Final Results - Year Ended 31 Dec 1999, Part 5

HSBC Hldgs PLC 28 February 2000 Part 5 HSBC Holdings plc Financial Review by Geographical Segment HSBC North American Operations Figures in US$m 1999 1998 Profit before tax 959 987 Share of Group pre-tax profits 12.0% 15.0% Total assets 110,120 63,903 Share of Group total assets 19.7% 13.4% Year end staff numbers (FTE basis) 19,498 14,500 Cost:income ratio 60.1% 57.2% The Group's operations in North America contributed US$959 million to the HSBC Group's profit before tax, after charging US$164 million of restructuring costs for the integration of RNYC's operations with our existing operations, a slight decrease from the level achieved in 1998. The level of net interest income benefited from investing the capital raised earlier in the year to fund the RNYC and SRH acquisitions completed at the year end. USA The acquisition of RNYC was completed on 31 December and strengthened our US operations with significant private banking, treasury and capital markets, and factoring businesses, and additional New York City retail branches. HSBC Bank USA now has the largest branch network in New York State and the second largest branch network in New York City. Our banking operations now reach 2.4 million households in the state. The rating agencies improved the ratings of HSBC Bank USA to the AA level. Detailed integration planning has been completed and progress is on-track to achieve the synergies highlighted at the time the acquisition was announced. Our commercial banking operations increased full year pre-tax profits, before one-off events, by 9 per cent. These results included a US$15 million gain on the sale of a loan portfolio and the benefit of a US$13 million settlement with the US Internal Revenue Service on Brazilian tax credits disallowed in the 1980s. The results for 1998 included a US$33 million settlement on Brazilian tax credits with US$28 million arising from the sale of credit card portfolios. Other operating income, before one-off events, increased 9 per cent with a greater contribution from wealth management products, including insurance, and from deposit service charges and commercial loan fees. Insurance revenues were US$10 million higher than 1998. Over 1,100 bank employees were licensed to sell insurance products with this number planned to almost double over the next year. Overall, costs continued to be carefully controlled and the underlying increase was less than 3 per cent. Our treasury and investment banking operations in the US produced an improved operating performance in 1999 largely reflecting a refocusing and rationalisation of activities mainly completed during 1998. Canada Profit before tax from banking operations in Canada for 1999 increased by 9 per cent over 1998. However, the comparative included in HSBC's results was for the 14 months ended 31 December 1998. Adjusting for this, the increase in pre-tax profit on an annualised basis was 27 per cent. Net interest income grew by 4 per cent on an annualised basis over the comparative period in 1998 despite continuing market pressures on interest spreads during 1999. The increase was due to steady growth in both the bank's retail and commercial loan portfolios. The net interest margin on average interest- earning assets also improved year on year from 2.27 per cent to 2.32 per cent. Other income was 36 per cent higher than the comparative period of 1998 on an annualised basis. Securities commissions increased significantly year on year following the acquisition of Gordon Capital Corporation in January 1999. Strong contributions were recorded by equity structured trading and, assisted by NetTrader, the first internet trading website in Canada, discount brokerage business volumes doubled and revenues increased by 80 per cent. Increased revenues from foreign exchange trading and a higher volume of bankers' acceptance and guarantee business were partially offset by lower fee income from mutual funds. Non-interest expenses rose during the year ended 31 December 1999. The Gordon Capital Corporation and Moss Lawson acquisitions resulted in higher staff, services and other acquisition-related costs. Growth of the bank's core retail operations and investment in new delivery channels also added to total employee, premises and equipment costs. A focus on improving the efficiency of operational processes and other customer service initiatives began in 1999 and will continue during 2000. Provisions for credit losses were lower in 1999 than in 1998, as there was no repeat step change in the level of general provisions charged in 1998 which reflected the economic decline in certain provinces, in particular British Columbia. 1999 Half year ended 1998 Half year ended Figures in US$m 30JUN ^ 31DEC ^ 1999 30JUN ^ 31DEC ^ 1998 Net interest income 817 870 1,687 787 831 1,618 Dividend income 6 6 12 7 7 14 Net fees and commissions 294 299 593 296 300 596 Dealing profits 109 72 181 40 36 76 Other income 81 82 163 80 105 185 Other operating income 490 459 949 423 448 871 Operating income 1,307 1,329 2,636 1,210 1,279 2,489 Staff costs (409) (475) (884) (374) (407) (781) Premises and equipment (90) (157) (247) (85) (95) (180) Other (192) (190) (382) (184) (213) (397) Depreciation (35) (37) (72) (30) (36) (66) Operating expenses (726) (859) (1,585) (673) (751) (1,424) Operating profit before provisions 581 470 1,051 537 528 1,065 Customers: - new specific provisions (115) (116) (231) (77) (179) (256) - releases and recoveries 52 48 100 64 47 111 (63) (68) (131) (13) (132) (145) - net general releases/charge - 23 23 (36) 72 36 Total bad and doubtful debt charge (63) (45) (108) (49) (60) (109) Provisions for contingent liabilities and commitments - (1) (1) (1) (9) (10) Operating profit 518 424 942 487 459 946 Income from associated undertakings 2 2 4 1 1 2 Gains on disposal of investments and tangible fixed assets 10 3 13 27 12 39 Profit before tax 530 429 959 515 472 987 ^ unaudited Figures in US$m At 31DEC99 At 31DEC98 Assets Loans and advances to customers (net) 52,851 41,936 Loans and advances to banks (net) 4,503 4,523 Debt securities, treasury bills and other eligible bills 42,706 15,674 Liabilities Deposits by banks 6,459 5,659 Customer accounts 55,000 33,401 Customer loans and advances and provisions Loans and advances to customers (gross) 53,710 42,531 Residential mortgages 16,942 13,059 Other personal 5,857 5,265 Total personal 22,799 18,324 Commercial, industrial and international trade 8,914 6,444 Commercial real estate 5,709 4,615 Other property-related 1,893 1,591 Government 726 651 Non-bank financial institutions 6,380 3,238 Settlement accounts 619 3,734 Other commercial^ 6,670 3,934 Specific provisions outstanding against loans and advances 254 223 Non-performing loans^^ 584 590 Specific provisions outstanding as a percentage of non-performing loans^^ 43.5% 37.8% Non-performing loans as a percentage of gross loans and advances to customers^^ 1.1% 1.4% Customer bad debt charge as a percentage of closing gross loans and advances 0.2% 0.3% ^ Includes advances in respect of Agriculture, Transport, Energy and Utilities ^^ Net of suspended interest HSBC Latin American Operations Figures in US$m 1999 1998 Profit before tax 318 234 Share of Group pre-tax profits 4.0% 3.6% Total assets 17,181 14,614 Share of Group total assets 3.1% 3.1% Period end staff numbers (FTE basis) 27,181 26,572 Cost:income ratio 76.8% 81.2% Despite the devaluation of the Brazilian real at the beginning of 1999 and the continuing economic recession in Argentina, our Latin American operations contributed US$318 million to the HSBC Group's profit before tax during 1999, an increase of 36 per cent. As suggested at the time of our interim results, the exceptional profits earned from the volatility in the Brazilian financial markets were not repeated in the second half of 1999. Brazil Our Brazilian operations reported profits before tax, in US dollar terms, 9 per cent higher than in 1998. Strategic positioning, in anticipation of a second half fall in interest rates to pre-devaluation levels, resulted in strong levels of interest income in the second half of 1999, augmenting the exceptionally strong net interest income and foreign exchange dealing profits earned in the first half of the year. The devaluation of the Brazilian real masked an increase in staff costs resulting from substantial labour litigation provisions incurred in the second half of 1999. These provisions were largely due to restructuring and local labour laws, which are affecting the entire industry. Although a number of exceptional factors impacted 1999's financial performance, of greater importance for the long term was the progress made in changing business mix to conform with the Group's Managing for Value strategy. In 1999 our banking operations achieved a substantial increase in cross-sales of retail banking and insurance products. Much of this improvement was achieved through fund management operations where funds under management grew from BRL4.5 billion to BRL7.9 billion during the year. Our insurance operations continued to increase their proportion of products sold through the bank's distribution channels with 33 per cent of insurance revenues now earned through these channels against 22 per cent in 1998. The charge for bad and doubtful debts remained low and was well covered by the margins achieved on lending products. Overall credit demand remained subdued and a cautious approach has been taken to lending to the middle market sector. In spite of this customer loans, principally to personal customers, grew by 31 per cent in local terms during 1999. The strong operating earnings together with slow growth in risk-weighted assets generated a very positive capital retention enabling our Brazilian operations to pay dividends of US$207 million during 1999. Argentina The Group's Argentinian operations reported profits before tax of US$67 million compared with a pre-tax loss of US$13 million in 1998. This was due largely to improved operating efficiency, the absence of a provision against an equity investment and the benefits from increasing our participation in La Buenos Aires New York Life (a life assurance company) and Maxima, from that of associate to majority shareholder. The salesforce of Maxima, our pension fund manager, achieved an encouraging increase in the cross-selling of retail banking products during 1999. Higher levels of net interest income were earned in 1999 as volume growth in average interest-earning assets, particularly in lower yielding debt securities, mortgages, leasing and loans secured on pledges more than offset the fall in net interest margin resulting from the resultant change in asset mix. The increase in other operating income reflected the change to majority shareholder in La Buenos Aires New York Life and Maxima, volume growth in cheque discounting and cards income and a stronger underwriting performance in the motor insurance business. Operating expenses grew to support volume growth and strengthen the control environment. The charge for bad and doubtful debts remained at 1998 levels as provisions were raised against a few corporate customers as a result of the current economic difficulties. 1999 Half year ended 1998 Half year ended Figures in US$m 30JUN ^ 31DEC ^ 1999 30JUN ^ 31DEC ^ 1998 Net interest income 582 515 1,097 507 688 1,195 Dividend income 11 - 11 9 - 9 Net fees and commissions 199 192 391 336 307 643 Dealing profits 40 24 64 9 (1) 8 Other income 140 184 324 141 111 252 Other operating income 390 400 790 495 417 912 Operating income 972 915 1,887 1,002 1,105 2,107 Staff costs (372) (429) (801) (444) (504) (948) Premises and equipment (76) (72) (148) (90) (101) (191) Other (195) (220) (415) (225) (265) (490) Depreciation (37) (49) (86) (38) (44) (82) Operating expenses (680) (770) (1,450) (797) (914) (1,711) Operating profit before provisions 292 145 437 205 191 396 Customers: - new specific provisions (91) (103) (194) (67) (130) (197) - releases and recoveries 24 42 66 - 28 28 (67) (61) (128) (67) (102) (169) - net general releases/charge 3 (8) (5) (8) (16) (24) Total bad and doubtful debt charge (64) (69) (133) (75) (118) (193) Provisions for contingent liabilities and commitments - - - (6) 5 (1) Amounts written off fixed asset investments - (2) (2) - (1) (1) Operating profit 228 74 302 124 77 201 Income from associated undertakings 11 - 11 10 10 20 Gains/(losses) on disposal of investments and tangible fixed assets 9 (4) 5 8 5 13 Profit before tax 248 70 318 142 92 234 ^ unaudited Figures in US$m 1999 1998 Assets Loans and advances to customers (net) 5,461 5,110 Loans and advances to banks (net) 2,402 1,740 Debt securities, treasury bills and other eligible bills 5,345 6,037 Liabilities Deposits by banks 1,339 1,237 Customer accounts 7,649 9,385 Customer loans and advances and provisions Loans and advances to customers (gross) 5,921 5,530 Residential mortgages 766 640 Other personal 1,024 888 Total personal 1,790 1,528 Commercial, industrial and international trade 2,470 2,602 Commercial real estate 255 62 Other property-related 168 174 Government 153 135 Non-bank financial institutions 209 101 Settlement accounts 9 43 Other commercial^ 867 885 Specific provisions outstanding against loans and advances 378 339 Non-performing loans^^ 442 403 Specific provisions outstanding as a percentage of non-performing loans^^ 85.5% 84.1% Non-performing loans as a percentage of gross loans and advances to customers^^ 7.5% 7.3% Customer bad debt charge as a percentage of closing gross loans and advances 2.2% 3.5% ^ Includes advances in respect of Agriculture, Transport, Energy and Utilities ^^ Net of suspended interest HSBC Investment Banking Return on shareholders' funds improved to 25.4 per cent, compared with 14.8 per cent in 1998. Pre-tax profits increased by US$315 million, or 66 per cent, to US$793 million. Attributable profits increased by US$254 million, or 85 per cent compared with 1998. Our Global Investment Banking Division performed well, contributing to a significant increase in fee income. The continuing enhancement of relationships with large corporate customers of the major banking operations within the HSBC Group has contributed to additional fee generation. Commission income increased reflecting active global equity markets. Trading income improved significantly despite significant provisioning in respect of exposure to a major trading company in Korea. All product areas performed well with further success in Europe and significant improvements in the Far East. Merchant Banking had a good year with particularly strong performances in Structured Finance, Project and Export Finance and Syndicated Finance. Funds under management in the Asset Management business increased by 20 per cent to US$75 billion compared with December 1998. The increased emphasis on the distribution of retail mutual funds and unit trusts through the Group's retail branch network has contributed to additional fee income during the year. Private banking revenues increased by 7 per cent compared with 1998, but profits declined by 9 per cent due to increased bad debt and other provisions and the amortisation of goodwill arising from the purchase of the 24 per cent minority interest in HSBC Guyerzeller at the end of 1998. At the end of the year, the acquisition of SRH constituted a major step forward for the Group's private banking business. The increased geographical spread of the combined business and the expanded customer base provide the platform for the Group to demonstrate its commitment to building a global private banking operation; this is key to our strategy and the successful integration of our private banking operations will be given the highest priority in 2000. Private Equity disposed of a number of equity investments from its portfolio, realising profits of US$114 million, an increase of 20 per cent compared with 1998. Other investment disposals generated profits of US$218 million. Operating expenses increased by 21 per cent compared with 1998, reflecting increased compensation costs linked to improved profitability. Headcount grew by 1 per cent, excluding acquisitions. 1999 Half Year ended 1998 Half Year ended Figures in US$m 30JUN^ 31DEC^ 1999 30JUN^ 31DEC^ 1998 Net interest income 183 190 373 168 205 373 Fees and commissions (net) 728 837 1,565 675 661 1,336 Trading income^^ 182 43 225 81 16 97 Other income^^^ 114 341 455 142 99 241 Total income 1,207 1,411 2,618 1,066 981 2,047 Operating expenses (904) (956) (1,860) (780) (756) (1,536) Bad and doubtful debts (19) 14 (5) 1 (39) (38) Other 32 8 40 10 (5) 5 Profit before tax 316 477 793 297 181 478 Attributable profit 211 342 553 172 127 299 Total assets 40,177 71,851 71,851 35,576 36,649 36,649 Shareholders' funds 2,141 5,268 5,268 2,008 2,128 2,128 Return on average shareholders' funds 19.6% 31.2% 25.4% 17.7% 12.2% 14.8% Staff numbers (FTE) basis 8,290 10,076 10,076 8,210 8,213 8,213 Segmental analysis of pre-tax profit: - Asset management 39 43 82 29 26 55 - Private banking 107 94 201 110 110 220 - Other investment banking 170 340 510 158 45 203 316 477 793 297 181 478 ^ Unaudited figures; the 1998 figures have been restated to include HSBC Trinkaus & Burkhardt KGaA transferred to HSBC Investment Banking on 1 January 1999. ^^ In order to present the results of HSBC Investment Banking on a basis consistent with common practice in investment banking, trading income as reported above includes all profits and losses relating to dealing activities, including interest income/expense and dividends arising from long and short positions. In this respect, it differs from dealing profits as reported on page 14. ^^^ Includes profit on disposal of venture capital and other investments,US$332 million in 1999 (1998: US$117 million) which were included in gains on disposal of fixed assets and investments at HSBC Group level. Additional Information 1. Accounting policies The accounting policies adopted are consistent with those described in the 1998 Annual Report and Accounts. In 1999 the provisions of Financial Reporting Standard 12 'Provisions, Contingent Liabilities and Contingent Assets' have been adopted. 2. Dividend The Directors have declared a second interim dividend for 1999 of US$0.207 per ordinary share, an increase of 11.9 per cent. The dividend will be payable on 27 April 2000 to shareholders on the Register at the close of business on 17 March 2000. The dividend will be payable in cash, in US dollars, sterling or Hong Kong dollars, or a combination of these currencies, at the exchange rates on 18 April 2000, with a scrip dividend alternative. Particulars of these arrangements will be mailed to shareholders on or about 23 March 2000, and elections will be required to be made by 13 April 2000. The dividend payable to holders of ADSs, each of which represents five ordinary shares, will be paid in cash in US dollars on 27 April 2000 or invested in additional ADSs for participants in the dividend reinvestment plan operated by HSBC Bank USA as depositary. The Company's shares will be quoted ex-dividend in London and in Hong Kong on 13 March 2000. The ADSs will be quoted ex- dividend in New York on 15 March 2000. 3. Earnings and dividends per share Figures in US$ 1999 1998 Basic earnings per share 0.65 0.54 Diluted earnings per share 0.65 0.53 Headline earnings per share 0.66 0.53 Dividends per share 0.34 0.308 Under the terms of the share capital reorganisation approved by the High Court on 30 June 1999, each shareholder of HSBC Holdings plc received three new ordinary shares of US$0.50 for each existing ordinary share of HK$10 or ordinary share of 75p held on 2 July 1999. Figures for 1998 earnings per share, dividends per share and net asset value have been adjusted to reflect the share capital reorganisation. Basic earnings per ordinary share was calculated by dividing the earnings of US$5,408 million (1998: US$4,318 million) by the weighted average number of ordinary shares outstanding in 1999 of 8,296 million (1998: 8,067 million). Diluted earnings per share was calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive ordinary potential shares, by the weighted average number of shares outstanding plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares (being share options outstanding not yet exercised) in 1999 of 8,374 million (1998: 8,124 million). The headline earnings per share was calculated in accordance with the definition in the Institute of Investment Management and Research (IIMR) Statement of Investment Practice No. 1, 'The Definition of IIMR Headline Earnings'. The headline earnings per share excluded the gains on the sale of fixed assets (other than investment securities) and included the add back of amortised goodwill. 4. Economic profit In 1999, HSBC enhanced its internal performance measures with economic profit which takes into account the cost of the capital invested in the Group by its shareholders. HSBC prices that cost of capital internally and the difference between that cost and post-tax profit is the amount of economic profit generated. Economic profit is used by management to decide where to allocate resources so that they will be most productive. HSBC's cost of capital is currently estimated to be 12.5 per cent. Economic profit increased by US$658 million, or 103.1 per cent, compared with 1998 as shown in the table below. Measurement of economic profit involves a number of assumptions and, therefore, management believe that the trend over time is more relevant than the absolute economic profit reported for a single period. Figures in US$m 1999 % 1998 % Average invested capital 37,063 33,086 Annual return on capital 5,929 16.0 4,774 14.4 Cost of capital (4,633) (12.5) (4,136) (12.5) Economic profit 1,296 3.5 638 1.9 ^ Annual return on capital represents profit after tax adjusted for non-equity minority interests, goodwill amortisation and other non-cash items. 5. Acquisitions Goodwill on the acquisition of subsidiary and associated undertakings of US$6,435 million arose during 1999. Of this amount, US$6,237 million arose on the acquisition of RNYC and SRH; there may be some adjustment to this goodwill figure during 2000 arising from the completion of the fair value appraisal process. 6. Provisions against advances Year ended 31 December 1999 Suspended Figures in US$m Specific General Total interest At 1 January 1999 4,639 2,019 6,658 768 Amounts written off (1,186) - (1,186) (162) Recoveries of advances written off in previous years 165 - 165 - Charge/(credit) to profit and loss account 2,120 (47) 2,073 - Interest suspended during the year - - - 723 Suspended interest recovered - - - (251) Exchange and other movements (22) 332 310 (5) At 31 December 1999 5,716 2,304 8,020 1,073 Total outstanding provisions Figures in US$m 1999 1998 Loans and advances to customers: - specific provisions 5,692 4,608 - general provisions 2,304 2,019 7,996 6,627 Loans and advances to banks: - specific provisions 24 31 Total provisions 8,020 6,658 Interest in suspense 1,073 768 Provisions against loans and advances to customers At 31DEC99 At 31DEC98 Total provisions to gross lending^ % % Specific provisions 2.25 1.93 General provisions - held against Asian risk 0.11 0.12 - other 0.80 0.72 Total provisions 3.16 2.77 Non-performing loans and advances Figures in US$m Banks 40 42 Customers 10,372 8,871 Total non-performing loans and advances 10,412 8,913 Total provisions cover as a percentage of non-performing loans and advances 77.0% 74.7% ^ Net of suspended interest and reverse repo transactions 7. Gains on disposal of investments Figures in US$m 1999 1998 Gains/(losses) on disposal of: - investment securities 439 210 - part of a business 10 - - associates 3 3 - subsidiaries (2) 9 450 222 HSBC Private Equity Europe recorded a US$114 million profit from venture capital investment disposals (1998: US$95 million). The investment bank in Asia recorded profits of US$205 million on the partial disposal of an investment. MORE TO FOLLOW FRCEAAAXASNEEFE

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