HSBC Holdings plc 2003 final results

01 March 2004

• Operating income up 54 per cent to US$41,072 million (US$26,595 million in 2002).

For the year (excluding goodwill amortisation):

• Operating profit before provisions up 72 per cent to US$19,990 million (US$11,641 million in 2002).
• Group pre-tax profit up 37 per cent to US$14,401 million (US$10,513 million in 2002).
• Attributable profit up 46 per cent to US$10,359 million (US$7,102 million in 2002).
• Return on average invested capital of 13.7 per cent (12.9 per cent in 2002).
• Earnings per share up 30 per cent to US$0.99 (US$0.76 in 2002).

For the year (as reported):

• Operating profit before provisions up 72 per cent to US$18,540 million (US$10,787 million in 2002).
• Group pre-tax profit up 33 per cent to US$12,816 million (US$9,650 million in 2002).
• Attributable profit up 41 per cent to US$8,774 million (US$6,239 million in 2002).
• Return on average shareholders’ funds of 13.0 per cent (12.4 per cent in 2002).
• Basic earnings per share up 25 per cent to US$0.84 (US$0.67 in 2002).

Dividend and capital position:

• Third interim dividend (in lieu of final dividend) of US$0.24 per share; total dividend for 2003 of US$0.60 per share, an increase of 13 per cent over 2002.
• Tier 1 capital ratio of 8.9 per cent; total capital ratio of 12.0 per cent (2002: tier 1 capital ratio of 9.0 per cent and total capital ratio of 13.3 per cent).

The figures for 2002 have been restated in this document to reflect the adoption of Urgent Issues Task Force Abstracts 37 'Purchases and sales of own shares', and 38 'Accounting for ESOP trusts', details of which are set out in Note 1 on page 17 of the news release PDF.

HSBC HOLDINGS REPORTS PRE-TAX PROFIT OF US$12,816 MILLION

HSBC made a profit on ordinary activities before tax of US$12,816 million in 2003, an increase of US$3,166 million, or 33 per cent, compared with 2002. Of this increase, over 70 per cent arose from two recent major acquisitions; Household contributed US$1,827 million while HSBC Mexico contributed US$441 million in its first full year.

The Directors have declared a third interim dividend for 2003 of US$0.24 per ordinary share (in lieu of a final dividend) which, together with the first interim dividend of US$0.24 per ordinary share and the second interim dividend of US$0.12 already paid, will make a total distribution for the year of US$0.60 per share (US$0.53 per share in 2002), an increase of 13.2 per cent. The dividend will be payable on 5 May 2004.

Net interest income of US$25,598 million in 2003 was US$10,138 million, or 66 per cent, higher than 2002. Of this increase, Household contributed US$8,305 million and HSBC Mexico US$874 million. Excluding these acquisitions, and in terms of constant currency, net interest income was marginally higher.

Other operating income of US$15,474 million was US$4,339 million, or 39 per cent, higher than 2002. Of this increase, Household contributed US$1,878 million and HSBC Mexico US$599 million.

Operating expenses (excluding goodwill amortisation) rose US$6,128 million, or 41 per cent, of which Household contributed US$3,406 million and HSBC Mexico US$881 million. HSBC’s cost:income ratio, excluding goodwill amortisation, improved to 51.3 per cent compared with 56.2 per cent in 2002.

The charge for bad and doubtful debts was US$6,093 million in 2003, US$4,772 million higher than in 2002. This was essentially all attributable to acquisitions. Of the increase, Household accounted for US$4,575 million and HSBC Mexico US$110 million.

Gains on disposal of investments and tangible fixed assets of US$414 million were US$94 million lower than 2002 reflecting lower sales of investment debt securities in the US.

The tier 1 capital and total capital ratios for the Group remained strong at 8.9 per cent and 12.0 per cent, respectively, at 31 December 2003.

The Group's total assets at 31 December 2003 were US$1,034 billion, an increase of US$276 billion, or 36 per cent, since 31 December 2002. Of this increase, US$131 billion were assets (including the related goodwill) added as at the date of the acquisition of Household. Excluding this and at constant exchange rates, total assets grew by US$92 billion or 11.2 per cent.

*In 2003, North America implemented a revised transfer pricing system to transfer interest rate risk from the business units to Corporate, Investment Banking and Markets. The figures for 2002 have been restated to reflect the impact of transfer pricing had it been in place on a similar basis.

**Comprises Household since 28 March 2003, the date of acquisition.

Comment by Sir John Bond, Group Chairman

Overall, 2003 was a good year for HSBC. Our record results show the diversity of our business against a backdrop of improvement in most of the world’s major economies. They reflect the trust which more than 110 million customers we serve around the world place in us for their various financial needs. Our performance also benefited from a strong contribution from recent acquisitions, an expanded geographical reach and our continuing investment in new products and services, in systems, and in our people. The dedication and talents of my colleagues throughout HSBC are amongst our greatest strengths.

Profit attributable to shareholders in 2003 rose 41 per cent to US$8,774 million on revenues which were 54 per cent higher at US$41,072 million. Profit attributable excluding the amortisation of goodwill, which is the measurement basis we believe best reveals our true performance, exceeded US$10 billion for the first time rising 46 per cent to US$10,359 million. On a per share basis earnings attributable to shareholders amounted to US$0.84 or US$0.99 before goodwill amortisation, increases of 25 and 30 per cent respectively. The Board has approved a third interim dividend of US$0.24 per share taking the total dividend for the year to US$0.60 per share, an increase of 13 per cent over 2002.

2003 was the final year of our five year strategic plan “Managing for Value”. The results for the year contributed to meeting the target of doubling our total shareholder return over the five year period. We also significantly out-performed our benchmark peer group of nine banks.

Our 2003 results and, indeed, the achievement of our TSR targets owe much to the improved geographical distribution of profits that has characterised HSBC’s progress in recent years. Our diversification has been all the more important given that, for almost all the life of ‘Managing for Value’, Hong Kong was undergoing deflation. For much of our history Hong Kong was our single largest market and as recently as 1998 accounted for 37 per cent of pre-tax profits. In 2003 Hong Kong’s share of pre-tax profits was 26 per cent. That said, the resilience and flexibility of our business there has been impressive and our team has managed our business through this difficult period with extraordinary skill, achieving a profit growth which, although modest, is remarkable in the circumstances. Happily, the economic outlook for Hong Kong is now improving. Hong Kong enjoys a unique position in the Asia Pacific region. Our confidence in its long term prospects remains undiminished and our new strategic plan specifically calls for continued investment in Hong Kong.

Integration of Recent Acquisitions

Two of our principal tasks during 2003 were integrating Household and HSBC Mexico (formerly GFBital) successfully into HSBC after they joined our Group in early 2003 and late 2002 respectively. In both cases the progress has exceeded our expectations. We have achieved synergies and overall results ahead of our original business cases. The following are highlights of the Household integration:

• Technology integration and other synergies - We have made significant progress in integrating Household and HSBC technology teams and systems, including initiatives to consolidate data centres and to convert HSBC credit card portfolios onto the Household loan processing system. Based on the joint strengths of HSBC and Household, we have also renegotiated a wide range of supplier contracts, including telecommunications. Also, we have achieved efficiency savings in a number of other areas through the integration of various functions including purchasing, human resources and facilities.
• Global processing opportunities - Processing costs have been reduced in Household’s consumer lending and auto finance businesses by using HSBC’s processing centres in India.
• Sharing best practices - We have made good progress in exporting and using Household’s consumer credit business models and other practices in HSBC’s operations both in the US and internationally. Shared practices include Household’s credit risk management, card management, collections, retail services and customer focused technology.
• Expanding business opportunities - We are developing a number of initiatives including offering a broader range of products, such as mortgage insurance and HSBC banking services, to existing Household customers, cross referring consumer finance and retail services customers between Household and HSBC and automating the HSBC auto finance loan process. Also, in conjunction with HSBC Bank USA, Household has initiated a customer referral programme. Household has also developed near prime and prime products to provide customers with a “full spectrum” of options. As at 31 December 2003, 4,600 near prime loans totalling almost US$600 million have been written by Household branches.
• Cross border payments - Globally, the largest bilateral remittance flow is that between the US and Mexico at around US$10 billion a year. Working closely with HSBC Mexico, Household is developing a remittance capability between customers in the US and their families and friends in Mexico. This initiative includes a web-based option in which the recipient is able to access the funds via an ATM using a stored value card and a remittance service via HSBC branches and kiosks in Mexico. Both services will provide cross-selling opportunities.

In addition, all the commitments given to regulators in relation to improvements in business practices were fulfilled. Household aims to be a leader in best practice in the consumer finance industry.

Progress in Mexico has also been ahead of expectations:

• We have bedded down the new management structure, blending local and international expertise.
• We took full control of our insurance joint venture, buying out ING, and we purchased a pension management company to complement it.
• We are strengthening operational, credit, technology and audit controls to bring them to HSBC standards.
• We exceeded our financial targets. We achieved 18 per cent core deposit growth and more than 20 per cent growth in consumer lending. Non-performing loans declined by 52 per cent as we cleansed the loan portfolio. We achieved a cash return on cash invested of 20 per cent in the first year.

Our platform for further growth in Mexico is firmly in place.

The Brand

One objective of “Managing for Value” was to establish HSBC and our hexagon symbol as a global consumer brand and to make it synonymous with integrity, trust and excellent customer service. Building our brand has been one of the most conspicuous successes of the plan. The careful management and further development of the brand is one of our most important responsibilities and we have consolidated our position by taking re-branding opportunities arising from recent acquisitions.

We re-branded our operations in Mexico as HSBC at the end of January this year to coincide with the visit of the HSBC Holdings plc Board to the country. We re-launched our private banking operations as HSBC Private Bank at the beginning of 2004, retiring the HSBC Republic brand which had been used since the acquisition of the Republic Bank of New York and Safra Republic Holdings in 1999. In the US, Household’s prime credit card business, its retail services business and its auto finance business will all be re-branded HSBC in the course of this year to build on the market position of HSBC amongst prime and business customers.

Customer Groups

All our major geographical businesses and customer groups performed well in 2003. Across all our businesses credit performances were sound. At the end of 2003, non-performing loans were US$15,074 million. After excluding the acquisition of Household, non-performing loans fell US$172 million to US$10,368 million with the level of new provisions reflecting the improving economic outlook.

Personal Financial Services

Low interest rates and lower unemployment fuelled demand for mortgages and other lending products in many of our personal markets. Excluding Household we grew residential mortgages across the Group by 15 per cent over the year. We achieved particularly good growth in the UK, US, Canada, Korea and New Zealand, the last reflecting the acquisition of a retail banking business from AMP Bank. We achieved this in part by more targeted cross-selling to HSBC’s own current account customers. We grew non-mortgage personal lending by over 20 per cent with particularly good growth in the UK, US and France. Worldwide we achieved 20 per cent growth in credit cards in issue. The increase reflected stronger marketing in the UK, the contribution of businesses acquired in Turkey and in Mexico in 2002 and 15 per cent organic growth in Asia. Sales of repayment protection insurance reached record levels.

Continuing nervousness over the sustainability of growth in equity market valuations hit sales of traditional investment and investment-linked insurance products. However, those incorporating capital protection features were again successful in Asia, particularly in Hong Kong, where increased sales generated commission income of US$130 million. With customers remaining cautious and preferring liquidity, we attracted record savings levels with deposits growing 13 per cent to US$291 billion. Hong Kong, the UK, France and Canada led the way with particularly strong inflows while current account balances grew faster than the underlying rate of economic activity. Current account balances in the UK exceeded £10 billion for the first time at year-end 2003.

We are beginning to see significant trends in customer channel preferences. Responding to those preferences has enabled us to achieve a 7 per cent increase in products in use by our customers. The number of customers registered for our e-banking services more than trebled in 2003 reflecting both the acquisition of Household and the value of our investments in the internet and telephone-based services. Registered users of personal internet banking increased by 200 per cent to 13.5 million. More than 60 per cent of them use the service regularly with over 325 million internet log-ons recorded during the year. The internet generated sales of more than 2.3 million products with some 87 million transactions migrating to this channel during 2003. As a result of this heightened online activity, calls to our call centres increased by the lowest rate in years. A third of all personal loans in the UK were arranged by telephone while in Hong Kong the internet accounted for 39 per cent of retail broking revenues which rose to US$80 million. Online transactions now account for 74 per cent of all retail stock trades conducted by our operations in Hong Kong.

Consumer Finance

During 2003 Household achieved generally good organic loan growth which it supplemented with portfolio acquisitions. The strongest growth was in the real estate portfolio and particularly in the mortgage services business. With interest rates at their lowest level for 25 years, strong demand for refinancing as well as debt consolidation loans contributed to the solid increase in the real estate secured portfolio. Household also achieved growth in its branch based consumer lending business in the second half of the year with an expanded range of products a contributing factor.

In retail services new partners in the US included Suzuki, Saks Inc., and Gottshalks. Synergy benefits with HSBC included new opportunities in store cards and point of sale financing and were instrumental in the signing of the John Lewis Partnership in the UK as a new business partner.

Household’s credit quality, specifically its delinquency and charge off levels improved in the second half of 2003. Early delinquency rates also showed improvement in the fourth quarter as a result of the recovery in the US economy and tighter underwriting in some products. There are grounds for optimism that these trends will continue during the first half of 2004.

Commercial Banking

The payment of interest on qualifying current accounts, imposed by the Competition Commission in the UK, came into effect in 2003. We absorbed the costs, taking the opportunity, at the same time, to stress to our customers the advantages of businesses banking with HSBC. This helped us increase our leading position in the UK business start-up market to 21 per cent and attract record levels of business current and deposit account balances. Business internet banking was launched in 13 more countries and territories, bringing the total to 20, and the number of registered users more than doubled to 540,000.

In Hong Kong, we launched a number of schemes to help customers worst affected by the outbreak of SARS in the first half of the year. However, the dramatic turnaround in both business activity and confidence in the second half, undoubtedly helped by the relaxing of restrictions on visitors from mainland China, meant that the economic impact on our customers was less than expected. Credit quality remained sound.

With demand for credit remaining soft, we focused on increasing revenues from fees by capitalising on our position as ‘The world’s local bank’ and by extending our range of products for commercial customers. As a result we saw growth in money transmission revenues, in trade finance fees and in wealth, savings and insurance products.

Corporate, Investment Banking and Markets

Our Global Markets business excelled as our CIBM activities achieved record results in 2003. In bond issuance, we increased our market shares in Europe and the US and maintained our market-leading position in Asia, excluding Japan. Continuing synergy benefits resulting from the Group’s acquisition of CCF in 2000 and a greater focus on debt origination have resulted in HSBC building a top eight position in the international debt issuance league in 2003 compared to a 1999 ranking of 18th.

Currency and interest rate volatility led to strong demand for risk management and structured products, justifying our decision to expand our capabilities in this area through increased investment in people and systems in 2002. Concerns about market concentration in the structuring and delivery of complex products and reputational damage from corporate scandals elsewhere in the market enabled HSBC to expand profitable relationships with an enlarged customer group.

We re-focused our Markets business in the US where profitability improved markedly as a result of the non-recurrence of bond losses suffered in 2002. We gained market share in foreign exchange, particularly in New York, and built up our currency options business, managed globally from London, and our credit derivatives business, managed from New York.

In Corporate Banking, debt restructuring and well-marketed equity raising helped to reduce the number of major companies in financial difficulties around the world and to keep corporate credit costs low. Demand for credit through bank facilities, however, remained muted and in line with the modest recovery in corporate investment activity. Instead, corporate borrowers focused their borrowing requirements on taking advantage of the low credit spreads available in bond markets. Attractive bank financing opportunities were few.

We restructured our Investment Banking operations in 2003 and focused the business more sharply. We concentrated our global advisory businesses on areas most relevant to our customers and where we have a competitive advantage. While staff numbers fell, selective recruitment enabled us to strengthen the team and revenues from our advisory businesses grew to US$158 million in 2003. We were entrusted with a number of landmark deals during the year in areas related to capital structuring, corporate reorganisation and broad strategic advice. These deals spanned our global client footprint.

Pressure on brokerage commissions and the likelihood of major structural change to the shape of the industry prompted us to reorganise our equities business with a significant reduction in headcount. Our revised business strategy, which fully integrates equities as part of our overall markets proposition, concentrates on areas where we have a competitive advantage and we returned to modest profit in the fourth quarter as markets improved.

Private Banking

Our Private Banking operations recorded strong results with pre-tax profits growing by 36 per cent. New business initiatives and a general improvement in investment markets led to increased client activity across a range of products. In particular, an increase in discretionary mandates together with strong demand for client-tailored structured products contributed to increased fee revenues and dealing income. We grew funds under management by 18 per cent reflecting both net inflows of client assets and improving market conditions. Results were strong across most geographies.

Strategy

In November 2003, we launched our new five year strategic plan, which we call “Managing for Growth”. Using the delivery platform which HSBC has constructed around the world and harnessing all our strengths it aims to accelerate our overall rate of revenue growth. At the same time, however, we shall not compromise our traditionally conservative risk profile which has served us well.

Our plan also calls for the strategic management of costs. This partly reflects the transforming effect of technology, including the internet, and the extent to which customers can now choose to conduct their business with us themselves. It also reflects the need to free up resources by reducing or eliminating our involvement in businesses limited in scope or potential in order to allocate additional resources to areas which demonstrate strong growth prospects.

In addition, our strategies always allow us to respond to opportunities to expand our geographical reach and product range through acquisitions, investments and joint ventures. Indeed, the last 12 months have already seen a number of such developments. Following the acquisition of Household International, we acquired in December Lloyds TSB’s business interests in Brazil including its market leading consumer finance subsidiary Losango with over 7 million customers. We also agreed to acquire an interest in UTI Bank in India. As we continued to develop our business in The People’s Republic of China, Hang Seng Bank agreed to take a 15.9 per cent stake in Industrial Bank and we announced a joint credit card venture with Bank of Shanghai.

In February this year we were delighted to complete our US$1.3 billion acquisition of the Bank of Bermuda. In addition to providing HSBC with a strong position in the local banking market in Bermuda, where potential exists for further expansion, the acquisition adds significant scale and geographical spread to our existing international fund administration, private banking, trustee and payments and cash management businesses. We are now working on integration.

Outlook

Turning to 2004, we have already seen growth in consumer spending and borrowing; in increased merger and acquisition activity; and a modest resumption of growth in demand for equity investment products. We see improving prospects for economic growth and private sector employment, particularly in the United States and in Hong Kong.

In emerging markets, such as Brazil, Mexico and the ASEAN countries, relatively stable currencies and historically low interest rates are promoting consumer activity, fuelling domestic growth and reducing export dependence.

However, we remain very conscious of the changing nature of the global economy and the speed of change. China plays an increasingly important role, not only through its export growth, but also as the fastest growing market for commodity producing countries and for those developed countries which are supplying the technology, equipment and services to support its economic expansion.

Nor do we underestimate the impact on sentiment and consumer spending of globally strong property prices, which continue to rise faster than underlying wage growth in many developed markets. While such rises are understandable in the context of low interest rates and limited appetite for alternative investment opportunities, in the long run property prices have to be linked to income growth.

The picture therefore is one of improving sentiment and stronger growth prospects in the near term, but with the potential risk that structural imbalances might lead to economic weakness or dislocation.

Against this backdrop we are concentrating on building our businesses steadily. We expect to see lending to consumers around the world rise as a proportion of our total lending, with the emphasis on real estate secured lending.

We also expect to see business in the US grow in importance to HSBC as we fulfil the potential of the Household acquisition and as the US economy shows its flexibility and responds to the lower value of its currency.

We look forward to the future with confidence. We are second to none in terms of geographic and product diversification. We believe that China, India, Brazil and Mexico will become increasingly important to the global economy. We also believe many of the world’s largest companies see the same opportunities as we do, and therefore we will use HSBC’s position as ‘The world’s local bank’ to serve their needs.

We have built a capital strength that allows us to develop our businesses wherever we see opportunities. Alternatively, such strength gives us resilience if economic conditions deteriorate.

We have an excellent customer base with opportunities across the board: In Personal Financial Services; in Commercial Banking where we have the largest international middle market franchise in the world; in Corporate, Investment Banking and Markets; and Private Banking. We have a talented workforce. And we have a commitment to do business only when it is in the interests of our customers and in line with our wider responsibilities to the communities we serve.

In so doing we protect and strengthen the value of our brand and this lies at the heart of our ability to create value for our shareholders who have entrusted to us, directly or indirectly, an important element of their long-term savings and pensions provisions.