Annual Financial Report - 13

RNS Number : 4059J

HSBC Holdings PLC

30 March 2010

 



North America

Profit/(loss) before tax by country within customer groups and global businesses

	Personal   Financial     Services         US$m		Commercial     Banking         US$m		Global Banking &     Markets         US$m		Private     Banking         US$m		Other         US$m		Total         US$m
2009
US .............................................................	(5,292)		158		505		(49)		(3,626)		(8,304)
Canada ......................................................	17		347		159		-		(100)		423
Bermuda ....................................................	49		37		47		(2)		10		141
Other ........................................................	-		1		1		1		(1)		2
	(5,226)		543		712		(50)		(3,717)		(7,738)
2008
US52 ..........................................................	(17,364)		226		(2,899)		67		3,427		(16,543)
Canada ......................................................	106		380		252		5		96		839
Bermuda ....................................................	31		51		72		11		9		174
Other ........................................................	(1)		1		-		-		2		2
	(17,228)		658		(2,575)		83		3,534		(15,528)
2007
US..............................................................	(1,824)		377		(1,243)		156		1,468		(1,066)
Canada ......................................................	265		466		239		8		5		983
Bermuda ....................................................	13		77		39		10		34		173
Other ........................................................	-		-		-		-		1		1
	(1,546)		920		(965)		174		1,508		91

For footnote, see page 149.

Loans and advances to customers (net) by country

	At 31 December
	2009              US$m		2008               US$m		2007               US$m
US ......................................................................................................	156,638		208,834		233,706
Canada ...............................................................................................	47,158		44,866		53,891
Bermuda .............................................................................................	3,057		2,514		2,263
	206,853		256,214		289,860

Customer accounts by country

	At 31 December
	2009              US$m		2008               US$m		2007               US$m
US ......................................................................................................	99,371		101,963		100,034
Canada ...............................................................................................	41,565		33,905		37,061
Bermuda .............................................................................................	8,221		7,664		8,078
	149,157		143,532		145,173

2009 compared with 2008

Economic briefing

Economic conditions remained extremely difficult in the US during the early months of 2009 before some signs of recovery appeared as the year progressed, limiting the decline in full year GDP to 2.4 per cent after a 0.4 per cent increase during 2008. Housing sales and residential construction activity showed some improvement from very depressed levels and this, along with the introduction of tax incentives, drove a reduction in the rate of decline of house prices in some states as the year progressed. Labour market conditions weakened throughout the year as the unemployment rate rose to a 26-year high of 10.1 per cent in October 2009, contributing to concerns around the trend of delinquencies on both secured and unsecured debt within the household sector. The annual CPI rate remained negative during the second and third quarters of the year before rising to 2.7 per cent by December 2009, although this trend was largely reflective of the

Profit/(loss) before tax

	2009		2008		2007
North America	US$m		US$m		US$m
Net interest income ............................................................................	13,670		15,218		14,847
Net fee income ...................................................................................	4,817		5,227		5,810
Net trading income/(expense) .............................................................	331		(3,135)		(542)
Changes in fair value of long-term debt issued and related derivatives .	(3,497)		3,736		1,750
Net income from other financial instruments designated at fair value .	1		1		-
Net income/(expense) from financial instruments designated at fair value ........................................................................................................	(3,496)		3,737		1,750
Gains less losses from financial investments .......................................	296		(120)		245
Dividend income ................................................................................	53		77		105
Net earned insurance premiums ..........................................................	309		390		449
Other operating income .....................................................................	566		23		360
Total operating income ..................................................................	16,546		21,417		23,024
Net insurance claims incurred and movement in liabilities to policyholders...............................................................................	(241)		(238)		(241)
Net operating income before loan impairment charges and other credit risk provisions ..................................................................	16,305		21,179		22,783
Loan impairment charges and other credit risk provisions ..................	(15,664)		(16,795)		(12,156)
Net operating income .....................................................................	641		4,384		10,627
Operating expenses (excluding goodwill impairment) ..........................	(8,391)		(9,359)		(10,556)
Goodwill impairment ..........................................................................	-		(10,564)		-
Operating profit/(loss)....................................................................	(7,750)		(15,539)		71
Share of profit in associates and joint ventures ...................................	12		11		20
Profit/(loss) before tax ....................................................................	(7,738)		(15,528)		91
	%		%		%
Share of HSBC's profit before tax ......................................................	(109.3)		(166.8)		0.4
Cost efficiency ratio ...........................................................................	51.5		94.1		46.3
Year-end staff numbers (full-time equivalent) .....................................	35,458		44,725		52,722
Balance sheet data41
	At 31 December
	2009		2008		2007
	US$m		US$m		US$m
Loans and advances to customers (net) ...............................................	206,853		256,214		289,860
Loans and advances to banks (net) .....................................................	15,386		11,458		16,566
Trading assets, financial assets designated at fair value, and financial investments49 ....................................................................	123,288		119,634		133,998
Total assets ........................................................................................	475,014		596,302		574,318
Deposits by banks ...............................................................................	13,970		18,181		16,618
Customer accounts .............................................................................	149,157		143,532		145,173

For footnotes, see page 149.

All commentaries on North America are on an underlying basis unless stated otherwise.

earlier volatility of energy prices. Measures of consumer confidence improved during the year, but remained consistent with a weak overall level of household expenditure. The Standard & Poor's S&P 500 stock market index recovered from a weak start to 2009 to eventually record a gain of 23 per cent in the year. Having already lowered the Fed funds target rate to within a narrow range of between zero and 25 basis points, the Federal Reserve maintained their efforts to improve the availability of credit across the economy by purchasing a range of financial instruments, while a substantial fiscal stimulus package provided additional support to economic activity from the middle of the year.

Canadian GDP fell by 3.2 per cent during the first eleven months of 2009 compared with the equivalent period of 2008, led by a sharp contraction

of output within the manufacturing sector. Labour market conditions deteriorated as the unemployment rate rose from a level of 6.8 per cent in December 2008 to an eleven year high of 8.7 per cent in August 2009, before then declining slightly in the final months of the year. In common with many other economies, the headline CPI rate turned negative around the middle of 2009, largely reflecting the trend of energy prices, and the core rate of inflation displayed a more pronounced downward trend as 2009 progressed. Responding to this deteriorating economic outlook, the Bank of Canada cut its overnight interest rate from 1.5 per cent in December 2008 to 0.25 per cent in April 2009, and provided a conditional commitment to maintain this level of interest rates until the end of the second quarter of 2010.

Reconciliation of reported and underlying profit/(loss) before tax

	2009 compared with 2008
North America	2008            as reported     US$m	2008       adjust-       ments10        US$m			Currency translation11       US$m		2008    at 2009 exchange       rates12      US$m	2009       adjust-       ments10        US$m			Under-       lying    change      US$m		2009            as reported     US$m	Re- ported change13         %		Under-  lying change13         %
Net interest income ......	15,218		-		(79)		15,139		-		(1,469)		13,670		(10)		(10)
Net fee income ......	5,227		-		(33)		5,194		-		(377)		4,817		(8)		(7)
Changes in fair value14 .......	3,444		(3,444)		-		-		(3,688)		-		(3,688)		(207)
Other income/ (expense)15	(2,710)		-		(4)		(2,714)		-		4,220		1,506		156		155
Net operating income16 ..	21,179		(3,444)		(116)		17,619		(3,688)		2,374		16,305		(23)		13
Loan impairment charges and other credit risk provisions .	(16,795)		-		(8)		(16,803)		-		1,139		(15,664)		7		7
Net operating income .....	4,384		(3,444)		(124)		816		(3,688)		3,513		641		(85)		431
Operating expenses (excluding goodwill impairment) ..................	(9,359)		-		58		(9,301)		-		910		(8,391)		10		10
Goodwill impairment	(10,564)		-		-		(10,564)		-		10,564		-		100		100
Operating loss ...........	(15,539)		(3,444)		(66)		(19,049)		(3,688)		14,987		(7,750)		50		79
Income from associates	11		-		(1)		10		-		2		12		9		20
Loss before tax ............	(15,528)		(3,444)		(67)		(19,039)		(3,688)		14,989		(7,738)		50		79

For footnotes, see page 149.

Review of business performance

In North America, HSBC reported a loss before tax of US$7.7 billion in 2009 compared with a loss of US$15.5 billion in 2008. On an underlying basis, excluding US$3.7 billion of fair value movements on HSBC's own debt, and also excluding an impairment charge of US$10.6 billion in 2008 to fully write-off goodwill in respect of North America Personal Financial Services, the pre-tax loss fell by 52 per cent to US$4.1 billion. This improved performance was largely due to a marked reduction in write-downs and losses in Global Banking and Markets, lower loan impairment charges in Personal Financial Services and lower operating expenses following the closure of the Consumer Lending branch network at the beginning of 2009, partly offset by higher loan impairment charges and other credit risk provisions in the corporate and commercial, and Private Banking, books.

Net interest income in 2009 declined by 10 per cent, mainly reflecting reduced asset balances in the legacy consumer finance portfolios, increases in average delinquencies and modified loans (which generate lower yields), the compression of deposit spreads and lower revenue from Balance Sheet Management activities. These effects were partly offset by lower funding costs from the decline in interest rates and higher credit card yields which were driven by the effects of re-pricing initiatives, interest rate floors and lower levels of promotional balances.

Loans and advances to customers declined, mainly in HSBC Finance, following decisions taken to cease new originations and run off the residual balances in Mortgage Services, Consumer Lending and vehicle finance. HSBC Bank USA sold US$4.5 billion of prime mortgages in 2009 in addition to normal sale activity. In Card and Retail Services, balances declined due to lower consumer spending and steps taken by management to mitigate risk and reduce originations, including tightening initial credit-line sales authorisation criteria, closing inactive accounts, decreasing credit lines, restricting underwriting criteria, restricting cash access and reducing marketing expenditure. In the second half of the year, direct marketing mailings and new customer account originations were resumed for portions of the sub-prime credit card portfolio which had held up well through the economic downturn.

In November 2009, HSBC entered into an agreement to sell the vehicle finance loan servicing operation and US$1.0 billion of associated loans. This transaction is expected to close in the first quarter of 2010.

On an underlying basis and excluding goodwill impairment in 2008, the pre-tax loss in North America halved.

In December 2009, HSBC Finance revised the write-off period for its real estate secured and other personal lending portfolios in order to reflect changed customer behaviour, aligning it with the policy used across the Group. As a consequence of this, real estate secured loan balances are now written down to net realisable value generally no later than the end of the month in which the account becomes 180 days delinquent, and personal lending products balances are now written off no later than the end of the month in which the account becomes 180 days delinquent. This change did not have a material effect on financial results as write-offs were offset with releases of related impairment allowances. However, the write-offs resulted in a US$3.3 billion reduction in gross balances in Mortgage Services and Consumer Lending.

Asset spreads narrowed slightly in the Mortgage Services and Consumer Lending portfolios as the effect of credit quality deterioration and increased loan modifications were partly offset by lower funding costs. Vehicle finance spreads widened due to lower funding costs. In Card and Retail Services, spreads widened due to lower funding costs, re-pricing initiatives, lower levels of promotional balances and interest rate floors on portions of the portfolio. In Global Banking and Markets and Commercial Banking, asset spreads widened, primarily due to loan repricing and lower funding costs.

Customer deposit balances were broadly unchanged. In Global Banking and Markets, reduced deposits reflected the decline in assets being funded. This reduction was partly offset in both Personal Financial Services and Commercial Banking, which were successful in increasing deposits through Premier, the expanded branch network and various internet-based propositions. Liability spreads tightened as base rates declined, although spreads widened in the second half of 2009 as rates paid to customers decreased in line with major competitors.

Net interest income from Balance Sheet Management fell, despite strong performance in the first half of the year, affected by risk management initiatives which included selling higher yielding assets and reinvesting the proceeds in assets with a reduced risk profile, resulting in lower yield.

Net fee income declined by 7 per cent to US$4.8 billion, driven by lower late, overlimit, interchange and cash advance fees in the US credit cards business. This was mainly due to a reduction in cards in issue, lower transaction volumes and changes in customer behaviour. Fee income from enhancement services also decreased due to lower balances and fewer accounts, and the discontinuance of all but one partner relationship and a change in product mix to lower revenue products led to a decline in fee income from Taxpayer Financial Services. In Global Banking and Markets, fee income from underwriting increased, driven by higher debt origination volumes.

Net trading income of US$331 million compared with a net trading loss of US$3.1 billion in 2008, primarily due to significantly lower write-downs on exposures in Global Banking and Markets, as the effect of downgrades of monoline insurers and mortgage-backed securities were far less marked than in 2008. Revenue from foreign exchange fell, following a record performance in 2008 in which there had been unprecedented levels of market volatility and wider spreads. In Global Banking, fair value losses were recorded on certain credit default swap transactions used to hedge corporate loan exposures following the tightening of credit spreads, compared with gains in 2008.

Net income from financial instruments designated at fair value declined by 35 per cent to US$192 million, as income from ineffective interest rate hedges related to long-term debt issued by the Group's subsidiaries in North America reduced.

Gains less losses from financial investments were US$296 million, compared with a net loss of US$123 million in 2008. Gains in the current year were largely attributable to the sale of mortgage-backed securities, compared with losses on the sale of US government agency securities in 2008. Gains from the sale of Visa shares in 2008 did not recur.

Net earned insurance premiums declined by 21 per cent as lower loan balances and the discontinuation of real estate originations in HSBC Finance led to lower premiums from payment protection insurance products.

Other operating income was US$566 million compared with US$26 million in 2008 due to lower losses on sales of repossessed properties during 2009. House prices began to stabilise during the second half of the year and this resulted in less deterioration in value in the time between taking title and selling the property. Also, there were further delays in the foreclosure process in 2009, resulting in lower inventory levels and fewer sales. In addition, HSBC Finance recognised gains from the refinement of the income recognition methodology of long-term insurance contracts, and gains on the sale of prime mortgages in HSBC Bank USA increased.

Net insurance claims incurred and movements in liabilities to policyholders increased marginally to US$241 million as higher claims and an increase in liabilities for credit protection policies written against the US prime mortgage book were largely offset by reduced life insurance and disability claims due to a decline in the number of policies underwritten.

Loan impairment charges and other credit risk provisionsdecreased by 7 per cent to US$15.7 billion. Lower loan impairment charges in HSBC Finance were partly offset by increases in loan impairment charges and other credit risk provisions in Global Banking and Markets, Commercial Banking, the US prime mortgage book and Private Banking.

Loan impairment charges in US consumer finance fell by 12 per cent to US$13.5 billion.

Loan impairment charges in US consumer finance decreased by 12 per cent to US$13.5 billion, due to a stabilisation in delinquency trends. In the Mortgage Services portfolio, loan impairment charges fell by 40 per cent to US$2.1 billion as the portfolio progressed further into run-off. By contrast, there was a 4 per cent rise in loan impairment charges in Consumer Lending, primarily in the unsecured portfolio due to a deterioration in the 2006 and 2007 vintages and, to a lesser extent, first lien real estate secured loans. This was partly offset by lower loan impairment charges for second lien real estate secured loans, reflecting a reduction in portfolio risk factors as delinquency trends stabilised and the outlook for current inherent losses on certain first lien real estate secured vintages improved. The change in write-off period referred above had no significant effect on loan impairment charges.

In Card and Retail Services, loan impairment charges decreased by 4 per cent, due to lower loan balances, reflecting lower consumer spending and actions taken to manage risk, and stable credit conditions. In addition, the outlook for future loss estimates improved: the effect of higher unemployment on losses was not as severe as had been predicted, in part due to tighter underwriting; fuel prices declined; and government stimulus activities helped household cashflow. These developments occurred despite the continued deterioration of the US economy and higher levels of unemployment and personal bankruptcy filings.

In Personal Financial Services in HSBC Bank USA, loan impairment charges rose by 18 per cent to US$616 million, mainly in the prime residential mortgage portfolios. Higher delinquencies and losses were experienced due to credit quality deterioration and continued weakness in house prices in certain markets.

Loan impairment charges and other credit risk provisions in Global Banking and Markets rose from US$198 million to US$621 million, driven by deterioration in the credit position of certain corporate clients and additional impairments recognised in respect of certain ABSs held in the available-for-sale portfolio which reflected mark-to-market losses. In Commercial Banking, loan impairment charges rose by 15 per cent to US$519 million as the recession adversely affected the commercial real estate and construction portfolios in the US, and the commercial real estate, manufacturing, trade and service sectors in Canada. In Private Banking, higher loan impairment charges were attributable to a single specific charge.

Further commentary on delinquency trends in the US Personal Financial Services portfolios is provided in 'Areas of special interest - personal lending' on page 215.

Operating expenses declined to US$8.4 billion. Apart from the non-recurrence of a US$10.6 billion charge for the impairment of the goodwill of the North American Personal Financial Services business, savings from the decision to discontinue originations and close branches in the Consumer Lending business and other cost reduction initiatives drove expense reduction. Restructuring costs associated with the closure of the branch network amounted to US$150 million. Staff costs decreased as a result of lower staff numbers, offsetting higher performance-related costs in Global Banking and Markets. General and administrative costs declined with lower marketing costs in Card and Retail Services as a significant element as origination

activity was curtailed. Deposit insurance expenses increased by US$143 million following a Federal Deposit Insurance Corporation special assessment in response to the bail out of a number of regional banks.

2008 compared with 2007

Economic briefing

Economic conditions proved very difficult in the US during 2008 as the economy entered a period of recession. Overall GDP growth slowed to just 1.1 per cent for the year, down from 2 per cent in 2007. In common with many other economies, much of this weakness was concentrated in the final months of 2008 as fourth quarter GDP registered the largest quarterly decline for 26 years. Economic weakness proved broad-based across most areas of the economy, with the notable exception of net exports. Housing sales and residential construction activity both declined from already depressed levels, with house prices continuing to fall in most regions and mortgage delinquencies continuing to rise. Labour market conditions weakened throughout the course of the year as the unemployment rate rose from 4.9 per cent in January to a 15-year high of 7.2 per cent in December 2008. The annual CPI rate reached a 17-year high of 5.6 per cent in July 2008 before moderating sharply to stand at just 0.1 per cent by the year-end. A combination of falling asset values and weak employment conditions undermined consumer confidence and household spending growth turned negative during the second half of 2008. The Standard & Poor's S&P 500 stock market index fell by 38 per cent during the year. Faced with this deterioration in economic activity and financial conditions, the Federal Reserve lowered short-term interest rates by 425 basis points during the course of 2008, leaving the Funds' target rate within a narrow range of between zero and 25 basis points, while a number of liquidity initiatives were also introduced.

Canadian GDP increased by 0.4 per cent during the first eleven months of 2008 compared with the equivalent period of 2007, with growth slowing markedly during the second half of the year, due predominantly to weaker external demand. Labour market conditions deteriorated as the unemployment rate rose from a historical low of 5.8 per cent in January 2008 to finish the year at 6.6 per cent. After rising to a level of 3.5 per cent in August 2008, the headline rate of consumer price inflation slowed to 1.2 per cent by the year-end. The core rate of inflation remained below 2.0 per cent throughout the year. Responding to the deteriorating economic outlook, the Bank of Canada cut its overnight interest rate from 4.25 per cent at the end of 2007 to 1.5 per cent in December 2008.

Reconciliation of reported and underlying profit/(loss) before tax

	2008 compared with 2007
North America	2007            as reported      US$m	2007 adjustments and dilution          gains10         US$m			Currency translation11        US$m		2007    at 2008 exchange        rates17       US$m	2008         adjust-         ments10         US$m			Under-        lying      change       US$m		2008            as reported      US$m	Re- ported change13         %		Under-    lying change13         %
Net interest income ..........	14,847		1		7		14,855		-		363		15,218		2		2
Net fee income .	5,810		(105)		1		5,706		-		(479)		5,227		(10)		(8)
Changes in fair value14 ..........	1,760		(1,760)		-		-		3,444		-		3,444		96
Other income/ (expense)15 ...	366		(18)		-		348		-		(3,058)		(2,710)		(840)		(879)
Net operating income16 .......	22,783		(1,882)		8		20,909		3,444		(3,174)		21,179		(7)		(15)
Loan impairment charges and other credit risk provisions ......................	(12,156)		-		12		(12,144)		-		(4,651)		(16,795)		(38)		(38)
Net operating income ..........	10,627		(1,882)		20		8,765		3,444		(7,825)		4,384		(59)		(89)
Operating expenses (excluding goodwill impairment) ..	(10,556)		98		(6)		(10,464)		-		1,105		(9,359)		11		11
Goodwill impairment ...	-		-		-		-		-		(10,564)		(10,564)
Operating profit/(loss) ...	71		(1,784)		14		(1,699)		3,444		(17,284)		(15,539)		(21,986)		(1,017)
Income from associates	20		-		-		20		-		(9)		11		(45)		(45)
Profit/(loss) before tax .....	91		(1,784)		14		(1,679)		3,444		(17,293)		(15,528)		(17,164)		(1,030)

For footnotes, see page 149.

Review of business performance

HSBC's operations in North America reported a pre-tax loss of US$15.5 billion in 2008, compared with a pre-tax profit of US$91 million in 2007. On an underlying basis, the loss before tax was US$17.3 billion worse at US$19.0 billion.

Net interest income in North America increased by 2 per cent to US$15.2 billion, driven by Balance Sheet Management activities in Global Banking and Markets which more than offset the decline in Personal Financial Services as lending reduced.

The significant increase in net interest income in the Balance Sheet Management business resulted from correct positioning in anticipation of lower interest rates. Net interest income was also boosted by higher balances within certain loan portfolios in Global Banking and Markets.

Net interest income fell in Personal Financial Services as asset balances declined and deposit spreads narrowed. Deposit spread compression was driven by the competitive environment for retail deposits in which HSBC refrained from passing on the full effects of interest rate cuts to customers. Asset spreads widened, particularly in vehicle finance and credit cards and, to a lesser extent, the real estate secured portfolios as yields declined by less than funding costs in the lower interest rate environment, and the credit card portfolio benefited from APR floors. This was partly offset by a rise in non-performing loans, lower loan prepayments, increased volumes of loan modifications, and lower fees from reduced loan origination volumes. Funding costs declined as a result of lower base rates during the year.

Lending balances declined as the mortgage services portfolio continued to run-off, originations ceased during the year within the dealer and direct-to-consumer channels in vehicle finance, and tighter underwriting criteria in consumer lending constrained customer eligibility for finance. In addition, US$8.2 billion of mortgages were sold from the US real estate secured portfolios during the year. These factors were partly offset by a change in mix towards higher-yielding credit card loans and reduced levels of prepayments that resulted in loans remaining on the balance sheet longer. At the end of February 2009, HSBC authorised the discontinuation as soon as practicable of all new receivable originations of all products by the branch-based consumer lending business of HSBC Finance in North America (see page 215).

Net fee income declined by 8 per cent, driven by reductions in US credit card fees following changes in fee practices implemented since the fourth quarter of 2007 and lower cash advance and interchange fees as a result of reduced volumes. Partly offsetting the decline were increased income from enhancement services due to higher customer acceptance rates of Account Secure Plus and Identity Protection Plan, a rise in syndication, credit and service fees in Commercial Banking and increased fees from asset management.

Trading losses were dominated by write-downs in Global Banking and Markets on legacy exposures as continuing turmoil in credit markets adversely affected valuations of credit and structured credit trading positions, monoline exposures and leveraged and acquisition finance loans. Continued deterioration in the fair value of the run-off portfolio of sub-prime residential mortgage loans held for sale also contributed to the loss. US$3.6 billion in leveraged loans, high yield notes and securities held for balance sheet management were reclassified in 2008 under revised IFRS rules from trading assets to loans and receivables and available for sale, preventing any further mark-to-market trading losses on these assets. If these reclassifications had not been made, the loss before tax would have been US$0.9 billion higher.

The losses on legacy assets were partly offset by strong performances in other trading areas as foreign exchange trading benefited from pronounced market volatility, Rates trading correctly anticipated central bank rate cuts and gains were generated on credit default swaps in Global Banking. Revenues from emerging markets trading and precious metals trading also rose as a result of ongoing market volatility and increased transaction volumes as prices of gold and platinum rose during 2008. Losses on non-qualifying hedge positions in interest rate swaps generated further trading losses. In 2007, the Decision One business, which was closed that year, recorded trading losses of US$263 million.

Net income from financial instruments designated at fair value rose by US$304 million to US$293 million due to income from ineffective hedges related to long-term debt issued by the Group's subsidiaries in North America.

Gains less losses from financial investments declined, mainly due to losses on US government agency securities in 2008 and the non-recurrence of the sale of MasterCard shares, partly offset by gains from the Visa IPO in 2008.

Net earned insurance premiums decreased by 13 per cent to US$390 million, driven by lower credit related premiums in HSBC Finance due to declining loan volumes.

Other operating income declined due to losses on sale of the Canadian vehicle finance businesses and other loan portfolios in 2008, in addition to the non-recurrence of gains on disposal of fixed assets and a small portfolio of private equity investments in 2007.

Net insurance claims incurred and movement in liabilities to policyholders were broadly in line with 2007 at US$238 million.

Loan impairment charges and other credit risk provisions rose sharply, by 38 per cent to US$16.8 billion, reflecting substantially higher impairment charges in HSBC Finance across all portfolios and, in HSBC USA, the deterioration of credit quality in prime residential mortgages, second lien portfolios and private label cards. The main factors driving this deterioration were the continued weakening of the US economy, which led to rising levels of unemployment and personal bankruptcy filings: higher early-stage delinquency and increased roll rates in consumer lending: the ageing of portfolios: and further declines in house prices which increased loss severity and reduced customers' ability to refinance and access equity in their homes. Partly offsetting these factors was a reduction in overall lending as HSBC continued to actively reduce its balance sheet and lower its risk profile in the US.

In the Mortgage Services business, loan impairment charges rose by 14 per cent to US$3.5 billion as the 2005 and 2006 vintages continued to season and experience rising delinquency. Run-off of the portfolio slowed in light of continued house price depreciation which, along with the constrained credit environment, restricted refinancing options for personal customers. In consumer lending, loan impairment charges rose by 39 per cent to US$5.7 billion. In the second half of 2008, delinquency rates began to accelerate particularly in the first lien portfolios in the parts of the country most affected by house price depreciation and rising unemployment rates. In HSBC USA, loan impairment charges rose by 76 per cent to US$2.6 billion driven by credit quality deterioration across the Home Equity line of credit, Home Equity loan, prime first lien residential mortgage and private label card portfolios.

Loan impairment charges in US card and retail services rose, driven by portfolio seasoning and rising unemployment, particularly in the second half of 2008, higher levels of personal bankruptcy filings and lower recovery rates. As with mortgages, this was most notable in parts of the country most affected by house price falls and unemployment. Vehicle finance loan impairment charges rose as delinquencies rose and lower prices resulted in lower recoveries when repossessed vehicles were sold at auction.

Loan impairment charges in Commercial Banking grew to US$449 million from a low base, primarily driven by higher impairment losses due to deterioration across the middle market, commercial real estate and corporate banking portfolios in the US and among firms in the manufacturing, export and commercial real estate sectors in Canada. Higher loan impairment charges and other credit risk provisions in Global Banking and Markets reflected weaker credit fundamentals in the US in 2008.

Operating expenses increased by 90 per cent, driven by US$10.6 billion of impairment charge recognised in respect of North America Personal Financial Services in 2008 to fully write off goodwill. Excluding the goodwill impairment charge, expenses were US$1.1 billion or 11 per cent lower. Staff costs declined, primarily in HSBC Finance, following decisions taken in 2007 to close the acquisition channels for new business in Mortgage Services and a number of consumer lending branches, and integrate the operations of the card businesses. HSBC USA made the decision to close its wholesale and third-party correspondent mortgage business in November 2008, while HSBC Finance took the decision to cease originations in the dealer and direct-to-consumer channels in the vehicle finance business in July 2008. Staff costs in Global Banking and Markets also fell as performance-related compensation and staff numbers both declined.

Other administrative costs decreased as origination activity declined, marketing costs in card and retail services reduced and branch costs in consumer lending fell as tightened underwriting criteria curtailed business and led to branch closures. This was partly offset by higher marketing and occupancy costs in the retail bank reflecting a continued expansion of the branch network, increased community investment activities and higher deposit insurance, collection, payments and cash management and asset management costs in support of business growth.

Analysis by customer group and global business

Profit/(loss) before tax

	2009
North America	Personal   Financial     Services         US$m		Commercial    Banking         US$m		Global    Banking &     Markets         US$m		Private    Banking         US$m		Other         US$m		Inter-   segment elimination50        US$m		Total         US$m
Net interest income/(expense)	11,244		1,391		999		178		(84)		(58)		13,670
Net fee income ......................	3,174		453		1,045		142		3		-		4,817
Trading income/(expense) excluding net interest income ...........................................	257		(10)		(179)		(3)		(30)		-		35
Net interest income/(expense) on trading activities ............	60		3		175		(1)		1		58		296
Net trading income/(expense)42	317		(7)		(4)		(4)		(29)		58		331
Changes in fair value of long- term debt issued and related derivatives ..........................	-		-		-		-		(3,497)		-		(3,497)
Net income from other financial instruments designated at fair value ............................	-		-		-		-		1		-		1
Net expense from financial instruments designated at fair value ........................	-		-		-		-		(3,496)		-		(3,496)
Gains less losses from financial investments ........................	16		3		277		-		-		-		296
Dividend income ....................	21		5		27		2		(2)		-		53
Net earned insurance premiums	309		-		-		-		-		-		309
Other operating income .........	9		162		317		11		1,828		(1,761)		566
Total operating income/ (expense) ..........................	15,090		2,007		2,661		329		(1,780)		(1,761)		16,546
Net insurance claims43 ............	(241)		-		-		-		-		-		(241)
Net operating income/ (expense)16 .......................	14,849		2,007		2,661		329		(1,780)		(1,761)		16,305
Loan impairment charges and other credit risk provisions .	(14,424)		(519)		(621)		(98)		(2)		-		(15,664)
Net operating income/ (expense) ..........................	425		1,488		2,040		231		(1,782)		(1,761)		641
Operating expenses ................	(5,651)		(958)		(1,328)		(281)		(1,934)		1,761		(8,391)
Operating profit/(loss) .......	(5,226)		530		712		(50)		(3,716)		-		(7,750)
Share of profit/(loss) in associates and joint ventures	-		13		-		-		(1)		-		12
Profit/(loss) before tax .......	(5,226)		543		712		(50)		(3,717)		-		(7,738)
	%		%		%		%		%				%
Share of HSBC's profit before tax ...........................	(73.8)		7.7		10.1		(0.7)		(52.6)				(109.3)
Cost efficiency ratio ..............	38.1		47.7		49.9		85.4		(108.7)				51.5
Balance sheet data41
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..................	151,671		31,292		18,654		5,236		-				206,853
Total assets ............................	179,597		38,232		260,131		6,572		2,071		(11,589)		475,014
Customer accounts .................	74,228		42,900		19,095		12,834		100				149,157

Profit/(loss) before tax (continued)

	2008
North America	Personal     Financial       Services          US$m		Commercial       Banking          US$m		Global Banking &      Markets          US$m		Private      Banking          US$m		Other          US$m		Inter-     segment elimination50         US$m		Total          US$m
Net interest income ...............	12,632		1,480		1,064		224		22		(204)		15,218
Net fee income/(expense) ......	3,896		391		818		181		(59)		-		5,227
Trading income/(expense) excluding net interest income ...........................................	(250)		5		(3,516)		10		(128)		-		(3,879)
Net interest income/(expense) on trading activities ............	66		-		584		-		(110)		204		744
Net trading income/(expense)42	(184)		5		(2,932)		10		(238)		204		(3,135)
Changes in fair value of long- term debt issued and related derivatives ..........................	-		-		-		-		3,736		-		3,736
Net income/(expense) from other financial instruments designated at fair value .......	(2)		-		(1)		-		4		-		1
Net income/(expense) from financial instruments designated at fair value .......	(2)		-		(1)		-		3,740		-		3,737
Gains less losses from financial investments ........................	65		5		(209)		-		19		-		(120)
Dividend income ....................	36		11		27		3		-		-		77
Net earned insurance premiums	390		-		-		-		-		-		390
Other operating income/ (expense) ...........................	(426)		140		240		20		1,419		(1,370)		23
Total operating income/ (expense) ...........................	16,407		2,032		(993)		438		4,903		(1,370)		21,417
Net insurance claims43 ............	(238)		-		-		-		-		-		(238)
Net operating income/ (expense)16 .........................	16,169		2,032		(993)		438		4,903		(1,370)		21,179
Loan impairment charges and other credit risk provisions .	(16,132)		(449)		(198)		(16)		-		-		(16,795)
Net operating income/ (expense) ...........................	37		1,583		(1,191)		422		4,903		(1,370)		4,384
Operating expenses (excluding goodwill impairment) .........	(6,701)		(937)		(1,384)		(339)		(1,368)		1,370		(9,359)
Goodwill impairment ..............	(10,564)		-		-		-		-		-		(10,564)
Operating profit/(loss) ...........	(17,228)		646		(2,575)		83		3,535		-		(15,539)
Share of profit/(loss) in associates and joint ventures	-		12		-		-		(1)		-		11
Profit/(loss) before tax ...........	(17,228)		658		(2,575)		83		3,534		-		(15,528)
	%		%		%		%		%				%
Share of HSBC's profit before tax ...........................	(185.1)		7.1		(27.7)		0.9		38.0				(166.8)
Cost efficiency ratio ..............	106.8		46.1		(139.4)		77.4		27.9				94.1
Balance sheet data41
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..................	179,663		35,725		35,583		5,243		-				256,214
Total assets ............................	205,722		42,211		348,347		7,054		3,323		(10,355)		596,302
Customer accounts .................	65,830		39,105		23,844		14,657		96				143,532

	2007
North America	Personal     Financial       Services          US$m		Commercial       Banking          US$m		Global Banking &      Markets          US$m		Private      Banking          US$m		Other          US$m		Inter-     segment elimination50         US$m		Total          US$m
Net interest income/(expense)	13,175		1,558		378		273		(17)		(520)		14,847
Net fee income/(expense) ......	4,571		338		701		279		(79)		-		5,810
Trading income/(expense) excluding net interest income ...........................................	(349)		(2)		(871)		11		(78)		-		(1,289)
Net interest income/(expense) on trading activities ............	134		-		137		-		(44)		520		747
Net trading income/(expense)42	(215)		(2)		(734)		11		(122)		520		(542)
Changes in fair value of long- term debt issued and related derivatives ..........................	-		-		-		-		1,750		-		1,750
Net income/(expense) from other financial instruments designated at fair value .......	-		-		11		-		(11)		-		-
Net income from financial instruments designated at fair value ............................	-		-		11		-		1,739		-		1,750
Gains less losses from financial investments ........................	176		(1)		65		2		3		-		245
Dividend income ....................	47		1		57		-		-		-		105
Net earned insurance premiums	449		-		-		-		-		-		449
Other operating income/ (expense) ...........................	(5)		88		167		34		1,480		(1,404)		360
Total operating income .........	18,198		1,982		645		599		3,004		(1,404)		23,024
Net insurance claims43 ............	(241)		-		-		-		-		-		(241)
Net operating income16 ..........	17,957		1,982		645		599		3,004		(1,404)		22,783
Loan impairment charges and other credit risk provisions .	(11,909)		(191)		(46)		(10)		-		-		(12,156)
Net operating income ............	6,048		1,791		599		589		3,004		(1,404)		10,627
Total operating expenses .......	(7,594)		(893)		(1,562)		(415)		(1,496)		1,404		(10,556)
Operating profit/(loss) ...........	(1,546)		898		(963)		174		1,508		-		71
Share of profit/(loss) in associates and joint ventures	-		22		(2)		-		-		-		20
Profit/(loss) before tax ...........	(1,546)		920		(965)		174		1,508		-		91
	%		%		%		%		%				%
Share of HSBC's profit before tax ...........................	(6.4)		3.8		(4.0)		0.7		6.3				0.4
Cost efficiency ratio ..............	42.3		45.1		242.2		69.3		49.8				46.3
Balance sheet data41
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..................	218,676		38,930		26,186		6,068		-				289,860
Total assets ............................	252,304		46,247		263,008		20,073		1,095		(8,409)		574,318
Customer accounts .................	61,824		36,306		30,732		16,187		124				145,173

For footnotes, see page 149.

Latin America

Profit/(loss) before tax by country within customer groups and global businesses

	Personal   Financial     Services         US$m		Commercial     Banking         US$m		Global Banking &     Markets         US$m		Private     Banking         US$m		Other         US$m		Total         US$m
2009
Argentina ..................................................	24		86		122		-		-		232
Brazil ........................................................	(224)		211		515		5		3		510
Mexico .....................................................	(31)		66		230		7		-		272
Panama .....................................................	69		55		24		-		-		148
Other ........................................................	(54)		(19)		40		(1)		(4)		(38)
	(216)		399		931		11		(1)		1,124
2008
Argentina ..................................................	-		111		113		-		-		224
Brazil ........................................................	250		348		298		8		6		910
Mexico .....................................................	360		157		190		7		-		714
Panama .....................................................	51		37		33		-		-		121
Other ........................................................	7		53		7		1		-		68
	668		706		641		16		6		2,037
2007
Argentina ..................................................	36		75		90		-		-		201
Brazil ........................................................	293		286		297		9		(6)		879
Mexico .....................................................	514		333		113		11		9		980
Panama .....................................................	45		18		16		7		-		86
Other ........................................................	5		28		1		(2)		-		32
	893		740		517		25		3		2,178

Loans and advances to customers (net) by country

	At 31 December
	2009              US$m		2008               US$m		2007               US$m
Argentina ...........................................................................................	2,319		2,356		2,485
Brazil .................................................................................................	22,765		18,255		18,491
Mexico ...............................................................................................	12,114		12,211		18,059
Panama ..............................................................................................	5,989		4,538		4,158
Other .................................................................................................	4,442		4,927		4,730
	47,629		42,287		47,923

Customer accounts by country

	At 31 December
	2009              US$m		2008               US$m		2007               US$m
Argentina ...........................................................................................	3,083		2,988		2,779
Brazil .................................................................................................	39,022		27,857		26,231
Mexico ...............................................................................................	18,195		17,652		22,307
Panama ..............................................................................................	6,996		5,185		5,062
Other .................................................................................................	5,593		5,761		4,913
	72,889		59,443		61,292

Profit before tax

	2009		2008		2007
Latin America	US$m		US$m		US$m
Net interest income ............................................................................	5,573		6,458		5,576
Net fee income ...................................................................................	1,729		2,167		2,153
Net trading income .............................................................................	848		701		548
Changes in fair value of long-term debt issued and related derivatives .	-		-		-
Net income from other financial instruments designated at fair value .	495		364		320
Net income from financial instruments designated at fair value ..........	495		364		320
Gains less losses from financial investments .......................................	168		176		253
Gains arising from dilution of interests in associates............................	-		-		11
Dividend income ................................................................................	11		20		9
Net earned insurance premiums ..........................................................	1,900		1,717		1,594
Other operating income .....................................................................	133		300		228
Total operating income ..................................................................	10,857		11,903		10,692
Net insurance claims incurred and movement in liabilities to policyholders .............................................................................	(1,833)		(1,390)		(1,427)
Net operating income before loan impairment charges and other credit risk provisions .................................................................	9,024		10,513		9,265
Loan impairment charges and other credit risk provisions ..................	(2,526)		(2,492)		(1,697)
Net operating income .....................................................................	6,498		8,021		7,568
Total operating expenses ...................................................................	(5,375)		(5,990)		(5,402)
Operating profit ..............................................................................	1,123		2,031		2,166
Share of profit in associates and joint ventures ...................................	1		6		12
Profit before tax ..............................................................................	1,124		2,037		2,178
	%		%		%
Share of HSBC's profit before tax ......................................................	15.9		21.9		9.0
Cost efficiency ratio ...........................................................................	59.6		57.0		58.3
Year-end staff numbers (full-time equivalent) .....................................	54,288		58,559		64,404
Balance sheet data41
	At 31 December
	2009		2008		2007
	US$m		US$m		US$m
Loans and advances to customers (net) ...............................................	47,629		42,287		47,923
Loans and advances to banks (net) .....................................................	18,608		14,572		12,675
Trading assets, financial assets designated at fair value, and financial investments ......................................................................	28,779		18,753		24,715
Total assets ........................................................................................	115,967		102,946		102,649
Deposits by banks ...............................................................................	5,421		5,598		4,092
Customer accounts .............................................................................	72,889		59,443		61,292

For footnote, see page 149.

All commentaries on Latin America are on an underlying basis unless stated otherwise.

1  

2009 compared with 2008

Economic briefing

A mixture of weak external demand and the disruption caused by the H1N1 virus contributed to a substantial deterioration in economic conditions in Mexico during the first half of 2009. The period of recession ended decisively as the economy improved strongly during the third quarter of the year, but the previous sharp decline in activity had left GDP some 6.2 per cent below the comparable figure in 2008. The annual CPI rate continued to moderate, falling from 6.5 per cent in December 2008 to 3.6 per cent in December 2009. In response to the deterioration in economic conditions, the Bank of Mexico cut its overnight interest rate by 375 basis points during the first seven months of 2009 to 4.5 per cent by the end of the year.

The Brazilian economy experienced a mild contraction during the early months of 2009 but returned to growth during the second quarter of the year, helped by a recovery in household consumption and a broader stabilisation of external demand and commodity prices. Starting the year at unusually low levels, the unemployment rate increased during the early months of 2009 relative to the comparable period of 2008, before declining to the historically low level of 6.8 per cent in December 2009. The annual CPI rate moderated from 5.9 per cent in December 2008 to a level slightly below the central banks' targeted rate of 4.5 per cent at the year end. Faced with this softening of economic conditions and diminishing inflationary pressures, the central bank of Brazil reduced the policy Selic target rate by a cumulative 500 basis points during the first seven months of 2009, placing the rate at 8.75 per cent at the end of the period.

In Argentina, economic activity was adversely affected by the decline in external demand during 2009, with a very weak level of growth being reported around the middle of the year. Industrial production is reported to have risen by 0.4 per cent during 2009. The improving global and regional outlook during the second half of 2009 and a recovery in commodity prices provided some relief to the economy, enabling interest rates to ease.

Reconciliation of reported and underlying profit before tax

	2009 compared with 2008
Latin America	2008            as reported     US$m	2008 acquisitions            and disposals10        US$m			Currency translation11       US$m		2008    at 2009 exchange       rates12      US$m	2009 acquisitions            and disposals10        US$m			Under-       lying    change      US$m		2009            as reported     US$m	Re- ported change13         %		Under-  lying change13         %
Net interest income ....	6,458		-		(783)		5,675		-		(102)		5,573		(14)		(2)
Net fee income ....	2,167		-		(291)		1,876		-		(147)		1,729		(20)		(8)
Other income15 .	1,888		(71)		(220)		1,597		-		125		1,722		(9)		8
Net operating income16	10,513		(71)		(1,294)		9,148		-		(124)		9,024		(14)		(1)
Loan impairment charges and other credit risk provisions ................	(2,492)		-		294		(2,198)		-		(328)		(2,526)		(1)		(15)
Net operating income ..	8,021		(71)		(1,000)		6,950		-		(452)		6,498		(19)		(7)
Operating expenses .	(5,990)		-		709		(5,281)		-		(94)		(5,375)		10		(2)
Operating profit .....	2,031		(71)		(291)		1,669		-		(546)		1,123		(45)		(33)
Income from associates	6		-		(2)		4		-		(3)		1		(83)		(75)
Profit before tax ................	2,037		(71)		(293)		1,673		-		(549)		1,124		(45)		(33)

For footnotes, see page 149.

Review of business performance

HSBC's operations in Latin America reported pre‑tax profits of US$1.1 billion, compared with US$2.0 billion in 2008. On an underlying basis, pre-tax profits decreased by 33 per cent, primarily attributable to significantly higher loan impairment charges in Personal Financial Services and Commercial Banking and lower revenues in Personal Financial Services. Global Banking and Markets' performance improved driven by strong results in trading and Balance Sheet Management.

2009 was a year of consolidating risk policies and strongly emphasising cost control. Additional capital was injected into Brazil and Mexico during the fourth quarter of 2009, in line with the Group strategy of focusing on emerging markets. In both Panama and Argentina, strong results were achieved in spite of the challenging economic environment. However, performance in Honduras, Costa Rica and El Salvador was significantly affected by higher loan impairment charges and lower income. One HSBC and Group systems were implemented in Chile and the operations in Panama were fully integrated.

Net interest income remained broadly in line with 2008 excluding the one-off interest income which arose on recovery of transactional taxes on insurance transactions in Brazil in 2008. Net interest income decreased in Personal Financial Services as average customer lending volumes declined, primarily driven by actions taken to tighten credit criteria and manage down existing higher risk portfolios including credit cards, personal loans and vehicle finance. The effect was partly offset by higher income on increased lending to commercial customers, primarily in Brazil. Repricing initiatives taken during 2008 and early 2009 drove increased spreads on lending products.

Average customer deposit balances rose, resulting from an increase in commercial and Global Banking balances. In Mexico, Personal Financial Services launched new deposit products to mitigate the fall in deposits. Deposits Spreads narrowed due to falling interest rates, also primarily in Mexico.

Interest income rose in Balance Sheet Management, primarily in Brazil.

Net fee income declined by 8 per cent. Tighter credit origination criteria resulted in lower credit card fees in Mexico. Account service fees also fell, primarily due to lower transaction volumes. Weak equity market performance in Brazil led to lower assets under management and related fee income. This was partly offset by growth in restructuring fees in Global Banking and Markets.

Below inflation increase in operating expenses reflected significant cost control measures in Latin America.

Net trading income rose by 42 per cent due to a strong performance in Global Banking and Markets, particularly in the first half of the year in Brazil. This resulted from increased foreign exchange and Rates trading income, which benefited from early positioning against interest rate movements in a volatile market.

Net income from financial instruments designated at fair valuerose by 36 per cent, primarily from higher insurance-related assets. This resulted from business growth and a recovery of the Brazilian equity markets as well as an increase in the fair value of fixed income securities held in support of personal pension portfolios in the country. An offsetting increase was recorded in net insurance claims incurred and movement in liabilities to policyholders.

Net earned insurance premiums rose by 24 per cent, driven by higher sales of pension and life assurance products. In addition, a number of customers in Brazil switched their personal pension annuities to HSBC. These gains were partially offset by the impact of the 2008 nationalisation of the pension system in Argentina on the annuities business there.

Net insurance claims incurred and movement in liabilities to policyholders rose, primarily as a result of the fair value movement on financial instruments referred to above and insurance business growth.

Other operating income fell by 29 per cent, largely due to the non-recurrence of gains arising in 2008 on a refinement of the income recognition

methodology used in respect of long-term insurance contracts in Brazil. In 2009, a one-off gain was realised on the sale of the head office in Argentina.

Loan impairment charges and other credit risk provisions rose by 15 per cent as economic conditions deteriorated across the region. In the first half of 2009, delinquencies rose as GDP fell and unemployment increased. The situation was exacerbated by the H1N1 virus in Mexico and the related economic shutdown. With the introduction of enhanced credit risk management techniques and gradual economic recovery, loan impairment charges in the second half of 2009 decreased by 11 per cent compared with the second half of 2008 and by 27 per cent on the first half of 2009.

In Personal Financial Services, the combination of portfolio seasoning, which followed expansion in market share in previous years, and increased delinquencies in secured and unsecured personal lending products such as personal loans and payroll loans in Brazil and cards and mortgages in Mexico, resulted in higher loan impairment charges, mainly in the first half of 2009. Some payroll loan portfolios were run down in Brazil, as were several consumer finance and unsecured portfolios in Mexico. Loan impairment charges in Personal Financial Services fell by 8 per cent in the second half of the year compared with the same period in 2008 and by 27 per cent compared with the first half of 2009.

Loan impairment charges rose in commercial lending portfolios, primarily in Business Banking and mid-market business segments in Brazil, as trade levels fell as a consequence of the global economic slowdown. This was partly offset by net releases in loan impairment charges in Global Banking and Markets when compared with a net charge in 2008.

Operating expenses increased slightly by 2 per cent, well below the inflation rates of the main economies in which HSBC operates, reflecting significant cost control measures. The benefit from the reduction in staff numbers, which began in 2008 and continued in 2009, was partially offset by union‑agreed pay rises. Savings in general and administrative costs were offset by investment expenditure on regional initiatives to centralise certain back office processes, and the implementation of One HSBC and Group systems intended to drive future operational efficiencies. Costs also increased in the form of higher litigation expenses and transactional taxes, the latter partly from the non-recurrence of a recovery of transactional taxes in the insurance business in 2008.

2008 compared with 2007

Economic briefing

Inflationary pressures developed in Mexico during the course of 2008, mostly due to rising commodity prices, as consumer price inflation accelerated from 3.7 per cent in January to 6.5 per cent by the year-end. In response, the Bank of Mexico raised its overnight interest rate by 75 basis points to 8.25 per cent by the end of the year, although a variety of economic indicators pointed to a sharp loss of momentum during the final quarter as global growth slowed.

The Brazilian economy performed strongly during the first half of 2008, driven by domestic demand, with the annual rate of consumer price inflation rising from 4.6 per cent in January to 6.4 per cent in July, towards the upper limit of the central banks' tolerance range. Conditions within the labour market improved, with the rate of unemployment well below levels observed a year earlier. In line with many other economies within the region, however, conditions weakened markedly towards the end of 2008, with industrial production falling by close to 20 per cent during the fourth quarter.

In Argentina, economic activity held at a reasonably robust level for much of the year, although measures of industrial production growth slowed noticeably during the final months of 2008. Declines in commodity prices during the second half of 2008 and the reduced value of exports raised concerns over the level of capital outflow from the country, while domestic currency interest rates increased sharply. The official headline rate of consumer price inflation rose during the first half of 2008, reaching 9.3 per cent in June 2008 before slowing to 7.2 per cent in December, although methodological changes make comparisons over year difficult.

Reconciliation of reported and underlying profit before tax

	2008 compared with 2007
Latin America	2007            as reported      US$m	2007 acquisitions,     disposals   & dilution          gains10         US$m			Currency translation11        US$m		2007    at 2008 exchange        rates17       US$m	2008 acquisitions             and     disposals10         US$m			Under-        lying      change       US$m		2008            as reported      US$m	Re- ported change13         %		Under-    lying change13         %
Net interest income ..........	5,576		-		155		5,731		-		727		6,458		16		13
Net fee income .	2,153		-		58		2,211		-		(44)		2,167		1		(2)
Other income15 .	1,536		(11)		23		1,548		71		269		1,888		23		17
Net operating income16 .......	9,265		(11)		236		9,490		71		952		10,513		13		10
Loan impairment charges and other credit risk provisions ......................	(1,697)		-		(64)		(1,761)		-		(731)		(2,492)		(47)		(42)
Net operating income ..........	7,568		(11)		172		7,729		71		221		8,021		6		3
Operating expenses ........	(5,402)		-		(190)		(5,592)		-		(398)		(5,990)		(11)		(7)
Operating profit	2,166		(11)		(18)		2,137		71		(177)		2,031		(6)		(8)
Income from associates	12		-		-		12		-		(6)		6		(50)		(50)
Profit before tax ......................	2,178		(11)		(18)		2,149		71		(183)		2,037		(6)		(9)

For footnotes, see page 149.

Review of business performance

In Latin America, HSBC reported a pre-tax profit of US$2.0 billion compared with US$2.2 billion in 2007, a decrease of 6 per cent. On an underlying basis, pre-tax profits decreased by 9 per cent as increased revenues were offset by higher loan impairment charges, largely in Mexico and Brazil, and increased operating costs across the region.

Net interest income increased by 13 per cent. Growth in average personal lending volumes was mainly driven by vehicle finance and payroll loans in Brazil, and credit cards and personal loans in Mexico. Average credit card balances increased as a result of significant organic growth in 2007 which was not repeated in 2008. Commercial loan volume growth was driven by increased lending for working capital and trade finance loans in Brazil, and medium-sized businesses and the real estate sector in Mexico. Increased income on customer liabilities, which was driven by volume growth, particularly in time deposits, was largely offset by a contraction in deposit spreads, primarily on US dollar denominated accounts. Active repricing strategies were deployed to mitigate spread compression in the region and to better reflect the credit risk on the loan portfolio. Lower overall spreads on lending products were partly offset by increases in cards in the region, small business loans in Mexico and overdrafts in Brazil. In Argentina, spreads on most products widened.

Net fee income decreased by 2 per cent following a ruling by the Brazilian Central Bank reducing or eliminating certain fees such as charges on early loan repayments and returned cheques. Lower transaction volumes in Personal Financial Services in Brazil also reduced fee income. These were partly offset by product repricing, the introduction of new fees and volume growth, particularly in cards, personal loans, packaged deposit products and payments and cash management.

Trading income rose by 22 per cent largely reflecting favourable positioning against foreign exchange movements and increased foreign exchange sales volumes. Trading losses were registered on certain transactions where an offsetting benefit is reported in net income from financial instruments designated at fair value. Losses from defaults on derivative contracts were registered, primarily in Mexico.

Gains less losses from financial investments declined by 24 per cent as gains on the redemption of VISA shares, following its global IPO, and the sale of shares in both Brazil and Mexico were lower than the gains achieved on the sale of shares in a number of companies in Brazil in 2007.

Net earned insurance premiums rose, driven by higher prices and increased sales in the general insurance business, primarily in Argentina. Sales of life assurance products remained strong.

Increased net insurance claims incurred and movements in liabilities to policyholders in
Argentina were more than offset by a decrease in liabilities to policyholders in Brazil following a decline in the equity market where the investment losses were passed on to unit-linked policyholders. This was compensated for by a similar decrease in net income from financial instruments designated at fair value.

Other operating incomewas broadly in line with 2007. A refinement of the income recognition methodology used in respect of long-term insurance contracts in Brazil in 2008 was offset by a similar adjustment in Mexico in 2007.

Loan impairment charges and other credit risk provisions rose by 42 per cent, mainly relating to credit cards, as organically grown portfolios in Mexico seasoned following market share growth and credit quality deteriorated in Mexico and Brazil. The personal unsecured, vehicle finance and small and medium-sized commercial loan portfolios in Brazil also experienced increased levels of loan impairment. Specific focus was placed on improving the quality of new business, based on underwriting experience and relationship management, and steps were taken to improve collection strategies.

Operating expensesincreased by 7 per cent. An increase in staff costs was primarily driven by higher salaries following union-agreed pay rises and redundancy payments following reductions in staff numbers, partly offset by cost savings from the reduced headcount. Administrative expenses rose following an increase in the use of a credit card cashback promotional facility in Mexico which was terminated at the end of 2008. Costs also grew in support of improved operational processes in the region. HSBC benefited in 2008 from the recognition of a tax credit following a court ruling in Brazil granting the right to recover excess taxes paid on insurance transactions and changes in transactional tax legislation. As economic conditions weakened towards the second half of 2008, strategic cost saving measures were implemented throughout the region.

Analysis by customer group and global business

Profit/(loss) before tax

	2009
Latin America	Personal   Financial     Services         US$m		Commercial    Banking         US$m		Global    Banking &     Markets         US$m		Private    Banking         US$m		Other         US$m		Inter-    segment elimination50        US$m		Total         US$m
Net interest income/(expense)	3,736		1,544		590		19		(5)		(311)		5,573
Net fee income ......................	948		490		251		28		12		-		1,729
Trading income excluding net interest income ..................	25		38		573		3		-		-		639
Net interest income/(expense) on trading activities ............	4		2		(108)		-		-		311		209
Net trading income42 ..............	29		40		465		3		-		311		848
Changes in fair value of long- term debt issued and related derivatives ..............	-		-		-		-		-		-		-
Net income/(expense) from other financial instruments designated at fair value .......	510		12		(38)		-		11		-		495
Net income/(expense) from financial instruments designated at fair value .......	510		12		(38)		-		11		-		495
Gains less losses from financial investments ........................	91		-		77		-		-		-		168
Dividend income ....................	9		1		1		-		-		-		11
Net earned insurance premiums	1,752		105		43		-		-		-		1,900
Other operating income/ (expense) ...........................	170		35		24		2		(1)		(97)		133
Total operating income ......	7,245		2,227		1,413		52		17		(97)		10,857
Net insurance claims43 ............	(1,750)		(58)		(25)		-		-		-		(1,833)
Net operating income16 ......	5,495		2,169		1,388		52		17		(97)		9,024
Loan impairment (charges)/ recoveries and other credit risk provisions ....................	(2,046)		(534)		57		-		(3)		-		(2,526)
Net operating income .........	3,449		1,635		1,445		52		14		(97)		6,498
Total operating expenses .......	(3,666)		(1,236)		(514)		(41)		(15)		97		(5,375)
Operating profit/(loss) .......	(217)		399		931		11		(1)		-		1,123
Share of profit in associates and joint ventures ...............	1		-		-		-		-		-		1
Profit/(loss) before tax .......	(216)		399		931		11		(1)		-		1,124
	%		%		%		%		%				%
Share of HSBC's profit before tax ...........................	(3.1)		5.6		13.2		0.2		-				15.9
Cost efficiency ratio ..............	66.7		57.0		37.0		78.8		88.2				59.6
Balance sheet data41
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..................	19,748		18,205		9,645		31		-				47,629
Total assets ............................	35,236		23,212		57,491		328		281		(581)		115,967
Customer accounts .................	30,628		19,775		20,142		2,344		-				72,889

	2008
Latin America	Personal     Financial       Services          US$m		Commercial       Banking          US$m		Global Banking &      Markets          US$m		Private      Banking          US$m		Other          US$m		Inter-      segment elimination50         US$m		Total          US$m
Net interest income/(expense)	4,582		1,637		579		22		(35)		(327)		6,458
Net fee income ......................	1,339		536		248		35		9		-		2,167
Trading income excluding net interest income ..................	123		27		200		3		4		-		356
Net interest income/(expense) on trading activities ............	7		4		8		-		(2)		327		345
Net trading income42 ..............	130		31		208		3		2		327		701
Changes in fair value of long- term debt issued and related derivatives ..............	-		-		-		-		-		-		-
Net income from other financial instruments designated at fair value ..................................	187		-		139		-		38		-		364
Net income from financial instruments designated at fair value ............................	187		-		139		-		38		-		364
Gains less losses from financial investments ........................	132		21		21		2		-		-		176
Dividend income ....................	16		1		3		-		-		-		20
Net earned insurance premiums	1,547		82		88		-		-		-		1,717
Other operating income .........	244		57		39		3		8		(51)		300
Total operating income .........	8,177		2,365		1,325		65		22		(51)		11,903
Net insurance claims43 ............	(1,281)		(42)		(68)		-		1		-		(1,390)
Net operating income16 ..........	6,896		2,323		1,257		65		23		(51)		10,513
Loan impairment charges and other credit risk provisions .	(2,120)		(340)		(29)		-		(3)		-		(2,492)
Net operating income ............	4,776		1,983		1,228		65		20		(51)		8,021
Total operating expenses .......	(4,114)		(1,277)		(587)		(49)		(14)		51		(5,990)
Operating profit .....................	662		706		641		16		6		-		2,031
Share of profit in associates and joint ventures ...............	6		-		-		-		-		-		6
Profit before tax ....................	668		706		641		16		6		-		2,037
	%		%		%		%		%				%
Share of HSBC's profit before tax ...........................	7.2		7.6		6.9		0.2		-				21.9
Cost efficiency ratio ..............	59.7		55.0		46.7		75.4		60.9				57.0
Balance sheet data41
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..................	18,523		15,460		8,273		31		-				42,287
Total assets ............................	30,320		19,382		53,870		391		361		(1,378)		102,946
Customer accounts .................	27,564		14,367		15,384		2,128		-				59,443

Profit/(loss) before tax (continued)

	2007
Latin America	Personal     Financial       Services          US$m		Commercial       Banking          US$m		Global Banking &      Markets          US$m		Private      Banking          US$m		Other          US$m		Inter-      segment elimination50         US$m		Total          US$m
Net interest income ...............	3,983		1,407		410		20		3		(247)		5,576
Net fee income ......................	1,372		485		250		40		6		-		2,153
Trading income excluding net interest income ..................	67		39		164		2		-		-		272
Net interest income on trading activities .................	10		1		18		-		-		247		276
Net trading income42 ..............	77		40		182		2		-		247		548
Changes in fair value of long- term debt issued and related derivatives ..............	-		-		-		-		-		-		-
Net income from other financial instruments designated at fair value ..................................	314		-		6		-		-		-		320
Net income from financial instruments designated at fair value ............................	314		-		6		-		-		-		320
Gains less losses from financial investments ........................	120		51		82		1		(1)		-		253
Gains arising from dilution of interests in associates .........	-		-		-		-		11		-		11
Dividend income ....................	5		2		2		-		-		-		9
Net earned insurance premiums	1,448		66		80		-		-		-		1,594
Other operating income .........	145		69		31		8		12		(37)		228
Total operating income .........	7,464		2,120		1,043		71		31		(37)		10,692
Net insurance claims43 ............	(1,330)		(37)		(60)		-		-		-		(1,427)
Net operating income16 ..........	6,134		2,083		983		71		31		(37)		9,265
Loan impairment (charges)/ recoveries and other credit risk provisions ....................	(1,492)		(212)		13		-		(6)		-		(1,697)
Net operating income ............	4,642		1,871		996		71		25		(37)		7,568
Total operating expenses .......	(3,758)		(1,132)		(481)		(46)		(22)		37		(5,402)
Operating profit .....................	884		739		515		25		3		-		2,166
Share of profit in associates and joint ventures ...............	9		1		2		-		-		-		12
Profit before tax ....................	893		740		517		25		3		-		2,178
	%		%		%		%		%				%
Share of HSBC's profit before tax ...........................	3.7		3.1		2.1		0.1		-				9.0
Cost efficiency ratio ..............	61.3		54.3		48.9		64.8		71.0				58.3
Balance sheet data41
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..................	21,680		16,243		9,935		65		-				47,923
Total assets ............................	35,181		21,049		46,606		302		261		(750)		102,649
Customer accounts .................	30,628		15,524		13,950		1,190		-				61,292

For footnotes, see page 149.

 

END

 

 

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