Annual Financial Report - 14 of 41

RNS Number : 8264D

HSBC Holdings PLC

30 March 2011

 



Middle East

In the Middle East, the network of branches of HSBC Bank Middle East Limited, together with HSBC's subsidiaries and associates, gives us the widest coverage in the region. Our associate in Saudi Arabia, The Saudi British Bank (40% owned), is the Kingdom's fifth largest bank by total assets.
	2010		2009		2008
	US$m		US$m		US$m
Net interest income ......	1,367		1,485		1,556
Net fee income .............	677		625		691
Net trading income .......	370		394		402
Other income ................	(4)		90		19
Net operating income46 ...................................	2,410		2,594		2,668
Impairment charges47 ....	(627)		(1,334)		(279)
Net operating income	1,783		1,260		2,389
Total operating expenses ...................................	(1,078)		(1,001)		(959)
Operating profit ........	705		259		1,430
Income from associates48	187		196		316
Profit before tax .........	892		455		1,746
Cost efficiency ratio .....	44.7%		38.6%		35.9%
Year-end staff numbers .	8,676		8,281		8,453
Underlying pre-tax profit doubled
Leading provider of traditional trade services in the UAE
PFS in the Middle East returns to profitability
For footnotes, see page 83. The commentary on the Middle East is on an underlying basis unless stated otherwise.

Economic background

Economic activity in much of the Middle East showed signs of stabilising during 2010. A 30% year on year rise in average oil prices led to a marked strengthening of public finances in the Gulf states, allowing governments such as Saudi Arabia to boost public current and capital spending. The high and stable average oil prices also improved external account positions in the Gulf, leading to an increase in reserves and overall net foreign asset accumulation following the modest drawdowns in 2009.

As well as receiving support from rising public spending, non-oil goods and service exporters in the region also benefited from rising external demand, particularly from Asia. The UAE was a leading beneficiary, most notably in its transport and logistics sectors. Banking sector activity remained relatively subdued, with rates of credit growth flat or negative in real terms across much of the region. This contributed to subdued consumer and asset price inflation. Although there was some evidence in Saudi Arabia, Oman and Kuwait that stronger growth and higher commodity prices were putting pressure on prices in late 2010, the pace of increase remained below that seen in other emerging markets. Inflation was largely absent in the UAE.

Dubai had another challenging year in 2010, as it continued to struggle with high levels of debt, falling real estate prices and a stagnant credit market. Although no figures have been released, officials estimated in October that real GDP was likely to have grown by2.3% in 2010, mostly from global trade as exports rose 35% in the year to the third quarter. The domestic economy was considerably weaker through most of the year although there were signs of an improvement by the year end.

In Egypt, GDP growth returned to 6% by the end of 2010, driven primarily by domestic demand. Egypt's structural economic strengths leave us positive on the medium‑term outlook, although recent political turmoil might overshadow its near-term prospects.

Review of performance

Our operations in the Middle East reported pre-tax profits of US$892m, an increase of US$437m compared with 2009.

In October 2010, we completed the sale of our investment in the British Arab Commercial Bank, on which a loss of US$42m was recorded. On an underlying basis and excluding this loss, pre-tax profits increased by US$481m.

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$m		Global       Private     Banking         US$m		Other         US$m		Total         US$m
2010
Egypt ........................................................	38		82		77		-		(2)		195
Qatar ........................................................	19		52		67		-		-		138
United Arab Emirates ................................	17		186		121		1		(1)		324
Other ........................................................	19		57		(19)		-		-		57
Middle East (excluding Saudi Arabia) .........	93		377		246		1		(3)		714
Saudi Arabia ..............................................	7		107		71		(16)		9		178
	100		484		317		(15)		6		892
2009
Egypt ........................................................	18		51		97		-		58		224
Qatar ........................................................	10		60		66		-		-		136
United Arab Emirates ................................	(177)		(136)		307		(2)		5		(3)
Other ........................................................	3		(15)		(80)		-		(3)		(95)
Middle East (excluding Saudi Arabia) .........	(146)		(40)		390		(2)		60		262
Saudi Arabia ..............................................	20		61		77		8		27		193
	(126)		21		467		6		87		455
2008
Egypt ........................................................	16		68		90		-		49		223
Qatar ........................................................	23		33		57		-		-		113
United Arab Emirates ................................	133		330		388		4		6		861
Other ........................................................	57		92		104		-		1		254
Middle East (excluding Saudi Arabia) .........	229		523		639		4		56		1,451
Saudi Arabia ..............................................	60		35		177		-		23		295
	289		558		816		4		79		1,746

Profits increased strongly in the second half of 2010 compared with the first half of the year, reflecting increased stability in the regional economy and growing momentum in several of the key markets.

The improvement in the credit environment and our risk management actions combined to contribute to significantly lower loan impairment charges and other credit risk provisions. The benefit was partly offset by lower revenues from the run-off of higher yielding unsecured loans, mainly in the UAE.

Our Premier and Advance customer base continued to grow in line with our strategy to build a sustainable wealth-driven, premium-based PFS business, with Premier attracting 35,000 net new customers in the year, of whom 19,000 were new to the Group. During 2010, we launched the Advance proposition across most of the region and the number of customers reached 152,000 at 31 December 2010. The opening of our 100th branch in Egypt is an example of initiatives to expand our regional presence.

In CMB, we continued to build on our competitive advantage in international connectivity. The increased opportunities to support business and trade flows between the region and the rest of the world, particularly mainland China and India, led to strong trade-related revenues and supported our market-leading position in this business. As a result, we gained market share in our key markets and received several awards for trade services including 'Leading Trade Services Bank in the Middle East and North Africa' which was awarded by Global Trade Review for the fourth consecutive year.

As part of our continued support to local internationally-focused businesses, we fully allocated the pledged US$100m fund to UAE SME customers engaged in international cross-border business.

In GB&M we continued to invest in the region to support existing and anticipated new business and we now have a fully functional dealing room in Abu Dhabi and a 'China desk' in the UAE to support 'East-East' business. We continued to be recognised as the dominant player in regional bond markets and won several awards, including 'Best Investment Bank in the Middle East' awarded by Euromoney.

Net interest income decreased by 8% as average lending balances declined in both PFS and CMB, the proportion of higher yielding assets fell and the cost of liquidity remained high.

In PFS, spreads narrowed as we focused new lending on Premier and Advance customers, while concurrently managing down higher risk unsecured lending balances, mostly in the UAE.

In CMB, asset balances and net interest income rose throughout the second half of 2010 as increasing trade finance balances contributed to growing revenues.

Average customer accounts declined as corporate customers reduced their deposits in response to tighter liquidity in the local markets. This was partly offset by an increase in average liability balances in PFS, which was driven by successful deposit campaigns launched in 2010 and by the acquisition of Premier and A dvance customers. Our overall liquidity position improved although the market returns on the deployment of liquidity remained low.

Net fee income increased by 8%, primarily driven by higher volumes of credit facilities related to trade, guarantees and remittances in CMB. The benefit was partly offset by lower advisory revenues from equity capital markets in GB&M as a result of limited issuances in the regional equity markets.

Net trading income fell by 6% to US$370m. Subdued trading conditions and the non-recurrence of gains which had resulted from the tightening of credit spreads on certain positions in early 2009 resulted in lower Credit trading income. Foreign exchange income decreased with the easing in market volatility as speculation regarding the unpegging of Gulf currencies from the US dollar receded.

Other operating income declined by US$37m as gains arising in 2009 from the buy-back and extinguishment of own debt did not recur.

Loan impairment charges and other credit risk provisions decreased by 53%. An overall improvement in credit conditions in the region along with enhanced collections processes, improvements in the quality of our customer base and a reduction in unsecured lending resulted in significantly lower net collective impairment provisions, notably in the UAE, and lower requirements for specific corporate provisions.

In PFS, strengthened collections processes and a repositioning of the loan book contributed to lower delinquency rates. In CMB, loan impairment charges and other credit risk provisions decreased due to significantly lower net collectively assessed impairment charges and fewer specific loan impairment charges, with the majority of the charge in 2010 relating to a small number of large corporate customers.

Loan impairment charges and other credit risk provisions in GB&M rose, mainly from restructuring activity which drove UAE-related loan impairments for a small number of large corporate customers in the first half of 2010. The improvement in economic conditions during the latter part of 2010 resulted in lower loan impairment charges in the second half of the year.

Operating expenses increased by 8%, driven by increased investment in marketing and advertising, including key sponsorship deals and the promotion of the HSBC brand through strategic messaging in the Abu Dhabi and Dubai airports, together with an increase in premises and people costs, mainly from the investment in the branch network expansion in Egypt.

Profit from associates and joint ventures decreased by 5%. The contribution from The Saudi British Bank was lower as revenue fell in challenging operating conditions.

 

END

 

 

ACSUKUARASAOUAR