HSBC Mexico third quarter 2007 financial results

On 8 August 2006, HSBC Panama was sold by Grupo Financiero HSBC, S.A. de C.V. to HSBC Asia Holdings BV. All comparative commentary within this report is therefore on a like-for-like basis excluding HSBC Panama, with the income statement as presented in Appendix A. The financial statements on pages 6-14 include HSBC Panama up to the date of disposal.

*
Net income down 10.8 per cent to MXN3,862 million for the nine months ended 30 September 2007 (MXN4,331 million for the nine months ended 30 September 2006).
*
Total revenues (excluding monetary position and before loan impairment charges) up 15.9 per cent to MXN24,976 million for the nine months ended 30 September 2007 (MXN21,553 million for the nine months ended 30 September 2006).
*
Net loans and advances to customers up MXN33.0 billion, or 21.9 per cent, to MXN183.6 billion at 30 September 2007 (MXN150.5 billion at 30 September 2006).
*
Total assets up MXN38.6 billion, or 13.1 per cent, to MXN334.2 billion at 30 September 2007 (MXN295.6 billion at 30 September 2006).
*
Cost efficiency ratio (excluding monetary position) improved to 60.1 per cent for the nine months ended 30 September 2007 (61.5 per cent for the nine months ended 30 September 2006).
*
Return on equity of 14.8 per cent for the nine months ended 30 September 2007 (20.1 per cent for the nine months ended 30 September 2006).

HSBC Mexico S.A. (the bank) is Grupo Financiero HSBC, S.A. de C.V.’s (HSBC) primary subsidiary company, and is subject to supervision by the Mexican Banking and Securities Commission. The bank is required to file periodic financial information on a quarterly basis (in this case for the quarter ended 30 September 2007) and this information is publicly available. Given that this information is available in the public domain, Grupo Financiero HSBC, S.A. de C.V. has elected to file this release.

Results are prepared in accordance with Mexican GAAP (generally accepted accounting principles), with figures denominated in Mexican pesos (MXN). Comparative figures are presented on an actual basis, indexed to constant MXN as at 30 September 2007.

Grupo Financiero HSBC, S.A. de C.V. is a 99.99 per cent directly owned subsidiary of HSBC Holdings plc (HSBC Group).

Commentary by Paul Thurston, CEO of Grupo Financiero HSBC:

"Grupo Financiero HSBC, Mexico’s fourth largest bank in terms of total assets, continues to demonstrate strong business growth, with revenues for the nine months to 30 September 2007 up by 15.9 per cent on the same period of the previous year, despite lower earnings from trading and balance sheet management.

"Year-on-year, credit card outstandings increased by 101.9 per cent to MXN24.3 billion and personal and payroll loans by 89.7 per cent to MXN8.2 billion. The commercial loan portfolio rose 28.9 per cent to MXN68.9 billion. Our packaged products have continued to be very successful, and in the nine months ended 30 September 2007 we sold 230,000 Tu Cuenta packages. Customer deposits increased by 14.5 per cent compared with the same period of 2006.

"In September 2007 we were pleased to join up with other members of the HSBC Group in the re-launch of our HSBC Premier service, the world’s first truly global personal banking service. HSBC Premier provides seamless cross-border banking for our customers in Mexico and around the world.

"In line with the HSBC Group’s organic growth strategy, we continue to expand our presence and market share in Mexico’s growing financial services market and now have some 24,000 employees. We have invested in enhancing our information technology, and modernising our processes to handle greater business volumes and to provide improved services to our clients. The 13.4 per cent growth in costs for the period ended 30 September 2007 was, however, exceeded by revenue growth, enabling us to record a cost efficiency improvement.

“Net income of MXN3,862 million in the nine months ended 30 September 2007, fell by MXN469 million compared with the same period of 2006 as the improvement in net operating income was offset by lower trading results due to weaker markets. Net income was also impacted by higher loan impairment charges, themselves a consequence of the continued investment in organically building our credit portfolio.”

Overview

For the nine months ended 30 September 2007, Grupo Financiero HSBC’s net income of MXN3,862 million was MXN469 million, or 10.8 per cent, lower than the same period in 2006.

Despite a relatively flat yield curve, net interest income (excluding monetary position) was up MXN2,976 million to MXN16,240 million for the nine months ended 30 September 2007, a 22.4 per cent increase compared with the same period in 2006. The growth has been driven by significant increases in higher-yielding consumer lending, partially offset by lower balance sheet management income due primarily to a reduction in the available-for-sale portfolio.

Income from fees and commissions was MXN7,799 million for the nine months ended 30 September 2007, an increase of 16.6 per cent compared with the same period in 2006. Increased income received from credit cards, membership programmes, ATM, card acquiring, payments and cash management services, investment funds, trusts and trade services fees contributed to the strong performance.

Trading income of MXN937 million for the nine months ended 30 September 2007 was 41.5 per cent lower than the same period of the previous year due to more favourable market conditions in 2006. Income during the third quarter of 2007 continued to be driven by solid results in retail foreign exchange, while derivatives and debt trading had reduced revenue opportunities due to the relatively flat yield curve.

Administrative expenses of MXN15,022 million for the nine months ended 30 September 2007 were 13.4 per cent higher than in the same period in 2006. Personnel expenses increased as a result of the 700 new employees hired since September 2006 to support business expansion. Marketing expenses increased principally due to the Global Premier re-launch and continued promotion of the Tu Cuenta 5 per cent cash back campaign. With revenue growth above the rate of cost growth, the cost efficiency ratio (excluding monetary position) improved from 61.5 per cent in the nine months ended 30 September 2006 to 60.1 per cent for the same period in 2007.

During the nine months ended 30 September 2007, loan impairment charges increased by MXN3,959 million to MXN6,442 million compared with the same period in 2006, consistent with HSBC’s strategy to grow its loan portfolio organically. Delinquency rates rose during the period, as the loan book grew, reflecting the acquisition costs of organic growth. Loan underwriting criteria and collections strategies are regularly reviewed to maintain the quality of the portfolio. In accordance with Mexican regulation in 2006, HSBC Mexico assigned MXN585 million of general reserves to fulfil loan portfolio requirements in the first nine months of 2006. Loan impairment charges also included MXN174 million relating to changes to recognise the risk associated with the loan portfolio when the quarter ends on a non-working day, as it did in September 2007. HSBC’s allowance for loan losses as a percentage of impaired loans was 144.8 per cent at 30 September 2007.

The bank’s capital adequacy ratio for the period was 12.40 per cent.

Business highlights

The bank’s Personal Financial Services (PFS) had strong business growth in credit cards, personal and payroll loans during the nine months ended 30 September 2007 by leveraging its customer relationship management capabilities and driving sales through direct channels. As delinquency rates have increased amongst consumer lending, collections activities have been reinforced and loan underwriting criteria tightened. During the quarter some 31,000 new Tu Cuenta packaged products were opened and over 200,000 new credit cards issued. During September the HSBC Group re-launched its Premier service globally, upgrading its wealth management proposition and benefiting existing Premier customers in Mexico.

In Mexico, Commercial Banking (CMB) is capitalising on HSBC’s strategy to be the leading international business bank. By leveraging the Group’s geographical presence and product capabilities, market share in trade services has grown by over five percentage points versus prior year to 16.3 per cent, the factoring portfolio has nearly tripled to MXN7.6 billion for the same period and CMB has joined up the Mexican and Latin American businesses across the region through the International Banking Centre in Mexico. HSBC also aims to be the best bank for small businesses and, in the first nine months of 2007, small business loans increased by 38.0 per cent compared to the same period in 2006, to MXN6.3 billion. Strong asset growth in commercial banking was driven additionally by higher real estate balances in Mexico’s fast growing real estate market, related to the continued expansion of this business after a re-segmentation strategy earlier in the year to serve customer needs better.

Corporate, Investment Banking and Markets (CIBM) is joining up its business across the Latin American region, and creating new links to other HSBC operations, by connecting and referring regional customers to other countries in the HSBC Group. It also offers services such as Global Markets products to CMB clients. There was strong performance in retail foreign exchange. Despite this, however, fixed income, interest rate and balance sheet trading revenues were weaker than prior year’s very strong results due to a relatively flat yield curve and uncertainty in the local Mexican market compared with the prior year. Several new infrastructure related transactions have been completed and mandated reflecting HSBC’s strong project finance capabilities and a large pipeline of debt capital markets transactions has been built, indicating HSBC’s local and global distribution capabilities, as well as a growing penetration of Mexico’s corporate market.