Interim Report - 11 of 25

RNS Number : 6262J

HSBC Holdings PLC

10 August 2012

 



North America

Our North American businesses are located in the US, Canada and Bermuda. Operations in the US are primarily conducted through HSBC Bank USA, N.A. and HSBC Finance, a national consumer finance company. HSBC Markets (USA) Inc. is the intermediate holding company of, inter alia, HSBC Securities (USA) Inc. HSBC Bank Canada and HSBC Bank Bermuda operate in their respective countries.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2012		2011		2011
	US$m		US$m		US$m
Net interest income .....	4,739		5,849		5,631
Net fee income ............	1,443		1,718		1,590
Net trading income/ (expense) ..................	161		448		(810)
Gains on disposal of US branch network and cards business.............	3,809		-		-
Other income/(expense)	(174)		225		1,349
Net operating income48 ..................................	9,978		8,240		7,760
Impairment charges49 ..	(2,161)		(3,049)		(3,967)
Net operating income	7,817		5,191		3,793
Total operating expenses ..................................	(4,462)		(4,602)		(4,317)
Operating profit/(loss) ..................................	3,355		589		(524)
Income from associates50	(1)		17		18
Profit/(loss) before tax	3,354		606		(506)
Cost efficiency ratio ....	44.7%		55.8%		55.6%
RoRWA40 ....................	2.1%		0.4%		(0.3%)
Period-end staff numbers	23,341		32,605		30,981
US$3.9bn gain recognised following the completion of strategic disposals
Gross balances in the CML portfolio down by US$3.8bn to US$45.7bn
29% reduction in loan impairment charges
For footnotes, see page 100. The commentary on North America is on a constant currency basis unless stated otherwise.

Economic background 

Annualised US GDP growth was 1.6% in the first half of 2012. Annualised consumer spending growth remained moderate at 2% as the process of reducing debt after the credit boom of the last decade continued to restrain growth in spending as households attempted to increase their savings. Employment growth remained positive in the first half of 2012 but slowed during the period. The unemployment rate was 8.2% in June, down from 9.1% a year earlier. In response to slow growth and stable core inflation, the Federal Reserve maintained the federal funds rate in a range of zero to 0.25% and, in January, it announced that these exceptionally low levels were likely to remain in place to at least the end of 2014. In June, the Federal Reserve extended its maturity extension programme to the end of 2012, continuing to purchase longer-term Treasury securities while simultaneously selling an equivalent amount of short-term securities.

Canadian GDP rose by an annualised rate of 1.9% in the first quarter of 2012 and domestic demand remained a key driver of GDP growth. March and April 2012 saw the largest gains in employment in a two-month period since 1976 which, alongside modest upward pressure on wages, helped sustain a rebound in Canadian consumer confidence in the first half of the year. The firm domestic backdrop led the Bank of Canada to suggest in mid-April that some policy tightening 'may become appropriate', but the deterioration in the global economic outlook saw the central bank maintain interest rates at 1% throughout the first half of 2012. With interest rates remaining low, the federal government put in place a number of measures aimed at reducing the pace of price appreciation in the housing market.

Review of performance

In the first half of 2012, our operations in North America reported a profit before tax of US$3.4bn, compared with US$606m in the first half of 2011. Our reported profits included gains in the US of US$3.1bn and US$661m following the completion of the sales of the Card and Retail Services business and the 138 non-strategic branches, respectively, while in Canada we recorded a gain of US$83m from the sale of the Private Client Services business. In addition, we recognised US$559m of adverse movements on our own debt designated at fair value resulting from tightening credit spreads, compared with adverse movements of US$66m in the first half of 2011 and favourable movements of US$1.0bn in the second half of 2011.

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
Half-year to 30 June 2012
US ......................................................	3,326		374		384		38		(1,388)		2,734
Canada ...............................................	129		307		174		−		(8)		602
Bermuda .............................................	18		1		(9)		3		4		17
Other .................................................	1		−		−		−		−		1
	3,474		682		549		41		(1,392)		3,354
Half-year to 30 June 2011
US ......................................................	(568)		177		599		47		(244)		11
Canada ...............................................	95		297		134		-		(6)		520
Bermuda .............................................	28		14		23		2		8		75
Other .................................................	-		-		-		-		-		-
	(445)		488		756		49		(242)		606
Half-year to 31 December 2011
US ......................................................	(2,293)		254		(32)		36		1,026		(1,009)
Canada ...............................................	52		248		131		-		14		445
Bermuda .............................................	21		12		20		5		1		59
Other .................................................	-		-		-		-		(1)		(1)
	(2,220)		514		119		41		1,040		(506)

On an underlying basis, our profit before tax was US$21m compared with US$483m in the first half of 2011. This decrease was mainly due to lower revenue in CML, reflecting a reduction in average lending balances as the business winds down, and lower revenue in GB&M. Operating expenses also increased, including a provision of US$700m related to US anti-money laundering, BSA and OFAC investigations. Partly offsetting this was a reduction in loan impairment charges in CML. In Canada, we increased our underlying profit before tax by 5% to US$537m. This was mainly due to a rise in revenue, notably from an improved performance in GB&M, partly offset by increased costs.

We continued to make progress in disposing of businesses not aligned with the Group's long-term strategy. On 1 May 2012, we completed the sale and transfer of our US Card and Retail Services business. Associated with the sale, over 5,000 employees and certain real estate facilities were transferred to the purchaser. In addition, we entered into a transition services agreement with the purchaser to support some of the account servicing operations until such time as all systems, processes and equipment are integrated into the purchaser's existing infrastructure. We also completed the sale of 138 of the 195 retail branches in upstate New York that we had agreed to sell, recognising gains of US$449m and US$212m in RBWM and CMB, respectively. In the third quarter of 2012, we expect to complete the disposal of the remaining 57 branches. In Canada, we completed the sale of the Private Client Services business. The impact of these sales on our results can be seen on page 38. We expect these sales to have a significant adverse effect on both revenue and profit in our North America region in the future.

In the first half of 2012, HSBC Bank USA, N.A. ('HSBC Bank USA') entered into a strategic relationship with PHH Mortgage to manage our mortgage origination and servicing operations. Under the terms of the agreement, we will continue to own the mortgage servicing rights ('MSR's) associated with our current portfolio of serviced loans, but we will not recognise any additional MSRs upon the completion of the transaction. The value of our existing MSRs will remain subject to interest rate risk, which is mitigated through an economic hedging programme. The conversion of these operations is expected to be completed in the first quarter of 2013. In March 2012, we announced the winding down of our consumer finance business in Canada and, except for existing commitments, ceased the origination of loans.

We incurred additional costs of US$151m in the first half of 2012 following restructuring activities in the region; these related mainly to the business disposals, the closure of our consumer finance operations in Canada and the continuation of our organisational effectiveness initiatives while we achieved some US$220m of additional sustainable cost savings during the same period. These were mainly derived from operational efficiencies and a de-layering programme.

We remained focused on managing the run-off of balances in our CML portfolio, with period-end lending balances of US$45.7bn, a decline of 8% from the end of 2011 of which 44% was attributable to the write-off of balances. We engaged an advisor to assist us in exploring options to accelerate the liquidation of this portfolio and identified certain loan pools that we intend to sell as market conditions permit. The financial effect of our run-off portfolio on the results of our North America operations can be seen on page 38.

Also in RBWM, we continued to develop our Wealth Management capabilities across the region. In Canada, we operate the country's largest Chinese and second largest Indian equity funds and, in the US, we launched a renminbi fixed income fund to provide US investors with the opportunity to access mainland China's rapidly growing bond market.

In CMB and GB&M, we continued to target companies with international banking requirements, while CMB's extended collaboration with GB&M resulted in a 26% rise in revenue from the sales of GB&M products to our CMB customers. This revenue is shared between the two global businesses.

In GB&M, we continued to work on delivering integrated solutions for our customers across the Americas, increasing our lending to Latin American corporates. In addition, we actively reduced our legacy credit exposure in the US by exiting certain positions. We will seek to further reduce the size of this portfolio as opportunities become available. The financial effect of the legacy credit portfolio on the results of our North America operations can be seen on page 38.

The following commentary is on a constant currency basis.

Net interest income fell by 19% to US$4.7bn, mainly due to the loss of income from the Card and Retail Services business along with a reduction in average lending balances and lower yields from operations to the date of sale. Excluding the results of the Card and Retail Services business and the other disposals referred to above, net interest income declined, reflecting the reduction in average lending balances as the CML portfolio continued to run-off, while lending spreads in this portfolio also reduced as the product mix comprised a higher balance of lower yielding products.

Net fee income declined by 16%, primarily due to the sale of the Card and Retail Services business and, to a lesser extent, the sale of the Private Client Services business in Canada. Excluding the results of the disposed businesses, net fee income was broadly unchanged.

Net trading income fell by 64% to US$161m. The reduction reflected lower revenue in GB&M, mainly in the legacy credit portfolio due to reduced net releases of write-downs in the first half of 2012 resulting from lower price appreciation on assets held in this portfolio, and losses incurred on the exit of certain exposures in advance of their scheduled maturity date. In addition, revenue from Credit declined as a result of unfavourable credit spread movements.

In RBWM, higher trading expense reflected an increase in adverse movements in the fair value of non-qualifying hedges used to hedge floating rate debt issued by HSBC Finance. In the first half of 2012, the effects of falling long-term US interest rates was more pronounced than in the first half of 2011, resulting in adverse fair value movements in HSBC Finance of US$217m compared with US$124m in the first half of 2011 and US$1.1bn in the second half of 2011.

Net expense from financial instruments designated at fair value increased from US$118m in the first half of 2011 to US$639m in the first half of 2012. Narrowing credit spreads resulted in adverse movements in the fair value of our own debt in both periods, though the effects were more pronounced in 2012.

Gains less losses from financial investments were US$175m, a rise of 61% compared with the first half of 2011 due to an increase in gains from sales of assets in Balance Sheet Management in the US, as well as an increase in gains from similar sales in Canada. These transactions were undertaken as part of structural interest rate risk management activities.

Other operating income increased following a reduction in losses on foreclosed properties, reflecting fewer sales.

Loan impairment charges and other credit risk provisions were US$2.2bn, 29% lower than in the first half of 2011. This reflected a marked decline in loan impairment charges in the CML portfolio, as well as the sale of the Card and Retail Services business.

Loan impairment charges in the CML portfolio declined by 28% to US$1.6bn, driven by a reduction in lending balances as the portfolio continued to run off, as well as an improvement in two-months-and-over contractual delinquency on balances less than 180 days past due. Loan impairment charges were adversely affected by delays in expected cash flows from mortgage loans due, in part, to delays in foreclosure processing, though the effects were more pronounced in the first half of 2011. Additionally, in the first half of 2012, we increased our loan impairment allowances having updated our assumptions regarding the timing of expected cash flows received from customers with loan modifications.

Further discussions of delinquency trends in the US personal lending portfolios are provided in 'Areas of special interest - US Personal Lending' on page 136.

Operating expenses of US$4.5bn were 3% lower than in the first half of 2011, as our cost base reduced following the completion of various disposals and the closure of the consumer finance business in Canada as well as the success of initiatives to lower cost levels and achieve sustainable savings.

Staff costs in the region reduced as average staff numbers fell by over 5,000 compared with the first half of 2011, the majority of whom transferred as part of the businesses sold. Performance-related costs also fell, while lower marketing costs reflected a reduction in marketing programmes. In addition, the costs of holding foreclosed properties declined reflecting lower inventory following the slowing of foreclosure processing activities. Restructuring costs of US$151m compared with US$190m in the first half of 2011. In the current period, restructuring was primarily associated with our business disposals, the closure of the consumer finance business in Canada and the continuation of our organisational effectiveness initiatives. Offsetting the decline in costs in the region was an increase in provisions, including US$700m related to anti-money laundering, BSA and OFAC investigations, which is reported in 'Other' for the purposes of the segmentation by global business. In addition, we incurred higher compliance costs, largely due to investment in process enhancements and infrastructure related to anti-money laundering and BSA consent orders, along with actions to address the regulatory consent orders relating to foreclosure activities.

Profit/(loss) before tax and balance sheet data - North America

	Half-year to 30 June 2012
	Retail      Banking and Wealth Management          US$m		Commercial     Banking          US$m		Global     Banking and     Markets         US$m		Global Private     Banking         US$m		Other          US$m		Inter-    segment elimination57        US$m		Total         US$m
Profit/(loss) before tax
Net interest income .............	3,418		715		491		97		50		(32)		4,739
Net fee income ... ......................... ......................... .........................	681		272		375		64		51		−		1,443
Trading income/(expense) excluding net interest income	(206)		20		245		11		8		−		78
Net interest income on trading activities .........................	9		1		41		−		−		32		83
Net trading income/ (expense)51 ......	(197)		21		286		11		8		32		161
Changes in fair value of long-term debt issued and related derivatives .......	-		-		-		-		(638)		-		(638)
Net expense from other financial instruments designated at fair value ................	-		-		(1)		-		-		-		(1)
Net expense from financial instruments designated at fair value ..........	−		−		(1)		−		(638)		−		(639)
Gains less losses from financial investments .....	12		−		158		−		6		−		176
Dividend income .	8		5		11		1		1		−		26
Net earned insurance premiums .........	109		−		−		−		−		−		109
Gains on disposal of US branch network and cards business ...	3,597		212		−		−		−		−		3,809
Other operating income .............	109		93		87		5		1,011		(1,079)		226
Total operating income ...........	7,737		1,318		1,407		178		489		(1,079)		10,050
Net insurance claims58 ............	(72)		−		−		−		−		−		(72)
Net operating income48 .........	7,665		1,318		1,407		178		489		(1,079)		9,978
Loan impairment (charges)/ recoveries and other credit risk provisions ........	(2,084)		(51)		(30)		4		−		−		(2,161)
Net operating income ...........	5,581		1,267		1,377		182		489		(1,079)		7,817
Operating expenses ..........	(2,108)		(583)		(828)		(141)		(1,881)		1,079		(4,462)
Operating profit/(loss) ....	3,473		684		549		41		(1,392)		−		3,355
Share of profit/(loss) in associates and joint ventures ...........	1		(2)		−		−		−		−		(1)
Profit/(loss) before tax .......	3,474		682		549		41		(1,392)		−		3,354
	%		%		%		%		%				%
Share of HSBC's profit before tax ........	27.3		5.4		4.3		0.3		(11.0)				26.3
Cost efficiency ratio .................	27.5		44.2		58.8		79.2		384.7				44.7
Balance sheet data47
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ........................	83,060		33,754		32,068		5,109		−				153,991
Total assets ........	110,038		46,321		347,728		7,444		12,054		(22,995)		500,590
Customer accounts ............................	58,962		45,783		29,465		14,061		89				148,360

Profit/(loss) before tax and balance sheet data - North America (continued)

	Half-year to 30 June 2011
	Retail        Banking and Wealth Management           US$m		Commercial       Banking          US$m		Global       Banking and       Markets          US$m		Global Private       Banking          US$m		Other           US$m		Inter-      segment elimination57         US$m		Total          US$m
Profit/(loss) before tax
Net interest income/ (expense) ...... ......................	4,617		748		465		94		(37)		(38)		5,849
Net fee income . ...................... ...................... ......................	936		276		420		79		7		-		1,718
Trading income/(expense) excluding net interest income ..........	(68)		16		344		13		(11)		-		294
Net interest income/(expense) on trading activities .......	10		1		106		-		(1)		38		154
Net trading income/ (expense)51 ....	(58)		17		450		13		(12)		38		448
Changes in fair value of long-term debt issued and related derivatives .....	-		-		-		-		(116)		-		(116)
Net income/(expense) from other financial instruments designated at fair value .......	-		-		(4)		-		1		-		(3)
Net expense from financial instruments designated at fair value .......	-		-		(4)		-		(115)		-		(119)
Gains less losses from financial investments ...	14		-		96		-		-		-		110
Dividend income ......................	8		4		7		1		1		-		21
Net earned insurance premiums ......	118		-		-		-		-		-		118
Other operating income/ (expense) ......	(28)		60		100		5		1,130		(1,099)		168
Total operating income ..........	5,607		1,105		1,534		192		974		(1,099)		8,313
Net insurance claims58 .........	(73)		-		-		-		-		-		(73)
Net operating income48 .......	5,534		1,105		1,534		192		974		(1,099)		8,240
Loan impairment (charges)/ recoveries and other credit risk provisions ......................	(3,035)		(45)		23		11		(3)		-		(3,049)
Net operating income ..........	2,499		1,060		1,557		203		971		(1,099)		5,191
Operating expenses ........	(2,945)		(587)		(801)		(154)		(1,214)		1,099		(4,602)
Operating profit/(loss) ...	(446)		473		756		49		(243)		-		589
Share of profit in associates and joint ventures	1		15		-		-		1		-		17
Profit/(loss) before tax ......	(445)		488		756		49		(242)		-		606
	%		%		%		%		%				%
Share of HSBC's profit before tax ................	(3.9)		4.3		6.6		0.4		(2.1)				5.3
Cost efficiency ratio ..............	53.2		53.1		52.2		80.2		124.6				55.8
Balance sheet data47
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) reported in:
- loans and advances to customers (net) ............	123,891		31,015		19,988		4,368		-				179,262
Total assets .......	153,098		42,971		341,246		6,831		13,009		(27,769)		529,386
Customer accounts .........	76,266		46,940		25,579		13,747		101				162,633

	Half-year to 31 December 2011
	Retail        Banking   and Wealth Management           US$m		Commercial       Banking          US$m		Global      Banking             and      Markets         US$m		Global Private       Banking          US$m		Other           US$m		Inter-      segment elimination57         US$m		Total US$m
Profit/(loss) before tax
Net interest income .......... ...................... ......................	4,314		780		428		93		46		(30)		5,631
Net fee income/(expense) ................. ...................... ...................... ......................	900		275		353		70		(8)		-		1,590
Trading income/(expense excluding net interest income ..........	(878)		18		(83)		4		(15)		-		(954)
Net interest income on trading activities .......	15		-		99		-		-		30		144
Net trading income/ (expense)51 ....	(863)		18		16		4		(15)		30		(810)
Changes in fair value of long-term debt issued and related derivatives .....	-		-		-		-		1,083		-		1,083
Net income/(expense) from other financial instruments designated at fair value .......	-		-		(1)		-		1		-		-
Net income/(expense) from financial instruments designated at fair value .......	-		-		(1)		-		1,084		-		1,083
Gains less losses from financial investments ...	44		7		99		-		2		-		152
Dividend income ......................	7		5		6		2		(1)		-		19
Net earned insurance premiums ......	118		-		-		-		-		-		118
Other operating income/ (expense) ......	(97)		50		93		6		1,114		(1,108)		58
Total operating income ..........	4,423		1,135		994		175		2,222		(1,108)		7,841
Net insurance claims58 .........	(81)		-		-		-		-		-		(81)
Net operating income48 .......	4,342		1,135		994		175		2,222		(1,108)		7,760
Loan impairment (charges)/ recoveries and other credit risk provisions ......................	(3,894)		(60)		(34)		19		2		-		(3,967)
Net operating income ..........	448		1,075		960		194		2,224		(1,108)		3,793
Operating expenses ........	(2,670)		(579)		(841)		(153)		(1,182)		1,108		(4,317)
Operating profit/(loss) ...	(2,222)		496		119		41		1,042		-		(524)
Share of profit/(loss) in associates and joint ventures	2		18		-		-		(2)		-		18
Profit/(loss) before tax ......	(2,220)		514		119		41		1,040		-		(506)
	%		%		%		%		%				%
Share of HSBC's profit before tax ......	(21.3)		4.9		1.1		0.4		10.0				(4.9)
Cost efficiency ratio ..............	61.5		51.0		84.6		87.4		53.2				55.6
Balance sheet data47
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) reported in:
- loans and advances to customers (net) ..............	86,490		32,215		19,289		4,753		-				142,747
- assets held for sale (disposal groups) ..........	31,058		520		-		-		-				31,578
Total assets .......	144,278		43,747		320,783		7,138		10,378		(22,022)		504,302
Customer accounts reported in:
- customer accounts ........	63,558		47,003		30,465		14,862		94				155,982
- liabilities of disposal groups held for sale ................	10,104		5,040		-		-		-				15,144

For footnotes, see page 100.

 

END

 

 

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