Interim Report - 11 of 26

RNS Number : 1187M

HSBC Holdings PLC

12 August 2011

 



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., which is concentrated in New York State, and HSBC Finance, a national consumer finance company based near Chicago. 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
	2011		2010		2010
	US$m		US$m		US$m
Net interest income ......	5,849		6,353		6,086
Net fee income .............	1,718		1,801		1,863
Net trading income/ (expense) ...................	448		(67)		381
Other income/(expense)	225		913		(283)
Net operating income41 ...................................	8,240		9,000		8,047
Impairment charges42 ....	(3,049)		(4,554)		(3,741)
Net operating income	5,191		4,446		4,306
Total operating expenses ...................................	(4,602)		(3,957)		(4,365)
Operating profit/(loss) ...................................	589		489		(59)
Income from associates43	17		3		21
Profit/(loss) before tax	606		492		(38)
Cost efficiency ratio .....	55.8%		44.0%		54.2%
RoRWA44 .....................	0.4%		0.3%		-
Period-end staff numbers	32,605		33,988		33,865
Card and Retail Services pre-tax profit 1H11 US$1.0bn
Continued improvement in loan impairment charges
Operations in Canada contributed US$520m to North America profit before tax
For footnotes, see page 81. The commentary on North America is on an underlying basis unless stated otherwise.

Economic background 

The process of reducing debt levels following the credit boom of the past decade continued to restrain growth in the US as households saved more and the rise in consumer spending was subdued. High oil prices made the process of reducing debt more difficult. In the first quarter, the growth of real consumer spending was only 2.2% higher than the level a year ago, compared with a long-run average annual growth rate of 3.3%. This depressed overall growth in GDP to a 2.8% annual rate since the recession ended in mid-2009. Reductions in spending among state and local governments also constrained economic activity. Slow GDP growth kept the unemployment rate high, at 9.2% in June, down only slightly from the peak of 10.1% in 2010. In response to slow growth and low inflation, the Federal Reserve maintained the Fed funds rate in the range of zero to 0.25% and undertook large-scale purchases of fixed-income securities.

Canadian GDP rose by 2.9% in the year ended 31 March 2011, up from 2.1% the year before. Labour market conditions improved with the unemployment rate dropping to 7.4% in June from 7.9% in June 2010. Steep increases in crude oil and gasoline prices drove the headline rate of inflation up to 3.7% in May 2011 from 1.4% a year earlier. However, the core rate of inflation followed by the Bank of Canada ('BoC') was steady at 1.8%. In response to these conditions, the BoC maintained its overnight lending rate at 1.0% throughout the period.

Review of performance

In North America, we reported a profit before tax of US$606m in the first half of 2011, compared with a profit before tax of US$492m in the first half of 2010. Our results included movements on our own debt designated at fair value resulting from changes in credit spreads, while 2010 also included a US$66m gain from the sale of our stake in the Wells Fargo HSBC Trade Bank. On an underlying basis, which excludes these items, the pre-tax profit was US$672m in the first half of 2011, compared with a pre-tax loss of US$51m. This improvement in performance resulted from a significant decline in loan impairment charges, partly offset by a reduction in revenue, both reflecting lower lending balances in HSBC Finance.

During the first half of 2011, we continued to evaluate the strategic options for elements within our US operations and remained focused on managing down our run-off assets sensitively and effectively. In addition, we continued to work closely with our regulators to ensure full compliance with new and existing frameworks and policies.

Profit/(loss) before tax by country within customer groups and global businesses

	Retail     Banking and Wealth Management16         US$m		Commercial     Banking         US$m	Global    Banking             and     Markets16         US$m			Global       Private     Banking         US$m		Other         US$m		Total         US$m
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 30 June 2010
US ...........................................................	(1,576)		265		840		55		342		(74)
Canada .....................................................	82		289		124		-		7		502
Bermuda ..................................................	27		18		16		(2)		7		66
Other .......................................................	1		-		-		1		(4)		(2)
	(1,466)		572		980		54		352		492
Half-year to 31 December 2010
US ...........................................................	(729)		137		444		58		(381)		(471)
Canada .....................................................	49		216		103		-		(3)		365
Bermuda ..................................................	31		14		22		(1)		-		66
Other .......................................................	(1)		-		-		-		3		2
	(650)		367		569		57		(381)		(38)

For footnotes, see page 81.

The North American economies continue to represent a significant share of international trade, and in our CMB and GB&M businesses we remain focused on expanding our business further into areas with strong international connectivity. In CMB, we expanded our operations in the West Coast of the US and in Texas and Florida as well as in eastern Canada to attract the growing number of businesses that trade internationally. Successful cross-border referrals from North America to other HSBC sites increased by 11% from the first half of 2010.

In GB&M, profit before tax fell in the first half of 2011 due to lower releases of collective loan impairment allowances, an increase in compliance costs and a change in the expense recognition of bonus awards. We successfully utilised our established platform in New York to interconnect more closely our GB&M businesses across the Americas and, in the first half of 2011, we syndicated several significant financing transactions for customers in Latin America.

The region represents a significant wealth management market and we continued to direct resources towards the expansion of wealth services and Premier, and remain focused on providing differentiated premium services to internationally minded, upwardly mobile customers.

Net interest income decreased by 9% to US$5.8bn, primarily due to lower lending balances in our Consumer Lending and Mortgage Services portfolios due to continued run-off, and in our Card and Retail Services portfolio as customers continued to pay down outstanding debt. In addition, balances declined following the sale of the vehicle finance portfolio in 2010. This was partly offset by wider asset spreads in our Consumer Lending and Mortgage Services portfolios as the cost of funds fell.

Average customer deposit balances increased in CMB in both the US and Canada as we continued to expand on the West Coast, Texas, Florida and Eastern Canada, and in RBWM due to growth in branch-based deposit products driven by our Premier strategy. In GB&M, increased deposit balances reflected a rise in repurchase transactions.

Net fee income declined by 6% to US$1.7bn, as a result of lower late and overlimit fees in our Card and Retail Services business, reflecting lower volumes and delinquency rates, customers actively seeking to reduce their credit card debt and changes required by the CARD Act.

In December 2010, we exited the Taxpayer Financial Services business, further reducing our fee income compared with the first half of 2010.

Net trading income increased by US$511m to US$448m, driven by fair value movements on non-qualifying hedges which reflected fluctuations in long‑term US interest rates. In the first half of 2011, these rates declined, but to a lesser extent than in the corresponding period in 2010, resulting in lower adverse fair value movements in non‑qualifying hedges.

In addition, in the first half of 2011 loss provisions for loan repurchase obligations relating to loans previously sold were lower while, in our GB&M business, trading income remained broadly flat. This reflected higher deal volumes in foreign exchange, metals and interest rate and emerging markets derivatives, and improved revenue on structured credit products which was broadly offset by the non-recurrence of a gain in the first half of 2010 associated with a settlement relating to certain loans previously purchased for re-sale from a third party.

Net expense from financial instruments designated at fair value of US$53m was 42% less than in the first half of 2010. This was due to lower adverse fair value movements from interest rate ineffectiveness in the economic hedging of our long-term debt designated at fair value, reflecting the decrease in long-term US interest rates.

Gains less losses from financial investmentsdeclined by 7% to US$110m, mainly due to lower gains on the disposal of private equity investments.

Other operating income declined by 29% to US$168m due to higher losses on foreclosed properties, reflecting an increase in the number of such properties sold and declines in house prices in the first half of 2011 and the non-recurrence of a US$56m gain on the sale of our New York headquarters. This was partly offset by the non-recurrence of a US$77m loss on the sale of the vehicle finance loan portfolio and servicing operation in the first half of 2010.

Loan impairment charges and other credit risk provisions decreased by 33% to US$3.0bn, primarily due to lower lending balances in our run‑off Consumer Lending and Mortgage Services portfolios and in our Card and Retail Services portfolio. The decline also reflected an overall improvement in credit quality resulting in lower delinquency levels and reduced write-offs. In our Consumer Lending and Mortgage Services
business, the improvement was partly offset by an incremental charge resulting from adverse changes to economic assumptions on the pace of recovery in home prices and delays in the timing of expected cash flows, mainly as a result of the suspension of foreclosure activity that began in late 2010.

Loan impairment charges and other credit risk provisions in CMB declined by 58% to US$45m, driven by lower impairment allowances relating to commercial real estate and middle market exposures and lower write-offs in business banking, reflecting improved credit quality and lower delinquency. This was partially offset by a specific loan impairment charge associated with the downgrade of an individual commercial real estate loan.

In GB&M, net recoveries of loan impairment charges and other credit risk provisions were 85% lower than in the first half of 2010 as a reduction in higher‑risk balances and a stabilisation of credit quality resulted in a reduced release of collective loan impairment allowances in the first half of 2011.

Further commentary on delinquency trends in the US RBWM portfolios is provided in 'Areas of special interest - US personal lending' on page 107.

Operating expenses increased by 15%. This included a charge of US$144m relating to the impairment of certain previously capitalised software development costs in the first half of 2011 and the non-recurrence of a pension curtailment gain in the first half of 2010. Excluding these items, operating expenses grew by 8%, mainly due to an increase in litigation provisions and, in GB&M, an increase in amortisation charges for previous years' performance shares and accelerated expense recognition for future deferred bonus awards. In addition, legal and compliance costs were higher and marketing expenses in Card and Retail Services rose, driven by an increase in direct mail volumes, albeit at lower than historical levels. Also notable in the first half of 2011 were severance costs of US$46m resulting from a planned reduction in staff numbers. Partly offsetting these increases were lower costs following the sale of the vehicle finance servicing operation and closure of the Taxpayer Financial Services business.

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

	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$m		Inter-     segment elimination52         US$m		Total          US$m
Profit/(loss) before tax
Net interest income/ (expense) ...... ......................	4,617		748		465		94		(37)		(38)		5,849
Net fee income . ...................... ...................... ......................	936		276		420		79		7		-		1,718
Trading income/(expense) excluding net interest income ..........	(68)		16		344		13		(11)		-		294
Net interest income/ (expense) on trading activities .......	10		1		106		-		(1)		38		154
Net trading income/ (expense)45 ....	(58)		17		450		13		(12)		38		448
Net expense from financial instruments designated at fair value ...	-		-		(4)		-		(115)		-		(119)
Gains less losses from financial investments ...	14		-		96		-		-		-		110
Dividend income ......................	8		4		7		1		1		-		21
Net earned insurance premiums ......	118		-		-		-		-		-		118
Other operating income/ (expense) ......	(28)		60		100		5		1,130		(1,099)		168
Total operating income .........	5,607		1,105		1,534		192		974		(1,099)		8,313
Net insurance claims53 .........	(73)		-		-		-		-		-		(73)
Net operating income41 ......	5,534		1,105		1,534		192		974		(1,099)		8,240
Loan impairment (charges)/ recoveries and other credit risk provisions ......................	(3,035)		(45)		23		11		(3)		-		(3,049)
Net operating income .........	2,499		1,060		1,557		203		971		(1,099)		5,191
Operating expenses ........	(2,945)		(587)		(801)		(154)		(1,214)		1,099		(4,602)
Operating profit/(loss) .	(446)		473		756		49		(243)		-		589
Share of profit in associates and joint ventures	1		15		-		-		1		-		17
Profit/(loss) before tax ....	(445)		488		756		49		(242)		-		606
	%		%		%		%		%				%
Share of HSBC's profit before tax ................	(3.9)		4.3		6.6		0.4		(2.1)				5.3
Cost efficiency ratio ..............	53.2		53.1		52.2		80.2		124.6				55.8
Balance sheet data39
	US$m		US$m		US$m		US$m		US$m				US$m
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

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

	Half-year to 30 June 2010
	Retail       Banking and Wealth Management16          US$m		Commercial        Banking           US$m		Global      Banking              and      Markets16          US$m		Global Private        Banking           US$m		Other           US$m		Inter-       segment elimination52          US$m		Total           US$m
Profit/(loss) before tax
Net interest income/ (expense) ...... ......................	5,190		758		425		94		(86)		(28)		6,353
Net fee income/(expense) ................. ...................... ...................... ......................	1,084		252		400		71		(6)		-		1,801
Trading income/(expense) excluding net interest income ..........	(567)		12		401		9		(16)		-		(161)
Net interest income on trading activities .......	13		1		40		-		12		28		94
Net trading income/ (expense)45 ....	(554)		13		441		9		(4)		28		(67)
Net income/(expense) from financial instruments designated at fair value .......	-		-		(3)		-		417		-		414
Gains less losses from financial investments ...	-		-		121		-		(3)		-		118
Dividend income ......................	9		3		6		1		2		-		21
Net earned insurance premiums ......	126		-		-		-		-		-		126
Other operating income/ (expense) ......	(8)		160		83		11		1,213		(1,153)		306
Total operating income ..........	5,847		1,186		1,473		186		1,533		(1,153)		9,072
Net insurance claims53 .........	(76)		-		-		-		4		-		(72)
Net operating income41 .......	5,771		1,186		1,473		186		1,537		(1,153)		9,000
Loan impairment (charges)/ recoveries and other credit risk provisions ......................	(4,613)		(104)		152		11		-		-		(4,554)
Net operating income ..........	1,158		1,082		1,625		197		1,537		(1,153)		4,446
Operating expenses ........	(2,624)		(511)		(645)		(143)		(1,187)		1,153		(3,957)
Operating profit/(loss) ...	(1,466)		571		980		54		350		-		489
Share of profit in associates and joint ventures	-		1		-		-		2		-		3
Profit/(loss) before tax ......	(1,466)		572		980		54		352		-		492
	%		%		%		%		%				%
Share of HSBC's profit before tax ................	(13.2)		5.1		8.8		0.5		3.2				4.4
Cost efficiency ratio ..............	45.5		43.1		43.8		76.9		77.2				44.0
Balance sheet data39
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..............	140,501		30,498		32,861		4,281		-				208,141
Total assets .......	164,600		38,525		299,300		5,608		7,290		(19,915)		495,408
Customer accounts ........	74,475		42,853		19,229		12,814		67				149,438

	Half-year to 31 December 2010
	Retail      Banking and Wealth Management16          US$m		Commercial       Banking          US$m		Global      Banking             and      Markets16         US$m		Global Private       Banking          US$m		Other           US$m		Inter-       segment elimination52          US$m		Total           US$m
Profit/(loss) before tax
Net interest income .......... ...................... ......................	4,722		767		527		96		15		(41)		6,086
Net fee income . ...................... ...................... ......................	1,058		282		445		78		-		-		1,863
Trading income excluding net interest income ..........	95		5		162		4		4		-		270
Net interest income on trading activities .......	11		1		53		-		5		41		111
Net trading income45 .......	106		6		215		4		9		41		381
Net income/(expense) from financial instruments designated at fair value .......	6		-		1		-		(310)		-		(303)
Gains less losses from financial investments ...	5		(6)		20		-		6		-		25
Dividend income ......................	9		4		6		2		-		-		21
Net earned insurance premiums ......	119		-		-		-		-		-		119
Other operating income/ (expense) ......	(242)		82		(12)		4		1,138		(1,043)		(73)
Total operating income ..........	5,783		1,135		1,202		184		858		(1,043)		8,119
Net insurance claims53 .........	(72)		-		-		-		-		-		(72)
Net operating income41 .......	5,711		1,135		1,202		184		858		(1,043)		8,047
Loan impairment (charges)/ recoveries and other credit risk provisions ......................	(3,581)		(219)		32		27		-		-		(3,741)
Net operating income ..........	2,130		916		1,234		211		858		(1,043)		4,306
Operating expenses ........	(2,784)		(570)		(665)		(154)		(1,235)		1,043		(4,365)
Operating profit/(loss) ...	(654)		346		569		57		(377)		-		(59)
Share of profit/(loss) in associates and joint ventures	4		21		-		-		(4)		-		21
Profit/(loss) before tax ......	(650)		367		569		57		(381)		-		(38)
	%		%		%		%		%				%
Share of HSBC's profit before tax ......	(8.2)		4.6		7.2		0.7		(4.8)				(0.5)
Cost efficiency ratio ..............	48.7		50.2		55.3		83.7		143.9				54.2
Balance sheet data39
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..............	131,194		30,277		24,338		4,723		-				190,532
Total assets .......	154,204		39,213		306,298		5,824		9,373		(22,425)		492,487
Customer accounts ........	76,817		46,425		22,324		12,812		108				158,486

For footnotes, see page 81.

 

END

 

 

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