Interim Report - 12 of 28

RNS Number : 1989P

HSBC Holdings PLC

15 August 2014

 



Latin America

Our operations in Latin America principally comprise HSBC Bank Brasil S.A.-Banco Múltiplo, HSBC México, S.A. and HSBC Bank Argentina S.A. In addition to banking services, we operate insurance businesses in Brazil, Mexico and Argentina.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2014		2013		2013
	US$m		US$m		US$m
Net interest income .....	2,700		3,274		2,912
Net fee income ............	697		896		805
Net trading income ......	543		397		539
Other income ..............	325		391		1,354
Net operating income13 ..................................	4,265		4,958		5,610
LICs53 ..........................	(998)		(1,423)		(1,243)
Net operating income	3,267		3,535		4,367
Total operating expenses ..................................	(2,893)		(3,069)		(2,861)
Operating profit .......	374		466		1,506
Income from associates54 ..................................	-		−		−
Profit before tax .......	374		466		1,506
Cost efficiency ratio ....	67.8%		61.9%		51.0%
RoRWA47 ....................	0.8%		1.0%		3.2%
Period-end staff numbers	42,157		46,046		42,542
Corporate lending balances grew by 11% on a constant currency basis
Latin America Derivatives House of the Year (Global Capital, 2014)
Launched a US$2bn joint Energy fund in Mexico for CMB customers in the energy sector
For footnotes, see page 96. The following commentary is on a constant currency basis and comparisons are with the first half of 2013, unless stated otherwise. Tables are on a reported basis.

Economic background

Economic activity in Latin America was subdued in early 2014, pointing to annualised growth below even the 2.4% achieved in 2013. GDP growth in Brazil grew by just 0.2% in the first quarter of the year and indicators suggest activity remained lacklustre in the second quarter. Inflation rose through the first half of 2014 due to rising food prices and the cost of tourism and other goods and services, where demand was boosted by visitors for the FIFA World Cup. The central bank raised the Selic rate to 11% in April 2014, up from 7.25% a year ago.

The weak growth experienced by Mexico in 2013 extended to the first quarter of 2014. This was in large part because of the rise in VAT (part of the fiscal reform approved in 2013) which depressed consumer spending. In addition, exports to the US remained weak and planned fiscal spending has yet to materialise. In the second quarter, there was a recovery in exports, though domestic demand struggled to grow. Inflation remained subdued, which prompted the central bank to cut the monetary policy rate by 50bp to 3% in the first half of 2014.

The Argentine economy appeared to have contracted in the first quarter of the year. The weakness of growth observed since the end of 2013 was aggravated by the effects of a strong depreciation of the peso in January. This should help restore competitiveness in the country's export sector and ease pressure on currency reserves. However, in the near term it put further upward pressure on inflation, which accelerated significantly in the first half of 2014. This prompted a gradual increase in the deposit rate by the central bank during the period.

Financial overview

In Latin America, profit before tax of US$374m was US$92m lower on a reported basis, although on a constant currency basis, it increased by US$9m.

Excluding the effect of non-strategic business disposals, including our operations in Panama, Paraguay and Peru and our general insurance business in Mexico in 2013 and the sale of our operations in Colombia in 2014, underlying profit before tax increased by US$53m. This was driven by lower LICs and higher revenue partly offset by increased operating expenses.

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 2014
Argentina.................................................	33		72		137		-		(1)		241
Brazil .......................................................	(129)		22		175		(6)		(7)		55
Mexico ....................................................	(2)		(4)		73		(1)		(7)		59
Other .......................................................	12		16		17		2		(28)		19
	(86)		106		402		(5)		(43)		374
Half-year to 30 June 2013
Argentina ................................................	44		69		67		−		−		180
Brazil .......................................................	(117)		(19)		290		4		(5)		153
Mexico ....................................................	85		(15)		55		1		(9)		117
Panama ...................................................	18		29		29		1		(24)		53
Other .......................................................	(27)		5		3		−		(18)		(37)
	3		69		444		6		(56)		466
Half-year to 31 December 2013
Argentina ................................................	53		73		103		−		(1)		228
Brazil .......................................................	3		(24)		224		1		(6)		198
Mexico ....................................................	69		(145)		60		(4)		20		−
Panama ...................................................	317		493		333		1		(13)		1,131
Other .......................................................	(19)		(2)		3		(3)		(30)		(51)
	423		395		723		(5)		(30)		1,506

Country business highlights

We continued to make progress with the implementation of our strategy in the region. In the first half of 2014 we completed the disposal of our operations in Colombia, and are assessing options for the sale of our banking business in Uruguay.

We remain focused on our priority growth markets of Brazil, Mexico and Argentina, where we continue to face slower economic and lending growth and inflationary pressures on our cost base. Revenue growth in RBWM has been affected by the continued shift towards more secured lending, notably in Brazil, and the introduction of a new incentive framework for our front line staff, as part of our wider strategy to improve the quality of revenue. In CMB, while lending volumes increased, revenues remained subdued as we continued to reposition the business. In GB&M, we increased our market share in equity and debt capital markets.

In Brazil, we implemented several initiatives to regain revenue momentum and grow high quality business in RBWM, including moving towards secured and relationship-based lending. Secured lending was 29% of our loan book at 30 June 2014, compared with 22% a year earlier. We launched the MasterCard Black credit card for Premier customers and improved features of our personal loan offering. We continued to invest in improving our credit processes, including recruiting specialists and enhancing credit underwriting models and processes. We also made progress in optimising our branch network by investing in Client Service Units focused on sales and automated transactions, and exited certain underperforming locations. In CMB we accelerated penetration in the MME market and created a middle office function enabling relationship managers to spend more time with clients.

In Mexico, we continued to reposition our portfolio, in particular in Business Banking, and further strengthened our account opening and transaction monitoring processes. In RBWM, we re-launched our mortgage campaign with strong results, introduced balance transfers for credit cards and increased sales of personal loans through the call centre. In CMB, we worked with our colleagues in the US to grow our market share in the North American Free Trade Agreement corridor and launched a US$2bn joint Energy fund with Nacional Financiera, a local development banking institution, in order to capture opportunities arising from energy reform. In GB&M we achieved a top three ranking in debt capital markets.

In Argentina, we continued to manage our business conservatively as the economic environment remained challenging. We focused our growth on GB&M and corporate CMB customers, and continued to follow cautious lending policies in RBWM and Business Banking.

Review of performance

The following commentary is on a constant currency basis and comparisons are with the first half of 2013, unless stated otherwise.

Net interest income decreased by US$206m, driven by the effect of the disposals of non-strategic businesses completed during 2013 and reductions in Brazil and Mexico, partly offset by growth in Argentina.

In Brazil, the reduction was mainly in GB&M, driven by increased costs of funding in Balance Sheet Management due to higher interest rates. In CMB and RBWM, net interest income also decreased, reflecting lower revenue from Business Banking and a move towards lower yielding MMEs in CMB, and a change in the product mix towards lower yielding, more secured lending in RBWM.

In Mexico, net interest income decreased in CMB due to a reduction in average lending balances, notably in Business Banking as we continued to reposition the business and in relation to homebuilders following the impairment of some of these loans, coupled with narrower deposit spreads following a decrease in interest rates. In RBWM, net interest income improved, reflecting growth in average lending balances, though this was partly offset by spread compression on deposits.

Net interest income in Argentina increased due to higher average lending and deposit balances across all global businesses and wider spreads due to an increase in interest rates.

Net fee incomedecreased by 12%. In Brazil fee income was lower in RBWM across a number of products, in part reflecting a change in mix and strong market competition. In Mexico, fees were lower in both RBWM and CMB as a result of lower Account Services and Payments and Cash Management ('PCM') fees reflecting fewer customers, as we continued to reposition the business. The reduction in net fee income was also affected by the sale of our non-strategic businesses. These factors were partly offset by an increase in PCM, deposits and trade services-related fees in Argentina following business growth.

Net trading income increased by US$201m, primarily reflecting favourable results in GB&M in Argentina, as well as higher Rates revenue in Brazil, in part reflecting increased client activity, and in Mexico.

Net income from financial instruments designated at fair value increased by US$295m, notably in Brazil, as a result of higher net income on the bonds portfolio held by the insurance business. To the extent that these investment gains were attributed to policyholders there was a corresponding movement in Net insurance claims incurred and movement in liabilities to policyholders.

Net earned insurance premiums decreased by 4%, driven by the disposal of our operations in Panama and the sale of our general insurance business in Mexico, coupled with lower sales of life products in Mexico. The reduction in net earned insurance premiums resulted in a corresponding decrease in Net insurance claims incurred and movement in liabilities to policyholders.

Other operating income increased by US$79m, mainly driven by minimal movements in the PVIF asset in the first half of 2014, compared with a significant reduction a year ago which reflected adverse lapse experience and interest rate movements. Other operating income also increased due to the net favourable effect of disposals of our non-strategic businesses.

LICs decreased by US$298m, primarily in Brazil. This was driven by changes to the impairment model and assumption revisions for restructured loan account portfolios which occurred in 2013 in both RBWM and CMB. This was partly offset by refinements to the impairment model for non-restructured loans, notably in RBWM, during the first half of 2014. In addition, Business Banking provisions reduced, reflecting improved delinquency rates.

In Mexico, LICs improved due to lower individually assessed charges in CMB, in particular relating to homebuilders, and in GB&M. In RBWM, LICs increased due to higher credit card, mortgages and personal lending balances.

LICs were also positively affected by the disposals of non-strategic businesses in the region.

Operating expenses increased by US$157m, primarily in Brazil and Argentina, due to union-agreed salary increases, inflationary pressures and an accelerated depreciation charge in Brazil. The increase was partly offset by the effect of disposals of non-strategic businesses along with continued strict cost control and progress with our strategic focus on streamlining, which resulted in sustainable cost savings of US$66m.

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

	Half-year to 30 June 2014
	Retail      Banking and Wealth Management          US$m		Commercial      Banking          US$m		Global      Banking              and      Markets          US$m		Global        Private      Banking          US$m		Other          US$m		Inter-     segment elimination65         US$m		Total          US$m
Profit/(loss) before tax
Net interest income ............. .........................	1,698		787		249		9		6		(49)		2,700
Net fee income/(expense) .......................	381		232		72		15		(3)		-		697
Trading income/(expense) excluding net interest income	86		57		288		2		(5)		-		428
Net interest income on trading activities .........................	-		-		66		-		-		49		115
Net trading income/ (expense)59 ......	86		57		354		2		(5)		49		543
Net income from financial instruments designated at fair value ......	268		94		-		-		-		-		362
Gains less losses from financial investments .....	-		-		49		-		-		-		49
Dividend income ..	3		2		1		-		-		-		6
Net earned insurance premiums .........	577		150		2		-		(1)		-		728
Other operating income .............	43		13		9		1		88		(80)		74
Total operating income............	3,056		1,335		736		27		85		(80)		5,159
Net insurance claims66 ............	(700)		(193)		(1)		-		-		-		(894)
Net operating income13 .........	2,356		1,142		735		27		85		(80)		4,265
Loan impairment charges and other credit risk provisions .	(701)		(261)		(29)		(7)		-		-		(998)
Net operating income ...........	1,655		881		706		20		85		(80)		3,267
Operating expenses .........................	(1,741)		(775)		(304)		(25)		(128)		80		(2,893)
Operating profit/(loss) ....	(86)		106		402		(5)		(43)		-		374
Share of profit in associates and joint ventures ...	-		-		-		-		-		-		-
Profit/(loss) before tax .......	(86)		106		402		(5)		(43)		-		374
	%		%		%		%		%				%
Share of HSBC's profit before tax ........	(0.7)		0.8		3.2		−		(0.3)				3.0
Cost efficiency ratio .................	73.9		67.9		41.4		92.6		150.6				67.8
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 .........................	13,637		21,528		11,410		79		-				46,654
Total assets .........	31,651		32,248		61,007		320		876		(472)		125,630
Customer accounts3 .........	24,794		17,538		9,394		2,126		-				53,852

	Half-year to 30 June 2013
	Retail        Banking   and Wealth Management           US$m		Commercial        Banking           US$m		Global        Banking               and        Markets           US$m		Global         Private        Banking           US$m		Other           US$m		Inter-       segment elimination65          US$m		Total           US$m
Profit/(loss) before tax
Net interest income/ (expense) ............ ............................	1,952		957		436		12		(6)		(77)		3,274
Net fee income .......	500		288		90		18		−		−		896
Trading income/(expense) excluding net interest income ...	58		55		190		2		(3)		−		302
Net interest income on trading activities ..	−		−		18		−		−		77		95
Net trading income/ (expense)59 ..........	58		55		208		2		(3)		77		397
Net income from financial instruments designated at fair value .........	71		13		1		−		−		−		85
Gains less losses from financial investments .........	−		1		50		−		−		−		51
Dividend income .....	2		2		1		−		−		−		5
Net earned insurance premiums ............	681		179		3		−		−		−		863
Other operating income/ (expense) ............................	6		(11)		5		−		84		(85)		(1)
Total operating income.................	3,270		1,484		794		32		75		(85)		5,570
Net insurance claims66 ...............	(505)		(106)		(1)		−		−		−		(612)
Net operating income13 .............	2,765		1,378		793		32		75		(85)		4,958
Loan impairment charges and other credit risk provisions .....	(877)		(501)		(45)		−		−		−		(1,423)
Net operating income ................	1,888		877		748		32		75		(85)		3,535
Operating expenses .	(1,885)		(808)		(304)		(26)		(131)		85		(3,069)
Operating profit/(loss) .........	3		69		444		6		(56)		−		466
Share of profit in associates and joint ventures ..............	−		−		−		−		−		−		−
Profit/(loss) before tax ......................	3		69		444		6		(56)		−		466
	%		%		%		%		%				%
Share of HSBC's profit before tax ............	−		0.5		3.2		−		(0.4)				3.3
Cost efficiency ratio	68.2		58.6		38.3		81.3		174.7				61.9
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 ..	13,996		20,689		9,807		53		-				44,545
Total assets .............	34,497		34,075		53,864		490		448		(342)		123,032
Customer accounts3 .	23,294		16,443		8,978		2,755		-				51,470

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

	Half-year to 31 December 2013
	Retail        Banking   and Wealth Management            US$m		Commercial        Banking           US$m		Global        Banking               and                          Markets           US$m		Global Private        Banking           US$m		Other           US$m		Inter-      segment elimination65         US$m		Total           US$m
Profit/(loss) before tax
Net interest income/ (expense) ....................	1,824		871		339		12		(6)		(128)		2,912
Net fee income ...............	452		260		78		14		1		−		805
Trading income/(expense) excluding net interest income .......................	80		62		266		2		(1)		−		409
Net interest income on trading activities .........	−		−		2		−		−		128		130
Net trading income/ (expense)59 .................	80		62		268		2		(1)		128		539
Net income from financial instruments designated at fair value ................	193		48		−		−		−		−		241
Gains less losses from financial investments ..	−		−		31		−		−		−		31
Dividend income ............	3		1		−		−		−		−		4
Net earned insurance premiums ....................	783		181		3		−		−		−		967
Other operating income .	306		496		305		1		112		(104)		1,116
Total operating income ..	3,641		1,919		1,024		29		106		(104)		6,615
Net insurance claims66 ....	(818)		(185)		(2)		−		−		−		(1,005)
Net operating income13 ..	2,823		1,734		1,022		29		106		(104)		5,610
Loan impairment charges and other credit risk provisions ...................	(675)		(561)		(7)		−		−		−		(1,243)
Net operating income......	2,148		1,173		1,015		29		106		(104)		4,367
Operating expenses ........	(1,725)		(778)		(292)		(34)		(136)		104		(2,861)
Operating profit/(loss) ....	423		395		723		(5)		(30)		−		1,506
Share of loss in associates and joint ventures .......	−		−		−		−		−		−		−
Profit/(loss) before tax ...	423		395		723		(5)		(30)		−		1,506
	%		%		%		%		%				%
Share of HSBC's profit before tax ...................	5.0		4.7		8.5		(0.1)		(0.4)				17.7
Cost efficiency ratio .......	61.1		44.9		28.6		117.2		128.3				51.0
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 .........	13,616		19,923		10,304		75		−				43,918
Total assets ....................	30,584		30,001		52,977		337		634		(534)		113,999
Customer accounts3 ........	23,943		16,593		8,994		1,859		−				51,389

For footnotes, see page 96.

 

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