HKEx reports first-quarter earnings drop of 22pc because of weak bond markets Weak international bond markets have hit earnings at Hong Kong Exchanges and Clearing (HKEx), which reported a 22 per cent year-on-year decline in net profits for the first three months this year. The exchange yesterday reported earnings of $245.42 million for first quarter, or 23 cents per share, compared with $312.89 million a year earlier. HKEx chairman Charles Lee Yeh-kwong blamed the profit decline on a 53 per cent year-on-year fall in investment income. 'The decrease in profit was primarily attributable to investment income in 2005 being significantly lower than that in the first quarter of 2004, reflecting bond market movements in the two periods,' Mr Lee said. 'The decline in the cash market activities in 2005 also resulted in a drop in turnover-related income.' HKEx derives income from investing its own corporate funds, margin deposits placed by futures investors and brokers' deposits put in the clearinghouse. The funds, amounting to $15.8 billion in the first quarter, are invested mainly in bond and bank deposits. Rising interest rates have led to falling bond prices and hence reduced investment income, which dropped to $43 million in the first quarter from $91 million during the same period last year. Looking ahead, Mr Lee worries that uncertainties over oil prices and the US dollar will take their toll on local stock market trading. 'The group's performance relies heavily on market turnover and listing activities. Rising interest rates, the performance of the US dollar, the instability of energy prices and the continued close economic ties with the mainland will all have significant impact on the Hong Kong capital markets,' Mr Lee said. 'HKEx will proactively reinforce its status as being the premier international marketplace for the listing and trading of Hong Kong and mainland related equities and derivatives.' In addition to investment income, the exchange relies on trading and clearing fees paid by investors on each stock transaction. Stock market turnover in the first quarter dropped 7 per cent year on year, resulting in a decline in trading and clearing fee income of 9 per cent to $307.93 million. In the first quarter, there were five new listings on the main board and two on the Growth Enterprise Market, with total proceeds of $29.8 billion. Listing fee income increased by 7 per cent to $96.7 million. Although profits declined at HKEx, staff salaries have increased 2.5 per cent since December last year. The pay rise, together with a growing headcount and granting of new share options, boosted staff costs during the first quarter by 7 per cent year on year to $141.38 million. HKEx revenues during the period dropped 11 per cent to $574.25 million while expenses dropped 1 per cent to $282.67 million.