HSBC Bank Canada Q3 2007
HSBC Holdings PLC
29 October 2007
HSBC BANK CANADA
THIRD QUARTER 2007 RESULTS^ - HIGHLIGHTS
• Net income attributable to common shares was C$145 million for the
quarter ended 30 September 2007, an increase of 5.1 per cent over the
quarter ended 30 September 2006.
• Net income attributable to common shares was C$419 million for the nine
months ended 30 September 2007, an increase of 13.6 per cent over the same
period in 2006.
• Return on average common equity was 21.3 per cent for both the quarter
and nine months ended 30 September 2007 compared with 23.0 per cent and 21.2
per cent, respectively, for the same periods in 2006.
• The cost efficiency ratio was 48.9 per cent and 50.8 per cent for the
quarter and nine months ended 30 September 2007 compared with 48.2 per cent
and 51.3 per cent, respectively, for the same periods in 2006.
• Total assets were C$63.6 billion at 30 September 2007 compared with
C$55.9 billion at 30 September 2006.
• Total funds under management were C$27.1 billion at 30 September 2007
compared with C$22.4 billion at 30 September 2006.
^ Results are prepared in accordance with Canadian generally accepted accounting
principles.
Financial Commentary
Overview
HSBC Bank Canada recorded net income attributable to common shares of C$145
million for the quarter ended 30 September 2007, an increase of C$7 million, or
5.1 per cent, from C$138 million for the third quarter of 2006. Net income
attributable to common shares for the nine months ended 30 September 2007 was
C$419 million compared with C$369 million for the same period in 2006, an
increase of C$50 million, or 13.6 per cent.
Net income attributable to common shares in the nine months ended 30 September
2007 benefited from gains of C$21 million after related income taxes, on the
sale of the bank's shares in the Montreal Exchange. Excluding these gains, net
income attributable to common shares for the nine months ended 30 September 2007
increased by 7.9 per cent from the same period last year.
Commenting on the results, Lindsay Gordon, President and Chief Executive
Officer, said:"HSBC Bank Canada recorded satisfactory results in the third quarter
with good growth in revenue and net income compared to previous periods. The strong
Canadian economy and strategic investments in key businesses and markets drove
growth. The recent volatility in international credit and liquidity markets has
provided evidence that we need to continue to manage our businesses prudently.
"For the remainder of 2007 and into 2008, we plan to continue our existing
strategy of enhancing sales through careful expansion in key target markets and
improving operational efficiencies while maintaining close control over credit
quality. We continue to work on global initiatives with the HSBC Group and
recently, along with 34 other countries and territories, we launched HSBC Global
Premier, a product that offers the world's mass affluent the most comprehensive
global banking and wealth management service in the market. Global Premier
leverages HSBC's presence in 83 markets to provide customers with seamless
international service."
Net interest income
Net interest income was C$319 million for the quarter ended 30 September 2007
compared with C$282 million for the same quarter in 2006, an increase of C$37
million, or 13.1 per cent. The increase was driven by growth in assets in all
businesses. Average interest-earning assets were C$5.9 billion or 12.2 per cent
higher compared with the same period in 2006. The net interest margin increased
to 2.33 per cent for the quarter compared with 2.31 per cent for the same period
in 2006.
Net interest income in the third quarter of 2007 was C$12 million higher
compared with the second quarter of 2007. An increase in the Canadian prime rate
during the quarter together with higher commercial loan volumes improved net
interest income. This was partly offset by higher interest rates on deposits, as
a result of the widening credit spreads recently experienced in international
credit and liquidity markets. The net interest margin was four basis points
higher than the previous quarter.
On a year-to-date basis, net interest income was C$920 million compared with
C$824 million for the same period last year, an increase of C$96 million, or
11.7 per cent. Year-to-date net interest income in 2007 benefited from continued
growth in assets across all businesses, partially offset by a decrease in net
interest margins to 2.30 per cent compared with 2.34 per cent in 2006.
Non-interest revenue
Non-interest revenue was C$184 million for the third quarter of 2007 compared
with C$160 million in the same quarter of 2006, an increase of C$24 million, or
15.0 per cent. Investment administration fees were higher as the bank's funds
under management in the wealth management business continued to record strong
growth. Deposit and payment service charges and credit fees increased as a
result of increased customer activity. Capital market fees were lower arising
from lower activity as a result of uncertainties in the markets, particularly
from new issue underwriting and advisory mandates. Trading income was higher,
mainly due to positive impacts of changes in the carrying values of certain debt
obligations recorded at fair value. Investment securities gains were lower due
to an increase in the fair value of the bank's investments in private equity
funds recorded in the third quarter of 2006, not repeated in the third quarter
of 2007.
Non-interest revenue was C$7 million higher in the third quarter of 2007
compared with the previous quarter, mainly due to higher trading revenues as
noted above offset by a reduction in investment securities gains on sale of
shares in the Montreal Exchange included in the second quarter and a reduction
in capital market fees, particularly from lower market activity impacting
underwriting and advisory mandates.
On a year-to-date basis, non-interest revenue was C$546 million, C$63 million,
or 13.0 per cent, higher compared with C$483 million for the same period last
year. Trading income was higher than the same period in 2006, mainly due to
positive impacts of changes in the carrying values of certain debt obligations
recorded at fair value. Investment administration fees increased due to growth
in funds under management, and deposit and payment service charges were also
higher. Investment securities gains were higher due to the sale of the bank's
Montreal Exchange shares, partially offset by a lower increase in fair value of
the private equity funds than that recorded in 2006.
Non-interest expenses and operating efficiency
Non-interest expenses were C$246 million for the third quarter of 2007 compared
with C$213 million in the same quarter of 2006, an increase of C$33 million, or
15.5 per cent. Salaries and employee benefits expenses were higher in 2007 due
to an increase in the employee base as a result of strategic growth initiatives
in new branches in Alberta and the Greater Toronto Area. Investments were also
made in the Direct Bank, Private Banking and Wealth Management and the Payments
and Cash Management businesses. Stock-based compensation and pension plan costs
were also higher than in the comparative period. Premises and equipment expenses
were higher due to the opening of new branches, investments in systems and
higher transaction costs arising from increased customer activity. Marketing
expenses also increased as we continued to build the HSBC brand in Canada. The
cost efficiency ratio of 48.9 per cent increased marginally compared with the
same period in 2006.
Non-interest expenses for the third quarter of 2007 were also little changed
compared with the second quarter of 2007. Salaries and benefits were lower as a
result of decreased variable compensation resulting from lower capital market
revenues and lower employee benefit costs seasonally experienced in the third
quarter. This was offset by higher other expenses due to increases in corporate
capital taxes, marketing and other infrastructure expenses.
On a year-to-date basis, non-interest expenses were C$744 million compared with
C$670 million for the same period last year, an increase of C$74 million, or
11.0 per cent. Salaries and benefits expenses were higher due to an increased
employee base, increased variable compensation, and higher pension costs. Other
expenses were higher due to continued investment in the business, as well as
higher costs arising from increased customer transactions. The cost efficiency
ratio improved to 50.8 per cent compared with 51.3 per cent for the same period
in 2006.
Credit quality and provision for credit losses
The provision for credit losses was C$21 million for the third quarter of 2007,
compared with C$5 million in the third quarter of 2006, and C$12 million for the
second quarter of 2007. Overall credit quality remains sound, reflecting prudent
lending standards and strong economic conditions in Canada. The increased charge
in the third quarter of 2007 compared to the same period last year is due to
additional provisions related to a single commercial exposure compared to an
unusually low loan loss experience in 2006 where corporate default rates were at
historically low levels.
Gross impaired credit exposures were C$206 million, C$11 million higher compared
with C$195 million at 30 June 2007, and C$40 million higher compared with C$166
million at 30 September 2006. Total impaired exposures, net of specific
allowances for credit losses, were C$139 million at 30 September 2007 compared
with C$141 million at 30 June 2007 and C$117 million at 30 September 2006.
The general allowance for credit losses of C$269 million remained unchanged from
30 June 2007 and 30 September 2006. The total allowance for credit losses, as a
percentage of loans and acceptances outstanding, was 0.75 per cent at 30
September 2007 compared with 0.74 per cent at 30 June 2007 and 0.80 per cent at
30 September 2006. The bank considers the total allowance for credit losses to
be appropriate given the credit quality of its portfolios and the current credit
environment.
Income taxes
The effective tax rate in the third quarter of 2007 was 35.2 per cent, which was
comparable to 34.9 per cent in the same quarter of 2006 and 35.5 per cent in the
second quarter of 2007. On a year-to-date basis in 2007, the effective tax rate
was 34.5 per cent compared with 36.4 per cent for the same period last year
primarily due to a higher level of gains subject to a lower tax rate and higher
non-deductible expenses in 2006.
Balance sheet
Total assets at 30 September 2007 were C$63.6 billion, an increase of C$6.8
billion from 31 December 2006 and C$7.7 billion from 30 September 2006. The loan
portfolio continues to be a major driver of balance sheet growth. Commercial
loans and bankers' acceptances grew C$3.3 billion since 31 December 2006 on the
continued strong economy, particularly in Western Canada. Residential mortgages
increased C$0.9 billion, before securitisation during the period. Balance sheet
management activity in the Treasury and Markets business has increased the
securities portfolio by C$1.9 billion although this was offset by slight
decreases in balances under reverse repurchase agreements.
Total deposits increased C$3.3 billion to C$47.5 billion at 30 September 2007
from C$44.2 billion at 31 December 2006 and by C$4.7 billion from C$42.8 billion
at 30 September 2006. Growth in personal deposits resulted largely from the new
High Rate and Direct Savings accounts. Commercial deposits were higher due to
growth in term products, driven by improved product offerings in the Payments
and Cash Management business and growth in commercial banking relationships.
Other liabilities increased largely from an increase in short positions in
securities resulting from an increase in activities in the Treasury and Markets
business.
Compared with the balance at 30 September 2006, total assets were higher largely
due to growth in commercial loans and markets activities. Residential mortgages
were also higher. Deposit growth benefited from increased cash management
balances from corporate customers as well as personal deposit growth from the
High Rate and Direct Savings accounts.
Total assets under administration
Funds under management were C$27.1 billion at 30 September 2007 compared with
C$25.8 billion at 30 June 2007 and C$22.4 billion at 30 September 2006.
Including custody and administration balances, total assets under administration
were C$36.4 billion compared with C$34.8 billion at 30 June 2007 and C$31.3
billion at 30 September 2006.
Growth in funds under management in 2007 benefited from strong acquisitions of
new clients, strong investment sales and the success of Private Client products
assisted by growth in equity markets.
Capital management
The tier 1 capital ratio was 8.5 per cent and the total capital ratio was 10.9
per cent at 30 September 2007. These compare with 8.8 per cent and 11.5 per
cent, respectively, at 30 June 2007 and 8.9 per cent and 11.1 per cent,
respectively, at 30 September 2006.
In addition to net income, regulatory capital increased from an issuance of
C$400 million in subordinated debentures in the second quarter of 2007. This was
partially offset by dividends declared on preferred and common shares and the
redemption of C$100 million and C$25 million in subordinated debentures in the
second and third quarters of 2007 respectively.
Accounting policies adopted in 2007
Effective 1 January 2007, the bank adopted new Canadian Institute of Chartered
Accountants (CICA) Handbook Standards relating to the recognition, measurement
and disclosure of financial instruments including hedges and comprehensive
income. Although these standards were adopted prospectively without restatement
of prior year comparatives, the impact on initial adoption as well as the
effects of certain transitional adjustments have been recorded as adjustments to
opening retained earnings or opening accumulated other comprehensive income.
Although there was no material impact on the results for the third quarter
arising from the adoption of these new standards, more detailed information on
the impact of adopting these standards was included in HSBC Bank Canada's first
quarter 2007 report to shareholders.
Dividends
During the third quarter of 2007, C$65 million in dividends were declared and
paid on the bank's common shares.
Regular quarterly dividends of 31.875 cents per share have been declared on HSBC
Bank Canada Class 1 Preferred Shares - Series C and 31.25 cents per share on
Class 1 Preferred Shares - Series D. The dividends will be payable on 31
December 2007, to shareholders of record on 14 December 2007.
About HSBC Bank Canada
HSBC Bank Canada, a subsidiary of HSBC Holdings plc, has more than 170 offices.
With around 10,000 offices in 83 countries and territories and assets of
US$2,150 billion at 30 June 2007, the HSBC Group is one of the world's largest
banking and financial services organisations. Visit the bank's website at
hsbc.ca for more information about HSBC Bank Canada and its products and
services.
Copies of HSBC Bank Canada's third quarter 2007 report will be sent to
shareholders in November 2007.
Caution regarding forward-looking financial statements
This document may contain forward-looking statements, including statements
regarding the business and anticipated financial performance of HSBC Bank
Canada. These statements are subject to a number of risks and uncertainties that
may cause actual results to differ materially from those contemplated by the
forward-looking statements. Some of the factors that could cause such
differences include legislative or regulatory developments, technological
change, global capital market activity, changes in government monetary and
economic policies, changes in prevailing interest rates, inflation level and
general economic conditions in geographic areas where HSBC Bank Canada operates.
Canada is an extremely competitive banking environment and pressures on interest
rates and the bank's net interest margin may arise from actions taken by
individual banks acting alone. Varying economic conditions may also affect
equity and foreign exchange markets, which could also have an impact on the
bank's revenues. The factors disclosed above may not be complete and there could
be other uncertainties and potential risk factors not considered here which may
impact the bank's results and financial condition.
HSBC Bank Canada Summary
Quarter ended Nine months ended
Figures in C$ millions 30Sept07 30Jun07 30Sept06 30Sept07 30Sept06
(except per share amounts)
Earnings
Net income attributable
to common shares 145 135 138 419 369
Basic earnings per share 0.30 0.28 0.28 0.86 0.76
Performance ratios (%)
Return on average common equity 21.3 20.7 23.0 21.3 21.2
Return on average assets 0.91 0.86 1.01 0.90 0.94
Net interest margin^ 2.33 2.29 2.31 2.30 2.34
Cost efficiency ratio^ 48.9 51.2 48.2 50.8 51.3
Non-interest revenue:total revenue ratio 36.6 36.6 36.2 37.2 37.0
Credit information
Gross impaired credit exposures 206 195 166
Allowance for credit losses 336 323 318
- As a percentage of gross impaired
credit exposures 163% 166% 192%
- As a percentage of gross loans
and acceptances 0.75% 0.74% 0.80%
Average balances
Assets 62,934 63,286 53,945 62,301 52,512
Loans 38,405 37,067 34,144 37,164 33,226
Deposits 47,588 46,691 42,206 46,717 41,033
Common equity 2,693 2,618 2,387 2,623 2,326
Capital ratios (%)
Tier 1 8.5 8.8 8.9
Total capital 10.9 11.5 11.1
Total assets under administration
Funds under management 27,129 25,795 22,372
Custody accounts 9,279 9,012 8,973
Total assets under administration 36,408 34,807 31,345
^ Net interest margin is net interest income divided by average interest earning
assets for the period.
^^ The cost efficiency ratio is defined as non-interest expenses divided by
total revenue.
Consolidated Statement of Income (Unaudited)
Figures in C$ millions Quarter ended Nine months ended
(except per share amounts) 30Sept07 30Jun07 30Sept06 30Sept07 30Sept06
Interest and dividend income
Loans 663 616 566 1,876 1,551
Securities 70 71 47 199 136
Deposits with regulated
financial institutions 61 62 59 182 172
794 749 672 2,257 1,859
Interest expense
Deposits 464 431 383 1,308 1,015
Debentures 11 11 7 29 20
475 442 390 1,337 1,035
Net interest income 319 307 282 920 824
Non-interest revenue
Deposit and payment service charges 25 25 23 73 67
Credit fees 30 28 28 85 80
Capital market fees 21 29 27 82 85
Investment administration
fees 33 33 26 96 75
Foreign exchange 10 9 8 28 23
Trade finance 6 6 6 18 18
Trading revenue 40 16 18 70 52
Investment securities gains - 10 5 35 23
Securitisation income 10 9 10 29 29
Other 9 12 9 30 31
184 177 160 546 483
Total revenue 503 484 442 1,466 1,307
Non-interest expenses
Salaries and employee benefits 132 139 120 414 379
Premises and equipment 31 32 26 94 82
Other 83 77 67 236 209
246 248 213 744 670
Net operating income before
provision for credit losses 257 236 229 722 637
Provision for credit losses 21 12 5 43 17
Income before taxes and
non-controlling interest in income
of trust 236 224 224 679 620
Provision for income taxes 81 77 76 228 219
Non-controlling interest in income
of trust 6 7 6 19 19
Net income 149 140 142 432 382
Preferred share dividends 4 5 4 13 13
Net income attributable to
common shares 145 135 138 419 369
Average common shares outstanding (000) 488,668 488,668 488,668 488,668 488,668
Basic earnings per share (C$) 0.30 0.28 0.28 0.86 0.76
Condensed Consolidated Balance Sheet (Unaudited)
At 30Sept07 At 31Dec06 At 30Sept06
Figures in C$ millions
^ ^
Assets
Cash and deposits with Bank of Canada 384 368 386
Deposits with regulated financial institutions 4,066 4,346 4,753
4,450 4,714 5,139
Available for sale securities 4,675 - -
Investment securities - 3,604 3,225
Trading securities 1,920 1,162 1,821
Other securities 59 - -
6,654 4,766 5,046
Assets purchased under reverse repurchase agreements 4,552 4,760 3,843
Loans
- Businesses and government 20,995 17,819 17,500
- Residential mortgage 14,220 14,016 13,597
- Consumer 4,612 3,728 3,855
- Allowance for credit losses (336) (327) (318)
39,491 35,236 34,634
Customers' liability under acceptances 5,237 5,130 4,880
Derivatives 737 308 215
Land, buildings and equipment 136 121 100
Other assets 2,301 1,735 2,037
8,411 7,294 7,232
Total assets 63,558 56,770 55,894
Liabilities and shareholders' equity
Deposits
- Regulated financial institutions 2,608 1,469 1,889
- Individuals 18,244 17,039 16,648
- Businesses and governments 26,683 25,665 24,278
47,535 44,173 42,815
Acceptances 5,237 5,130 4,880
Assets sold under repurchase agreements 686 162 290
Derivatives 941 316 208
Securities sold short 1,461 715 1,215
Other liabilities 3,372 2,413 2,700
Non-controlling interest in trust and subsidiary 430 430 430
12,127 9,166 9,723
Subordinated debentures 799 563 559
Shareholders' equity
- Preferred shares 350 350 350
- Common shares 1,125 1,125 1,125
- Contributed surplus 205 202 199
- Retained earnings 1,416 1,191 1,123
- Accumulated other comprehensive income 1 - -
3,097 2,868 2,797
Total liabilities and shareholders' equity 63,558 56,770 55,894
^Certain prior period amounts have been reclassified to conform with the current
period presentation.
Condensed Consolidated Statement of Cash Flows (Unaudited)
Quarter ended Nine months ended
30Sept07 30Jun07 30Sept06 30Sept07 30Sept06
Figures in C$ millions
Cash flows provided by/(used in):
- operating activities 205 389 128 1,060 312
- financing activities 1,867 62 1,677 3,953 4,082
- investing activities (1,721) (771) (1,021) (4,680) (4,652)
(Decrease) increase in cash and
cash equivalents 351 (320) 784 333 (258)
Cash and cash equivalents,
beginning of period 4,020 4,340 4,158 4,038 5,200
Cash and cash equivalents,
end of period 4,371 4,020 4,942 4,371 4,942
Represented by:
Cash resources per balance sheet 4,450 4,851 5,139
- less non-operating
deposits^ (79) (831) (197)
Cash and cash equivalents,
end of period 4,371 4,020 4,942
^Non-operating deposits are comprised primarily of cash which reprices after 90
days and cash restricted for recourse on securitisation transactions.
This information is provided by RNS
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