Annual Financial Report - 17 of 48

RNS Number : 3724B

HSBC Holdings PLC

03 April 2013

 



Middle East and North Africa

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 sixth largest bank by total assets.
	2012			2011		2010
	US$m			US$m		US$m
Net interest income .....	1,470			1,432		1,367
Net fee income ............	595			627		677
Net trading income ......	390			482		370
Other income ..............	(25)			66		(4)
Net operating income21 ..................................	2,430			2,607		2,410
LICs76 ..........................	(286)			(293)		(627)
Net operating income	2,144			2,314		1,783
Total operating expenses	(1,166)			(1,159)		(1,078)
Operating profit .......	978			1,155		705
Income from associates77	372			337		187
Profit before tax .......	1,350			1,492		892
Cost efficiency ratio ....	48.0%			44.5%		44.7%
RoRWA66 ....................	2.2%			2.6%		1.6%
Year-end staff numbers	8,765			8,373		8,676
Completed two acquisitions and made progress on the Group's six filters
Approximately  US$70m sustainable cost savings from our organisational effectiveness programmes
4th consecutive year: Best Regional Cash Management Provider in the Middle East (Euromoney)		5th consecutive year: Best Trade Finance Bank in the Middle East and North Africa (Global Trade Review 2012)
For footnotes, see page 120.

Economic background

Real GDP in the Middle East and North Africa region grew by an estimated 4.5% in 2012. However, this weighted aggregate figure masked a wide disparity between oil producers (5.1%) and non-oil producers (2.9%). For the Gulf Cooperation Council's top performers, energy output volumes remained high and revenues rose, fuelling government spending-driven domestic demand which fed through to a stronger non-oil private sector performance, job creation and a recovery in bank lending. Saudi Arabia (which recorded growth of nearly 7% in 2012), Qatar (6%) and Oman (5%) fell into this category. In the UAE, more muted fiscal and monetary stimuli meant overall growth was slower, but Dubai's export-oriented service sector recorded a good recovery in 2012, and Abu Dhabi picked up in the second half of the year. Despite the strong growth, inflation remained low across the Gulf region.

In Egypt, growth remained weak, held back by ongoing political uncertainty which continued to weigh on domestic and foreign investment and consumption. Pressure on public finances and Egypt's external accounts remained pronounced, with the Egyptian pound weakening significantly. Elsewhere in the oil importing parts of the region, the pressures were not as great, but in Lebanon, Jordan, Morocco and Tunisia, growth fell and their external balances deteriorated, with the latter three, following a significant worsening of public finances, approaching the International Monetary Fund for assistance by the end of the year.

Review of performance

Our operations in the Middle East and North Africa reported a profit before tax of US$1.4bn, a decrease of 10% compared with 2011. On a constant currency basis, pre-tax profits decreased by 9%.

Our reported results in 2012 included an investment loss on a subsidiary of US$85m and adverse movements of US$12m on our own debt designated at fair value resulting from tightening credit spreads, partly offset by gains recognised on acquisitions totalling US$21m. Reported profits in 2011 included a dilution gain of US$27m on our holding in HSBC Saudi Arabia Ltd following its merger with SABB Securities Ltd and a loss of US$7m relating to the disposal of our Private Equity business. On an underlying basis, excluding the items noted above, profit before tax decreased by 3% as a result of a small number of significant impairments on GB&M exposures.

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
2012
Egypt ............................................	67		71		157		-		(5)		290
Qatar .............................................	9		36		84		-		-		129
United Arab Emirates ....................	143		235		141		1		(56)		464
Other ............................................	(27)		125		29		-		(37)		90
MENA (excluding Saudi Arabia) .....	192		467		411		1		(98)		973
Saudi Arabia ...................................	60		120		170		9		18		377
	252		587		581		10		(80)		1,350
2011
Egypt ............................................	43		55		129		-		(2)		225
Qatar .............................................	(4)		35		81		-		-		112
United Arab Emirates ....................	134		240		200		(6)		7		575
Other ............................................	17		109		93		-		-		219
MENA (excluding Saudi Arabia) .....	190		439		503		(6)		5		1,131
Saudi Arabia ...................................	57		98		140		4		62		361
	247		537		643		(2)		67		1,492
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
MENA (excluding Saudi Arabia) .....	93		377		246		1		(3)		714
Saudi Arabia ...................................	25		107		53		(16)		9		178
	118		484		299		(15)		6		892

During 2012, we focused on simplifying our operations in the Middle East and North Africa by disposing of non-strategic businesses and continuing to improve our organisational efficiency while investing in strategic acquisitions.

We made significant progress in integrating our operations in Oman with OIB following the merger in June 2012. The combined entity, HSBC Bank Oman S.A.O.G., of which we own 51%, is now the third largest bank in the Sultanate. We also completed the acquisition of the onshore retail and commercial banking business of Lloyds Banking Group in the UAE in the fourth quarter of 2012. Lloyds' strong presence in expatriate retail banking and commercial banking was a good strategic fit with our position as the leading international bank in the UAE. We also completed the disposal of 80.1% of our Private Equity business in December. We announced in September our agreement to sell our operations in Pakistan and, in October, the restructuring of our Amanah business in the region outside Saudi Arabia.

We remained focused on our priority markets, delivering profit growth in Egypt and Saudi Arabia. The strong performance in Egypt was driven by robust deposit growth in RBWM which led to higher net interest income. We also achieved growth in profits from our associates, mainly The Saudi British Bank, which won the Euromoney award for excellence as 'The Best Bank in Saudi Arabia' and 'The Best Debt House in Saudi Arabia'. Although profit before tax declined in the UAE as a result of the impairments in GB&M noted above, it remains a priority market for HSBC and the economy continued to improve in 2012.

Delivery of sustainable cost savings remained a priority for 2012. Our organisational effectiveness initiatives included streamlining procedures by delayering our management structure and transferring additional operational processes to our global service centres. We realised about US$70m in sustainable savings from our organisational effectiveness programmes.

In RBWM, we remained focused on growing Wealth Management revenues. We entered into a strategic alliance with Zurich Life International ('Zurich') in 2012 to provide wealth and general insurance products to our customers in the region. Our focus on foreign exchange resulted in increased transaction volumes, which provided us with higher Wealth Management revenues for 2012. In addition, we enhanced our internet banking capabilities in the UAE to provide improved security and rolled out our digital solution for mobile banking in the region to allow customers greater accessibility.

In CMB, we continued to support internationally oriented SMEs. This was evidenced by the launch of our third SME fund in the UAE of AED1bn (US$272m), targeted at international trade customers. We continued to invest in the Global Trade and Receivables Finance client service and business development teams, and enhanced our Receivables Finance products across the region. We endeavoured to strengthen this position by holding mainland China and Turkey events to focus on these emerging trade routes.

Our Payments and Cash Management business continued to record strong revenue growth, and was named 'The Best Cash Management House in the Middle East 2012' in the Euromoney awards for excellence for the fourth consecutive year.

In GB&M, we continued to focus on 'South-South' connectivity. We leveraged our global expertise to provide access to Asian investors for issuers in the region with funding requirements with our dedicated coverage teams on our mainland China, South Korea and India desks in the UAE and Saudi Arabia. We also completed a significant number of bond issuances, reflecting the continuing investor appetite for the region's debt. We won several Euromoney awards for excellence including 'The Best Debt House in the Middle East' and 'The Best Flow House in the Middle East'. GB&M also won Global Investor's 'The Best Domestic Custodian'.

The following commentary is on a constant currency basis.

Net interest income rose by 3%, driven by higher average deposit balances in RBWM, primarily savings accounts in Egypt, reflecting the competitive pricing introduced at the beginning of the year. Despite this, we benefited from wider spreads as interest rates rose in Egypt. Net interest income in CMB was in line with 2011 as higher income resulting from the merger with OIB was offset by competitive asset pricing across most of the region.

Net fee income decreased by 4% due to a decline in credit and lending, Securities Services and advisory fees in GB&M, which were affected by lower levels of deal activity and the challenging political and economic environment. Fees also declined in RBWM due to higher reward scheme charges in the UAE following revisions to the agreement with our partner aimed at improving card utilisation, partly offset by higher insurance revenues as a result of the strategic alliance with Zurich. The decline in fees was also attributable to our exit from domestic private banking in the UAE. These factors were partly offset by higher trade import fees in CMB in Algeria, Oman and Jordan driven by higher volumes from targeted sales activity.

Net trading income decreased by 18%, mainly due to unfavourable credit valuation adjustments on trading positions relating to a small number of exposures in GB&M. We also reported adverse fair value movements on certain economic hedges as well as on structured liabilities as credit spreads tightened. This was partly offset by higher revaluation gains on equity holdings in Principal Investments.

Gains less losses from financial investments increased by US$17m, driven by the non-recurrence of impairments on two available-for-sale equity securities in 2011, together with gains on the disposal of available-for-sale equity and debt securities in 2012.

Other operating income decreased by US$89m, driven by the US$85m investment loss on a subsidiary.

Loan impairment charges and other credit risk provisions decreased by US$6m. Lower impairments in RBWM attributable to an improvement in delinquency rates reflected the repositioning of the book towards higher quality lending in previous years. In addition, CMB recorded a modest reduction in loan impairment charges as higher customer recoveries were largely offset by individually assessed impairments. These were partly offset by significant loan impairment charges recorded for a small number of large exposures in GB&M.

Operating expenses increased by 1% as a result of employee and legal costs relating to the merger of our Omani operations with OIB and the acquisition of the onshore retail and commercial banking business of Lloyds Banking Group in the UAE. This was partially offset by the benefit arising from sustainable cost saving initiatives implemented in 2011 and throughout 2012. Excluding the effect of the two acquisitions, we reduced both our employee numbers and our cost base.

Share of profits from associates and joint ventures increased by 10%, mainly from The Saudi British Bank. This was driven by higher revenue resulting from strong balance sheet growth, together with lower costs derived from effective control and monitoring.

 

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ACSUURSROBASRAR