HSBC Holdings plc 2005 final results - highlights

06 Mar 2006

• Total operating income up 10 per cent to US$61,704 million (US$55,988 million in 2004).

For the year:

• Net operating income up 10 per cent to US$49,836 million (US$45,162 million in 2004).
• Group pre-tax profit up 11 per cent to US$20,966 million (US$18,943 million in 2004).
• Profit attributable to shareholders of the parent company up 17 per cent to US$15,081 million (US$12,918 million in 2004).
• Return on average invested capital of 15.9 per cent (15.0 per cent in 2004).
• Earnings per share up 15 per cent to US$1.36 (US$1.18 in 2004).

Dividend and capital position:

• Fourth interim dividend for 2005 of US$0.31 per share, an increase of 15 per cent; total dividends declared in respect of 2005 of US$0.73 per share, an increase of 11 per cent over 2004.
• Tier 1 capital ratio of 9.0 per cent and total capital ratio of 12.8 per cent.

HSBC HOLDINGS REPORTS PRE-TAX PROFIT OF US$20,966 MILLION

HSBC made a profit before tax of US$20,966 million, an increase of US$2,023 million, or 11 per cent, over 2004.

Net interest income of US$31,334 million was US$235 million, or 1 per cent, higher than 2004.

Net operating income before loan impairment charges and other credit risk provisions of US$57,637 million was US$6,284 million, or 12 per cent, higher than 2004.

Operating expenses of US$29,514 million rose US$3,027 million, or 11 per cent, compared with 2004. On an underlying basis and expressed in terms of constant currency, operating expenses increased by 9 per cent.

HSBC’s cost efficiency ratio was 51.2 per cent compared with 51.6 per cent in 2004.

Loan impairment charges and other credit risk provisions were US$7,801 million in 2005, US$1,610 million higher than 2004.

The tier 1 capital and total capital ratios for the Group remained strong at 9.0 per cent and 12.8 per cent, respectively, at 31 December 2005.

The Group’s total assets at 31 December 2005 were US$1,502 billion, an increase of US$222 billion, or 17 per cent, since 31 December 2004.

Financial statements for the year ended 31 December 2005 are prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as endorsed by the EU. Comparative figures for 2004 are also prepared under IFRSs but reflect transition exemptions on the move to reporting under IFRSs and therefore individual lines may not be strictly comparable. In particular, comparative figures do not reflect the impact of IAS 32 ‘Financial Instruments: Disclosure and Presentation’, IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IFRS 4 ‘Insurance Contracts’ (see Note 1 ‘Accounting policies’ on page 16).

Comment by Sir John Bond, Group Chairman

Our results reflect our success in growing revenues and improving productivity, in line with our Managing for Growth strategic plan. They are a tribute to the talents and dedication of the 284,000 people who work for HSBC in meeting our customers' needs. Overall, 2005 was a year of sustained progress for HSBC and our all round performance during the last three years has brought impressive returns to our shareholders.

We grew profit attributable to shareholders by 17 per cent to US$15.1 billion in 2005. This represents US$1.36 per share, an increase of 15 per cent. Our earnings remained well diversified both geographically and by customer group. We have continued to invest in the future of our business, particularly the growth of our personal financial services in Asia, but at the same time we improved productivity as the level of expenditure on the development of our investment banking businesses passed its peak. We also achieved good growth and further efficiencies in our core UK personal and commercial banking businesses. Worldwide, we grew our commercial banking business strongly on the back of recent investment. For the year as a whole, revenue growth of 12 per cent exceeded cost growth by 1 percentage point. A strong second half performance reversed a 4 percentage point deficit at the interim stage.

The Board has declared a fourth interim dividend of US$0.31 per share taking the total dividend in respect of 2005 to US$0.73 per share, an increase of 10.6 per cent over the dividends for 2004. The dividend is payable on 11 May 2006 to shareholders on the register on 24 March 2006, with a scrip dividend alternative available for shareholders who prefer this option.

The business climate
Economic conditions in 2005 reflected the growing impact of globalisation and the imbalance between resource producers and consumers. International trade flows were dominated by China’s growing share of world manufacturing and by further increases in commodity prices, notably energy prices. Trade in services continued to expand, partly reflecting India’s growing role. Other emerging markets such as Mexico, Turkey and eastern Europe benefited from their proximity to the major consumer markets and from continued foreign investment. Resource rich countries such as Australia, Brazil and Canada enjoyed the strong global demand for commodities. Liquidity in the oil exporting countries from higher oil prices fuelled major infrastructure investment and, through the recycling of petro-dollars, boosted asset prices elsewhere in the world. The US current account deficit widened further as strong domestic demand and higher energy prices raised the value of US imports.

Worldwide consumer spending remained resilient, supporting economic expansion. Risk premia fell across most asset classes as investors sought higher yields which in turn led to increased enthusiasm for emerging markets. The world’s best performing stock markets included Japan, where domestic growth recovered, and a range of emerging markets, for example Egypt, Saudi Arabia, Russia and Turkey.

Core businesses, new initiatives
HSBC’s core businesses in the US, Hong Kong and the UK produced robust performances and we made good progress in a number of key areas of focus. In particular, we stabilised the risk adjusted margins in our consumer finance business in the US. We held costs flat and significantly increased revenues in our UK personal and commercial businesses. We improved deposit spreads in Hong Kong during the course of the year. We achieved robust growth in global transaction banking for corporate clients on the back of strong trade flows and we obtained our best ever ranking in foreign exchange surveys and debt capital markets league tables. We also grew our loan books without materially changing the risk profile of the portfolio.

Technology remains the key to productivity improvements and to increasing our coverage in many markets without the need for establishing a significant physical presence. At the same time, the investments we have made during the last decade in developing HSBC’s geographical coverage and product capabilities and in building our brand, allowed us to benefit from the prevailing economic conditions in many of our major markets and to capture returns for our shareholders from an ever more diversified revenue base. In addition to the performance of our core businesses, we achieved incremental revenues from a number of new or developing areas. For example:

• Our operations in mainland China performed well in 2005. We expanded our branch network and we retain the largest presence in China of any international bank. In addition, the contribution to earnings from our strategic investments continued to grow. Those in Bank of Communications, Industrial Bank, Ping An Group and Bank of Shanghai accounted for over 70 per cent of our earnings in mainland China in 2005. With the addition of HSBC Jintrust Fund Management Co Ltd to our holdings, HSBC is well placed to benefit from China’s continued economic development and from the liberalisation of its financial services sector which membership of the World Trade Organisation will bring.
• In India, we expanded our global resourcing activities including increasing our largest IT development centre to 2,500 people. We also used our expertise and knowledge of the country to build the world’s largest equity investment fund focused on India. Through a combination of third party and internal distribution we have grown the GIF Indian Equity fund from US$2.6 billion in 2004 to US$4.7 billion at the end of 2005.
• We achieved record results in Mexico, Turkey and the Middle East, increasing their aggregate contribution to the Group’s profit before tax by US$490 million, or 42 per cent. The results reflected the benefits of co-operation with other parts of the HSBC Group in areas as varied as consumer finance, capital markets, payments and cash management, Amanah (Islamic) finance and insurance.
• Exceptional liquidity in the Middle East generated strong investment flows. Our businesses in Saudi Arabia and Dubai more than doubled commissions from retail brokerage. HSBC also advised on many outward investments by clients in the region, including Dubai International Capital’s acquisitions of Tussauds Group for US$1.5 billion in the UK. We also benefited from regional growth in infrastructure spending, notable assignments including the Shuaibah and Taweelah water and power projects in Saudi Arabia and Abu Dhabi respectively.
• The worldwide fall in risk premia generated strong demand for the higher yields available from emerging markets and structured products. In addition to the GIF Indian Equity fund described above, our GIF BRIC (Brazil, Russia, India and China) Freestyle fund, also managed by HSBC Halbis Partners, attracted considerable support, growing from US$21 million, to US$2.1 billion, during the course of 2005. HSBC brought a growing number of initial public offerings to investors, notably the Polish gas company PGNiG, Middle Eastern telecom provider Investcom and three of the five largest in Hong Kong this year, including Bank of Communications. In addition, HSBC used its experience in emerging markets to advise on a number of cross-border deals, most notably Bank of America’s US$3 billion investment in China Construction Bank.
• Exceptional liquidity in private equity markets afforded us opportunities to realise attractive gains on historical investments and to refinance companies with expensive capital structures.
• Responding to demand from the investment markets, we achieved significant growth across all businesses in the manufacture and distribution of bespoke products and solutions, mainly for corporate clients. In Global Markets we grew market share significantly and profitably in complex derivative products, reflecting recent investment in this area. Sinopia, the Group’s specialist manager of quantitative, structured and guaranteed investment products delivered 80 per cent growth in revenues.
• Strong investment flows into emerging market equities and into alternative investment funds, brought significant growth in the Group’s sub-custody and clearing business, where we are particularly strong in Asia. They also benefited our fund administration business, which was well positioned to meet clients’ service requirements for traditional and alternative investments, following the integration of Bank of Bermuda. Revenue growth exceeded 40 per cent in our sub-custody business, and 25 per cent in the global custody and fund administration business.

Benign credit conditions
Throughout 2005, credit conditions remained broadly favourable, particularly in the US which, despite steadily rising interest rates, experienced continued economic growth, lower unemployment and rising wages. Due to the effect of hurricanes and accelerated bankruptcy filings ahead of a change in the law, credit charges in the US initially increased during the second half but are now returning to more normal levels.

In the UK, 2005 saw a significant rise in personal bankruptcies following an earlier relaxation in the law and a general expansion in credit availability. In response to the increased levels of personal credit charges, the steps we took on both underwriting and collection processes began to have a positive effect during the second half. Furthermore, HSBC has been at the forefront of efforts in the UK to broaden access to information sharing in order to strengthen responsible lending practices.

Worldwide, corporate credit performance was strong with net recoveries in the large corporate sector and a low level of charges in the commercial banking sector. These conditions may not prove sustainable.

Corporate, Investment Banking and Markets
We are a little more than half way through our five year strategic plan for developing our Corporate, Investment Banking and Markets business and we are progressing well and gaining momentum in the areas of investment. Cost growth peaked during the year and there is clear evidence of positive client response to our expanded product capabilities.

We have established leadership positions in foreign exchange, (‘FX’) in transaction banking, in project and export finance, and in funds administration. We have developed strongly and gained market share in debt capital markets globally, and in government bond trading in Europe. In higher added value products our significant investment in quantitative skills and support systems has been rewarded with strong growth in market share in FX options and structured derivatives.

Our investment in recruiting a number of senior advisory bankers significantly increased our coverage of major corporate relationships, building on the foundations already in place and expanding the range of opportunities available.

Organic investment
With considerable excess capital in the banking sector and relatively few investment opportunities available, prices for potential acquisitions were high in 2005. In line with our strategy, we concentrated on organic growth. During the year we almost doubled our stake in Ping An Insurance in China, in August, to 19.9 per cent, at a cost of US$1.0 billion. In December we completed the acquisition of Metris, a US-based sub-prime credit card business with four million clients, and complementary to HSBC Finance, for US$1.6 billion.

During the last 12 months, organic investment has created some exciting opportunities for the future. For example, in the US we launched a national direct online savings product. By December this was attracting deposits at the rate of US$75 million per week and had garnered US$1 billion in total. In Asia, we expanded our card base to reach 10.3 million cards with 2.1 million cards added during the year.

We established consumer finance operations in Argentina, Australia and India, while in Mexico we launched several new products including ‘Tu Cuenta’ an integrated current account, deposit and card product, which has attracted some 2,300 customers per day since its launch in February. In Turkey, our Personal Financial Services business reported a three-fold increase in pre-tax profits, reflecting strong organic growth and an increase in customers to 2.2 million.

Group Private Banking grew strongly in all regions; net new money inflows were US$35.7 billion. We continued to invest in Asia, particularly in India, Japan and Taiwan and we expanded our support of clients from mainland China. In Europe we established regional offices in the UK, France and Russia, and we also expanded our geographical presence in the US.

We continued to release capital through the sale of interests which lay outside our core business or which lacked critical mass. These included the disposal of the support functions of our fleet management business in the UK and the contribution of our Asian merchant acquiring business into a joint venture. In aggregate, we realised disposal gains of US$652 million in 2005. Last month we announced completion of the sale of our 21.16 per cent interest in Laiki Group for a consideration of US$235 million and the sale of 7.19 per cent from our interest in UTI Bank for US$142 million. A profit on sale of US$174 million will be included in our results for the first half of 2006 from these disposals.

Outlook
In the near term, the outlook is encouraging. The world economy continues to grow steadily. The US economy is strong, the UK resilient, Japan and Germany are recovering and the emerging markets are buoyant.

Longer term prospects are more uncertain. Apart from the possibility, however remote, of a sudden shock to the world’s financial system, we remain concerned about the unprecedented level of trade imbalances. Similarly, the implications of demographic change and of ageing populations for financial markets and businesses will be profound. It is inevitable that, at some stage, a process of adjustment will begin but the timing is open to question. So far, the financial markets are taking a benign view of these potential sources of instability.

Progressively, globalisation is forcing countries and businesses operating within them to re-evaluate their comparative advantages and to adjust to a world in which emerging markets compete not only in terms of cost but also in skills and technology. The globalisation of the services industry, spurred on by new technologies and the rapid fall in communication costs, will afford huge opportunities but also pose significant challenges to many areas of economic activity including financial services. Incipient protectionism, resulting from a reluctance to face up to the new competitive realities, remains a threat to the continuing growth of the world economy.

In certain mature markets, under-funded pension plans threaten to become a drain on companies’ resources. Combined with the rising cost of long-term healthcare they pose a considerable challenge to policy makers. Continuing productivity growth is therefore increasingly important. Only if it is achieved will financial markets be able to offer returns with a meaningful premium to the risk-free rate embodied in government debt. Without such productivity gains and associated financial returns the affordability of pension and healthcare promises will become increasingly burdensome. The challenge to society of managing the equitable distribution of wealth created between competing generations may well become one of the most pressing of the next decade.

In this environment HSBC, with its unique international footprint, is determined to continue to deliver profitable growth and value to its several constituencies. Success ensures that we can offer good employment prospects to an ever more diverse workforce. It means that we can afford to continue to invest in expanding the platforms by which we deliver services to our customers. It enables us to contribute to the savings and retirement needs of those who invest in HSBC directly, or indirectly through pension plans and investment funds.

Building on our achievements, our priority for the rest of 2006 is to continue to implement our Managing for Growth strategy. We will achieve this by being distinctive, reinforcing our brand values of trust and integrity in all our dealings with customers. We will make ourselves even more relevant by broadening the product, channel and geographical coverage we offer. Furthermore, we will ensure that the scale and complexity needed to compete successfully will be seamless from the perspective of our customers and manageable from that of our colleagues.

Our businesses in Asia, Turkey, Mexico, Brazil and the Middle East see strong opportunities for growth on the back of investments already made. We also see opportunities to strengthen our position in our franchises in the UK, Hong Kong, North America and France. We believe there is growing momentum from the development of our new business streams within Corporate, Investment Banking and Markets businesses. Overall, HSBC is well positioned for further growth.

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