HSBC Bank Canada fourth quarter 2011 results
Results are based on the unaudited financial statements for the period, prepared in accordance with International Financial Reporting Standards ('IFRS'), which the bank adopted on 1 January 2011. All comparative figures, which were previously reported under Canadian generally accepted accounting principles, have been restated to conform with IFRS.
- (1888PressRelease) February 28, 2012 - We recorded a strong performance in faster-growing markets and had a record year in commercial banking. I am pleased with our progress but there is a lot more to do and we remain focused on delivering our targets."
For full details of the bank's adoption of IFRS, reference should be made to the bank's audited consolidated financial statements for 2011 which will be published in March 2012. Reference may also be made to the First Quarter 2011 Interim Report issued in May 2011.
The abbreviations 'C$m' and 'C$bn' represent millions and billions of Canadian dollars, respectively.
* Calculated using guidelines issued by the Office of the Superintendent of Financial Institutions ('OSFI') in accordance with Basel II capital adequacy framework. Risk-weighted assets and ratios at 31 December 2010 have not been restated for the impact of the adoption of IFRS on 1 January 2011.
Overview
HSBC Bank Canada recorded profit of C$135m for the fourth quarter of 2011, an increase of C$17m, or 14.4% compared with C$118m for the fourth quarter of 2010. Profit for the year ended 31 December 2011 was C$704m, an increase of C$86m, or 13.9% compared to the same period in 2010. Profit attributable to common shareholders was C$118m for the fourth quarter of 2011, and C$633m for the year ended 31 December 2011, increases of C$22m, or 22.9%, and C$102m, or 19.2%, respectively over the same periods in 2010. This increase in profits in 2011 was primarily due to lower loan impairment charges, partially offset by lower net interest income and a write down in the value of investment property.
Profit for the fourth quarter of 2011 was C$66m or 32.8% lower than the third quarter mainly due to the investment property provision, as well as lower gains on sale of financial investments and the impact in the third quarter of 2011 of changes in credit spreads on financial instruments designated at fair value.
Commenting on the results, Lindsay Gordon, President and Chief Executive Officer of HSBC Bank Canada, said:
"HSBC Bank Canada delivered solid results in 2011 largely due to strong business fundamentals in our core businesses, despite reduced customer borrowing demands, and improving asset quality leading to lower loan impairment charges. Canada is a great place for HSBC to do business and has been for the last 30 years and there are many opportunities for us to grow. We continue to invest in those areas of our business that leverage the global capabilities of the HSBC Group. In 2011, we invested in Commercial Banking to grow our business in central Canada and strengthened our cross-border capabilities. In our Global Banking and Markets and our Retail Banking and Wealth Management businesses we focused on deepening relationships with our
customers ensuring access to our global and emerging markets capabilities. These actions will enable us to continue to meet our customers' needs in the years ahead."
Analysis of consolidated financial results for the fourth quarter of 2011
Net interest income for the fourth quarter of 2011 was C$393m compared with C$400m for the fourth quarter of 2010, a decrease of C$7m, or 1.8% and marginally higher than the third quarter. Net interest income for the year was C$1,556m in 2011 compared with C$1,608m in 2010, a decrease of C$52m, or 3.2%. The decrease is due to declines in commercial borrowings and consumer finance receivables as clients continue to de-leverage. The impact of the lower loan volumes is partially offset by the effect of increases in the Bank of Canada interest rates in the second half of 2010 which positively impacted the yield on the bank's prime rate-based assets compared to the prior year.
Net fee income for the fourth quarter of 2011 was C$157m compared with C$182m for the fourth quarter of 2010, a decrease of C$25m, or 13.7% and C$162m for the third quarter of 2011. Net fee income for the year increased marginally to C$644m in 2011 compared with C$638m in 2010. The decrease in fee income in the fourth quarter was primarily due to lower brokerage commissions in our full service retail brokerage business, lower corporate finance fees arising from lower activity as well as a one-time receipt of credit insurance income in the fourth quarter of 2010, partially offset by higher fees from the Global Investor Immigration Program due to an increase in the number of applications processed by the government.
Net trading income for the fourth quarter of 2011 was C$31m compared with C$24m for the fourth quarter of 2010, an increase of C$7m, or 29.2%, but a decrease of C$15m or 32.6% compared to the third quarter. The increase over 2010 is primarily due to an increase in foreign exchange trading revenue arising from volatile currency markets particularly in the third quarter of 2011 partially offsetting losses arising from the impact of changes in market rates on certain hedge positions. Net trading income for the year was C$150m in 2011
compared with C$153m in 2010, a decrease of C$3m, or 2.0%. The main factor contributing to the decrease compared to the prior year was a C$21m recovery in the second quarter of 2010 of previously recorded losses upon the disposal of substantially all of the bank's non-bank Canadian asset-backed commercial paper ('ABCP') portfolio. This was partially offset by the foreign exchange trading revenue noted above.
Net gain/(loss) from financial instruments designated at fair value. The bank records certain debt securities and subordinated debentures at fair value. Although there were some changes in credit spreads in the fourth quarter of 2011, there were no net changes in the fair value of these balances, while a loss of C$4m was recorded in the same quarter in 2010 and a gain of C$22m in the third quarter of 2011. Financial instruments designated at fair value recorded gains for the year of C$16m compared with a loss of C$2m in 2010, mainly as a result of widening credit spreads in 2011.
Gains less losses from financial investments for the fourth quarter of 2011 were C$3m, compared with nil for the fourth quarter of 2010 and C$20m in the third quarter of 2011. The increase compared to the fourth quarter of 2010 is due to the sale of certain available-for-sale ('AFS') securities including government bonds and bank debt securities in 2011 particularly in the third quarter. Year-to-date, gains less losses from financial investments were C$43m in 2011, compared with C$8m in 2010, an increase of C$35m. The increase in the year-to-date period was a result of gains recognized in the first quarter of 2011 from the disposal of the bank's AFS preferred share portfolio, combined with higher gains from the sale of certain AFS government bonds and bank debt securities mainly in the second and third quarters of 2011.
Other operating income for the fourth quarter of 2011 was a loss of C$10m compared with income of C$51m for the fourth quarter of 2010, a decrease of C$61m, compared to income of C$33m for the third quarter of 2011. This was mainly as a result of a C$42 million write-down of investment property. Other operating income for the year was C$88m in 2011 compared with C$181m in 2010, a decrease of C$93m, or 51.4%. Following the Group's decision to emphasize cost containment and focus on certain core systems, there was a decrease of C$37m in income for the year received from affiliates in respect of software development services performed on their behalf. There was also a C$59m charge in 2011 resulting from a write-down in the value of investment property.
Loan impairment charges and other credit risk provisions of C$54m were recorded in the fourth quarter of 2011 compared with C$115m for the fourth quarter of 2010, a decrease of C$61m, or 53.0% and C$63m in the third quarter of 2011. Loan impairment charges and other credit risk provisions for the year were C$197m compared with C$359m in 2010, a decrease of C$162m, or 45.1%. The decrease in loan impairment charges in 2011 compared with 2010 was due to reduced levels of individually assessed impairment charges, and a lower collective impairment provision due to improved asset quality and lower loan volumes in the bank's commercial loan and consumer finance portfolios.
Total operating expenses for the fourth quarter of 2011 were C$335m compared with C$370m for the fourth quarter of 2010, a decrease of C$35m, or 9.5% and marginally lower than the third quarter of 2011. Total operating expenses for the year were C$1,348m in 2011 compared with C$1,357m in 2010, a decrease of C$9m, or 0.7%. Employee compensation and benefits decreased by C$13m in the quarter mainly as result of lower performance incentives. The increase of C$46m year-to-date arose partially due to an increase in the post-retirement benefits expense as a result of enhancements to certain of the bank's defined contribution pension plans, combined with higher full-time salaries and restructuring costs associated with certain efficiency-driven initiatives. General and administrative expenses decreased by C$33m compared to the fourth quarter of 2010 and C$73m for the year. The year-on-year decline is partially due to a recovery from an HSBC affiliate of fees paid with respect to prior years. The fourth quarter also included expenses of C$14 million relating to the sale of the full service retail brokerage business, which closed in early 2012. Amortization and impairment of intangible assets increased by C$13m in the quarter and increased C$21m year-to-date as a result of a write-off of certain internally-developed software costs in both the second and fourth quarters.
Income tax expense. The effective tax rate in the fourth quarter of 2011 was 27.0% compared with 30.2% in the fourth quarter of 2010 and little changed from the third quarter. For the year, the effective tax rate was 26.4%, compared with 29.4% in 2010. The year over year decrease was a result of the reduction in statutory tax rates and the recovery of fees from an HSBC Group affiliate during the second quarter of 2011 which were not taxable.
Statement of financial position
Total assets at 31 December 2011 were C$80.0bn, an increase of C$2.0bn from 31 December 2010, primarily due to a C$3.0bn increase in financial investments and a C$0.8bn increase in derivatives partially offset by a C$1.3bn decrease in loans and advances to banks, and a C$0.9bn decrease in loans and advances to customers. Liquidity remained strong with C$28.5bn of cash and balances at central banks, items in the course of collection from other banks, trading assets, short-term loans and advances to banks and financial investments at 31 December 2011, compared with C$26.1bn at 31 December 2010. Loans and advances to customers at 31 December 2011 were C$44.3bn compared to C$45.2bn at 31 December 2010. The decline in loans and advances to customers is primarily due to a decrease in the balance of reverse repurchase agreements with customers. Excluding repurchase agreements, loans and advances to customers increased marginally.
Improving asset quality resulted in a reduced impact from impaired loans and lower specific and collective provisions. Gross impaired loans were C$678m, a decrease of C$120m compared with C$798m at 31 December 2010. Total impaired loans net of specific allowances for credit losses were C$470m at 31 December 2011, compared with C$571m at 31 December 2010. Total impaired loans includes C$59m (31 December 2010: C$117m) of consumer finance loans, for which impairment is assessed collectively. The collective allowance applicable to consumer finance loans was C$89m compared with C$148m at 31 December 2010. The total collective allowance was C$329m compared with C$400m at 31 December 2010.
Following campaigns with our commercial customers, total customer accounts of C$46.6bn at 31 December 2011 increased C$1.1bn from 31 December 2010. Debt securities in issue decreased to C$13.3bn at 31 December 2011 from C$14.8bn at 31 December 2010 as a result of reduced borrowing requirements.
Business performance in the fourth quarter of 2011
Retail Banking and Wealth Management
Commentary in this news release related to Retail Banking and Wealth Management reflects the change in structure previously announced, whereby Retail Banking and Wealth Management is now managed as a single customer group, and all prior periods presented have been restated on that basis.
The Retail Banking and Wealth Management business continued to focus on being the leading international premium bank in Canada, offering its premium customers global connectivity through innovative products, providing them access to emerging market exposure and deepening relationships with them through propositions and pricing.
The loss before income tax expense was C$7m for the fourth quarter of 2011, C$16m lower than the fourth quarter of 2010. The current quarter's results included a C$9m write-off of internally-developed software costs and charges of C$14m related to sale of the full service retail brokerage business. Excluding the impact of these items, profit before income tax expense was C$16m for the quarter, C$7m higher than 2010. Profit before income tax expense for the year was C$74m in 2011, compared with C$63m in 2010. Results for 2011 were impacted by a C$16m write-off of internally-developed software costs and charges of C$14m related to sale of the full service retail brokerage business noted above, partially offset by a recovery from an HSBC Group affiliate of fees paid in prior years of C$28m, while 2010 included a gain of C$7m arising from the recovery of previously recorded losses on non-bank ABCP. Excluding the impact of these items, the year over year increase in profit is mainly due to higher net interest income resulting from product re-pricing initiatives, higher income from our Wealth Management business relating to funds under management due to stronger sales, higher loan fees, and lower loan impairment charges due to a release of collective impairment provisions resulting from improved asset quality.
Commercial Banking
The Commercial Banking business continued to focus on being the leading international bank for business by continuing to strengthen its cross-border capabilities, particularly through investment to grow its presence in central Canada as well as aiming to be the best bank for small business through our Business Direct strategy.
Profit before income tax expense was C$110m for the fourth quarter of 2011, C$13m higher than the fourth quarter of 2010 and C$26m lower than the third quarter of 2011. The current quarter's results included a C$42m write-down resulting from a write down in the value of investment property. Excluding the impact of the write down, profit before income tax expense was C$152m for the quarter, C$16m higher than the third quarter of 2011 and C$55m higher than 2010. Profit before income tax expense for the year was C$532m in 2011, an increase of C$13m over 2010. Results for 2011 were impacted by a C$59m write-down in the value of investment property, partially offset by a recovery of fees from an HSBC Group affiliate with respect to prior years of C$18m, and C$7m recovery on non-bank ABCP in 2010. Excluding the impact of these items, the increase in year-to-date profit is C$61m or 11.9% higher than 2010, mainly due to lower loan impairment charges due to lower loan volumes and improved asset quality offset by lower interest revenues.
Global Banking and Markets
The prior period results for Global Banking and Markets have been restated to reflect the transfer of the Global Asset Management business to Retail Banking and Wealth Management, as discussed above.
The Global Banking and Markets business continued to focus on enhancing its position as the international bank of choice by building a client-driven franchise serving the global needs of core clients, delivering global products to Canadian clients and Canadian products to global clients.
For the fourth quarter of 2011, profit before income tax expense was C$67m, an increase of C$7m, compared with the same period in 2010. The increase is mainly due to an increase in advisory fees, a decrease in mark to market accounting losses, gains from the disposal of certain financial investments and a decrease in certain restructuring and variable compensation costs. This was offset by a decrease in capital market fees. Profit before income tax expense decreased by C$8m, compared with the third quarter of 2011 mainly due to an increase in mark to market accounting losses and a decrease in gains from the disposal of certain financial investments. This was offset by a decrease in certain restructuring and variable compensation costs. Profit before income tax expense was C$274m for the year 2011, compared with C$234m in 2010. The increase was mainly due to an increase in net interest income from the positive impact from an increase in Bank of Canada interest rates in the second half of 2010, an increase in foreign exchange trading revenues as a result of increased customer volumes, as well as gains from the disposal of certain financial investments. This was offset by a decrease in capital market fees, an increase in certain restructuring costs and a recovery in the prior year of previously recorded losses upon the disposal of non-bank ABCP.
Consumer Finance
The principal goals of the Consumer Finance business continued to be the improvement of the sales force's productivity and managing risk and credit quality.
Profit before income tax expense for Consumer Finance was C$17m for the fourth quarter of 2011 compared with C$10m for the same period in 2010 and C$61m for the year compared to C$58m for 2010. Net interest income and fees were C$9m lower for the fourth quarter of 2011 compared with the same period in 2010, mainly due to a one time receipt of C$10m in credit insurance income in 2010. There was a reduction in loan impairment charges of C$12m resulting from improved economic conditions, investments in credit collection processes and credit tightening actions taken in prior years. There was a reduction in operating expenses of C$5m primarily due to cost reduction initiatives undertaken during 2011. For the full year, the decrease in net revenue resulted mainly from lower average receivables, primarily emanating from the liquidating portfolio as well as the impact of the C$10m in credit insurance income in the 2010. The reduction in loan impairment charges for the full year was C$33 million and operating expenses decreased by C$8m.
Other
Activities or transactions which do not relate directly to the above business segments are reported in Other. The main items reported under Other include gains and losses from the impact of changes in credit spreads on financial instruments designated at fair value and revenue and expense recoveries related to information technology activities performed on behalf of HSBC Group companies. A loss before income tax expense of C$2m was recorded in the fourth quarter of 2011, compared with a loss of C$7m for the fourth quarter of 2010. Profit before income tax expense for the year of C$15m was recorded in 2011 compared to C$1m in 2010. The variances are primarily due to the impact of changes in the fair value of financial instruments designated at fair value.
Sale of full service retail brokerage business
On 20 September 2011 the bank, together with certain of its wholly owned subsidiaries, entered into an agreement to sell certain assets of the full service retail brokerage business and related wealth management business. The transaction closed effective 1 January 2012. Following the announcement of the sale, but prior to its closing, a number of investment advisors left to pursue opportunities elsewhere. This led to a reduction in funds under management and revenues during the fourth quarter. Funds under management in the business sold at 31 December 2011 and 2010 were $10.6bn and $15.7bn respectively.
On closing, the assets of the full service retail brokerage business were transferred including accounts receivable, client trading accounts, certain contracts, goodwill, certain leased property and furniture and equipment. The assets, liabilities and profit relating to the business are included in the Retail Banking and
Wealth Management segment.
Assets and liabilities relating to the business sold were recorded as held for sale and are measured at the lower of the carrying amount and fair value less costs to sell. At 31 December 2011, non-current assets held for sale of C$3m representing property, plant and equipment and intangible assets have been included in other assets. Client accounts receivable and prepayments and accrued income of C$58m; and client trading accounts and accruals and deferred income of C$318m have been included in other assets and other liabilities respectively. There was no impact on the carrying amount on reclassifying these assets as held for sale. In the fourth quarter, C$14 million of charges were incurred relating to this transaction. A gain on the sale of approximately C$80m will be recorded in the first quarter of 2012.
Dividends
During the fourth quarter of 2011, the bank declared and paid C$75m in dividends on HSBC Bank Canada common shares, compared with C$70m in the same period in 2010. The bank declared and paid C$300m in common share dividends during the year ended 31 December 2011 compared with C$280m in the same period in 2010.
Regular quarterly dividends of 31.875 cents per share have been declared on HSBC Bank Canada Class 1 Preferred Shares – Series C, 31.25 cents per share on Class 1 Preferred Shares – Series D, 41.25 cents per share on Class 1 Preferred Shares – Series E and 7.75 cents per share on Class 2 Preferred Shares – Series B. Dividends will be paid on 31 March 2012 to shareholders of record on 15 March 2012.
IFRS and related non-IFRS measures used in this news release
The bank uses both IFRS and certain non-IFRS financial measures to assess performance. Securities regulators require that companies caution readers that earnings and other measures that have been adjusted to a basis other than IFRS do not have a standardized meaning under IFRS and are therefore unlikely to be comparable to similar measures used by other companies. The following outlines various non-IFRS measures that are regularly monitored by management:
Return on average common equity – Profit attributable to common shareholders on an annualized basis divided by average common equity, which is calculated using month-end balances of common equity for the period.
Post-tax return on average assets – Profit attributable to common shareholders on an annualized basis divided by average assets, which is calculated using average daily balances for the period.
Post-tax return on average risk weighted assets – Profit attributable to common shareholders on an annualized basis divided by the average monthly balances of risk weighted assets for the period. Risk weighted assets are calculated using guidelines issued by OSFI in accordance with the Basel II capital adequacy framework.
Cost efficiency ratio – Calculated as total operating expenses for the period divided by net operating income before loan impairment charges and other credit risk provisions for the period.
Adjusted cost efficiency ratio – Cost efficiency ratio adjusted to exclude gains and losses from financial instruments designated at fair value from net operating income before loan impairment charges and other credit risk provisions and intra-group recoveries from HSBC Group entities from both net operating income before loan impairment charges and other credit risk provisions and total operating expenses. For purposes of this adjusted ratio, intra-group revenues and expenses, which are reported on a gross basis in "other operating income” and "general and administrative expenses” in our consolidated financial statements, are reflected on a net basis, consistent with our reporting to our parent.
Net interest income, net fee income and net trading income as a percentage of total operating income – Net interest income, net fee income and net trading income for the period divided by net operating income before loan impairment charges and other credit risk provisions for the period.
Ratio of customer advances to customer accounts – Loans and advances to customers divided by customer accounts, using period-end balances.
Average total shareholders' equity to average total assets – Average shareholders' equity is calculated using month-end balances of total shareholders' equity for the period and average total assets are calculated using average daily balances for the period.
Caution concerning forward-looking statements
This document may contain forward-looking information, including statements regarding the business and anticipated actions of HSBC Bank Canada. These statements can be identified by the fact that they do not pertain strictly to historical or current facts. Forward-looking statements often include words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes," and words and terms of similar substance in connection with discussions of future operating or financial performance. These statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from those contemplated by the forward-looking statements. Some of the factors that could cause such differences include legislative or regulatory developments, technological change, global capital market activity, changes in government monetary and economic policies, changes in prevailing interest rates, inflation levels and general economic conditions in geographic areas where HSBC Bank Canada operates. Canada is an extremely competitive banking environment and pressures on the bank's net interest margin may arise from actions taken by individual banks or other financial institutions acting alone. Varying economic conditions may also affect equity and foreign exchange markets, which could also have an impact on the bank's revenues. The factors disclosed above are not exhaustive and there could be other uncertainties and potential risk factors not considered here which may impact the bank's results and financial condition. Any forward-looking statements speak only as of the date of this document. The bank undertakes no obligation to, and expressly disclaims any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise, except as required by law.
About HSBC Bank Canada
HSBC Bank Canada, a subsidiary of HSBC Holdings plc, is the leading international bank in Canada. With around 7,200 offices in over 80 countries and territories and assets of US$2,556bn at 31 December 2011, the HSBC Group is one of the world's largest banking and financial services organizations.
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