HSBC Bank Canada third quarter 2004 results

26 October 2004

Highlights

• Net income was C$265 million for the nine months ended 30 September 2004, an increase of 16.7 per cent over the same period in 2003.
• Net income was C$84 million for the quarter ended 30 September 2004, an increase of 3.7 per cent over the third quarter of 2003.
• Return on average common equity was 19.0 per cent for the nine months ended 30 September 2004 and 16.4 per cent for the quarter ended 30 September 2004 compared with 19.3 per cent and 19.7 per cent, respectively, for the same periods in 2003.
• The cost:income ratio was 56.1 per cent for the nine months ended 30 September 2004 and 58.1 per cent for the quarter ended 30 September 2004.
• Total assets of C$42.3 billion at 30 September 2004 compared with C$37.0 billion at 30 September 2003.
• Total assets under administration were C$21.4 billion at 30 September 2004, of which C$16.2 billion were funds under management and C$5.2 billion were custody and administration accounts.

Financial Commentary

HSBC Bank Canada recorded net income of C$265 million for the nine months ended 30 September 2004, an increase of C$38 million, or 16.7 per cent, from C$227 million for the same period in 2003. Net income for the quarter ended 30 September 2004 was C$84 million, an increase of C$3 million, or 3.7 per cent, from C$81 million for the quarter ended 30 September 2003. Excluding a large securitisation gain in the third quarter of 2003, the increase would have been C$10 million, or 12.3 per cent. Net income year-to-date benefited from higher net interest income, lower provision for credit losses, increased fee income from client retail brokerage activities and a one-time change in accounting for mortgage loan prepayment fees. For the third quarter of 2004, net income benefited from higher net interest income and lower provision for loan losses, offset by higher salaries and benefits costs.

Commenting on the results, Lindsay Gordon, President and Chief Executive Officer, said: “Results for the quarter were satisfactory. The business continues to grow across all our customer groups, reflecting the balance in our operations. Net interest income is increasing with the growth in the business, however spreads are still low due to the low interest rate environment and competition. Fee income is benefiting from ongoing investment in the business and additional ways to add more value to the customer proposition. Credit losses remain stable given the favourable conditions in the overall market. As a result of the growth in our business, non-interest expenses have increased accordingly during the quarter.

“Our integration of Intesa Bank Canada is on track and we expect to complete outstanding tasks, with minimal impact to our customers, during the fourth quarter of 2004.”

Net interest income

Net interest income for the nine months ended 30 September 2004 was C$667 million, including C$8 million from the former Intesa Bank Canada (Intesa), compared with C$652 million for the same period in 2003. For the quarter ended 30 September 2004, net interest income was C$230 million, with C$6 million from Intesa, compared with C$213 million for the same quarter in 2003. Net interest income in 2004 benefited from strong growth in assets across all customer groups. Despite some tightening of interest rates in Canada and the US during the third quarter of 2004, commercial loans continued to increase driven by the prospects of improving economic factors. The stronger economy and historically low borrowing costs in 2004 also continued to drive the increases in consumer loans and residential mortgages.

Net interest margins were negatively impacted by lower average interest rates in 2004 compared with 2003. The net interest margin, as a percentage of average interest earning assets, was 2.53 per cent for the nine months ended 30 September 2004 compared with 2.71 per cent for the same period in 2003. For the quarter ended 30 September 2004 the net interest margin was 2.51 per cent compared with 2.58 per cent for the same period in 2003. Competitive product pricing, particularly in personal financial services, continues to negatively impact net interest margins in the industry in Canada.

Other income

Other income was C$383 million for the nine months ended 30 September 2004 compared with C$328 million for the same period in 2003. For the quarter ended 30 September 2004, other income was C$126 million compared with C$121 million for the same quarter in 2003.

Credit fees, year-to-date, in 2004 were higher than in 2003 due to an increase in commercial lending activities as economic conditions improved. Capital market fees in 2004 were significantly higher than the comparative periods in 2003 due to higher retail brokerage commissions, which were driven by an overall increase in the average number of client retail equity trading transactions. However, fees from client transactions in the third quarter of 2004 were impacted due to uncertainty in the equity markets over this period resulting from geopolitical events and increasing oil prices. Investment administration fees continue to benefit from investment into the higher value wealth management products. Foreign exchange revenue in 2004 has benefited from continued volatility in foreign exchange rates, primarily between the Canadian and US dollars, which has increased customer activity. Securitisation income was lower in the third quarter of 2004 compared with last year as the prior year quarter included a C$11 million gain on sale of personal loans. Higher fees and income from merchant banking activities benefited other income in 2004 compared with the same periods in 2003.

Non-interest expenses

Non-interest expenses were C$589 million, including C$8 million from Intesa, for the nine months ended 30 September 2004 compared with C$543 million for the same period in 2003. For the quarter ended 30 September 2004 non-interest expenses were C$207 million, with C$6 million from Intesa, compared with C$183 million for the same quarter in 2003.

Salaries and benefits in 2004 were higher than comparative periods in 2003, and included C$4 million from Intesa year-to-date. Variable compensation costs increased due to higher capital market fees and other revenue-related compensation. In addition, 2004 was impacted by higher stock-based compensation, pension and employee benefits costs, including a year-to-date adjustment to pension costs in the third quarter. Business activity increased in 2004 resulting in higher other non-interest expenses, and administrative and technical services fees when compared with the same periods in 2003. These increased costs were partially offset by lower operating losses incurred in 2004.

Credit quality and provision for credit losses

The provision for credit losses was C$44 million for the nine months ended 30 September 2004 compared with C$53 million in the same period of 2003. For the quarter ended 30 September 2004 the provision for credit losses was C$10 million compared with C$14 million in the same period last year. The decrease in the year-to-date provision reflects the continuing improvement in the performance of the credit portfolio. There have been lower non-performing loans due to declining corporate default rates and improving economic conditions in Canada and the United States.

Gross impaired loans decreased C$31 million to C$190 million at 30 September 2004 compared with C$221 million at 30 September 2003. Total impaired loans, net of specific allowances, were C$108 million at 30 September 2004 compared with C$145 million at 30 September 2003. The general allowance for credit losses was C$273 million compared with C$254 million at 30 September 2003. The total allowance for credit losses, as a percentage of loans outstanding, was 1.25 per cent at 30 September 2004 compared with 1.31 per cent at 30 September 2003.

Balance sheet

Total assets at 30 September 2004 were C$42.3 billion, an increase of C$4.8 billion from C$37.5 billion at 31 December 2003 and an increase of C$5.3 billion from C$37.0 billion at 30 September 2003. The acquisition of Intesa in the second quarter of 2004 added approximately C$1.2 billion in assets. The underlying growth in assets during 2004 was strong due to improved economic factors, continued strong activity in the housing market and low interest rates. Commercial loans increased, excluding Intesa, by C$1.3 billion year-to-date and by C$0.2 billion for the quarter ended 30 September 2004. Total residential mortgages and consumer loans, excluding Intesa, grew by C$1.2 billion year-to-date and by C$0.6 billion for the quarter ended 30 September 2004.

Total deposits at 30 September 2004 were C$33.0 billion, an increase of C$3.7 billion from C$29.3 billion at 31 December 2003 and an increase of C$3.9 billion from C$29.1 billion at 30 September 2003. Commercial deposits increased, excluding Intesa, by C$2.7 billion year-to-date and by C$1.2 billion for the quarter ended 30 September 2004. Personal deposits, excluding Intesa, grew by C$0.4 billion year-to-date. For the quarter ended 30 September 2004, personal deposits decreased by C$0.1 billion due in part to the strengthening of the Canadian dollar against the US dollar and seasonality of deposit growth in the first half of the year. At constant exchange rates, personal deposits in the third quarter of 2004 would have increased by C$0.1 billion.

Total assets under administration

Funds under management were C$16.2 billion at 30 September 2004 compared with C$13.5 billion at the same time last year and C$15.8 billion at 30 June 2004. Year over year growth benefited from continued investments in our wealth management businesses and a general improvement in the equity markets. However, this was offset somewhat by the strengthening of the Canadian dollar relative to the US dollar over the same period.

During the quarter ended 30 September 2004, personal funds under management grew as a result of increased client acquisition. This was despite the strengthening of the Canadian dollar by 5.4 per cent relative to the US dollar over the third quarter of 2004. Institutional funds under management increased during the quarter as a result of new business acquisition. Including custody and administration balances, total assets under administration were C$21.4 billion compared with C$20.5 billion at 30 June 2004 and C$17.5 billion at 30 September 2003.

Capital ratios

The bank’s tier 1 capital ratio was 8.7 per cent and the total capital ratio was 11.2 per cent at 30 September 2004. This compares with 8.3 per cent and 11.0 per cent, respectively, at 30 September 2003. The capital ratios improved due to a C$175 million issuance of common shares, partially to fund the acquisition of Intesa in June 2004. This was offset by payment of C$100 million in dividends on common shares in 2004.

Preferred share dividends

A regular dividend of 39.0625 cents per share, totalling C$2 million, has been declared on the Class 1 Preferred Shares – Series A. The dividend will be payable in cash on 30 December 2004, for shareholders of record on 15 December 2004.

About HSBC Bank Canada

HSBC Bank Canada (HSB.PR.A - TSX), a subsidiary of HSBC Holdings plc, has more than 170 offices. With about 10,000 offices in 76 countries and territories and assets of US$1,154 billion at 30 June 2004, the HSBC Group is one of the world’s largest banking and financial services organisations.