HSBC USA Inc 1Q03 results

HSBC Holdings PLC 28 April 2003 HSBC USA INC. 2003 First Quarter - Highlights * Net income for the quarter ended 31 March 2003 increased by 20 per cent to US$254 million compared to US$211million in the first quarter of 2002. * Net income as a percentage of average common equity for the quarter ended 31 March 2003 was 15.1 per cent compared to 12.9 per cent during the quarter ended 31 March 2002. * The cost:income ratio for the 2003 first quarter was 50.9 per cent compared to 52.4 per cent for the same period in 2002. * Tier 1 capital to risk-weighted assets was 9.4 per cent at 31 March 2003 compared to 8.4 per cent at 31 March 2002. * Client assets under administration at 31 March 2003 were US$48.9 billion, of which US$34.0 billion were funds under management and US$14.9 billion were custody accounts. HSBC USA Inc. Financial Commentary HSBC USA Inc. reported net income of US$254 million for the quarter ended 31 March 2003, an increase of 20 per cent from US$211 million for the first quarter of 2002. Net interest income grew and most categories of fee based income improved. Commenting on the results, Youssef A Nasr, Chief Executive Officer of HSBC USA Inc., said: "We are pleased with the results that we have reported today. Notwithstanding the difficult economic and consumer environment in which we are operating, they present a positive picture in almost all aspects of our business. However, we remain cautious about the general economic outlook as we move forward. "On March 28, HSBC Holdings plc completed its acquisition of Household International, Inc. The acquisition gives HSBC an immediate presence in 45 states and presents us with an exciting opportunity in the United States to offer HSBC and Household customers a full spectrum of financial services. The broadened business and product mix will create exciting cross selling opportunities for both retail and commercial customers as well as an opportunity for Household to capitalise on its strong credit management and technological skills." Net interest income For the quarter ended 31 March 2003, net interest income increased by US$61 million, or more than 10 per cent, to US$644 million. A better yielding mix of loans, securities and deposits on the balance sheet and lower funding costs contributed to the result. Other operating income For the quarter ended 31 March 2003, other operating income increased 12 per cent to US$311 million from US$277 million for the 2002 comparable quarter. This increase was driven by solid growth in most categories of fee-based income. Fees and commissions, including commercial loan fees, fees on deposit and cash management products and bankcard fees, grew 17 per cent from US$93 million for the quarter ended 31 March 2002 to US$109 million for the quarter ended 31 March 2003. In wealth management, there was some slowdown in sales of annuities and mutual funds associated with the uncertainties affecting the stock market and lower levels of interest rates, but Wealth & Tax Advisory Services, a business which was acquired in July 2002, contributed US$11 million in revenues to other operating income. Insurance revenues increased by 78 per cent to US$16 million for the quarter ended 31 March 2003, up from US$9 million in the comparable quarter of 2002. Over 1,600 professionals are now licensed to sell insurance and certain annuity products through the bank's retail network. Service charges also increased by almost 11 per cent to US$52 million for the quarter ended 31 March 2003 from US$47 million in the 2002 comparable quarter. Treasury trading revenues for the quarter ended 31 March 2003 were US$70 million, an increase of US$27 million, or almost 63 per cent from US$43 million in the 2002 first quarter with strong improvements in the foreign exchange and derivatives businesses. Mortgage-related other operating income, including servicing fees net of impairment, gains on sales of originated mortgages, and related hedge costs including gains on the sale of securities, were flat in the first quarter of 2003 compared to the first quarter of 2002. Total gains from the sales of securities for the quarter ended 31 March 2003 were US$27 million, a decrease of US$11 million from US$38 million in the comparable period in 2002. Operating expenses Operating expenses increased by 8 per cent to US$486 million for the quarter ended 31 March 2003 compared to US$450 million in the 2002 comparable quarter. This increase was primarily attributable to an increase in salary and employee benefits of US$26 million which largely reflects the costs associated with the Wealth & Tax Advisory Services business, an increase in pension costs, and certain volume driven incentive compensation programs. The cost:income ratio for the quarter ended 31 March 2003 was 50.9 per cent compared to 52.4 per cent for the quarter ended 31 March 2002. Provision for income taxes The provision for income taxes was US$159 million for the quarter ended 31 March 2003, compared to US$125 million in the comparable period for 2002. The effective tax rate was 38.5 per cent in 2003 and 37.2 per cent in the 2002 period. Credit quality and provisions for credit losses The provision for credit losses for the first quarter of 2003 of US$56 million was US$18 million lower than in 2002, reflecting better credit quality. Net charge-offs of US$49 million for the quarter ended 31 March 2003 were US$12 million lower than in 2002. The reserve to non-accrual ratio decreased to 132.8 per cent at 31 March 2003 from 138.2 per cent at 31 March 2002. Balance sheet Total assets of HSBC USA Inc. grew 1 per cent to US$88.7 billion at 31 March 2003 compared to US$87.5 billion at 31 March 2002. Total deposits grew 1 per cent to US$61.1 billion at 31 March 2003, compared to US$60.5 billion at 31 March 2002. Total loans grew 2 per cent to US$43.7 billion at 31 March 2003 from US$42.8 billion at 31 March 2002. Compared to 31 March 2002, the loan book saw an increase in residential mortgages and a decrease in lower margin large corporate loans. The mix of personal deposits changed with more demand and savings deposits and fewer certificates of deposit. During this same period, commercial deposits also increased. HSBC Bank USA's residential mortgage business, with approximately 335,000 customers, originated US$6.2 billion in mortgages in the first quarter of 2003, an increase of approximately 15 per cent over the US$5.4 billion originated in the first quarter of 2002. Total assets under administration Total funds under management at 31 March 2003 were US$34.0 billion, up US$750 million, or 2 per cent from 31 March 2002, largely due to the movement of new and existing deposits to investment products. Including custody balances, assets under administration at 31 March 2003 totalled US$48.9 billion. Capital ratios HSBC USA Inc.'s tier 1 capital to risk-weighted assets ratio was 9.4 per cent at 31 March 2003 compared to 8.4 per cent at 31 March 2002. Total capital to risk-weighted assets was 14.2 per cent at 31 March 2003, compared to 13.3 per cent at 31 March 2002. As part of its strategy of providing customers with multiple choices for product and service delivery, HSBC Bank USA offers a comprehensive internet banking service. At 31 March 2003, more than 439,000 customers had registered for the service, up from approximately 410,000 at year-end 2002. The HSBC Bank USA web site, us.hsbc.com, where customers can apply for accounts, conduct financial planning and link to online services, receives approximately 57,000 visits daily. In addition, debit card usage has increased by more than 25 per cent to approximately 9 million transactions in the first quarter of 2003. About HSBC Bank USA HSBC Bank USA has more than 400 branches in New York State, giving it the most extensive branch network in New York State. The bank also has eight branches in Florida, two in Pennsylvania, four in California, one in Oregon, one in Washington and 15 in Panama. HSBC Bank USA is the tenth largest US commercial bank ranked by assets and is a wholly-owned subsidiary of HSBC USA Inc., an indirectly-held, wholly-owned subsidiary of HSBC Holdings plc (NYSE: HBC). Headquartered in London, and with over 9,500 offices in 80 countries and territories, the HSBC Group is one of the world's largest banking and financial services organisations. For more information about HSBC Bank USA and its products and services visit www.us.hsbc.com. HSBC USA Inc. Summary Quarter ended Figures in US$ millions 31 Mar 03 31Mar 02 Earnings Net income * 254 211 Performance ratios (%) Net income as a percentage of Average common equity 15.1 12.9 Net interest margin 2.9 2.7 Cost:income ratio 50.9 52.4 Other operating income to total income 32.5 32.3 Credit information Non-accruing loans at end of period 373 375 Net charge-offs 49 61 Allowance available for credit losses - Balance at end of period 496 518 - As a percentage of non-accruing loans 132.8 % 138.2 % - As a percentage of loans outstanding 1.1 % 1.2 % Average balances Assets 90,953 88,214 Loans 43,200 42,104 Deposits 59,939 59,484 Common equity 6,828 6,652 Capital ratios (%) at end of period Leverage ratio 5.9 5.6 Tier 1 capital to risk-weighted assets 9.4 8.4 Total capital to risk-weighted assets 14.2 13.3 Assets under administration at end of period Funds under management 34,019 33,269 Custody accounts 14,863 16,592 Total assets under administration 48,882 49,861 * During the fourth quarter of 2002, HSBC USA Inc. adopted SFAS 147, Acquisitions of Certain Financial Institutions, and as a result US$65 million of intangible assets that had been previously reported as identifiable intangible assets were reclassified to goodwill effective January 1, 2002. Therefore, the amortization expense previously recorded during the 2002 first quarter was retroactively reversed, resulting in an increase in net income of US$1 million. HSBC USA Inc. Consolidated Statement of Income Quarter ended Figures in US$ millions 31 Mar 03 31 Mar 02 Interest income Loans 610 635 Securities 240 248 Trading assets 40 33 Short-term investments 21 45 Other interest income 7 6 Total interest income 918 967 Interest expense Deposits 188 272 Short-term borrowings 38 53 Long-term debt 48 59 Total interest expense 274 384 Net interest income 644 583 Provision for credit losses 56 74 Net interest income, after provision for credit losses 588 509 Other operating income Trust income 23 25 Service charges 52 47 Mortgage banking revenue * 19 17 Other fees and commissions 109 93 Trading revenues - Treasury business and other 70 43 - Residential mortgage business related ** (26 ) (11 ) Total trading revenues 44 32 Security gains, net ** 27 38 Other income 37 25 Total other operating income 311 277 Total income from operations 899 786 Operating expenses Salaries and employee benefits 279 253 Occupancy expense, net 38 36 Other expenses 169 161 Total operating expenses 486 450 Income before taxes 413 336 Applicable income tax expense 159 125 Net income 254 211 * Mortgage banking revenue includes mortgage servicing fees, net of impairment, gains on sale of mortgages and fair value adjustments related to qualifying hedges (under FAS 133) of residential mortgages originated for sale. ** Trading revenues include the mark-to-market on non-qualifying financial instruments (under FAS 133) providing economic protection on mortgage servicing rights values and interest rate and forward sales commitments in the residential mortgage business. Some security gains were also related to providing economic protection on mortgage servicing rights values. HSBC USA Inc. Consolidated Balance Sheet At 31 Mar 03 At 31 Dec 02 At 31 Mar 02 Figures in US$ millions Assets Cash and due from banks 2,077 2,081 1,918 Interest bearing deposits with banks 1,298 1,048 2,761 Federal funds sold and securities purchased Under resale agreements 4,375 2,743 5,587 Trading assets 11,120 13,408 8,768 Securities available for sale 14,521 14,694 14,866 Securities held to maturity 4,484 4,629 4,280 Loans 43,665 43,636 42,778 Less - allowance for credit losses 496 493 518 Loans, net 43,169 43,143 42,260 Premises and equipment 710 726 749 Accrued interest receivable 336 329 410 Equity investments 282 278 275 Goodwill 2,829 2,829 2,835 Other assets 3,538 3,518 2,785 Total assets 88,739 89,426 87,494 Liabilities Deposits in domestic offices - Non-interest bearing 5,594 5,731 5,092 - Interest bearing 35,992 34,902 35,739 Deposits in foreign offices - Non-interest bearing 425 398 432 - Interest bearing 19,065 18,799 19,191 Total deposits 61,076 59,830 60,454 Trading account liabilities 6,120 7,710 3,570 Short-term borrowings 6,796 7,392 9,772 Interest, taxes and other liabilities 3,683 3,422 2,567 Subordinated long-term debt and perpetual capital notes 2,108 2,109 2,702 Guaranteed mandatorily redeemable securities 1,071 1,051 728 Other long-term debt 520 515 584 Total liabilities 81,374 82,029 80,377 Shareholders' equity Preferred stock 500 500 500 Common shareholders' equity - Common stock * - - - - Capital surplus 6,048 6,057 6,038 - Retained earnings 571 578 512 - Accumulated other comprehensive income 246 262 67 Total common shareholders' equity 6,865 6,897 6,617 Total shareholders' equity 7,365 7,397 7,117 Total liabilities and shareholders' equity 88,739 89,426 87,494 * Less than $500,000. 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