Interim Results - Part 4
HSBC Hldgs PLC
31 July 2000
Part 4
USA
Overall our commercial banking performance in the first half
of 2000 was better than the comparable period last year. The
current period includes, for the first time, a contribution
from the former Republic operations. The integration of the
former Republic operations within those of our existing
operations continues to proceed smoothly and is on course to
be largely completed by the year end. Customer retention is
strong with 97 per cent of the former Republic related
deposits retained at 30 June 2000. Total assets under
management increased US$3.2 billion, or 8 per cent, since
December 1999 led by growth in mutual funds and proprietary
funds sales.
The current period's results included US$56 million of
restructuring costs relating to the integration of the former
Republic operations and a related goodwill amortisation
charge of US$72 million. Total restructuring costs, including
capital costs, are expected to be less than originally
announced, and we are on target to achieve expected levels of
cost savings.
The rate of realisation will accelerate later this year and
again in early 2001 when IT systems and offices are
consolidated.
Revenues from domestic wealth management were strong at
US$100 million for the first six months of 2000, up 18.0 per
cent compared with the combined results of the two
organisations for the same period last year. Life insurance
revenues surpassed 1999 full-year levels. Total portfolio
holdings for international private banking (New York, Florida
and California) increased over 9.4 per cent compared with 31
December 1999. Our government and corporate bond business
showed continued improvement over the comparable period last
year and we now represent 4.8 per cent of the US Agency
Securities market, of which our share is 16.0 per cent of the
Discounted Note market. Our US banknote business also has
shown improvement over last year.
There has been some deterioration in the credit quality of
the more leveraged advances but overall credit quality is
stable and the current level of our bad and doubtful debt
provisions remains adequate.
Canada
In Canada, our operations reported an increase of 42.7 per
cent in profit before tax compared to the six months ended 30
June 1999.
Net interest income for the half year grew by 23.8 per cent
compared to the first half of 1999. This was achieved through
a combination of strong commercial and personal loan growth
and improved net interest margin in the Canadian bank and the
benefit of the acquisition of the former Republic (Canada)
operations. The improvement in the Canadian bank's net
interest margin resulted from asset repricing ahead of
deposits as prime base rates increased and the continued
focus on loan pricing.
Other operating income was 30.0 per cent higher than the
comparable period last year and reflected the continuing
focus on the Group's wealth management initiatives, in
particular the provision of investment advice and products to
personal customers. Fee income earned from investment and
securities services, including brokerage, benefited from
strong equity markets in Canada in the first part of the
year. Also revenues from mutual funds increased resulting
from strong net sales of mutual funds during the period.
Dealing profits were lower as higher foreign exchange trading
income was more than offset by lower equity structured and
other trading revenues.
Encouragingly, the number of customers using Canada's
internet online trading facility continued to grow to almost
28,000 compared to less than 10,000 at the end of June 1999.
The number of online trades quadrupled to more than 270,000.
Operating expenses increased by 24.1 per cent when compared
to the first half of 1999. The increase was primarily driven
by the growth in performance related compensation, volume
related expenses on increased transaction processing costs
and the inclusion of the former Republic (Canada) operations.
The centralisation of back office accounting and support
centres was completed during the period and this should lead
to further cost efficiencies in the future.
The continuing strong economy and the maintenance of strong
credit quality was reflected in a low provision for credit
losses.
Half-year to
Figures in US$m 30 Jun 2000 30 Jun 1999 31 Dec 1999
Net interest income 1,057 817 870
Dividend income 33 6 6
Net fees and commissions 451 294 299
Dealing profits 132 109 72
Other income 68 81 82
Other operating income 684 490 459
Operating income 1,741 1,307 1,329
Staff costs (707) (409) (475)
Premises and equipment (157) (90) (157)
Other (269) (192) (190)
Depreciation (54) (34) (35)
Goodwill amortisation (74) (1) (2)
Operating expenses (1,261) (726) (859)
Operating profit before
provisions 480 581 470
Customers:
- new specific provisions (170) (115) (116)
- releases and recoveries 59 52 48
(111) (63) (68)
- net general releases 39 - 23
Total bad and doubtful debt
charge (72) (63) (45)
Provisions for contingent
liabilities and commitments - - (1)
Operating profit 408 518 424
Income from associated
undertakings 2 2 2
Gains on disposal of
investments and tangible
fixed assets 4 10 3
Profit before tax 414 530 429
At 30 Jun At 30 Jun At 31 Dec
Figures in US$m 2000 1999 1999
Assets
Loans and advances to customers
(net) 59,956 43,252 52,851
Loans and advances to banks
(net) 9,398 6,524 4,503
Debt securities, treasury bills
and other eligible bills 34,307 21,265 42,706
Liabilities
Deposits by banks 5,742 3,965 6,459
Customer accounts 67,922 34,228 55,000
Customer loans and advances and
provisions
Loans and advances to customers
(gross) 60,762 43,864 53,710
Residential mortgages 18,049 13,227 16,942
Other personal 6,350 5,212 5,857
Total personal 24,399 18,439 22,799
Commercial, industrial and
international trade 9,375 6,285 8,914
Commercial real estate 5,797 4,898 5,709
Other property-related 4,099 1,733 4,097
Government 673 787 726
Other commercial^ 4,125 3,981 4,466
Total corporate and commercial 24,069 17,684 23,912
Non-bank financial institutions 9,369 4,068 619
Total financial 12,294 7,741 6,999
Specific provisions outstanding
against loans and advances 264 233 254
Non-performing loans^^ 589 557 584
Specific provisions outstanding
as a percentage
of non-performing loans^^ 44.8% 41.8% 43.5%
Non-performing loans as a
percentage of gross loans and
advances to customers^^ 1.0% 1.3% 1.1%
Customer bad debt charge as a
percentage of
closing gross loans and 0.2% 0.3% 0.2%
advances (annualised)
^ Includes advances in respect of Agriculture, Transport,
Energy and Utilities.
^^ Net of suspended interest.
Review by Geographical Segment
HSBC Latin American Operations
HSBC Latin American
Operations
Half-year to
Figures in US$m 30 Jun 2000 30 Jun 1999 31 Dec 1999
Profit before tax 193 248 70
Cash basis profit before
tax 199 252 76
Share of Group pre-tax
profits 3.7% 6.1% 1.8%
Total assets at period-end 16,917 13,555 17,181
Share of Group total assets 3.0% 2.8% 3.1%
Staff numbers (FTE basis)
at period-end 26,738 27,208 27,181
Cost:income ratio
(excluding
goodwill amortisation) 74.1% 69.5% 83.5%
The Group's operations in Latin America contributed US$193
million to the HSBC Group's profit before tax in the first
half of the year, a fall of 22.2 per cent.
The contribution from our operations in Brazil was lower than
in the first half of 1999 as the exceptional profits earned
in the volatile financial markets in early 1999 were not
repeated. In Argentina an increased contribution from our
operations was due largely to the benefits of increasing our
participation in La Buenos Aires New York Life and Maxima,
from that of associate to majority shareholder. The first
half 2000 results were also affected by a small loss arising
from disposal of our shareholding in Grupo Financiero Serfin
reflecting the fact that the guaranteed value negotiated with
the Mexican authorities on our original investment was cashed
in early.
Brazil
The economic environment continued to improve with positive
GDP growth and strong trade performance in the first half of
the year, combined with falling inflation consistent with the
Government's target of 6 per cent for 2000. The positive
movement in economic fundamentals has allowed interest rates
to fall over this period by nearly 200 basis points.
Our Brazilian operations continued to develop consistently
with the Group's 'Managing for Value' strategy, particularly
with regard to delivering wealth management, in the form of
insurance and asset management products, and growing
commercial and retail business. This, coupled with the more
favourable economic environment, resulted in a strong first
half performance.
The Brazilian operations contributed US$122 million to pre-
tax profits for the first half of 2000, representing a US$87
million or 249 per cent improvement over second half results
for 1999. The results were 4 per cent down on the comparable
period in 1999, which was characterised by high interest rate
and foreign exchange market volatility which resulted in
exceptional net interest income and foreign exchange dealing
profits. With improving economic fundamentals and lower
interest rates, Brazilian operations achieved their target of
gradually planned growth in interest-earning commercial and
retail assets with no significant change in provisioning
requirements. The major sectors into which advances were made
were mortgage lending, consumer credit and corporate sector
working capital. In addition, further improvements in cross-
sales were achieved during the period. Asset management
operations continued to expand with funds under management
growing to BRL9.2 billion at the half year, from BRL7.9
billion as at the end of 1999.
Consistent with the Group's strong focus on capital
management, Brazil paid dividends of US$35 million during the
period, bringing total dividends since December 1998 to
US$242 million.
Argentina
The Group's Argentinian operations reported profits before
tax of US$59 million compared with US$33 million for the
first half of 1999. The weak economic conditions which
prevailed during 1999 continued to restrain the pace at which
the business could be developed although there continued to
be sound progress in growing an integrated financial services
group.
Higher levels of net interest income were achieved despite a
fall in loan volume caused by the recession. This was mainly
due to the reinvestment of increased deposit and savings
account balances.
Growth in other operating income reflected increased
contributions from La Buenos Aires New York Life and Maxima,
and higher fees from credit facilities, cards and funds under
management. Operating costs were kept under tight control and
were only increased in support of specific new business
initiatives.
The charge for bad and doubtful debts fell against both
halves of 1999 following remedial work on the non-performing
loan portfolio.
Half-year to
Figures in US$m 30 Jun 2000 30 Jun 1999 31 Dec 1999
Net interest income 591 582 515
Dividend income 8 11 -
Net fees and commissions 221 199 192
Dealing profits 30 40 24
Other income 206 140 184
Other operating income 465 390 400
Operating income 1,056 972 915
Staff costs (439) (372) (429)
Premises and equipment (83) (76) (72)
Other (227) (195) (220)
Depreciation (33) (33) (43)
Goodwill amortisation (6) (4) (6)
Operating expenses (788) (680) (770)
Operating profit before
provisions 268 292 145
Customers:
- new specific provisions (106) (91) (103)
- releases and recoveries 38 24 42
(68) (67) (61)
- net general releases/(charge) 1 3 (8)
Total bad and doubtful debt
charge (67) (64) (69)
Amounts written off fixed asset
investments - - (2)
Operating profit 201 228 74
Income from associated
undertakings - 11 -
Gains/(losses) on disposal of
investments and tangible
fixed assets (8) 9 (4)
Profit before tax 193 248 70
At 30 Jun At 30 Jun At 31 Dec
Figures in US$m 2000 1999 1999
Assets
Loans and advances to customers
(net) 5,904 4,286 5,461
Loans and advances to banks
(net) 2,318 1,398 2,402
Debt securities, treasury bills
and other eligible bills 5,133 4,184 5,345
Liabilities
Deposits by banks 1,818 1,121 1,339
Customer accounts 8,674 6,753 7,649
Customer loans and advances and
provisions
Loans and advances to customers
(gross) 6,409 4,716 5,921
Residential mortgages 847 662 766
Other personal 1,154 778 1,024
Total personal 2,001 1,440 1,790
Commercial, industrial and
international trade 2,769 1,991 2,470
Commercial real estate 130 66 255
Other property-related 195 151 168
Government 95 136 153
Other commercial^ 833 819 867
Total corporate and commercial 4,022 3,163 3,913
Non-bank financial institutions 236 88 209
Settlement accounts 150 25 9
Total financial 386 113 218
Specific provisions outstanding
against loans and advances 419 365 378
Non-performing loans^^^ 645 558 ^^ 595 ^^
Specific provisions outstanding
as a percentage
of non-performing loans^^^ 65.0% 65.4% 63.5%
Non-performing loans as a
percentage of gross
loans and ^^^ 10.1% 11.8% 10.0%
Customer bad debt charge as a
percentage of closing gross
loans and advances
(annualised) 2.1% 2.7% 2.3%
^ Includes advances in respect of Agriculture, Transport,
Energy and Utilities.
^^ Restated to include certain fully provided loans.
^^^ Net of suspended interest.
HSBC Investment Banking
HSBC Investment Banking comprises the Group's equity capital
markets, advisory, equity securities origination and
distribution, trading and research, asset management,
merchant banking, private banking and trustee and private
equity activities.
Profit before tax and goodwill amortisation increased by
US$321 million (106 per cent) over the first half of 1999 and
by US$153 million (32 per cent) over the second half of 1999
to US$624 million. Attributable profit increased by US$185
million, or 93 per cent compared with the same period in
1999.
Return on shareholders' funds of 18.8 per cent improved when
compared with 18.4 per cent in the first half of 1999 despite
the capital base of HSBC Investment Banking increasing
substantially as a result of the acquisition of the former
Republic and Safra businesses, but fell when compared with
29.9 per cent in the second half of 1999, which included an
exceptional gain on the disposal of an investment.
Our global investment banking division made a significant
contribution to income with strong levels of fees,
commissions and trading income. All geographical regions
reported higher equity commissions in line with the increase
in global equity volumes. In corporate finance and advisory,
fee income continued to grow as sectoral expertise and strong
relationships with the Group's corporate customers were
further consolidated. Trading income was strong reflecting
the ability of the division to take advantage of conditions
in equity markets during the first half of the year.
Merchant banking maintained a solid performance with fee
income from syndicated finance particularly strong in part
related to telecom acquisition financing. Increased
profitability in project and export finance and continuing
successes in Structured Finance were encouraging. Our Islamic
banking division, Amanah Finance, continued to develop
satisfactorily. HSBC Equator Bank developed its investment
banking franchise further and benefited from improving credit
conditions in sub-Saharan Africa.
Funds under management in the asset management business
increased by 24 per cent to US$93 billion compared with
December 1999. This increase principally reflects the
consolidation of all geographical asset management businesses
under a central management team allowing the development of a
truly global product. Distribution relationships with other
parts of the Group have developed well resulting in an
increase in fee income, particularly in Asia, due to the
successful distribution of retail mutual funds and unit
trusts through the retail branch network.
Private banking pre-tax profits before amortisation of
goodwill increased by 165 per cent compared with the first
half of 1999, chiefly due to the inclusion of the former
Republic and Safra Republic businesses. Consolidation of
operations in all 29 geographical locations has continued
successfully in 2000 giving the Group a strong platform on
which to continue to serve its expanding customer base.
Commission income from customer securities transactions
increased markedly in buoyant equities markets. With the
inclusion of CCF later in the year, the Group will add
further well established private banking franchises to its
global private banking operations. Funds under management at
30 June were US$157 billion including cash deposits of US$54
billion.
Private Equity disposed of a number of equity investments
from its portfolio, realising profits of US$28 million
compared with US$47 million in the first half of 1999 and
US$67 million in the second half of 1999. Other investment
disposals generated profits of US$76 million.
Operating expenses increased by 36 per cent compared with
1999, reflecting the inclusion of the former Republic and
Safra Republic businesses for the first time and increased
compensation expenses linked to improved profitability.
Half-year to
Figures in US$m 30 Jun 2000 30 Jun 1999 31 Dec 1999
Net interest income 366 183 190
Fees and commissions (net) 1,034 706 812
Trading income^ 236 182 43
Other income^^ 188 114 341
Total income 1,824 1,185 1,386
Operating expenses (1,220) (895) (937)
Bad and doubtful debts (7) (19) 14
Other 27 32 8
Profit before tax and goodwill
amortisation 624 303 471
Goodwill amortisation (88) (6) (15)
Profit before tax 536 297 456
Attributable profit 383 198 327
Total assets 73,840 40,177 71,851
Shareholders' funds 4,249 2,141 4,041^^^
Return on average shareholders'
funds 18.8% 18.4% 29.9%
Staff numbers (FTE) basis 10,391 8,290 10,076
Segmental analysis of profit
before tax and goodwill
amortisation:
- Asset management * 42 20 22
- Private banking 292 110 96
- Other investment banking 290 173 353
624 303 471
* Restated to exclude income derived from unit trust
related business, management responsibility for which
was transferred from HSBC Investment Banking on
1 January 2000.
^ 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 15.
^^ Includes profit on disposal of venture capital and other
investments, US$104 million in the first half of 2000
(first half 1999: US$53 million; second half 1999:
US$279 million) which were included in gains on disposal
of investments at HSBC Group level.
^^^ Shareholders' funds attributable to investment banking
at 31 December 1999 have been restated to exclude
shareholders' funds in the former Republic businesses
which do not relate to private banking business.
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