Interim Results - Part 2
HSBC Hldgs PLC
31 July 2000
Part 2
HSBC Holdings plc Financial Review
(continued)
Other operating income
Half-year to
Figures in US$m 30 Jun 2000 30 Jun 1999 31 Dec 1999
By geographic segment:
% % %
Europe 2,848 52.4 2,481 54.0 2,455 53.2
Hong Kong 870 16.0 750 16.3 802 17.4
Rest of Asia-Pacific 563 10.4 482 10.5 501 10.8
North America 684 12.6 490 10.7 459 9.9
Latin America 465 8.6 390 8.5 400 8.7
5,430 100.0 4,593 100.0 4,617 100.0
Intra-Group
elimination (96) (96) (102)
Group total 5,334 4,497 4,515
By income category:
Dividend income 111 73 84
Fees and commissions
(net) 3,559 2,887 3,130
Dealing profits
- foreign exchange 478 452 345
- interest rate
derivatives 43 60 7
- debt securities 144 170 27
- equities and other
trading 213 132 106
878 814 485
- operating leased
assets rental
income 248 255 256
- general insurance
underwriting (net) 184 163 190
- increase in value
of long-term
insurance
business 71 81 100
- other 283 224 270
786 723 816
Total other operating
income 5,334 4,497 4,515
Changes in the composition of the Group had a major impact on
growth in other operating income. The acquisition of the
former Republic and Safra Republic businesses added
significantly to fee and commission income and to dealing
profits. In Argentina, the transfer of our pensions, life and
healthcare businesses from associate to subsidiary status
improved other income.
In the UK, there was strong income growth from wealth
management products and higher fees from personal overdrafts,
cards, private clients, corporate banking and asset custody.
The buoyant equity markets in the first half of the year, and
in particular in the first quarter, created the conditions
for a major increase in income from retail and institutional
brokerage and from global custody. Improved economic
conditions in Asia and expanded personal lending globally led
to an increase in fees from credit facilities of over 20 per
cent. Trade finance fees rose by over 15 per cent.
Foreign exchange earnings held up well in the first half in
the face of intensifying competition and narrowing market
spreads, with volume helped by the stronger trade flows; the
addition of a stronger trading presence in New York as a
result of the acquisition of the former Republic business has
been a positive factor. Performance in interest rate
derivative and debt securities trading improved markedly
relative to the second half of 1999. Equity trading
businesses have performed well in 2000 as higher market
volumes have benefited customer-driven market-making
business.
Operating expenses
Half-year
Figures in US$m to 30 Jun 2000 to 30 Jun 1999 to 31 Dec 1999
By geographic
segment:
% % %
Europe 3,055 45.8 2,663 48.4 2,791 46.2
Hong Kong 950 14.2 894 16.2 1,002 16.6
Rest of Asia-
Pacific 618 9.3 548 9.9 614 10.2
North America 1,261 18.9 726 13.2 859 14.2
Latin America 788 11.8 680 12.3 770 12.8
6,672 100.0 5,511 100.0 6,036 100.0
Intra-Group
elimination (96) (96) (102)
Group total 6,576 5,415 5,934
By expense category:
Staff costs 3,893 3,266 3,426
Premises and
equipment
(excluding
depreciation) 695 606 723
Other administrative
expenses 1,305 1,072 1,257
Administrative
expenses^ 5,893 4,944 5,406
Depreciation and
amortisation
- tangible fixed
assets 511 460 503
- goodwill 172 11 25
Total operating
expenses 6,576 5,415 5,934
Cost:income ratio
(excluding goodwill
amortisation) 53.3% 51.9% 55.8%
^ Included in administrative expenses were US$56 million
of restructuring costs relating to the former Republic
and Safra Republic businesses (second half 1999 : US$164
million).
Costs in the United States, excluding goodwill amortisation
were US$410 million higher, principally as a result of the
acquisition of the former Republic businesses of which
US$56 million related to restructuring costs. In Europe,
the former Republic and Safra Republic businesses accounted
for US$144 million of the cost increase with the remainder
mainly reflecting growth in wealth management businesses
and IT and related costs directed at improved customer
service and, in particular, the expansion of channels
through which customers can transact with the Group. Profit-
related pay in our treasury and investment banking
businesses grew in line with the improved performance of
these businesses.
In Hong Kong and the Rest of Asia-Pacific, cost growth
reflected the improving economic conditions with higher
advertising and promotion expenses. Staff costs grew in
Japan, Korea, Taiwan and Australia supporting business
expansion. Profit-related pay in investment banking was also
higher in line with performance. Continuing focus on
efficiency and sharing best practice between the bank in Hong
Kong and Hang Seng Bank, was reflected in staff costs in the
commercial bank in Hong Kong being held at the same level as
1999. In Latin America, cost growth reflected the transfer to
subsidiary status of the pensions, life and healthcare
businesses in Argentina together with planned growth in
Brazil as the business expanded.
Global processing is being piloted in China and India, with a
view to enhancing productivity through economies of scale and
processing efficiencies. These sites can potentially
undertake routine processing from anywhere in the world,
allowing all parts of the HSBC Group to benefit.
The Group's cost:income ratio improved to 53.3 per cent
compared with 55.8 per cent for the second half of 1999.
Bad and doubtful debts
Half-year
Figures in US$m to 30 Jun 2000 to 30 Jun 1999 to 31 Dec 1999
By geographic
segment:
% % %
Europe 167 45.4 213 19.7 225 22.7
Hong Kong 128 34.8 319 29.5 266 26.8
Rest of Asia-Pacific (66) (18.0) 423 39.1 386 39.0
North America 72 19.6 63 5.8 45 4.5
Latin America 67 18.2 64 5.9 69 7.0
Group total 368 100.0 1,082 100.0 991 100.0
By category:
Loans and advances to customers
- specific charge:
new provisions 995 1,493 1,500
releases and
recoveries (493) (389) (480)
502 1,104 1,020
- general (release):
special provision
reflecting Asian
risk raised in
1997 (116) - -
other (16) (20) (27)
(132) (20) (27)
Customer bad and
doubtful
debt charge 370 1,084 993
Loans and advances
to banks
- net specific
release (2) (2) (2)
Total bad and
doubtful
debt charge 368 1,082 991
As a result of improved economic conditions, lower interest
rates in Asia and strong liquidity in all major markets, new
specific provisions against exposures to customer advances
declined by one third against the charge in either half of
1999. Continuing progress on loan workouts also achieved
higher levels of releases and recoveries against both halves
of 1999.
In the UK and North America, credit quality remained stable.
There were signs of weakness in certain sectors caused partly
by competition from new economy companies and, for the UK,
also by the strength of sterling.
In Malaysia, low interest rates with a stable exchange rate,
exceptional liquidity in the banking sector and strong export
activity provided favourable conditions for loan
restructuring and repayment. As a result the quality of the
loan portfolio continued to improve gradually as economic
activity picked up; new specific provisions were sharply
lower than in 1999. The net charge for customer bad and
doubtful debts in Malaysia in the first half of 2000 was
US$14 million against US$198 million in the first half of
1999.
The level of new provisions for exposures to mainland China
related companies was only US$11 million against a first half
charge in 1999 of US$225 million. There were net releases of
provisions against exposures to customers in Indonesia and
Thailand but small increases in specific provisions against
exposures to customers in Taiwan, Japan, Korea and the Middle
East. In view of evidence of the improving economic
conditions, 40 per cent of the special general provision of
US$290 million raised in 1997 in respect of Asia was
released.
In general terms, asset quality in Hong Kong has continued to
improve although the benefit of economic recovery has yet to
be seen in the residential mortgage portfolio. The net charge
for specific provisions for personal lending remained at a
similar level to 1999. Within this, provisions for
residential mortgages were higher whilst provisions for other
personal lending fell. Although delinquency rates for
residential mortgages increased, they still remained low in
absolute terms.
Non-performing customer advances decreased in the first half
of 2000 by US$671 million to US$9,854 million which
represented 3.7 per cent of gross customer advances
(31 December 1999: 4.0 per cent)
Customer loans and advances and provisions
Figures in US$m At 30 Jun 2000 At 30 Jun 1999 At 31 Dec 1999
Loans and advances to customers
(gross) 269,891 243,985 262,351
Residential mortgages 67,121 61,751 66,397
Hong Kong SAR Government Home
Ownership Scheme 7,254 6,628 6,565
Other personal 31,827 25,299 31,706
Total personal 106,202 93,678 104,668
Commercial, industrial and
international trade 61,320 58,654 60,843
Commercial real estate 24,972 23,298 24,823
Other property related 10,891 8,515 10,412
Government 4,220 5,000 5,173
Other commercial^ 33,229 32,814 35,538
Total corporate and commercial 134,632 128,281 136,789
Non-bank financial institutions 20,191 12,869 17,125
Settlement accounts 8,866 9,157 3,769
Total financial 29,057 22,026 20,894
Specific provisions against loans
and advances 5,442 5,200 5,692
Non-performing loans^^^ 9,854 9,957^^ 10,525^^
Specific provisions outstanding as
a percentage of
non-performing loans^^^ 55.2% 52.2% 54.1%
Non-performing loans as a
percentage of gross loans
and advances to customers^^^ 3.7% 4.1% 4.0%
Customer bad and doubtful debt
charge as a percentage of
closing gross loans and advances
(annualised) 0.28% 0.90% 0.75%
^ Includes advances in respect of Agriculture, Transport,
Energy and Utilities.
^^ Restated to include certain fully provided loans.
^^^ Net of suspended interest.
Country risk and cross-border
exposure
Brazil Indonesia Malaysia South Thailand
Figures in US$bn Korea
At 30 June 2000
In-country local currency
obligations 6.9 0.4 6.5 1.6 0.8
In-country foreign currency
obligations 0.4 0.9 0.7 0.8 0.2
Net cross-border obligations 1.2 0.5 0.5 0.8 0.2
1.6 1.4 1.2 1.6 0.4
Claims under contracts in
financial derivatives 0.1 - - - 0.1
Total exposure 8.6 1.8 7.7 3.2 1.3
Figures in US$m
Non-performing customer
loans^ 106 595 932 289 299
Specific provisions
outstanding 96 427 582 233 188
At 30 June 1999
Figures in US$bn
Total exposure 6.0 1.7 7.5 3.9 1.6
Figures in US$m
Non-performing customer
loans^ 126 633^^ 950 7 499
Specific provisions
outstanding 82 443 550 5 333
At 31 December 1999
Figures in US$bn
Total exposure 7.8 1.8 7.4 3.2 1.3
Figures in US$m
Non-performing customer
loans^ 80 612 ^^ 992 316 358
Specific provisions
outstanding 65 473 596 223 217
^ Net of suspended interest.
^^ The comparative figures for 31 December 1999 and 30 June
1999 have been presented on a consistent basis with June
2000 for interest in suspense.
The table provides in-country and cross-border outstandings
and claims under contracts in financial derivatives for
Indonesia, South Korea, Thailand, and Brazil, all of which
have negotiated arrangements with the International Monetary
Fund (IMF), as well as Malaysia, which implemented currency
control restrictions in 1998.They are prepared in accordance
with the Bank of England Country Exposure Report (Form C1)
guidelines. On this basis, the figures exclude accrued
interest and intra-Group exposures.
In-country obligations represent local offices' on-balance-
sheet exposures to and acceptances given under facilities
opened on behalf of local residents.
Net cross-border obligations represent non-local offices' on-
balance-sheet exposures to and acceptances given under
facilities opened on behalf of customers based on the country
of residence of the borrower or guarantor of ultimate risk,
irrespective of whether such exposures are in local or
foreign currency.
Cross-border risk is controlled centrally through a well-
developed system of country limits, which are frequently
reviewed to avoid concentrations of transfer, economic or
political risks.
Brazil signed an agreement with the IMF in December 1998
designed to sustain confidence in Brazil's exchange rate
regime following economic uncertainty after the default by
Russia on its domestic debt. After the float of the Brazilian
currency in January 1999, Brazil agreed to revised economic
targets with the IMF, thereby allowing it to resume drawing
funds under the IMF programme. Subsequently, in March 1999,
Brazil reached agreement with a group of international banks
(including HSBC) whereby the banks voluntarily maintained
their trade-related business and inter-bank lines with Brazil
for a period of six months. This agreement was not extended
in view of the improvement in economic stability and an
inflow of foreign investment.
In September 1998, Malaysia introduced a limited form of
exchange controls to curb currency speculation against the
Malaysian ringgit following the regional economic crisis
which commenced in 1997. This involved, inter alia, fixing
the exchange rate at 3.8 Malaysian ringgit to the US dollar.
As pressure on the ringgit subsided, interest rates fell and
the markets calmed, the Malaysian authorities have
subsequently been able to relax the majority of these
controls. A comprehensive programme to restructure and
recapitalise the banking system has been put in place through
the establishment of two government agencies: Pengurusan
Danaharta Nasional Berhad, which absorbed non-performing
loans from Malaysian banks; and Danamodal Nasional Berhad,
which worked to recapitalise banks where required. The
improved economic environment has enabled certain individual
banks to begin repayment of capital received from Danamodal.
On 31 March 1998, a loan agreement was signed between a group
of international banks (including HSBC) and the Republic of
Korea, which was the first stage of the programme to address
South Korea's economic problems. The loan agreement
facilitated a voluntary exchange of short-term credits owed
by Korean banks for new loans with one, two and three year
maturities guaranteed by the Republic of Korea. Subsequent to
the completion of the loan exchange, foreign currency
liquidity pressures in South Korea eased considerably, and
the sovereign rating of the country was reinstated to
investment grade. On 8 April 1999, repayment of the one year
maturity tranche of these loans took place. In September
1999, some Korean obligors prepaid a portion of their
remaining debt under this scheme. In April 2000, repayment
of the two year tranche occurred on schedule and further
prepayments were made by some obligors. All principal and
interest under this scheme remains current.
Thailand has not entered into any specific arrangements with
the foreign banking community to restructure its foreign
currency obligations. However, Thailand has taken positive
steps under its IMF programme to recapitalise its financial
system, including the sale of majority equity stakes in some
financial institutions to foreign investors. The IMF
programme expired on 19 June 2000 after a favourable final
review in May 2000 by the IMF Executive Board.
On 4 June 1998, an agreement was reached between the Steering
Committee of Banks for Indonesia (including HSBC) and the
Indonesia Debt Negotiation team for a comprehensive programme
to address Indonesia's external debt problems. The programme
consists of three principal components: (i) the voluntary
maintenance of trade finance by foreign banks to the
Indonesian banking system, effected by the completion of
individual agreements between Bank Indonesia (the central
bank) and the foreign banks during the second half of 1998;
(ii) an exchange offer through which foreign banks could
exchange specified existing exposures to Indonesian banks
for loans guaranteed by Bank Indonesia with maturities of
one, two, three and four years, which is evidenced by a
number of separate loan agreements completed during the
second half of 1998, and (iii) 'INDRA', the Government of
Indonesia's voluntary programme for the provision of foreign
exchange availability to Indonesian corporate obligors which is
applicable on a case-by-case basis. In respect of (i) above,
during the first half of 2000 an extension of the voluntary
facilities to maintain trade finance for a further period of
12 months was agreed between several foreign banks (including
HSBC) and Bank Indonesia. In respect of (ii) above, on 8
April 1999, a second exchange offer was concluded extending
maturities in years 2000 and 2001 to years 2002 to 2005. In
August 1999, repayments of the one year maturities were made
on schedule.
Asset disposition
Figures in US$m At 30 Jun 2000 At 30 Jun 1999 At 31 Dec 1999
Total assets
% % %
Europe 221,306 38.7 194,977 39.8 211,222 37.7
Hong Kong 163,390 28.5 157,004 32.1 165,420 29.6
Rest of Asia-Pacific 55,979 9.8 52,238 10.7 55,291 9.9
North America 114,778 20.0 71,469 14.6 110,120 19.7
Latin America 16,917 3.0 13,555 2.8 17,181 3.1
Group total 572,370 100.0 489,243 100.0 559,234 100.0
Loans and advances
to customers 261,593 45.7 236,125 48.3 253,567 45.3
Loans and advances
to banks 112,667 19.7 96,136 19.6 100,077 17.9
Debt securities 104,143 18.2 75,066 15.4 110,068 19.7
Treasury bills and
other eligible
bills 21,380 3.7 23,683 4.8 23,213 4.2
Equity shares 5,503 1.0 4,420 0.9 4,478 0.8
Other 67,084 11.7 53,813 11.0 67,831 12.1
572,370 100.0 489,243 100.0 559,234 100.0
HK SAR Government
certificates of
indebtedness 7,910 7,277 9,905
Total assets 580,280 496,520 569,139
Loans and advances
to customers
include:
- reverse repos 12,353 4,532 8,411
- settlement
accounts 8,866 9,153 3,769
Loans and advances
to banks
include:
- reverse repos 10,566 9,338 10,172
- settlement
accounts 4,728 4,336 1,579
Total assets grew by US$13.1 billion, and by US$27.2 billion at
constant exchange rates, in the six months to 30 June 2000.
The increase was due principally to placement of increased
customer deposits, a higher level of financial market
transactions and the deployment of capital raised ahead of
the Group's acquisition of the French banking group CCF.
In Hong Kong, there was an increase in customer advances
principally from loans made under the Government Home
Ownership Scheme and property related lending to corporate
customers. This was partially offset by a reduction in
residential mortgages due to the severe price competition.
North America reported growth in both residential mortgages
and other personal lending. In Europe, there was weak demand
for both working capital and investment finance. However,
personal lending remained buoyant particularly for consumer
credit.
In the rest of the Asia-Pacific region, in particular Korea,
India and Taiwan, there was an encouraging increase in the
level of personal lending following the expansion in personal
banking within several countries in the region. Demand for
corporate credit was muted. In Latin America, there was also
good growth in personal lending.
Debt securities held in the accruals book showed an unrecognised
loss, net of off-balance-sheet hedges of US$18 million
(December 1999: unrecognised loss US$110 million). Equity
shares included US$1,914 million (December 1999: US$1,521
million) held on investment account, on which there was an
unrecognised gain of US$1,043 million (December 1999: US$911
million).
At 30 June 2000, the amount of assets held by the Group as
custodian amounted to US$1,300 billion. Custody is the
safekeeping and administration of securities and financial
instruments on behalf of others.
The funds under management of the Group amounted to US$239
billion.
Capital resources
At 30 Jun 2000 At 30 Jun 1999 At 31 Dec 1999
Capital ratios % % %
Total capital ratio 14.1 15.3 13.2
Tier 1 capital ratio 9.6 11.4 8.5
- estimated on full
consolidation of CCF 9.1 - -
Composition of capital
Figures in US$m
Tier 1:
Shareholders' funds 35,319 31,642 33,408
Minority interests 4,363 4,394 4,228
Innovative tier 1 securities 3,540 - -
less : property revaluation
reserves (2,290) (2,087) (2,353)
: goodwill capitalised and
intangible assets (8,283) (355) (6,750)
Total tier 1 capital 32,649 33,594 28,533
Tier 2:
Property revaluation
reserves 2,290 2,087 2,353
General provisions 2,039 1,776 2,088
Perpetual subordinated debt 3,366 3,252 3,264
Term subordinated debt 10,209 6,683 10,151
Minority interests in tier 2
capital 698 - 577
Total qualifying tier 2
capital 18,602 13,798 18,433
Unconsolidated investments (2,359) (1,517) (1,487)
Investments in other banks (818) (738) (1,032)
Other deductions (139) (147) (177)
Total capital 47,935 44,990 44,270
Total risk-weighted assets 339,444 294,016 336,126
The above figures were computed in accordance with the EU
Consolidated Supervision Directive.
Tier 1 capital increased by US$4.1 billion, US$3.5 billion as
a result of innovative tier 1 capital issues made by HSBC
Holdings to finance the acquisition of CCF and US$2.2 billion
from retained profit offset by US$1.7 billion of estimated
goodwill arising on the 24 per cent stake in CCF acquired in
June. Had the acquisition of CCF been completed on 30 June,
it is estimated that on a proforma basis, taking into account
the equity shares issued under the exchange offer for CCF,
the tier 1 ratio would have been approximately 9.1 per cent
at that date.
The increase in tier 2 capital reflects the proceeds of
capital issues, net of redemptions and regulatory
amortisation.
The increase in capital deductions represents the estimated
tangible net asset value of the 24 per cent stake in CCF.
Risk-weighted assets by principal subsidiary
In order to give an indication as to how the Group's capital
is deployed, the table below analyses the disposition of risk-
weighted assets by principal subsidiary. The risk-weighted
assets are calculated using FSA rules and exclude intra-group
items.
At 30 Jun 2000 At 30 Jun 1999 At 31 Dec 1999
Figures in US$m
Hang Seng Bank 29,998 26,872 27,438
HSBC Investment Bank Asia Holdings 2,392 2,327 2,409
The Hongkong and Shanghai Banking
Corporation Ltd and other
subsidiaries 72,701 72,323 71,473
The Hongkong and Shanghai Banking
Corporation Ltd and
subsidiaries 105,091 101,522 101,320
HSBC Bank plc 116,947 108,917 123,871^
HSBC USA, Inc. 54,404 27,232 55,766
HSBC Bank Middle East 6,244 5,771 5,650
HSBC Bank Malaysia Berhad 3,845 4,715 3,939
HSBC Bank Canada 13,881 13,248 12,477
HSBC Latin American operations 8,581 6,997 7,009
HSBC Holdings sub-group 1,181 825 301
Other 29,270 24,789 25,793
Group risk-weighted assets 339,444 294,016 336,126
^ Includes the risk-weighted assets of HRL.
Review by Geographical Segment
HSBC European Operations
Half-year to
Figures in US$m 30 Jun 2000 30 Jun 1999 31 Dec 1999
Profit before tax 1,962 1,719 1,603
Cash basis profit before
tax^ 2,051 1,724 1,606
Share of Group pre-tax
profits 37.6% 42.3% 40.9%
Total assets at period-
end 221,306 194,977 211,222
Share of Group total
assets 38.7% 39.8% 37.7%
Staff numbers (FTE
basis) at period-end 55,364 50,859 53,861
Cost:income ratio
(excluding
goodwill amortisation) 56.9% 58.3% 60.5%
^ Adding back goodwill amortised.
Our European operations contributed US$1,962 million to the
Group's profit before tax for the first half of 2000, an
increase of US$243 million or 14.1 per cent compared with the
first half of 1999, and represented 37.6 per cent of the
Group's pre-tax profits. At constant exchange rates, Europe's
profit before tax increased by 19.5 per cent.
HSBC Bank plc's UK Banking operating profit increased from
US$1,118 million to US$1,197 million, driven primarily by the
strong personal and commercial current account base and
growth in wealth management business. At constant exchange
rates, the underlying increase in UK Banking's operating
profit was 11 per cent. The following commentary on UK
Banking's results is based on the underlying currency
performance.
HSBC Bank plc's strategy is to deliver a high quality, value
for money service across a growing number of channels based
on customer preference. It continued to focus on the delivery
of wealth management services to personal customers, growing
the commercial business and deepening the relationship with
large corporate customers by promoting the wide range of
services offered by the HSBC Group. HSBC Premier, the premium
global banking service for personal customers, was launched
in March. The bank's new variable rate mortgage product was
introduced in July this year and the bank has become the
first high street bank to offer stakeholder-ready pensions to
its customers.
First Direct continued to grow in the first half of 2000 with
pre-tax profit increasing by US$6 million to US$47 million.
It attracted over 50,000 new customers while customer
retention remained strong. Product penetration is amongst the
highest of the UK banks. Over 200,000 of its customers now
bank on-line. New internet products were launched in July by
firstdirect.com, its online banking service, and customers
will be able to access their bank accounts over WAP mobiles
shortly.
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