HSBC Canada H1 Results
HSBC Holdings PLC
27 July 2004
HSBC BANK CANADA 2004 INTERIM RESULTS - HIGHLIGHTS
•Net income was C$181 million for the half-year ended 30 June 2004, an
increase of 24.0 per cent from C$146 million in the same period in 2003.
•Net income was C$89 million for the quarter ended 30 June 2004, an
increase of 21.9 per cent from C$73 million for the quarter ended 30 June
2003.
•Return on average common equity was 20.5 per cent for the half-year and
19.7 per cent for the quarter ended 30 June 2004 compared with 19.1 per cent
for the same periods in 2003.
•The cost:income ratio was 55.0 per cent for the half-year ended 30 June
2004 and 54.1 per cent for the quarter ended 30 June 2004 compared with 55.7
per cent and 56.6 per cent for the same periods in 2003.
•Total assets of C$40.8 billion at 30 June 2004 compared with C$36.1
billion at 30 June 2003.
•Total assets under administration were C$20.5 billion at 30 June 2004, of
which C$15.8 billion were funds under management and C$4.7 billion were
custody and administration accounts compared with C$12.4 billion and C$3.4
billion at 30 June 2003.
Financial Commentary
HSBC Bank Canada recorded net income of C$181 million for the half-year ended 30
June 2004, an increase of C$35 million, or 24.0 per cent, from C$146 million for
the same period in 2003. Net income for the quarter ended 30 June 2004 was C$89
million, an increase of C$16 million, or 21.9 per cent, from C$73 million for
the quarter ended 30 June 2003. Net income benefited from a C$4 million gain on
sale of a subsidiary in the quarter ended 30 June 2004 and from a C$9 million
one-time change in accounting for mortgage loan prepayment fees in the quarter
ended 31 March 2004. Excluding these items, net income for the half-year ended
30 June 2004 was C$168 million, 15.1 per cent higher when compared with the same
period in 2003. Net income in the quarter ended 30 June 2004, excluding the
gain, was C$85 million, 16.4 per cent higher when compared with the quarter
ended 30 June 2003.
Commenting on the results, Lindsay Gordon, President and Chief Executive
Officer, said: "Results for the quarter were encouraging and reflect good
momentum in our core businesses. We continued to attract new customers, which
contributed to strong asset growth in our personal and commercial customer
groups. However, the continued competitive environment, particularly in
residential mortgages and personal deposits, has impacted our net interest
margins. We are pleased to see that our ongoing investment in wealth management
has resulted in higher fee income. Credit losses for the quarter were stable
compared with the same period in 2003 and is reflective of the improving economy
in Canada and in the United States during 2004.
"As the acquisition of Intesa Bank Canada (Intesa) was successfully completed in
the quarter ended 30 June 2004, I would like to take this opportunity to
formally welcome customers and staff of Intesa to HSBC. While we do not expect
Intesa to materially impact our results in 2004, the focus over the balance of
the year will be to successfully integrate the operations of Intesa into ours.
We will work hard to ensure that our new customers continue to receive the high
levels of service they are accustomed to while introducing them to the expanded
range of products and services that HSBC offers."
Net interest income
Net interest income for the half-year ended 30 June 2004 was C$437 million
compared with C$439 million for the same period in 2003. For the quarter ended
30 June 2004, net interest income was C$221 million, in line with the quarter
ended 30 June 2003. Net interest income was negatively impacted by lower average
interest rates in 2004 compared with 2003. However, average interest earning
assets in 2004 were higher across all customer groups. Commercial loans were
higher due to the improving economy during 2004. Personal lending in consumer
loans and residential mortgages continued to be strong in the quarter ended 30
June 2004 and was aided by a further 25 basis point decrease in the Bank of
Canada's overnight lending rate.
The net interest margin, as a percentage of average interest earning assets, was
2.55 per cent for the half-year ended 30 June 2004 compared with 2.77 per cent
for the same period in 2003. For the quarter ended 30 June 2004 the net interest
margin was 2.52 per cent compared with 2.75 per cent for the same period in
2003. The net interest spread continues to be negatively impacted by extremely
competitive product pricing, consistent with the trend experienced by the
industry in 2003, and the low interest rate environment.
Other income
Other income was C$257 million for the half-year ended 30 June 2004 compared
with C$207 million for the same period in 2003. For the quarter ended 30 June
2004, other income was C$130 million compared with C$106 million for the same
quarter in 2003.
Capital market fees in 2004 were significantly higher than the comparative
periods in 2003 due to higher retail brokerage commissions, which were driven by
the improving equity markets and an increase in the average number of retail
equity trading transactions. Credit fees were higher due to an increase in
commercial lending activities as economic conditions improved during the quarter
ended 30 June 2004. Mutual fund and administration fees were higher in 2004 than
the comparative periods in 2003 due to success in attracting funds into the
higher value and tailored Private Investment Management and Portfolio Advantage
products. Foreign exchange revenue was higher in 2004 compared with 2003 as
customer activity increased due to the continued volatility of the Canadian and
US dollars. Securitisation income was higher due to gains of C$8 million in the
quarter ended 30 June 2004 arising from the sale of C$317 million of residential
mortgages. Higher fees and income from merchant banking activities benefited
other income in 2004 compared with the same periods in 2003.
Non-interest expenses
Non-interest expenses were C$382 million for the half-year ended 30 June 2004
compared with C$360 million for the same period in 2003. For the quarter ended
30 June 2004 non-interest expenses were C$190 million compared with C$185
million for the same quarter in 2003.
Salaries and benefits in 2004 were higher than comparative periods in 2003 due
to higher variable compensation resulting from higher capital market fees and
increased discretionary bonuses. In addition, 2004 included higher stock-based
compensation, pension and employee benefits costs. Other non-interest expenses
in the quarter ended 30 June 2004 were lower than in the quarter ended 30 June
2003 due to lower operating losses.
Credit quality and provision for credit losses
The provision for credit losses was C$34 million for the half-year ended 30 June
2004 compared with C$39 million in the same period of 2003. For the quarter
ended 30 June 2004 the provision for credit losses was C$20 million compared
with C$19 million in the same period last year. The decrease in the year-to-date
provision reflects the continuing improvement in the performance of the credit
portfolio primarily from declining corporate default rates and improving
economic conditions in Canada and the United States.
Gross impaired loans increased C$30 million to C$232 million at 30 June 2004
compared with C$202 million at 31 March 2004 and C$246 million at 30 June 2003.
The acquisition of Intesa accounted for C$28 million of the increase in the
quarter ended 30 June 2004. Certain of these loans are supported by a letter of
credit from Intesa's former parent or have been adequately provided for. Total
impaired loans, net of specific allowances, were C$138 million at 30 June 2004
and at 31 March 2004 compared with C$155 million at 30 June 2003. The general
allowance for credit losses was C$265 million compared with C$258 million at 31
March 2004 and C$247 million at 30 June 2003. The allowance for credit losses,
as a percentage of loans outstanding, was 1.30 per cent at 30 June 2004 compared
with 1.24 per cent at 31 March 2004 and 1.36 per cent at 30 June 2003.
Balance sheet
Total assets at 30 June 2004 were C$40.8 billion, up C$3.3 billion from C$37.5
billion at 31 December 2003 and C$4.7 billion from C$36.1 billion at 30 June
2003. The acquisition of Intesa added C$1.2 billion in total assets comprising
of C$0.5 billion in cash and securities and C$0.7 billion in loans. The
underlying growth in assets during 2004 was strong. Commercial loans increased,
excluding Intesa, by C$1.1 billion for the half-year and by C$0.6 billion for
the quarter ended 30 June 2004, as economic conditions in Canada and the United
States improved. Total residential mortgages and consumer loans, excluding
Intesa, grew by C$0.6 billion for the half-year and by C$0.4 billion in the
quarter ended 30 June 2004, due to continued strong activity in the housing
market and continued low interest rates.
Total deposits increased C$2.8 billion, C$1.0 billion from Intesa, to C$32.1
billion at 30 June 2004 from C$29.3 billion at 31 December 2003. Commercial
deposits increased, excluding Intesa, by C$1.5 billion for the half-year and by
C$1.1 billion for the quarter ended 30 June 2004, as economic conditions in
Canada and the United States improved. Personal deposits, excluding Intesa, grew
by C$0.5 billion for the half-year and by C$0.3 billion in the quarter ended 30
June 2004, in part due to a successful investment campaign in the first quarter
of 2004.
Impact of new accounting policy
In the first quarter of 2004, we adopted the Canadian Institute of Chartered
Accountants' new accounting requirements that provide additional guidance on
appropriate accounting policies. Loan prepayment fees arising from repayment or
renegotiation of residential mortgages, previously deferred and amortised, are
recognised when the related mortgages are repaid or renegotiated. As a result,
C$14 million, before income taxes, of previously deferred mortgage prepayment
fees were recognised and disclosed separately in the statement of income.
Discontinued operations
The sale of HSBC Canadian Direct Insurance Incorporated (CDII) to Canadian
Western Bank was completed in the quarter ended 30 June 2004. We received cash
proceeds of C$25 million and recorded a gain on sale of C$4 million, after
income taxes. The gain on sale and net income of CDII, up to 30 April 2004, are
disclosed in the consolidated statement of income as income from discontinued
operations for the current and comparative quarters.
Total assets under administration
Funds under management were C$15.8 billion at 30 June 2004 compared with C$12.4
billion at the same time last year and were in line with the balances at 31
March 2004. Year over year growth benefited from a general improvement in the
equity markets, an increase in number of new accounts, increased productivity
from investment advisors and favourable effects of recent investments in the
wealth management businesses. During the quarter ended 30 June 2004, growth in
personal funds benefited from a successful investment campaign, which began in
the quarter ended 31 March 2004. This was offset by a drop in institutional
funds due to the competitive market and less funds being placed as companies
increased their business spending due to the improving economy. Including
custody and administration balances, total assets under administration were
C$20.5 billion compared with C$20.7 billion at 31 March 2004.
Capital ratios
The bank's tier 1 capital ratio was 8.7 per cent and the total capital ratio was
11.2 per cent at 30 June 2004. This compares with 8.3 per cent and 10.9 per
cent, respectively, at 31 March 2004 and 8.0 per cent and 10.9 per cent,
respectively, at 30 June 2003. The capital ratios improved in the quarter ended
30 June 2004 due to a C$175 million issuance of common shares, partially to fund
the acquisition of Intesa. This was offset by declaration of C$50 million in
dividends on common shares in the quarter ended 30 June 2004.
Preferred share dividends
A regular dividend of 39.0625 cents per share (totalling C$2 million) has been
declared on the Class 1 Preferred Shares - Series A. The dividend will be
payable in cash on 30 September 2004, for shareholders of record on 15 September
2004.
About HSBC Bank Canada
HSBC Bank Canada (HSB.PR.A - TSX), a subsidiary of HSBC Holdings plc, has more
than 170 offices. With over 9,500 offices in 79 countries and territories and
assets of US$1,034 billion at 31 December 2003, the HSBC Group is one of the
world's largest banking and financial services organisations. For more
information about HSBC Bank Canada and its products and services, visit our
website at hsbc.ca.
Copies of HSBC Bank Canada's Interim Report will be sent to shareholders during
August 2004.
This document may contain forward-looking statements, including statements
regarding the business and anticipated financial performance of HSBC Bank
Canada. These statements are subject to a number of risks and uncertainties that
may cause actual results to differ materially from those contemplated by the
forward-looking statements. Some of the factors that could cause such
differences include legislative or regulatory developments, competition,
technological change, global capital market activity, changes in government
monetary and economic policies, changes in prevailing interest rates, inflation
levels and general economic conditions in geographic areas where HSBC Bank
Canada operates.
Summary
Quarter ended Half-year ended
Figures in C$ millions
(except per share
amounts) 30Jun04 31Mar04 30Jun03 30Jun04 30Jun03
Earnings
Net income 89 92 73 181 146
Basic earnings per share 0.18 0.19 0.15 0.37 0.30
Performance ratios (%)
Return on average
common equity 19.7 21.3 19.1 20.5 19.1
Return on average
assets 0.88 0.95 0.79 0.92 0.80
Net interest margin 2.52 2.57 2.75 2.55 2.77
Cost:income ratio 54.1 56.0 56.6 55.0 55.7
Other income:total
income ratio 37.0 37.0 32.4 37.0 32.0
Credit information
Impaired loans 232 202 246
Allowance for credit
losses
- Balance at end of
period 359 322 338
- As a percentage of
impaired loans 155% 159% 137%
- As a percentage of
loans outstanding 1.30% 1.24% 1.36%
Average balances
Assets 39,650 38,061 36,275 38,859 35,933
Loans 26,280 25,423 24,322 25,851 24,142
Deposits 30,668 29,895 28,732 29,897 28,599
Common equity 1,772 1,711 1,505 1,742 1,507
Capital ratios (%)
Tier 1 8.7 8.3 8.0
Total capital 11.2 10.9 10.9
Total assets under
administration
Funds under management 15,761 15,775 12,447
Custody and
administration accounts 4,721 4,971 3,388
Total assets under
administration 20,482 20,746 15,835
Consolidated Statement of Income (Unaudited)
Quarter ended Half-year ended
Figures in C$ millions
(except per share
amounts) 30Jun04 31Mar04 30Jun03 30Jun04 30Jun03
Interest and dividend income
Loans 338 340 352 678 685
Securities 19 21 29 40 57
Deposits with regulated
financial institutions 12 14 14 26 27
Total interest income 369 375 395 744 769
Interest expense
Deposits 140 150 165 290 312
Debentures 8 9 9 17 18
Total interest expense 148 159 174 307 330
Net interest income 221 216 221 437 439
Provision for credit losses 20 14 19 34 39
Net interest income after
provision for credit losses 201 202 202 403 400
Other income
Deposit and payment
service charges 21 20 20 41 40
Credit fees 21 18 17 39 33
Capital market fees 25 32 22 57 38
Investment administration fees 15 14 13 29 26
Foreign exchange 17 17 15 34 29
Trade finance 8 6 7 14 13
Trading revenue 4 2 2 6 5
Securitisation income 9 6 3 15 8
Other 10 12 7 22 15
Total other income 130 127 106 257 207
Net interest and other income 331 329 308 660 607
Non-interest expenses
Salaries and employee benefits 103 100 93 203 178
Premises and equipment 26 27 28 53 56
Other 61 65 64 126 126
Total non-interest expenses 190 192 185 382 360
Income before effect of
accounting change 141 137 123 278 247
Effect of accounting change - 14 - 14 -
Income before provision
for income taxes and
non-controlling interest
in income of trust 141 151 123 292 247
Provision for income taxes (52) (56) (47) (108) (94)
Non-controlling interest
in income of trust (4) (4) (4) (8) (8)
Income from continuing
operations 85 91 72 176 145
Income from discontinued
operations 4 1 1 5 1
Net income 89 92 73 181 146
Preferred share dividends 2 2 2 4 4
Net income attributable
to common shares 87 90 71 177 142
Average common shares
outstanding (000) 475,591 471,168 471,168 473,380 471,168
Basic earnings per share (C$) 0.18 0.19 0.15 0.37 0.30
Condensed Consolidated Balance Sheet (Unaudited)
Figures in C$ millions At 30Jun04 At 30Jun03 At 31Dec03
Assets
Cash and deposits with Bank of Canada 343 256 371
Deposits with regulated financial
institutions 4,041 3,373 3,713
4,384 3,629 4,084
Investment securities 1,986 2,234 2,491
Trading securities 715 642 596
2,701 2,876 3,087
Assets purchased under reverse
repurchase agreements 2,050 1,572 596
Loans
- Businesses and government 13,029 11,664 11,992
- Residential mortgage 11,487 10,880 10,248
- Consumer 3,100 2,702 2,573
- Allowance for credit losses (359) (313) (338)
27,257 24,933 24,475
Customers' liability under accceptances 3,309 3,247 2,904
Land, buildings and equipment 96 111 105
Other assets 977 1,141 888
4,382 4,499 3,897
Total assets 40,774 37,509 36,139
Liabilities and shareholders' equity
Deposits
- Regulated financial institutions 720 641 710
- Individuals 14,895 13,924 13,914
- Businesses and governments 16,495 14,774 13,641
32,110 29,339 28,265
Subordinated debentures 508 504 509
Acceptances 3,309 3,247 2,904
Assets sold under repurchase agreements 176 30 25
Other liabilities 2,366 2,340 2,541
Non-controlling interest in trust and
subsidiary 230 230 230
6,081 5,847 5,700
Shareholders' equity
- Preferred shares 125 125 125
- Common shares 1,125 950 950
- Contributed surplus 173 169 165
- Retained earnings 652 575 425
2,075 1,819 1,665
Total liabilities and shareholders' equity 40,774 37,509 36,139
Condensed Consolidated Statement of Cash Flows (Unaudited)
Quarter ended Half-year ended
Figures in C$ millions 30Jun04 31Mar04 30Jun03 30Jun04 30Jun03
Cash flows (used in)/
provided by:
- Operating activities (42) 426 687 384 1,062
- Financing activities 1,390 592 (168) 1,982 (264)
- Investing activities (1,297) (834) (583) (2,131) (902)
Increase/(decrease) in cash
and cash equivalents 51 184 (64) 235 (104)
Cash and cash equivalents,
beginning of period 3,633 3,449 3,597 3,449 3,637
Cash and cash equivalents,
end of period 3,684 3,633 3,533 3,684 3,533
Represented by:
- Cash resources per balance
sheet 4,384 4,379 4,084
- less non-operating deposits^ (700) (746) (551)
- Cash and cash equivalents,
end of period 3,684 3,633 3,533
^ Non-operating deposits are comprised primarily of cash which reprices after
90 days and cash restricted for recourse on securitisation transactions.
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