HSBC Holdings Regulatory News (HSBA)

6 Mar 2006 08:15

HSBC Holdings PLC06 March 2006 Consolidated Cash Flow Statement 31Dec05 31Dec04Figures in HK$m restated Net cash inflow from operating activities 26,840 17,623 Cash flows from investing activitiesPurchase of an interest in an associate - (1,634)Dividends received from associates 75 21Purchase of available-for-sale investments (48,780) -Purchase of held-to-maturity debt securities (190) (61,039)Proceeds from sale or redemption of available-for-sale investments 21,888 -Proceeds from sale or redemption of held-to-maturity debt securities 33 39,337Purchase of fixed assets (167) (139)Proceeds from sale of fixed assets 186 181Interest received from available-for-sale investments 4,495 3,258Dividends received from available-for-sale investments 58 131Net cash outflow from investing activities (22,402) (19,884) Cash flows from financing activitiesDividends paid (9,942) (9,750)Interest paid for subordinated liabilities (58) - Proceeds from subordinated liabilities, including financial liabilities designated at fair value 4,478 -Net cash outflow from financing activities (5,522) (9,750) Decrease in cash and cash equivalents (1,084) (12,011) Cash and cash equivalents at 1 January 67,051 77,575Effect of foreign exchange rate changes (454) 1,487Cash and cash equivalents at 31 December 65,513 67,051 Financial Review Net interest income 2005 2004Figures in HK$m restated Net interest income^ 11,068 10,005Average interest-earning assets 505,221 480,317 Net interest spread 1.94% 2.00%Net interest margin 2.19% 2.08% ^ Included within net interest income is HK$20 million in respect of interestincome accrued on impaired advances. Net interest income increased by HK$1,063 million, or 10.6 per cent, comparedwith 2004, with an increase of HK$24.9 billion, or 5.2 per cent, in averageinterest-earning assets. Net interest margin improved by 11 basis points to 2.19per cent. Net interest spread fell 6 basis points to 1.94 per cent, while thecontribution from net free funds rose by 17 basis points to 0.25 per cent,benefiting from the steady rise in market interest rates. The gradual rise in market interest rates in 2005 led to a widening of depositspreads and boosted the contribution made by net free funds. The net interestmargin also benefited from the growth in customer advances, particularly higheryielding cards and personal and SME loans, and the increase in interest earnedon the life insurance debt securities portfolio. The exclusion of HK$272 millionin net interest expense of the trading and fair value portfolio following thechange in accounting presentation in 2005 also contributed to the increase innet interest income. Treasury securities investment and money market portfolios were negativelyaffected by the rise in funding costs and the flattening of yield curves.Average mortgage portfolio yields were lower than in 2004, although new mortgagepricing moved up gradually in the second half of 2005. The impact of individual factors on net interest income and net interest marginis analysed below: HK$m Basis points Net interest Net interest income margin Widening of deposit spreads 354 7Increase in interest income from insurance fund assets 148 3Narrowing of spreads on treasury securities investment and money market portfolios (758) (15)Fall in mortgage portfolio yields (199) (4)Contribution from net free funds 859 17Loan growth and spread improvement 137 3Growth in average interest-earning assets 522 - 1,063 11 The average yield on the residential mortgage portfolio (excluding GHOSmortgages and staff loans) was 225 basis points below Best Lending Rate ('BLR')for 2005, compared with 202 basis points below BLR in 2004. The average yieldwas on a downward trend during the first half of 2005 but stabilised in thesecond half, with BLR and mortgage pricing gradually moving up. Mortgageincentive payments totaled HK$91 million, compared with HK$157 million in 2004. With effect from 1 January 2005, and in accordance with HKAS 30, interest incomeand expenses of financial instruments for trading and designated at fair valueare reported as net trading income and net income from financial instrumentsdesignated at fair value respectively. The following table shows the total netinterest income from all sources for both years on a comparable basis. 2005 2004Figures in HK$m restated Net interest income as per income statement 11,068 10,005Interest income less expense from:- trading financial instruments (306) -- fair value financial instruments 34 -Total net interest income 10,796 10,005 Net fee income 2005 2004Figures in HK$m restated - Stockbroking and related services 493 560- Retail investment products and funds under management 916 1,388- Insurance 116 101- Account services 225 214- Private banking 174 111- Remittances 141 125- Cards 705 598- Credit facilities 117 268- Trade services 375 360- Other 132 116Fee income 3,394 3,841Fee expense (520) (416) 2,874 3,425 Net fee income was HK$551 million, or 16.1 per cent, lower than in 2004. Salesof capital-guaranteed funds slowed significantly under a rising interest rateenvironment, leading to a fall of 34.0 per cent in fee income from retailinvestment products and funds under management. This was partly compensated bygrowth in the issue of market-linked instruments, which generate trading incomeinstead of fee income. Credit facilities fees fell by HK$151 million, due mainlyto the amortisation of fees as part of effective interest income under the newaccounting standards. Income from stockbroking and securities-related activitiesfell by HK$67 million, or 12.0 per cent, affected by the fall in retail investoractivity. Private banking investment services and advisory income rose by 56.8per cent to HK$174 million. Card services income rose by HK$107 million, or 17.9per cent. There has been a growth of 19.7 per cent in cardholder spending, theresult of various cash dollar awards and merchant sponsored benefit campaigns,improved consumer sentiment and an expansion of 10.2 per cent in the credit cardbase following a series of successful acquisition programmes. Insurance agencycommission also recorded encouraging growth of 14.9 per cent, mainly fromcommercial banking business. Net trading income 2005 2004Figures in HK$m restated Dealing profits:- Foreign exchange 785 975- Securities, derivatives and other trading activities 100 49- Income from insurance fund assets - 89 885 1,113Net interest expense on trading assets and liabilities (306) - 579 1,113 Net trading income fell by HK$534 million, or 48.0 per cent, compared with theprevious year. Net trading income was maintained at the same level as that in2004 excluding the impact of certain changes due to the application of newaccounting standards that came into effect on 1 January 2005. These changes arethe inclusion of net interest expense of HK$306 million on trading assets andliabilities and revaluation losses of HK$145 million on forward foreign exchangecontracts linked to money market activities, and the reduction in the income ofHK$89 million from the trading portfolio of life insurance fund assets. There was a significant rise in income earned on derivatives embedded incurrency and other market-linked deposits and instruments. This was offset by afall in foreign exchange income due to lower customer transaction volumes,losses on securities and other trading in an adverse interest rate environment,and revaluation losses on certain financial instruments that failed to satisfythe hedging criteria of HKAS 39. Net income from financial instruments designated at fair value Net income from financial instruments designated at fair value amounted to HK$2million, including net interest income and expense, investment income, andrevaluation gains and losses. On adoption of HKAS 39 with effect from 1 January2005, certain financial assets, liabilities and derivatives are designated atfair value, mainly to eliminate or significantly reduce accounting mismatch.Certain long-term insurance fund assets are also designated at fair value tomeet policyholders' liabilities. Prior to the adoption of HKAS 39, these incomestreams were reported under their respective income categories. Other operating income 2005 2004Figures in HK$m restated Rental income from invested properties 207 202Value of in-force long-term assurance business 316 255Other 275 316 798 773 Analysis of income from wealth management businesses 2005 2004Figures in HK$m restated Investment income:- retail investment products and funds under management^ 1,199 1,413- private banking 188 123- stockbroking and related services 493 560- margin trading 63 66 1,943 2,162Insurance income:- life insurance -- underwriting including embedded value 869 623 -- life investment income^^ 406 418- general insurance and others 270 269 1,545 1,310Total 3,488 3,472 ^ Income from retail investment products and funds under management includesincome reported under net fee income on the sale of unit trust funds and thirdparty investment products. It also includes profits on the issue of structuredinvestment products, reported under net trading income. ^^ Investment income from insurance funds includes income reported as netinterest income, net trading income and net income from financial instrumentsdesignated at fair value. Wealth management income rose by HK$16 million, with the 17.9 per cent growth ininsurance income making up for the 10.1 per cent reduction in income frominvestment services. The life insurance business continued to gain momentum, achieving a 66.4 percent growth in annualised premiums and gaining market share, with an increase inboth the number of policies concluded and in the premium per policy. Newproducts, such as 'Three Year Express Wealth' which provides comprehensive lifecover and potential enhancement in investment return, have been very wellreceived. The investment services business became more diversified in 2005. Under a risinginterest rate environment, focus was shifted from the sale of longer-term,capital-guaranteed funds which generate higher upfront fee income, to the issueof shorter-term, market-linked deposits and instruments which turn over morequickly but with lower profit margins. Private banking business continued toexpand its customer base and funds under management, and reported growth of 52.8per cent in investment services and advisory fees. Stockbroking and relatedservices, however, fell by 12.0 per cent, affected by the fall in retailinvestor activity. Total funds under management, including discretionary and advisory, grew by 18.1per cent to HK$106.2 billion. Loan impairment (charges)/releases and other credit risk provisions 2005 2004Figures in HK$m restated Loan impairment (charges)/releases- individually assessed (309) 141- collectively assessed -- portfolio basis (122) (176) -- individually unimpaired loans (187) 812 (618) 777Of which:- new and additional (1,070) (463)- releases 351 1,131- recoveries 101 109 (618) 777 Loan impairment charges and other credit risk provisions amounted to HK$618million, compared with a net release of HK$777 million in 2004. Impairmentcharges on individually assessed loans amounted to HK$309 million, with theincrease in charges on commercial banking accounts partially offset by netreleases from mortgages and personal loans, which benefited from rising propertyprices, falling unemployment, and a reduction in bankruptcy cases. This comparedwith a net release of HK$141 million, mainly from corporate and commercialbanking customer accounts, in 2004. Charges on collectively assessed portfoliosof small homogeneous loans amounted to HK$122 million, reflecting theimprovement in credit card charge-off rates under the favourable economicenvironment. This compared favourably with the charge of HK$176 million on loanscollectively assessed on a portfolio basis in 2004. Collective assessment of theloans not individually identified as impaired recorded a charge of HK$187million, as loss rates were updated in the light of historic experience. Thiscompared with a release of HK$812 million in 2004. Operating expenses 2005 2004Figures in HK$m restated Employee compensation and benefits:- salaries and other costs 2,144 2,065- retirement benefit costs 137 169 2,281 2,234 General and administrative expenses:- rental expenses 207 193- other premises and equipment 751 677- other operating expenses 1,018 864 1,976 1,734Depreciation of business premises and equipment 280 256Amortisation of intangible assets 9 8 4,546 4,232 Cost efficiency ratio 28.0% 26.4% Staff numbers by region^ 2005 2004 Hong Kong 7,425 7,228Mainland and others 420 314Total 7,845 7,542 ^ Full-time equivalent Operating expenses rose by HK$314 million, or 7.4 per cent. Staff costsincreased by 2.1 per cent, due to the salary increment at the beginning of theyear and the increase in staff numbers. The 10.9 per cent increase in otherpremises and equipment expenses was mainly attributable to informationtechnology expenditure on the enhancement of the group's e-banking platform,credit management systems and new product launches. Other operating expensesrose by 17.8 per cent. The group stepped up its marketing expenditure to supportthe launch of new investment and insurance products and credit card promotioncampaigns. Processing fees also increased with the further migration ofback-office functions to HSBC Group service centres in lower cost areas.Depreciation of business premises and equipment rose by 9.4 per cent as a resultof the increase in fair value of group premises. The number of full-time equivalent staff increased by 303. The increased staffnumber in Hong Kong was mainly to further strengthen the Personal FinancialServices and Commercial Banking relationship management teams. The expansion ofthe group's mainland network in 2005 (with the opening of a branch in Beijingand two sub-branches in Shanghai, plus the expansion of the Fuzhou branch)brought the mainland workforce to 377 full-time equivalent staff at 31 December2005, an increase of 32.7 per cent over the previous year end. The cost efficiency ratio for 2005 was 28.0 per cent, compared with 26.4 percent for 2004. Profit on disposal of fixed assets and financial investments 2005 2004Figures in HK$m restated Profit on disposal of available-for-sale securities- realisation of amounts previously recognised in reserves at 1 January 611 -- net losses arising in current year (153) - 458 - Profit on disposal of long-term financial investments- realisation of amounts previously recognised in reserves at 1 January - 371- net gains arising in current year - 41 - 412 Profit less loss on disposal of fixed assets 19 30 477 442 The profit on disposal of financial investments comprises gains on sales ofequity securities less losses on disposals of available-for-sale debtsecurities. Tax expenses Taxation in the consolidated income statement represents: 2005 2004Figures in HK$m restated Current tax - provision for Hong Kong profits taxTax for the year 1,501 1,522 Current tax - taxation outside Hong KongTax for the year 12 7 Deferred taxOrigination and reversal of temporary differences 282 182 Total tax expenses 1,795 1,711 The current tax provision is based on the estimated assessable profit for 2005,and is determined for the bank and its subsidiaries operating in the Hong KongSAR by using the Hong Kong profits tax rate of 17.5 per cent (the same rate asin 2004). For subsidiaries and branches operating in other jurisdictions, theappropriate tax rates prevailing in the relevant countries are used. Deferred tax is calculated at the tax rates that are expected to apply in theyear when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement except when it relates to itemscharged or credited directly to reserves, in which case the deferred tax is alsorecorded within reserves. The carrying amount of deferred tax assets/liabilitiesis reviewed at each balance sheet date and is reduced to the extent that it isno longer probable that sufficient taxable profit will be available to allow therelated tax benefit to be utilised. Earnings per share The calculation of earnings per share in 2005 is based on earnings of HK$11,342million (HK$11,364 million in 2004) and on the weighted average number ofordinary shares in issue of 1,911,842,736 shares (unchanged from 2004). Dividends per share 2005 2004 HK$ HK$m HK$ HK$m per share per share First interim 1.10 2,103 1.10 2,103Second interim 1.10 2,103 1.10 2,103Third interim 1.10 2,103 1.10 2,103Fourth interim 1.90 3,633 1.90 3,633 5.20 9,942 5.20 9,942 Segmental analysis Segmental information is presented in respect of business and geographicalsegments. Business by customer group information, which is more relevant to thegroup in making operating and financial decisions, is chosen as the primaryreporting format. For the purpose of segmental analysis, the allocation of revenue reflects thebenefits of capital and other funding resources allocated to the customer groupsor geographical segments by way of internal capital allocation and fundstransfer pricing mechanisms. Cost allocation is based on the direct costincurred by the respective customer groups and apportionment of managementoverheads. Rental charges at market rate for usage of premises are reflected asinter-segment income for the 'Other' customer group and inter-segment expensesfor the respective customer groups. (a) By customer group The group's business comprises five customer groups. Personal Financial Servicesprovides banking (including deposits, credit cards, mortgages and other retaillending) and wealth management services (including private banking, investmentand insurance) to personal customers. Commercial Banking manages middle marketand smaller corporate relationships and specialises in trade-related financialservices. Corporate and Institutional Banking handles relationships with largecorporate and institutional customers. Treasury engages in interbank and capitalmarket activities and proprietary trading. Treasury also manages the funding andliquidity positions of the group and other market risk positions arising frombanking activities. 'Other' mainly represents management of shareholders' fundsand investments in premises, investment properties and equity shares. Pre-tax profit contributed by the customer groups in 2005 compared with 2004 isset out in the table below. More customer group analysis and discussions are setout the 'Customer group performance' section in page 5. Personal Corporate & Inter- Financial Commercial Institutional segmentFigures in HK$m Services Banking Banking Treasury Other elimination Total Year ended 31Dec05 Profit before tax 7,686 1,078 507 1,072 3,015 - 13,358Share of pre-tax profit 57.5% 8.1% 3.8% 8.0% 22.6% - 100.0% Year ended 31Dec04 Profit before tax 6,775 2,121 815 2,395 1,177 - 13,283Share of pre-tax profit 51.0% 16.0% 6.1% 18.0% 8.9% - 100.0% (b) By geographical region The geographical regions in this analysis are classified by the location of theprincipal operations of the subsidiary companies or, in the case of the bankitself, by the location of the branches responsible for reporting the results oradvancing the funds. MainlandFigures in HK$m Hong Kong Americas and other Total Year ended 31Dec05 Income and expense Total operating income 21,377 1,644 225 23,246Profit before tax 11,253 1,614 491 13,358 At 31Dec05 Total assets 497,406 60,845 22,569 580,820Total liabilities 520,260 9,395 7,435 537,090Capital expenditure incurred during year 206 - 25 231Contingent liabilities and commitments 137,536 - 3,973 141,509 Year ended 31Dec04 (restated) Income and expense Total operating income 18,105 1,594 126 19,825Profit before tax 11,590 1,566 127 13,283 At 31Dec04 Total assets 460,612 69,675 16,660 546,947Total liabilities 490,665 9,315 5,186 505,166Capital expenditure incurred during year 143 - 5 148Contingent liabilities and commitments 123,563 - 2,925 126,488 Analysis of financial assets and liabilities by accounting classification The following matrix sets out the financial assets and liabilities by type andby accounting classification on adoption of HKAS 39. The related changes inaccounting policies are set out in the appendix on page 65. Designated Available AmortisedFigures in HK$m Trading at fair value for sale cost Total At 31Dec05 Financial assetsCash and balances with banks and other financial institutions - - - 9,201 9,201Placings with and advances to banks and other financial institutions - - - 69,286 69,286Treasury bills 2,594 - 4,816 - 7,410Certificates of deposit 538 194 25,909 1,138 27,779Investment securities 9,468 5,833 148,448 9,593 173,342Derivative financial instruments 1,245 16 454 - 1,715Advances to customers - - - 260,680 260,680Total financial assets 549,413Other assets 31,407Total assets 580,820 Financial liabilitiesDeposits by banks - - - 12,043 12,043Customer accounts 24,422 - - 430,995 455,417Certificates of deposit and other debt securities in issue 13,616 - - 10,023 23,639Securities net short position 7,766 - - - 7,766Derivative financial instruments 1,307 28 457 - 1,792Liabilities to customers under investment contracts - - - 561 561Subordinated liabilities - 967 - 3,511 4,478Total financial liabilities 505,696Liabilities to customers under insurance contracts 15,335Other liabilities 16,059Total liabilities 537,090 Analysis of assets and liabilities by remaining maturity The maturity analysis is based on the remaining period at the balance sheet dateto the contractual maturity date, with the exception of the trading portfoliosthat may be sold before maturity and are accordingly recorded as 'Repayable ondemand'. Three months Three One Repayable or less months year Over on but not to to fiveFigures in HK$m demand on demand one year five years years Undated Total AssetsCash and balances with banks and other financial institutions 9,201 - - - - - 9,201Placings with and advances to banks and other financial institutions 11,824 52,661 4,597 204 - - 69,286Trading assets 12,600 - - - - - 12,600Financial assets designated at fair value - 52 113 1,601 2,262 1,999 6,027Derivative financial instruments 1,246 106 105 233 25 - 1,715Advances to customers 14,330 26,348 33,457 91,279 95,266 - 260,680Financial investments - 14,214 35,010 126,831 12,528 1,321 189,904Investments in associates - - - - - 2,929 2,929Investment properties - - - - - 4,273 4,273Premises, plant and equipment - - - - - 6,750 6,750Interest in leasehold land held for own use under operating lease - - - - - 594 594Intangible assets - - - - - 1,636 1,636Other assets 8,589 4,589 1,360 28 6 653 15,225At 31Dec05 57,790 97,970 74,642 220,176 110,087 20,155 580,820At 31Dec04 37,328 108,219 75,973 209,636 99,669 16,122 546,947 LiabilitiesCurrent, savings and other deposit accounts 233,907 190,206 5,916 966 - - 430,995Deposits from banks 1,664 10,370 9 - - - 12,043Trading liabilities 45,804 - - - - - 45,804Financial liabilities designated at fair value - - - - 994 (27) 967Derivative financial instruments 1,307 22 81 346 36 - 1,792Certificates of deposit and other debt securities in issue - 233 1,952 7,788 50 - 10,023Other liabilities 6,706 6,661 442 48 99 182 14,138Liabilities to customers under investment contracts - - - - - 561 561Liabilities to customers under insurance contracts - - - - - 15,335 15,335Deferred tax and current tax liabilities 370 2 78 - - 1,471 1,921Subordinated liabilities - - - - 3,511 - 3,511At 31Dec05 289,758 207,494 8,478 9,148 4,690 17,522 537,090At 31Dec04 319,208 144,903 16,059 12,738 1,677 10,581 505,166 This information is provided by RNS The company news service from the London Stock Exchange