HSBC Bank Canada recorded net income attributable to common shares of C$142 million for the quarter ended 30 June 2008, an increase of C$7 million, or 5.2 per cent, from C$135 million for the second quarter of 2007. Net income attributable to common shares for the first half of 2008 was C$297 million compared with C$274 million for the same period in 2007, an increase of C$23 million or 8.4 per cent.
Commenting on the results, Lindsay Gordon, President and Chief Executive Officer, said: "HSBC Bank Canada's results for the second quarter were in line with expectations in a difficult environment for banks in Canada and worldwide. Falling market interest rates adversely impacted our net interest margin and although our ongoing credit position continues to be stable overall, further increases in specific credit provisions also impacted reported earnings.
"However, our underlying business in Canada remains strong and being part of the HSBC Group remains a significant advantage in times of uncertain market conditions. We will continue to pursue our strategy of growing our business by building on the international strengths of the HSBC Group with the aim of providing our customers with the financial products and services most suitable for their circumstances and we will strive to deliver a consistent level of excellent customer service throughout HSBC in Canada."
Net interest income
Net interest income of C$296 million for the quarter ended 30 June 2008 was C$11 million lower than C$307 million recorded in the same quarter of 2007. Average interest earning assets for the quarter were C$58.5 billion, 7.7 per cent higher than the same period in 2007. However, continuing competitive pressures and a challenging interest rate environment impacted the net interest margin, which decreased to 2.03 per cent for the quarter ended 30 June 2008 from 2.29 per cent for the same period in 2007. Since November 2007, a falling prime rate has resulted in reduced interest income on our floating rate loans without a corresponding reduction in interest expense as deposits re-priced less quickly. In addition, widening credit spreads experienced across the banking industry adversely impacted the cost of wholesale deposits.
Net interest income in the second quarter of 2008 was largely unchanged compared with the first quarter of 2008. Although average interest earning assets increased by C$0.8 billion compared to the first quarter of 2008, this was offset by a decrease in net interest margin from 2.08 per cent to 2.03 per cent.
On a year-to-date basis, net interest income was C$594 million which decreased marginally from C$601 million for the same period last year. Net interest income in 2008 benefited from continued growth in assets across all businesses, but a decrease in net interest margin to 2.06 per cent compared with 2.29 per cent in 2007 has more than offset the increase.
Non-interest revenue
Non-interest revenue was C$195 million for the second quarter of 2008 compared with C$177 million in the same quarter of 2007, an increase of C$18 million, or 10.2 per cent. Securitization income was C$12 million higher due to increased activity as well as increased income resulting from larger spreads on loans securitized as a result of falling interest rates. Trading revenues increased C$3 million compared to the same period last year primarily due to volatile foreign exchange and credit markets experienced in the first half of 2008. Deposit and payment service charges and credit fees were each higher due to continued business growth. These increases were partially offset by lower capital market fees in 2008 and a C$7 million reduction in gains on available-for-sale securities due to a gain recorded in the same period last year from the sale of part of the bank's shares in the Montreal Exchange.
Non-interest revenue decreased from the first quarter of 2008 by C$24 million, or 11.0 per cent. Trading income decreased by C$32 million from the prior quarter of which C$24 million was related to gains on certain debt obligations recorded at fair value as a result of widening credit spreads, while in the current quarter a small loss was recorded as credit spreads narrowed. In addition, trading revenues which had been very high in the first quarter due to volatile market activity were C$6 million lower in the second quarter. Securitization income also decreased by C$6 million compared to the first quarter of 2008, mainly due to lower spreads on loans securitized. These decreases were partially offset by a C$5 million increase in capital market fees due to increased businesses activity experienced in the second quarter of 2008 and a C$2 million increase in investment administration fees as funds under management grew. During the second quarter of 2008, C$2 million in gains on disposals of certain available-for-sale securities was also recognized.
On a year-to-date basis, non-interest revenue was C$414 million, C$52 million, or 14.4 per cent, higher compared with C$362 million for the same period last year. Trading revenues increased C$40 million as a result of volatile foreign exchange and credit markets experienced in the first half of 2008. It included a positive impact of C$18 million arising from changes in the amount of certain debt obligations recorded at fair value. Securitization income was C$29 million higher due to increased activity as well as higher gains on securitizations of loans arising from the effect of falling interest rates. Deposit and payment service charges, credit fees and investment administration fees were also higher due to continued business growth. These increases were partially offset by a reduction in capital market fees of C$12 million due to lower capital market activity in the first half of 2008 compared to the same period in 2007. In addition, gains on available-for-sale securities were C$24 million lower than in the same period last year due to gains recorded in the first half of 2007 from the sale of the bank's shares in the Montreal Exchange. Gains on other securities were C$7 million lower due to lower income from the bank's investment in private equity funds compared to 2007.
Non-interest expenses
Non-interest expenses were C$259 million for the second quarter of 2008 compared with C$248 million for the same quarter of 2007, an increase of C$11 million, or 4.4 per cent. The cost efficiency ratio was 52.7 per cent for the second quarter of 2008 compared to 51.2 per cent for the same period in 2007. Salary expenses grew reflecting increased staff levels as we expanded the branch network, the direct bank and the payments and cash management businesses. This was partially offset by lower variable compensation as a result of reductions in capital market revenue and lower pension and post retirement benefit costs. Premises and equipment expenses increased as a result of additional investments in IT and higher occupancy costs.
Non-interest expenses increased by C$7 million compared to the first quarter of 2008. Salaries and benefits were marginally higher with increased variable compensation arising from increased capital market fees which were offset by lower pension and benefit expenses. Premises and equipment expenses increased by C$3 million arising from increased IT costs and higher occupancy expenses as the bank continued to open new branches.
On a year-to-date basis, non-interest expenses were C$511 million compared with C$498 million for the same period last year, an increase of C$13 million, or 2.6 per cent. Salaries and benefits expenses were C$3 million higher due to an increased employee base, and increased benefit costs as a result of opening new branches. These were offset by lower variable compensation arising from lower capital market fees and lower pension costs. Premises costs increased by C$10 million due to increased costs from new branches as well as increases in IT costs. Other non-interest expenses were higher due to continued investments in the business, as well as higher customer transaction costs. The cost efficiency ratio of 50.7 per cent compared favourably with 51.7 per cent for the same period in 2007.
Credit quality and provision for credit losses
The provision for credit losses was C$25 million for the second quarter of 2008, compared with C$12 million in the second quarter of 2007, and C$25 million for the first quarter of 2008. On a year-to-date basis, the provision for credit losses was C$50 million, compared with C$22 million for the same period of 2007.
The credit environment deteriorated somewhat in the latter part of 2007 and quarterly provisions for the first half of 2008 were at a similar level to that experienced in the second half of 2007. An increase in retail provisions primarily related to auto loans and a specific provision relating to the commercial construction sector in the first half of 2008 resulted in an increase of C$28 million compared with the same period in 2007.
The same factors impacted movements in impaired credit exposures. Gross impaired credit facilities were C$290 million, C$24 million lower compared with 31 March 2008 and C$95 million higher compared with C$195 million at 30 June 2007. Total impaired credit facilities, net of specific allowances for credit losses, were C$194 million at 30 June 2008 compared with C$188 million at 31 December 2007 and C$141 million at 30 June 2007. Overall credit quality remains sound, reflecting prudent lending standards.
The general allowance for credit losses remained unchanged at C$269 million compared with 31 December 2007 and at 30 June 2007. The total allowance for credit losses, as a percentage of loans and acceptances outstanding, was 0.78 per cent at 30 June 2008 compared with 0.79 per cent at 31 December 2007 and 0.74 per cent at 30 June 2007. -- www.cnxmarketlink.com
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