HSBC Holdings Regulatory News (HSBA)

5 Mar 2007 08:15

HSBC Holdings PLC05 March 2007 HSBC HOLDINGS PLC 2006 FINAL RESULTS - HIGHLIGHTS • Total operating income up 14 per cent to US$70,070 million (US$61,704 million in 2005). For the year: • Net operating income up 10 per cent to US$54,793 million (US$49,836 million in 2005). • Group pre-tax profit up 5 per cent to US$22,086 million (US$20,966 million in 2005). • Profit attributable to shareholders of the parent company up 5 per cent to US$15,789 million (US$15,081 million in 2005). • Return on average invested capital of 14.9 per cent (15.9 per cent in 2005). • Earnings per share up 3 per cent to US$1.40 (US$1.36 in 2005). Dividend and capital position: • Fourth interim dividend for 2006 of US$0.36 per ordinary share, an increase of 16.1 per cent; total dividends declared in respect of 2006 of US$0.81 per share, an increase of 11.0 per cent over 2005. • Tier 1 capital ratio of 9.4 per cent and total capital ratio of 13.5 per cent. HSBC HOLDINGS REPORTS PRE-TAX PROFIT OF US$22,086 MILLION HSBC made a profit before tax of US$22,086 million, an increase of US$1,120million, or 5 per cent, over 2005. Net interest income of US$34,486 million was US$3,152 million, or 10 per cent,higher than 2005. Net operating income before loan impairment charges and other credit riskprovisions of US$65,366 million was US$7,729 million, or 13 per cent, higherthan 2005. Operating expenses of US$33,553 million rose US$4,039 million, or 14 per cent,compared with 2005. On an underlying basis and expressed in terms of constantcurrency, operating expenses increased by 11 per cent. HSBC's cost efficiency ratio was 51.3 per cent compared with 51.2 per cent in2005. Loan impairment charges and other credit risk provisions were US$10,573 millionin 2006, US$2,772 million higher than 2005. The tier 1 capital and total capital ratios for the Group remained strong at 9.4per cent and 13.5 per cent, respectively, at 31 December 2006. The Group's total assets at 31 December 2006 were US$1,861 billion, an increaseof US$359 billion, or 24 per cent, since 31 December 2005. Financial statements for the year ended 31 December 2006 are prepared inaccordance with International Financial Reporting Standards ('IFRSs') asendorsed by the EU. Comparative figures for 2005 are also prepared under IFRSs. Geographical distribution of results Year ended Year endedFigures in US$m 31Dec06 31Dec05Profit before tax % %Europe 6,974 31.5 6,356 30.3Hong Kong 5,182 23.5 4,517 21.5Rest of Asia-Pacific 3,527 16.0 2,574 12.3North America^ 4,668 21.1 5,915 28.2Latin America^ 1,735 7.9 1,604 7.7 22,086 100.0 20,966 100.0 Tax expense (5,215) (5,093) Profit for the year 16,871 15,873 Profit attributable to shareholders of the parent company 15,789 15,081Profit attributable to minority interests 1,082 792 ^ In 2006, Mexico and Panama were reclassified from the North America segment toLatin America. Comparative information has been restated accordingly. See note 1on page 17. Distribution of results by customer group Year ended Year ended Figures in US$m 31Dec06 31Dec05 Profit before tax % % Personal Financial Services 9,457 42.8 9,904 47.2 Commercial Banking 5,997 27.2 4,961 23.7 Corporate, Investment Banking and Markets 5,806 26.3 5,163 24.6 Private Banking 1,214 5.5 912 4.4 Other (388) (1.8) 26 0.1 22,086 100.0 20,966 100.0 Comment by Stephen Green, Group Chairman It is a testament to HSBC's strength and diversity that we grew pre-tax profitsin 2006 to US$22 billion, despite a major setback in part of our mortgagebusiness in the United States. For the third year running, return on averageshareholders' equity exceeded 15 per cent, revenue growth was in double digitsand we maintained an essentially flat cost-efficiency ratio. In 2006, pre-taxprofits from Asia, the Middle East, Latin America and other emerging marketsapproached 50 per cent of the Group's total. There were a number of outstanding achievements, for example, exceeding US$1billion pre-tax profits for the first time in both Mexico and the Middle East,and in each of our Private Banking and Commercial Banking businesses in Asiaoutside Hong Kong. We added around an extra US$1 billion of pre-tax profits inAsia outside Hong Kong and another US$1 billion in our Commercial Bankingbusinesses worldwide. In Hong Kong, net fee income from personal customers grewover 30 per cent to approach US$1 billion for the first time. However, our pre-tax profits fell by US$725 million in our personal businessesin the United States. This was caused by one portfolio of purchased sub-primemortgages in our US Consumer Finance subsidiary, Mortgage Services, whichevidenced much higher delinquency than had been built into the pricing of theseproducts. We are restructuring this business to avoid any repetition of the riskconcentration that built up over the past two years. As part of this exercise wehave effected broad changes in management and strengthened risk controls andprocesses. Despite the issues in our US mortgage business, Group profit attributable toshareholders grew by 5 per cent to US$15,789 million. We met our objective offunding organic expansion through productivity improvements. To achieve this ina year of continuing investment in developing our distribution platforms andproduct capabilities is a tribute to the focus which HSBC's 312,000 staff aroundthe world have placed on serving our customers. Earnings continued to be well diversified both geographically and by customergroup. Regionally, Asia, including Hong Kong, had record results as did ournewly designated Latin American Region, which combines Mexico and CentralAmerica with our South American businesses. Within our customer groups,Commercial Banking again delivered a record performance, as did Private Bankingand Corporate, Investment Banking and Markets, which made strong progress in theareas in which we have been investing in recent years. Personal FinancialServices profits declined as growth in Asia and Latin America was masked by theproblems in the US Mortgage Services business. The Board has declared a fourth interim dividend of US$0.36 per share, takingthe total dividend in respect of 2006 to US$0.81 per share, an increase of 11per cent over the comparable payout last year. In sterling terms, dividendgrowth is 5 per cent. The fourth interim dividend is payable on 10 May 2007 toshareholders on the register on 23 March 2007 with a scrip dividend alternativeavailable for shareholders who prefer this option. Global economic trends and their impact on HSBC Globalisation is determining how we think about positioning HSBC to takeadvantage of the changing pattern of economic flows. Historical patterns basedon national boundaries are becoming less relevant. In aggregate, our operationswithin countries designated as emerging markets grew by 19 per cent in 2006, thethird year running of high double-digit growth. However, this understates theimportance of emerging markets to HSBC, as their influence is also significantto the results of our operations in developed economies. This reflects thegrowth in export flows to meet the infrastructure development needs of emergingmarkets and the reorganisation of global supply chains to optimise internationalresourcing. HSBC is strongly positioned to benefit from these trends. HSBC seeksto differentiate itself by taking developed market opportunities to emergingmarket customers and bringing emerging market products to developed investmentmarkets. For example: In Commercial Banking, we launched a new customer referral system, which led tointernational referrals with an aggregate facility value of US$3 billion,involving over 50 sites and 4,000 relationship managers. Within Group Investment Businesses, the Group's India, China and BRIC (Brazil,Russia, India, China) funds were major contributors to a record performance inthe year as we leveraged our reputation for emerging market expertise to becomea major distributor as well as manager of such funds. Performance fees reachedrecord levels. In the UK, the Passport bank account provides individuals newly arrived in theUK with discounted remittance services back home together with guidance onestablishing themselves in the UK. Corporate, Investment Banking and Markets' strategy to be a leading wholesalebank by focusing on financing and emerging markets was recognised by industryawards including European Loan House of the Year, China Loan House of the Yearand Asian Domestic Currency Bond House of the Year by International FinancingReview. Our Global Markets business was named Best at Treasury and RiskManagement in Asia by Euromoney for the ninth consecutive year. Leveraging our global services HSBC continued to deepen its relevance to its customer base by offeringcoordinated services on a worldwide scale. As the globalisation of businessincreasingly becomes the norm, international capabilities become more and morecritical to an ever wider range of customers. We responded to this trend bydeveloping our business in a number of ways. Benefiting from growing international trade, the Group's payments and cashmanagement business had a record year, particularly in Asia, as increasingnumbers of commercial customers expanded internationally. As emerging market stock exchanges outperformed, the Group's custody businessesbenefited from the higher volumes and value flowing into emerging marketequities. HSBC retained its position as the leading sub-custodian in Asia andthe Middle East, being ranked first in 19 of the 28 markets it serves. Growth inboth assets under custody and assets under administration exceeded 25 per cent,as interest in emerging market equities increased and the alternative fundmanagement sector expanded. The customer base of International Premier, the Group's personal banking servicetargeted at affluent customers with financial needs in more than one country,grew by 35 per cent to reach 1.8 million. We see great opportunities to developthis service further. Cross-border distribution was a noteworthy feature of many HSBC-led debt capitalmarket and equity capital market transactions. Highlights included: AmericaMovil's 8 billion Mexican peso bond; Khazanah Nasional of Malaysia's US$750million Islamic exchangeable 'Sukuk'; Emaar Economic City's US$680 million IPOin Saudi Arabia; and Shui On Land's US$876 million IPO in Hong Kong. Transferring best practice HSBC seeks to transfer best practice and product innovation internationally.Through such linkages, HSBC is able to achieve both cost efficiency and speed tomarket, giving us competitive advantages over purely domestic or regional peers.In 2006, we launched a number of successful initiatives. Using Group technology and marketing expertise, we expanded the Group's cardbase in Asia by some 1.9 million to 11.9 million. In addition, Bank ofCommunications' cards business in mainland China, with which we cooperatereached over 2 million cards in issue at the end of the year from its launch inMay 2005. Also in mainland China, we cooperated with Bank of Communications in launchingpoint of sale finance in partnership with Wal-Mart and SuNing, one of China'slargest consumer electronics chain. In Argentina, our relationship with C&Aadded 100,000 cards, while in Australia we entered the retail storecard marketand now offer point of sale finance in over 1,000 locations through over 100merchants. We took the successful direct retail deposit service introduced in the US at theend of 2005 and used the experience to launch in Taiwan in September 2006. Inthe first 15 weeks, over 24,000 customers had signed up for the service andUS$182 million had been raised in deposits. In the US, by the end of 2006, thedirect deposit product had raised some US$7 billion of funding for ourbusinesses there. Building on our experience of Takaful (Islamic insurance) in Singapore andUnited Arab Emirates, we were among the first to be awarded licences to conductTakaful business in both Malaysia and Saudi Arabia during 2006. Creating advantage from scale, technology and process engineering We continue to make progress in streamlining our operations by focusing onstraight through processing and simplifying our products. During 2006, among other things, we introduced 2,300 advanced self-serviceterminals, added 13 countries to HSBCnet, which is our strategic internetplatform for corporate and institutional clients and made over 900,000 onlineinsurance sales. HSBC in Mexico was the first bank to offer pre-approved online mortgages in2006, allowing customers to apply and obtain details about amounts, duration andmonthly payments within minutes. In Hong Kong in the past four years, processing has been moved from the branchesin favour of sales-related activities, with the result that less than 5 per centof transactions are now being handled physically in the branches. In the UK retail network, product simplification has reduced the range ofproducts by two-thirds over the last two years which, together with branchrelocation and refurbishment and adopting retail store hours, is having apositive impact on sales volumes. Credit environment The global credit environment, particularly in the corporate and commercialsegments, remained generally favourable throughout 2006. In part, this continuedto reflect a general abundance of liquidity and the prevalence of historicallylow nominal interest rates. A significant proportion of the trade surpluses ofthe major Asian exporting countries and the oil producers continued to berecycled into government debt in developed markets. Consequently, risk premia remained at record low levels. This encouragedincreasing interest in structured products and the acceptance of greaterleverage as fixed income investors sought higher yielding assets. The risks arising from this activity were widely distributed using a range of market techniques. The major credit issue affecting the Group in 2006 arose in the US in thesub-prime mortgage market. A slowdown in the rate of growth in US house pricesaccelerated delinquency trends in the US sub-prime mortgage market.Deterioration was marked in the more recent loans, as the absence of equityappreciation reduced customers' options for refinancing. Reduced refinancingoptions also highlighted the fact that, as adjustable rate mortgages reset overthe next few years at higher interest rates than their original rates, theeffect of the greater contractual payment obligations will lead to furtherdelinquency. We took these factors into account in determining the appropriate level ofimpairment allowances at 31 December 2006 against the Mortgage Services loanbook. We factored into our allowances the most recent trends in delinquency andloss severity and estimated the effect of the higher payments due on adjustablerate mortgages as they reset, in particular where we hold a second lien mortgagebehind an adjusting first mortgage. Going forward, the level of futureimpairment allowances will be sensitive to economic conditions and, inparticular, to the state of the housing market, the level of interest rates andthe availability of financing options for sub-prime borrowers. Elsewhere in consumer finance in the US, the delinquency rate rose during theyear, in large part due to the unusually low levels of delinquency at the end of2005. This resulted from the effect of changes in bankruptcy law in the fourthquarter of 2005, portfolio ageing and the mix of the Metris portfolio acquiredat the end of that year. In UK Personal Financial Services, loan impairment charges as a percentage oflending remained broadly in line with last year, as actions taken onunderwriting and collections mitigated the increasing trend of indebtedcustomers to seek recourse in debt management services. Similarly, in Taiwan,measures taken to deal with the effect of mandatory regulatory relief fromcredit card debt, which increased impairment charges in the first half of 2006,reduced the charge in the second half of the year. In the context of HSBC's financial strength and operating profitability, theareas of current weakness are well covered and they will not restrict ourability to develop our business opportunities as planned, or maintain ourprogressive dividend policy. They have, however, brought additional focus on theuncertain longevity of today's generally benign conditions and on the creditrisks inherent in economies where asset prices are accelerating ahead of realwage rises and cash flows are being leveraged using financial products designedto support higher levels of debt. We will ensure that our credit appetitereflects these risks. Group Strategy As noted above, in 2006, pre-tax profits from Asia, the Middle East, LatinAmerica and other emerging markets approached 50 per cent of the Group's total.We intend the contribution from these markets to trend upwards over the nextfive years. These economies are growing faster than developed markets and,therefore, we will concentrate investment primarily in these markets in the formof both organic development and acquisition. During 2006, we brought together our businesses in Latin America into a singlemanagement framework to provide clarity and consistency of direction for thisimportant region. Hong Kong and mainland China are already managed on a combinedbasis, reflecting the fact that this is increasingly a seamless business. In mature markets, we will focus particularly on serving customers withinternational financial needs and connectivity, including the diaspora fromemerging markets. In an increasingly competitive world, we will enforce tightcost control and will re-engineer or dispose of businesses that dilute ourreturn on capital or do not fit with our core strategy. Insurance and retirementservices will be a growing part of our business. To deliver our strategy, we have articulated seven 'global pillars' - theactions we will take to build a financial services company based on the conceptof recommendation, both as a place to work and a place to do business. MichaelGeoghegan, Group CEO and the senior management team are leading this. We will remain a broad-based universal bank, with four strategic businesses: • Personal Financial Services, within which consumer finance will remain a core competence; • Corporate, Investment Banking and Markets, which will be a leading wholesale bank by focusing on financial and emerging markets; • Commercial Banking, for which our international service capabilities and connectivity provide a unique competitive platform; and • Private Banking, with its broad international network and connectivity with the rest of the Group's businesses. These businesses will be increasingly interconnected. In particular, asderivatives markets expand in product breadth and liquidity and as more risk issecuritised globally, our Global Markets business will take a central role inthe efficient management of HSBC's capital, risk and related profitability. Investments in franchise development In November 2006, we completed the acquisition of Grupo Banistmo S.A., theleading Central American banking group, adding operations in Panama, Colombia,Costa Rica, El Salvador, Honduras and Nicaragua to our existing operations inMexico, Brazil, Argentina, Uruguay, Chile and Paraguay. HSBC is now one of theleading foreign banks in Latin America. Apart from Banistmo, 2006 was a year ofonly modest acquisition activity. Very few of the opportunities we examined metour hurdle rates. Subsequent to the end of the year, we announced our intention to acquire, whenregulations permit, a further 10 per cent stake in Techcombank, the thirdlargest joint-stock bank in Vietnam, taking our ownership interest to 20 percent as rules are relaxed to make higher levels of foreign ownership possible. Organic investment In 2006 in China, where we are the largest international bank, we opened 13 newoffices, taking HSBC's total to 45. We made significant progress in developingour personal and commercial distribution platforms throughout Asia, the MiddleEast and Latin America. We added 25 consumer finance offices in India and 28 inIndonesia. We established a further 38 branches in Turkey and three in Malaysia. In Mexico our continuing development of our business added 2,000 new jobs, bringing the total of new jobs created since we acquired Bital to 8,000. We havealso continued to invest in and improve our physical infrastructure in Mexico, with 372 ATMs added in 2006, bringing the total number to over 5,400. The beginning of 2007 has been marked by our application to incorporate ouroperations in mainland China after 141 years of unbroken presence in thecountry. Today, HSBC offers renminbi deposit services in nine cities: Beijing,Dalian, Guangzhou, Qingdao, Shanghai, Shenzhen, Tianjin, Wuhan and Xiamen. The provision of diversified and international banking services to mainland Chinese citizens constitutes one of the most significant growth opportunities for HSBC in the near and long-term and we will support this opportunity with capital and technology resources as required. Increasingly important to our ongoing success is our brand. Starting in 2007 wewill progressively invest more to support and enhance the customer experiencethat drives the brand's strength. Outlook Although growth expectations in the US are moderating, the economic outlookelsewhere remains encouraging as globalisation expands market access andemerging markets grow stronger, forcing competitive restructuring. The financialmarkets are playing a major part in this realignment by financing theinfrastructure needed to deliver the necessary energy and material resourcesfrom producer to consumer nations, and by facilitating trade flows.Additionally, financial markets are providing more sophisticated tools to helppersonal customers plan their long-term financial affairs, corporates to hedgetheir business risks and investors to manage their portfolio risks. The demandfor financial services, therefore, remains strong, particularly forinternationally linked services. This plays to HSBC's huge competitivestrengths. The most significant risks to continuing growth currently relate to politicaland macro events which are outside our control. Recognising that the effect ofsuch risks materialising could be immediate and potentially severe, we remainstrongly capitalised and liquid. Our focus as we enter 2007 is resolutely on continuing to play to our strengthsof linking emerging and developed markets and building comparative advantage byutilising our scale and our local and international reach. We continue to seeopportunities to deploy capital profitably to the long-term advantage ofshareholders and are committed to so doing. This information is provided by RNS The company news service from the London Stock Exchange