HSBC Holdings plc 2004 final results

28 February 2005

• Operating income up 23 per cent to US$50,587 million (US$41,072 million in 2003).

For the year (excluding goodwill amortisation):

• Operating profit before provisions up 24 per cent to US$24,712 million (US$19,990 million in 2003).
• Group pre-tax profit up 35 per cent to US$19,426 million (US$14,401 million in 2003).
• Attributable profit up 32 per cent to US$13,658 million (US$10,359 million in 2003).
• Return on average invested capital of 15.2 per cent (13.7 per cent in 2003).
• Earnings per share up 26 per cent to US$1.25 (US$0.99 in 2003).

For the year (as reported):

• Operating profit before provisions up 24 per cent to US$22,898 million (US$18,540 million in 2003).
• Group pre-tax profit up 37 per cent to US$17,608 million (US$12,816 million in 2003).
• Attributable profit up 35 per cent to US$11,840 million (US$8,774 million in 2003).
• Return on average shareholders’ funds of 14.4 per cent (13.0 per cent in 2003).
• Basic earnings per share up 30 per cent to US$1.09 (US$0.84 in 2003).

Dividend and capital position:

• Fourth interim dividend (in lieu of final dividend) of US$0.27 per share; total dividend for 2004 of US$0.66 per share, an increase of 10 per cent over 2003.
• Tier 1 capital ratio of 8.9 per cent and total capital ratio of 12.0 per cent, unchanged from 2003.

HSBC HOLDINGS REPORTS PRE-TAX PROFIT OF US$17,608 MILLION

HSBC made a profit on ordinary activities before tax of US$17,608 million in 2004, an increase of US$4,792 million, or 37 per cent, compared with 2003.

The Directors have declared a fourth interim dividend for 2004 of US$0.27 per ordinary share (in lieu of a final dividend) which, together with the first, second and third interim dividends, each of US$0.13 per ordinary share already paid, will make a total distribution for the year of US$0.66 per share (US$0.60 per share in 2003), an increase of 10 per cent. The fourth interim dividend will be payable on 4 May 2005.

Net interest income of US$31,024 million in 2004 was US$5,426 million, or 21 per cent, higher than 2003.

Other operating income of US$19,563 million was US$4,089 million, or 26 per cent, higher than 2003.

Operating expenses (excluding goodwill amortisation) of US$25,875 million rose US$4,793 million, or 23 per cent. HSBC’s cost:income ratio, excluding goodwill amortisation, improved to 51.1 per cent compared with 51.3 per cent in 2003.

The charge for bad and doubtful debts was US$6,357 million in 2004, US$264 million higher than in 2003.

Gains on disposal of investments and tangible fixed assets of US$802 million were US$388 million higher than 2003.

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 2004.

The Group’s total assets at 31 December 2004 were US$1,277 billion, an increase of US$243 billion, or 23 per cent, since 31 December 2003. At constant exchange rates, total assets grew by US$205 billion or 19 per cent.

*Comprises HSBC Finance Corporation’s consumer finance business and the US residential mortgages and credit card portfolios acquired by HSBC Bank USA, N.A. (‘HSBC Bank USA’) from HSBC Finance Corporation and its correspondents since December 2003.

Comment by Sir John Bond, Group Chairman

2004 was another good year for HSBC. The solid performance of the first six months continued and we were able to build on the record results of 2003.

We grew profit attributable to shareholders by 35 per cent to US$11.8 billion. Excluding the amortisation of goodwill, which is the basis we use internally to measure our performance, profit attributable was US$13.7 billion. This represents US$1.25 per share, an increase of 26 per cent over 2003. Our earnings growth was well diversified across all our main geographical regions and our customer groups, all of which achieved record results. Overall, our performance was driven by broadly based revenue growth of 23 per cent and by particularly favourable credit conditions.

In the light of this performance, and the Group’s continuing capital strength, the Board has declared a fourth interim dividend of US$0.27 per share bringing the total dividend for the year to US$0.66 per share, an increase of 10 per cent over 2003. The dividend is payable on 4 May 2005 with a scrip dividend alternative available for shareholders who prefer this option.

Throughout 2004 the economic environment remained broadly favourable. A gradual economic recovery in the US contributed to improved employment levels. Interest rates and inflation remained low, encouraging consumer confidence and spending. The remarkable economic progress of the People’s Republic of China continued and its demand for raw materials and capital goods benefited both regional and international trading partners. In Hong Kong, a period of six consecutive years of deflation ended. The Hong Kong economy rebounded on strong trade flows, buoyed further by the impact of significantly expanded tourism from mainland China and by rising property prices. The UK continued to enjoy high levels of employment and, while property prices softened, the market remained resilient. Indeed, buoyant domestic housing markets were a significant factor in most economies where they contributed to continued economic activity by bolstering consumer confidence and releasing equity to fund spending growth.

During the last two years we have also completed the integration of a major consumer finance business in the US and a large commercial bank in Mexico, two of the most important and successful acquisitions in our recent history. In addition we have strengthened the foundations for our future development in mainland China.

2004 was also a year of substantial investment in our established businesses. In addition to building out our investment banking capabilities we focused on developing our credit card and consumer finance platforms internationally, reflecting the opportunities we see to harness both HSBC’s underwriting and collection skills and to achieve further economies of scale.

Investing for the future
We remain keenly aware of the need to balance short-term results with the investment necessary to secure the long-term future of our business. We are allocating resources continuously to strengthening our brand, developing our presence in areas where we have comparative advantage and entering new markets with significant potential. For example:-

• In 2004 we generated US$1.1 billion in pre-tax profits (before goodwill amortisation) from Mexico, Turkey, Bermuda and Malta, in all of which our presence five years ago was small or non-existent.
• We grew pre-tax profits (before goodwill amortisation) from our overall personal financial services business in Brazil to US$51 million, reflecting the successful integration of the Losango acquisition supported by skills transfer from HSBC Finance Corporation. Additionally, some 36 per cent of Losango’s commercial customer base has now become corporate customers of the Group, an increase of over 5,000 relationships.
• In Personal Financial Services we grew fee and commission revenues by 26 per cent to reach US$4.6 billion representing a compound rate of growth over the last four years of 12 per cent as we have worked to diversify our reliance on deposit and lending margins.
• Through acquisition and by using marketing, technology and collection capabilities, which have been greatly enhanced since the acquisition of HSBC Finance Corporation (formerly Household International) in 2003, we grew credit cards in issue outside the US by 48 per cent to reach 29 million cards now in force.
• With an expanded product range, supported by greater cooperation across the HSBC Group, we drove revenues from commercial banking customers to US$8.4 billion, the highest level we have ever achieved.
• Our Global Markets business maintained strong business momentum despite difficult market conditions and generated record pre-tax profits in foreign exchange and derivatives reflecting the investment made in these areas in the previous year. In 2004 we have continued to invest in Global Markets, a business that has achieved double digit growth in pre-tax profits over the last five years as we have expanded our business from regional to global strength.
• We delivered strong results from providing transaction banking services to corporate and institutional clients as we reinforced our leadership positions in payments and cash management, trade services, and security services.
• With its reorganisation substantially complete, Private Banking delivered 23 per cent growth in pre-tax profits, before goodwill amortisation, to US$693 million as instability in certain parts of the world underlined the relevance of the HSBC brand to this client base. This compares with a contribution of some US$200 million five years ago.

During 2004 we made important investments for our future, both organically and through acquisition.

• We invested approximately US$1.7 billion to take a 19.9 per cent stake in Bank of Communications Limited (BoCom), the fifth largest bank in mainland China with over 2,700 branches. We also signed a technical support agreement with BoCom to provide advice in the areas of governance and back office functions and agreed in principle to form a joint venture subsidiary to distribute credit cards when laws and regulations permit.
• Also in China, we invested a further US$168 million to maintain our 10 per cent interest in Ping An Insurance, China’s second largest insurance company as it came to the public markets through an IPO in both Hong Kong and Shanghai. We have expanded our relationship with Ping An to include a joint venture bank, Ping An Bank. Ping An Bank’s long-term objective is to develop consumer banking businesses, including credit card and real estate mortgage lending activities when laws and regulations permit.
• Hang Seng Bank invested US$208 million to acquire a 15.98 per cent stake in Fuzhou-based Industrial Bank Company Limited. The two parties entered into a cooperation agreement stipulating that Industrial Bank and Hang Seng Bank will form joint ventures in financial services activities, including credit cards and other unsecured personal loan businesses, as and when regulations permit.
• In the UK, we acquired access to two prestigious customer bases through the acquisition of M&S Money and our partnership agreement with the John Lewis Group for the management of their store card businesses. We were able to take these opportunities by combining the strength of our banking relationships with two long standing customers in the retail sector with HSBC Finance Corporation’s partnership skills in store card business.
• In Brazil, we acquired further consumer finance operations, adding some 1.1 million customers to the 7 million acquired in 2003 when we bought Losango, the market leader.
• In Corporate, Investment Banking and Markets we made a major investment in people adding almost 2,000 new staff. At the same time, some 1,500 departed. The areas benefiting principally from the increased resource and capabilities were investment banking advisory, equities sales and trading, research, asset backed financing and structured solutions.
• In the Rest of Asia-Pacific, we invested heavily in sales and marketing to grow our personal financial services businesses. Marketing expenditure grew by 42 per cent from US$88 million to US$125 million. The number of telesales employees working in the region grew by 330 per cent to 1,680 staff. Our branch-based sales force doubled to 1,950. The number of external sales employees grew by 48 per cent to 6,800.
• In Hong Kong, the bank increased expenditure on marketing from US$84 million in 2003 to US$97 million in 2004, a rise of 15 per cent. The bank continued to invest in its branch network with refurbishments reaching US$9 million last year, up 11 per cent on the previous year. The bank continued to recruit sales staff, increasing the number of Financial Planning Managers by 17 per cent to some 630 staff. In the US, we continued to win new retail services relationships, combining HSBC’s traditional corporate capabilities with HSBC Finance Corporation’s partnering skills. Important new accounts included American Suzuki Corporation, Helzberg Diamonds, Liz Claiborne, and Komatsu.
• In the Middle East, we continued to build HSBC Amanah organically to become the leading international provider of Shariah compliant financial services.
• In India, we invested US$68 million to take a 14.62 per cent stake in UTI Bank, which has the second largest retail banking network amongst private sector banks.

We also took the opportunity to release resources and capital through the disposal of operations which did not meet our own investment criteria and which were of greater value to the acquirers. These included our direct auto insurance business in Canada, our securities operations in Poland and Thailand, and part of our personal trust business in the US.

Credit Quality
The generally buoyant economic conditions remained favourable for credit quality throughout 2004. As a result, our delinquency experience in both personal and corporate lending in aggregate was better than in 2003. In the case of corporate lending, provisioning requirements were unusually low. The level of new provisions declined and we were able to make significant recoveries on previously impaired debt which was restructured or repaid in the improved economic environment.

Corporate, Investment Banking and Markets
We are now some 21 months into the restructuring and expansion of our capabilities in investment banking advisory services, in equity sales and trading, research, in asset backed financing and structured solutions. The investment in senior management to support these initiatives is largely complete. The development of the infrastructure required to support them is also well advanced.

Our corporate and institutional customer base continues to welcome the broader range of services we can now offer. This became evident through 2004 as we increased our market share of global bond issuance and enhanced our equity, advisory and financing capabilities.

We also saw growing interest in our asset backed securities services and our increased capacity to offer structured solutions for interest rate and foreign exchange management.

In industry surveys we continued to move upwards, notably in league tables covering corporate bond issuance. We were also pleased to receive advisory mandates to work with some world class companies including Ford, LNM Holdings, Neptune Orient and Saudi Aramco.

There is still much to do but our strategy to develop this part of our business is on course and we remain confident of its potential. We have a first rate corporate and institutional client base and there is an opportunity to expand the range of services we offer them in a way which will also create additional value for our shareholders.

Our Brand
Recognition of the HSBC brand continues to grow. During the course of 2004, Household International adopted the HSBC name for much of its business. In France, CCF plans to follow suit with much of its operations later this year. According to Interbrand, a leading brand consultancy, the HSBC brand now ranks as the 33rd ‘Best Global Brand’ by value and first amongst British-based companies. We were delighted to receive a number of awards during the year including being named ‘Global Bank of the Year’ by The Banker magazine for the third year in a row and the world’s ‘Best Bank’ of the year by Euromoney magazine. It is particularly gratifying to note that a number of the citations highlight HSBC’s overall conduct and commitment to good governance. It is our objective to make the HSBC brand synonymous with the highest standards of behaviour, fair value for customers, and corporate responsibility everywhere we operate.

Outlook
As we look forward, the external imbalances which have been a feature of the global economy in recent years remain a potential vulnerability for the financial markets. However, some of the concerns which made for an uncertain economic outlook in 2004 have been allayed to a degree. Despite the six interest rate increases in the US since the beginning of last year, the outstanding level of consumer debt has proved manageable, largely because employment levels have remained high and long-term interest rates have fallen. The US economy has also improved its competitiveness through a weaker dollar without fuelling inflation or significantly disturbing the foreign capital inflows necessary to fund continuing current account deficits.

Although investment in China has slowed the country’s rate of real economic growth has remained strong. The world economy has withstood a significant period of high oil prices and volatility in future price expectations. Indeed it has also shown an impressive resilience. The financial architecture, through which risks and potential shocks are managed and distributed to diversify their impacts, has proved robust.

As the western world recognises the economic consequences of increasing longevity, it has become clear that there is a growing need for higher savings rates and for greater individual responsibility in funding personal retirement provisions. If the current savings rates in some of the world’s most developed economies remain too low, the risk increases of a sharp adjustment to consumption patterns when significant numbers of people suddenly recognise the need to make provision for their retirement. Currently, the world’s excess liquidity, caused in part by the recycling of Asian trade surpluses at low rates, is masking this possibility. Nevertheless, a sudden correction to the savings imbalance is, we believe, a major risk in the world economic outlook.

We continue to position HSBC to withstand sudden economic volatility and to respond to opportunities for profitable growth. We are investing increasingly in countries with comparative economic advantages including those where population growth is generating economic momentum, where social costs are manageable and where savings rates will sustain self-financed expansion. In particular, we see China’s economy as the most significant driver of economic growth over the next decade. China’s importance to the oil producing and natural resource economies will increase. Our investments in China during 2004 reflect our confidence in the country’s future. We also recognise the growth prospects of markets such as Brazil, India, Mexico, South Korea, Turkey and the Middle East, and for the same reasons we continue to invest in them. The considerable financial strength of our businesses in the UK, the US and Hong Kong allows us to afford such investment while maintaining a progressive dividend policy.

Our principal focus for 2005 is to achieve further revenue growth together with improved productivity. The opportunities available to HSBC to grow profitably have never been broader, either by geography or by customer group. The task before us now is to ensure that we respond in full, and with the talents and dedication of my 253,000 colleagues around the world I am confident that we shall. I believe that we are uniquely well placed to meet the requirements both of our shareholders and those of the wider communities we serve.