HK&Shanghai Banking Corp FY2013 results

Comment by Stuart Gulliver, Chairman

Asia's economic growth slowed during the early part of 2013, then stabilised during the second half as activity in mainland China picked up. Growth expectations for the region are now more modest than at this time last year. In mainland China, reforms are likely to take priority and GDP is expected to grow by 7.4%, after 7.7% growth in 2013. Hong Kong's economy grew modestly in 2013, as robust domestic demand offset weakness in exports. Growth is expected to improve in 2014 to 3.7% as export volumes recover and trade with mainland China remains resilient. Concerns over the potential effects on countries with current account deficits of eventual tightening in monetary conditions in the West affected a number of currencies around the region during the year, and some countries may experience continued exchange rate volatility, leading to pressure on interest rates. After a period in which the ratio of debt to GDP in the region has risen, growth is sensitive to global interest rate movements and structural reforms are needed to generate gains in productivity.

The Hongkong and Shanghai Banking Corporation Limited delivered a resilient performance in 2013, as we maintained our focus on deepening customer relationships, increasing collaboration between our businesses, leveraging our global connectivity and re-engineering our business. Reported profit before tax was HK$144,756m, an increase of 33% over 2012. This included the net gain on disposal of our shareholding in Ping An of HK$30,747m and an accounting gain on the reclassification of Industrial Bank as a financial investment of HK$8,454m. During the year we completed the sale of our 18% shareholding in Bao Viet Holdings and our insurance businesses in South Korea and Taiwan and in July we announced plans to wind down our remaining Retail Banking and Wealth Management services in South Korea. In October we announced that we will discontinue retail broking and depository services in India. In November, we acquired the Hong Kong and Singapore branches of HSBC Private Bank (Suisse) SA. In December we announced the sale of our 8% shareholding in Bank of Shanghai. Our priorities going forward in mainland China will emphasise the growth of our own operations and our partnership with Bank of Communications.

Customer loans grew by 14% during the year as we continued to support our customers' financing needs, while deposits increased by 10% and, at the year end, the loans to deposits ratio stood at 62.7%. Lending growth occurred mainly in trade facilities and residential mortgages, with strong increases in mainland China and Singapore. In competitive markets for both loans and deposits, margins reduced. Asset quality continued to be strong and loan impairment charges remained low, broadly unchanged compared with the prior year. We continued to invest in the business in areas such as technology platforms and mobile banking, while absorbing inflation and generating efficiencies and, in total, operating costs were unchanged.

In Commercial Banking ('CMB') we saw strong growth in lending, although this was offset by narrower asset spreads in competitive markets, albeit margin pressures eased in the second half of the year. We continued to generate higher fee income from collaboration between CMB and Global Banking and Markets through both debt and equity capital markets transactions, including the largest ever IPO in Hong Kong for a mainland Chinese consumer company. We remained vigilant over asset quality and loan impairment charges were broadly unchanged at modest levels. Among several awards, we gained 'Best Cash Management House in Asia' from Euromoney and FinanceAsia's 'Best Foreign Commercial Bank in China'. Profit before tax in CMB was 5% lower than in 2012, mainly as gains on the disposals of businesses in 2012 were not repeated and the share of profits from associates was lower.