HSBC Holding plc Interim Management Statement
HSBC’s profit for the third quarter of 2008 was ahead of the third quarter in 2007. For the nine months ended 30 September 2008, pre-tax profit was lower than in the equivalent period in 2007.
The unprecedented turbulence seen in financial markets continues to present enormous challenges for the financial sector as a whole, as an increasing range of asset classes experience illiquidity and extreme price volatility. The succession of government and central bank interventions designed to stabilise the financial system was unprecedented. In emerging markets, equities demonstrated significant weakness. This was exacerbated, in some countries, by sudden and severe currency depreciation as portfolio investments were repatriated and cross-border interbank funding was withdrawn. The underlying change in sentiment reflected growing concerns over the effect of recession in mature economies on the growth prospects in many emerging markets.
In this environment, HSBC was a major recipient of deposit inflows as participants in financial markets sought to reduce the risks associated with their investment portfolios and retail customers moved to larger and stronger institutions. HSBC is responding to the increasing economic uncertainty by considering carefully how it deploys its balance sheet and capital strength and through focusing on ensuring that lending margins appropriately reflect increasing risk.
Group Chairman Stephen Green said, "At the time of our interim results I described our performance as resilient, enabling us to balance the need to conserve capital with meeting our commitment to continue to invest for the future. Although we have not been immune from the effects of the severe de-leveraging of the financial system, we have been able to reinforce and grow some of our most important franchises as other banks have weakened, and this will make us stronger when market stability returns. In particular the inflow of Premier customers, private banking relationships, the expansion of services to leading corporates and institutions and the strengthening of Commercial Banking customer relationships will stand us in good stead for the future.
"Our relatively strong position has also allowed us to invest cautiously in line with our strategy, while managing our business and capital tightly in these times of extreme financial turbulence.
“In the context of the external environment, performance has been satisfactory.”
Key highlights included:
Q3 2008 pre-tax profit ahead of Q3 2007. Asia remained at the heart of core operating profitability of the Group in the quarter and retail businesses in Europe remained robust. Core operating profitability was also significantly augmented by a number of individually significant items which are discussed below.
Pre-tax profit for the nine months ended 30 September 2008 was lower than the equivalent period in 2007 on both a reported and an underlying basis, but by less in percentage terms than the position at the half year.
We continued to generate capital during Q3 2008 from operating activities as well as from the sale of the French regional banks, with the result that at 30 September 2008, the tier 1 capital ratio1 stood at 8.9 per cent, towards the top of our current target range.
Underlying pre-tax profit in Asia, Latin America and Europe for the nine months ended 30 September 2008 was ahead of the comparable period in 2007 and was strongly capital generative.
The emerging markets businesses within Global Banking and Markets continued to perform strongly.
Our US business declined markedly as a result of rising loan impairment charges in Personal Financial Services and from further write-downs within Global Banking and Markets.
We declared a third interim dividend for 2008 of US$0.18 per ordinary share on 3 November. The dividend is payable in cash, with a scrip dividend alternative, on 14 January 2009 to shareholders on the Register at the close of business on 21 November 2008.
Summary financial metrics were as follows:
Net interest income in Q3 2008 grew in line with the first half of the year.
Net fee income for Q3 2008 declined moderately from the first half of the year and was lower than that achieved in Q3 2007, due largely to weaker equity market-related income in Personal Financial Services and lower fees on credit cards in the US due to changes in practice.
Costs in Q3 2008 were broadly in line with the first half of the year and marginally higher on an underlying basis.
Loan impairment charges rose in Q3 2008 compared with both Q3 2007 and the run rate in the first half of 2008. Over two-thirds of the additional loan impairment charges in Q3 2008 arose in Personal Financial Services, driven mainly by continuing weakness in the US housing market and rising unemployment and underemployment. In Commercial Banking, loan impairment charges increased from what had been historically low levels and, in Global Banking and Markets, the rise in loan impairments largely reflected our exposure to a single European property company.
The securities portfolio held available-for-sale was marked lower, predominantly through reserves as credit spreads widened. This is described more fully below.
Total balance sheet footings were in line with 30 June 2008. The ratio of customer advances to customer deposits fell modestly, reflecting faster growth in customer deposits.
Commenting on the results, Michael Geoghegan, Group Chief Executive, said: "These are extraordinary times in our industry and in navigating through them we are benefiting from the collective experience of the management team gained over the last three decades during successive economic cycles including, inter alia, the Asian crisis in 1997/98 and the Latin American turmoil in the early part of this century.
"Our US results in HSBC Finance were broadly in line with our expectations but current trends point to further deterioration in the near to medium term. Recovery depends on the success of further economic stimulation which is likely to take some time to take effect but we were early in positioning ourselves for this downturn.
“Our results reinforce the importance of maintaining focus on HSBC’s core strengths of sound liquidity, capital strength, cost discipline and relationship banking built on harnessing the global capabilities of the Group. These are times which underscore more strongly than ever the importance of delivering value to our customers as the industry adapts to slower growth and a changing regulatory environment.”
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