Annual
Report
and
Accounts
1997
980002 Holdings Cover
16 01 98 (FL)
H S B C H O L D I N G S P L C
Annual Report and Accounts 1997
Financial Highlights
1996
£m For the year
4,524
Profit before tax
3,112
Profit attributable
1,090 Dividends
At year-end
15,187
Shareholders’ funds
23,486 Capital resources
1997
1997
£m
4,971
3,355
1,337
HK$m
63,046
42,550
16,957
16,442
25,236
209,817
322,024
169,179 Customer accounts and deposits by banks
202,268
2,581,142
236,553
Total assets
153,488 Risk-weighted assets
286,391
3,654,636
177,283
2,262,308
Pence
Per share
117.61
Earnings
115.42 Headline earnings
41.00 Dividends
570.73 Net asset value
Pence
125.70
124.96
50.00
614.42
HK$
15.94
15.85
6.32*
78.41
Number of ordinary shares in issue at year-end
1,791m HK$10
870m £0.75
% Ratios
21.3
Return on average shareholders’ funds
1.45
Post-tax return on average assets
Capital ratios
15.3 — total capital
9.9 — tier 1 capital
52.9
Cost:income ratio
1,802m
874m
%
20.7
1.37
14.2
9.3
54.0
1997
US$m
8,143
5,495
2,190
27,080
41,562
333,136
471,686
291,985
US$
2.06
2.05
0.82*
10.12
* The dividends per share figures are translated at the closing rate. Shareholders who receive dividends in Hong Kong dollars received
a first interim dividend of HK249.45 cents per share. The second interim dividend of 30 pence per share will, where required, be
converted into Hong Kong dollars at the exchange rate on 17 April 1998.
1
H S B C H O L D I N G S P L C
Annual Report and Accounts 1997
Five-Year Comparison
At year-end (£m)
Share capital
Shareholders’ funds
Capital resources
Customer accounts
Loans and advances to customers
Total assets
For the year (£m)
Operating profit before provisions
Provisions for bad and doubtful debts
Pre-tax profit
Profit attributable to shareholders
Dividends
HK$/£ average exchange rate
Per ordinary share (pence)
Earnings
Headline earnings
Dividends
ive-Year Comparison
1993
2,111
9,334
16,510
128,843
97,753
207,447
1994
2,090
10,790
18,098
128,707
98,795
201,518
3,588
(1,158)
2,584
1,806
(594)
11.582
71.13
68.77
23.50
3,060
(275)
3,166
2,053
(703)
11.853
79.60
76.84
27.00
1995
2,124
13,387
21,324
142,121
109,373
226,818
3,772
(416)
3,672
2,462
(843)
12.203
1996
2,014
15,187
23,486
151,149
114,353
236,553
1997
2,068
16,442
25,236
178,621
145,975
286,391
4,519
(384)
4,524
3,112
(1,090)
12.078
5,222
(615)
4,971
3,355
(1,337)
12.683
94.01
93.89
32.00
117.61
115.42
41.00
125.70
124.96
50.00
Contents
1 Financial Highlights
2 Five-Year Comparison
2 Contents
3 Group Chairman’s Statement
6 Group Chief Executive’s Review of Operations
14 The HSBC Group and Education
17 Board of Directors and Group General Managers
21 Report of the Directors
33 Financial Review
2
48 Statement of Directors’ Responsibilities in
Relation to Financial Statements
48 Report of the Auditors
49 Accounts
54 Notes on the Accounts
93 Taxation of Shares and Dividends
94 The HSBC Group: International Network
95 The HSBC Group: Principal Offices
T H E H S B C G R O U P
Group Chairman’s Statement
Satisfactory results in challenging
markets characterised the 1997 financial performance
of HSBC Holdings. Profit attributable to you, our
shareholders, rose by 8 per cent to £3,355 million
(HK$42,550 million).
Pre-tax profit rose by 10 per cent to £4,971 million
(HK$63,046 million, or 15 per cent), and growth in
operating profit before provisions was strong at 16
per cent.
Your Directors declared a second interim dividend
(in lieu of a final dividend) of 30 pence per ordinary
share. With the 20 pence per share first interim
dividend, the total distribution for 1997 of 50 pence
represents an annual increase of 22 per cent (24 per
cent in Hong Kong dollar terms at the exchange rate in
effect on 31 December 1997). The dividend is payable
on 29 April 1998 in cash, in sterling or Hong Kong
dollars, with a scrip alternative.
Our commercial banking businesses in the United
Kingdom, North America and the Middle East
produced results well ahead of 1996, while business in
Asia was affected by turbulent currency and market
conditions.
In Asia,
these economic difficulties have
dominated the second half of 1997 and the first quarter
instability, brought about by
of 1998. The
dramatically weakening exchange rates, attracted
increased customer deposits to our branches in the
region and a larger volume of customer business to our
treasury dealing rooms.
The coincidence of weak exchange rates, lower
stock exchange levels and high interest rates led to a
deterioration in credit quality, the full impact of which
is only now being felt. Reflecting this unusual level of
uncertainty, the Group set aside £175 million in the
form of a special general provision. Additionally,
other general provisions were increased by £116
million, to £1,052 million.
Our investment banking business weakened in the
second half of 1997; however, it remained profitable
against a backdrop of significant changes and volatile
earnings within the industry. In treasury and capital
markets, dealing profits rose as business increased and
margins widened in unstable markets. Growth in
foreign exchange earnings more than offset a weak
performance in debt securities and equities trading.
Over the course of the year, the Group’s total assets
rose by 21 per cent, to £286 billion. Integration of the
acquisitions made in 1997 has begun, and their
performance has been satisfactory. Although 1997
on
brought
acquisitions and adjustments in respect of local
goodwill write-offs
significant
currency weakness in Asian markets, our total capital
remained strong at 14.2 per cent, with tier one capital
at 9.3 per cent at 31 December. Our cost-to-income
ratio rose slightly, to 54 per cent, largely due to our
acquisitions in Brazil and Argentina.
Exchange rates again had an impact on our
reported results: at constant exchange rates, growth in
attributable profit of 8 per cent would have been
higher, at 12 per cent. Since the US dollar and
currencies closely linked to it form the main currency
bloc in which the Group’s business is transacted, our
Board has decided that in future the Company will
report its results in US dollars. In 1998, dividends will
be declared in US dollars; however, shareholders will
receive payment
continue
alternatively in sterling or Hong Kong dollars or
as scrip.
to be entitled
to
In 1997, the HSBC Group received the coveted
‘Best Bank’ designation from Euromoney; was named
‘Asian Bank of the Year’ by International Financing
Review; and was ranked the world’s largest and most
profitable bank by Institutional Investor. Some of the
awards received by individual Group members are
highlighted by the Group Chief Executive.
Acquisitions and investments
dominated the first half of 1997, when the Group
embarked on an ambitious expansion programme in the
Americas to capitalise on growing intra-regional and
international trade flows. Banco HSBC Bamerindus
was established in Brazil in March, operating the
country’s second-largest private branch network, a
significant
leasing and
insurance business, and
securities businesses. Its progress was noteworthy,
generating a profit in its first period of operation and
attracting nearly 1.5 million new accounts, with deposit
growth of more than 50 per cent.
In Argentina, the Roberts Group, in which we had
previously held a minority banking interest, was
acquired in August and renamed HSBC Roberts. It,
too, made a small contribution to the Group’s
operating profit in 1997. Elsewhere in Latin America,
the Group acquired 10 per cent of Banco del Sur del
Peru and raised our equity investment in Banco
Santiago in Chile to 6.99 per cent. In addition, at the
year-end we acquired a 19.9 per cent stake in Grupo
Financiero Serfin of Mexico, whose principal banking
subsidiary, Banca Serfin, is the country’s third-largest
bank.
The
integration of Marine Midland Bank’s
acquisition of First Federal Savings and Loan and J P
Morgan’s US dollar-clearing business enhanced our
performance, and the Group formed a strategic
3
T H E H S B C G R O U P
Group Chairman’s Statement (continued)
alliance to market financial services globally with
North Carolina’s Wachovia Corporation, the United
States’ 20th-largest bank holding company. Our joint
venture, Wells Fargo HSBC Trade Bank (HSBC
Group interest: 40 per cent), now ranks among the
leading trade finance providers in the western United
States.
Hongkong Bank of Canada was the first Group
member to launch an Internet securities trading
service, NetTrader. Since the year-end, it agreed in
principle to acquire the banking business of National
Westminster Bank of Canada, while HSBC James
Capel Canada Inc. announced plans to acquire
Moss, Lawson Holdings Limited, a Toronto-based
investment firm.
leasing
In the UK, Midland Bank had a record year and its
subsidiary, Forward Trust, acquired a major rail
rolling-stock
company, which was
subsequently renamed Forward Trust Rail.
Members of the Group opened
new branches or offices in Asia, the Middle East,
including Dhaka,
Europe and
Bangladesh; Almaty, Kazakhstan; Lahore, Pakistan;
and Bilbao, Spain. In China, HongkongBank received
approval to upgrade its representative office in Wuhan
to a branch, opened new premises in Shanghai, Dalian
and Beijing and relocated its card centre to Shanghai,
while Hang Seng Bank opened a branch in Shanghai
and new premises in Guangzhou and applied to open
a representative office in Beijing.
the Americas,
HSBC Investment Bank raised its investment in the
South African stockbroker, HSBC Simpson McKie
(Pty) Limited, to 89.8 per cent, and purchased the
remaining equity in March 1998. Investment banking
services were offered for the first time in India through
HSBC Capital Markets India Private Limited.
The value of the HSBC brand grew in 1997 as we
enhanced its visibility and Group members sought a
closer identification with it. With Midland adopting
the Group’s corporate identity, all wholly-owned
subsidiaries now share the corporate symbol, the
hexagon, enabling our customers around the world —
from Hong Kong to Hamilton, Buffalo to Brisbane,
and São Paulo to Saipan — to identify their bank with
ease. Additionally, in April 1998 HSBC Investment
Banking will complete its rebranding, designating its
equities business ‘HSBC Securities’. The private
bank, Samuel Montagu, and James Capel Investment
Management will retain the names of their founders.
The HSBC-sponsored Stewart-Ford Formula One
Team achieved an impressive second-place finish at
the prestigious Monaco Grand Prix, and although the
4
Team experienced technical difficulties in its first
season, the HSBC brand reached hundreds of millions,
building our name recognition, and stimulating new
business in a variety of markets. Stewart Grand Prix
helped with the Group’s charitable endeavours,
participating in Go-Karting in the City of London to
raise funds for the Lord Mayor’s Appeal for the
Cancer Research Campaign.
The HSBC Money Gallery at the British Museum
attracted millions of visitors after its formal opening in
January 1997. A ‘Resource Pack for Teachers’ was
created to help teach the history and value of money to
students; and, to facilitate distance learning for those
unable to visit the Gallery, a CD-ROM, The World of
Money, will be released in June 1998. The book,
Money: A History, will soon be available in Korean,
Japanese, French and German, and the children’s
book, The Story of Money, is being reissued in
paperback and in Danish.
New advertising campaigns by most Group
members — all displaying the Group hexagon — are
building customer awareness of the many products
and services on offer. In 1998, HSBC Global
Payments and Cash Management and HSBC Trade
Services will undertake major brand-building
exercises in all of their markets.
Reinforcing our key Asia-Pacific relationships, the
Group was a major sponsor of the Asia-Pacific
Economic Co-operation Forum in Vancouver, and in
support of our newly-forged links in Latin America,
we sponsored trade promotion conferences focusing
on Brazil and Argentina.
A commitment to education remained the
Group’s philanthropic priority, with a particular
emphasis on language skills. HSBC expanded its
sponsorship of specialist language colleges in the UK
to a third school. We sponsored the English Speaking
Union’s International Public Speaking Competition
and a volunteer English teacher through the Voluntary
Service Overseas’ Partners in China Programme. An
essay in this Annual Report by the Group Chief
Executive highlights some of our educational
initiatives around the world.
HSBC was the first bank to sign the revised United
Nations Environment Programme Statement by
Financial Institutions on
the Environment and
Sustainable Development, signalling our ongoing
commitment to the environment. A new policy
statement was posted to shareholders with this
Annual Report. As in past years, Group members
sponsored a wide array of environmental initiatives
around the world, ranging from conservation to
education.
The Group and its staff continued to help people in
crisis and need, supporting the victims of floods and
earthquakes in China, of a typhoon in Vietnam, and of
ice storms
in Canada and New York State.
HongkongBank’s many years of charitable work were
acknowledged by a special Hong Kong Council of
Social Service Golden Jubilee Award as Outstanding
Philanthropist.
We sponsored Save the Children’s Children in
Cities Appeal, and Group members around the world
helped charities for the homeless, the aged and the
handicapped. HSBC Holdings supported the British
Red Cross’ Victims of Landmines Appeal: a London
staff member chaired a fundraiser in the presence of
Diana, Princess of Wales and, following her tragic
death, a substantial donation was made in her memory
to the Appeal.
Our most important asset is
our dedicated staff in 79 countries and territories who
contribute so much, not only to the Group’s success,
but to many volunteer programmes in their local
communities. On behalf of the Board, I commend and
thank them.
In March 1998, we extended a fifth invitation to
staff in more than 40 countries to join our award-
winning Savings-Related Share Option Scheme.
Dr Q W Lee retired as Adviser to our Board of
Directors in December; in February, B H Asher retired
from the Board and as Chairman of HSBC Investment
Bank; and at our Annual General Meeting in May, Sir
Joseph Hotung and C D Mackay will retire as non-
executive Directors. We thank all of them for their
devoted service to the Group.
Hang Seng Bank’s
founder and Honorary
Chairman, Dr S H Ho, died at the age of 97 in
December. He has been succeeded in that role by Dr
Q W Lee.
In March 1998, Sir Brian Moffat, Chairman and
Chief Executive of British Steel plc, was appointed to
our Board and, in May, we hope to be joined by three
other non-executive Directors, Lord Butler, Master of
University College, Oxford, and former Secretary of
the Cabinet and Head of the Home Civil Service in the
UK; R K F Ch’ien, Chairman of Inchcape Pacific
Limited and a member of the Executive Council in the
Hong Kong SAR; and W K L Fung, Group Managing
Director of Li & Fung Limited. We also welcome two
new executive Directors: S K Green, formerly Group
Treasurer, who was appointed Executive Director
Investment Banking and Markets on 1 March; and
W R P Dalton, formerly President and Chief
Executive Officer of Hongkong Bank of Canada, who
will be appointed Midland Bank’s Chief Executive on
1 April. M J Jacobi, formerly Head of Group Public
Affairs, will be appointed an Adviser to the Board on
the same date.
We entered 1998 with sound liquidity,
strong capital and a conservative balance sheet,
attributes which have supported our profitable growth
and served us well during weaker economic periods.
Our business is well balanced geographically and by
product line, and our commitment to cost discipline
and profitable growth remains unchanged.
Hong Kong’s transition to a Special Admin-
istrative Region of the People’s Republic of China
has been smooth, and we look forward to continu-
ing to develop our business throughout Asia in the
years ahead.
At the end of this year’s Annual General Meeting
I shall retire, with John Bond taking my position as
your Group Chairman and Keith Whitson succeeding
him as Group Chief Executive. Both have many years
of experience and successful service to the Group to
guide them as they take up their new duties, and I wish
them much good fortune.
It has been my privilege to work with the men and
women of HSBC for 44 years. Although I shall retire
during an interesting and, perhaps, difficult period, I
am confident that their commitment will ensure that
the Group continues to seize opportunities and reward
shareholders in the challenging years ahead.
Sir William Purves, Group Chairman
27 March 1998
5
T H E H S B C G R O U P
T H E H S B C G R O U P
Group Chief Executive’s Review of Operations (continued)
Group Chief Executive’s Review of Operations (continued)
The financial performance of
HSBC Holdings plc in 1997 was satisfactory.
Operating profit before provisions improved by 16 per
cent to £5,222 million, mainly due to 15 per cent
growth in net interest income, which accounted for
about 59 per cent of our total operating income. This
improvement reflected growth
in both average
interest-earning assets and a modest increase in net
interest margin. Net fees and commissions grew by 21
per cent, reflecting growth in all regions, as well as the
contributions for the first time of HSBC Bamerindus
and HSBC Roberts.
The geographic distribution of our assets was
broadly unchanged from that of 1996, except for the
Americas where assets increased by 4 per cent to 19 per
cent as a result of acquisitions.
We retained over 60 per cent of net profits to
support future business growth and invest in new
sources of income. Earnings per share rose by 7 per
cent to 126 pence.
The Group has a long history of providing value
for its shareholders. Under our progressive dividend
policy, dividends have grown by an annual average of
more than 20 per cent over the last five years. During
the same period, earnings per share averaged an
annual increase of about 15 per cent.
Increasingly, we are branding
It is HSBC Holdings’ policy for our subsidiaries to
derive benefits both from the centre and from each
other. We do this centrally, for instance, by managing
our risk on a Group basis, and also by co-ordinating
those parts of our business that operate across national
these
borders.
businesses to derive benefits from the growing
visibility of the HSBC name. In 1997, HSBC Global
Payments and Cash Management joined HSBC Trade
Services and HSBC Financial Institutions as global
business brands. In every subsidiary, chief executive
officers are tasked with, and measured on, delivering
increased Group referrals or business opportunities.
For our customers, a growing number of whom
trade on a global basis, access to our worldwide
network provides a competitive advantage.
One particular area where our Group structure has
helped members is the ‘year 2000’ issue, when date-
dependent business equipment, ranging from com-
puters to security and building management systems,
may have to be converted to recognise the year 2000
and beyond. Many older computer systems were
developed to recognise years by the last two digits, so
6
RA 18592 Proof 6
‘97’ refers to 1997. As a result, in the year 2000, these
systems will read the year as ‘00’, which has the
potential to cause problems ranging from total system
failure to errors in age/date calculations or comparisons.
Our Group standard computerised systems for com-
mercial banking, foreign exchange and money markets,
credit authorisation and management information were
originally designed to be year 2000 compliant, thus
reducing the problem for most of our operations. The
Group aims to have all its critical banking systems and
external interfaces year 2000 compliant by the end of
1998 when testing will be well under way.
An analysis of the results by major subsidiary and
line of business follows.
Attributable profit by subsidiary and by line of business
1996
(£m)
1997
Hang Seng Bank Limited
Less: minority interests
HSBC Investment Bank Asia Holdings
739
(283)
456
Limited
HSBC Americas, Inc.
Less: preference dividend
(1)
HongkongBank and other subsidiaries 1,110
HongkongBank and subsidiaries
1,565
Midland Bank plc
1,051
Less: preference dividend
(44)
1,007
291
(1)
290
79
54
61
42
73
The British Bank of the Middle East
Hongkong Bank Malaysia Berhad
Hongkong Bank of Canada
HSBC Latin American operations
HSBC Holdings sub-group
Other commercial banking
703
(271)
432
72
1,092
1,596
849
(37)
812
245
(4)
241
62
84
55
3
47
entities
Less: investment banking profits
included above
Commercial banking
Investment banking
Group profit
89
92
(37)
(108)
%%^ %%^
2,884
3,223
228
132
%%^ %%^
3,112
3,355
ZZX ZZX
Hong Kong Special
Administrative Region
Hong Kong’s economy performed strongly in the
first half of 1997. The resumption of the exercise of
sovereignty over Hong Kong by China was success-
fully completed on 1 July. In the second half, the
turmoil in the currency and foreign exchange markets
across Asia put pressure on the Hong Kong dollar
which, in turn, led to higher interest rates. This caused
a fall in the property and stock markets, and a
slowdown in the rate of growth in domestic and
external demand.
The major effects on the banking sector were a
significant reduction in interest spreads, a slowdown
in growth of mortgage business in the last quarter of
the year, and restraint on trade finance business due to
weak export growth.
Operations in Hong Kong contributed 39 per cent,
or £1,783 million, of the Group’s operating profit
for 1997.
Against a background of increased competition,
particularly in the mortgage market, the Group’s Hong
Kong operations reported strong growth in net interest
income. This reflected significant increases in advances
to customers, despite reductions in interest spreads.
Other operating income was higher due to increased
fee income and foreign exchange dealing profits. In
commercial banking, there was good growth in fees
from securities, cards and credit facilities, the latter
reflecting strong growth in advances to customers.
The proportion of the Group’s total assets invested
in Hong Kong remained broadly unchanged at 30 per
cent. Advances to customers increased by 32 per cent
in HongkongBank and by 25 per cent in Hang Seng
Bank, as both banks recorded strong growth in
residential mortgages and corporate lending, although
this slackened significantly towards the end of
the year.
Commercial banking competition remained keen,
particularly in personal loans, Hong Kong dollar time
deposits and credit cards.
In personal banking, HongkongBank competed
vigorously to acquire new business and maintain
market share by offering innovations, including the
introduction of flexible payment and interest savings
features to the mortgage service, such as fortnightly
repayment and step-up repayment schemes.
In personal loans, revolving facilities and automatic
limit increases were offered to quality credit users.
The success of capital-protected investment products
led to several further variations being offered. A com-
prehensive range of unit trust funds was made avail-
able, including those of HSBC Asset Management.
the Euromoney
HongkongBank won
‘Best
Domestic Bank in Hong Kong’ award, and HSBC
Investment Bank Asia Limited ‘Best Securities Firm’.
HSBC Markets was voted number one in both corporate
foreign exchange and derivatives by Asiamoney and
‘Hong Kong Dollar Bond House of 1997’ by
International Financing Review.
Hang Seng Bank (HSBC Group interest: 62.1 per
cent) won the Asiamoney ‘Commercial Bank of the
Year’ award. It continued to develop its branches into
one-stop financial supermarkets offering a ‘total
package solution’ to customers. It also continued to
expand investment-related services and launched its
personal financial planning service, SmartInvest
Services.
HongkongBank maintained its position as the
largest issuer and acquirer of credit cards in Hong
Kong, and launched a number of co-branded pro-
grammes. Hang Seng Bank launched Hang Seng
SuperCash, a card offering revolving standby cash and
merchant discounts. Hang Seng Bank also extended
its credit card range by launching SelectImage
MasterCard, a credit card featuring the holder’s
favourite photograph. It also launched the world’s first
Forever Friends MasterCard and City Smart, Asia’s
first dual-chip identity and stored-value ‘smart card’.
Hang Seng Life Limited, a joint venture company
between Hang Seng Bank and HSBC Life (Inter-
national) Limited, launched the Education Savings
Protection plan, while HSI Services Limited, a wholly-
owned subsidiary of Hang Seng Bank, launched the
Hang Seng China-Affiliated Corporations Index to
track the performance of locally-listed companies
with a significant equity interest held by entities in
mainland China.
HSBC Investment Bank Asia’s strong presence in
the Hong Kong SAR enabled it to record growth in
advisory and corporate finance fees, particularly from
initial public offerings and aviation and structured
finance. This success mitigated a significant loss on an
underwriting transaction in the first half of the year.
Two major advisory projects in which HSBC
Investment Bank Asia participated were the reorgan-
isation of the Cheung Kong Group, and the acquisition
of Furama Hotel Enterprises by Lai Sun Development
which, at HK$6.9 billion, was one of the largest ever
take-overs in Hong Kong.
HongkongBank’s Trade Services Division continued
to promote a number of new trade initiatives and, as a
result, was able to increase its market share in Hong
Kong and the rest of the region.
In securities services, a new centre was opened
in Hong Kong with an upgraded securities system
offering better processing capability and improved
customer services. Top-rated status was awarded in
7
T H E H S B C G R O U P
Group Chief Executive’s Review of Operations (continued)
the annual Global Custodian bank review in 11 Asia-
Pacific markets, including top position in Hong Kong
for the ninth consecutive year.
HongkongBank sold its interest in Hong Kong
International Terminals Group in September.
Rest of Asia-Pacific
(including the Middle East
and Africa)
Asia-Pacific
The currency turmoil which arose in mid-1997
changed the outlook for the region’s growth prospects.
The resulting decline in stock and property markets
has adversely affected the region’s economies. High
domestic interest rates in many countries, combined
with reduced government spending, and dampened
domestic consumption and investment expenditure,
led to a slowdown in economic growth throughout the
region in the second half of the year.
Excluding Hong Kong, the region contributed
8 per cent, or £354 million, of the Group’s operating
profit. We continued to make investments in the
region in 1997, which we expect to contribute to
growth in operating income achieved from personal
banking in the coming years.
The proportion of Group assets in the rest of Asia-
Pacific fell slightly in 1997 to 12 per cent. Interest
margins rose, due to higher spreads on customer
lending, as liquidity tightened in the second half, asset
and liability mix improved and treasury earnings
increased. An exception was Hongkong Bank Malaysia
Berhad where margins decreased due to the faster
growth in time deposit rates against the slower rise in
base lending rates.
China’s GDP grew by 8.8 per cent with inflation at
2.8 per cent in 1997. The Group’s presence continued
to grow in China, and HongkongBank maintained its
position as the country’s leading foreign bank with
seven branches, one sub-branch and three representa-
tive offices. HongkongBank won Euromoney’s ‘Best
Foreign Bank in China’ award. Opportunities for
business increased in March 1997 with the opening of
HongkongBank’s branch in the Pudong district of
Shanghai, which is licensed to conduct renminbi
business in defined sectors.
8
In Malaysia, net interest income rose by 8 per cent
in Hongkong Bank Malaysia, reflecting higher levels
of corporate lending, together with increased long-
term investments, partly offset by reduced short-term
lending to banks. The growth in lending was funded
in customer
principally by substantial growth
deposits, which increased by 31 per cent. Other
operating income grew by 26 per cent, including
increased customer-driven foreign exchange trading
and higher fees and commissions, principally from
card products and trade bills. Specific provisions for
bad and doubtful debts increased to RM151 million and
an additional general provision of RM98 million was
set aside to increase the ratio from 1.0 per cent to 1.5
per cent of performing advances.
The Group’s expansion in the Asia-Pacific region
was reflected by higher staff numbers, notably in
Australia, Brunei, mainland China, India, Indonesia,
Malaysia, the Philippines, Singapore, Sri Lanka,
Thailand and Taiwan. There was an accompanying
increase in operating expenses, largely offset by
revenue expansion, and improved productivity in the
region.
We continued to focus on expanding our personal
banking business, partly by extending Hongkong-
Bank’s AssetVantage service to new areas. Asset-
Vantage is a premium service aimed at professionals,
managers and executives, which features a com-
prehensive range of banking facilities, such as
interest-paying current accounts, branded ATM cards
and, often, dedicated AssetVantage counters within
branches.
In Singapore and Taiwan, the bank opened Select
Personal Financial Centres to enhance customer
service. HongkongBank’s ATM networks were
extended in India, Brunei and Mauritius to provide
better service to our customers. In Indonesia and
Korea, the bank signed ATM network-sharing agree-
ments to improve banking access for our customers.
Personal
lending products continued
to be
developed across the region. These included personal
instalment loans, home equity loans, car loans and
other specially-tailored loan packages appealing to
relationship
personal banking
customers.
corporate
and
New insurance and unit trust services were
introduced in New Zealand, Macau, Mauritius,
Singapore and Taiwan.
A personal
in Australia, India,
telephone banking service was
the Philippines,
established
Taiwan and Thailand. PC banking
trials were
conducted in Australia, Brunei, India, Indonesia, the
Philippines, Singapore, Sri Lanka and Thailand. In
several areas, this was supplemented by an automated
telephone banking service.
A major sales and service training programme was
developed for staff. It was first piloted in New
Zealand, Thailand and Taiwan and will be rolled out
across the region in 1998.
Four more securities centres
the region
(Bangkok, Jakarta, Seoul and Shanghai) were
upgraded to the Group’s global securities system,
bringing the total number of converted sites to seven.
in
HongkongBank won Euromoney’s ‘Best Bank in
Asia’ award for excellence and the ‘Best Foreign
Bank’ award in Singapore. In Malaysia, Hongkong
Bank Malaysia was also named ‘Best Foreign Bank’
by Euromoney and ‘Best Foreign Commercial Bank’
by Finance Asia.
Middle East and Africa
The Gulf States, except Qatar, experienced slower
GDP growth due to weaker oil prices. Qatar remained
buoyant as developments in the gas sector stimulated
growth and offset the impact of falling oil prices.
The British Bank of the Middle East recorded good
profit growth with improved contributions from most
areas, particularly the United Arab Emirates (UAE)
and Qatar, and from the offshore banking unit in
Bahrain and the Middle East Finance Company.
Net interest income rose as a result of growth in
average interest-earning assets, while the net interest
margin decreased slightly. Other operating income
grew due to increased trade finance-related fee income
and foreign exchange dealing profits in the UAE.
Despite strong growth in business volumes, costs were
contained, leading to an improvement of 5 percentage
points
the cost-to-income ratio. The bank
restructured its capital by replacing its subordinated
loan liabilities with additional equity and preference
share capital totalling £225 million.
in
BritishBank continued to focus strongly on its
personal banking business, resulting in strong growth
in customer lending and deposits. Network service
centres were established in Oman, Qatar and the UAE
to handle back-office functions and allow branches to
concentrate on customer service. The bank also
piloted a personal telephone banking scheme, tested a
loan product for the self-employed in the UAE and
created a cash management capability within the
electronic banking department.
British Arab Commercial Bank Limited (HSBC
Group interest: 46.51 per cent) recorded satisfactory
profit growth and implemented a new strategic plan to
reduce overheads and increase operating income. It
launched a Trade Finance Agency which seeks to link
its origination capacity with the distribution capability
of HSBC’s global network.
Elsewhere in the Middle East, our associate, The
Saudi British Bank (HSBC Group interest: 40 per
cent), reported good profit growth despite an
increasingly competitive environment. The bank
focused on improving services to high-net-worth
individuals and increased its loan portfolio, partly as a
result of advertising its personal instalment loan.
A new investment product, SABBInvest, was
launched; the bank’s ATM network was increased to
109 machines with further expansion planned; the
JCB Gold Card and co-branded Visa/MasterCards
were introduced, as well as a special edition Master-
Card that commemorated the FIFA Confederations
Cup in December. The bank completed a joint
advisory assignment with HSBC Investment Banking
and continued
investment banking
expertise.
to develop
Egyptian British Bank S.A.E. (HSBC Group
interest: 40 per cent) recorded good profit growth. The
bank became a founder member of the first ATM-
sharing network in Egypt. It also established HSBC
Investment Company Egypt S.A.E. and HSBC James
Capel Egypt S.A.E. (to be renamed HSBC Securities
Egypt S.A.E.), both joint ventures with HSBC
Investment Banking.
HSBC Equator Bank plc, the HSBC Group’s trade
finance and investment bank in sub-Saharan Africa,
advised the government of Côte d’Ivoire on its
privatisation of the state-owned sugar company. It was
also an adviser, with HSBC Investment Banking, in
the toll road linking South Africa with Mozambique,
for which they successfully structured and arranged
finance for the ‘Trac Consortium’.
9
T H E H S B C G R O U P
Group Chief Executive’s Review of Operations (continued)
United Kingdom and
Continental Europe
The United Kingdom’s GDP growth rate was strong at
3.5 per cent in 1997. The consumer sector benefited
from an estimated £35 billion of windfalls from
demutualising financial institutions. Inflation pressures
remained subdued, unemployment continued to fall
and sterling appreciated, particularly against the
deutschmark.
The British banking sector continued to be
extremely competitive with additional pressures on
current accounts, savings and mortgages. Midland
Bank plc achieved strong growth at operating and
profit levels. Results posted by the personal and
corporate banking activities in the UK were again
highly satisfactory.
In continental Europe, GDP growth of 2.6 per cent
was the strongest for some years and, at 2 per cent,
inflation was at its lowest level since the 1960s.
Average unemployment rose slightly to 12.6 per cent,
as economic policies were pursued to achieve the
Maastricht convergence criteria
for European
economic and monetary union (EMU).
Europe’s contribution to the Group’s operating
profit was, at 39 per cent, or £1,779 million, 7 per cent
higher than in 1996. The UK’s contribution to this was
£1,655 million. Results for France, the Channel
Islands and Turkey improved significantly. Corporate
banking profits in Greece were enhanced by the
acquisition of a shipping portfolio. In Germany,
higher fee income was offset by lower dealing profits.
The proportion of Group assets in the UK and contin-
ental Europe was broadly unchanged at 39 per cent.
In the UK, Midland’s net interest income in-
creased, reflecting strong customer recruitment and
continued growth in lending, particularly mortgages
and deposit balances. Within operating income, net
fees and commissions also grew, mainly in personal
and business lending and insurance, and operating lease
income rose. Operating costs continued to be tightly
controlled, rising by less than 3 per cent in spite of
business expansion. The net effect of increased income
and controlled costs was an improvement in the cost-to-
income ratio of 4.7 percentage points.
Midland Bank adopted the Group hexagon as its
corporate symbol in 1997. Over 1,000 branches had
the new signs by the year-end, and all branches will
bear the new identity by mid-1998.
10
Midland continued to focus on growing its current
account and deposit bases, as well as cross-selling
mortgages, life insurance, pensions and investment
products. It was market leader for student accounts for
the second year running, and it was the UK’s 11th-
largest mortgage lender, with a book of £11 billion
and a growth rate three times the market average.
In cards, Midland launched ‘Solo’, a pre-authorised
debit card for young people and higher credit-risk
customers. ‘Smart card’ trials started in Northampton
as part of an industry-wide, anti-fraud initiative.
First Direct maintained its position as the UK’s
leading telephone banking service, attracting 150,000
new customers, making a total of 800,000. It success-
fully tested PC banking and will launch a full service
in 1998.
In partnership with Wm. Morrison Supermarkets,
Midland launched nine in-store outlets which operate
supermarket hours, including Saturdays, Sundays and
public holidays.
Forward Trust Group Limited’s portfolio of leased
assets grew and its invoice and debt management
services continued to expand.
HSBC MIDLAND’s dealing profits improved,
principally due to foreign exchange trading. Overall
dealing profits, however, were in line with 1996 as
dealing profits from international operations were
lower due to difficult bond market conditions.
Midland corporate banking had lead roles in the
two largest UK financings of 1997, ICI and BAT.
HSBC Investment Bank plc originated and executed
several corporate finance mandates during the year,
including co-leading the privatisation of OTE, the
Greek telecoms company, and won the brokerships of
British Energy plc and National Power plc. In equities,
the investment bank’s UK and continental European
operations were merged to offer a pan-European
product in preparation for EMU. Midland also made
systems preparations for introduction of the European
single currency, with seminars for customers em-
phasising Midland’s preparedness to handle fresh
business requirements.
An internal reorganisation to improve management
and reporting lines saw Midland’s interests in
Trinkaus & Burkhardt KGaA in Germany and
Guyerzeller Bank AG in Switzerland transferred to
other Group members. The Swiss private banking
subsidiary of Trinkaus was transferred to Guyerzeller
in return for a minority interest. Both banks produced
satisfactory results.
HSBC Investment Bank and Trinkaus & Burkhardt
launched a joint initiative for German-speaking
Europe under the HSBC Trinkaus brand. This en-
compassed strategic advisory services and primary
and secondary market equity activities. HSBC Private
Equity opened an office in Düsseldorf.
The Cyprus Popular Bank Limited (HSBC Group
interest: 21.96 per cent) produced good growth in
operating profit despite a recessionary domestic
environment. The bank expanded its overseas branch
network to six in the UK and 10 in Greece, and opened
four new representative offices, in New York,
Belgrade, Moscow and Montreal. Its ATM network,
the largest in Cyprus, increased to 53 machines.
Americas
Economic growth in the United States was strong in
1997 at 3.8 per cent. New York State, where most of
the Group’s US operations are concentrated, grew
more slowly.
The Canadian economy achieved growth of 3.8 per
cent, and inflation of 1.6 per cent. Interest rates
declined and unemployment fell to 9.2 per cent.
Latin America enjoyed
its best economic
performance for two decades, with growth for the
region averaging 5.5 per cent, although this may slow
down, due to a knock-on effect of the turbulence in
Asia. Inflation for the region as a whole averaged
11 per cent.
The contribution to Group operating profit of
operations in the Americas improved to £628 million,
or 14 per cent. The proportion of the Group’s total
assets in the Americas increased to 19 per cent.
HSBC Americas, Inc. successfully integrated First
Federal Savings and Loan, which increased its New
York State market share to 5.3 per cent. J P Morgan’s
US dollar clearing business was also successfully
integrated and improved HSBC Americas’ presence in
this business. Marine Midland Bank, HSBC
Americas’ main operating subsidiary, also acquired
the loans and business of the corporate banking unit of
Midland’s New York branch in November 1997.
HSBC Americas’ average interest-earning assets
increased, and there was also growth in the core
lending portfolios.
consumer and commercial
Changes in the asset and liability mixes as a result of
acquisitions led to a lower net interest margin. In-
creases in operating expenses were also primarily due
to acquisitions and related integration expenses.
Moreover, tight cost control elsewhere resulted in a
slight improvement of the cost-to-income ratio. There
was an increase in the charge for bad and doubtful
debts due to a substantial increase in consumer loan
provisions.
Marine Midland opened a new mortgage centre in
Buffalo, piloted a telephone bill-payment service and
introduced Brokerage Talk, a 24-hour automated
telephone service for trading equity securities.
Hongkong Bank of Canada’s net interest income
increased as the result of continued growth in com-
mercial loans and residential mortgages. The net
interest margin fell in response to competitive
pressures. The expansion of financial services offered
by the bank resulted in an increase in other operating
income, primarily in corporate finance, retail brokerage
commissions and mutual fund fees. Other operating
expenses increased, reflecting a headcount increase
and costs related to new financial services.
Hongkong Bank of Canada introduced a personal
financial services initiative, incorporating branch re-
design, new merchandising material and staff training,
which aimed to improve the delivery of retail services.
By year-end, 31 branches had been converted, with 85
to follow in 1998.
In Brazil, the first nine months of operation of
HSBC Bamerindus was spent stabilising the business,
establishing a control environment consistent with
Group standards, and completing the process of due
diligence. The Head Office is in Curitiba; however,
corporate and regional operations moved to a new
building in São Paulo. More than 400 branches have
been refurbished with new signage under the trading
name ‘HSBC Bamerindus’.
As a result of the Group’s increased direct in-
vestment in Latin America, Midland Bank disposed of
most of its Argentinian and Brazilian Brady Bonds,
leading to bad debt recoveries of £59 million.
Global Businesses
The HSBC Group devotes considerable efforts to
developing those parts of its business which benefit
most from wide geographic exposure.
11
T H E H S B C G R O U P
Group Chief Executive’s Review of Operations (continued)
Investment Banking
HSBC Investment Bank, HSBC Asset Management
and HSBC Investment Bank Asia are the principal
Group members comprising HSBC Investment Bank-
ing, which is responsible for the advice and financing,
equity securities, asset management, and most of the
private banking and trustee activities of the Group.
Despite the impact of falling Asian equity markets
in the second half of the year, HSBC Asset Manage-
ment’s funds under management were up slightly, at
US$45.7 billion.
The activities of HSBC Investment Banking have
been reported in the regions where they took place.
Treasury and Capital Markets
The Group had treasury and capital market operations
in 48 countries and territories, enabling it to provide a
full range of services across all time zones.
The Asian currency turmoil, which started mid-
year, increased corporate foreign exchange business
and led to wider margins for most Asian businesses.
Midland’s London foreign exchange desk, specialised
derivatives group and emerging markets currency
group also benefited. Resultant interest rate volatility,
combined with widening credit spreads, led to some
securities trading losses.
Insurance
The HSBC Group undertook a wide range of
insurance activities, including underwriting, broking
and agency activities in both the life and non-life
sectors. The non-life market was characterised by
reducing premium levels in most countries, but im-
proved levels of claims, except for motor insurance.
Our life and pensions market share in Hong Kong
grew by 8 per cent overall, with individual life sales up
30 per cent.
Midland Bank’s life and non-life agency business
made a strong contribution, and overall insurance
agency was the largest contributor, with sales in-
creasing by 20 per cent. Midland Business Insurance
Direct, the joint venture between HSBC Gibbs and
Midland Personal Financial Services, performed well,
with over 40 per cent of new business accounts at
Midland being referred.
New initiatives in Asia with Royal & Sun Alliance
for non-life insurance and American International
12
Assurance for life insurance were designed to expand
our services in countries where they are not available
from the HSBC Group. In the US, Marine Midland
offered new life products.
The acquisitions in Brazil and Argentina have
given the Group’s underwriting business significant
critical mass, counter-cyclical revenue streams and
improved reinsurance purchasing power. The growing
commitment of the Group’s commercial banks to
selling insurance and investment products raised
average penetration rates to over 4 per cent.
Services for Financial Institutions
The Group’s business with banks and non-bank
financial institutions is marketed as HSBC Financial
Institutions. The Group remained the leading sterling
and Hong Kong dollar clearer. It is the fifth largest user
of the CHIPS payments sytem in New York.
With the introduction of the European single
currency expected in January 1999, we began internal
training and external marketing initiatives to establish
the Group as a leading euro banker for our customers
around the world.
The HSBC Group is a founder member of the
‘G20’ initiative, which established the Continuous
Linked Settlement Bank (CLSB) to reduce the risk
and volumes associated with foreign exchange trading
settlement. The Group will share in the development
costs, and market CLSB-related products to our
correspondent banking partners.
Global Banking Services
The Group rationalised its range of personal banking
products and enhanced PC banking capabilities for
worldwide launch in 1998. In credit cards, the Group
ended 1997 with some 10 million issued globally, an
increase of 15 per cent during the year.
The HSBC Global Payments and Cash Manage-
ment name was adopted for our business which meets
the growing requirements of corporate and institu-
tional customers. Preparations were made for the
launch of euro-denominated services, which will
extend our leading position in sterling payments into
continental Europe.
HSBC Trade Services had another successful year.
It was named ‘Best Trade Finance Documentation
Bank’ in 1997 for the second year running by Project
and Trade Finance magazine.
Asia-Pacific Securities Services and Midland
Securities Services won substantial new business and
were ‘top-rated’ by leading market surveys in several
Asia-Pacific markets, as well as in the UK.
Preparations were made for an integrated Islamic
banking capability to be launched in 1998.
Further investment was made in common Group
processing systems to improve the quality of service
in all businesses, with a number of strategic upgrades
to functionality across the network.
Strategic Outlook
The Group’s capital ratios remain strong, which is
appropriate given the challenges and opportunities the
Group faces. The principles of sound liquidity and
strong capital remain embedded within our strategic
thinking. Earnings from volatile business areas will be
kept low as a proportion of total earnings and dividend
policy will be set to maximise total shareholder return,
recognising the potential utilisation of retained capital
within our businesses.
In Hong Kong, we anticipate GDP growth will
slow in 1998, although its underlying economic
fundamentals should see this rebound ahead of the rest
of the region. So far, mainland China has been insulated
from the Asian turmoil and its growth will continue
steadily, which will benefit Hong Kong. The banking
environment will remain intensely competitive.
Elsewhere in Asia-Pacific, it is clear that we are
entering a period of slower growth and the pace of our
expansion into personal banking will depend on the
economic situation in each country. As a result of the
economic turmoil experienced by some countries, it is
likely that we will see further financial deregulation
and a ‘flight to quality’ by some investors. Both these
factors should benefit the HSBC Group.
In the UK and continental Europe, Midland will
continue to focus on growing its market share based
on straightforward products, value for money and
first-class customer service.
In North America, Hongkong Bank of Canada and
Marine Midland will continue to expand the range of
products available to their core customer bases.
Wealth management services and insurance will
widen customer choice, and services will be delivered
by new channels, such as the telephone, PC and
Internet.
In Latin America, the integration of HSBC
Bamerindus and HSBC Roberts into the Group will
continue. This will involve significant staff training,
introducing new products and services, focusing on
customer service, and
targeting areas such as
insurance and trade services where Group strengths
can be brought to bear.
We will continue to seize opportunities which offer
long-term shareholder value, especially where we can
build on our global network, financial strength or
Group synergies.
Growing personal banking within our commercial
banks remains a principal objective. The Group aims
to broaden the range of personal banking products
available in all key territories and extend penetration
of our core customer account base.
We shall build an investment banking capability in
all markets where we have competitive strengths and
focus that capability on working closely with our
commercial banks to develop corporate, institutional
and private client relationships on a durable and
profitable basis.
Insurance is an increasingly important business for
us, focusing on developing opportunities provided by
our commercial banking networks.
For a Group like ours to provide value to our
shareholders, we must give our customers around the
world the best possible value and service. Our talented
and hard-working staff continued to do this, and I
thank them for their efforts during the year.
On a personal note, I would like to record my
thanks to Sir William Purves for his immense
contribution to the HSBC Group during more than 40
years’ distinguished service; we shall miss him but we
shall continue to take HSBC forward.
J R H Bond, Group Chief Executive
27 March 1998
13
T H E H S B C G R O U P
T H E H S B C G R O U P
The HSBC Group and Education (continued)
The HSBC Group and Education (continued)
Group Chief Executive John Bond describes the
rationale behind the HSBC Group’s commitment to
education.
The Group supports hundreds of
educational projects and programmes around the
globe as the main thrust of its community affairs
policy. The scope of our activities is enormous, but the
rationale is simple.
We believe in supporting the development of
communities where we make profits and we believe
education is the life-blood of our business; therefore
we support it at many levels. As an employer, the
HSBC Group is a ‘consumer’ of education from at
least 79 different education systems around the world
and we recognise that we can succeed only if our staff
are better educated and better trained than those of our
competitors.
believes
The HSBC Group
international
competition demands highly-trained employees with
world-class skills to develop, promote and deliver
products and services. We also recognise that, in
today’s global markets, a country needs to offer
internationally-competitive standards of education to
create or attract jobs.
In a changing world, education and training are
investments that pay off many times over. These
investments benefit everyone: business, the wider
community and young people themselves.
To achieve high educational standards, we believe
there needs to be a working partnership among
educators, parents and business. Business needs to
work more closely with schools and teachers.
Business should articulate more forcefully its needs
and experience. And parents need to work with
teachers and employers to make sure that education
equips their children for the challenges they will face
in their working lives.
In 1997, the HSBC Group supported many types
of educational initiatives, with contributions ranging
from a few hundred pounds to more than a million.
Primary and secondary education
Our involvement begins with primary and secondary
education. The type of support we offer depends on the
particular community involved but, generally, it focuses
on those most in need.
Disadvantaged children across the globe benefited
from many educational initiatives undertaken by the
14
Group in 1997. In Taiwan, for instance, Hongkong-
Bank sponsored a school library, but its main focus
remained on educational facilities for the under-
privileged, as it did in New Zealand where its Books-
in-Homes scheme supplied free books for dis-
advantaged primary schoolchildren.
Projects for deprived and disabled children in India
included financial support for a school in Mumbai;
Child Relief and You, an organisation involved in
primary education for children of Banjara fisherfolk;
and Future Hope, a Calcutta charity which takes care
of street children. And half of the running costs of the
School of Hope, which provides free primary
education to Bangladeshi children from deprived
backgrounds, were met by HongkongBank’s recently-
opened Dhaka branch.
HSBC Gibbs announced plans to make bursaries
available
financial
to schoolchildren suffering
hardship in the UK. In New York State, HSBC
Americas, Inc. continued Jumpstart, a joint project of
Marine Midland and Buffalo’s Riverside High
School. Last year alone, over 400 students benefited
from this programme to provide computer hardware
and software, sponsor educational and team-building
internships and
activities,
encourage employees to participate in mentoring and
training. Marine Midland also provided scholarships
and educational programmes in Buffalo, Rochester,
Syracuse and New York City for children from low-
to-moderate income families.
to create business
Elsewhere, HSBC Equator Bank endowed a place
at the Starehe Boys Centre in Kenya and The Cyprus
Popular Bank began a three-year educational games
programme to teach Cypriot history and archaeology
to primary schoolchildren on the Island.
Graduate and postgraduate education
Students in many countries reaped the rewards from
HSBC Group participation in graduate and postgraduate
education in 1997, including more than 100 in the Hong
Kong Special Administrative Region who received
scholarships to continue their education either locally or
overseas. This scheme is funded by the Hongkong Bank
Foundation, which also continued to support student
and teacher exchanges between the SAR and the
Mainland.
Hang Seng Bank provided 32 scholarships for
students at Hong Kong tertiary institutions and at the
Hong Kong Academy for Performing Arts, and
awarded four scholarships to Hong Kong and
Mainland students to study at Harvard and Princeton
universities in the United States.
Elsewhere in Asia, Hongkong Bank Malaysia
awarded three scholarships to the University of
Malaya and, under the British High Commission/
HongkongBank Award, supplied a stipend for living
expenses to a Malaysian postgraduate student in the
UK. HongkongBank also provided two university
scholarships in Sri Lanka.
two Lebanese
In the Middle East, the BritishBank Foundation
provided
students with MBA
scholarships to the American University of Beirut,
while in Saudi Arabia, The Saudi British Bank
introduced a scheme to provide scholarships for Saudi
nationals studying for MBAs at British universities.
The Chevening Scholarship Scheme, which
promotes higher-level education through the British
Council, received support from The Saudi British
Bank in Saudi Arabia, the Egyptian British Bank in
Egypt and the British Arab Commercial Bank in the
Sudan.
In Europe, Trinkaus & Burkhardt supported the
Banking and Finance Department at the European
Business School near Frankfurt, Germany, while more
than 50 undergraduates from ethnic minorities in the
UK took part in the Midland Fellowship programme,
which provides valuable work experience and
encourages them to apply for positions within
the bank.
In North America, Hongkong Bank of Canada
doubled its staff’s voluntary donations to post-
secondary educational establishments and contributed
to
tertiary
institutions.
several Canadian universities and
Languages
In the competitive environment of international finance
and trade, increasing emphasis is placed on the value of
linguistic skills and the Group is an avid supporter of
language tuition.
As English is the international language of
business, the Group encourages its teaching around
the world. This was clearly demonstrated when 38
competitors from 23 countries converged on London
for the final of the English-Speaking Union’s 1997
International Public Speaking Competition, sponsored
by HSBC Holdings. It was won by a Latvian student.
Elsewhere, an English-language quiz for schools in
Brunei was sponsored by HongkongBank, and
through the BritishBank Foundation, an English-
language competition was organised with the help of
the British Council to identify 14 United Arab
Emirates students to study English for two months in
the UK. BritishBank was also the largest single
sponsor of an English-language laboratory at the
Institute of Foreign Languages in Baku, Azerbaijan.
(Mandarin),
But our support for language tuition is by no means
confined to English. In Hong Kong, for instance,
HongkongBank sponsors a popular radio programme
in Putonghua
the official spoken
language of China, and HongkongBank of Australia
has co-sponsored two children’s Putonghua-speaking
competitions organised by the Chinese Language
Teachers’ Association of Victoria. And Hongkong
Bank Malaysia promotes Bahasa Malaysia (Malay)
through
radio
programme
the National
Language.
sponsorship of an educational
called Understand
HSBC Holdings continued its programme of
financial support for two schools in the UK which
teach Asian languages: the Royal Grammar School in
High Wycombe and Levenshulme School
in
Manchester. A third, Shireland High School, near
Birmingham, will benefit in 1998.
Vocational and other educational initiatives
The HSBC Group provided support for many other
types of educational initiatives, including the Hongkong
Bank Foundation School of Nursing at Hong Kong’s
Haven of Hope Hospital, which it helped establish, an
Education and Resource Centre for the Blind Union,
also in Hong Kong, and a school for the blind in
Vietnam, which was helped with money the bank saved
by not sending greetings cards.
Business education is supported by many members
of the Group. Hang Seng Bank’s School of Commerce
in Hong Kong, set up in 1980 with donations from the
bank and its directors, continued to receive a high
level of support. The school prepares secondary pupils
for careers in business, and so far over 4,600 have
graduated from it.
HSBC Holdings sponsored Heads, Teachers &
Industry, a UK organisation which places teachers in
businesses for up to one year to enhance their
leadership and management skills and promote a
better understanding of the workplace. Midland Bank
funded an administrator for this organisation.
15
T H E H S B C G R O U P
The HSBC Group and Education (continued)
HSBC Holdings was a founding donor of the
School for Social Entrepreneurs in London, which
aims to teach entrepreneurial skills to those working in
the not-for-profit sector.
Midland Bank is the largest corporate sponsor
of Young Enterprise, a UK business-education
partnership which encourages young people to set up
and run their own companies while remaining in full-
time education. The bank also provides more than 850
staff volunteers as advisers and area board members.
Keith Whitson, Group Chief Executive designate, is
Chairman of Young Enterprise.
was performed 80 times during a three-month school
tour, and Midland Bank funded Ooh Ah Showab
Khan, a play about racism, which began a 10-month
school tour in September 1997. It will eventually be
seen by about 60,000 children.
HSBC Investment Banking combined its support
for education with the arts through Shakespeare’s
Globe Educational Programme and the Whitechapel
Art Gallery Education Programme. And in con-
junction with the Arts Development Council, Hong-
kongBank launched a new arts programme in
secondary schools in Hong Kong.
Midland now has more than 1,100 Midbanks —
mini-banks run by young people — in UK schools and
colleges and, during the 1997 ‘Pupils into Midland’
day, more than 1,000 children of staff members visited
over 100 Midland offices to explore aspects of
working life.
Sponsorship of the HSBC Money Gallery at the
British Museum included a significant educational
component in the form of two books and a CD-ROM.
As
international permanent collection
dedicated to money, the Gallery serves as a valuable
resource for academics and researchers.
the first
Hongkong Bank Malaysia aligned support for
education with concern for the environment. During
1997, it sponsored a Marine Education Kit as a
schools’ teaching aid and produced school videos and
posters for the Turtle Awareness Campaign.
Theatre was used by HongkongBank as an
educational tool in Singapore when it sponsored Go
Green!, a play with an environmental message which
This is just a glimpse of the wide range of activities
supported by the HSBC Group and underscores the
importance of education to us. As a business, we
prosper in successful economic environments. And, as
education is the ultimate determinant of economic
success, our continuing support for it will underpin
our own long-term growth.
16
H S B C H O L D I N G S P L C
Board of Directors and Group General Managers
Directors
Sir William Purves, CBE, DSO, Group Chairman (retiring on 29 May 1998)
Age 66. An executive Director and Group Chairman since 1990. Joined HongkongBank in 1954; an
executive Director of HongkongBank since 1982 and Chairman and Group Chief Executive Officer
from 1986 to 1992. A Director of Midland Bank plc since 1987 and Chairman from 1994 to
December 1997. A Director of HSBC Americas, Inc. and Marine Midland Bank. A non-executive
Director of The ‘Shell’ Transport and Trading Company, plc and The East Asiatic Company
Limited A/S.
*Baroness Dunn, DBE, Deputy Chairman and senior non-executive Director
Age 58. Executive Director of John Swire & Sons Limited and a Director of Swire Pacific Limited,
Christie’s International plc and The General Electric Company p.l.c. A non-executive Director since
1990 and a non-executive Deputy Chairman since 1992. A non-executive Director of HongkongBank
from 1981 to 1996. Former senior member of the Hong Kong Executive Council and Legislative
Council.
*Sir Peter Walters, Deputy Chairman and senior non-executive Director
Age 67. Deputy Chairman of EMI Group plc, non-executive Chairman of SmithKline Beecham plc
and a non-executive Director of Saatchi & Saatchi plc. A non-executive Director since 1992 and a
non-executive Deputy Chairman since 1993. Chairman of Midland Bank plc from 1991 to 1994.
J R H Bond
Age 56. Group Chief Executive. Group Chairman (designate). An executive Director since 1990.
Joined HongkongBank in 1961; an executive Director of HongkongBank from 1988 to 1992.
Chairman of Midland Bank plc, Marine Midland Bank, HSBC Americas, Inc. and The British Bank
of the Middle East. A Director of HongkongBank and The Saudi British Bank and a non-executive
Director of the London Stock Exchange and Orange plc.
*Lord Butler, GCB, CVO (appointed on 2 May 1998)
Age 60. Master, University College, Oxford. Secretary of the Cabinet and Head of the Home Civil
Service in the United Kingdom from 1988 to January 1998.
*R K F Ch’ien, CBE (appointed on 2 May 1998)
Age 46. A Director of Inchcape plc and Chairman of Inchcape Pacific Limited. A member of the first
Executive Council of the Hong Kong SAR. Chairman of the Industry & Technology Development
Council, the Hong Kong Industrial Technology Centre Corporation and the Hong Kong/Japan
Business Co-operation Committee and a Director of Tianjin Development Holdings Limited. A non-
executive Director of HongkongBank since 1997.
*D E Connolly, OBE
Age 66. Chartered Accountant. A Director of Kowloon-Canton Railway Corporation. A non-
executive Director since 1990 and a non-executive Director of HongkongBank from 1985 to
May 1997.
W R P Dalton (appointed on 1 April 1998)
Age 54. An executive Director of the Company, Director and Chief Executive, Midland Bank plc and
Chairman of Forward Trust Group Limited with effect from 1 April 1998. Joined Hongkong Bank
of Canada in 1981. President and Chief Executive Officer, Hongkong Bank of Canada from 1992
to December 1997.
17
H S B C H O L D I N G S P L C
Board of Directors and Group General Managers (continued)
D J Flint
Age 42. Group Finance Director. An executive Director since 1995. A Director of HSBC Investment
Bank Holdings plc, Hongkong Bank Malaysia Berhad and HSBC Roberts S.A. de Inversiones. A
member of the Urgent Issues Task Force of the Accounting Standards Board. A former partner
of KPMG.
*W K L Fung, OBE (appointed on 2 May 1998)
Age 49. Group Managing Director of Li & Fung Limited. Past Chairman of the Hong Kong General
Chamber of Commerce. A member of the Economic Advisory Committee to the Financial Secretary
of the Hong Kong SAR and Chairman of the Hong Kong Committee for Pacific Economic
Co-operation. A non-executive Director of HongkongBank since 1995.
S K Green (appointed on 1 March 1998)
Age 49. Executive Director Investment Banking and Markets. Joined HongkongBank in 1982. Group
Treasurer from 1992 to February 1998. Chairman of HSBC Investment Bank Holdings plc and a
Director of Midland Bank plc.
*Sir Joseph Hotung (retiring on 29 May 1998)
Age 67. A Director of Hongkong Electric Holdings Limited from 1984 to 1997. A non-executive
Director since 1991 and a non-executive Director of HongkongBank from 1991 to 1996.
*C D Mackay (retiring on 29 May 1998)
Age 57. Non-executive Deputy Chairman of Thistle Hotels Plc, a non-executive Director of
Eurotunnel plc and Eurotunnel SA and a Member of the Supervisory Board of Gucci Group NV. A
non-executive Director since 1990. A non-executive Director of HongkongBank from 1986 to 1992
and of Midland Bank plc from 1992 to 1993.
*Sir Colin Marshall
Age 64. Chairman of British Airways Plc and Inchcape plc and Deputy Chairman of British
Telecommunications plc and Siebe plc. A non-executive Director since 1993. President of the
Confederation of British Industry and a member of the Board of the New York Stock Exchange. A
non-executive Director of Midland Bank plc from 1989 to 1994.
*C Miller Smith
Age 58. Chief Executive of Imperial Chemical Industries plc. A non-executive Director since 1996.
A former Director of Unilever plc and Unilever N.V. and a non-executive Director of Midland Bank
plc from 1994 to 1996.
*Sir Brian Moffat, OBE (appointed on 27 March 1998)
Age 59. Chairman and Chief Executive of British Steel plc. A non-executive Director of Delta plc
and Enterprise Oil plc.
18
*M Murofushi
Age 66. Chairman of ITOCHU Corporation. A non-executive Director since 1992. Chairman of the
Japan Foreign Trade Council. Special Advisor to the Chairman of the Japan Chamber of Commerce
and Industry. Vice Chairman of the Tokyo Chamber of Commerce and Industry. Chairman of the
Japan-Brazil Economic Committee of Keidanren (Japan Federation of Economic Organizations). A
member of the Foreign Investment Advisory Council of the Russian Federation.
*Sir Wilfrid Newton, CBE
Age 69. Chairman of Raglan Properties plc, Jacobs Holdings PLC, Mountcity Holdings Limited and
Guy Maunsell International Limited. A non-executive Director of Maunsell Holdings Limited and
Sketchley plc. A non-executive Director since 1990. Former Chairman of Mass Transit Railway
Corporation and of London Regional Transport and a non-executive Director of HongkongBank
from 1986 to 1992. A non-executive Director of Midland Bank plc since 1992.
*C E Reichardt
Age 66. A Director and former Chairman and Chief Executive of Wells Fargo & Company. A non-
executive Director since 1996. A Director of Ford Motor Company.
*H Sohmen, OBE
Age 58. Chairman of World-Wide Shipping Agency Limited, World-Wide Shipping Group Limited,
World Maritime Limited, World Shipping and Investment Company Limited, World Finance
International Limited and N&T Argonaut AB. A non-executive Director since 1990. A non-executive
Director of HongkongBank since 1984 and Deputy Chairman since 1996.
J E Strickland
Age 58. Chairman of HongkongBank since 1996. Joined HongkongBank in 1971 (previous service
1966-69). An executive Director since 1989. A Director of Midland Bank plc from 1993 to 1996. A
Director of Marine Midland Bank from 1994 to 1996. Vice-Chairman of Hang Seng Bank Limited
and Chairman of Hongkong Bank Malaysia Berhad.
*Sir Adrian Swire
Age 66. Executive Director and Honorary President of John Swire & Sons Limited and a Director
of Swire Pacific Limited and Cathay Pacific Airways Limited. A non-executive Director since 1995.
A member of the General Committee of Lloyd’s Register of Shipping. Former Chairman of the
International Chamber of Shipping and former President of the General Council of British Shipping.
K R Whitson
Age 55. Group Chief Executive (designate). An executive Director since 1994. A Director of Midland
Bank plc since 1992, Chief Executive from 1994 to 31 March 1998 and Deputy Chairman since
January 1998. Joined HongkongBank in 1961. Deputy Chairman of the Supervisory Board of
Trinkaus & Burkhardt KGaA. A Director of HSBC Investment Bank Holdings plc, Hongkong Bank
of Canada and HSBC Roberts S.A. de Inversiones. A non-executive Director and Chairman of Young
Enterprise Limited.
*Independent non-executive Directors
19
H S B C H O L D I N G S P L C
Board of Directors and Group General Managers (continued)
Advisers to the Board
F R Frame
Age 68. Former Deputy Chairman of HongkongBank. Chairman of Wallem Group Limited and a
non-executive Director of Baxter International Inc and Edinburgh Dragon Trust plc.
M J Jacobi (appointed 1 April 1998)
Age 46. Joined Marine Midland Bank as Senior Vice President Group Public Affairs USA in 1990.
Head of Group Public Affairs, HSBC Holdings plc, from 1993 to 31 March 1998. Former Assistant
Secretary of Commerce of the United States; former executive Director, Drexel Burnham Lambert;
and former Special Assistant to the President of the United States.
Secretary
R G Barber
Age 47. Group Company Secretary since 1990. Joined HongkongBank as Assistant Secretary in
1980; Corporation Secretary from 1986 to 1992. Company Secretary of Midland Bank from 1994
to 1996.
Group General Managers
D Beath
Age 59. General Manager and Group Audit Controller. Joined
HongkongBank in 1960.
R E T Bennett
Age 46. General Manager and Group Legal Adviser. Joined
HongkongBank in 1979.
I M Burnett
Age 50. Chief Executive Officer, HSBC Americas and President
and Chief Executive Officer, Marine Midland Bank. Joined
HongkongBank in 1966.
V H C Cheng, OBE
Age 49. Executive Director, HongkongBank. Joined Hong-
kongBank in 1978.
A Dixon, OBE
Age 53. Deputy Chairman, The British Bank of the Middle East.
Joined HongkongBank in 1965.
D G Eldon
Age 52. Chief Executive Officer, HongkongBank. Joined
HongkongBank in 1968.
M F Geoghegan
Age 44. President and Chief Executive Officer of Banco HSBC
Bamerindus. Joined HongkongBank in 1973.
A P Hope
Age 51. General Manager Group Insurance. Joined Antony
Gibbs & Sons Insurance in 1971.
H H Jacobi
Age 63. Chairman of the Managing Partners, Trinkaus &
Burkhardt. Joined Midland Bank in 1981.
A W Jebson
Age 48. Group General Manager Technical Services. Joined
HongkongBank in 1978.
C P Langley, OBE
Age 53. General Manager, HongkongBank. Joined Hongkong-
Bank in 1961.
M B McPhee
Age 56. Group General Manager Credit and Risk. Joined
Hongkong Bank of Canada in 1984.
A Mehta
Age 51. General Manager International, HongkongBank.
Joined HongkongBank in 1968.
T W O’Brien
Age 50. Deputy Chairman and Chief Executive Officer,
Hongkong Bank Malaysia. Joined HongkongBank in 1969.
R M J Orgill
Age 59. Deputy Chief Executive, Midland Bank. Joined
HongkongBank in 1958.
J C S Rankin
Age 56. General Manager and Chief Executive Officer
Singapore, HongkongBank. Joined HongkongBank in 1960.
P E Selway-Swift
Age 53. Deputy Chairman of HSBC Investment Bank and
Chairman of HSBC Investment Bank Asia Holdings. Joined
HongkongBank in 1962.
R A Tennant
Age 55. General Manager Group Human Resources. Joined
Midland Bank in 1960.
20
H S B C H O L D I N G S P L C
Report of the Directors
Results for 1997
The Group profit for the year attributable to shareholders of the Company was £3,355 million, an increase of
8 per cent.
A first interim dividend of 20 pence per ordinary share was paid on 8 October 1997 and the Directors have
declared a second interim dividend of 30 pence per ordinary share, payable on 29 April 1998, making a total
distribution for the year of £1,337 million. The second interim dividend will be payable in cash, in sterling or in
Hong Kong dollars at an exchange rate to be fixed on 17 April 1998, with a scrip dividend alternative. The
reserves available for distribution before accounting for the second interim dividend of £803 million are
£3,689 million.
Further information about the results is given in the accompanying consolidated profit and loss account on
page 49.
Principal Activities and Business Review
Through its subsidiary and associated undertakings, the Group provides a comprehensive range of banking and
related financial services through an international network of more than 5,500 offices in 79 countries and
territories in the Asia-Pacific region, Europe, the Americas, the Middle East and Africa.
A review of the development of the business of Group undertakings during the year, particulars of important
events since the end of the year and an indication of likely future developments are given in the ‘Group Chief
Executive’s Review of Operations’ on pages 6 to 13.
Taken together, the five largest customers of the Group do not account for more than 1 per cent of the Group’s
income.
Connected Transactions
The following constitute connected transactions under the rules of The Stock Exchange of Hong Kong.
In May 1997, Hang Seng Bank Limited, a subsidiary, entered into an agreement to sell its property 4/F Wing
On House, 71 Des Voeux Road Central, Hong Kong to Hung On Investments Limited, a company indirectly
controlled by Dr Lee Quo-Wei, its then Chairman, for a consideration of HK$115 million.
In December 1997, HSBC Investment Bank Holdings BV, a subsidiary, acquired 1,193,169 ordinary shares
and Rand 11,025,000 subordinated loan stock of HSBC Simpson McKie (Proprietary) Limited, also a subsidiary,
from 21 directors and employees of HSBC Simpson McKie (Proprietary) Limited, for a total consideration of
Rand 161 million.
Capital and Reserves
The following events occurred during the year:
1. 1,005,502 ordinary shares of 75p and 7,768,306 ordinary shares of HK$10 each were issued on 30 April 1997
at par in lieu of the 1996 second interim dividend to shareholders who elected to receive new shares in lieu
of cash dividends. The average market price per share used to calculate shareholders’ entitlements to new
shares was 1,478.65p.
2. 370,477 ordinary shares of 75p and 3,215,656 ordinary shares of HK$10 each were issued on 8 October 1997
at par in lieu of the 1997 first interim dividend to shareholders who elected to receive new shares in lieu of
cash dividends. The average market price per share used to calculate shareholders’ entitlements to new shares
was 2,113.9p.
3. Options over 1,344,850 ordinary shares of 75p each were awarded at nil consideration on 24 March 1997 under
the Executive Share Option Scheme. The options are exercisable between the third and tenth anniversaries of
the award at a price of 1,504.8p per share, the market value at the date of the award.
4. Options over 11,750 ordinary shares of 75p each were awarded at nil consideration on 12 August 1997 under
the Executive Share Option Scheme. The options are exercisable between the third and tenth anniversaries of
the award at a price of 2,339.5p per share, the market value at the date of the award.
21
H S B C H O L D I N G S P L C
Report of the Directors (continued)
5. Options over 6,574,794 ordinary shares of 75p each were awarded at nil consideration on 9 April 1997 to
Group employees resident in 38 countries under the Savings-Related Share Option Scheme. The options are
exercisable within the period of six months commencing on the fifth anniversary of the commencement of the
relevant savings contract on 1 August 1997 at a price of 1,356.18p per share, a 15 per cent discount to market
value at the date of the award.
6. Options over 445,199 ordinary shares of 75p each were awarded at nil consideration on 12 August 1997 under
the Savings-Related Share Option Scheme (USA Section). The options are exercisable within the period of
six months commencing on the fifth anniversary of the commencement of the relevant savings contract on
1 July 1997 at a price of 1,955.6p per share, a 15 per cent discount to market value at the date of the award.
7. 508,727 ordinary shares of 75p each were issued at prices ranging from 541.8p to 1,356.18p per share in
connection with the exercise of options under the Savings-Related Share Option Scheme and options over
1,756,663 ordinary shares of 75p each lapsed.
8. 581,391 ordinary shares of 75p each were issued at prices ranging from 651.8p to 1,504.8p in connection with
the exercise of options under the Executive Share Option Scheme and options over 85,001 ordinary shares
of 75p each lapsed.
9. 1,107,401 ordinary shares of 75p each were issued at prices ranging from 118.43p to 237.12p in connection
with the exercise of options under the Midland Bank Savings-Related and Executive Share Option Schemes
and options over 32,623 ordinary shares of 75p each lapsed.
Valuation of Freehold and Leasehold Land and Buildings
The Group’s freehold and long leasehold properties, and properties in Hong Kong with an unexpired lease term
of between 30 and 50 years, were revalued in November 1997 in accordance with the Group’s policy of annual
valuation. As a result of this revaluation, the net book value of land and buildings has decreased by £75 million.
Further details are included in Note 20 of the ‘Notes on the Accounts’.
Directors
The Directors who served during the year were Sir William Purves, Baroness Dunn, Sir Peter Walters, B H Asher,
J R H Bond, D E Connolly, D J Flint, Sir Joseph Hotung, C D Mackay, Sir Colin Marshall, C Miller Smith,
M Murofushi, Sir Wilfrid Newton, C E Reichardt, H Sohmen, J E Strickland, Sir Adrian Swire and K R Whitson.
B H Asher will retire on 28 February 1998.
Baroness Dunn, Sir Joseph Hotung, C D Mackay, Sir William Purves and J E Strickland will retire by rotation
at the Annual General Meeting. Baroness Dunn and J E Strickland will offer themselves for re-election; Sir
Joseph Hotung, C D Mackay and Sir William Purves will not seek re-election.
Directors appointed since the last Annual General Meeting, W R P Dalton (with effect from 1 April 1998),
S K Green (with effect from 1 March 1998) and Sir Brian Moffat (with effect from 27 March 1998), will retire
at the forthcoming Annual General Meeting and will offer themselves for election.
Brief biographical notes of the Directors are set out on pages 17 to 19.
None of the Directors had, during the year or at the end of the year, a material interest, directly or indirectly,
in any contract of significance with the Company or any of its subsidiary undertakings.
Corporate Governance
The Company has complied throughout the year with the operative provisions of the Code of Best Practice (‘the
Code’) contained in the Report of the Committee on the Financial Aspects of Corporate Governance (‘the
Cadbury Committee’) and with the provisions of the Code of Best Practice set out in Appendix 14 to the Rules
Governing the Listing of Securities on The Stock Exchange of Hong Kong. The Auditor, KPMG Audit Plc, has
confirmed to the Directors that this statement appropriately reflects the Company’s compliance with the Code,
insofar as it relates to the paragraphs of the Code which the London Stock Exchange has specified for review by
the Auditor.
22
Internal Financial Control
The Directors are responsible for internal financial control in respect of the Group as a whole and have designed
procedures for the safeguarding of assets against unauthorised use or disposition; for the maintenance of proper
accounting records; and for the reliability of financial information used within the business or for publication.
Such procedures can only provide reasonable and not absolute assurance against material errors, losses or fraud.
The key procedures that the Directors have established and which are designed to provide effective internal
financial control within the Group, include the following:
• Authority to operate the various subsidiaries is delegated to their respective chief executive officers within
limits set by the Board of Directors of the Company or the Group Executive Committee. The appointment of
executives to the most senior positions within the Group requires the approval of the Board of Directors of
the Company. Functional operating and financial reporting standards are established by Group Head Office
management for application across the whole Group. These are supplemented by operating standards set by
the local management, as required for the type of business and geographical location of each subsidiary.
• Systems and procedures are in place in the Company and subsidiaries to report on and control the major
financial risks: credit; changes in the market prices of financial instruments; funding of assets; operational
error and fraud. Exposure to these risks is monitored by asset and liability committees and executive
committees in subsidiaries and by the Group Executive Committee for the Group as a whole.
• Comprehensive annual financial plans are prepared by subsidiaries and are reviewed and approved at Group
Head Office. Results are monitored regularly and reports on progress compared with plan are prepared
throughout the Group each quarter. A strategic plan is prepared by all major operating subsidiaries every three
years. Financial accounting and reporting and certain management reporting standards are established for
application across the whole Group. Centralised functional control is exercised over all computer system
developments and operations. Common systems are employed where possible for similar business processes.
Credit and market risks are measured and reported on in subsidiaries and aggregated for review of risk
concentrations on a Group-wide basis.
• Responsibilities for financial performance against plans and for capital expenditure, credit exposures and
market risk exposures are delegated with limits to line management in the subsidiaries. In addition, functional
management in Group Head Office set policies and standards in the areas of finance; legal and regulatory
compliance; human resources; credit; market risk; computer systems and operations; property management;
and for certain global product lines.
• The internal audit function, which is centrally controlled, monitors compliance with policies and standards and
the effectiveness of internal control structures across the whole Group. The work of the internal audit function
is focused on areas of greatest risk to the Group as determined by a risk management approach. The head of
this function reports to the Group Chairman and the Group Audit Committee. The Group’s independent
Auditor, KPMG Audit Plc, reviews the internal financial controls of the Group and conducts such tests and
other auditing procedures as it considers necessary to express the opinion in its report on the financial
statements. KPMG Audit Plc has free access to the Group Audit Committee, with and without members of
management present, to discuss its audit and its findings as to the integrity of the Group’s financial reporting
and the adequacy of the internal financial control structure.
The Group Audit Committee has reviewed the effectiveness of the system of internal financial control
throughout 1997 and the subsequent period up to 23 February 1998 when the financial statements were signed.
KPMG Audit Plc has reviewed both the statement on the Group’s internal financial control systems and the
reference to the Group’s continued adoption of the going concern basis in preparing the Group’s financial
statements, contained in the ‘Statement of Directors’ Responsibilities in Relation to Financial Statements’ on
page 48. KPMG Audit Plc has reported that in its opinion these statements: (i) provide the disclosures required
by the London Stock Exchange Listing Rules; and (ii) are not inconsistent with the information of which it is
aware from its audit work on the Accounts. The Directors note that KPMG Audit Plc has performed its reviews
23
H S B C H O L D I N G S P L C
Report of the Directors (continued)
in accordance with the guidance issued by the Auditing Practices Board and has not therefore performed any
additional procedures to express separate opinions on internal financial controls or going concern.
Board Committees
The Board has appointed a number of committees consisting of certain Directors and senior executives. The
following are the principal committees:
Group Executive Committee
The Group Executive Committee meets regularly and operates as a general management committee under the
direct authority of the Board. The members of the Committee at the date of this report are J R H Bond (Chairman),
B H Asher, D J Flint, Sir William Purves, J E Strickland and K R Whitson, who are executive Directors, and
I M Burnett, D G Eldon, S K Green, A W Jebson, M B McPhee and A Mehta, who are Group General Managers.
B H Asher will retire on 28 February 1998 and W R P Dalton will become a member of the Committee upon his
appointment as an executive Director with effect from 1 April 1998.
Group Audit Committee
The Group Audit Committee meets regularly with the Group’s senior financial, internal audit and compliance
management and the external auditor to consider the nature and scope of audit reviews and the effectiveness of
the systems of internal control and compliance. The members of the Group Audit Committee are Sir Wilfrid
Newton (Chairman), D E Connolly and Sir Joseph Hotung, all of whom are non-executive Directors, and
F R Frame, Adviser to the Board.
Nomination Committee
The Nomination Committee carries out the process of nominating candidates to fill vacancies on the Board of
Directors. The members of the Committee are the members of the Remuneration Committee, together with the
Group Chairman.
Remuneration Committee
The Remuneration Committee meets regularly to consider human resource issues, particularly terms and
conditions of employment, remuneration, retirement benefits, development of high potential employees and key
succession planning.
Report by the Remuneration Committee
The following is a Report by the Remuneration Committee which has been approved and adopted by the Board
for submission to shareholders.
‘The members of the Remuneration Committee are Baroness Dunn (Chairman), H Sohmen and Sir Peter
Walters, all of whom are non-executive Directors.
Policy
Within the authority delegated to the Remuneration Committee by the Board of Directors, the Committee is
responsible for determining the remuneration policy of the HSBC Group, including the terms of bonus schemes,
share option schemes and other long-term incentive schemes, and for fixing the individual remuneration packages
of executive Directors and other senior Group employees.
In framing the remuneration policy, the Committee has continued to give full consideration to the London
Stock Exchange’s Best Practice Provisions relating to remuneration policy, service contracts and compensation.
The Committee strives to ensure that total remuneration is fair and attractive to potential employees, whilst
motivating and retaining existing high calibre staff. The remuneration packages are structured to take due account
of levels and composition of pay and the market positioning in the many countries and businesses in which the
Group operates. In appropriate circumstances, performance-related payments and share awards are provided with
the objective of rewarding achievement and aligning the interests of the individual with those of the Group’s
shareholders. The Committee seeks to respond to the variety of environments and circumstances which are faced
by different businesses in different markets at different times.
24
In determining the terms of annual bonus and incentive schemes, individual remuneration awards, retirement
benefit arrangements, notice periods and severance terms, the Committee considers the practices and levels of
remuneration in appropriate comparator companies which operate in similar industry sectors and territories to
those in which the individual Group company operates and the executive Director or employee is employed. Due
regard is paid to advice rendered by external professional consultants.
Basic Salary and Benefits
Salaries are reviewed annually in the context of individual and business performance, market practice and internal
relativities. Allowances and benefits are largely determined by local market practice.
Annual Performance-Related Payments
The level of performance-related payment depends upon the performance of the Company, constituent businesses
and the individual concerned. Key measures of success include achievement of financial goals, concerning both
revenue generation and expense control; maintenance of customer relationships; full utilisation of professional
skills; and adherence to the Group’s ethical standards. The Group has a long history of paying close attention to
its customers in order to provide value for its shareholders. This has been achieved by ensuring that the interests
of the Group and its staff are aligned with those of its shareholders, and that the Group’s approach to risk
management serves the interests of all.
Bonus ranges are reviewed in the context of prevailing market practice and overall remuneration.
Long-Term Share Awards
The Restricted Share Plan is intended to align the interests of executives with those of shareholders by linking
executive rewards to the creation of superior shareholder value. This is achieved by focusing on progressive
earnings growth without undue volatility. Details of conditional awards and the related performance requirements
are set out on pages 29 to 31.
Executive Directors and Group General Managers are eligible to receive a conditional award under the
Restricted Share Plan, but may no longer participate in the Executive Share Option Scheme, although options
granted in prior years will remain valid.
Executive Directors are eligible to participate in the Savings-Related Share Option Scheme on the same terms
as other eligible employees.
Pensions
The pension entitlements earned by the current Directors during the year are shown in the table below.
The pension arrangements for J R H Bond and K R Whitson to contractual retirement age of 60 are provided
under the Midland Bank Pension Scheme. The pensions accrue at a rate of one thirtieth of pensionable salary per
year of pensionable service in the United Kingdom.
The pension arrangements for J E Strickland are provided under the HSBC International Staff Retirement
Benefits Scheme. The pension accrues at a rate of one twenty-seventh of pensionable salary per year of
pensionable service.
Only basic salary is pensionable. No other Director participated in any Group pension arrangements and none
of the Directors participating in Group pension arrangements is subject to the earnings cap introduced by the 1989
Finance Act.
25
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Accrued annual
pension at 31
December 1997
(£000)
73
159
57
Increase in accrued
pension during
1997, excluding any
increase for inflation
(£000)
Personal
contributions
towards pension
(£000)
14
10
10
—
10
—
Transfer value
relating to increase in
accrued pension *
(£000)
207
7
141
J R H Bond
J E Strickland
K R Whitson
* The transfer value represents a liability of the Group’s pension funds and not a sum paid or due to the individual; it cannot
meaningfully be added to annual remuneration.
Directors’ Service Contracts
No executive Director has a service contract with the Company or any of its subsidiaries with a notice period in
excess of one year or with provisions for predetermined compensation on termination which exceeds one year’s
salary and benefits-in-kind. Non-executive Directors are appointed for fixed terms not exceeding three years.
J E Strickland, who is to retire by rotation and stand for re-election at the forthcoming Annual General
Meeting, is employed on a contract which provides for six months’ notice to be given by either party.
S K Green and W R P Dalton, who have been appointed Directors with effect from 1 March and 1 April 1998
respectively, will stand for election at the forthcoming Annual General Meeting. They are both employed on
contracts which provide for 12 months’ notice to be given by either party.
Directors’ Individual Remuneration and Interests
Particulars of Directors’ individual share interests and remuneration are set out on pages 26 to 29.
Other Directorships
Executive Directors, if so authorised by the Board, may accept appointments as non-executive Directors of
suitable companies which are not part of the Group. Executive Directors normally would be permitted to take on
no more than two such appointments. Any remuneration receivable in respect of these appointments is paid to
the Group company by which the executive Director is employed.
Compliance
The Company has complied throughout the year with the London Stock Exchange’s Best Practice Provisions
relating to remuneration committees.
Directors’ Interests
According to the registers of Directors’ interests maintained by the Company pursuant to section 325 of the
Companies Act 1985 and section 29 of the Securities (Disclosure of Interests) Ordinance, the Directors of the
Company at the year-end had the following interests, all beneficial unless otherwise stated, in the shares and loan
capital of the Company:
26
At 1 January
1997
Total
555557 55555555555555555555555678
Family Corporate
Personal
Other
At 31 December 1997
Ordinary Shares of HK$10
B H Asher
J R H Bond
D E Connolly
Baroness Dunn
D J Flint
Sir Joseph Hotung
Sir Wilfrid Newton
Sir William Purves
H Sohmen
J E Strickland
Sir Adrian Swire
K R Whitson
Ordinary Shares of 75p
J R H Bond
Baroness Dunn
D J Flint
C D Mackay
Sir Colin Marshall
Sir Wilfrid Newton
Sir William Purves
J E Strickland
Sir Adrian Swire
Sir Peter Walters
K R Whitson
2,100
17,776
195,707
20,000
—
703,754
3,767
36,903
646,393
30,168
60,000
1,709
—
—
—
7,500
2,066
2,000
1,471
10,090
109
13,005
—
2,100
18,259
15,855
20,000
1,000
—
3,869
37,907
—
29,952
—
1,755
—
—
—
3,750
2,122
2,000
1,511
10,364
—
13,005
—
11.69% Subordinated Bonds 2002 of £1
J R H Bond
Baroness Dunn
Sir Colin Marshall
Sir Wilfrid Newton
Sir Adrian Swire
Sir Peter Walters
500,000
70,000
975
35,000
359
6,500
500,000
70,000
975
35,000
—
6,500
—
—
—
—
—
—
—
—
120,666
1,035
—
—
—
—
—
3,750
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
816,1231
—
—
699,7711
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
98,0002
—
7,8843
8,0002
4,9313
—
—
—
3202
5,9173
8,0002
—
5,9173
—
—
—
—
3592
—
2,100
18,259
15,855
20,000
1,000
816,123
3,869
37,907
820,437
30,987
98,000
1,755
7,884
8,000
4,931
7,500
2,122
2,000
1,831
16,281
8,000
13,005
5,917
500,000
70,000
975
35,000
359
6,500
Interests held by private investment companies.
1
2 Non-beneficial.
3
Shares conditionally awarded under the Restricted Share Plan in 1997 together with additional shares arising from scrip
dividends. The monetary value of the shares awarded during 1997 was: J R H Bond £120,000; D J Flint £75,000; J E Strickland
£90,000; and K R Whitson £90,000. For these shares to vest in 2000 or 2001, in whole or in part, performance tests described
in the Report of the Remuneration Committee in the 1996 Annual Report and Accounts must be satisfied.
Share Options
At 31 December 1997, the undernamed Directors held options to acquire the number of ordinary shares of 75p
each set against their respective names. The options were awarded for nil consideration at exercise prices
equivalent to the market value at the date of award except that options awarded under the Savings-Related Share
Option Scheme are exercisable at a 15 per cent discount to the market value at the date of award. Except as
otherwise indicated, there are no performance criteria conditional upon which the outstanding options are
exercisable. The market value of the ordinary shares of 75p each at 31 December 1997 was 1,571 pence. The
highest and lowest market values during the year were 2,347 pence and 1,273 pence. Market value is the mid-
market price quoted on the London Stock Exchange on the relevant date.
27
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Options Options Options
held at awarded exercised held at 31 Exercise
price in
pence
1 January
1997
Options
year
during
year
during December
1997
Exercisable
until
4
55555555555555558 555555555555555555556
12 Oct 2003
8 Mar 2004
7 Mar 2005
31 Jan 2001
— 721.84 12 Oct 1993 12 Oct 1996
8 Mar 1997
8 Mar 1994
851.27
7 Mar 1998
651.80
7 Mar 1995
1 Aug 2000
541.80 10 Apr 1995
— 12,6133
—
—
—
— 15,136
— 15,000
3,1831
—
Date of Exercisable
from4
award
12,613
15,136
15,000
3,183
20,181
20,181
25,000
3,183
25,000
12,000
—
—
—
—
—
—
— 20,181
— 20,181
— 25,000
—
3,1831
— 25,0002 1,000.00
721.84 12 Oct 1993 12 Oct 1996
8 Mar 1997
8 Mar 1994
851.27
7 Mar 1998
651.80
7 Mar 1995
1 Aug 2000
541.80 10 Apr 1995
1 Apr 1999
1 Apr 1996
12 Oct 2003
8 Mar 2004
7 Mar 2005
31 Jan 2001
1 Apr 2006
—
1,271
— 12,0002 1,000.00
1,2711 1,356.18
—
1 Apr 1996
9 Apr 1997
1 Apr 1999
1 Aug 2002
1 Apr 2006
31 Jan 2003
B H Asher
J R H Bond
D J Flint
Sir William 25,227
45,408
Purves
45,000
1,476
1,273
35,000
J E Strickland 15,136
15,000
15,000
—
K R Whitson 12,613
20,000
3,183
20,000
—
—
—
—
—
—
—
—
—
1,271
—
—
—
—
— 25,227
— 45,408
— 45,000
1,4761
—
—
1,2731
— 35,0002 1,000.00
721.84 12 Oct 1993 12 Oct 1996
8 Mar 1994
8 Mar 1997
851.27
651.80
7 Mar 1998
7 Mar 1995
700.84 11 Apr 1994
541.80 10 Apr 1995
1 Apr 1996
12 Oct 2003
8 Mar 2004
7 Mar 2005
1 Jul 1999 31 Dec 1999
31 Jan 2001
1 Apr 2006
1 Aug 2000
1 Apr 1999
851.27
— 15,136
— 15,000
651.80
— 15,0002 1,000.00
1,2711 1,356.18
—
8 Mar 1994
7 Mar 1995
1 Apr 1996
9 Apr 1997
— 12,613
— 20,000
3,1831
—
— 20,0002 1,000.00
8 Mar 1994
851.27
651.80
7 Mar 1995
541.80 10 Apr 1995
1 Apr 1996
8 Mar 1997
7 Mar 1998
1 Apr 1999
1 Aug 2002
8 Mar 1997
7 Mar 1998
1 Aug 2000
1 Apr 1999
8 Mar 2004
7 Mar 2005
1 Apr 2006
31 Jan 2003
8 Mar 2004
7 Mar 2005
31 Jan 2001
1 Apr 2006
1 Options awarded under the Savings-Related Share Option Scheme.
2 The exercise of these options is conditional upon the growth in earnings per share over a three-year period being equal to or
greater than a composite rate of inflation (comprising 50 per cent of the Hong Kong Composite Consumer Price Index, 35 per
cent of the UK Retail Price Index and 15 per cent of the USA All Urban Consumer Price Index) plus 2 per cent per annum.
3 Market price at date of exercise (30 April 1997) was 1,620 pence.
4 May be advanced to an earlier date in certain circumstances, e.g. retirement.
Sir Joseph Hotung has a personal interest in HK$10 million of The Hongkong and Shanghai Banking
Corporation Limited Subordinated Collared Floating Rate Notes 2003, which he held throughout the year.
H Sohmen has a corporate interest in £1,200,000 of Midland Bank plc 9% Subordinated Notes 2005, which
he held throughout the year.
Save as stated above, none of the Directors had an interest in any shares or debentures of any Group company
at the beginning or at the end of the year and none of the Directors, or members of their immediate families, was
awarded or exercised any right to subscribe for any shares or debentures during the year. No options held by
Directors lapsed during the year.
There have been no changes in Directors’ interests from 31 December 1997 to the date of this report. Any
subsequent changes up to the last practicable date before the publication of the Notice of Annual General Meeting
will be set out in the notes to that Notice.
28
Directors’ Emoluments
The emoluments of the Directors of the Company for 1997 were as follows:
Salary and
Executive Directors
Sir William Purves
— waived
J E Strickland1
— waived
J R H Bond
— waived
B H Asher
K R Whitson
D J Flint
Non-executive Directors
Sir Wilfrid Newton
D E Connolly
Sir Joseph Hotung
Baroness Dunn
Sir Peter Walters
H Sohmen
— waived
C D Mackay
Sir Colin Marshall
C Miller Smith
M Murofushi
Sir Adrian Swire
C E Reichardt
Total
Total
19963
£000
555555555555555555555555555555
other Benefits
in kind
£000
Discretionary
bonuses2
£000
remuneration
£000
Total
1997
£000
Fees
£000
25
(20)
20
(25)
25
(20)
25
25
25
531
320
449
415
325
333
25
618
2
8
28
7
150
—
150
150
100
85
731
(20)
958
(25)
626
(20)
598
478
450
726
(16)
672
(20)
615
(16)
578
433
409
—
—
—
—
—
—
—
—
—
—
—
—
50
33
25
25
25
20
(25)
25
25
25
25
25
25
47
41
28
24
23
20
(23)
20
20
20
20
20
16
555555555555555555555555555555
3,732
zzzzzzzzzzzzzzzzzzzzzzzzzzzzzz
60
41
33
33
30
25
(30)
25
25
25
25
25
25
10
8
8
8
5
5
(5)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,417
4,213
635
473
688
1 The emoluments of J E Strickland include housing and other expatriate benefits in kind which are normal within the location in
which he is employed.
2 These discretionary bonuses are in respect of 1997 and will be paid in 1998.
3 Restated to exclude employer pension contributions.
Executive Directors who are also Directors of HongkongBank may elect to receive a fee from either the
Company or HongkongBank. H Sohmen has elected to waive any fees payable to him by the Company.
1998 Conditional Awards under the Restricted Share Plan
The Committee has decided that conditional awards under the Restricted Share Plan should be made in 1998 and
that the Trustee to the Plan should be provided with funds to acquire ordinary shares of 75p each between 23 and
27 February 1998. The 1998 conditional awards of shares to executive Directors and Group General Managers
in respect of 1997 will have an aggregate value at the date of award of £1.41 million and will include conditional
awards of shares to the following values to executive Directors:
J R H Bond
D J Flint
K R Whitson
Total
£000
555567
150
100
120
555567
370
zzzzxc
29
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Purpose
The Restricted Share Plan is designed to reward the delivery of sustained financial growth of the Company. A
key factor in the creation of superior shareholder return is stable and reliable earnings growth. Accordingly, the
Restricted Share Plan is focused on rewarding sustained earnings growth and contains particular features which
reduce or remove any benefit from volatile earnings growth.
Earnings per share for the purpose of the Restricted Share Plan are defined as headline earnings per share,
calculated in accordance with the definition in the Institute of Investment Management and Research (IIMR)
Statement of Investment Practice No.1 ‘The Definition of IIMR Headline Earnings’ and are disclosed in the
Company’s Annual Report and Accounts each year. Headline earnings per share exclude profits on the sale of
tangible fixed assets, subsidiary undertakings, interests in associated undertakings and other participating
interests and provisions for permanent diminution in the value of fixed assets.
To illustrate how the Restricted Share Plan is applied, particulars of the terms are set out below, together with
an example which describes the circumstances necessary for full awards to vest.
Vesting Schedule
Having regard to the Group’s diverse profits stream, the Committee has determined that earnings growth will be
measured by reference to a composite rate of inflation applicable to the major geographical areas in which the
Group operates. The composite rate of inflation for the 1998 awards will comprise a weighted average of the rates
of inflation as measured by the following indices during the performance period:
• 50% of the Hong Kong Composite Consumer Price Index;
• 35% of the UK Retail Price Index; and
• 15% of the USA All Urban Consumer Price Index.
For vesting of the 1998 awards to be achieved in whole or in part, the following tests must be satisfied.
Test 1
Earnings per share in the year 2001 (the fourth year of the performance period) must be greater than
earnings per share in 1997 (the base year for the calculation) by a factor equivalent to the composite
rate of inflation plus 2 per cent, compounded over each year of the performance period;
Test 2
Earnings per share must increase relative to the previous year in not less than three of the four years of
the performance period; and
Test 3 Cumulative earnings per share over the four years of the performance period, 1998 to 2001 inclusive,
must exceed an aggregate figure calculated by compounding 1997 earnings per share by a factor
equivalent to the annual composite rate of inflation plus 2 per cent for each year of the performance
period.
If these tests are met, 50 per cent of the conditional awards will be released to each eligible participant by the
Trustees.
If the cumulative earnings per share over the performance period exceed an aggregate figure calculated by
compounding 1997 earnings per share by a factor equivalent to the annual composite rate of inflation plus 5 per
cent or more, or 8 per cent or more, for each year of the performance period, the Trustees will release 75 per cent
or 100 per cent of the conditional awards respectively.
If the tests are not satisfied over the years 1998 to 2001, the same tests will be applied over the years 1999
to 2002. If the tests still have not been satisfied at the end of that period, the conditional share awards will be
forfeited.
In the event of any occurrence that would cause awards to vest in whole or in part or not to vest in
circumstances which the Committee considers to be anomalous, the right is reserved to the Committee to make
such adjustments as in its absolute discretion it deems appropriate to make.
By way of example, if the composite rate of inflation were 5 per cent per annum over the period 1998-2001,
50 per cent of the conditional awards would be released if the following had been achieved:
30
1. earnings per share for the year 2001 exceeded US$2.68;
2. there had been earnings per share growth in at least three of the four years; and
3. cumulative earnings per share over the four years 1998-2001 exceeded US$9.70.
For the maximum number of shares to vest, the cumulative earnings per share over the four years 1998-2001
would have to exceed us$11.19.
On behalf of the Board
Dunn, Chairman, Remuneration Committee’
Employees’ Emoluments
Set out below is information in respect of the five individuals, who are not Directors of the Company, whose
emoluments (excluding commissions or bonuses related to the revenue or profits generated by employees
individually or collectively with others engaged in similar activities) were the highest in the Group for the year
ended 31 December 1997.
Basic salaries, allowances and benefits in kind
Pension contributions
Bonuses paid or receivable
Amounts paid as inducements to join or on joining the Group
Total
Their emoluments are within the following bands:
£1,400,001 – £1,500,000
£1,500,001 – £1,600,000
£1,700,001 – £1,800,000
£1,800,001 – £1,900,000
£000
555567
1,053
416
5,300
1,256
555567
8,025
zzzzxc
Number of
employees
555567
2
1
1
1
Employee Involvement
The Company continues to regard communication with its employees as a key aspect of its policies. Information
is given to employees about employment matters and about the financial and economic factors affecting the
Group’s performance through management channels, in-house magazines and by way of attendance at internal
seminars and training programmes. Employees are encouraged to discuss operational and strategic issues with
their line management and to make suggestions aimed at improving performance. The involvement of employees
in the performance of the Group is further encouraged through participation in bonus and share option schemes
as appropriate.
There are some 40,000 Group employees in 38 countries and territories worldwide now participating in the
Savings-Related Share Option Scheme.
Employment of Disabled Persons
The Company continues to be committed to providing equal opportunities to employees. The employment of
disabled persons is included in this commitment and the recruitment, training, career development and promotion
of disabled persons are based on the aptitudes and abilities of the individual. Should employees become disabled
during employment, every effort would be made to continue their employment and, if necessary, appropriate
training would be provided.
Supplier Payment Policy
The Company has subscribed to the Confederation of British Industry Prompt Payers Code for all suppliers.
Information about the Code may be obtained from the CBI.
31
H S B C H O L D I N G S P L C
Report of the Directors (continued)
It is Company practice to organise payment to its suppliers through a central purchasing unit operated by
Midland Bank plc, a subsidiary of HSBC Holdings plc. Included in the balance with Midland Bank plc is the
amount due to trade creditors which at 31 December 1997 represents 18 days’ average daily purchases of goods
and services received from such creditors, calculated in accordance with the Companies Act 1985, as amended
by Statutory Instrument 1997/571.
Substantial Interests in Share Capital
The following interests in the Company’s ordinary shares of 75p each are recorded in the register maintained
under section 211 of the Companies Act 1985:
Standard Life Group
The Prudential Corporation Group of Companies
Legal & General Group
5.29 per cent
4.76 per cent
3.63 per cent
No substantial interest, being 10 per cent or more, in any of the equity share capital is recorded in the register
maintained under section 16(1) of the Securities (Disclosure of Interests) Ordinance.
Dealings in HSBC Holdings plc Shares
With the exception of HSBC Investment Bank plc, which for the purposes of the Companies Act 1985 is an
intermediary in securities in London in the shares of the Company, neither the Company nor any subsidiary
undertaking bought or sold any shares of the Company during the year.
Donations
During the year, the Group made charitable donations totalling £10,146,000. Of this amount, £2,585,000 was
given for charitable purposes in the United Kingdom.
No political donations were made during the year.
Annual General Meeting
The Annual General Meeting of the Company will be held at the Barbican Hall, Barbican Centre, London EC2
on Friday, 29 May 1998 at 11.00 a.m.
Auditor
At the Annual General Meeting on 31 May 1996, KPMG resigned following their decision to form a limited
liability company, KPMG Audit Plc, to undertake that part of their audit business that included the Company and
its subsidiaries and KPMG Audit Plc was appointed.
KPMG Audit Plc has expressed its willingness to continue in office. A resolution proposing the reappointment
of KPMG Audit Plc as auditor of the Company and giving authority to the Directors to fix its remuneration will
be submitted to the forthcoming Annual General Meeting.
On behalf of the Board
R G Barber, Secretary
23 February 1998
32
T H E H S B C G R O U P
Financial Review (continued)
Summary of Financial Performance
Group profit
The HSBC Group made a profit before tax of £4,971
million in 1997, an increase of £447 million, or 10 per
cent, over 1996. In Hong Kong dollar terms, pre-tax
profit grew by 15 per cent from HK$54,641 million to
HK$63,046 million.
Net interest income of £6,680 million was £859
million, or 15 per cent, higher than 1996. Other
operating income rose by £912 million, or 24 per cent,
to £4,679 million.
The Group’s cost:income ratio increased to 54.0
per cent from 52.9 per cent in 1996. The inclusion of
Banco HSBC Bamerindus and HSBC Roberts added
2.8 per cent to the cost:income ratio.
The charge for bad and doubtful debts was £615
million, which was £231 million, or 60 per cent,
higher than 1996. General provisions were augmented
by £291 million, compared with £78 million in 1996,
and included a special general provision charge of
£175 million as a precautionary measure in view of the
uncertain conditions within Asia.
The gains on disposal of investments were £341
million, in line with 1996.
Profit attributable to shareholders was £3,355
million (HK$42,550 million) in 1997, an increase of 8
per cent (13 per cent in Hong Kong dollar terms).
Shareholder ratios
Earnings per share increased by 7 per cent, from 117.6
pence to 125.7 pence.
in accordance with
The headline earnings per share, which
is
calculated
the Institute of
Investment Management and Research Statement of
Investment Practice, increased by 10 pence, or 8 per
cent. The headline earnings per share excluded profit
on the sale of tangible fixed assets, subsidiaries and
associates and provisions for permanent diminution in
value of other participating interests.
The return on average shareholders’ funds, at 20.7
per cent, decreased from 21.3 per cent in 1996.
Shareholders’ funds rose by a net £1,255 million to
Net interest income
The improvement in the Group’s net interest income
reflected both growth in average interest-earning
assets and a modest improvement in net interest
margin in 1997. With the exception of continental
Europe, income levels rose in all regions, with
acquisition-driven growth of 60 per cent in the
Americas. Excluding acquisitions, the rate of increase
in the Group’s net interest income reduced in the
second half of the year, as average interest-earning
assets grew more slowly and competitive pressures,
together with actions taken by central banks to defend
their countries’ currencies, resulted in a decline in the
interest spread in the latter part of the year.
Average interest-earning assets increased by £28
billion, or 14 per cent, to £230 billion in 1997. The
growth was principally in customer advances and debt
£16,442 million, including the retention of £2,018
million of Group profits, and the take-up of scrip
dividends and shares issued under options totalling
£216 million in aggregate. These were partly offset by
a goodwill charge of £735 million in respect of Latin
American and other acquisitions.
The Directors have declared a second interim
dividend of 30 pence per ordinary share (in lieu of a
final dividend), which, together with the first interim
dividend of 20 pence, will make a total distribution for
the year of 50 pence (1996: 41 pence), an increase of
22 per cent. The dividend is covered 2.5 times by
attributable profit (1996: 2.9 times).
Net interest income (£m)
6,680
5,821
5,119
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1995
1996
1997
securities and was financed mainly by increased
customer deposits.
33
T H E H S B C G R O U P
Financial Review (continued)
The modest improvement in the Group’s net
interest margin to 2.91 per cent reflected a change in
mix with margin pressures in most of the Group’s
principal areas of operation, particularly in Hong
Kong, being offset by the inclusion of the new higher-
margin business in Latin America.
In the UK, Midland Bank’s domestic margin fell as
the benefits of improved spreads on savings products
and mortgages in the branch network were more than
offset by the adverse effect of the funding costs of the
expansion of the operating leased assets business and
narrower spreads on treasury assets as short-term
funding rates rose. Growth of £8.1 billion in average
interest-earning assets reflected higher corporate
customer and residential mortgage lending and debt
securities, the latter partly due to the placement of
surplus funds generated from customer deposits in the
branch network.
In continental Europe, Midland’s margin rose by 3
basis points, whilst the increase in the second half in
average
the
reflected
acquisition of a Greek shipping loan portfolio.
interest-earning
assets
In Hong Kong, HongkongBank’s margin
deteriorated due to increased price competition in the
residential mortgage market, which persisted until
August, exacerbated by a narrowing of the gap
between best lending rate and interbank rates in the
second half and a shift in funding mix. These
pressures were mitigated by an improved asset mix
and a higher contribution from net free funds. Hang
Seng Bank’s margin remained constant, as changes in
asset mix and higher levels of net free funds offset
margin pressures. The growth in average interest-
earning assets principally reflected increased lending
to corporates and for residential mortgages.
Non-interest income
The improvement in the net interest margin in the
Asia-Pacific operations of the HongkongBank Group
was mainly due to higher spreads on customer
lending, as liquidity tightened in the second half of
1997, improved asset and liability mix and higher
treasury earnings in the principal countries of
operation within the region.
Hongkong Bank Malaysia’s margin was lower as
spreads tightened as the economy faced considerable
pressure on its currency and a reduced contribution
was made from lower levels of net free funds. The
margin in The British Bank of the Middle East fell
because a favourable change in asset-mix, as funds
were switched out of interbank placements to
customer lending, was more than offset by increased
levels of interest suspended and foregone and a
smaller contribution from net free funds.
In
in a
the Americas, acquisitions resulted
significant increase in net interest income. HSBC
Americas, Inc.’s
lower margin was principally
attributable to a change in both asset and liability mix.
The First Federal Savings acquisition increased the
proportion of lower-yielding residential mortgages.
Additionally, the credit card portfolio was lower
during 1997, which, while lowering the proportion of
higher-yielding balances, also reduced credit exposure
to this sector. In Hongkong Bank of Canada, the
margin narrowed as competitive pressures on pricing
of retail mortgages and deposit products reduced
spreads.
Banco HSBC Bamerindus reported a net interest
margin of 9.37 per cent on average interest-earning
assets of BRL10,348 million since it was established in
March 1997.
Non-interest income of £4,679 million was £912
million, or 24 per cent, higher than 1996, mainly due
to a substantial increase in net fees and commissions.
Income levels were higher in all geographic regions.
There was particularly strong growth in the Americas
(105 per cent) mainly as a result of acquisitions, the
rest of Asia-Pacific (14 per cent) and Hong Kong (11
per cent). Excluding net fees and commissions, other
operating income rose by £325 million, or 32 per cent,
from £1,015 million in 1996 to £1,340 million in
1997.
Net fees and commissions increased by £587
million, or 21 per cent, with growth recorded in all
regions. Banco HSBC Bamerindus and HSBC
Roberts contributed £210 million of the increase.
Non-interest income (£m)
5,000
4,000
3,000
443
533
500
515
2,752
735
605
3,339
2,000
2,402
1,000
0
1995
1996
Fees and commissions (net)
Dealing profits
1997
Other
34
55555555555678 55555555555888
1997
Dividend
and net
interest
income
1996
Dividend
and net
interest
income
Analysis of income from dealing in financial
Dealing
Total
profits
instruments (£m)
55555555555555555555555555555555555555555 555555555555567888888
380
Foreign exchange
Dealing
profits
Total
354
629
609
20
26
Interest rate derivatives
Debt securities
48
(37)
22
115
70
78
53
61
10
98
63
159
Equities and other trading
77
55555555555555555555555555555555555555555 555555555555567888888
679
zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz zzzzzzzzzzzzzxcvvvvvv
515
164
(15)
200
605
805
28
47
30
43
Corporate finance, advisory and structured finance
activities in Asia and Europe performed well,
generating higher fees. Increased volumes in most
markets led to larger equities securities commission
revenues. Within commercial banking, good growth
was achieved in insurance, account services and card
products. Trade finance grew modestly.
led
Dealing profits, which exclude net interest income
attributable to dealing activities and dividend income
on trading equities, increased by £90 million over
1996. Asian currency volatility
to better
foreign exchange earnings resulting from increased
customer business volumes and wider spreads. Debt
securities trading losses were sustained in Germany
and in a number of other locations as the uncertain
outlook for Asian government and corporate bond
issuers resulted in wider credit spreads. Losses in
equities and other trading were sustained in equity
underwriting activity and equity trading in Hong Kong.
The term ‘dealing profits’ is a prescribed heading
under the UK’s implementation of the European
Union’s Bank Accounts Directive; it excludes net
interest income, fees and commissions, and the cost of
associated staff and other administrative expenses.
The table above shows the dividend income and net
interest income attributable to dealing activities. The
net interest income on securities trading arises on
marked-to-market debt securities and treasury bills.
Other income mainly comprises rental income,
increases in the net present value of the future earnings
inherent in life assurance policies in force and other
insurance premiums. Higher operating lease rental
income from the acquisition of Eversholt Leasing and
a contribution of £102 million (before commissions
and operating expenses) from the insurance business
in Brazil contributed to the increase in other operating
income.
Operating expenses
Operating expenses increased by £1,068 million, or
21 per cent, to £6,137 million in 1997. The
acquisitions and investments made in the Americas,
mainly in Latin America, and the further business
expansion in Asia have increased the Group’s cost
base. The investments in Latin America added 2.8
percentage points to the Group’s cost:income ratio,
24,440 to the Group headcount and accounted for two-
thirds of the increase in costs.
In the UK, costs continued to be tightly controlled.
In Asia, the Group’s commercial banks invested to
develop their core businesses and opened new
branches. Outside of Hong Kong, staff complement
increased, notably in Taiwan, Indonesia, Sri Lanka,
India, the Philippines, mainland China, Australia,
Brunei, Singapore, Malaysia and Thailand.
Staff costs were up by £591 million, or 19 per cent,
compared with 1996. Total staff costs in Midland were
unchanged. Although salary increases within the
HongkongBank Group were held broadly in line with
Operating expenses (£m)
347
932
612
2,834
367
981
652
3,069
440
1,277
760
3,660
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1995
1996
Staff costs
Premises and equipment
1997
Other
Depreciation
inflation, staff costs rose due to an increase of 1,680 in
headcount.
Premises and equipment costs rose by £108
million, or 17 per cent, over 1996.
35
T H E H S B C G R O U P
Financial Review (continued)
Full-time equivalent
Staff numbers
1997
1996
1995
HongkongBank
24,038
Hang Seng Bank
8,048
Other HongkongBank Group 3,426
Midland Bank
42,601
Banco HSBC Bamerindus
21,292
HSBC Americas, Inc.
8,995
Hongkong Bank Malaysia
4,474
Hongkong Bank of Canada
4,094
HSBC Roberts
3,148
The British Bank of the
Middle East
Other
2,856
9,313
22,468
7,960
3,404
43,019
—
7,985
4,160
3,816
—
21,953
7,926
3,346
43,572
—
8,012
4,093
3,373
—
2,570
7,088
2,397
6,398
Total staff numbers
132,285 102,470 101,070
Bad and doubtful debts
of
the
non-recurrence
The charge for bad and doubtful debts of £615 million
was £231 million higher than 1996. New specific
customer provisions were £24 million higher
notwithstanding
the
individually-significant provisioning requirements in
1996 on one relationship in each of the UK and Hong
Kong. In the UK, credit quality remained good and
non-performing loans declined. Higher charge-offs
for consumer credit card advances were recorded in
HSBC Americas, Inc. The general bad debt charge
rose to reflect growth in advances and, as a
precautionary measure
the
to
emerging credit difficulties in Asia, a special general
provision charge of £175 million was made. This
special general provision will be utilised should
specific provisions be
required and will be
replenished, if appropriate, as circumstances become
clearer during 1998. Excluding this special general
provision, general provisions held at 31 December
1997 stood at £1,052 million and covered 0.74 per
cent of gross advances.
take account of
The charge in Midland Bank of £129 million was
lower than 1996 following improved recoveries as a
result of higher release of provisions from sales of
LDC debt. New specific provisions fell from £357
million to £340 million. Releases and recoveries rose
from £206 million to £248 million, of which £101
million related to LDC debt. The general provision
charge was £16 million higher than 1996 reflecting
growth in customer advances.
The charge in HSBC Americas, Inc. was higher
than 1996 due to a substantial increase in consumer
loan provisions. This was partially offset by
recoveries of commercial loans previously written off.
The increased level of consumer bankcard bad debts
was in line with general industry experience in the US.
36
The charge for depreciation increased by 20 per
cent to £440 million, mainly attributable to the higher
carrying values of properties following the 1996
property revaluation.
The Group’s cost:income ratio increased to 54.0
per cent from 52.9 per cent in 1996.
Charge for bad and doubtful debts (£m)
615
175
440
416
384
700
600
500
400
300
200
100
0
1995
1996
1997
Charge for bad and doubtful debts
Special general provision
The net charge in the HongkongBank Group of
HK$4,546 million was HK$3,103 million higher than
1996. The general bad debt charge was raised to
reflect growth in customer advances and more
particularly as a precautionary measure to take
account of emerging credit problems arising from the
severe economic downturn in Asia. The general
provision charge for 1997 was increased by HK$1,600
million in excess of the normal coverage held within
the HongkongBank Group to reflect the emerging
credit difficulties in Asia.
Gains on disposal of investments
The Group’s gains on disposal of
investment
securities of £341 million were £18 million higher
than 1996 and included HongkongBank’s profit on the
disposal of its investment in Hong Kong International
Terminals. Hang Seng Bank recorded gains on the sale
of listed equity investments of £47 million (1996: £41
million). HSBC Private Equity Europe reported £107
million (1996: £82 million) of gains from venture
capital investment disposals.
Taxation
The 1997 effective rate of tax was 25.3 per cent,
compared with 23.7 per cent in 1996. The effective tax
rate was below the average standard rate of UK
corporation tax of 31.5 per cent (1996: 33 per cent)
mainly because of lower rates of tax in major
subsidiaries overseas, albeit this benefit was eroded by
the fall in the year of the UK corporation tax rate.
Likewise the recognition of previously unrecognised
tax losses was lower in 1997, mainly as a result of
lower realised capital gains in the UK in 1997.
Furthermore, unlike 1996, tax-free gains in Hong
Kong in 1997 were negated by unrelieved losses and
general provisions.
Assets
Analysis of overall tax charge (£m)
1997
1996
Taxation at UK corporation tax rate
of 31.5 per cent (1996: 33 per cent)
Impact of differently taxed overseas
profits in principal locations
Utilisation of previously unrecognised
tax losses
Other items
Overall tax charge
1,566
1,493
(209)
(346)
(65)
(34)
(104)
30
1,258
1,073
The growth in assets of £50 billion was predominantly
in loans and advances to customers. Acquisitions
contributed £14 billion of the increase in total assets.
Customer lending growth was strongest in Hong
Kong, where increased corporate lending and the
demand for residential mortgages remained high,
although it slackened significantly towards the end of
the year. In the UK, Midland grew its personal,
residential mortgage and corporate lending books. In
the Asia-Pacific region, there were increases in
corporate lending, particularly in Japan, China,
Taiwan and Malaysia. The increase in the Americas
reflected the contribution of First Federal Savings to
the residential mortgage portfolio and the new
businesses in Argentina and Brazil.
The debt securities held in accrual books showed
an unrecognised gain, net of off-balance-sheet hedges,
of £87 million compared with a net gain of £144
million at December 1996.
Equity shares included £634 million (December
1996: £757 million) held on investment account, on
which there was an unrealised gain of £455 million
(December 1996: £720 million).
Assets 1997 (excluding Hong Kong Government
certificates of indebtedness)
Assets 1996 (excluding Hong Kong Government
certificates of indebtedness)
Treasury and other
eligible bills
%
£b
3.7
10.4
Treasury and other
eligible bills
%
3.4
£b
7.9
Debt securities
Loans and advances
to banks
Loans and advances
to customers
12.0
18.7
51.9
33.9
52.5
146.0
Debt securities
Loans and advances
to banks
Loans and advances
to customers
12.8
21.1
49.4
29.6
49.0
114.4
Other
Total
13.7
38.7
100.0 281.5
Other
Total
13.3
30.9
100.0 231.8
37
T H E H S B C G R O U P
Financial Review (continued)
Capital Management
Capital measurement and allocation
The Bank of England is the supervisor of the HSBC
Group on a consolidated basis and in this capacity
receives information on the capital adequacy of, and
sets capital requirements for, the Group as a whole.
The UK Government has announced that respon-
sibility for banking supervision is to be transferred
from the Bank of England to the Financial Services
Authority and this is currently scheduled to come into
effect on 1 June 1998. Individual banking subsidiaries
are directly regulated by the appropriate local banking
supervisors, which set and monitor capital adequacy
requirements
them. Similarly, non-banking
subsidiaries are subject to supervision and capital
requirements of relevant local regulatory authorities.
Since 1988, when the governors of the Group of Ten
central banks agreed to guidelines for the international
convergence of capital measurement and standards,
the banking supervisors of the HSBC Group’s major
banking subsidiaries have exercised capital adequacy
supervision in a broadly similar framework.
for
The Bank of England, in implementing the
European Union’s Own Funds and Solvency Ratio
Directives, requires each bank and banking group to
maintain an individually prescribed ratio of total
capital to risk-weighted assets. Since 1 January 1996,
the method the Bank of England uses to assess the
capital adequacy of banks and banking groups has
been modified as a result of its implementation of the
European Union’s Capital Adequacy Directive (CAD).
It is the Group’s policy to maintain a strong capital
base to support development of the Group’s business.
It seeks to maintain a prudent balance between the
different components of Group capital and, in the
Group capital structure
The table on the opposite page (top) sets out the
analysis of regulatory capital at the end of 1997 and
1996.
During 1997, the Group’s total capital ratio
decreased from 15.3 per cent to 14.2 per cent and its
tier 1 capital ratio decreased from 9.9 per cent to 9.3
per cent.
Tier 1 capital increased by £1,420 million from the
level at the end of 1996, mainly due to retained
earnings of £2,018 million and the take-up of scrip
dividends and shares issued under options totalling
£216 million in aggregate. This was offset by a
goodwill charge of £735 million in respect of Latin
American and other acquisitions and other movements
of £79 million.
38
holding company, between the composition of its
capital and that of its investment in subsidiaries.
Group capital adequacy is measured by the ratio of
the Group’s capital to risk-weighted assets, taking into
account both balance sheet assets and off-balance-
sheet transactions.
Capital is divided into two tiers: tier 1, comprising
shareholders’ funds and minority interests; and tier 2,
comprising general loan loss provisions, property
revaluation reserves and qualifying subordinated loan
capital. The amount of qualifying tier 2 capital cannot
exceed that of tier 1 capital, and term subordinated
loan capital may not exceed 50 per cent of tier 1
capital. There are also limitations on the amount of
general provisions which may be included in the tier
2 capital. Deductions in respect of intangible assets
and unconsolidated investments are made from tier 1
capital and total capital, respectively.
Under CAD, banking operations are categorised as
either
trading book (broadly, marked-to-market
activities) or banking book (all other banking
activities) and risk-weighted assets are determined
accordingly. Banking book risk-weighted assets are
measured by means of a hierarchy of risk weights
classified according to the nature of each asset and
counterparty. Banking book off-balance-sheet items
giving rise to credit, foreign exchange or interest rate
risk are assigned weights appropriate to the category
of the counterparty. Trading book risk-weighted
assets are determined by taking into account market-
related risks, such as foreign exchange, interest rate
and equity position risks, as well as counterparty risk.
Tier 2 capital increased by £686 million mainly as
a result of issues previously made by HSBC Americas,
Inc. and HSBC Banco Roberts which have become
eligible on a Group basis. General provisions
excluded those which did not meet local regulatory
criteria for tier 2 capital. Capital deductions increased,
mainly due to investments in banks in Chile, Peru and
Mexico.
The Group’s risk-weighted assets increased by
£23.8 billion due to increased customer lending and
acquisitions in Latin America.
Overall, the impact of acquisitions lowered the tier
1 ratio by 0.9 per cent and the total capital ratio by 1.1
per cent.
£m
1997
1996
Composition of capital
Tier 1:
Shareholders’ funds
Minority interests
Less: property revaluation
Less: reserves
Less: intangibles/other
16,442
2,730
(2,587)
(21)
15,187
2,695
(2,700)
(38)
Total qualifying tier 1 capital
16,564
15,144
Tier 2:
Property revaluation reserves
General provisions
Perpetual subordinated debt
Term subordinated debt
Minority interests
(in tier 2 preference shares)
2,587
1,084
1,987
4,064
—
2,700
943
1,783
3,552
58
Total qualifying tier 2 capital
9,722
9,036
Unconsolidated investments
Investments in other banks
Other deductions
Total capital
(681)
(294)
(75)
(551)
(131)
(12)
25,236
23,486
Total risk-weighted assets
177,283
153,488
Capital ratios (per cent)
Total capital/risk-weighted assets
Tier 1 capital/risk-weighted assets
14.2
9.3
15.3
9.9
Deployment of shareholders’ funds
The shareholders’ funds of HSBC Holdings plc are
deployed mainly in investments in its subsidiaries. At
investments of
31 December 1997
shareholders’ funds, compared with the previous year,
were:
the major
£m
1997
1996
Hang Seng Bank — 62.10% owned
(1996: 61.51%)
2,422
HongkongBank and other subsidiaries 4,722
HongkongBank and subsidiaries
7,144
Midland Bank plc
3,922
HSBC Americas, Inc.
983
Hongkong Bank Malaysia Berhad
251
Hongkong Bank of Canada
286
The British Bank of the Middle East
333
HSBC Investment Bank plc
306
Holding company and non-trading
subsidiaries
Banco HSBC Bamerindus
Other subsidiaries
Associates
758
288
1,905
266
2,257
4,083
6,340
3,491
1,102
335
267
164
298
2,136
—
803
251
16,442
15,187
It is Group policy for subsidiaries to retain
sufficient profits to support planned business growth
and to dividend any surplus profits to the holding
company. Movements in the figures principally reflect
The banking book risk-weighted assets increased
by £23.2 billion, as a result of increased customer
lending and acquisitions in Latin America. The
increase of £0.6 billion in trading book notional risk-
weighted assets arose principally in HongkongBank
due to increased customer-driven business volumes in
Asian markets.
these retentions, and the impact of the property
revaluation in 1997, partly offset by the effect of
exchange rate movements.
HSBC Investment Bank plc, a UK-based holding
company, had consolidated shareholders’ funds as at
31 December 1997 that were substantially less than
the sum of the share capital and reserves of all the
subsidiaries included in the investment banking line of
business (most notably due to HSBC Investment Bank
Asia Holdings Limited being a subsidiary of
HongkongBank).
The shareholders’ funds of the holding company
and non-trading subsidiaries represent the surplus of
HSBC Holdings plc’s equity capital over its equity
investments, after adjusting for the capital structure of
its immediate non-trading holding companies.
The increase in shareholders’ funds deployed in
other subsidiaries and the offsetting reduction in funds
deployed within the holding company principally
reflect the transfer of Midland’s overseas operations to
other parts of the Group and investments in other
entities in Latin America.
39
T H E H S B C G R O U P
Financial Review (continued)
Credit Risk Management
Credit Risk
Credit risk is the risk that a customer or counterparty
of the Group will be unable or unwilling to meet a
commitment that it has entered into with a member of
the Group. It arises from the lending, trade finance,
treasury and other activities undertaken by Group
companies. The Group has in place Group standards,
policies and procedures for the control and monitoring
of all such risks.
Group Head Office
the
is responsible for
the
formulation of high-level credit policies;
independent review of the Group’s larger credit
exposures; the control of the Group’s cross-border
exposures as well as those to banks and financial
institutions; and portfolio management of risk
concentrations. It also reviews the efficiency of Group
companies’ credit approval processes, a key element
of which is the Group’s universal facility grading
system. The Group Executive Committee receives
regular reports on credit exposures at both Group and
subsidiary levels. These include information on large
credit exposures, asset concentrations,
industry
exposures, levels of bad debt provisioning and
country exposure limits.
In each of
the Group’s subsidiaries,
local
Industry exposures
to customers are spread
Loans and advances
throughout the various industrial sectors, as well as
geographically. Approximately one-third of loans and
advances to customers are to the personal banking
sector and two-thirds are to commercial enterprises.
Residential mortgages now comprise 24.4 per cent
of the overall portfolio, having increased by £9,982
million, or 38 per cent, during 1997. Much of this
increase was due to continued growth in the mortgage
books of Midland in the UK, HongkongBank and
Hang Seng Bank in Hong Kong and Marine Midland
in the US, the latter mainly as a result of the First
Federal acquisition. Loan loss experience in this
sector remains very good. Other personal banking
advances increased by 18 per cent during 1997, to
£17,490 million.
Commercial, industrial and international trade
loans increased by £5,251 million, or 16 per cent, to
£37,982 million.
Commercial real estate advances increased by
£2,669 million, or 21 per cent, to £15,267 million and
other property related advances increased by £837
million, or 21 per cent, to £4,907 million.
40
management is responsible for the quality of its credit
portfolios. Each subsidiary has established a credit
process involving delegated approval authorities and
credit procedures, the objective of which is to build
and maintain risk assets of high quality.
The Group’s credit risk limits to counterparties in
the financial and government sectors are managed
centrally to optimise the use of credit availability and
to avoid excessive
risk concentration. Group
companies remain responsible for their own credit
exposures. In addition to the portfolio management
undertaken at Group level, each subsidiary manages
its own risk concentrations on a market sector,
geographical and product basis.
is controlled
Cross-border risk
the
imposition of country limits, with sub-limits by
maturity and type of business. Transactions with
higher risk countries are considered on a case-by-case
basis.
through
Special attention is paid to the management of
problem loans. Where deemed appropriate, specialist
units are established to provide intensive management
and control to maximise recoveries of doubtful debts.
Advances to financial institutions other than banks
increased by £7,234 million, or 126 per cent.
Other commercial advances increased by £3,320
million, or 16 per cent.
Gross loans and advances to customers by industry
1996
exposure
1997
Personal banking:
Residential mortgages
Other personal*
36,431
17,490
24.4
11.7
26,449 22.5
14,772 12.6
£m
%
£m %
Total personal banking
53,921
36.1
41,221 35.1
Commercial:
Commercial, industrial
and international trade 37,982
Commercial real estate 15,267
Other property related
4,907
Non-bank financial
institutions
Other commercial
12,971
24,416
25.4
10.2
3.3
8.7
16.3
32,731 27.8
12,598 10.7
3.5
4,070
5,737
4.9
21,096 18.0
Total commercial
95,543
63.9
76,232 64.9
Total
149,464 100.0 117,453 100.0
* Advances to individuals under the Hong Kong Government’s Home
Ownership Scheme are included under ‘Other personal’.
Bad debt provisions
Total provisions against loans and advances to
customers amounted
to £3,116 million at 31
December 1997 and represented 2.2 per cent of
lending, compared with 2.4 per cent at the end of
1996.
The general improvement in credit quality of the
Group’s customer loan portfolio is reflected in the fall
in non-performing loans and advances of £58 million,
or 2 per cent, to £3,283 million. Non-performing loans
amounted to 2.2 per cent of total loans and advances
to customers, compared with 2.9 per cent at the end of
December 1996. The decrease in Midland Bank was
partly offset by small increases in other Group entities.
Specific provisions against loans and advances to
banks of £52,561 million (1996: £49,011 million)
amounted to £28 million (1996: £31 million). Non-
performing loans to banks remained at £37 million.
Country risk and cross-border exposure (£b)
South
5555 555 5557
Indonesia
Korea Thailand
As at 31 December 1997
In-country local currency
obligations
In-country foreign
currency obligations
Net cross-border
obligations
Claims under contracts
in financial derivatives
Total
0.2
0.5
0.3
0.8
0.2
0.5
1.7
2.2
0.6
0.4
0.4
0.8
0.1
55 55 55
0.3
0.1
1.7
2.5
zz zz zz
1.1
The in-country risk exposure and cross-border
exposure figures in the table are for the three Asian
countries that are in discussion with the International
Monetary Fund. They are prepared in accordance with
the Bank of England Country Exposure Report
(Form C1) guidelines. On this basis, the figures
Market Risk Management
Market risk
Customer loans and advances (£m)
1997
1996
Gross loans and advances
149,464 117,453
Suspended interest
Provisions
(373)
(334)
149,091 117,119
(2,766)
(3,116)
Net loans and advances
145,975 114,353
Provisions to customer loans and
advances (%)
Specific provisions
General provisions:
— held against Asian risks
— other
Total provisions
Non-performing customer loans
and provisions (£m)
Non-performing loans
Provisions
Total provisions cover as a
percentage of non-performing
loans and advances
1997
1996
1.3
0.1
0.8
2.2
1.6
—
0.8
2.4
1997
1996
3,283
3,116
3,341
2,766
94.7
82.8
exclude accrued interest and intra-Group exposures.
In-country obligations represent local offices’ on-
balance sheet exposures to local residents.
Net cross-border obligations are on-balance sheet
exposures based on the country of residence of the
borrower or guarantor of ultimate risk, irrespective of
whether such exposures are in local or foreign
currency.
Cross-border obligations are controlled centrally
through a well-developed system of country limits,
which are frequently reviewed to avoid concentrations
of transfer, economic or political risks.
Market risk is the risk that interest rates, foreign
exchange rates or equities and commodity prices will
move and result in profits or losses to the Group.
Market risk arises on financial instruments which are
valued at current market prices (mark-to-market basis)
and those valued at cost plus any accrued interest
(accruals basis).
The Group makes markets in interest rate and
exchange rate derivative instruments, as well as in
debt, equities and other securities. Trading risks arise
either from customer-related business or from position
taking.
Market risk is managed within risk limits approved
by the Group Executive Committee. Group Market
Risk, an independent unit within Group Treasury,
develops risk management policies and measurement
techniques, and reviews limit utilisation.
41
T H E H S B C G R O U P
Financial Review (continued)
Risk limits are determined for each location and
within location, for each portfolio. Limits are set by
product and risk type with market liquidity being a
principal factor in determining the level of limits set.
Only those offices within major subsidiaries with
sufficient derivative product expertise and appropriate
control systems are authorised to trade derivative
products. Actual risk levels compared with approved
limits are monitored daily by each subsidiary and by
Group Market Risk.
A key component of market risk management is
the estimation of potential losses that could occur on
risk positions taken due to movements in market rates
and prices — generally referred to as ‘value at risk’.
Value at risk is computed across the Group on a
regular basis, incorporating positions subject to both
mark-to-market and accrual valuation bases. The
value at risk measure employed assesses the potential
loss that could occur due to the change in value of
portfolios caused by movements in market rates and
prices. The calculation uses historical one-day
movements in market rates and prices, a 95 per cent
confidence level and takes account of correlations
between different markets and rates. This analysis is
augmented by stress testing, both on individual
portfolios and on a consolidated basis. Stress testing
looks at the potential profit and loss impact of more
extreme moves in market prices.
Value at risk measurement techniques have been
applied in respect of treasury activities throughout the
year.
The average daily revenue earned from market
risk-related treasury activities in 1997, including
accrual book net interest income and funding related
to dealing positions, was £4.3 million compared with
£3.7 million in 1996. The standard deviation of these
daily revenues was £2.7 million (£2.1 million for
1996). An analysis of the frequency distribution of
daily revenues shows a maximum daily loss of £8
million, with only 14 out of 260 days showing losses.
The most frequent result was a daily revenue of
between £4 million and £5 million, with 45
occurrences. The highest daily revenue was £16
million.
Daily distribution of market risk revenues 1997
Group Treasury centres
Daily distribution of market risk revenues 1996
Group Treasury centres
Number of days
Number of days
60
50
40
30
20
10
0
1
4345
38
30
14
14
6
421
26
20
9
4
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1
1 2 3 4 5
0
Revenues (£m)
6 7 8 9 10
11
1
1112 131415 16
17
60
50
40
30
20
10
0
62
47
35
31
29
14
16 16
1
2
2
3 2
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1
6 7 8 9 10
1112 131415 16
17
1 2 3 4 5
0
Revenues (£m)
Foreign exchange exposure
The Group’s foreign exchange exposure comprises
the following: those which arise from foreign
exchange dealing within Group Treasury; structural
foreign currency translation exposures; and currency
exposures originated by commercial banking
businesses in the Group. The latter are transferred to
local treasury units where they are managed together
with exposures which result from dealing activities
within limits approved by the Group Executive
Committee.
Value at risk related to foreign exchange dealing
positions as at 31 December 1997 was £2.9 million
(£2.3 million at 31 December 1996) and the average
for 1997 was £3.0 million, with a maximum of £4.7
million and a minimum of £1.8 million in the year.
The average one-day foreign exchange trading profit
for 1997 was £2.3 million (£1.4 million for 1996). The
value at risk and average dealing profit information
noted excludes structural foreign currency exposures,
since related gains or losses are taken through
reserves.
The Group’s structural foreign currency exposure
is represented by the net asset value of the holding
company’s foreign currency equity and subordinated
debt investments in its subsidiaries, branches and
foreign currency
associated companies. These
42
investments amounted
the foreign currency
to
equivalent of £10,906 million (66 per cent of
shareholders’ funds) at 31 December 1997, an
increase from £9,856 million (65 per cent of
shareholders’ funds) at 31 December 1996. Gains or
losses on structural foreign currency exposures are
taken to reserves.
Structural
foreign exchange exposures are
managed within the Group with the primary objective
of ensuring, where practical, that the Group’s and
individual banking subsidiaries’ tier 1 capital ratios
are protected from the effect of changes in exchange
rates. This is achieved by capital being denominated
broadly in proportion to the corresponding foreign-
currency-denominated risk-weighted assets. As a
consequence of this policy, there was no material
effect from foreign exchange movements on Group or
subsidiary tier 1 capital ratios. Where appropriate, net
foreign currency investments in overseas subsidiaries
and associates are hedged to meet this objective or to
protect the sterling value of capital invested. The
result of this policy in practice is that the Group’s
structural exposures are almost entirely unhedged.
Similarly, translation exposures arising from foreign-
currency-denominated profits arising during the year
are not hedged.
Interest rate exposure
The Group’s interest rate exposures comprise those
originating in its treasury trading activities and
structural interest rate exposures; both are managed
under limits described above. Interest rate risk arises
in both dealing portfolios and accrual books.
Value at risk at 31 December 1997 related to
interest rate exposures, including interest rate risk
related to accrual book positions, was £16.9 million
(£11.2 million at 31 December 1996) and the average
for 1997 was £12.2 million, the maximum was £37.9
million and the minimum £6.0 million. The average
daily revenues earned from treasury-related interest
rate activities for 1997 was £2.0 million (£2.3 million
for 1996).
Structural interest rate risk arises primarily from
the employment of non-interest bearing liabilities,
such as shareholders’ funds and some current
accounts, as well as fixed rate loans and liabilities
other than those generated by treasury business. Each
major Group subsidiary assesses the structural interest
rate risks which arise in its business and either
transfers such risks to its local treasury unit or to
separate books managed by the local asset and liability
management committee. These interest rate positions
are regularly monitored by subsidiaries’ asset and
liability management committees and, where
necessary, quantitative models are used to assess the
potential net interest income and market value effects
of these interest rate positions in different interest rate
scenarios. While the primary objective of such interest
rate risk management is to limit potential adverse
effects of interest rate movements on net interest
income, the subsidiaries also seek to enhance net
interest income, subject to risk limits approved by the
Group Executive Committee.
Equities exposure
The Group’s equities exposure comprises trading
equities forming the basis of value at risk, and long
term equities investments. The latter are reviewed
annually by the Group Executive Committee and
regularly monitored by the subsidiaries’ asset and
liability management committees.
Value at risk related to equities dealing positions as
at 31 December 1997 was £2.1 million.
43
T H E H S B C G R O U P
Financial Review (continued)
Liquidity Management
The Group manages the liquidity structure of its
assets, liabilities and commitments so as to ensure that
cash flows are sufficiently balanced within each of the
subsidiaries. Where cash flow imbalances arise, the
Group’s policy is to establish minimum ratios of
liquid assets to customer deposits.
Core retail deposits (current accounts and savings
deposits payable on demand or at short notice) form a
significant part of the Group’s overall funding.
Considerable importance is attached to the stability of
this core deposit base, achieved through the Group’s
diverse geographical retail banking activities. The
Group prefers to grow its balance sheet through
increasing core retail deposits where possible.
Professional market funds are accessed for the
purposes of providing additional funding, maintaining
a presence in local money markets and optimising
asset and liability maturities.
As at 31 December 1997, customer accounts
totalled £178.6 billion, an increase of 18 per cent from
31 December 1996. Deposits by banks increased by 31
per cent to £23.6 billion at 31 December 1997.
Customer current, deposit and savings accounts
accounted for 88.3 per cent of the Group’s deposit
base at 31 December 1997, compared with 89.4 per
cent at 31 December 1996. As at 31 December 1997,
81.7 per cent of the Group’s customer accounts were
deployed in loans and advances to customers,
compared with 75.7 per cent at 31 December 1996.
Cash and balances at central banks, treasury bills
and other eligible bills, and loans and advances to
banks accounted for 22.6 per cent of total assets and
32.0 per cent of deposits at 31 December 1997,
compared with 24.8 per cent and 34.7 per cent,
respectively, at 31 December 1996.
Customer accounts and deposits by banks 1997
Current
Savings
and other
deposits
Deposits
by banks
%
30.0
£b
60.7
58.3
117.9
11.7
23.6
Total
100.0
202.2
Customer accounts and deposits by banks 1996
Current
Savings
and other
deposits
Deposits
by banks
%
21.0
£b
35.6
68.4
115.6
10.6
18.0
Total
100.0
169.2
Assets, deposits and advances (£b)
300
250
200
150
100
50
0
226.8
236.6
142.1
109.4
57.5
151.2
114.4
58.7
286.4
178.6
146.0
64.8
1995
1996
1997
Cash and balances at central banks, treasury and
other eligible bills and loans and advances to banks
Loans and advances to customers
Customer accounts
Total assets
Off-Balance-Sheet Financial Instruments
Derivatives
Off-balance-sheet financial instruments, commonly
referred to as derivatives, are contracts whose
characteristics are derived from those of underlying
assets, interest and exchange rates or indices. They
include
swap and options
transactions in the foreign exchange, interest rate and
forwards,
futures,
equity markets. Deals are negotiated directly with
customers, with the bank acting as a counterparty, or
can be dealt through exchanges.
Users of derivatives typically want to convert an
unwanted risk generated by their business to a more
44
acceptable risk, or cash. Derivatives provide an
effective tool for companies to manage the financial
risks associated with their business and, as a
consequence, there has been a significant growth in
derivatives transactions in recent years.
The Group, through the dealing operations of its
subsidiaries, acts as an intermediary between a broad
range of users, structuring deals to produce risk
management products to suit individual customer
needs. As a result, the Group can accumulate
significant open positions in derivatives portfolios.
These positions are managed constantly to ensure that
they are within acceptable risk levels, with offsetting
deals being undertaken
this where
necessary. As well as acting as a dealer, the Group
also uses derivatives (principally interest rate swaps)
in the management of its own asset and liability
portfolios and structural positions.
to achieve
The following table gives a summary of the
outstanding notional principal contract amounts with
third parties and the cost of replacing the contracts at
current market rates if counterparties were not to meet
their commitments under the contracts, as at 31
December 1996 and 31 December 1997. Contract
amounts shown indicate the volume of transactions
outstanding; they do not represent values at risk.
Total derivatives contracts outstanding (£m)
Spot and forward foreign exchange
Currency swaps, futures and options purchased
Currency options written
Other contracts
Total exchange rate contracts
Less: not recognised in the balance sheet
Balance sheet values
Interest rate swaps
Interest rate futures, forward rate agreements and
options purchased
Interest rate options written
Total interest rate contracts
Less: not recognised in the balance sheet
Balance sheet values
Equities, futures and options purchased
Equities options written
Other contracts
Total equities contracts
Less: not recognised in the balance sheet
Balance sheet values
* Third party only.
† Including internal deals.
Derivatives contracts with third parties (£m)
1997
1996
Replace-
55555557 55555557
Replace-
ment
55555555555555555555666
cost
Exchange rate
contracts
Interest rate
contracts
ment Contract
cost amount
Contract
amount
8,666 404,332
3,143 481,441
526,136
453,533
4,325
4,804
Equities
contracts
Total
13,336
55577 55577 55577 55577
601
9,730
993,005
zzzcc zzzcc zzzcc zzzcc
13,034 892,657
1,225
6,884
At 31 December 1997, the total notional principal
of outstanding contracts with third parties was
£993 billion, compared with a value of £893 billion at
31 December 1996. The net increase of £100 billion,
or 11 per cent, is primarily due to a £49 billion
increase in exchange rate contracts and a £45 billion
rise in interest rate contracts. The increase of £6
billion in equities contracts resulted from increased
transaction levels. The increase in exchange rate
contracts arose across all types of instruments and is
mainly in HSBC MIDLAND in London and in Hong
Kong. The most significant growth was noted in
forward foreign exchange contracts, resulting from
greater activity in Asian currencies, and in increased
1997
Contract amounts
Trading* Non-Trading†
Mark-to-market values*
Negative
Positive
365,873
49,329
33,584
1,543
(6,165)
(1,211)
(751)
55555 55555 55555 55555
(95)
zzzzz zzzzz
(8,222)
28,440
26,834
1,606
—
—
6,678
1,933
—
55
450,329
8,666
(29)
55555 55555
48
zzzzz zzzzz
(8,174)
8,637
267,488
53,030
2,706
(2,845)
197,654
37,836
(67)
55555 55555 55555 55555
(299)
zzzzz zzzzz
(3,211)
59,133
6,103
—
502,978
437
—
3,143
(104)
55555 55555
105
zzzzz zzzzz
(3,106)
3,039
5,172
7,602
444
(2)
(1,336)
55555 55555 55555 55555
(185)
zzzzz zzzzz
(1,523)
394
1,224
—
1
394
—
—
13,218
1,225
(1)
55555 55555
—
zzzzz zzzzz
(1,523)
1,224
45
T H E H S B C G R O U P
Financial Review (continued)
currency options business in London. The rise in
interest rate contracts relates primarily to interest rate
futures used to hedge interest rate swaps and increased
volume of interest rate swaps.
The replacement cost amount increased from
£10 billion at 31 December 1996 to £13 billion at
31 December 1997. £4 billion of this increase related
to exchange rate contracts, reflecting increased
business in forward foreign exchange contracts in
Asia and higher Asian currency volatility. Other
significant factors in the overall rise were noted in
currency swaps and equity options purchased, where
the rise in the replacement cost arose from market
volatility. The £1 billion fall in the positive mark-to-
market value of interest rate contracts reflects the
effect of increased netting of £750 million in HSBC
MIDLAND London and a reduction in the mark-to-
market value of interest rate swaps in London due to
interest rate movements.
The table at the bottom of the previous page
provides an analysis of derivatives by product at 31
December 1997, showing those contracts undertaken
for trading purposes and those used for asset and
liability management purposes (non-trading). The
sum total of the contract amounts outstanding is
greater than the total outstanding with third party
counterparties shown above since it includes internal
deals undertaken for asset and liability management
purposes. An analysis of positive and negative mark-
to-market values is also shown. Positive amounts
represent the replacement cost values, whilst negative
amounts represent losses on contracts where the
current mark-to-market value is less than the value
contracted. The mark-to-market values are amounts
outstanding on contracts with third parties that are
included within the balance sheet under ‘Other assets’
and ‘Other liabilities’.
Risks associated with derivatives
Derivative instruments are subject to both market risk
and credit risk.
The market risk associated with derivatives can be
significant since large positions can be accumulated
with a substantially smaller initial outlay than required
in cash markets. Recognising this, only certain offices
within major subsidiaries with sufficient derivative
product expertise and appropriate control systems are
authorised
trade derivative products. The
management of market risk arising from derivatives
business is monitored by Group Market Risk, in
combination with market risks arising from on-
balance-sheet instruments.
to
Unlike assets recorded on the balance sheet, where
the credit risk is typically the full amount of the
principal value, together with any unrealised interest
accrued or mark-to-market gain, the credit risk relative
to a derivative is principally the replacement cost of
any contract with a positive mark-to-market gain and
an estimate for the potential future change in value,
reflecting the volatilities affecting the contract. Credit
risk on contracts having a negative mark-to-market
value is restricted to the potential future change in
value. Credit risk on derivatives is therefore small in
risk.
relation
In addition, credit exposure with
individual
counterparties can be reduced by close-out netting
agreements which allow for positive and negative
mark-to-market values on different transactions to be
to a comparable balance sheet
46
offset and settled by a single payment in the event of
default by either party. Such agreements are
enforceable in the jurisdictions of the major market
makers and the Group has executed close-out netting
agreements with the majority of these counterparties,
notwithstanding the fact that the Group deals only
with the most creditworthy counterparties.
The following table analyses the replacement cost
of all third party exchange rate, interest rate and
equities contracts with positive mark-to-market gains,
after netting where possible, by maturity and by
category of counterparty at 31 December 1997 and 31
December 1996. The table shows that the replacement
cost of derivatives is predominantly with banks and
under five years.
Residual maturity
5555555555555555
55555555555567888 55678
1996
Less than
Over
1997
1-5
45
42
6,974 2,479
1 year years 5 years Total
£m
Total
5555555555555555557 5567
40
Governments
Banks
7,751
Non-bank
financial
institutions
— exchanges*
— other
117
601 10,054
30
62
944
997
8
291
331
35
—
70
326
82 1,317
555555555557888
1,578
148 1,476
861 13,034
9,022 3,151
zzzzzzzzzzzcc 55678
5,594 3,077
9,730
1,059
zzzzzzzzzzzcc zzxcv
Other sectors
Total 1997
Total 1996
* Exchanges with margining requirements.
55555555555567888 5567
1997
1-5 Over 5
Less than
years years
1 year
1996
5555555555555555558888 5567
£m
Total
Exchange rate,
interest rate
and equities
contracts
— exchanges* 73,481 21,782
— other
— contracts
30 95,293 58,056
Total
55555555555775
663,690 192,818 41,204 897,712 834,601
737,171 214,600 41,234 993,005
zzzzzzzzzzzccz 5567
892,657
671,880 188,414 32,363
zzzzzzzzzzzzcc zzxc
Total
Total 1996
The maturity profile of the notional principal
values of third party derivative contracts outstanding
as at 31 December 1997 and 31 December 1996 above
shows that the vast majority of contracts are executed
over the counter and mature within one year.
* Exchanges with margining requirements.
Financial Reporting
The accounting policies used in the preparation of the
1997 financial accounts are consistent with the
previous year.
traders and other entities taxed on the cash dividend
received as trading income, dividend income is no
longer grossed up for any tax credit.
During the year, the Group adopted the guidance
issued by the Accounting Standards Board on the
application of the Statement of Standard Accounting
Practice (‘SSAP’) 8, ‘The treatment of taxation under
the imputation system in the accounts of companies’,
to the presentation of dividend income following the
corporation tax changes enacted in the Finance (No. 2)
Act 1997. Accordingly, from July 1997, for financial
Since the US dollar and currencies closely linked
to it form the main currency bloc in which the Group’s
business is transacted, the Group will report its results
in US dollars commencing in 1998. Sterling and Hong
Kong dollar equivalent figures will be given for the
profit and loss account and balance sheet for
information only.
47
H S B C H O L D I N G S P L C
Statement of Directors’ Responsibilities in Relation to Financial Statements
The following statement, which should be read in conjunction with the Auditor’s statement of its responsibilities
set out in its report below, is made with a view to distinguishing for shareholders the respective responsibilities
of the Directors and of the Auditor in relation to the financial statements.
The Directors are required by the Companies Act 1985 to prepare financial statements for each financial year
which give a true and fair view of the state of affairs of the Company and its subsidiary undertakings as at the
end of the financial year and of the profit or loss for the financial year. The Directors are required to prepare these
financial statements on the going concern basis unless it is not appropriate. Since the Directors are satisfied that
the Group has the resources to continue in business for the foreseeable future, the financial statements continue
to be prepared on the going concern basis.
The Directors consider that in preparing the financial statements on pages 49 to 92, the Company has used
appropriate accounting policies, consistently applied, save as disclosed in the ‘Notes on the Accounts’, and
supported by reasonable and prudent judgements and estimates, and that all accounting standards which they
consider to be applicable have been followed.
The Directors have responsibility for ensuring that the Company keeps accounting records which disclose with
reasonable accuracy the financial position of the Company and which enable them to ensure that the financial
statements comply with the Companies Act 1985.
The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and other irregularities.
On behalf of the Board
R G Barber, Secretary
23 February 1998
Report of the Auditors, KPMG Audit Plc, to the Members of HSBC Holdings plc
We have audited the financial statements on pages 49 to 92. We have also examined the amounts disclosed
relating to emoluments, share options, Restricted Share Plan awards and pension entitlements of the Directors,
which form part of the ‘Report of the Directors’ on pages 26 to 29.
Respective responsibilities of Directors and Auditors
As described above, the Company’s Directors are responsible for the preparation of financial statements. It is
our responsibility to form an independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant estimates and judgements made by the Directors in
the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered
necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our
opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the
Group as at 31 December 1997 and of the profit of the Group for the year then ended and have been properly
prepared in accordance with the Companies Act 1985.
KPMG Audit Plc
Chartered Accountants/Registered Auditor
London
48
23 February 1998
H S B C H O L D I N G S P L C
Consolidated Profit and Loss Account for the Year Ended 31 December 1997
1996
£m
Note
1997
£m
1997
HK$m
1997
US$m
Interest receivable
— interest receivable and similar
1,770
income arising from debt securities
2,062
26,152
3,378
— other interest receivable and
12,525
(8,474)
555556
similar income
Interest payable
5,821 Net interest income
103 Dividend income
Fees and commissions receivable
3,171
(419) Fees and commissions payable
515 Dealing profits
397 Other operating income
555556
9,588 Operating income
— continuing operations
— acquisitions
(4,702) Administrative expenses
555556
(367) Depreciation and amortisation
4,519 Operating profit before provisions
Provisions
3
5
4,5
20
15,433
(10,815)
195,737
(137,167)
25,279
(17,715)
55557 55557 55557
10,942
156
6,619
(1,150)
991
1,048
55557 55557 55557
18,606
84,722
1,205
51,252
(8,903)
7,673
8,117
6,680
95
4,041
(702)
605
640
144,066
11,359
10,358
1,001
(5,697)
(440)
(9,332)
(720)
55557 55557 55557
8,554
(72,255)
(5,581)
66,230
5,222
(384) — provisions for bad and doubtful debts
14
(615)
(7,800)
(1,007)
— provisions for contingent liabilities
(7)
and commitments
Amounts written off fixed
(48)
555556
asset investments
4,080 Operating profit
— continuing operations
— acquisitions
Gains on disposal of
323 — investments
Income from associated undertakings
33 — tangible fixed assets
88
555556
4,524
(1,073) Tax on profit on ordinary activities
555556
3,451
Profit on ordinary activities before tax
Profit on ordinary activities after tax
Minority interests
(298) — equity
555556
(41) — non-equity
Profit for the financial year
3,112
(1,090) Dividends
555556
attributable to shareholders
zzzzzx
2,022 Retained profit for the year
Pence
zzzzzx
117.61 Earnings per ordinary share
zzzzzx
115.42 Headline earnings per ordinary share
zzzzzx
41.00 Dividends per ordinary share
Movements in reserves are set out in Note 31.
27
5
5
6
8
9
9
8
(34)
(431)
(56)
(29)
(48)
55557 55557 55557
7,443
57,631
(368)
4,544
4,400
144
341
17
69
4,324
216
875
559
28
113
55557 55557 55557
8,143
(2,061)
55557 55557 55557
6,082
63,046
(15,955)
4,971
(1,258)
47,091
3,713
(513)
(74)
55557 55557 55557
(3,970)
(571)
(313)
(45)
3,355
(1,337)
5,495
(2,190)
55557 55557 55557
3,305
zzzzcv zzzzc zzzzc
42,550
(16,957)
25,593
2,018
Pence
HK$
US$
2.06
zzzzcv zzzzc zzzzc
125.70
15.94
2.05
zzzzcv zzzzc zzzzc
124.96
15.85
0.82
zzzzcv zzzzc zzzzc
50.00
6.34
49
H S B C H O L D I N G S P L C
Consolidated Balance Sheet at 31 December 1997
1996
£m
ASSETS
1,814 Cash and balances at central banks
Items in the course of collection from
2,653
7,944
4,731
48,980
114,353
other banks
Treasury bills and other eligible bills
Hong Kong SAR Government
certificates of indebtedness
Loans and advances to banks
Loans and advances to customers
29,550 Debt securities
1,676
519
Equity shares
Interests in associated undertakings
43 Other participating interests
Tangible fixed assets
6,238
15,878 Other assets
2,174
555556
236,553
zzzzzx
Total assets
Prepayments and accrued income
LIABILITIES
4,735 Hong Kong SAR currency notes in
circulation
18,030 Deposits by banks
151,149 Customer accounts
Items in the course of transmission to
other banks
1,573
10,040 Debt securities in issue
24,894 Other liabilities
1,997 Accruals and deferred income
Provisions for liabilities and charges
393 — deferred taxation
— other provisions for liabilities
455
and charges
Subordinated liabilities
1,768 — undated loan capital
4,207 — dated loan capital
Minority interests
1,599 — equity
526 — non-equity
2,014 Called up share capital
Share premium account
299
26 Reserves
2,697 Revaluation reserves
10,151
Profit and loss account
15,187
555556
236,553
zzzzzx
Shareholders’ funds
Total liabilities
MEMORANDUM ITEMS
Contingent liabilities
2,162 — acceptances and endorsements
— guarantees and assets pledged
as collateral security
167 — other contingent liabilities
14,389
555556
16,718
zzzzzx
zzzzzx
72,001 Commitments
W Purves, Group Chairman
50
Note
1997
£m
1997
HK$m
1997
US$m
1,798
22,944
2,961
3,442
10,433
43,923
133,136
5,669
17,183
4,944
52,533
145,975
33,858
1,960
546
194
7,914
20,191
2,603
8,143
86,522
240,421
55,764
3,228
899
320
13,034
33,255
4,287
55557 55557 55557
471,686
3,654,636
zzzzc zzzzc zzzzc
63,084
670,374
1,862,787
432,062
25,012
6,968
2,476
100,991
257,658
33,221
286,391
4,944
23,647
178,621
63,084
301,759
2,279,383
2,456
16,846
30,162
2,830
570
1,295
1,970
4,421
1,671
516
2,068
297
—
2,588
11,489
31,341
214,972
384,903
36,114
7,274
16,525
25,139
56,416
21,324
6,585
26,390
3,790
—
33,025
146,612
8,143
38,947
294,189
4,045
27,745
49,676
4,661
939
2,133
3,245
7,281
2,752
850
3,406
489
—
4,262
18,923
16,442
27,080
55557 55557 55557
471,686
3,654,636
zzzzc zzzzc zzzzc
286,391
209,817
2,923
37,300
4,814
12,485
63
159,321
804
20,563
104
55557 55557 55557
25,481
zzzzc zzzzc zzzzc
136,288
1,055,960
zzzzc zzzzc zzzzc
197,425
82,749
15,471
10
11
12
13
16
17
18
19
20
22
11
23
24
25
26
27
28
29
30
31
31
31
31
33
33
H S B C H O L D I N G S P L C
Company Balance Sheet at 31 December 1997
1996
£m
FIXED ASSETS
9
Tangible assets
Investments
1997
£m
1997
HK$m
1997
US$m
3
38
5
Note
20
21
14,230 — shares in Group undertakings
912 — loans to Group undertakings
244 — other investments other than loans
555556
15,395
zzzzzx
CURRENT ASSETS
Debtors
— money market deposits with Group
1,851
undertakings
— other amounts owed by Group
659
undertakings
15,650
443
243
25,776
730
400
55557 55557 55557
26,911
zzzzc zzzzc zzzzc
199,709
5,653
3,101
208,501
16,339
1,451
1,240
18,516
15,824
2,390
2,042
— amounts owed by Group undertakings
(falling due after more than 1 year)
6 — other debtors
222
555556
2,738
Cash at bank and in hand
144 — balances with Group undertakings
555556
2,882
555556
CREDITORS: amounts falling
due within one year
(807) Amounts owed to Group undertakings
(118) Other creditors
(259) Taxation
(693) Proposed dividend
555556
(1,877)
555556
555556
1,005 NET CURRENT ASSETS
TOTAL ASSETS LESS CURRENT
16,400 LIABILITIES
CREDITORS: amounts falling
due after more than one year
Subordinated liabilities
(806) — owed to third parties
(205) — owed to Group undertakings
(133) Amounts owed to Group undertakings
PROVISIONS FOR LIABILITIES
AND CHARGES
555556
zzzzzx
(69) Deferred taxation
15,187 NET ASSETS
CAPITAL AND RESERVES
2,014 Called up share capital
Share premium account
299
9,783 Revaluation reserve
3,091
555556
15,187
zzzzzx
Profit and loss account
W Purves, Group Chairman
222
4
366
7
55557 55557 55557
4,805
2,833
51
37,224
2,917
252
415
55557 55557 55557
5,220
55557 55557 55557
40,440
3,216
3,169
(659)
(119)
(323)
(803)
(8,409)
(1,519)
(4,122)
(10,247)
(1,085)
(196)
(532)
(1,323)
55557 55557 55557
(3,136)
55557 55557 55557
2,084
55557 55557 55557
(24,297)
(1,904)
16,143
1,265
17,604
224,644
28,995
(811)
(211)
(133)
(10,348)
(2,693)
(1,697)
(1,336)
(348)
(219)
(7)
(12)
55557 55557 55557
27,080
zzzzc zzzzc zzzzc
209,817
16,442
(89)
2,068
297
11,191
2,886
3,406
489
18,432
4,753
55557 55557 55557
27,080
zzzzc zzzzc zzzzc
26,390
3,790
142,809
36,828
209,817
16,442
51
8
28
27
30
31
31
31
H S B C H O L D I N G S P L C
Statement of Total Consolidated Recognised Gains and Losses for the Year Ended 31 December 1997
Profit for the financial year attributable to shareholders
Unrealised (deficit)/surplus on revaluation of investment properties
— subsidiaries
— associates
Unrealised (deficit)/surplus on revaluation of land and buildings
(excluding investment properties)
Exchange and other movements
Total recognised gains and losses for the year
1997
£m
3,355
(2)
8
1996
£m
3,112
9
12
639
(960)
555558 555558
(67)
(183)
2,812
zzzzzv zzzzzv
3,111
Reconciliation of Movements in Consolidated Shareholders’ Funds for the Year Ended 31 December 1997
Profit for the financial year attributable to shareholders
Dividends
Other recognised gains and losses relating to the year
New share capital subscribed
Arising on shares issued in lieu of dividends
Goodwill written back on disposal
Goodwill on acquisition of subsidiary and associated undertakings
Net addition to shareholders’ funds
Shareholders’ funds at 1 January
Shareholders’ funds at 31 December
1997
£m
1996
£m
3,112
(1,090)
555558 555558
3,355
(1,337)
2,018
2,022
(300)
13
190
9
(134)
555558 555558
(244)
10
206
—
(735)
1,255
1,800
13,387
555558 555558
15,187
15,187
zzzzzv zzzzzv
16,442
No note of historical cost profits and losses has been presented as there is no material difference between the Group’s results as
disclosed in the consolidated profit and loss account and the results on an unmodified historical cost basis.
52
H S B C H O L D I N G S P L C
Consolidated Cash Flow Statement for the Year Ended 31 December 1997
Net cash inflow from operating activities
Returns on investments and servicing of finance:
Dividends received from associated undertakings
Interest paid on finance leases and similar hire purchase contracts
Interest paid on subordinated loan capital
Dividends paid to minority interests
— equity
— non-equity
Net cash (outflow) from returns on investments
and servicing of finance
Taxation paid
Capital expenditure and financial investment:
Purchase of investment securities
Proceeds from sale of investment securities
Purchase of tangible fixed assets
Proceeds of sale of tangible fixed assets
Net cash (outflow) from capital expenditure
and financial investments
Acquisitions and disposals
Net cash (outflow) from acquisition of and increase in stake
in subsidiary undertakings
Net cash inflow from disposal of subsidiary undertakings
Purchase of interest in associated undertakings and other
participating interests
Proceeds from disposal of associated undertakings and
other participating interests
Net cash (outflow)/inflow from acquisitions and disposals
Equity dividends paid
Net cash inflow before financing
Financing:
Issue of ordinary share capital
Issue of preference share capital
Redemption of preference share capital
Subordinated loan capital issued
Subordinated loan capital repaid
Net cash inflow from financing
Increase in cash
Note
34
1997
£m
8,726
39
(18)
(442)
1996
£m
8,787
49
(13)
(385)
(226)
(32)
555558 555558
(192)
(40)
(653)
(897)
(607)
(713)
(13,486)
10,615
(651)
167
555558 555558
(19,307)
18,182
(826)
207
(1,744)
(3,355)
(573)
18
(74)
(29)
33
(53)
87
555558 555558
15
(614)
38
(807)
555558 555558
(1,021)
3,797
3,343
13
124
—
1,005
(90)
555558 555558
10
30
(60)
453
(195)
238
1,052
4,395
zzzzzv zzzzzv
4,035
35
36
53
H S B C H O L D I N G S P L C
Notes on the Accounts
1 Basis of preparation
a The accounts have been prepared under the historical cost convention, as modified by the revaluation of certain
investments and land and buildings and in accordance with applicable accounting standards.
The consolidated accounts are prepared in accordance with the special provisions of Part VII Chapter II of the
Companies Act 1985 (‘the Act’) relating to banking groups. The consolidated accounts comply with Schedule
9 and the accounts of HSBC Holdings plc (‘the Company’) comply with Schedule 4 to the Act.
As permitted by Section 230 of the Act, no profit and loss account is presented for the Company.
The Group has adopted the guidance issued by the Accounting Standards Board on the application of the
Statement of Standard Accounting Practice (‘SSAP’) 8, ‘The treatment of taxation under the imputation
system in the accounts of companies’, to the presentation of dividend income following the corporation tax
changes enacted in the Finance (No. 2) Act 1997. Accordingly, from July 1997, for financial traders and other
entities taxed on the cash dividend received as trading income, dividend income is no longer grossed up for
any tax credit.
b The consolidated accounts of the Group comprise the accounts of the Company and its subsidiary
undertakings. Accounts of subsidiary undertakings are made up to 31 December, except in the case of
Hongkong Bank of Canada, which has a 31 October year-end. In the case of the principal banking and
insurance subsidiaries of HSBC Roberts, whose accounts are made up to 30 June annually to comply with local
regulations, the Group uses audited interim accounts, drawn up to 31 December annually. The consolidated
accounts include the attributable share of the results and reserves of associated undertakings, based on
accounts made up to dates not earlier than six months prior to 31 December.
All significant intra-Group transactions have been eliminated on consolidation.
Within these accounts, the Hong Kong Special Administrative Region of China has been referred to as ‘Hong
Kong’.
2 Principal accounting policies
a Income recognition
Interest income is recognised in the profit and loss account as it accrues, except in the case of doubtful debts
(Note 2b).
Fee income is accounted for in the period when receivable, except where the fee is charged to cover the costs
of a continuing service to, or risk borne for, the customer, or is interest in nature. In these cases, the fee is
recognised on an appropriate basis over the relevant period.
b Loans and advances and doubtful debts
Specific provision is made for doubtful debts as and when they are so considered and, in addition, amounts
have been set aside as general provisions for doubtful debts. The specific element relates to individual banking
relationships; the general element relates to other exposures not separately identified but known from
experience to exist in any portfolio of banking relationships. When there is no longer any realistic prospect
of recovery, the outstanding debt is written off.
Interest on doubtful debts is credited to a suspense account which is netted in the balance sheet against the
relevant balances.
Assets acquired in exchange for advances in order to achieve an orderly realisation continue to be reported
as advances. The asset acquired is recorded at the carrying value of the advance disposed of at the date of the
exchange, and provisions are based on any subsequent deterioration in its value.
c Debt securities and equity shares
Debt securities and equity shares intended to be held on a continuing basis are disclosed as investment
securities and are included in the balance sheet at cost less provision for any permanent diminution in value.
Where dated investment securities have been purchased at a premium or discount, these premiums and
discounts are amortised through the profit and loss account over the period from the date of purchase to the
date of maturity. If the maturity is at the borrowers’ option within a specified range of years, the maturity date
54
2 Principal accounting policies (continued)
which gives the more conservative result is adopted. These securities are included in the balance sheet at cost
adjusted for the amortisation of premiums and discounts arising on acquisition. The amortisation of premiums
and discounts is included in ‘Interest receivable’. Any profit or loss on realisation of these securities is
recognised in the profit and loss account as it arises and included in ‘Gains on disposal of investments’.
Debt securities held for the purpose of hedging are valued on the same basis as the liabilities which are being
hedged.
Other debt securities and equity shares are included in the balance sheet at market value. Changes in the market
value of such assets are recognised in the profit and loss account as ‘Dealing profits’ as they arise.
Where securities are sold subject to a commitment to repurchase them at a predetermined price, they remain
on the balance sheet and a liability is recorded in respect of the consideration received. Conversely, securities
purchased under analogous commitments to resell are not recognised on the balance sheet and the
consideration paid is recorded in ‘Loans and advances to customers’ or ‘Loans and advances to banks’.
d Subsidiary and associated undertakings and other participating interests
i The Company’s investments in subsidiary undertakings are stated at attributable net asset values. Changes
in net assets of subsidiary undertakings are accounted for as movements in the revaluation reserve.
Interests in associated undertakings are stated at the Group’s attributable share of their net assets.
ii
iii Other participating interests are investments in the shares of undertakings which are held on a long-term
basis for the purpose of securing a contribution to the Group’s business, other than subsidiary or associated
undertakings. Other participating interests are stated at cost less any permanent diminution in value.
iv Goodwill arising on the acquisition of subsidiary or associated undertakings, being the excess of the cost
of acquisition over the fair value of the Group’s share of separable net assets acquired, is charged against
reserves in the year of acquisition. At the date of disposal of subsidiary or associated undertakings,
goodwill is reinstated in reserves and included in the calculation of the profit on disposal of the
undertaking.
e Tangible fixed assets
i Land and buildings are stated at valuation or cost less depreciation calculated to write off the assets over
their estimated useful lives as follows:
— freehold land and land held on leases with more than 50 years to expiry are not depreciated;
— land held on leases with 50 years or less to expiry is depreciated over the unexpired terms of the leases; and
— buildings and improvements thereto are depreciated on cost or valuation at the greater of 2% per annum
on the straight line basis or over the unexpired terms of the leases.
ii Equipment, fixtures and fittings are stated at cost less depreciation calculated on the straight line basis to
write off the assets over their estimated useful lives, which are generally between 5 years and 20 years.
iii The Group holds certain properties as investments. No depreciation is provided in respect of such
properties other than leaseholds with 20 years or less to expiry. Investment properties are included in the
balance sheet at their open market value and the aggregate surplus or deficit, where material, is transferred
to the investment property revaluation reserve.
f Finance and operating leases
i Assets leased to customers under agreements which transfer substantially all the risks and rewards
associated with ownership, other than legal title, are classified as finance leases. Where the Group is a
lessor under finance leases the amounts due under the leases, after deduction of unearned charges, are
included in ‘Loans and advances to customers’ or ‘Loans and advances to banks’. Finance charges
receivable are recognised over the periods of the leases in proportion to the funds invested.
ii Where the Group is a lessee under finance leases the leased assets are capitalised and included in
‘Equipment, fixtures and fittings’ and the corresponding liability to the lessor is included in ‘Other
liabilities’. Finance charges payable are recognised over the periods of the leases based on the interest rates
implicit in the leases.
55
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
2 Principal accounting policies (continued)
iii All other leases are classified as operating leases and, where the Group is the lessor, are included in
‘Tangible fixed assets’. Rentals payable and receivable under operating leases are accounted for on the
straight line basis over the periods of the leases and are included in ‘Administrative expenses’ and ‘Other
operating income’ respectively.
g Deferred taxation
Deferred taxation is provided on timing differences, using the liability method, between the accounting and
taxation treatment of income and expenditure. Provision is made for deferred tax only to the extent that it is
probable that an actual liability will crystallise.
h Pension and other post-retirement benefits
The Group operates a number of pension and other post-retirement benefit schemes throughout the world and
the majority of staff are members of defined benefit schemes.
For UK defined benefit schemes annual contributions are made, on the advice of qualified actuaries, for
funding of retirement benefits in order to build up reserves for each scheme member during the employee’s
working life and used to pay a pension to the employee or dependant after retirement. The costs of providing
these benefits are charged to the profit and loss account on a regular basis.
Arrangements for staff retirement benefits in overseas locations vary from country to country and are made
in accordance with local regulations and custom. The pension cost of the major overseas schemes is assessed
in accordance with the advice of qualified actuaries so as to recognise the cost of pensions on a systematic
basis over employees’ service lives.
The cost of providing post-retirement health-care benefits, which is assessed in accordance with the advice
of qualified actuaries, is recognised on a systematic basis over employees’ service lives. At 1 January 1993,
there was an accumulated obligation in respect of these benefits relating to current and retired employees. This
is being charged in the profit and loss account in equal instalments over 20 years.
i Foreign currencies
i Assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange
ruling at the year-end. The results of overseas branches and subsidiary and associated undertakings are
translated into sterling at the average rates of exchange for the year.
ii Exchange differences arising from the retranslation of opening foreign currency net investments and the
related cost of hedging and exchange differences arising from retranslation of the result for the year from
the average rate to the exchange rate ruling at the year-end are accounted for in reserves.
iii Other exchange differences are recognised in the profit and loss account.
j Off-balance-sheet financial instruments
Off-balance-sheet financial instruments arise from futures, forward, swap and option transactions undertaken
by the Group in the foreign exchange, interest rate and equity markets.
Accounting for these instruments is dependent upon whether the transactions are undertaken for trading or
non-trading purposes. Trading transactions include transactions undertaken for market-making, to service
customers’ needs and for proprietary purposes, as well as any related hedges. Non-trading transactions are
those which are held for hedging purposes as part of the Group’s risk management strategy against assets,
liabilities, positions or cash flows measured on an accruals basis.
Transactions undertaken for trading purposes are marked to market value and the net present value of any gain
or loss arising is recognised in the profit and loss account as ‘Dealing profits’, after appropriate deferrals for
unearned credit margin and future servicing costs.
Non-trading transactions are accounted for on an equivalent basis to the underlying assets, liabilities or net
positions. Any profit or loss arising is recognised on the same basis as that arising from the related assets,
liabilities or positions.
Assets, including gains, resulting from off-balance-sheet interest rate and exchange rate contracts which are
marked-to-market are included in ‘Other assets’. Liabilities, including losses, resulting from such contracts,
are included in ‘Other liabilities’.
56
3 Dividend income
Income from equity shares
Income from participating interests other than associated
undertakings
4 Administrative expenses
a
Staff costs
— wages and salaries
— social security costs
— other pension costs (Note 4b below)
Premises and equipment (excluding depreciation)
Other administrative expenses
1997
£m
90
1996
£m
98
5
5
5555678 5555678
103
zzzzxcv zzzzxcv
95
1997
£m
1996
£m
3,137
224
299
2,663
138
268
5555678 5555678
3,069
652
981
5555678 5555678
4,702
zzzzxcv zzzzxcv
3,660
760
1,277
5,697
The average number of persons employed by the Group during the year was made up as follows:
Commercial banking
Investment banking
b Retirement benefits
1997
Number
126,554
6,415
1996
Number
103,542
5,756
5555678 5555678
109,298
zzzzxcv zzzzxcv
132,969
The Group operates some 114 pension schemes throughout the world, covering 87% of the Group’s
employees, with a total pension cost of £299 million (1996: £268 million), of which £136 million (1996:
£145 million) relates to overseas schemes. Of the overseas schemes, £21 million (1996: £17 million) has been
determined in accordance with best practice and regulations in the United States and Canada.
The majority of the schemes are funded defined benefit schemes, which cover 75% of the Group’s employees,
with assets, in the case of the larger schemes, held in trust or similar funds separate from the Group. The
pension cost relating to these schemes was £253 million (1996: £252 million) which is assessed in accordance
with the advice of qualified actuaries; the schemes are reviewed at least on a triennial basis or in accordance
with local practice and regulations. The actuarial assumptions used to calculate the projected benefit
obligations of the Group’s pension schemes vary according to the economic conditions of the countries in
which they are situated.
In the UK, the Midland Bank Pension Scheme covers employees of Midland Bank and certain other employees
of the Group. This scheme comprises a funded defined benefit scheme (‘the Principal Scheme’) and a defined
contribution scheme which was established on 1 July 1996 for new employees. The latest valuation of the
Principal Scheme was made at 31 December 1996 by C G Singer, Fellow of the Institute of Actuaries, of
Watson Wyatt Partners. At that date, the market value of the Principal Scheme’s assets was £4,463 million.
The actuarial value of the assets represented 107% of the benefits accrued to members, after allowing for
expected future increases in earnings, and the resulting surplus amounted to £301 million. The method adopted
for this valuation was the projected unit method and the main assumptions used were a long-term investment
return of 7.6% per annum, salary increases of 4.5% per annum, equity dividend increases and rental growth
of 3.5% per annum, and post-retirement pension increases of 3.0% per annum.
57
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
4 Administrative expenses (continued)
As a result of the Finance (No. 2) Act 1997, which came into force in July 1997, pension schemes are no longer
able to claim a tax credit on UK equity dividend income. The actuaries have estimated that the effect on the
Principal Scheme will be largely to offset the surplus shown by the 31 December 1996 valuation and this has
been accounted for over the average remaining service lives of the employees in the Principal Scheme in
accordance with Urgent Issues Task Force Abstract number 18.
In consultation with the actuaries, it has been decided to maintain contributions at 16.1% of pensionable
salaries until the next actuarial valuation. The next actuarial valuation is due as at 31 December 1999.
For the principal non-UK scheme, The Hongkong and Shanghai Banking Corporation Limited Local Staff
Retirement Benefits Scheme, the latest valuation was made at 31 December 1997 and was performed by
E Chiu, Fellow of the Society of Actuaries of the United States of America, of HSBC Life (International)
Limited, a subsidiary of the Group. At that date, the market value of the scheme’s assets was £326 million.
On an ongoing basis, the actuarial value of the scheme’s assets represented 92% of the benefits accrued to
members, after allowing for expected future increases in salaries, and the resulting deficit amounted to
£27 million. On a wind-up basis, the actuarial value of the scheme’s assets represents 103% of the members’
vested benefits, based on current salaries, and the resulting surplus amounted to £9 million. The actuarial
method used is the projected unit credit method and the main assumptions used in this valuation were a long-
term investment return of 9% per annum and salary increases of 8% per annum.
The Midland Bank Pension Scheme and The Hongkong and Shanghai Banking Corporation Limited Local
Staff Retirement Benefits Scheme cover 40% (1996: 48%) of the Group’s employees.
The pension cost for defined contribution schemes, which cover 12% (1996: 9%) of the Group’s employees,
was £22 million (1996: £16 million).
The Group also provides post-retirement health-care benefits under schemes, mainly in the UK and also in the
United States and Canada. The charge relating to these schemes, which are unfunded, is £24 million for the
year (1996: £23 million). The latest actuarial review as at 31 December 1997 estimated the present value of
the accumulated post-retirement benefit obligation at £170 million (1996: £188 million), of which
£91 million (1996: £76 million) has been provided. The actuarial assumptions used to estimate this obligation
vary according to the claims experience and economic conditions of the countries in which the schemes are
situated. For the UK schemes, the main financial assumptions used at 31 December 1997 are price inflation
at 3% per annum, health-care claims cost escalation of 8.5% per annum and a discount rate of 7% per annum.
c Directors’ emoluments
The aggregate emoluments of the Directors of the Company, computed in accordance with Part I of Schedule
6 of the Act were:
Fees
Salaries and other emoluments
Discretionary bonuses
1997
£000
473
3,105
635
1996
£000
452
3,220
585
5555678 5555678
4,257
zzzzxcv zzzzxcv
4,213
Gains on the exercise of share options
100
zzzzxcv zzzzxcv
113
In addition, there were annual commitments under retirement benefit agreements with former Directors of
£103,509 (1996: £143,000). The provision as at 31 December 1997 in respect of unfunded pension obligations
to a former Director amounted to £1,656,500 (1996: £1,496,000).
During the year, aggregate contributions to pension schemes in respect of Directors were £178,000 (1996:
£187,000).
Discretionary bonuses for Directors are based on a combination of individual and corporate performance and
are determined by the Remuneration Committee, whose report, together with details of Directors’ share
options and conditional awards under the Restricted Share Plan, are disclosed in the ‘Report of the Directors’
(see pages 24 to 31). The cost of the conditional awards is recognised through an annual charge based on the
likely level of vesting of shares, apportioned over the period of service to which the award relates.
58
4 Administrative expenses (continued)
Four Directors waived the right to receive emoluments totalling £95,000 (1996: five Directors £83,000).
Details of individual Directors’ remuneration are disclosed in the ‘Report of the Directors’ on page 29.
d Auditors’ remuneration
Auditors’ remuneration amounted to £10.9 million (1996: £9.7 million). In addition, £12.5 million (1996:
£4.2 million) was paid by Group companies to the auditors and their associates for non-audit work as analysed
below:
Regulatory work
Tax services
Consultancy
Acquisition services
Other
1997
£m
2.1
1.3
1.5
6.7
0.9
1996
£m
1.7
0.7
0.8
—
1.0
555567 555567
4.2
zzzzxc zzzzxc
12.5
In 1997, the auditors provided extensive support in the due diligence and integration of Banco HSBC
Bamerindus S.A. The cost of this support constituted substantially all of the amount disclosed above under
‘Acquisition services’.
Of fees paid to auditors for non-audit work, £4.9 million were capitalised as part of the cost of acquisitions
made during 1997.
5 Profit on ordinary activities before tax
a Profit on ordinary activities before tax is stated after:
i
Income
Aggregate rentals receivable, including capital repayments, under
— finance leases
— operating leases
Income from listed investments
Profits less losses on debt securities and equities dealing
Gains on disposal of investment securities
ii Charges
Charges incurred with respect to subordinated liabilities
Finance charges in respect of finance leases and
similar hire purchase contracts
Hire of plant and machinery
Rentals payable on premises held under operating leases
1997
£m
2,307
253
1,201
(53)
333
460
16
46
266
1996
£m
2,019
133
1,408
121
246
426
10
59
252
Gains on the disposal of investments and tangible fixed assets attracted a tax charge of £57 million (1996: £43
million). Of the after tax amount, £19 million (1996: £15 million) is attributable to minority interests.
59
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
5 Profit on ordinary activities before tax (continued)
b The impact of acquisitions on operating profit was as follows:
Operating income
Administrative expenses
Depreciation and amortisation
Provisions
— provisions for bad and doubtful debts
— provisions for contingent liabilities and commitments
Operating profit
1997
£m
1,001
(786)
(44)
555567
171
(25)
(2)
555567
144
zzzzxc
6 Tax on profit on ordinary activities
The charge for taxation comprises:
United Kingdom corporation tax charge
Relief for overseas taxation
Overseas taxation
Deferred taxation (Note 27)
Associated undertakings
1997
£m
587
(91)
1996
£m
513
(107)
555567 555567
406
598
58
555567 555567
1,062
11
555567 555567
1,073
zzzzxc zzzzxc
496
678
79
1,253
5
1,258
The Company and its subsidiary undertakings in the UK provide for UK corporation tax at 31.5% (1996: 33%).
Overseas tax includes Hong Kong profits tax of £266 million (1996: £250 million). Subsidiary undertakings in
Hong Kong provide for Hong Kong profits tax at the rate of 16.5% (1996: 16.5%) on the profits for the year
assessable in Hong Kong. Other overseas subsidiary undertakings and overseas branches provide for taxation at
the appropriate rates in the countries in which they operate.
7 Profit of the Company
The profit of the Company for the year is £926 million (1996: £807 million).
8 Dividends
First interim
Second interim
555555555567 555555555567
1996
1997
Pence per
share
20.00
30.00
£m
397
693
555567 555567 555567 555567
1,090
zzzzxc zzzzxc zzzzxc zzzzxc
£m
534
803
41.00
50.00
1,337
Pence per
share
15.00
26.00
Of the first interim dividend for 1997, £76 million (1996: £89 million) was settled by the issue of shares. Of the
second interim dividend for 1996, £130 million (1995 final dividend: £101 million) was settled by the issue of
shares in 1997.
9 Earnings per ordinary share
Earnings per ordinary share is calculated by dividing the earnings of £3,355 million (1996: £3,112 million) by
the weighted average number of ordinary shares in issue in 1997 of 2,669 million (1996: 2,646 million). Fully
diluted earnings per share is not materially different from the basic earnings per ordinary share shown.
60
9 Earnings per ordinary share (continued)
Headline earnings per share has been calculated in accordance with the definition in the Institute of Investment
Management Research (‘IIMR’) Statement of Investment Practice No. 1, ‘The Definition of IIMR Headline
Earnings’, as follows:
Earnings per ordinary share
Adjustments:
Profit on sale of tangible fixed assets
Profit on disposal of subsidiary undertaking
Profit on sale of interest in associated undertaking
Provision for permanent diminution in value of other
participating interests
Headline earnings per ordinary share
10 Treasury bills and other eligible bills
Treasury bills and similar securities
Other eligible bills
1997
Pence
125.70
(0.64)
(0.22)
(0.07)
1996
Pence
117.61
(1.06)
(1.10)
(1.47)
0.19
1.44
5555678 5555678
115.42
zzzzxcv zzzzxcv
124.96
1997
£m
8,403
2,030
1996
£m
6,755
1,189
5555678 5555678
7,944
zzzzxcv zzzzxcv
10,433
None of the treasury and other eligible bills has been accounted for as an investment security.
11 Hong Kong SAR currency notes in circulation
Authorised note issue
Excess note issue (HK$63,084 million)
1997
£m
—
4,944
1996
£m
4
4,731
5555678 5555678
4,735
zzzzxcv zzzzxcv
4,944
In 1996, the authorised note issue was secured by the deposit of investments having a market value of
HK$70 million. In 1997, the entire note issue and in 1996, the excess note issue, was secured by the deposit of
funds in respect of which the Government of the Hong Kong Special Administrative Region certificates of
indebtedness are held.
12 Loans and advances to banks
Remaining maturity
— repayable on demand
— 3 months or less but not repayable on demand
— 1 year or less but over 3 months
— 5 years or less but over 1 year
— over 5 years
Specific bad and doubtful debt provisions (Note 14)
1997
£m
1996
£m
10,806
38,483
2,307
427
538
(28)
7,066
36,775
3,748
421
1,001
(31)
5555678 5555678
48,980
zzzzxcv zzzzxcv
52,533
61
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
12 Loans and advances to banks (continued)
Amounts include:
Due from associated undertakings
— unsubordinated
13 Loans and advances to customers
1997
£m
1996
£m
62
zzzzxc zzzzxcv
19
1997
£m
1996
£m
Remaining maturity
— repayable on demand or at short notice
— 3 months or less but not repayable on demand or at short notice
— 1 year or less but over 3 months
— 5 years or less but over 1 year
— over 5 years
General and specific bad and doubtful debt provisions (Note 14)
22,101
29,353
18,517
41,219
37,901
(3,116)
32,548
9,212
13,425
32,481
29,453
(2,766)
555567 555567
114,353
zzzzxc zzzzxc
145,975
Amounts include:
Subordinated
68
zzzzxc zzzzxc
80
Securitised advances not qualifying for linked
presentation under Financial Reporting Standard (‘FRS’) 5
117
zzzzxc zzzzxc
92
Due from associated undertakings
— unsubordinated
Due from other undertakings in which the Group
has a participating interest
— unsubordinated
132
zzzzxc zzzzxc
211
3
zzzzxc zzzzxc
—
14 Provisions for bad and doubtful debts
Specific
General
Suspended
Provisions against advances
interest
Total
555567 555567 555567 555567
£m
394
(46)
£m
1,873
(457)
£m
2,797
(457)
£m
924
—
105
324
—
—
72
—
—
154
(61)
(15)
555567 555567 555675 675555
426
zzzzxc zzzzxc zzzzxc zzzzxc
105
615
—
—
84
—
291
—
—
12
1,917
1,227
3,144
28
3,116
555567
3,144
zzzzxc
At 1 January 1997
Amounts written off
Recoveries of advances written off in
previous years
Charge to profit and loss account
Interest suspended during the year
Suspended interest recovered
Exchange and other movements
At 31 December 1997
Included in:
Loans and advances to banks (Note 12)
Loans and advances to customers (Note 13)
62
14 Provisions for bad and doubtful debts (continued)
At 1 January 1996
Amounts written off
Recoveries of advances written off in
previous years
Charge to profit and loss account
Interest suspended during the year
Suspended interest recovered
Exchange and other movements
At 31 December 1996
Included in:
Loans and advances to banks (Note 12)
Loans and advances to customers (Note 13)
Specific
General
Suspended
Provisions against advances
interest
Total
555567 555567 555567 555567
£m
453
(36)
£m
2,182
(604)
£m
3,076
(604)
£m
894
—
112
306
—
—
(123)
—
—
145
(137)
(31)
555567 555567 555567 555567
2,797
924
394
1,873
zzzzxc
zzzzxc
zzzzxc
zzzzxc
zzzzxc
zzzzxc
zzzzxc
zzzzxc
zzzzxc
zzzzxc zzzzxc
zzzzxc zzzzxc
zzzzxc zzzzxc
zzzzxc
zzzzxc
zzzzxc
zzzzxc
zzzzxc
112
384
—
—
(171)
—
78
—
—
(48)
31
2,766
555567
2,797
zzzzxc
The total of advances, net of suspended interest, on which interest is being placed in suspense, is as follows:
Gross
Net of specific provisions
15 Concentrations of exposure
1996
£m
1,991
777
zzzzxc zzzzxc
1997
£m
1,967
732
The Group has the following concentrations of loans and advances to customers:
Continental
Rest of
Total gross advances to customers:
At 31 December 1997
Residential mortgages
Other personal
Commercial, industrial and
international trade
Commercial real estate
Other property related
Non-bank financial institutions
Other commercial
UK
Total
55558 55557 55557 55556 55557 5555
£m
Europe Hong Kong Asia-Pacific Americas
£m
£m
£m
£m
£m
11,561
5,712
56
503
14,792
5,463*
1,356
1,935
8,666
3,877
36,431
17,490
15,766
3,483
1,096
3,142
9,719
37,982
15,267
4,907
12,971
24,416
55558 55557 55557 55556 55557 5555
149,464
zzzzc zzzzc zzzzc zzzzx zzzzc zzzz
4,777
3,017
1,052
5,391
4,785
7,254
6,329
1,560
3,208
4,828
8,782
2,222
1,067
991
3,436
1,403
216
132
239
1,648
19,789
31,565
50,479
43,434
4,197
63
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
15 Concentrations of exposure (continued)
Total gross advances to customers:
At 31 December 1996
Residential mortgages
Other personal
Commercial, industrial and
international trade
Commercial real estate
Other property related
Non-bank financial institutions
Other commercial
Continental
Rest of
UK
Total
55558 55557 55557 55556 55557 5555
£m
Europe Hong Kong Asia-Pacific Americas
£m
£m
£m
£m
£m
9,861
5,300
99
238
10,821
4,609*
1,192
1,418
4,476
3,207
26,449
14,772
13,647
2,956
986
2,580
9,213
32,731
12,598
4,070
5,737
21,096
55558 55557 55557 55556 55557 5555
117,453
zzzzc zzzzc zzzzc zzzzx zzzzc zzzz
8,384
2,010
1,040
880
3,370
6,471
4,710
1,301
1,477
3,518
3,109
2,642
560
713
3,552
1,120
280
183
87
1,443
18,259
18,294
44,543
32,907
3,450
* Advances to individuals under the Hong Kong Government Home Ownership Scheme are included under ‘Other personal’
lending.
The geographical information shown above has been classified by the location of the principal operations of the
subsidiary undertaking, or in the case of HongkongBank, Midland and The British Bank of the Middle East
operations, by the location of the branch responsible for advancing the funds.
16 Debt securities
1997
555555555567 555555555567
Market
Book value
valuation
555567 555567 555567 555567
£m
Market
valuation
Book value
£m
£m
£m
1996
Issued by public bodies
Investment securities
— government securities
— other public sector securities
Other securities
— government securities
— other public sector securities
Issued by other bodies
Investment securities
— bank and building society certificates of deposit
— other debt securities
Other securities
— bank and building society certificates of deposit
— other debt securities
64
9,439
613
8,675
702
555567 555567 555567 555567
9,377
zzzzxc
10,172
zzzzxc
8,602
689
9,549
623
10,052
9,291
4,984
451
555567
15,487
555567
4,859
213
555567
14,363
555567
2,311
4,405
1,596
4,495
555567 555567 555567 555567
6,091
zzzzxc
6,729
zzzzxc
1,597
4,403
2,350
4,379
6,000
6,716
6,426
5,229
555567
18,371
555567
33,858
zzzzxc
3,578
5,609
555567
15,187
555567
29,550
zzzzxc
16 Debt securities (continued)
Due within 1 year
Due 1 year and over
Amounts include:
Subordinated debt securities
Unamortised net (discounts) on
investment securities
Investment securities
— listed on a recognised UK exchange
— listed in Hong Kong
— listed elsewhere
— unlisted
Other debt securities
— listed on a recognised UK exchange
— listed in Hong Kong
— listed elsewhere
— unlisted
1997
555555555567 555555555567
Market
Book value
valuation
555567 555567 555567 555567
£m
Market
valuation
Book value
£m
1996
£m
15,427
18,431
555567
33,858
zzzzxc
£m
9,954
19,596
555567
29,550
zzzzxc
77
zzzzxc
134
zzzzxc
(17)
zzzzxc
(19)
zzzzxc
3,665
292
5,243
7,568
4,028
390
5,463
5,587
555567 555567 555567 555567
15,468
zzzzxc
4,023
386
5,352
5,530
3,682
283
5,361
7,575
16,901
zzzzxc
15,291
16,768
1,859
390
6,347
8,494
555567
33,858
zzzzxc
1,795
184
6,335
5,945
555567
29,550
zzzzxc
Where securities are carried at market value, and the market value is higher than cost, the difference between cost
and market value is not disclosed as it cannot be determined without unreasonable expense.
The above market valuations do not take account of transactions entered into to hedge the value of the Group’s
investment securities. If these transactions were included, the market valuation of investment securities would be
£16,855 million (1996: £15,435 million).
Investment securities:
At 1 January 1997
Additions
Acquisitions of subsidiaries
Disposals and amounts repaid
Transfers
Provisions made
Amortisation of discounts and premiums
Exchange movements
At 31 December 1997
Cost
Book value
Provisions
555567 555567 555567
£m
15,291
19,237
506
(17,651)
7
(6)
22
(638)
555567 555567 555567
16,768
zzzzxc zzzzxc zzzzxc
£m
15,309
19,237
506
(17,651)
7
—
22
(636)
£m
(18)
—
—
—
—
(6)
—
(2)
16,794
(26)
65
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
17 Equity shares
Investment securities
— listed on a recognised UK exchange
— listed in Hong Kong
— listed elsewhere
— unlisted
Other securities
— listed on a recognised UK exchange
— listed in Hong Kong
— listed elsewhere
— unlisted
1997
555555555567 555555555567
Market
Book value
valuation
555567 555567 555567 555567
£m
Market
valuation
Book value
£m
£m
£m
1996
27
216
125
266
104
695
257
421
555567 555567 555567 555567
1,477
zzzzxc
81
423
231
354
47
261
181
268
1,089
zzzzxc
634
757
672
49
499
106
555567
1,960
zzzzxc
549
77
269
24
555567
1,676
zzzzxc
Where securities are carried at market value, and the market value is higher than cost, the difference between cost
and market value is not disclosed as it cannot be determined without unreasonable expense.
Included in the above are 249,440 (1996: 907,712) shares in the Company held by subsidiary undertakings as
equity market-makers.
Investment securities:
At 1 January 1997
Additions
Acquisitions of subsidiaries
Disposals
Other transfers
Provisions made
Provisions released
Provisions written off
Exchange movements
At 31 December 1997
18 Interests in associated undertakings
At 1 January 1997
Additions
Acquisitions of subsidiaries
Retained profits
Disposals
Transfer to subsidiaries
Transfer from subsidiaries
Surplus on revaluation of property
Exchange and other movements
At 31 December 1997
66
Cost
Book value
Provisions
555567 555567 555567
£m
757
70
80
(198)
(34)
(28)
10
—
(23)
555567 555567 555567
634
zzzzxc zzzzxc zzzzxc
£m
(63)
—
—
6
1
(28)
10
1
(2)
£m
820
70
80
(204)
(35)
—
—
(1)
(21)
(75)
709
1997
£m
519
12
28
17
(10)
(51)
8
14
9
555567
546
zzzzxc
18 Interests in associated undertakings (continued)
a Shares in banks
Other
Listed shares (all listed outside the UK and Hong Kong)
Unlisted shares
b The principal associated undertakings of the Group are:
1997
£m
341
205
1996
£m
361
158
555567 555567
519
zzzzxc zzzzxc
546
248
298
224
295
555567 555567
519
zzzzxc zzzzxc
546
Group’s
interest
in equity
capital
Accounts
31.12.97
31.12.97
Principal
activity
Hong Kong
England
Issued
equity
Country of
made up to incorporation
capital
555567 555556 55555 555678 55558
*
25%
47% US$81m
£32m fully
paid, £5m
nil paid
C£75m
E£101m
ARS98m
Cyprus
Egypt
Argentina
31.12.97
31.12.97
30.6.97
Property
Banking
22%
40%
35%
Banking
Banking
Pension fund
management
England Electronic cash
Banking
Trade finance
Shipping
31.12.97
31.12.97 Saudi Arabia
31.12.97 United States
Bermuda
30.6.97
50%
40%
20%
38%
†
SR1,250m
¶
US$58m
Barrowgate Limited
British Arab Commercial Bank
Limited
The Cyprus Popular Bank Limited
Egyptian British Bank S.A.E.
Máxima S.A. A.F.J.P.
Mondex UK Limited
The Saudi British Bank
Wells Fargo HSBC Trade Bank, N.A.
World Finance International Limited
* Issued equity capital is less than HK$1 million.
† Issued equity capital is less than £1 million.
¶ Issued equity capital is less than US$1 million.
All the above interests in associated undertakings are owned by subsidiaries of the Company.
The principal countries of operation are the same as the countries of incorporation, except for World Finance
International Limited which operates worldwide.
c The associated undertakings listed above have no loan capital, except for British Arab Commercial Bank
Limited which has issued US$44.5million of subordinated unsecured loan stock in which the Group has a
34.7% interest; Barrowgate Limited which has HK$845 million of loan capital in which the Group has a 25%
interest; and The Cyprus Popular Bank Limited which has issued C£15 million of convertible debentures in
which the Group has a 43.5% interest. The Group also has a 100% interest in the issued preferred stock (less
than US$1 million) of Wells Fargo HSBC Trade Bank, N.A. The Group has a 40% economic interest in Wells
Fargo HSBC Trade Bank, N.A. by virtue of the joint agreement under which the Group’s equity capital and
preferred stock interests are held.
67
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
19 Other participating interests
Listed other than on a recognised UK exchange or in Hong Kong
Unlisted
1997
£m
3
191
1996
£m
3
40
555567 555567
43
zzzzxc zzzzxc
194
Market value of listed securities
Other participating interests in banks
6
zzzzxc zzzzxc
5
24
zzzzxc zzzzxc
177
Cost
Carrying
value
Provisions
555567 555567 555567
£m
43
157
4
(3)
(5)
—
(2)
555567 555567 555567
194
zzzzxc zzzzxc zzzzxc
£m
(52)
—
—
—
(5)
38
1
£m
95
157
4
(3)
—
(38)
(3)
(18)
212
At 1 January 1997
Additions
Acquisitions of subsidiaries
Disposals
Provisions made
Provisions written off
Exchange and other movements
At 31 December 1997
68
20 Tangible fixed assets
a Group
Freehold
land and
buildings
Long
leasehold
land and
buildings
Short
leasehold Equipment,
fixtures
land and
and fittings
buildings
Equipment
on
operating
leases
Total
55556 55556 55556 55556 55556 55556
£m
£m
£m
£m
£m
£m
Cost or valuation at
1 January 1997
Additions
Acquisitions of
subsidiaries
Disposals
Reclassifications
Transfer of accumulated
depreciation arising
on revaluation
Surplus/(deficit) on
revaluation
Exchange and other
1,151
92
3,316
8
1,031
74
256
(35)
—
(23)
22
—
(41)
(845)
(9)
(155)
3
(33)
747
(51)
58
1,847
398
93
(144)
98
—
—
512
254
1,458
(173)
—
—
—
7,857
826
1,810
(426)
—
(83)
(75)
movements
30
Cost or valuation at 55556 55556 55556 55556 55556 55556
9,939
zzzzx zzzzx zzzzx zzzzx zzzzx zzzzx
31 December 1997
2,233
1,864
2,380
1,413
2,049
(50)
(59)
106
(2)
35
Accumulated depreciation
at 1 January 1997
Acquisitions of
subsidiaries
Disposals
Reclassifications
Transfer of accumulated
depreciation arising
on revaluation
Charge for the year
Exchange and other
movements
Accumulated
depreciation at
31 December 1997
Net book value at
31 December 1997
Net book value at
31 December 1996
—
(5)
5
—
23
(19)
(4)
—
—
—
—
9
(12)
3
(310)
(1,175)
(134)
(1,619)
—
22
70
51
(59)
(38)
—
131
(70)
—
(243)
29
(272)
78
—
—
(107)
2
(277)
236
—
83
(440)
(8)
55556 55556 55556 55556 55556 55556
(2,025)
zzzzx zzzzx zzzzx zzzzx zzzzx zzzzx
(1,328)
(264)
(433)
—
—
7,914
zzzzx zzzzx zzzzx zzzzx zzzzx zzzzx
2,380
1,616
1,600
1,413
905
6,238
zzzzx zzzzx zzzzx zzzzx zzzzx zzzzx
3,316
1,151
672
721
378
69
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
20 Tangible fixed assets (continued)
b Company
Cost or valuation at 1 January 1997
Transfer from another Group company
Deficit on revaluation
Exchange and other movements
Cost or valuation at 31 December 1997
Accumulated depreciation at 1 January 1997
Transfer from another Group company
Accumulated depreciation at 31 December 1997
Net book value at 31 December 1997
Net book value at 31 December 1996
c Valuations
Freehold Equipment,
land and fixtures and
fittings
buildings
£m
—
2
—
—
£m
9
—
(3)
(4)
Total
55555 55555 55555
£m
9
2
(3)
(4)
55555 55555 55555
4
zzzzz zzzzz zzzzz
—
(1)
55555 55555 55555
(1)
zzzzz zzzzz zzzzz
—
(1)
—
—
(1)
—
2
2
3
zzzzz zzzzz zzzzz
1
2
9
zzzzz zzzzz zzzzz
—
9
Group
555555555567 555555555567
1996
£m
1997
£m
1997
£m
1996
£m
Company
Cost or valuation of freehold and long and
short leasehold land and buildings
(excluding investment properties):
At 1997 valuation (1996: at 1996 valuation)
At cost
On the historical cost basis, freehold and long
and short leasehold land and buildings
would have been included as follows
(excluding investment properties):
Cost
Accumulated depreciation
4,760
448
9
—
555567 555567 555567 555567
9
zzzzxc zzzzxc zzzzxc zzzzxc
4,630
423
5,053
5,208
2
—
2
2,955
(471)
1
—
555567 555567 555567 555567
1
zzzzxc zzzzxc zzzzxc zzzzxc
2,822
(430)
2,392
2,484
—
—
—
The Group values its non-investment properties on an annual basis. In November 1997, the Group’s freehold
and long leasehold properties, together with properties in Hong Kong with an unexpired lease term of between
30 and 50 years, were revalued on an existing use basis or, in the case of a few specialised properties, at
depreciated replacement cost. The properties were valued either by professional external valuers or by
professionally qualified staff.
As a result of the revaluation, the net book value of land and buildings (excluding investment properties)
decreased by £76 million. A deficit of £67 million (net of minority interest of £9 million) was charged to
reserves at 31 December 1997.
70
20 Tangible fixed assets (continued)
Included within ‘Short leasehold land and buildings’ are the following amounts in respect of assets classed
as improvements to buildings, which are carried at depreciated historical cost:
At 1 January 1997
Additions
Disposals
Charge for the year
Exchange and other movements
At 31 December 1997
Cost
Accumulated
depreciation
555567 555567
£m
(268)
—
22
(28)
2
555567 555567
(272)
zzzzxc zzzzxc
£m
423
59
(25)
—
(9)
448
Net book value at 31 December 1997 (1996: £155 million)
176
zzzzxc
The property of the Company was also valued by an independent, professionally qualified valuer on an
existing use basis. The deficit on revaluation of £3 million has been charged to reserves at 31 December 1997.
d Investment properties
The valuation at which investment properties are included in Group tangible fixed assets, together with the
net book value of these properties calculated under the historical cost basis, is as follows:
555555555567 555555555567
1996
1997
Freehold land and buildings
Short and long leasehold land and buildings
At
valuation
£m
25
424
At cost
£m
12
73
555567 555567 555567 555567
85
zzzzxc zzzzxc zzzzxc zzzzxc
At cost
£m
25
60
449
445
85
At
valuation
£m
10
435
Investment properties are valued on an open market value basis at 31 December annually by professional
valuers. Of the Group’s investment properties at valuation, 89% were valued by Wayfoong Property Limited,
a subsidiary of HongkongBank, and 11% were valued by independent professionally qualified valuers. As a
result of the revaluation, the net book value of investment properties has increased by £1 million (1996: surplus
of £13 million). A deficit of £2 million, net of minority interests of £3 million, has been charged to reserves
at 31 December 1997.
The Company had no investment properties at 31 December 1997 or 1996.
e Group properties leased to customers
Group properties leased to customers, none of which was held by the Company, included £420 million at
31 December 1997 (1996: £360 million) let under operating leases, net of accumulated depreciation of
£13 million (1996: £7 million).
f Land and buildings occupied for own activities
Net book value
1996
£m
4,525
zzzzxc zzzzxc
1997
£m
4,786
There were no such assets in the Company at 31 December 1997 or 1996.
71
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
21 Investments
a
At 1 January 1997
Additions
Repayments and redemptions
Amortisation of discounts and premiums
Write-up of subsidiary undertakings
to net asset value (Note 31)
Provisions for diminution in value
Exchange movements
At 31 December 1997
Other
investments
other than
loans
Loans to
Group
undertakings
Shares in
Group
undertakings
Total
555567 555567 555567 555567
£m
15,386
111
(546)
(2)
£m
14,230
70
—
—
£m
912
40
(546)
—
£m
244
1
—
(2)
1,453
(103)
—
1,453
(103)
37
555567 555567 555567 555567
16,336
zzzzxc zzzzxc zzzzxc zzzzxc
—
—
—
—
—
37
15,650
243
443
‘Loans to Group undertakings’ includes qualifying or regulatory capital and similar financing which can only
be repaid by the relevant Group undertaking with the consent of its local regulatory authority.
Included within ‘Other investments other than loans’ is £1 million of the Company’s own shares purchased
in 1997 and held in trust for the purposes of conditional awards under the Restricted Share Plan, details of
which are provided in the ‘Report of the Directors’ on pages 27 and 29 to 31. At 31 December 1997, the trust
held 69,097 shares (1996: nil) of nominal value 75p with a market value at that date of £1,077,913 (1996: £
nil) in respect of these conditional awards.
‘Other investments other than loans’ also includes the Company’s holdings of investments in UK Government
stock listed on a recognised UK exchange of £242 million (1996: £244 million). The market value of these
investments at 31 December 1997 was £249 million (1996: £241 million).
On the historical cost basis, shares in
Group undertakings would have been included as follows:
Cost less provisions of £103 million (1996: £ nil)
b The principal subsidiary undertakings of the Company are:
1997
£m
1996
£m
14,388
zzzzxc zzzzxc
14,355
UK
The British Bank of the Middle East
Forward Trust Group Limited (formerly
Forward Trust Limited)
HSBC Gibbs Limited
HSBC Greenwell
HSBC Investment Bank plc
Midland Bank plc
Midland Life Limited
Samuel Montagu & Co. Limited
Continental Europe
Guyerzeller Bank AG (71% owned)
Trinkaus & Burkhardt KGaA
Country of
incorporation
or registration
555555
Issued
equity
capital
555555 55555
Principal
activity
England
Banking
£125m
Finance
England
Insurance
England
England
Capital markets
England Investment banking
Banking
England
Insurance
England
Private banking
England
£265m
£3m
£30m
£180m
£797m
£14m
£112m
Switzerland
Banking
SFr5m
(partnership limited by shares, 73% owned)
Germany
Banking
DM131m
72
21 Investments (continued)
Hong Kong
Hang Seng Bank Limited (62.10% owned)
The Hongkong and Shanghai Banking
Corporation Limited
HSBC Insurance Limited (82.5% owned)
HSBC Investment Bank Asia Limited
Wayfoong Finance Limited
Rest of Asia-Pacific
HongkongBank of Australia Limited
Hongkong Bank Malaysia Berhad
Americas
Banco HSBC Bamerindus S.A.
HSBC Banco Roberts S.A. (99.85% owned)
Hongkong Bank of Canada
HSBC Americas, Inc.
HSBC Asset Management Asia
Pacific Limited
HSBC Bamerindus Seguros S.A. (65.06% owned)
HSBC Securities, Inc.
La Buenos Aires Compañia Argentina de
Seguros S.A. (98.03% owned)
Marine Midland Bank
* Issued equity capital is less than US$1 million.
Country of
incorporation
or registration
555555
Issued
equity
capital
555555 55555
Principal
activity
Hong Kong
Banking
HK$9,566m
Banking
Hong Kong
Hong Kong
Insurance
Hong Kong Investment banking
Finance
Hong Kong
HK$16,254m
HK$125m
HK$770m
HK$300m
Australia
Malaysia
Banking
Banking
A$500m
M$100m
Brazil
Argentina
Canada
Banking
Banking
Banking
United States Holding company
BRL1,018m
ARS175m
C$75m
—*
Bahamas Asset management
Insurance
United States Investment banking
Brazil
Argentina
United States
Insurance
Banking
—*
BRL244m
—*
ARS44m
US$185m
Details of all Group companies will be annexed to the next Annual Return of the Company.
Except where indicated otherwise, the issued equity capital of the above undertakings is wholly-owned by the
Group and, except for Midland Bank plc, is held by subsidiaries of the Company. All the above make their
accounts up to 31 December, except Hongkong Bank of Canada, whose accounts are made up to 31 October
annually and HSBC Roberts, whose accounts are made up to 30 June annually.
The principal countries of operation are the same as the countries of incorporation except for The British Bank
of the Middle East which operates mainly in the Middle East. All the above subsidiaries are included in the
consolidation.
c Acquisitions
The Group made the following acquisitions of subsidiary undertakings or net assets and operations in 1997,
which are accounted for on an acquisitions basis:
i On 19 February 1997, Forward Trust Group Limited, a wholly-owned subsidiary undertaking of the Group,
acquired 100% of the issued share capital of Forward Trust Rail Services Limited (formerly Eversholt
Holdings Limited) for a consideration of £464 million. The consideration comprised cash of £422 million
and loan notes of £42 million. No goodwill arose on this acquisition.
ii On 1 March 1997, Marine Midland Bank, a wholly-owned subsidiary undertaking of the Group, acquired
100% of the issued share capital of First Federal Savings and Loan Association of Rochester for a cash
consideration of £417 million. Goodwill of £139 million arose on this acquisition.
iii On 26 March 1997, following the intervention of the Central Bank of Brazil, Banco HSBC Bamerindus
S.A. capitalised at BRL1,018 million (£589 million), a wholly-owned subsidiary of the Group, assumed
selected assets, liabilities and subsidiaries, together with a significant part of the activities of Banco
Bamerindus do Brasil for a cash consideration of £226 million. Goodwill of £297 million arose on this
acquisition. The fair values of the assets and liabilities acquired have been determined only on a provisional
basis at 31 December 1997, pending completion of the intervention period on 25 March 1998.
73
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
21 Investments (continued)
iv On 12 August 1997, HSBC Latin America B.V., a wholly-owned subsidiary of the Group, acquired 100%
of the issued share capital of Roberts S.A. de Inversiones and 100% of the issued share capital of Roberts
Meynell S.A. de Inversiones (together, with their respective subsidiaries and associated companies, ‘HSBC
Roberts’). The 29.9% of the issued share capital of Banco Roberts S.A. already owned by Midland Bank
plc was also transferred to HSBC Latin America B.V. The consideration for the acquisition of HSBC
Roberts comprised cash of £374 million and additional deferred contingent consideration in the form of
loan notes of up to US$80 million. The deferred contingent consideration is dependent on the determination
of net asset value at the date of acquisition and the performance of HSBC Roberts in the year ending 30
June 1998.
At 31 December 1997, no deferred consideration had been provided. Goodwill of £297 million arose on
this acquisition.
v Midland Bank plc also acquired a shipping loan portfolio on 21 July 1997, for consideration of
£26 million, on which goodwill of £7 million arose.
vi HSBC Investment Bank Holdings B.V., a wholly-owned subsidiary of the Group, increased its stake in
HSBC Simpson McKie Pty Limited on 31 December 1997 from 51.00% to 89.84% for cash consideration
of £18 million, and goodwill of £16 million arose. This acquisition is not included in the table below
because it represents an increase in stake in an existing subsidiary undertaking. There were no fair value
adjustments arising on this acquisition.
The assets and liabilities at the dates of acquisition and the total consideration paid are set out in the
following table.
Book value Revaluations
Fair value
555567 555567 555567 555567
£m
£m
£m
£m
Accounting
policy
alignments
450
361
803
3,479
6,901
933
1,298
602
—
—
—
—
22
3
308
29
—
—
—
—
—
—
(73)
(77)
450
361
803
3,479
6,923
936
1,533
554
(350)
(1,970)
(7,408)
(2,691)
(916)
(806)
(350)
(1,976)
(7,415)
(2,694)
(924)
(845)
555567 555567 555567 555567
835
(23)
—
(6)
(7)
(3)
(45)
(39)
—
—
—
—
37
—
(113)
9
686
(47)
262
15
(45)
(45)
555567 555567 555567 555567
767
(104)
zzzzxc zzzzxc zzzzxc
277
594
—
—
740
555567
1,507
zzzzxc
At the date of acquisition:
Cash and balances at central banks
Items in the course of collection from
other banks
Treasury bills and other eligible bills
Loans and advances to banks
Loans and advances to customers
Debt securities and equity shares
Tangible fixed assets
Other asset categories
Items in the course of transmission to
other banks
Deposits by banks
Customer accounts
Debt securities in issue
Provision for liabilities and charges
Other liability categories
Less: minority interests
Less: carrying value of the Group’s existing
interest in HSBC Roberts (Note iv above)
Net assets acquired
Goodwill written off against reserves
(Note 31)
Total consideration including costs of acquisition
74
21 Investments (continued)
The fair value adjustments in the above table represent the following:
i Revaluations, reflecting the recognition of
— the market value of acquired properties;
— the fair value of train rolling stock acquired;
— UK basis actuarial provisions for general insurance businesses acquired (included in provisions for
liabilities and charges);
— the fair value of financial instruments acquired and in issue;
— deferred and current tax liabilities not previously recognised; and
— the fair value of lessee obligations assumed.
ii Accounting policy alignments reflecting
— the Group’s criteria for the recognition of intangible assets, capitalised costs and deferred tax assets;
— compliance with Urgent Issues Task Force Abstract 16 ‘Income and expenses subject to non-standard
rates of tax’ (issued February 1997).
22 Other assets
Bullion
Assets, including gains, resulting from off-balance-sheet interest
rate, exchange rate and equities contracts which are marked-
to-market
Current taxation recoverable
Deferred taxation (Note 27)
Long-term assurance assets attributable to policyholders (Note 26)
Other accounts
1997
£m
197
1996
£m
133
13,157
70
58
4,093
2,616
9,578
63
52
3,383
2,669
555567 555567
15,878
zzzzxc zzzzxc
20,191
Included in the above are 2,458,506 (1996: 2,392,214) shares in the Company held by subsidiary undertakings,
as part of their insurance and retirement funds for the benefit of the policyholders.
The composition of the net tangible assets relating to long-term assurance and retirement funds is analysed as
follows:
Loans and advances to banks — with Group companies
Debt securities
Equity shares
Other assets
Prepayments and accrued income
Other liabilities
1997
£m
180
1,615
1,526
1,428
24
(680)
1996
£m
351
1,086
1,593
888
12
(547)
555567 555567
3,383
zzzzxc zzzzxc
4,093
75
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
23 Deposits by banks
Repayable on demand
With agreed maturity dates or periods of notice, by
remaining maturity:
— 3 months or less but not repayable on demand
— 1 year or less but over 3 months
— 5 years or less but over 1 year
— over 5 years
Amounts include:
Due to associated undertakings
24 Customer accounts
Repayable on demand
With agreed maturity dates or periods of notice, by
remaining maturity:
— 3 months or less but not repayable on demand
— 1 year or less but over 3 months
— 5 years or less but over 1 year
— over 5 years
Amounts include:
Due to associated undertakings
25 Debt securities in issue
Bonds and medium-term notes, by remaining maturity:
— within 1 year
— between 1 and 2 years
— between 2 and 5 years
— over 5 years
Other debt securities in issue, by remaining maturity:
— 3 months or less
— 1 year or less but over 3 months
— 5 years or less but over 1 year
— over 5 years
76
1997
£m
6,981
1996
£m
5,271
13,265
2,913
425
63
11,319
1,191
171
78
555567 555567
18,030
zzzzxc zzzzxc
23,647
16
zzzzxc zzzzxc
48
1997
£m
81,960
1996
£m
78,586
85,172
8,563
2,100
826
64,881
5,743
1,726
213
555567 555567
151,149
zzzzxc zzzzxc
178,621
6
zzzzxc zzzzxc
24
1997
£m
1996
£m
668
284
1,823
140
29
51
182
175
555567 555567
437
2,915
6,638
4,519
2,714
60
4,688
2,470
2,376
69
555567 555567
10,040
zzzzxc zzzzxc
16,846
26 Other liabilities
Short positions in securities:
Treasury bills and other eligible bills
Debt securities
— government securities
— other public sector securities
— other debt securities
Equity shares
Liabilities, including losses, resulting from off-balance-sheet interest
rate, exchange rate and equities contracts which are marked-
to-market
Current taxation
Obligations under finance leases
Dividend payable by the Company
Long-term assurance liabilities attributable to policyholders
(Note 22)
Other liabilities
Obligations under finance leases fall due as follows:
— within 1 year
— between 1 and 5 years
— over 5 years
1997
£m
1,050
1996
£m
1,576
4,348
24
576
492
3,914
32
230
305
555567 555567
6,057
6,490
13,333
1,145
178
803
9,637
1,008
50
693
4,093
4,120
3,383
4,066
555567 555567
24,894
zzzzxc zzzzxc
30,162
13
6
159
18
17
15
555567 555567
50
zzzzxc zzzzxc
178
27 Provisions for liabilities and charges
a Deferred taxation
i Deferred taxation is provided for in accordance with the Group’s accounting policy in Note 2g.
At 1 January 1997
Charge/(credit) to profit and loss account (Note 6)
Acquisitions of subsidiaries
Exchange and other movements
At 31 December 1997
Group
Company
555567 555567
£m
69
(42)
—
(20)
555567 555567
7
zzzzxc zzzzxc
£m
341
79
147
(55)
512
77
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
27 Provisions for liabilities and charges (continued)
Included in ‘Provisions for liabilities
and charges’
Included in ‘Other assets’ (Note 22)
Net deferred taxation provision
Comprising:
Short-term timing differences
Leasing transactions
Relief for tax losses
Advance corporation tax on dividends
proposed
Provision for additional UK tax on profit
remittances from overseas
Other items
Group
555555555567 555555555567
1996
£m
1997
£m
1997
£m
1996
£m
Company
570
(58)
69
—
555567 555567 555567 555567
69
zzzzxc zzzzxc zzzzxc zzzzxc
393
(52)
7
—
512
341
7
18
541
(7)
21
368
(15)
—
—
—
3
—
—
(201)
(173)
(201)
(173)
141
20
170
69
555567 555567 555567 555567
69
zzzzxc zzzzxc zzzzxc zzzzxc
170
(30)
141
67
341
512
7
There is no material deferred taxation liability not provided for.
ii The distribution of the reserves of certain subsidiary and associated undertakings may give rise to
additional tax liabilities. Of the £200 million provision for a potential UK tax charge established upon
the acquisition of Midland, £141 million remained at 31 December 1997 (1996: £170 million).
Of the £29 million decrease in this provision in the year ended 31 December 1997 (1996: £18 million),
£6 million was utilised and £23 million was released to the profit and loss account as a result of the
reduction in the rate of UK corporation tax to 31%.
iii No provision is made for deferred taxation on revalued premises. The Directors are of the opinion that, in
respect of properties occupied for the purposes of the Group’s business, the likelihood of a material taxation
liability arising is remote and no useful purpose would be served by attempting to quantify it. In respect
of investment and other properties which have been revalued, no material taxation liability is judged likely
to arise in the foreseeable future under management’s current intentions for these properties.
iv At 31 December 1997, there were potential future tax benefits of approximately £250 million (1996: £210
million) in respect of trading losses, allowable expenditure charged to the profit and loss account but not
yet allowed for tax and capital losses which have not been recognised because recoverability of the
potential benefits is not considered certain.
b Other provisions for liabilities and charges
Insurance
and other
provisions
Provisions
for
contingent
liabilities and
commitments
Provisions
for pension
and other
post-
retirement
Total
obligations
555567 555567 555567 555567
£m
455
777
144
(105)
24
555567 555567 555567 555567
1,295
zzzzxc zzzzxc zzzzxc zzzzxc
£m
163
—
42
(23)
16
£m
90
166
34
(31)
45
£m
202
611
68
(51)
(37)
304
793
198
At 1 January 1997
Acquisitions of subsidiaries
Charge to the profit and loss account
Provisions utilised
Exchange and other movements
At 31 December 1997
78
27 Provisions for liabilities and charges (continued)
Provisions assumed on the acquisition of subsidiaries principally related to general insurance businesses, and
contingent liabilities and commitments in respect of acquisitions made in 1997 (Note 21c).
None of the above provisions relates to the Company (1996: £ nil).
28 Subordinated liabilities
1997
£m
1996
£m
Undated subordinated loan capital:
— the Company
— other Group
Dated subordinated loan capital:
— the Company
— other Group
Total subordinated liabilities:
— the Company
— other Group
Dated subordinated loan capital is repayable:
— within 1 year
— between 1 and 2 years
— between 2 and 5 years
— over 5 years
The total subordinated borrowings of the Company are as follows:
£413m
£250m
US$250m
11.69% subordinated bonds 2002
9.875% subordinated bonds 2018
Subordinated collared floating rate notes 2008
Amounts owed to Group undertakings:
US$350m
7.525% subordinated loan 2003 — HSBC
Finance Nederland B.V.
The Company’s dated subordinated loan capital is repayable:
— between 2 and 5 years
— over 5 years
—
1,970
—
1,768
555567 555567
1,768
zzzzxc zzzzxc
1,970
811
3,610
806
3,401
555567 555567
4,207
zzzzxc zzzzxc
4,421
811
5,580
806
5,169
555567 555567
5,975
zzzzxc zzzzxc
6,391
40
357
916
3,108
73
155
781
3,198
555567 555567
4,207
zzzzxc zzzzxc
4,421
1997
£m
1996
£m
413
246
152
413
246
147
555567 555567
806
811
211
205
555567 555567
1,011
zzzzxc zzzzxc
1,022
1997
£m
1996
£m
413
609
—
1,011
555567 555567
1,011
zzzzxc zzzzxc
1,022
79
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
28 Subordinated liabilities (continued)
At 31 December 1997, the following other Group subordinated borrowings were £100 million or over:
US$1,200m Primary capital subordinated undated floating rate notes
Undated floating rate primary capital notes
US$750m
Undated floating rate primary capital notes
US$500m
7.625% subordinated notes 2006
US$500m
Subordinated unsecured floating rate notes 2001
£250m
8.625% subordinated notes 2004
US$400m
HK$3,000m Subordinated collared (7% to 9%) floating rate notes 2003
7.4% subordinated guaranteed notes 2003
US$350m
9% subordinated notes 2005
£200m
Undated floating rate primary capital notes (Series 3)
US$300m
6.95% subordinated notes 2011
US$300m
7.65% subordinated notes 2025
US$300m
7% fixed rate subordinated notes 2006
US$300m
9.25% Step-up undated subordinated notes
£150m
8.625% Step-up undated subordinated notes*
£150m
Subordinated Step-up coupon floating rate notes 2007*
£150m
7.808% capital securities 2026
US$200m
8.38% capital securities 2027†
US$200m
Guaranteed floating rate notes 1999
US$200m
Floating rate subordinated notes 2000
US$200m
Fixed rate (5.0% to 5.5%) subordinated loans 2004
¥24.8b
14% subordinated unsecured loan stock 2002/07
£100m
Guaranteed floating rate notes 1986/98
DM300m
Other subordinated liabilities less than £100m
1997
£m
729
455
304
304
250
241
235
213
200
181
181
181
181
150
150
149
122
122
122
122
115
100
—
773
1996
£m
705
441
294
294
250
233
228
206
200
176
176
176
176
150
—
—
118
—
118
118
125
100
114
771
555567 555567
5,169
zzzzxc zzzzxc
5,580
* The proceeds of the issue of 8.625% Step-up Undated Subordinated Notes and Subordinated Step-up Coupon Floating Rate Notes
2007 during the year were used to support the development of Midland Bank plc and to strengthen further Midland’s capital base.
† The proceeds of the issue of 8.38% capital securities 2027 during the year were added to the general funds of HSBC Americas,
Inc. and are available for general corporate purposes.
Subordinated loan capital is repayable at par on maturity, but some is repayable prior to maturity at the option
of the borrower, generally with the consent of the Bank of England, in certain cases at a premium over par. Interest
rates on the floating rate loan capital are related to interbank offered rates. On the remaining subordinated loan
capital, interest is payable at fixed rates up to 14%.
29 Minority interests — non-equity
Preference shares issued by subsidiaries:
US$98m
US$875m
Perpetual preference shares
Non-cumulative preference shares
1997
£m
—
516
1996
£m
58
468
555567 555567
526
zzzzxc zzzzxc
516
During 1997, Midland Bank issued US$50 million Series 1 non-cumulative preference shares to strengthen
its capital base and HSBC Americas, Inc. redeemed US$98 million perpetual preference shares.
80
30 Called up share capital
Authorised:
The authorised ordinary share capital of the Company at 31 December 1997 and 1996 is HK$20,000 million
divided into 2,000 million ordinary shares of HK$10 each, £1,125 million divided into 1,500 million ordinary
shares of 75p each, and £301,500 divided into 301,500 non-voting deferred shares of £1 each. In addition, at
31 December 1997 and 1996, the authorised preference share capital of the Company is £500 million divided into
500 million non-cumulative preference shares of £1 each.
Number of
HK$10
shares
Number of
75p
shares
£m
555556 555567 555567
Issued:
At 1 January 1997
Shares issued under option schemes
Shares issued in lieu of dividends
Exchange movements
At 31 December 1997
1,790,628,607
—
10,983,962
—
2,014
2
10
42
555556 555567 555567
1,801,612,569
2,068
874,130,350
zzzzzx zzzzxc zzzzxc
870,556,852
2,197,519
1,375,979
—
The 301,500 non-voting deferred shares are held by a subsidiary undertaking of the Company.
Options outstanding to subscribe for the Company’s ordinary shares of 75p each under the Executive and
Savings-Related Share Option Schemes and Midland’s Executive and Savings-Related Share Option Schemes are
as follows:
31 December 1997
31 December 1996
31 Reserves
Share premium account:
At 1 January 1997
Shares issued under option schemes
Shares issued in lieu of dividends and
associated issue costs
At 31 December 1997
Reserves:
— Merger reserve
At 1 January 1997
Goodwill written off on acquisition
At 31 December 1997
Number of shares
Exercise price
Period of exercise
5555555 5555555 5555555
£1.1843 to £23.395
1998 to 2007
43,496,592
38,376,784
1997 to 2006
£1.1843 to £10.00
Associated
undertakings
555567 555567 555567
£m
Company
Group
£m
£m
299
8
299
8
—
—
—
555567 555567 555567
—
zzzzxc zzzzxc zzzzxc
(10)
297
(10)
297
26
(26)
—
—
555567 555567 555567
—
zzzzxc zzzzxc zzzzxc
—
—
—
—
81
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
31 Reserves (continued)
Revaluation reserves:
— Investment property revaluation reserve
At 1 January 1997
Unrealised surplus on revaluation of land
and buildings
Transfer to revaluation reserve
Realisation on disposal of properties
Exchange and other movements
At 31 December 1997
— Revaluation reserve
At 1 January 1997
Realisation on disposal of properties
Unrealised deficit on revaluation of
Group properties
Transfer of depreciation from profit and
loss account reserve
Transfer from investment property
revaluation reserve
Net increase in attributable net assets of
subsidiary undertakings
Exchange and other movements
At 31 December 1997
Total revaluation reserves
Profit and loss account:
At 1 January 1997
Retained profit/(deficit) for the year
Goodwill written off on acquisitions
Transfer of depreciation to revaluation reserve
Realisation on disposal of properties
Arising on shares issued in lieu of dividends
Exchange and other movements
At 31 December 1997
Associated
undertakings
555567 555567 555567
£m
Company
Group
£m
£m
313
—
54
6
(5)
(7)
6
8
—
—
1
555567 555567 555567
63
555567 555567 555567
—
—
—
—
313
—
2,384
(18)
9,783
—
(67)
(34)
5
(3)
—
—
3
—
—
—
—
—
5
—
2
555567 555567 555567
5
555567 555567 555567
1,453
(42)
11,191
2,275
68
zzzzxc zzzzxc zzzzxc
11,191
2,588
10,151
2,018
(709)
34
25
206
(236)
94
17
—
—
—
—
(12)
555567 555567 555567
99
zzzzxc zzzzxc zzzzxc
3,091
(411)
—
—
—
206
—
11,489
2,886
Goodwill amounting to £3,086 million (1996: £2,351 million) has been charged against reserves in current and
prior years in respect of acquisitions of subsidiaries. In 1997, goodwill written off on acquisition includes a write-
back of £21 million in respect of deferred consideration on the acquisition of J P Morgan’s domestic US dollar
clearing business.
Many of the Group’s banking subsidiary and associated undertakings operate under local regulatory jurisdictions
which could potentially restrict the amount of reserves which can be remitted to the Company in order to maintain
local regulatory capital ratios. In addition, as stated in Note 27 above, the remittance of reserves may result in
further taxation liabilities.
82
32 Analysis of total assets and total liabilities
1997
£m
1996
£m
a Assets and liabilities denominated in foreign currency
Denominated in sterling
Denominated in currencies other than sterling
Total assets
Denominated in sterling
Denominated in currencies other than sterling
Total liabilities
b Assets subject to sale and repurchase transactions
Total assets subject to sale and repurchase transactions
c Assets leased to customers
Loans and advances to customers
Tangible fixed assets — equipment on operating leases
(Note 20a)
80,940
205,451
65,389
171,164
555567 555567
236,553
zzzzxc zzzzxc
286,391
97,064
189,327
77,164
159,389
555567 555567
236,553
zzzzxc zzzzxc
286,391
1996
£m
4,200
zzzzxc zzzzxc
1997
£m
6,135
1997
£m
4,654
1996
£m
4,292
1,616
378
555567 555567
4,670
zzzzxc zzzzxc
6,270
The cost of assets acquired during 1997 for letting to customers under finance leases and hire purchase
contracts by the Group amounted to £2,718 million (1996: £2,568 million).
d Assets charged as security for liabilities
The Group has pledged assets as security for liabilities included under the following headings:
Deposits by banks
Customer accounts
Debt securities in issue
Other liabilities
Amount of liability secured
55675555675557
1996
£m
415
598
531
1,081
555567 555567
2,625
zzzzxc zzzzxc
1997
£m
242
1,205
683
1,002
3,132
The amount of assets pledged to secure these amounts is £8,309 million (1996: £8,432 million). This is mainly
made up of items included in ‘Debt securities’ and ‘Treasury bills and other eligible bills’ of £6,255 million
(1996: ‘Debt securities’ £6,775 million).
83
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
33 Memorandum items
a Group
Contingent liabilities:
Acceptances and
endorsements
Guarantees and assets
pledged as collateral
security:
— guarantees and
irrevocable
letters of credit
Other contingent
liabilities
Commitments:
Documentary credits
and short-term trade-
related transactions
Forward asset purchases
and forward forward
deposits placed
Undrawn note issuing
and revolving
underwriting facilities
Undrawn formal
standby facilities,
credit lines and other
commitments to lend:
— over 1 year
— 1 year and under
1997
5555555555555556 5555555555555556
Risk-
weighted
amount
555567 555567 555567 555567 555567 555567
£m
Credit
equivalent
amount
Credit
equivalent
amount
Risk-
weighted
amount
Contract
amount
Contract
amount
£m
£m
£m
£m
£m
1996
2,923
2,124
2,054
2,162
1,588
1,581
12,485
9,466
8,371
14,389
11,675
8,553
26
555567 555567 555567 555567 555567 555567
167
63
27
48
63
10,160
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
13,290
16,718
10,473
11,653
15,471
5,098
1,413
1,060
5,075
1,333
1,070
721
587
270
90
45
45
450
139
450
307
70
70
16,003
60,837
6,485
—
555567 555567 555567 555567 555567 555567
7,932
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
14,766
51,571
7,996
—
7,383
—
7,427
—
82,749
10,041
72,001
8,802
9,236
The table above gives the nominal principal amounts, credit equivalent amounts and risk-weighted amounts
of off-balance-sheet transactions. The credit equivalent amounts are calculated for the purposes of deriving
the risk-weighted amounts. These are assessed in accordance with the Bank of England’s guidelines which
implement the Basle agreement on capital adequacy and depend on the status of the counterparty and the
maturity characteristics.
Contingent liabilities and commitments are credit-related instruments which include acceptances, letters of
credit, guarantees and commitments to extend credit. The contractual amounts represent the amounts at risk
should the contract be fully drawn upon and the client default. Since a significant portion of guarantees and
commitments are expected to expire without being drawn upon, the total of the contract amounts is not
representative of future liquidity requirements.
84
33 Memorandum items (continued)
Exchange rate, interest rate and
equities contracts
Exchange rate contracts
Interest rate contracts
Equities contracts
1996
1997
amount
Contract Replacement
cost
55555555558 55555555558
Contract Replacement
cost
555567 555567 555567 555567
£m
4,804
zzzzxc zzzzxc zzzzxc zzzzxc
4,325
zzzzxc zzzzxc zzzzxc zzzzxc
601
zzzzxc zzzzxc zzzzxc zzzzxc
£m
453,533
£m
404,332
£m
8,666
526,136
481,441
amount
13,336
3,143
6,884
1,225
Off-balance-sheet financial instruments arise from futures, forward, swap and option transactions undertaken
by the Group in the foreign exchange, interest rate and equities markets.
Included in the above table, which excludes contracts made with other Group counterparties, there are
£450,329 million (1996: £399,821 million) contract amount of exchange rate contracts, £502,978 million
(1996: £452,740 million) contract amount of interest rate contracts and £13,218 million (1996: £6,762 million)
contract amount of equities contracts which were made for trading purposes. The remaining exchange rate,
interest rate and equities contracts were made for non-trading purposes. Non-trading contracts are also made
with Group counterparties and further analysis of the Group’s trading and non-trading contracts is provided
in the ‘Financial Review’ on page 45.
The notional or contractual amounts of these instruments indicate the volume of transactions outstanding at
the balance sheet date; they do not represent amounts at risk.
Replacement cost of contracts represents the mark-to-market assets on all contracts with a positive value i.e.
an asset to the Group. Replacement cost is therefore a close approximation of the credit risk for these contracts
as at the balance sheet date. The actual credit risk is monitored internally and is the sum of positive mark-to-
market value and an estimate for the future fluctuation risk, using a future risk factor.
b Company
The Company had no contingent liabilities (1996: £39 million). In addition, the Company enters into
guarantees and letters of support on behalf of other Group undertakings in the normal course of business.
c Concentrations of contingent liabilities and commitments
The Group has the following concentrations of exposure to contingent liabilities and commitments and is
determined on the basis set out in Note 40:
Contract amounts
Contingent liabilities:
1997
1996
Continental
Rest of
Europe Hong Kong Asia-Pacific
UK
Total
555567 555567 555567 555567 555567 555567
£m
Americas
£m
£m
£m
£m
£m
6,076
15,471
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
16,718
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
4,069
3,856
2,217
1,302
1,459
1,971
1,863
2,029
7,347
Commitments:
£m
£m
£m
£m
£m
£m
1997
1996
29,507
82,749
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
72,001
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
11,487
25,272
21,484
27,986
10,829
13,696
2,787
2,535
9,167
85
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
34 Reconciliation of operating profit to net cash flow from operating activities
Operating profit
Change in prepayments and accrued income
Change in accruals and deferred income
Interest on finance leases and similar hire
purchase contracts
Interest on subordinated loan capital
Depreciation and amortisation
Provisions for bad and doubtful debts
Loans written off net of recoveries
Provisions for liabilities and charges
Provisions utilised
Amounts written off fixed asset investments
Net cash inflow from trading activities
Change in items in the course of collection from
other banks
Change in treasury bills and other eligible bills
Change in loans and advances to banks
Change in loans and advances to customers
Change in other securities
Change in other assets
Change in deposits by banks
Change in customer accounts
Change in items in the course of transmission to other banks
Change in debt securities in issue
Change in other liabilities
Elimination of exchange differences*
Net cash inflow from operating activities
1997
£m
4,544
(437)
817
1996
£m
4,080
364
(360)
16
460
440
615
(352)
144
(105)
29
10
426
367
384
(492)
105
(49)
48
555567 555567
4,883
6,171
(428)
(1,686)
3,131
(25,088)
(2,916)
(3,779)
3,641
20,057
533
4,112
4,295
683
4
4,822
(2,306)
(4,672)
(3,507)
1,387
(2,663)
9,028
207
1,390
(162)
376
555567 555567
8,787
zzzzxc zzzzxc
8,726
* Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line
by line basis, as it cannot be determined without unreasonable expense.
35 Changes in financing during the year
Balance at 1 January 1997
Shares issued in lieu of dividends
Acquisition of subsidiaries
Issued during the year
Repaid during the year
Net cash inflow from financing
Exchange and other movements
Balance at 31 December 1997
shares*
Preference
Ordinary
shares
Subordinated
Share
premium
loan capital
555567 555567 555567 555567
£m
299
(10)
—
£m
5,975
—
99
£m
2,014
10
—
£m
526
—
—
453
(195)
258
30
(60)
(30)
2
—
2
8
—
8
59
—
555567 555567 555567 555567
297
zzzzxc zzzzxc zzzzxc zzzzxc
6,391
2,068
516
20
42
* Preference shares in issue are in subsidiary undertakings (Note 29).
86
36 Analysis of cash
a The Group is required to make deposits with central banks as a result of government regulations in the
territories in which it operates. As at 31 December 1997, these amounted to £1,838 million (1996: £933 million).
b Changes in cash during the year
Balance at 1 January
Net cash inflow before the effect of foreign
exchange movements
Effect of foreign exchange movements
Balance at 31 December
1997
£m
8,880
1996
£m
5,182
4,035
(311)
4,395
(697)
555567 555567
8,880
zzzzxc zzzzxc
12,604
c Analysis of the balances of cash as classified in the consolidated balance sheet
Cash and balances at central banks
Loans and advances to banks
1997
£m
1,798
10,806
1996
£m
1,814
7,066
555567 555567
8,880
zzzzxc zzzzxc
12,604
37 Litigation
The Group, through a number of its subsidiary undertakings, is named in and is defending legal actions in various
jurisdictions arising from its normal business. No material adverse impact on the financial position of the Group
is expected to arise from these proceedings.
38 Capital commitments
Expenditure contracted for
Expenditure authorised by Directors but not contracted for
1997
£m
99
75
1996
£m
142
82
555567 555567
224
zzzzxc zzzzxc
174
There were no capital commitments in respect of the Company (1996: £ nil).
39 Lease commitments
At the year-end, annual commitments under non-cancellable operating leases were:
1997
£m
1996
£m
Leasehold land and buildings
Operating leases which expire:
— within 1 year
— between 1 and 5 years
— over 5 years
Equipment
Operating leases which expire:
— within 1 year
— between 1 and 5 years
23
88
74
18
75
102
555567 555567
195
zzzzxc zzzzxc
185
5
10
1
3
555567 555567
4
zzzzxc zzzzxc
15
The Company had no commitments under operating leases at 31 December 1997 (1996: none).
87
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
40 Segmental analysis
As the Group is not required to disclose turnover, no segmental analysis of turnover is included. Turnover of non-
banking businesses is included in other operating income above. The allocation of earnings reflects the benefit
of shareholders’ funds to the extent that these are actually allocated to businesses in the segment by way of intra-
Group capital and funding structures. Common costs are included in segments on the basis of the actual recharges
made.
The allocation of intra-sector recharges between operating income and operating expenses has been revised in
order to reflect the nature of these items more appropriately. Comparative data have been restated for this change
in presentation.
a By geographic region
Geographical information has been classified by the location of the principal operations of the subsidiary
undertaking, or in the case of HongkongBank, Midland and The British Bank of the Middle East operations,
by the location of the branch responsible for reporting the results or for advancing the funds. Due to the nature
of the Group structure, the analysis of profits and net assets shown below includes intra-Group items between
geographic regions. The ‘Rest of Asia-Pacific’ geographical segment includes the Middle East, India and
Australasia.
Total assets:
UK
Continental Europe
Hong Kong
Rest of Asia-Pacific
Americas*
At 31 December 1996
At 31 December 1997
55556755575567 55557567555567
%
37.2
4.2
31.1
12.7
14.8
555567 555567 555567 555567
100.0
zzzzxc
£m
98,088
10,340
85,127
34,806
53,086
£m
86,157
9,852
72,029
29,364
34,420
%
34.9
3.7
30.2
12.4
18.8
100.0
zzzzxc
231,822
281,447
Add: Hong Kong SAR Government
certificates of indebtedness
Total assets
4,944
555567
286,391
zzzzxc
4,731
555567
236,553
zzzzxc
88
40 Segmental analysis (continued)
Net assets:
UK
Continental Europe
Hong Kong
Rest of Asia-Pacific
Americas
Total net assets
Profit on ordinary activities before tax:
At 31 December 1996
At 31 December 1997
55556755575567 55557567555567
%
35.1
4.4
38.7
10.4
11.4
555567 555567 555567 555567
100.0
zzzzxc zzzzxc zzzzxc zzzzxc
£m
4,858
1,058
7,016
1,337
2,173
£m
5,334
665
5,879
1,579
1,730
%
29.6
6.4
42.7
8.1
13.2
15,187
16,442
100.0
Year ended 31 December 1997
Interest receivable
Interest payable
Net interest income
Dividend income
Fees and commissions receivable
Fees and commissions payable
Dealing profits
Other operating income
Operating income
Operating expenses
Operating profit before provisions
Rest of
Asia-
Pacific
Continental
Europe
Hong
Kong
UK
Americas*
£m
580
(446)
£m
4,084
(2,623)
£m
5,579
(3,378)
£m
2,357
(1,582)
£m
5,629
(3,520)
Total
55558 55558 55558 55558 55558 555588
£m
18,229
(11,549)
55558 55558 55558 55558 55558 555588
6,680
95
4,106
(767)
605
755
55558 55558 55558 55558 55558 555588
11,474
1,461
10
767
(184)
29
189
2,201
37
1,880
(376)
232
364
2,109
36
758
(87)
124
180
134
10
234
(52)
25
—
775
2
467
(68)
195
22
3,120
2,272
4,338
1,393
351
(2,639)
(6,252)
55558 55558 55558 55558 55558 555588
5,222
(1,169)
(1,562)
1,699
1,951
(225)
(657)
736
710
126
Provisions for bad and doubtful
debts
Provisions for contingent
liabilities and commitments
Amounts written off fixed asset
investments
Operating profit
Gains on disposal of
investments and tangible
fixed assets
Income from associated
undertakings
Profit on ordinary
activities before tax
(50)
(4)
8
(136)
(372)
(65)
(615)
(10)
(7)
(7)
(6)
(34)
10
(29)
55558 55558 55558 55558 55558 555588
4,544
1,655
1,783
(25)
(11)
628
124
354
(3)
—
156
8
182
4
8
358
69
55558 55558 55558 55558 55558 555588
(3)
(3)
11
19
45
4,971
zzzzv zzzzv zzzzv zzzzv zzzzv zzzzv
1,808
1,984
633
403
143
* In the Americas region, included within profit on ordinary activities before tax and total assets are £78 million and £12,973
million respectively in relation to businesses acquired during 1997.
89
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
40 Segmental analysis (continued)
Profit on ordinary activities before tax (continued):
Year ended 31 December 1996
Interest receivable
Interest payable
Net interest income
Dividend income
Fees and commissions receivable
Fees and commissions payable
Dealing profits
Other operating income
Operating income
Operating expenses
Operating profit before
provisions
Provisions for bad and doubtful
debts
Provisions for contingent
liabilities and commitments
Amounts written off fixed asset
investments
Operating profit
Gains on disposal of
investments and tangible
fixed assets
Income from associated
undertakings
Profit on ordinary
activities before tax
Rest of
Asia-
Pacific
Continental
Europe
Hong
Kong
UK
Americas
£m
567
(432)
£m
2,484
(1,572)
£m
2,193
(1,489)
£m
5,017
(3,014)
£m
5,017
(2,950)
Total
55558 55558 55558 55558 55558 555588
£m
15,278
(9,457)
55558 55558 55558 55558 55558 555588
5,821
103
3,171
(419)
515
595
55558 55558 55558 55558 55558 555588
9,786
2,067
57
1,596
(213)
151
316
2,003
32
684
(84)
129
152
135
1
169
(19)
59
(1)
704
6
413
(56)
129
48
912
7
309
(47)
47
80
2,916
3,974
1,244
1,308
344
(5,267)
55558 55558 55558 55558 55558 555588
(2,546)
(1,125)
(773)
(564)
(259)
1,428
(180)
1
85
(6)
—
1,791
(143)
—
680
(20)
(9)
535
4,519
(35)
(384)
1
(7)
(41)
(48)
55558 55558 55558 55558 55558 555588
4,080
1,642
1,208
650
501
(6)
(1)
79
—
—
212
—
116
17
11
356
88
55558 55558 55558 55558 55558 555588
16
21
35
7
9
4,524
zzzzv zzzzv zzzzv zzzzv zzzzv zzzzv
1,436
1,779
519
702
88
Total interest receivable and total interest payable include intra-Group interest of £734 million (1996: £983
million). Fees and commissions receivable and fees and commissions payable include intra-Group items of
£65 million in 1997. Other operating income and operating expenses include intra-Group items of
£115 million (1996: £198 million).
Investment banking
Commercial banking
55555555678 55555555678 55555555678
1996
£m
1997
£m
1997
£m
1997
£m
1996
£m
1996
£m
Total
4,524
zzzzv zzzzv zzzzv zzzzv zzzzv zzzzv
4,252
4,971
4,755
272
216
236,553
zzzzv zzzzv zzzzv zzzzv zzzzv zzzzv
274,356
225,694
286,391
10,859
12,035
15,187
zzzzv zzzzv zzzzv zzzzv zzzzv zzzzv
16,442
15,523
14,433
919
754
b By class of business
Profit on ordinary activities
before tax
Total assets
Net assets
90
41 Subsequent events
On 2 February 1998, Hongkong Bank of Canada announced that, subject to regulatory approval, it had reached
an agreement with National Westminster Bank Plc to acquire all of the corporate and commercial banking
business of National Westminster Bank of Canada.
42 Related party transactions
a Transactions, arrangements and agreements involving Directors and others
Particulars of transactions, arrangements and agreements entered into by subsidiary undertakings of the
Company with Directors and connected persons and companies controlled by them and with officers of the
Company disclosed pursuant to Section 232 of the Companies Act 1985 are as follows:
1997
555555555567 555555555567
£m
Number
Number
£m
1996
Directors and connected persons and
companies controlled by them:
Loans and credit card transactions
(including £37,000 in credit card
transactions (1996: £37,000) and
£31,593,000 in guarantees
(1996: £1,609,000))
Officers:
Loans and credit card transactions
(including £60,000 in credit card
transactions (1996: £31,000) and
£ nil in guarantees (1996: £82,000))
153
zzzzxc zzzzxc zzzzxc zzzzxc
388
62
58
3
zzzzxc zzzzxc zzzzxc zzzzxc
16
19
6
Particulars of Directors’ transactions are recorded in a register held at the Registered Office of the Company
which is available for inspection by members.
b Transactions with other related parties of the Group
Associated undertakings
Information relating to associated undertakings can be found in the ‘Notes on the Accounts’ where the
following are disclosed:
— Notes 12 and 13: amounts due from associated undertakings
— Note 18: interests in associated undertakings; principal associated undertakings and interests in loan
capital
— Notes 23 and 24: amounts due to associated undertakings.
Pension funds
At 31 December 1997, £6.7 billion (1996: £6.2 billion) of Group pension fund assets were under management
by Group companies of which £511 million (1996: £510 million) is included in the Group’s balance sheet
under ‘Other assets’ in ‘Long-term assurance assets attributable to policyholders’. Fees to Group companies
in connection with such management amounted to £11 million (1996: £11 million). The Group’s pension funds
had deposits of £93 million (1996: £101 million) with banking subsidiaries within the Group.
43 Foreign currency amounts
The Hong Kong and United States dollar figures shown in the consolidated profit and loss account and the balance
sheets are for information only. They are translated from sterling at the average rate of exchange for the year
ended 31 December 1997 and the closing rate at that date respectively. These were as follows:
£1.00 = HK$
£1.00 = US$
Average rate Closing rate
12.761
1.647
12.683
1.638
91
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
44 UK and Hong Kong accounting requirements
The financial statements have been prepared in accordance with UK accounting requirements; there would be no
material differences had they been prepared in accordance with Hong Kong accounting standards other than in
the presentation of the cash flow statement which has been prepared in accordance with Financial Reporting
Standard 1 (revised 1996) ‘Cash Flow Statements’ rather than Hong Kong Statement of Standard Accounting
Practice 15 ‘Cash Flow Statements’.
45 Approval of accounts
These accounts were approved by the Board of Directors on 23 February 1998.
92
H S B C H O L D I N G S P L C
Taxation of Shares and Dividends
1. Cash Dividends
Since 1 January 1993, when the Company became UK resident for UK taxation purposes, HSBC Holdings plc
has had to account to the UK Inland Revenue for advance corporation tax when the Company pays a dividend.
For individual shareholders who are resident in the United Kingdom for taxation purposes and liable to UK
income tax at the basic rate, no further tax liability will arise. Individual shareholders who are liable to UK
income tax at the higher rate of 40 per cent will be taxed on the dividend, including the tax credit of 20 per cent.
The tax credit will then be available for set-off against the higher rate liability. Individual UK-resident
shareholders whose income falls within the lower rate band of income tax charged at 20 per cent will not be
entitled to any tax credit repayment. Other UK-resident shareholders who are exempt from tax on their
investment income will be entitled to repayment by the UK Inland Revenue of the tax credit in respect of
dividends at the rate of 20 per cent.
Non-UK-resident shareholders are generally not entitled to any payment of the tax credit in respect of
any dividend received. However, some shareholders who are not resident in the United Kingdom may be entitled
to a cash payment from the Inland Revenue of a proportion of the tax credit in respect of dividends received.
Such entitlement depends in general either upon the provisions of any double taxation agreement between
the country of residence and the United Kingdom, or upon the shareholder being a Commonwealth citizen or a
European Economic Area national. The UK Inland Revenue has confirmed that after 30 June 1997, Hong Kong
residents will continue to be treated as Commonwealth citizens if registered as British Nationals (Overseas) or
otherwise classified as British Overseas citizens.
Dividends paid by HSBC Holdings plc are generally not subject to tax in Hong Kong.
2. Scrip Dividends
Information on the taxation consequences of the HSBC Holdings plc scrip dividends offered in lieu of the 1996
second interim dividend and the 1997 first interim dividend was set out in the Secretary’s letters to shareholders
of 27 March and 1 September 1997. The market value of the scrip dividend shares on the first day of dealing
was not substantially different from the cash dividend forgone and, accordingly, the price of both classes of the
Company’s ordinary shares for income and capital gains tax purposes is £14.7865 for the 1996 second interim
dividend and £21.139 for the 1997 first interim dividend. Shareholders should contact their professional advisers
to obtain further information.
3. UK Capital Gains Tax
The computation of the capital gains tax liability arising on disposals of shares in the Company by shareholders
subject to UK capital gains tax can be complex, partly dependent on whether the shares were purchased since
April 1991, acquired in April 1991 in exchange for shares in The Hongkong and Shanghai Banking Corporation
Limited, or acquired in July 1992 in acceptance of the offer for shares in Midland Bank plc.
Whilst it is not possible to give specific guidance on the tax calculation, it may be helpful to note that the
market value of the relevant shares as at 31 March 1982 (before any adjustment to take account of subsequent
rights and capitalisation issues) was:
The Hongkong and Shanghai Banking Corporation Limited
Midland Bank plc
£1.36
£3.23
For capital gains tax purposes, the acquisition cost for ordinary shares is adjusted to take account of subsequent
rights and capitalisation issues. Further adjustments may be necessary where a shareholder has chosen to receive
shares instead of cash dividends. Any capital gain arising on a disposal will also be adjusted to take account of
indexation allowance.
If in doubt, shareholders are recommended to consult their professional advisers.
93
T H E H S B C G R O U P
International Network
Services are provided by more than 5,500 offices in 79 countries and territories:
Asia-Pacific
Offices
Offices
Australia
Bangladesh
Brunei Darussalam
China
Hong Kong Special Administrative Region
India
Indonesia
Japan
Kazakhstan
Korea, Republic of
Macau
Europe
Armenia
Austria
Azerbaijan
Channel Islands
Cyprus
Czech Republic
France
Germany
Greece
Hungary
Ireland
Isle of Man
Americas
Argentina
Bahamas
Bermuda
Brazil
Canada
Cayman Islands
Chile
Colombia
Middle East and Africa
Angola
Bahrain
Egypt
Ghana
Jordan
Kenya
Lebanon
Mauritius
Mozambique
Namibia
Malaysia
Myanmar (Burma)
New Zealand
Pakistan
Philippines
Singapore
Sri Lanka
Taiwan
Thailand
Vietnam
Italy
Luxembourg
Malta
Netherlands
Poland
Russia
Spain
Sweden
Switzerland
Turkey
United Kingdom
44
1
12
15
436
30
9
8
1
4
6
1
1
1
26
148
2
3
14
4
1
4
4
178
6
1
2,006
124
4
1
2
Guam
Mexico
Panama
Peru
Saipan
United States of America
Uruguay
Venezuela
Oman
Palestinian Autonomous Area
Qatar
Saudi Arabia
South Africa
Uganda
United Arab Emirates
Zambia
Zimbabwe
2
6
8
1
5
1
6
14
1
1
46
1
8
4
7
31
7
8
9
2
3
2
1
1
2
3
5
2
4
2
1,792
1
2
4
47
1
450
1
1
5
1
3
63
6
1
15
1
4
Associated companies are included in the network of offices.
94
980002 Pages 94-96 16.02.98(W)
T H E H S B C G R O U P
Principal Offices
HSBC Holdings plc
UNITED KINGDOM
Group Head Office
10 Lower Thames Street
London EC3R 6AE
Telephone: 44 0171-260 0500
Facsimile: 44 0171-260 0501
Web: www.hsbcgroup.com
COMMERCIAL BANKING
Banco HSBC Bamerindus S.A.
BRAZIL
Travessa Oliveira Belo, 11-B Centro
Curitiba-PR
CEP: 80.020-030
Telephone: 55 41 321 6070/6517
Facsimile: 55 41 321 6150
British Arab Commercial Bank
Limited*
UNITED KINGDOM
30 Gresham Street
London EC2V 7LP
Telephone: 44 0171-606 7777
Facsimile: 44 0171-600 3318
The British Bank of the Middle East
CHANNEL ISLANDS
Head Office
1 Grenville Street, St Helier
Jersey JE2 4UF
Telephone: 44 01534-606511
Facsimile: 44 01534-606149
Egyptian British Bank S.A.E.*
EGYPT
Abu El Feda Building
3 Abu El Feda Street, Zamalek, Cairo
Telephone: 20 2 3404849, 3409186
Facsimile: 20 2 3414010
Hang Seng Bank Limited
HONG KONG
Head Office
83 Des Voeux Road Central
Telephone: 852 2825 5111
Facsimile: 852 2845 9301
The Hongkong and Shanghai
Banking Corporation Limited
HONG KONG
Head Office
1 Queen’s Road Central
Telephone: 852 2822 1111
Facsimile: 852 2810 1112
Hongkong Bank Malaysia Berhad
MALAYSIA
Head Office
2 Leboh Ampang
50100 Kuala Lumpur
Telephone: 60 3 2300744
Facsimile: 60 3 2301146
HongkongBank of Australia Limited
AUSTRALIA
Level 10, 1 O’Connell Street
Sydney, NSW 2000
Telephone: 61 2 9255-2888
Facsimile: 61 2 9255-2332
* Associated company
Hongkong Bank of Canada
CANADA
Head Office
Suite 300, 885 West Georgia Street
Vancouver, BC V6C 3E9
Telephone: 1 604 685-1000
Facsimile: 1 604 641-1849
HSBC Private Equity Europe Limited
UNITED KINGDOM
Vintner’s Place
68 Upper Thames Street
London EC4V 3BJ
Telephone: 44 0171-260 9000
Facsimile: 44 0171-488 1630
HSBC Banco Roberts S.A.
ARGENTINA
25 de Mayo 258
1002 Buenos Aires
Telephone: 54 1-334 3968
Facsimile: 54 1-334 6404
Marine Midland Bank
UNITED STATES OF AMERICA
Corporate Headquarters
One Marine Midland Center
Buffalo, NY 14203
Telephone: 1 716 841-2424
Facsimile: 1 716 841-5391
Midland Bank plc
UNITED KINGDOM
Head Office
27-32 Poultry
London EC2P 2BX
Telephone: 44 0171-260 8000
Facsimile: 44 0171-260 7065
The Saudi British Bank*
SAUDI ARABIA
Head Office
Al Amir Adbul Aziz Ibn
Mossaad Ibn Jalawi Street, Riyadh
Telephone: 966 1 405-0677
Facsimile: 966 1 405-0660
Wells Fargo HSBC Trade Bank, N.A.*
UNITED STATES OF AMERICA
525 Market Street, 25th Floor
San Francisco, California 94105
Telephone: 1 415-477 6858
Facsimile: 1 415-541 0299
INVESTMENT BANKING
HSBC Investment Bank plc
UNITED KINGDOM
Thames Exchange
10 Queen Street Place
London EC4R 1BL
Telephone: 44 0171-621 0011
Facsimile: 44 0171-621 0496
INVESTMENT BANKING —
ADVICE AND FINANCING
HSBC Equator Bank plc
UNITED KINGDOM
66 Warwick Square
London SW1V 2AL
Telephone: 44 0171-821 8797
Facsimile: 44 0171-821 6221
HSBC Investment Bank Asia
Limited
HONG KONG
Level 15, 1 Queen’s Road Central
Telephone: 852 2841 8888
Facsimile: 852 2845 9047
INVESTMENT BANKING —
EQUITY SECURITIES
HSBC Investment Bank plc
HSBC Securities
UNITED KINGDOM
Thames Exchange
10 Queen Street Place
London EC4R 1BL
Telephone: 44 0171-621 0011
Facsimile: 44 0171-621 0496
HSBC Securities Asia Limited
HONG KONG
Level 17, 1 Queen’s Road Central
Telephone: 852 2843 9111
Facsimile: 852 2810 7673
HSBC Securities Japan Limited
JAPAN
Kyobashi Itchome Building
1-13-1 Kyobashi
Chuo-ku, Tokyo 104
Telephone: 81 03-5203 3111
Facsimile: 81 03-5203 3591
Wardley Financial Services Limited
HONG KONG
3/F, Hutchison House
10 Harcourt Road
Telephone: 852 2521 1661
Facsimile: 852 2810 0145
INVESTMENT BANKING —
ASSET MANAGEMENT
HSBC Asset Management
Americas Inc.
UNITED STATES OF AMERICA
6th Floor, 140 Broadway
New York, NY 10005
Telephone: 1 212 658-7815
Facsimile: 1 212 658-7672
HSBC Asset Management Europe
Limited
HSBC Unit Trust Management
Limited
UNITED KINGDOM
6 Bevis Marks
London EC3A 7QP
Telephone: 44 0171-955 5050
Facsimile: 44 0171-955 5052
HSBC Asset Management
Hong Kong Limited
HONG KONG
10/F Citibank Tower
3 Garden Road
Telephone: 852 2801 0111
Facsimile: 852 2845 0226
95
980002 Pages 94-96
16.02.98(W)
T H E H S B C G R O U P
Principal Offices (continued)
HSBC Securities, Inc.
UNITED STATES OF AMERICA
140 Broadway, New York, NY 10005
Telephone: 1 212 825-6780
Facsimile: 1 212 825-3861
FINANCE
Forward Trust Group Limited
UNITED KINGDOM
Forward Trust House
12 Calthorpe Road
Edgbaston, Birmingham B15 1QZ
Telephone: 44 0121-454 6141
Facsimile: 44 0121-455 3050
HSBC Forfaiting Asia Pte Limited
SINGAPORE
21 Collyer Quay
#19-03 HongkongBank Building
Singapore 049320
Telephone: 65 2242477
Facsimile: 65 2258021
HSBC International Trade
Finance Limited
UNITED KINGDOM
6 Arthur Street
London EC4R 9HT
Telephone: 44 0171-626 9411
Facsimile: 44 0171-260 4829
Mortgage And Finance Berhad
BRUNEI DARUSSALAM
Shops 3 and 4
Goodwood Building
Mile 2 Jalan Gadong
Bandar Seri Begawan 3180
Telephone: 673 2 427969, 427970
Facsimile: 673 2 448474
Wayfoong Credit Limited
Wayfoong Finance Limited
HONG KONG
18/F, Leighton Centre
77 Leighton Road
Telephone: 852 2839 6333
Facsimile: 852 2895 4845
Wayfoong Mortgage And Finance
(Singapore) Limited
SINGAPORE
6 Claymore Hill
#03-01 Claymore Plaza
Singapore 229571
Telephone: 65 7377977
Facsimile: 65 7378997
INSURANCE, RETIREMENT
BENEFITS, ACTUARIAL AND
PERSONAL FINANCIAL
SERVICES
Hang Seng Life Limited
HONG KONG
5/F, 83 Des Voeux Road Central
Telephone: 852 2825 3212
Facsimile: 852 2530 3223
INVESTMENT BANKING —
PRIVATE BANKING AND
TRUSTEE
The British Bank of the Middle East
HSBC Investment Bank plc
SWITZERLAND
Quai General Guisan 2
1211 Geneva 11
Telephone: 41 22 818 05 11
Facsimile: 41 22 818 05 12
The British Bank of the Middle East
HSBC Investment Bank plc
UNITED KINGDOM
29-31 Hill Street, Mayfair
London W1X 7FD
Telephone: 44 0171-355 6300
Facsimile: 44 0171-355 6415
Guyerzeller Bank AG
SWITZERLAND
Genferstrasse 6-8, CH-8027 Zurich
Telephone: 41 1 206 7111
Facsimile: 41 1 206 7397
HSBC International Trustee Limited
HSBC Private Bank (Jersey) Limited
HSBC Trustee (Jersey) Limited
Midland Bank Trustee (Jersey)
Limited
CHANNEL ISLANDS
1 Grenville Street, St Helier
Jersey JE2 4UF
Telephone: 44 01534-606500
Facsimile: 44 01534-606504
HSBC Investment Bank Asia Limited
HONG KONG
Level 15
1 Queen’s Road Central
Telephone: 852 2841 8888
Facsimile: 852 2845 9047
HSBC Trustee (Hong Kong) Limited
HONG KONG
Level 13, 1 Queen’s Road Central
Telephone: 852 2533 6333
Facsimile: 852 2810 5259
Midland Bank Trust Company
Limited
UNITED KINGDOM
2/F, Norwich House, Nelson Gate
Commercial Road
Southampton SO15 1GX
Telephone: 44 01703-723 722
Facsimile: 44 01703-723 587
Trinkaus & Burkhardt KGaA
GERMANY
Königsallee 21/23
D-40212 Düsseldorf 1
Telephone: 49 211 910 0
Facsimile: 49 211 910 616
CAPITAL MARKETS
HSBC Greenwell
UNITED KINGDOM
Thames Exchange
10 Queen Street Place
London EC4R 1BQ
Telephone: 44 0171-336 3000
Facsimile: 44 0171-220 7113
HSBC Gibbs Limited
HSBC Insurance Holdings Limited
UNITED KINGDOM
Bishops Court
27/33 Artillery Lane
London E1 7LP
Telephone: 44 0171-247 5433
Facsimile: 44 0171-377 2139
Facsimile: (HSBC Gibbs)
Facsimile: 44 0171-247 7373
Facsimile: (HSBC Insurance Holdings)
HSBC Gibbs Personal
Insurances Limited
UNITED KINGDOM
Hexagon House
Cleppa Park
Newport, Gwent NP1 9XT
Telephone: 44 01633-654300
Facsimile: 44 01633-817910
HSBC Insurance (Asia-Pacific)
Holdings Limited
HONG KONG
40/F, Sun Hung Kai Centre
30 Harbour Road, Wanchai
Telephone: 852 2827 3322
Facsimile: 852 2827 7636
La Buenos Aires Compañia
Argentina de Seguros S.A.
ARGENTINA
Casa Central
Avenida de Mayo 701
1084 Buenos Aires
Telephone: 54 1 331 1961/71/81
Facsimile: 54 1 334 0860
Midland Life Limited
UNITED KINGDOM
Norwich House
Nelson Gate
Commercial Road
Southampton SO15 1GX
Telephone: 44 01703-229929
Facsimile: 44 0117-925 1993
BULLION DEALING AND
COMMODITY/BROKERAGE
SERVICES
Wardley Broking Services Private
Limited
SINGAPORE
21 Collyer Quay
#17-01 HongkongBank Building
Singapore 049320
Telephone: 65 2254007
Facsimile: 65 2249201
PROPERTY
Wayfoong Property Limited
HONG KONG
31/F, Hopewell Centre
183 Queen’s Road East
Telephone: 852 2822 7211
Facsimile: 852 2861 2492
SHIPPING SERVICES
HSBC Shipbrokers Limited
HONG KONG
20/F, 111 Leighton Road
Telephone: 852 2923 7733
Facsimile: 852 2577 4188
6
-
5
9
2
1
9
r
e
b
m
u
n
k
c
o
t
S
96
980002 Pages 94-96 16.02.98(W)
Chinese translation
A Chinese translation of this Annual Report and Accounts
is available on request from:
Central Registration Hong Kong Limited
Rooms 1901-5, Hopewell Centre
183 Queen’s Road East, Hong Kong
1901-1905
© HSBC Holdings plc 1998
Published by Group Public Affairs, HSBC Holdings plc,
London
Printed by R R Donnelley-Pindar, Feltham, United Kingdom,
on environmentally-friendly, totally chlorine-free paper
Photography
All photographs by Ben Rice except: Lord Butler and
Sir Brian Moffat by Guy Drayton; R K F Ch’ien and
W K L Fung by Josiah Leung; Sir Colin Marshall by
Adrian Meredith; and M Murofushi by Sakon Hattori
RA18592 Proof 4
2
H
S
B
C
H
o
l
d
n
g
s
p
l
c
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
1
9
9
7
HSBC Holdings plc
10 Lower Thames Street, London EC3R 6AE, United Kingdom