Interim Report - 12 of 25

RNS Number : 6269J

HSBC Holdings PLC

10 August 2012

 



Latin America

Our operations in Latin America principally comprise HSBC Bank Brasil S.A.-Banco Múltiplo, HSBC México, S.A., HSBC Bank Argentina S.A. and HSBC Bank (Panama) S.A. In addition to banking services, we operate insurance businesses in Brazil, Mexico, Argentina and Panama.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2012		2011		2011
	US$m		US$m		US$m
Net interest income .....	3,542		3,517		3,439
Net fee income ............	843		902		879
Net trading income ......	597		589		789
Other income ..............	583		675		663
Net operating income48 ..................................	5,565		5,683		5,770
Impairment charges49 ..	(1,136)		(820)		(1,063)
Net operating income	4,429		4,863		4,707
Total operating expenses ..................................	(3,285)		(3,712)		(3,543)
Operating profit .......	1,144		1,151		1,164
Income from associates50	1		-		-
Profit before tax .......	1,145		1,151		1,164
Cost efficiency ratio ....	59.0%		65.3%		61.4%
RoRWA40 ....................	2.2%		2.2%		2.2%
Period-end staff numbers	51,667		55,618		54,035
14% increase in Wealth Management revenues
17% increase in GB&M revenues on a constant currency basis
HSBC Brazil best in International Debt Capital Markets (Brazilian Financial and Capital Markets Association)
For footnotes, see page 100. The commentary on Latin America is on a constant currency basis unless stated otherwise.

Economic background

Growth in Latin America slowed in the first half of 2012, with a common feature being the slowdown in demand from eurozone economies.

Brazilianeconomic activity slowed markedly; the annual pace of GDP growth fell to 0.8% in the first quarter. In contrast to the other economies of the region, the loss of momentum in Brazil appeared to be mainly the result of weak domestic investment spending. Inflation moderated, allowing the Central Bank of Brazil to cut the Selic policy rate by 400bps from the peak reached in August 2011.

Mexico produced the strongest performance in the region with the annual pace of GDP growth accelerating to 4.6% in the first quarter of 2012. Despite the weakness of global growth, exports remained a key driver of Mexican activity. Domestic demand was also robust. Inflation remained moderate despite strong fluctuations in the currency and, accordingly, Banco de Mexico left the monetary policy rate unchanged at 4.5% during the period.

In Argentina, economic activity decelerated markedly during the first half of 2012. Annualised GDP growth fell from 8.9% in 2011 to 3% in the first five months of 2012. Inflation remained high, and the currency depreciated at an annualised rate of 10%. To counter the deterioration in the current and financial account balances, the government required official authorisation of most transactions involving the acquisition of foreign currency.

Review of performance

In Latin America, our operations reported a profit before tax of US$1.1bn for the first half of 2012, broadly unchanged compared with the first half of 2011 and an increase of 11% on a constant currency basis. This included a gain of US$102m following the completion of the sale of our general insurance manufacturing business in Argentina, and a loss of US$135m recognised following the reclassification of our non-strategic businesses to held for sale.

On an underlying basis, which excludes the above US$102m gain, pre-tax profits increased by 3%, mainly due to increased revenue in our CMB and RBWM businesses in Brazil and Argentina following growth in average lending balances, primarily during 2011, higher Balance Sheet Management and Rates and Foreign Exchange revenues in Brazil as interest rates declined, and lower operating expenses resulting from lower restructuring costs and cost saving initiatives. This was partly offset by the loss of US$135m described above. Performance in Brazil was affected by higher

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

	Retail      Banking and Wealth Management          US$m		Commercial     Banking         US$m	Global      Banking              and      Markets          US$m			Global       Private     Banking         US$m		Other         US$m		Total         US$m
Half-year to 30 June 2012
Argentina ................................................	156		100		98		−		(42)		312
Brazil .......................................................	(83)		200		413		10		(35)		505
Mexico ....................................................	179		77		111		−		(1)		366
Panama ...................................................	13		33		21		−		−		67
Other .......................................................	(51)		(29)		6		−		(31)		(105)
	214		381		649		10		(109)		1,145
Half-year to 30 June 2011
Argentina ................................................	49		46		67		-		(8)		154
Brazil .......................................................	136		294		250		7		(50)		637
Mexico ....................................................	169		103		171		2		(142)		303
Panama ...................................................	17		27		26		1		(2)		69
Other .......................................................	(35)		5		29		-		(11)		(12)
	336		475		543		10		(213)		1,151
Half-year to 31 December 2011
Argentina ................................................	42		61		81		-		6		190
Brazil .......................................................	105		272		265		6		(55)		593
Mexico ....................................................	234		26		97		2		(36)		323
Panama ...................................................	6		32		26		2		(7)		59
Other .......................................................	(20)		1		37		-		(19)		(1)
	367		392		506		10		(111)		1,164

loan impairment charges, following balance sheet growth in RBWM and CMB during previous periods, which benefited from strong customer sentiment in the buoyant economic conditions. Subsequently, as the economy has slowed, delinquency rates have risen.

In line with the Group's strategy, we applied the five filters to our Latin American businesses and decided on a number of disposals. In the first half of 2012, we announced the sale of our businesses in Costa Rica, El Salvador and Honduras, which is expected to be completed in the second half of 2012. We also announced the sale of our businesses in Colombia, Peru, Uruguay and Paraguay, with completion expected in 2013. We will continue to offer full branch services to customers during the transition.

Following a review of our general insurance business, we completed the sale of our general insurance manufacturing business in Argentina and in Mexico, we agreed to sell a portfolio of general insurance assets and liabilities. Under the terms of these agreements, the purchasers will provide general insurance to HSBC's retail customers in the two countries. This long-term collaboration will broaden and strengthen the suite of general insurance products available to these customers.

In our RBWM business, we continued with our strategy of generating strong long-term relationships and high risk-adjusted returns, capturing wealth creation opportunities from mass-market customers as a feeder to capitalise on upward social mobility. We grew our Wealth Management revenues across the region by 14%. We also continued to manage down certain vehicle finance and payroll loan portfolios in Brazil where there is no relationship-building capacity.

In CMB, we worked closely with GB&M to ensure our clients have access to relevant GB&M products. This collaboration resulted in revenue growth of 3% as more CMB customers started using Global Markets products. Our relationships with CMB payroll customers enabled us to increase personal lending to their employees, who became our RBWM customers.

In GB&M, we continued to target global corporate customers throughout Latin America. We maintained a strong presence in the foreign exchange and derivatives markets. We were also awarded first place in International Debt Capital Markets by the Brazilian Financial and Capital Markets Association.

We continued to implement measures to improve operational efficiency. As a result, we incurred restructuring costs in the first half of 2012 of US$72m and a 4% net reduction of 2,300 staff numbers during the first half of 2012. We also achieved a total of US$140m of additional sustainable savings.

The following commentary is on a constant currency basis.

Net interest income increased by 12% compared with the first half of 2011, driven by strong growth in our RBWM and CMB businesses.

In RBWM, net interest income increased in Brazil, mainly due to a change in the composition of the lending book as we increased our balances of higher-yielding assets and managed down our exposure in certain vehicle finance and payroll loan portfolios as described earlier. Additionally, in Mexico we increased average lending balances, mainly in payroll and personal loans. In CMB, average lending balances in Brazil were higher than the comparative period, mainly in trade and working capital products.

In Brazil, spreads widened across most lending products in RBWM and CMB as interest rates declined, resulting in lower cost of funds while in Argentina lending spreads in CMB were wider on overdrafts.

In Balance Sheet Management, net interest income increased notably in Brazil as we benefited from the downward movements in interest rates which lowered the cost of funding assets in this portfolio.

Net fee incomeincreased by 4% to US$843m, mainly in Brazil due to higher current accounts and Payments and Cash Management revenues, which benefited from repricing initiatives.

Net trading income of US$597m was 15% higher than in the first half of 2011, primarily in Brazil due to higher GB&M revenues which reflected increased revenues in Rates, resulting from tightening spreads on long bond positions, and also in Foreign Exchange products as a result of increased collaboration with CMB clients.

Net income from financial instruments designated at fair value increased by 38%, reflecting the growth of policyholder assets in Brazil. An offsetting increase was recorded in 'Net insurance claims incurred and movement in liabilities to policyholders'. 

Gains less losses from financial investments of US$89m was 33% higher than in the first half of 2011, primarily in Mexico and Brazil due to disposals of government bonds in GB&M in the first half of 2012, partly offset by the non-recurrence of a gain in GB&M on the sale of shares in a Mexican listed company in the first half of 2011.

Net earned insurance premiums increased by 12% to US$1.3bn, driven by increased sales in Brazil of unit-linked pension products, term life insurance and credit protection products. Premiums also rose in Mexico, mainly due to growth in sales of the endowment product, partly offset by a decrease in Argentina, driven by the sale of the general insurance business reflecting two months less of operations in the first half of 2012.

Other operating income decreased by US$103m, primarily due to the loss recognised following the reclassification of certain businesses to held-for-sale and the non-recurrence of the gain on sale and leaseback of branches in Mexico in the first half of 2011. This was partly offset by the gain on sale of the insurance business in Argentina of US$102m.

Loan impairment charges and other credit risk provisions increased by 57%, mainly in Brazil. This resulted from increased delinquency rates in RBWM in Brazil, following strong balance sheet growth in previous periods which was driven by increased marketing and acquisitions, and strong consumer demand in buoyant economic conditions which subsequently weakened. In CMB, loan impairment charges almost doubled, mainly in Brazil following increased delinquency and a rise in individually assessed loan impairment charges booked in the first half of 2012. We took a number of steps to address the increase in delinquencies in RBWM and CMB including improving our collections capabilities, reducing third-party originations and lowering credit limits where appropriate.

Operating expenses decreased by 1% compared with the first half of 2011. Restructuring costs declined by US$56m as the equivalent period in 2011 included costs associated with the consolidation of the branch network and the reorganisation of regional and country support functions. The success of these restructuring initiatives and our continued efforts to exercise strict cost control and progress with our organisational effectiveness programmes contributed to about US$140m of additional sustainable cost savings and a net 7% reduction in staff numbers of almost 4,000 compared with the end of June 2011. These savings were partly offset by inflationary pressures, union-agreed wage increases in Brazil and Argentina, and a provision relating to anti-money laundering in Mexico.

Profit/(loss) before tax and balance sheet data - Latin America

	Half-year to 30 June 2012
	Retail      Banking and Wealth Management          US$m		Commercial      Banking          US$m		Global      Banking              and      Markets          US$m		Global        Private      Banking          US$m		Other          US$m		Inter-     segment elimination57         US$m		Total          US$m
Profit/(loss) before tax
Net interest income/ (expense) ........ ........................	2,148		1,123		520		16		(15)		(250)		3,542
Net fee income ... ........................ ........................ ........................	423		303		102		15		−		−		843
Trading income excluding net interest income ........................	36		52		252		1		3		−		344
Net interest income on trading activities .........	−		−		3		−		−		250		253
Net trading income51 .........	36		52		255		1		3		250		597
Net income from financial instruments designated at fair value .....	223		53		−		−		12		−		288
Gains less losses from financial investments ....	4		2		83		−		−		−		89
Dividend income .	4		4		1		−		−		−		9
Net earned insurance premiums ........	1,008		235		13		−		−		−		1,256
Other operating income ............	72		2		(7)		2		73		(95)		47
Total operating income...........	3,918		1,774		967		34		73		(95)		6,671
Net insurance claims58 ...........	(889)		(209)		(8)		−		−		−		(1,106)
Net operating income48 ........	3,029		1,565		959		34		73		(95)		5,565
Loan impairment charges and other credit risk provisions	(819)		(316)		−		(1)		−		−		(1,136)
Net operating income ..........	2,210		1,249		959		33		73		(95)		4,429
Operating expenses .........	(1,996)		(869)		(310)		(23)		(182)		95		(3,285)
Operating profit/(loss) ...	214		380		649		10		(109)		−		1,144
Share of profit in associates and joint ventures ..	−		1		−		−		−		−		1
Profit/(loss) before tax ......	214		381		649		10		(109)		−		1,145
	%		%		%		%		%				%
Share of HSBC's profit before tax .......	1.7		3.0		5.1		0.1		(0.9)				9.0
Cost efficiency ratio ................	65.9		55.5		32.3		67.6		249.3				59.0
Balance sheet data47
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ........................	17,491		24,865		10,521		83		−				52,960
Total assets ........	38,296		37,387		62,624		819		365		(523)		138,968
Customer accounts ........................	27,918		21,477		15,104		5,095		−				69,594

Profit/(loss) before tax and balance sheet data - Latin America (continued)

	Half-year to 30 June 2011
	Retail        Banking   and Wealth Management           US$m		Commercial        Banking           US$m		Global        Banking               and        Markets           US$m		Global         Private        Banking           US$m		Other           US$m		Inter-       segment elimination57          US$m		Total           US$m
Profit/(loss) before tax
Net interest income/ (expense) ....................	2,215		1,096		456		12		(1)		(261)		3,517
Net fee income ...............	492		292		98		19		1		-		902
Trading income excluding net interest income .....	29		49		186		2		3		-		269
Net interest income on trading activities .........	1		-		58		-		-		261		320
Net trading income51 ......	30		49		244		2		3		261		589
Net income from financial instruments designated at fair value ................	181		55		-		-		-		-		236
Gains less losses from financial investments ..	-		-		73		-		-		-		73
Dividend income ............	5		2		-		-		-		-		7
Net earned insurance premiums ....................	961		289		18		-		-		-		1,268
Other operating income .	118		40		24		1		127		(130)		180
Total operating income...	4,002		1,823		913		34		130		(130)		6,772
Net insurance claims58 ....	(821)		(258)		(10)		-		-		-		(1,089)
Net operating income48 ..	3,181		1,565		903		34		130		(130)		5,683
Loan impairment charges and other credit risk provisions ...................	(633)		(180)		(7)		-		-		-		(820)
Net operating income .....	2,548		1,385		896		34		130		(130)		4,863
Operating expenses ........	(2,212)		(910)		(353)		(24)		(343)		130		(3,712)
Operating profit/(loss) ....	336		475		543		10		(213)		-		1,151
Share of profit/(loss) in associates and joint ventures ......................	-		-		-		-		-		-		-
Profit/(loss) before tax ...	336		475		543		10		(213)		-		1,151
	%		%		%		%		%				%
Share of HSBC's profit before tax ...................	2.9		4.1		4.7		0.1		(1.8)		-		10.0
Cost efficiency ratio .......	69.5		58.1		39.1		70.6		263.8		100		65.3
Balance sheet data47
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ...........	22,431		29,036		14,271		64		-				65,802
Total assets ....................	40,866		41,136		78,131		1,564		2,926		(1,012)		163,611
Customer accounts .........	32,619		27,251		29,402		6,837		-				96,109

	Half-year to 31 December 2011
	Retail        Banking   and Wealth Management            US$m		Commercial        Banking           US$m		Global        Banking               and                          Markets           US$m		Global Private        Banking           US$m		Other           US$m		Inter-       segment elimination57          US$m		Total           US$m
Profit/(loss) before tax
Net interest income/ (expense) ....................	2,304		1,133		426		13		(6)		(431)		3,439
Net fee income/(expense)   ....................................	447		318		98		17		(1)		-		879
Trading income/(expense) excluding net interest income .......................	39		57		186		3		(10)		-		275
Net interest income/(expense) on trading activities .........	(1)		-		76		-		8		431		514
Net trading income/ (expense)51 .................	38		57		262		3		(2)		431		789
Net income from financial instruments designated at fair value ................	243		69		2		-		-		-		314
Gains less losses from financial investments ..	11		1		51		1		-		-		64
Dividend income ............	5		1		1		-		-		-		7
Net earned insurance premiums ....................	1,107		262		16		-		-		-		1,385
Other operating income .	147		17		8		1		95		(120)		148
Total operating income ..	4,302		1,858		864		35		86		(120)		7,025
Net insurance claims58 ....	(1,029)		(220)		(6)		-		-		-		(1,255)
Net operating income48 ..	3,273		1,638		858		35		86		(120)		5,770
Loan impairment charges and other credit risk provisions ...................	(736)		(321)		(5)		-		(1)		-		(1,063)
Net operating income......	2,537		1,317		853		35		85		(120)		4,707
Operating expenses ........	(2,170)		(925)		(347)		(25)		(196)		120		(3,543)
Operating profit/(loss) ....	367		392		506		10		(111)		-		1,164
Share of profit in associates and joint ventures .......	-		-		-		-		-		-		-
Profit/(loss) before tax ...	367		392		506		10		(111)		-		1,164
	%		%		%		%		%				%
Share of HSBC's profit before tax ...................	3.5		3.8		4.9		0.1		1.1				11.2
Cost efficiency ratio .......	66.3		56.5		40.4		71.4		227.9				61.4
Balance sheet data47
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ...........	19,025		25,834		11,011		62		6				55,938
Total assets ....................	39,231		38,410		66,241		1,660		417		(1,070)		144,889
Customer accounts .........	28,629		24,050		18,940		7,079		62				78,760

For footnotes, see page 100.

 

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