Annual Financial Report - 14 of 44

RNS Number : 1102A

HSBC Holdings PLC

27 March 2012

 



Middle East and North Africa

The network of branches of HSBC Bank Middle East Limited, together with HSBC's subsidiaries and associates, gives us the widest reach in the region. Our associate in Saudi Arabia, The Saudi British Bank (40% owned), is the Kingdom's sixth largest bank by total assets.
	2011		2010		2009
	US$m		US$m		US$m
Net interest income .....	1,432		1,367		1,485
Net fee income ............	627		677		625
Net trading income ......	482		370		394
Other income ..............	66		(4)		90
Net operating income52 ..................................	2,607		2,410		2,594
Impairment charges53 ..	(293)		(627)		(1,334)
Net operating income	2,314		1,783		1,260
Total operating expenses	(1,159)		(1,078)		(1,001)
Operating profit .......	1,155		705		259
Income from associates54	337		187		196
Profit before tax .......	1,492		892		455
Cost efficiency ratio ....	44.5%		44.7%		38.6%
RoRWA55 ....................	2.6%		1.6%		0.8%
Year-end staff numbers	8,373		8,676		8,281
Pre-tax profit significantly above 2010 despite regional political unrest and economic pressures
Loan impairment charges decline to 2008 levels
Best trade finance bank in the Middle East and North Africa (Global Trade Review 2011) for the fourth consecutive year
For footnotes, see page 95. The commentary on Middle East and North Africa is on an underlying basis unless stated otherwise.

Economic background

In the Middle East and North Africa region, GDP grew by more than 5% in 2011, though the headline figure masks a wide variance in overall performance and growth drivers. In the oil producing states of the Gulf, high oil prices prompted growth in oil output and encouraged substantial increases in current and capital spending, most notably in Saudi Arabia. The export-oriented service sectors of countries including the UAE also grew robustly, supported in part by firm Asian demand.

The aggregate fiscal and current account surpluses of the Gulf Co-operation Council members stood at 15% and 25% of GDP, respectively, significantly higher than in 2010. Despite the pick‑up in growth, CPI inflation remained generally muted with slow private sector wage growth and broadly unchanged real estate prices.

Regional political uncertainties weighed more heavily on performance elsewhere, however, particularly in countries that were subject to regime change. In Egypt, the level of GDP fell by an estimated 6 percentage points year-on-year as unrest held back investment and service sector exports, particularly tourism, contracted. Increased pressure on public finances and external account balances also added to the challenges for the post-revolution economies.

Review of performance

Our operations in the Middle East and North Africa reported a profit before tax of US$1.5bn, an increase of US$600m, or 67%. In 2010, we completed the sale of our investment in the British Arab Commercial Bank on which a loss of US$42m was incurred. In 2011, we recorded a dilution gain of US$27m as a result of the reduction of our holding in HSBC Saudi Arabia Limited following its merger with SABB Securities Limited. On an underlying basis, excluding these items, pre‑tax profits increased by 57% as significant loan impairment charges in 2010 did not recur and trading income rose. In addition, profits from our associate, The Saudi British Bank, increased significantly driven by a decline in loan impairment charges as the credit environment in Saudi Arabia improved.

Despite political unrest and economic pressures, profits increased in all countries with the exception of Qatar, which was adversely affected by new regulations on foreign banks which curtailed growth in certain products, and Jordan, where we incurred a

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

	Retail      Banking and Wealth Management17           US$m		Commercial       Banking           US$m		Global      Banking               and      Markets17           US$m		Global         Private       Banking           US$m		Other           US$m		Total           US$m
2011
Egypt ..................................	43		55		129		-		(2)		225
Qatar ...................................	(4)		35		81		-		-		112
United Arab Emirates ..........	134		240		200		(6)		7		575
Other ..................................	17		109		93		-		-		219
MENA (excluding Saudi Arabia) ............................	190		439		503		(6)		5		1,131
Saudi Arabia .........................	57		98		140		4		62		361
	247		537		643		(2)		67		1,492
2010
Egypt ..................................	38		82		77		-		(2)		195
Qatar ...................................	19		52		67		-		-		138
United Arab Emirates ..........	17		186		121		1		(1)		324
Other ..................................	19		57		(19)		-		-		57
MENA (excluding Saudi Arabia) ............................	93		377		246		1		(3)		714
Saudi Arabia .........................	25		107		53		(16)		9		178
	118		484		299		(15)		6		892
2009
Egypt ..................................	18		51		97		-		58		224
Qatar ...................................	10		60		66		-		-		136
United Arab Emirates ..........	(177)		(136)		307		(2)		5		(3)
Other ..................................	3		(15)		(80)		-		(3)		(95)
MENA (excluding Saudi Arabia) ............................	(146)		(40)		390		(2)		60		262
Saudi Arabia .........................	42		61		55		8		27		193
	(104)		21		445		6		87		455

For footnote, see page 95.

specific loan impairment charge related to a corporate customer. Customer deposits across the region grew by 10%, reflecting the overall resilience of the oil-based regional economies and the strength of the HSBC brand.

We initiated a number of strategic programmes to optimise and reconfigure our branch network. This resulted in branch closures and consolidations in Jordan, Lebanon, Qatar and Bahrain together with an exit from our retail operations in Kuwait and part of our Principal Investments business. We also reconfigured domestic private banking in the UAE in order to focus solely on international private banking products and services through the conversion of the existing operation into a representative office for GPB.

In RBWM, we continued to focus on wealth management and secured lending, while building long-term relationships through our Premier and Advance customer offerings. During 2011, we implemented new technologies to improve our financial planning capabilities. We also successfully launched mobile banking in the UAE, Oman, Bahrain and Jordan allowing customers to access HSBC Internet Banking instantly through smart phones.

In CMB, we continued to strengthen our position as a leading international trade and business bank, achieving double-digit trade-related growth year-on-year and increasing market share in key markets. We also launched services to support settlements in renminbi to further facilitate trade between mainland China and the region.

In the UAE, we entered into partnerships with a number of Free Trade Zones to provide improved access to banking services for internationally-oriented SMEs.

In Payments and Cash Management, we launched 'ClientSphere', a system which will further simplify cash management products and improve the overall customer experience. We also won a number of awards, including 'Best Overall Bank for Cash Management in the Middle East' from Global Finance Awards and 'Best Cash Management Bank in the Middle East' from Euromoney.

Greater collaboration between CMB and GB&M benefited both businesses with a significant increase in GB&M-related revenues from 2010.

In GB&M, we continued to focus on our key clients and used our global expertise and reach both to complete a number of cross-border deals for regional clients and provide risk management solutions tailored for customer needs, including Islamic products. We won a number of awards, including 'Best for Middle Eastern Currencies' in the Euromoney FX survey and 'Best Risk Advisor in Middle East' from Euromoney. We continued to be recognised as a leading provider of Islamic financial services and we were awarded 'Best Islamic Investment Bank, Middle East' and 'Sukuk House of the Year' from The Asset Magazine Triple A Islamic Finance Awards.

Net interest income rose by 6%, driven by strong growth in average trade lending balances in the second half of 2010 and throughout 2011 in CMB as we leveraged opportunities to support global and intra‑regional trade flows. GB&M also benefited from the restructuring of a large customer facility along with improved spreads on investment portfolios. This was partly offset by a reduction in spreads in CMB as we priced competitively to drive volume growth. In addition, average lending balances declined in RBWM as unsecured lending portfolios continued to be managed down and replaced by higher quality lending resulting in an overall improvement in the credit quality of the portfolio. Central bank regulations limiting interest rates on certain products in Qatar also contributed to lower net interest income.

Net fee income decreased by 7%, despite higher trade volumes in CMB, as lower institutional equity activity in GB&M reflected the challenging political environment. In addition, net fee income in RBWM decreased due to a decline in the number of credit cards in issue as certain portfolios were managed down, along with lower late fees as a result of an improvement in delinquency rates.

Trading income increased by 31%, mainly in Rates in GB&M due to an increase in government bond trading along with a net release of credit valuation adjustments driven by movements in exchange rates and an improvement in counterparty risk. A greater focus on sales of GB&M products to CMB customers, notably foreign exchange, also contributed to the rise in trading income.

Loan impairment charges and other credit risk provisions decreased markedly as the significant loan impairment charges which resulted from restructuring activity for a small number of large GB&M customers in 2010 did not recur. In addition, lower loan impairment charges in RBWM reflected a significant improvement in delinquency rates, which resulted from a repositioning of the loan book towards higher quality lending as we continued to manage down higher risk unsecured lending, together with strengthened collection practices. Our lending portfolios were not significantly adversely affected by political instability in the region, although uncertainties remain in certain of these markets.

Operating expenses increased by 8% due to an increase in staff costs as we enhanced the employee base, and to a lesser extent, in line with inflation. Strategic programmes, including de‑layering our management structure, streamlining our business processes and implementing the 'hub and spoke' model to drive future sustainable cost savings, resulted in lower staff numbers than last year. This resulted in restructuring costs of US$31m. Marketing costs also rose as we increased investment in the promotion of the HSBC brand.

Profit from associates and joint ventures increased by 81%, mainly from The Saudi British Bank, driven by a decline in loan impairment charges as the credit environment in Saudi Arabia improved, along with cost control.

 

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