflecting the reclassification of credit card provisions as collectivelyassessed, and a small charge against corporate lending, reflecting a rise inlending while the credit environment across the region was stable. The netcharge for provisions against credit card lending rose by 35.3 per cent,attributable to the increase in delinquency levels in Taiwan, coupled withgrowth in receivables throughout the region. 9. Employee compensation and benefits 2005 2004Figures in HK$m restated Wages, salaries and other costs 16,428 13,816Social security costs 238 184Retirement benefit costs 1,070 765 17,736 14,765 Staff numbers by region^ At 31Dec05 At 31Dec04 Hong Kong 24,842 23,947 Rest of Asia-Pacific 25,956 21,009 Americas/Europe 18 16 Total 50,816 44,972 ^ Full-time equivalent Staff costs increased by HK$2,971, or 20.1 per cent, compared with 2004,attributable to the increase in headcount throughout the region of 5,844. Staffnumbers rose in all customer groups, notably in Personal Financial Services inIndia, Taiwan, Korea and Indonesia, in Commercial Banking in Hong Kong andmainland China, and in Corporate, Investment Banking and Markets as the build-upof the investment banking division in Hong Kong was substantially completed.Headcount in the Group Service Centre in Guangdong rose by more than 1,000 inorder to support the expansion in processing work. Performance-relatedremuneration increased in line with the improved operating profits. 10. General and administrative expenses 2005 2004Figures in HK$m restated Premises and equipment- Rental expenses 1,243 1,144- Amortisation of prepaid operating lease payments 56 55- Other premises and equipment 2,089 1,761 3,388 2,960 Other administrative expenses 8,394 7,202 Litigation and other provisions 313 131 12,095 10,293 The increase in general and administrative expenses of HK$1,802 million, or 17.5per cent, reflected additional costs incurred in business expansion throughoutthe region. Advertising and marketing expenditure increased in Hong Kong, Korea,Taiwan, Thailand and India, in line with the growth in the Personal FinancialServices business in these countries. Technology costs increased as the group'sgrowth initiatives required investment in systems and the development ofdistribution channels. Other general expenses, including rental, communicationsand travel costs increased in support of business expansion across the region. 11. Share of profit in associates Share of profit in associates in 2005 included the group's share of post-taxprofits from Bank of Communications and Industrial Bank, and amortisation ofintangible assets arising on acquisition, for the 12 months to 30 September2005. In 2004, this included share of profits and amortisation for the periodfrom the date of acquisition (August 2004 and May 2004 for Bank ofCommunications and Industrial Bank respectively) to 30 September 2004. 12. Tax expense The charge for taxation in the consolidated income statement comprises: 2005 2004Figures in HK$m restated Current income tax- Hong Kong profits tax 4,974 3,982- Overseas taxation 2,598 2,497Deferred taxation 479 509 8,051 6,988 The effective rate of tax for 2005 was 17.8 per cent compared with 16.1 per centin 2004, largely as a result of the interest expense on preference shares forwhich tax relief is not available, and a different product and geographic mix oftaxable profits. 13. Dividends 2005 2004 HK$ HK$m HK$ HK$m per per share share Dividends paid on ordinary share capital- in respect of the previous financial year, approved and paid during the year 0.53 4,800 1.30 8,450- in respect of the current financial year 1.76 15,800 2.18 15,500 2.29 20,600 3.48 23,950 The Directors have declared a fourth interim dividend in respect of thefinancial year ending 31 December 2005 of HK$4,500 million (HK$0.50 per ordinaryshare). 14. Trading assets At 31Dec05 At 31Dec04Figures in HK$m restated Debt securities 108,687 82,159Equity shares 22,677 5,573Treasury bills 69,880 -Other 14,437 - 215,681 87,732 Treasury bills held for trading have been reclassified from 'Cash and short-termfunds' to 'Trading assets' on adoption of HKAS 39. 15. Financial assets designated at fair value At 31Dec05 At 31Dec04Figures in HK$m restated Debt securities 15,070 -Equity shares 18,320 -Treasury bills 94 -Other 3,589 - 37,073 - Financial assets designated at fair value are assets which have been designatedas such so that movements in their fair value can be taken to the incomestatement rather than reserves (see Accounting policies Note (f)). This classification in 2005 was made on adoption of HKAS 39. There was no suchcategory in 2004. 16. Advances to customers At 31Dec05 At 31Dec04Figures in HK$m restated Gross advances to customers 1,005,902 927,121 Impairment allowances- Individually assessed^ (2,963) (5,482)- Collectively assessed^^ (3,600) (2,447)- Country risk allowances (13) - (6,576) (7,929) 999,326 919,192 Allowances as a percentage of gross advances to customers:Individually assessed 0.29% 0.59%Collectively assessed 0.36% 0.26%Country risk allowances - -Total allowances 0.65% 0.85% ^ Individually assessed impairment allowances in 2004 refer to specific provisions.^^ Collectively assessed impairment allowances in 2004 refer to general provisions. 17. Impairment allowances against advances to customers Individually Collectively Country assessed assessed riskFigures in HK$m allowances allowances allowances Total At 1Jan05 (restated^) 4,719 3,179 11 7,909Amounts written off (1,982) (1,948) - (3,930)Recoveries of advances written off in previous years 267 395 - 662Net charge to income statement (Note 8) 105 1,961 2 2,068Unwinding of discount of loan impairment (81) - - (81)Exchange and other adjustments (65) 13 - (52) At 31Dec05 2,963 3,600 13 6,576 ^ Includes the effect of adoption of HKAS 39. 18. Impaired advances to customers and allowances The geographical information shown below, and in notes 19, 20, 21 and 23, hasbeen classified by location of the principal operations of the subsidiarycompany or, in the case of the bank, by location of the branch responsible foradvancing the funds. Rest of Americas/Figures in HK$m Hong Kong Asia-Pacific Europe Total Year ended 31Dec05 Impairment provision 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 (1,335) (1,628) - (2,963) 2,585 1,451 - 4,036 Individually assessed allowances as a percentage of gross impaired advances 34.1% 52.9% - 42.3% Gross impaired advances as a percentage of gross advances to customers 0.6% 0.8% - 0.7% Hong Rest of Americas/ TotalFigures in HK$m Kong Asia-Pacific Europe Restated Year ended 31Dec04 (restated) Impairment provision charge/(release) (1,680) 912 (6) (774) At 31Dec04 (restated) Advances to customers which are considered to be impaired are as follows: Gross impaired advances^ 5,423 4,268 5 9,696 Individually assessed allowances^^ (2,485) (2,992) (5) (5,482) 2,938 1,276 - 4,214 Individually assessed allowances as a percentage of gross impaired advances 45.8% 70.1% 100.0% 56.5% Gross impaired advances as a percentage of gross advances to customers 0.9% 1.3% 35.7% 1.0% Impaired advances to customers are those advances where objective evidenceexists that full repayment of principal or interest is considered unlikely. The individually assessed allowances are made after taking into account thevalue of collateral in respect of such advances. ^ Impaired advances in 2004 refer to non-performing advances.^^ Individually assessed allowances in 2004 refer to specific provisions. 19. Overdue advances to customers Hong Rest of Americas/Figures in HK$m Kong Asia-Pacific Europe Total At 31Dec05 Gross advances to customers which have been overdue with respect to either principal or interest for periods of: - six months or less but over three months 1,073 891 - 1,964 - one year or less but over six months 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: - six months or less but over three months 0.2% 0.2% - 0.2% - one year or less but over six months - 0.1% - 0.1% - over one year 0.2% 0.3% - 0.2% 0.4% 0.6% - 0.5% Hong Rest of Americas/ TotalFigures in HK$m Kong Asia-Pacific Europe Restated At 31Dec04 (restated) Gross advances to customers which have been overdue with respect to either principal or interest for periods of: - six months or less but over three months 959 706 - 1,665 - one year or less but over six months 607 296 - 903 - over one year 1,631 1,430 - 3,061 3,197 2,432 - 5,629 Overdue advances to customers as a percentage of gross advances to customers: - six months or less but over three months 0.1% 0.2% - 0.2% - one year or less but over six months 0.1% 0.1% - 0.1% - over one year 0.3% 0.4% - 0.3% 0.5% 0.7% - 0.6% This information is provided by RNS The company news service from the London Stock Exchange