HSBC Holdings plc
Annual Report and Accounts 1998
HSBC Holdings plc
10 Lower Thames Street, London EC3R 6AE, United Kingdom
The HSBC Group
Headquartered in London, HSBC Holdings plc is one of the largest banking and financial services organisations in the
world. The HSBC Group’s international network comprises more than 5,000 offices in 79 countries and territories,
operating in the Asia-Pacific region, Europe, the Americas, the Middle East and Africa.
With primary listings on the London and Hong Kong stock exchanges, shares in HSBC Holdings plc are held by
some 170,000 shareholders in more than 90 countries and territories. In the United States, HSBC Holdings plc offers
investors a sponsored American Depositary Receipt programme.
Through a global network linked by advanced technology, the Group provides a comprehensive range of financial
services: personal, commercial, investment and private banking; trade services; cash management; treasury and capital
markets services; insurance; consumer and business finance; pension and investment fund management; trustee services;
and securities and custody services.
HSBC HOLDINGS PLC
Incorporated in England with limited liability
Registered in England: number 617987
REGISTERED OFFICE AND GROUP HEAD OFFICE
10 Lower Thames Street
London EC3R 6AE
United Kingdom
Telephone: 44 0171 260 0500
Facsimile: 44 0171 260 0501
Web: www.hsbc.com
REGISTRARS
Principal Register
Computershare Services PLC
PO Box 435, Owen House
8 Bankhead Crossway North
Edinburgh EH11 4BR
United Kingdom
Telephone: 44 0131 523 6666
Hong Kong Overseas Branch Register
Central Registration Hong Kong Limited
Rooms 1901-5, Hopewell Centre
183 Queen’s Road East
Hong Kong
Telephone: 852 2862 8628
STOCKBROKERS
Cazenove & Co.
12 Tokenhouse Yard
London EC2R 7AN
United Kingdom
HSBC Securities
Thames Exchange
10 Queen Street Place
London EC4R 1BL
United Kingdom
ADR DEPOSITARY
HSBC Issuer Services
HSBC Bank USA
140 Broadway
New York
New York 10005
USA
H S B C H O L D I N G S P L C
Annual Report and Accounts 1998
Financial Highlights
1997
1998
1998
1998
£m
3,962
2,604
1,505
HK$m
50,899
33,447
19,326
16,523
24,778
212,256
318,299
206,981
2,658,829
291,326
3,742,309
182,076
2,338,905
Pence
97.1
95.9
96.5
55.4*
612.0
HK$
12.47
12.31
12.39
7.17*
78.62
US$m For the year
8,130 Profit before tax
5,487 Profit attributable
2,206 Dividends
At year-end
27,080 Shareholders’ funds
41,562 Capital resources
333,136 Customer accounts and deposits by banks
471,686 Total assets
291,985 Risk-weighted assets
US$ Per share
2.060 Basic earnings
2.040 Diluted earnings
2.040 Headline earnings
0.830† Dividends
10.120 Net asset value
Number of ordinary shares in issue at year-end
1,802m HK$10
874m £0.75
% Ratios
20.70 Return on average shareholders’ funds
1.37 Post-tax return on average assets
2.17 Post-tax return on average risk-weighted asets
Capital ratios
14.20 — total capital
9.30 — tier 1 capital
54.00 Cost:income ratio
US$m
6,571
4,318
2,495
27,402
41,092
343,252
483,128
301,950
US$
1.610
1.590
1.600
0.925
10.150
1,816m
883m
%
15.50
0.98
1.60
13.60
9.70
54.90
* The second interim dividend of US$0.555 per share is translated at the closing rate. Where required, the dividend will be converted into sterling
or Hong Kong dollars at the exchange rate on 16 April 1999.
† US dollar amounts have been calculated at the exchange rate on the dividend payment dates.
1
H S B C H O L D I N G S P L C
Annual Report and Accounts 1998
Five-Year Comparison
At year-end (US$m)
Share capital
Shareholders’ funds
Capital resources
Customer accounts
Loans and advances to customers
Total assets
For the year (US$m)
Operating profit before provisions
Provisions for bad and doubtful debts
Pre-tax profit
Profit attributable to shareholders
Dividends
Per ordinary share (US$)
Basic earnings
Headline earnings
Dividends
1994
3,265
16,854
28,269
201,040
154,318
314,771
1995
3,296
20,776
33,095
220,572
169,747
352,022
1996
3,426
25,833
39,950
257,104
194,514
402,377
1997
3,406
27,080
41,562
294,189
240,421
471,686
1998
3,443
27,402
41,092
308,910
235,295
483,128
4,694
(422)
4,857
3,149
(1,078)
1.22
1.18
0.43
5,952
(657)
5,794
3,885
(1,330)
1.48
1.48
0.49
7,054
(604)
7,052
4,852
(1,738)
1.83
1.80
0.66
8,553
(1,014)
8,130
5,487
(2,206)
2.06
2.04
0.83
9,051
(2,637)
6,571
4,318
(2,495)
1.610
1.600
0.925
For comparative purposes, the sterling data previously reported have been translated for balance sheet data at the closing rates, and for profit and
loss account data at the average rates.
Contents
1 Financial Highlights
2 Five-Year Comparison
2 Contents
3 Group Chairman’s Statement
6 Group Chief Executive’s Review of Operations
16 Managing for Value
19 HSBC: Business Principles and Values
22 Board of Directors and Group General Managers
26 Report of the Directors
41 Financial Review
2
556 Statement of Directors’ Responsibilities in
Relation to Financial Statements
557 Report of the Auditors
558 Accounts
563 Notes on the Accounts
102 Taxation of Shares and Dividends
103 Shareholder Information
105 HSBC International Network
106 HSBC Principal Offices
T H E H S B C G R O U P
Group Chairman’s Statement
We want to be the world’s leading financial services
company. That is our vision. To achieve this, we have
a new strategy called ‘Managing for Value’ which you
can read about on pages 16 to 18. The strategy is
designed to place you, our shareholders, at the centre
of everything we do. HSBC has always been about
shareholder value. US$100 invested in HSBC at the
beginning of 1974, with dividends reinvested, would
be worth over US$11,000 at the beginning of 1999, a
compound annual growth rate of over 20 per cent. The
strategy simply reinforces our commitment to
shareholders and gives us a focus.
We have adopted this strategy from a position of
strength. The strength of the Group was widely
recognised during the year, including being rated the
world’s strongest bank by The Banker magazine and
the ‘best bank in Asia’ by Euromoney. Forbes magazine
rated us number 2 in its ‘Super 50’ league table of global
companies. We are building from that strength: this
strategy is evolutionary, not revolutionary.
Operating Environment
In a number of our major markets, 1998 saw the
toughest economic conditions for many years, with
some 40 per cent of those markets in recession. Profit
attributable to you, our shareholders, was US$4,318
million, down 21 per cent. That the Group was able to
report increased operating profits before provisions of
US$9,051 million, a return on shareholders’ funds of
15.5 per cent and declare dividends of US$0.925 per
share reflects the spread and robustness of our
businesses and our ability to generate revenues and hold
down costs.
Inevitably, the results of the commercial banking
members of the Group reflected to a considerable
degree the economic environment of the countries in
which they operate. In 1998, these conditions varied
markedly. The United States, Canada, the Middle East
and the United Kingdom remained relatively buoyant
and our subsidiaries in those countries reported
satisfactory results. Our core UK banking business did
particularly well. In contrast, a number of Asian
economies contracted sharply and some in Latin
America faltered. We responded to the changed
economic circumstances by focusing new lending on
preferred economies and customers, enhancing liquidity
and maintaining our strong capital position. Our
financial standing enabled us to grow our share of
deposits in many of our major markets including, in
particular, the Hong Kong Special Administrative
Region of China.
Much has been written about the events in Asia. Our
faith in the region’s long-term prospects remains
undiminished. There is no one Asian model. But there
are some common denominators, some fundamentals,
which help to explain the region’s success. First,
talented people: across Asia, there are hard-working
entrepreneurial people dedicated to improving their life
and the lives of their families. Second, there is also a
strong commitment to basic education at the primary
and secondary levels, and excellent universities. Third,
countries throughout the region also have very high
savings rates which lead naturally to high levels of
investment. Fourth, labour costs across Asia compare
favourably with those in OECD countries.
Of course, there are well-documented problems. In
some cases, the financial and economic infrastructure
did not keep pace with the dynamic growth enjoyed by
many Asian countries over 30 years. But these issues
are being addressed and when that has been done, Asia
will return to the high growth rates that have
characterised the region for so long. The current
problems experienced by some countries should be seen
in the context of 30 years of economic success.
We also see excellent long-term potential in Latin
America, despite the difficulties experienced by some
countries in 1998. We are encouraged by the progress
made in integrating our businesses there into the HSBC
Group.
In our operations in OECD countries, we see strong
potential to conduct more business with our excellent
customer base, and our strategy highlights the areas
we shall focus on.
Old Values
As well as more information on our new strategy in
this report, we are also publishing for the first time a
3
T H E H S B C G R O U P
Group Chairman’s Statement (continued)
statement on the principles which underpin our
business. Again, this is an evolutionary step. Our values
are old values; only the publication of them is new.
group, this year I acknowledge my colleagues in
Indonesia who did a marvellous job in very difficult
circumstances.
One aspect of our conduct deserves special mention.
HSBC plays a full part in the communities in which
we operate. Our priority continues to be education: we
supported some 236 projects in 1998. We also sponsor
measures to protect the environment and to help the
underprivileged. HSBC Holdings plc undertook many
initiatives in these three areas, including four specialist
language colleges, Earthwatch, the Royal Geographical
Society, Save the Children, Asia House, Voluntary
Service Overseas, the English Speaking Union and the
British Museum’s Money Gallery. The HSBC-
sponsored Millennium Bridge in London is our means
of marking the millennium.
Our subsidiaries continued to be heavily involved
in local initiatives. Among many other activities, the
Hongkong Bank Foundation funded over a hundred
scholarships and bursaries for Hong Kong students and
continued to promote exchange programmes with
mainland China. The BritishBank Foundation
supported several educational projects in its first full
year of operation.
Young Enterprise, Shelter, Age Concern and
Children in Need were just four of the charities helped
by Midland Bank. Banco HSBC Bamerindus focused
on helping the poorest areas of Brazil, with support for
education and health services, as well as for orphanages
in Curitiba. In the United States, our successful Project
Jumpstart with Buffalo’s Riverside High School went
from strength to strength and meeting former students
who are now employees was one of the highlights of
my year. We contributed towards the founding of a
college of higher education in Saudi Arabia. Group
members backed environmental initiatives in many
countries, including Canada, Malaysia, Australia and
Singapore.
Colleagues’ Contributions
I should also record my thanks to the many colleagues
who devoted considerable time and effort to supporting
their communities.
It would be remiss of me if I did not also thank them
for the contribution they make to HSBC’s business
success. It is commonplace to commend staff in an
annual report. Nevertheless, I should like to say ‘thank
you’ to my many talented colleagues around the world,
who have contributed so much to the achievements of
HSBC. While it is invidious to single out any particular
4
The photographs in this Annual Report show some
of our staff at work. For us to create shareholder value,
we need satisfied customers. To satisfy our customers,
we need committed and capable staff. It is the job of
management to build and maintain this virtuous circle.
During 1998, we made the decision to bring together
some 8,000 staff in a new headquarters building at
London’s Canary Wharf. We will start occupying the
building in 2002. It is being constructed under a fixed-
price contract and the effect over time will be cost
neutral, which is why we decided to proceed. We expect
to realise benefits from bringing business units closer
together.
At the end of 1998, John Strickland retired from the
Board and as Chairman of The Hongkong and Shanghai
Banking Corporation Limited. John was succeeded by
David Eldon. Sir Wilfrid Newton will retire at this
year’s Annual General Meeting in May. I thank John
and Sir Wilfrid for their services to your Board.
New York Stock Exchange Listing
You may be aware already that we plan to seek a listing
on the New York Stock Exchange to supplement our
existing listings in London and Hong Kong. Given the
size and nature of the Group, your Board thought it
appropriate that HSBC should have access to the widest
range of international capital markets, and we felt that
a listing in New York should also stimulate international
demand for HSBC shares. To facilitate this, we will
ask your approval to simplify the existing share
structure by creating a new class of 50 US cent ordinary
shares. If approved, shareholders will receive three new
shares for each existing share they hold, whether 75p
or HK$10. We also seek your authority for the ability
to buy back shares. Full details of our proposals are set
out in the ‘Notice of the Annual General Meeting’
circular which is enclosed with this report.
The year ahead promises to be very challenging.
Much will depend on the performance of the US
economy and its ability to continue a remarkable record
of sustained growth. Some Asian economies are
expected to begin to recover; others are still
experiencing a severe downturn and we do not rule out
the possibility of further setbacks. In the first three
months of 1999, we have already made progress in a
number of areas.
T H E H S B C G R O U P
In February, we purchased for a total consideration
of US$57.6 million a further 14 per cent equity interest
in three Argentine financial services companies in
which we already held minority interests. We also
signed a memorandum of understanding with the
Korean Government with respect to the acquisition of
a controlling interest in Seoul Bank. The exact terms
of the transaction are being negotiated at the time of
writing. If the outcome is successful, the acquisition
will add significant weight to our presence in South
Korea, an OECD country, and give us some 3.5 million
customers there.
We have entered 1999 confident in our strength to
withstand further volatility and in our ability to build
on the strengths of the Group to deliver further value
to shareholders. We have many strengths: sound
liquidity, strong capital and a conservative balance
sheet. We have an excellent customer base, the envy of
our competitors. We have strength in depth in our
management team. (The 22 executive Directors and
general managers of your Group have a combined
length of service of some 600 years, averaging 27 years
of service each.) And we have more than 130,000
dedicated members of staff across 79 countries and
territories. The task before our team is to marshal our
resources and unlock the massive further potential in
the HSBC Group. I look forward to reporting to you
on our progress.
John Bond, Group Chairman
26 March 1999
5
T H E H S B C G R O U P
Group Chief Executive’s Review of Operations (continued)
Our telephone banking division, First Direct,
established nearly 10 years ago, continued to be very
popular, attracting on average over 10,000 new cheque
accounts a month. With 880,000 customers today, we
expect First Direct to take on its one-millionth customer
in the year 2000.
We also continued to develop new ways of delivering
banking services. PC banking was launched at First
Direct, and has attracted 68,000 users. A service will
be launched for Midland customers during 1999. We
opened more outlets at Wm Morrison Supermarkets
plc, taking the total to 21, and offering the banking
public an alternative way to reach us. Development of
a TV banking proposition also continued through
Open...., the marketing name of British Interactive
Broadcasting.
In our business market, specific initiatives included
a two-year free banking package to start up businesses
and the establishment of a business innovation and
Attributable profit by subsidiary and by line of business
1997
US$m
1998
Hang Seng Bank
Less: minority interests
HSBC Investment Bank Asia Holdings
The Hongkong and Shanghai Banking
Corporation and other subsidiaries
The Hongkong and Shanghai Banking
Corporation and subsidiaries
Midland Bank
Less: preference dividend
HSBC Americas
Less: preference dividend
The British Bank of the Middle East
HSBC Bank Malaysia
Hongkong Bank of Canada*
HSBC Latin American operations
HSBC Holdings sub-group
— Canary Wharf vacant space
— provisions
— Other
Other commercial banking
entities
UK GAAP adjustments
Less: investment banking profits
876
(332)
1,210
(463)
%%^ %%^
747
(2)
544
59
789
1,812
1,392
1,726
(71)
1,655
527
—
527
141
(91)
122
147
(158)
28
229
161
2,557
1,719
(69)
1,650
471
(3)
468
129
88
100
66
—
122
92
60
(101)
included above†
Commercial banking
Investment banking
(87)
%%^ %%^
5,245
4,052
266
%%^ %%^
5,487
4,318
ZZX ZZX
* 1998 figures for Hongkong Bank of Canada are based on the 14-month
period to 31 December 1998. The attributable profit arising in the
additional two-month period was US$16 million.
Group profit
242†
† Restated to include Guyerzeller Bank, which was transferred from
Midland Bank to HSBC Investment Bank on 31 December 1997.
This year’s ‘Review of Operations’ has been organised
differently from that in previous years. In line with our
new strategy, it describes the Group’s activities in a
way that reflects the relative economic importance of
our operations worldwide. We have divided our
operations into three categories. First, we have four
large businesses, each with more than one million
customers: the UK, the Hong Kong SAR and mainland
China, Brazil and the United States. Second, we have
seven major businesses, each with more than 200,000
customers. Third, we have other international
businesses which support our large and major
businesses, and some of which we hope will become
our major businesses of tomorrow.
Aligned with these is our Corporate and Institutional
Banking business which, by its nature, often crosses
geographical borders and is increasingly co-ordinated
globally. We have also included other businesses which
are global or supra-regional in nature.
An analysis of our results by subsidiary and by line
of business is shown in the table opposite.
HSBC’s Large Businesses
United Kingdom
The core UK banking business grew strongly in 1998.
Despite the impact of a gradual economic slowdown,
operating profit rose by 15 per cent to US$1,912
million. Wealth management activities, which include
the sale of investment, insurance and private banking
products, showed strong growth.
Improvements were made to Midland Bank plc’s
personal products range, including a relaunch of the
bank’s savings accounts, which provided better terms
for 1.5 million customers. Service enhancements
included access to products over the telephone, such
as savings, mortgages and loans.
6
growth unit. Five new South Asian banking units were
opened in the UK, bringing to 11 the total number of
offices serving the needs of the South Asian business
community.
Our asset-based financing businesses performed
well, with new business growth contributing to
increased operating profit.
Several factors had an adverse impact on the overall
results. A provision of US$99 million was raised to
cover the extension of the pension review in the UK.
Provisions for bad and doubtful debts increased, due
mainly to lower Latin American debt recoveries.
Exceptional market volatility affected operating
profits at HSBC MIDLAND, which fell to US$63
million, although foreign exchange, money markets and
sterling bond issues recorded a sound year.
Hong Kong SAR and Mainland China
The economic and financial turmoil of the last 18
months inevitably affected the performance of The
Hongkong and Shanghai Banking Corporation and its
subsidiaries. Despite the downturn, the bank was able
to generate a level of operating profit before provisions
similar to 1997. Provisions for bad and doubtful debts
rose significantly, however, as credit quality
deteriorated and non-performing loans increased,
leading to a fall in attributable profit.
These difficult times also provided opportunities.
Most notably, we gained new business and new
customers. The bank also benefited from the reduction
in liquidity that affected the ability of some competitors
to meet customer requirements and from increased
spreads on corporate lending, as pricing more accurately
reflected increased credit risks, although margins were
affected by the rise in non-performing loans.
Although competition in the retail market
intensified, reflecting economic conditions, the bank
was able to maintain or grow market share in all core
product sectors, including customer deposits, residential
mortgages (including the Hong Kong SAR
Government’s Home Ownership Scheme), and other
personal loans. We continued to expand and improve
our products and services while controlling costs
through streamlined operations. A downturn in unit trust
sales was offset by increased sales of insurance
products, which more than doubled compared with
1997. Credit card receivables continued to grow.
Although write-off and delinquency rates rose slightly,
they remained below the industry average.
The focus in 1999 will be to seek out new business
growth opportunities, maintain strict control of credit
quality and costs, and improve customer relationships
by offering corporate and personal customers a wider
range of products and services. In particular, in personal
banking, the focus will be on deepening customer
relationships by increasing the number of products sold
to our large personal customer base. Existing products
will be made more easily available through new
delivery channels, such as enhanced telephone and
electronic banking services.
The bank’s soundness, financial standing and strong
revenue-generating capability means that it is well
placed to take advantage of appropriate business
opportunities and to benefit from improved market
conditions when economic recovery takes place.
Hang Seng Bank (HSBC Group interest: 62.14 per
cent) focused on investment-related and insurance
products, including launching the Hang Seng
Investment Series as the umbrella brand for the bank’s
managed portfolios; opening Hong Kong’s first
automated securities phone-trading service and first
automated mobile phone messaging service for
securities customers; and launching a number of credit
cards, including the Hang Seng MasterCard Cor-
porate Card and Hang Seng Platinum MasterCard (in
January 1999).
Joint initiatives between The Hongkong and Shang-
hai Banking Corporation and Hang Seng Bank included
the launch of an interbank fund transfer function on
our automated teller machines (ATMs) in June and the
introduction of utility bill payments via ATMs.
In mainland China, The Hongkong and Shanghai
Banking Corporation upgraded
its Wuhan
representative office to a branch in April and, since the
year-end, has opened a representative office in
Chongqing, bringing the bank’s total network up to
eight branches, one sub-branch and three representative
offices. Permission was also obtained to undertake
renminbi banking in Shenzhen, the second bank
location to be granted this status. Hang Seng’s Beijing
representative office was opened in December.
Brazil
HSBC’s Brazilian operations generated attributable
profit of US$165 million in its first full year of
operation. This represents a 16.2 per cent return on
equity in local currency terms, compared with 6.9 per
cent in 1997.
Banco HSBC Bamerindus S.A. also took several
new initiatives to increase market share, such as the
premier branches, a totally new concept of service in
7
T H E H S B C G R O U P
Group Chief Executive’s Review of Operations (continued)
8
Group Chief Executive’s Review of Operations (continued)
the country. The first premier branch was opened in
Curitiba, where our Brazilian headquarters are located.
More will be opened in 1999.
During the year, two new business units were
launched: Auto Finance and Real Estate. Auto Finance,
focusing on car loans for personal customers, began
operations in five major cities and is preparing to open
in 10 others in 1999. Auto Finance offers quick finance,
often enabling customers to purchase cars on the spot.
The Real Estate unit provides property-related services
to large corporate customers, developing specific
solutions for residential, commercial and industrial
projects.
Funds under management rose by 22 per cent to
US$3.87 billion, serving 216,000 clients. Several funds
reported excellent performances, with some of them
receiving industry awards in recognition.
The process of establishing a control culture and an
environment consistent with Group standards
continued, with the implementation of further controls
of costs and expenses. Banco HSBC Bamerindus also
invested US$25 million to establish a back-up site for
its data-processing activities.
USA
HSBC Americas saw record profits for the sixth
consecutive year. Profit before tax in 1998 rose by
15 per cent to US$765 million and attributable
profit increased by 12 per cent to US$527 million.
The results benefited from a settlement with the
US Internal Revenue Service on Brazilian tax credits
disallowed in the 1980s, which contributed US$33
million pre-tax, and reduced taxes by a net amount of
US$10 million. Other operating income was enhanced
by a US$28 million gain from the sale of credit card
portfolios. A return on average shareholders’ funds
of 25 per cent and a cost-to-income ratio of 48 per
cent on a local basis continued to place HSBC
Americas among the top performing regional banks in
the United States.
In 1998, as part of a five-year strategic plan, HSBC
Americas set a new challenge to ensure customer
satisfaction: ‘Superior customer service, every time’.
A new management structure was established with
a single head of personal banking and a focus on
wealth management. The range of wealth manage-
ment products available to customers was expanded,
with the introduction of life and long-term care
insurance, and the launch of a platinum credit card,
one of the fastest-growing card products in the
US market-place. Telephone bill payment and PC-
banking services were introduced in partnership with
NYCE Corporation.
HSBC Americas announced the acquisition of First
Commercial Bank of Philadelphia, Pennsylvania, which
fits with the bank’s strategy of attracting Asian
communities in the United States.
In the fourth quarter of the year, the commercial
loans of the US branches of The Hongkong and Shang-
hai Banking Corporation were acquired by HSBC Ameri-
cas, completing the consolidation of the HSBC Group’s
commercial banking activities in the United States.
HSBC’s Major Businesses
Argentina
HSBC Roberts made a disappointing pre-tax loss of
US$13 million in 1998. A strategic plan was completed
and approved in June. This sets the direction for HSBC
Roberts’ banking and insurance companies up to the
year 2000. The focus in 1998 was primarily on
introducing HSBC standards across the business and
operational areas. Work also began on consolidating
the product range, client base and management skills
in order to create a highly competitive financial services
business in 1999. The bank will actively cross-sell its
products and those of the insurance and health care
businesses. There is a large untapped domestic market
and, with the spread of products and services available
through HSBC Roberts, the bank is well placed to
provide a comprehensive financial service to clients.
HSBC Group practices are steadily being
implemented. The Group treasury system was installed
in the fourth quarter of 1998; a single administration
and payments system was
introduced; a
communications policy implemented; and further
investment was made in staff training.
Canada
Hongkong Bank of Canada’s net interest income
increased in 1998, primarily as a result of strong growth
in commercial loans and residential mortgages. This
was assisted by new business gains arising from
previously proposed consolidations in the Canadian
financial services industry. Other operating income
improved due to growth in our investment businesses,
which increased brokerage commissions and mutual
fund fees, and higher trading income. An additional
provision for credit losses equivalent to US$22 million
was recorded during the 14 months from October 1997
to December 1998, as the bank increased its general
loan loss reserves in anticipation of new industry-wide
guidelines.
9
T H E H S B C G R O U P
Group Chief Executive’s Review of Operations (continued)
The acquisitions of National Westminster Bank of
Canada and Moss, Lawson Holdings Limited, a
Canadian retail brokerage company, were completed
during 1998. The purchase agreement for Gordon
Capital Corporation, a leading Canadian institutional
investment dealer, was concluded in early January 1999.
This acquisition will greatly enhance the strengths and
capabilities of our existing securities business.
We continued to focus on personal financial services
and wealth management initiatives. HSBC InvestDirect
Canada implemented the first internet-based discount
brokerage businesses in Canada.
India
HSBC’s operations in India performed satisfactorily in
1998. In personal banking, loan demand grew by over
10 per cent, and the range of asset products was
extended to provide greater choice. Growth in the
number of credit cards issued was particularly strong,
despite keen competition from both local and foreign
banks. India is now our third most important credit
card centre in Asia, after Hong Kong and Taiwan.
During the year, two new branches were opened by
Group members to improve the availability of services
to customers. A programme to refurbish existing
branches in conjunction with the adoption of the HSBC
brand and the introduction of a standard presentation
for the Group’s worldwide network of branches is being
implemented.
A further investment of US$7 million was a new
Central Services Centre in Mumbai, which has allowed
us to bring together on one site our back-office
operations for credit cards and custodian services, our
training and technical services staff, and our network
services management team.
Continued growth was seen in the corporate banking
business. In the course of the year, we created a
factoring capability and established an integrated
payments and cash management unit. Growing
awareness within Asia-Pacific of the importance of cash
management techniques has led to a significant rise in
the volume of new business. A special debt-recovery
team was created to monitor developments in local
industry and tighten credit procedures.
Malaysia
In the face of economic uncertainties, HSBC Bank
Malaysia Berhad (formerly Hongkong Bank Malaysia
Berhad) adopted a conservative stance.
The bank’s operating profit before provisions was
up 31.1 per cent in local currency terms, although
10
adverse currency movements resulted in an 8 per cent
fall in US dollar terms. Significantly increased
provisioning resulted in a pre-tax loss of US$90.2
million. Included in this was a strengthening of the
general provision, which the bank considered prudent
to mitigate against further deterioration in asset quality.
The bank is investing to support its personal banking
business and, at the same time, driving business more
aggressively through the branch network. A major
project to streamline back-office functions and create
dedicated sales and services outlets through the
branches has been undertaken. A unit has been set up
to market payment and cash management services to
corporate customers.
The bank is pursuing a selective asset growth
strategy. Cross-selling opportunities to increase non-
interest income and non-credit risk business are
receiving emphasis.
The bank also participated in the US$1.35 billion
financing recently arranged for the Malaysian
Government.
HSBC Finance (Malaysia) Berhad’s business was
transferred to the bank in November 1998 and its licence
surrendered. At the same time, the bank was given
permission to relocate four branches.
HSBC Bank Malaysia changed its legal name in
February 1999, the first in the Group to do so under
our initiative to establish a global brand.
Singapore
The regional financial turmoil, and consequent slowing
of Singapore’s domestic economy, had a significant
impact on our business. During the year, in preparation
for an eventual upturn in the economy, a new
management structure and revised work processes were
put in place for personal banking. The effect of these
changes has been to create a more sales- and customer-
driven culture ahead of the anticipated deregulation of
the retail banking sector.
In corporate banking, other operating income saw a
marginal improvement over 1997, but results were
depressed by provisioning and the influence of cross-
border exposures to more severely affected economies
in the region. The bank was well positioned to meet
the increased demand for domestic and regional cash
management services and trade-related facilities.
Securities services also performed well.
The bank’s treasury and capital markets business
also had a successful year, despite the economic
difficulties. Further progress was made in establishing
11
T H E H S B C G R O U P
Group Chief Executive’s Review of Operations (continued)
HSBC Markets as a leading player in the Singapore
bond and derivatives market. To cope with the increased
volumes of business and to ensure closer co-ordination
between HSBC Markets, HSBC Securities and HSBC
Futures, a new dealing room employing the latest
technology was opened in July. In November, HSBC
Markets successfully arranged and placed S$100
million seven-year negotiable certificates of deposit for
HSBC in Singapore.
Saudi Arabia
The 1998 net profit of The Saudi British Bank (HSBC
Group interest: 40 per cent) amounted to US$163
million, an increase of 13 per cent over 1997. This was
primarily due to improved net interest income, and
higher returns from banking services and foreign
exchange trading.
The Corporate Banking Division enhanced and
rebranded its increasingly important import and export
business as ‘SABB Trade Services’. Personal banking
continued to restructure management reporting lines;
this had a positive effect on business, especially on the
cards and loan portfolios.
Products aimed at three new customer segments
were introduced: Al Mutamiyazah (Ladies’) Account,
Al Mustaqbal (Future) Account for college students,
and Islamic loans and trade funds. The branch and
ladies’ section network has been expanded to 75, with
the opening of four new outlets. The ATM network has,
meanwhile, risen to 124 machines.
Depressed oil prices will result in reduced spending
and higher fiscal deficits this year in the oil-producing
states of the Arabian Gulf. Growth in the private non-
oil sector is likely to diminish, liquidity will be tight,
and public sector investment restrained.
Middle Eastern operations of The British Bank
of the Middle East
Despite depressed oil prices and the downturn in trade
originating from the former Soviet Union, The British
Bank of the Middle East achieved a 9 per cent increase
in attributable profit.
With the exception of the newly opened branch in
Ramallah in the Palestinian Autonomous Area, all
branch networks produced operating profits, including
the branch in Azerbaijan which is in only its second
year of operation. Record results in Qatar were
supported by improved contributions from the United
Arab Emirates, Oman and Bahrain.
The cost-to-income ratio improved by over 3 per
cent and the opening during the year of network service
12
centres — centralising processing and other admin-
istrative functions — in the United Arab Emirates,
Lebanon and Bahrain, and the extension of the existing
centre in Qatar, can be expected to continue this trend.
Income increased from trade finance, personal and
private banking activities and there was strong growth
in income from the card business. The latter was
underpinned by an award-winning promotion campaign
focusing on the football World Cup. Personal banking
continued to expand, and a range of targeted new
products was launched by branch networks in the region.
In addition to the extension of its geographical reach
with the new office in Ramallah, the bank opened new
branches in existing networks in Qatar and India. Work
commenced on the new headquarters buildings in
Doha, Qatar, and Beirut, Lebanon.
HSBC’s International Businesses
With HSBC operating in 79 countries and territories, it
is not possible to cover every area in this review.
However, there were some notable highlights around
the world which deserve recognition.
January 1999 saw the introduction of the European
single currency, the euro, in 11 countries. Preparations
had been under way since 1994 and the conversion of
our systems to the euro was completed successfully,
thanks to the commitment of over 500 staff working
around the clock over the new year holiday. Our
branches in France, Italy and Spain have successfully
joined their local clearing systems, and branches will
be opened in Belgium, Ireland and the Netherlands in
1999 to extend our payments and cash management
capabilities.
HSBC’s operations in the Channel Islands, Turkey,
Greece and France reported significantly improved
results, and efforts are being made to expand the fund
management business across Europe.
In Germany, Trinkaus & Burkhardt KGaA (HSBC
Group interest: 73.47 per cent), which is soon to be
renamed HSBC Trinkaus & Burkhardt KGaA, aligned
its operations more closely with our investment banking
and markets operations, and has full local clearing
capabilities. In Switzerland, we purchased 25 per cent
of the shares of our Swiss private bank, Guyerzeller
Bank AG, bringing the Group’s interest to 95.80 per
cent. The bank is to be renamed HSBC Guyerzeller
Bank AG soon.
Egyptian British Bank (HSBC Group interest: 40
per cent) enjoyed strong growth, with net profit before
tax up by 39 per cent to US$13 million.
British Arab Commercial Bank Limited (HSBC
Group interest: 46.51 per cent) recorded a 14 per cent
increase in attributable profit to US$24 million.
The Cyprus Popular Bank Limited (HSBC Group
interest: 21.96 per cent) increased operating profit by
US$17 million or 19.7 per cent. During the year, it
launched the first internet banking service in Cyprus
and, in January 1999, it purchased a life and general
insurance group.
In other countries of Asia, the economic downturn
adversely affected our operations. Most countries, in
particular Indonesia and Thailand, experienced a
deterioration in asset quality and increased provisioning
was required, although this was lower in the second
half of the year.
In March, HSBC was one of a group of international
banks that exchanged Korean short-term credits for
sovereign-guaranteed loans with maturities of one to
three years. The sovereign rating of Korea has now
returned to investment grade.
Australia, Indonesia, Korea and the Philippines all
contributed strong operating profit before provisions,
with a particularly good net result recorded in Korea.
Customer assets showed limited growth in a few areas
but, in most cases, were lower than in 1997.
Personal banking was launched in Korea with
the opening of the first personal banking branch in
Seoul in October. New branches were also opened
in Bangladesh, Sri Lanka and Taiwan. Towards the
end of the year, approval was received to establish
a 100 per cent-owned subsidiary in Kazakhstan,
HSBC Bank Kazakhstan, which opened for business
in January 1999.
Good growth in personal banking portfolios was
recorded in a number of countries, notably Australia,
Indonesia, Sri Lanka and Taiwan. The focus in 1999
will be on further increasing our personal banking and
credit cards market penetration, increasing deposits and
sales of insurance and asset management products. In
Australia, our recently introduced discount broking
capability has been very well received and will be
further promoted.
Corporate and Institutional Banking
As our major corporate customers operate
internationally, we must serve them internationally. To
achieve this objective, in the second half of the year
we brought together the following functional units
under a top Group executive to enable us to present a
cohesive structure to our clients.
13
T H E H S B C G R O U P
Group Chief Executive’s Review of Operations (continued)
Financial Institutions
The Group’s management of relations with bank and
non-bank financial institutions, marketed as HSBC
Financial Institutions, focused in 1998 on the cross-
border selling of the Group’s euro services. To help
reduce interbank settlement risk, we will be making
preparations in 1999 to deliver Continuous Linked
Settlement solutions to financial institutions in 2000.
Trade Services
Despite the downturn in trade volumes in some of our
major markets in 1998, our business continued to grow
and was named ‘best trade documentation bank’ by
Trade Finance magazine for the third successive year.
Global Payments and Cash Management
Continued investment in 1998 has positioned HSBC
competitively, with particular strengths in euro clearing
and pan-Asian services.
Securities Services
Our global custody business continued to expand its
client base, especially in the UK and continental
Europe. In the UK, we launched a fund administration
service. In Asia, we remained the top-rated regional
sub-custodian service provider.
Investment Banking and Markets
HSBC Investment Banking and Markets has
responsibility for the Group’s treasury, capital markets,
advisory, equity securities origination and distribution,
trading and research, asset management, merchant
banking and the private banking and trustee activities
of the Group.
Attributable profit from investment banking
increased by 10 per cent over 1997 in spite of major
market turbulence which adversely affected many
investment banks. However, new issue and advisory
activity in Europe was buoyant and the Group’s market
position improved. Equity commissions were lower in
Asia, but this was compensated by a strong performance
in European business. The Project and Export Finance
division performed strongly in a difficult economic
climate and maintained a broad spread of business.
HSBC Loan Syndication retained its leading market
position, arranging and distributing syndicated finance
for Group clients. Declining Asian market values
adversely affected HSBC Asset Management, but this
was partially offset by continued strong investment
performance.
HSBC Equator Bank plc (HSBC Group interest:
60 per cent) continued to strengthen its trade finance
14
business and increased its investment banking activity
in several African markets.
HSBC Private Equity had another strong year and
disposed of a number of investments from its portfolio.
Private banking accounted for the largest share of
profits in our investment banking operations, with
increased earnings in all geographical locations.
The Group continued to provide a full range of
treasury and capital markets services in all areas. A
focus on customer-driven business, combined with
sound risk management practices, helped to achieve a
significant growth in income in 1998.
As Asian currency fluctuations continued in the first
half of 1998, wide margins and high volumes continued
to underpin foreign exchange earnings. At the same
time, the Group’s policy of maintaining high levels of
liquidity enabled it to benefit from interest rate
movements in Asia and South America. Although Asian
currencies began to stabilise in the second half of 1998,
core customer-driven businesses remained buoyant and
proved resilient in the face of market pressures.
Insurance
HSBC continues to develop a wide range of insurance
protection and investment products. Our activities
encompass underwriting, broking and agency activities
in both the life and general insurance sectors. Insurance
now accounts for over 8 per cent of Group profit.
Considerable effort was devoted to integrating our
insurance capability with commercial banking to
improve cross-sales and to take advantage of our
existing distribution networks. HSBC now offers
insurance in 27 countries and territories, with 1.5
million customers having purchased an insurance
product or service from us.
In 1998, total premiums increased by 25 per cent
and revenues by more than 30 per cent. The number of
personal banking customers acquiring insurance
increased from 4 to 7 per cent.
The UK contributed the majority of insurance
profits, with the balance coming mainly from Latin
America and South-East Asia. Strong growth was
recorded in Hong Kong, particularly in life products.
Strategic Outlook
In 1999, we will concentrate on implementing our new
strategic plan throughout the Group. All our senior
executives will attend a training programme in the first
half of 1999 on ‘Managing for Value’. We have a wealth
of experience and a wide range of expertise in
our businesses around the world. Successful
implementation of the strategy will be accelerated by
taking the opportunities available to us to transfer our
best practices across the Group. We will be arranging a
number of conferences for colleagues from around the
world in comparable lines of business to exchange
experience and ideas, and to work together on shared
developments.
In our retail banks, we will concentrate on personal
wealth management — unlocking the potential for
deepening customer relationships in all our principal
markets for personal business — and on increasing our
commercial business. Corporate and Institutional
Banking will be more closely aligned with our
Investment Banking and Markets operation to sharpen
our focus on the entirety of the global needs of our
largest customers.
We will continue the process of creating a global
brand for the HSBC Group, using HSBC and our
hexagon symbol everywhere, and aim to have
effectively completed this process by 1 January 2000.
This major initiative is designed to achieve full
recognition for HSBC as one of the world’s largest and
most successful financial services organisations. We
want HSBC to become a strong consumer brand
synonymous with integrity, trust and excellent customer
service. The brands of the wholly owned commercial
banks have now been changed. During 1999, to execute
the brand strategy, we are seeking regulatory approval
to change the legal names of most of our wholly owned
commercial banks as well as subsidiaries involved in a
number of other businesses.
HSBC will be ready for the challenge of the year
2000 issue and preparations are in hand to ensure that
our systems do not produce any disruptions to either
our customers or to our own operations. We will also
be converting our global communications networks to
internet-compatible technology.
This will be a challenging year, but one which I am
confident will see us continuing to build on the strengths
of the Group.
Keith Whitson, Group Chief Executive
26 March 1999
15
T H E H S B C G R O U P
Managing for Value
We believe HSBC is an excellent company, but we also
believe that we can do better.
Over a generation, we have provided superior returns
to our shareholders. We have many strengths and, today,
HSBC is a well-capitalised business with an excellent
customer base, geographically diverse earnings and
strong management.
But there is always room to improve. In 1998, HSBC
was one of the top 10 banks in the world by market
capitalisation. If we want to stay that way, we must
continue to deliver sustained and profitable growth. To
do this, we have been through a process of internal
consultation, research and planning involving manage-
ment and the Board. What has emerged is a strategy —
‘Managing for Value’ — to see us through the next five
years (1999-2003). With this new strategy, we are
sharpening our focus and articulating it more clearly.
There is nothing new about managing for value in the
HSBC Group. This plan is evolutionary, not
revolutionary; it clearly builds on our existing strengths.
What We Aim to Do
We have one aim, which we call our governing
objective. It is to beat the average total shareholder
returns (TSR) performance of a peer group of financial
institutions, with a minimum objective to double
shareholder returns over a five-year period. We measure
TSR as the increase in our share price with dividends
assumed to be reinvested.
The objective has two measures: one relative and
one absolute. It has a relative measure because TSR is
dependent on a company’s stock-market valuation and
stock-markets are subject to external influences. So it
is no good us increasing value by 20 per cent if our
competitors do so by 40 per cent. We must aim to do
better than our peer group. We use an absolute measure
because our shareholders entrust their money to us and
we ought to reward that trust with a return superior to
the cost of their capital, by at least doubling their
investment every five years.
Our Vision
To achieve this, we need a vision of what we want to
be. And what we want to be is the world’s leading
financial services company. The verdict of the market,
and also of management at HSBC, is that today we are
a contender, not yet the champion. We aim to change
that.
what makes HSBC unique to its shareholders. No other
financial services institution derives half its profit from
stable, mature economies and half from the faster-
growing, albeit more volatile, emerging markets. HSBC
will preserve this balance as a truly global organisation.
What We Stand For
As part of our review, we looked at what HSBC stood
for. We found five sets of values in the Group that we
aim to live by. First and foremost, we believe in long-
term ethical service for our customers. You will see
our statement of principles on pages 19 to 21. We also
aim for high productivity through our teamwork,
something which is reflected in our cost-to-income
ratio.
We are confident and we are ambitious. We need to
be: this strategy is ambitious. We are truly international
in character with a conservative orientation, as you
would expect from an organisation that has long
experience of operating successfully in volatile markets.
And we have the potential to be capable of creativity
and strong marketing. The potential is there; the
challenge for management is to realise that potential.
These values are the glue that holds us together around
the world, making all our businesses recognisably
HSBC.
What We Will Do
To do what we want to do, we will need to focus
relentlessly on those parts of our business where we
can create value. We see some real opportunities.
We will concentrate on delivering ‘wealth
management’ to our key markets around the world. By
wealth management, we mean deepening relationships
with our personal customers to give them much more
than a bank account. We mean offering them the full
range of financial services, including savings, pensions,
investments and insurance. Competition will be strong,
both from traditional providers and also new entrants
to the business. But nowhere is this business fully
mature and we see strong growth prospects.
To deliver wealth management, we need to offer the
right products and unlock the potential in our
relationships with existing personal and business
clients. This is an area in which HSBC lags behind the
best of its competitors in some countries: we need to
provide better products and build a more effective sales
capability.
Our other vision is to balance our earnings between
the OECD countries and the emerging markets. This is
As well as personal wealth management, we will
grow our commercial business. This market consists
16
of a wide range of businesses, including major
companies, trading enterprises, professional practices,
charities, entrepreneurs and smaller businesses. We
have been very successful in this market and we aim to
build on our strengths, in particular by making sure
our customers have access to our full range of products
and services.
To take advantage of the opportunities we see, we
will allocate our resources, including capital,
management time, human resources and information
technology, according to the contributions made by each
country or territory.
We will enhance our risk-adjusted cost of capital
methodology, based on a measure called economic
profit. Capital entrusted to HSBC by its shareholders
has a cost that is not shown in its accounts. HSBC prices
that cost of capital internally and the difference between
that cost and post-tax profit is the amount of economic
profit created.
We first started measuring costs of capital over 20
years ago. This further refinement not only allows us
to measure at the Group level, but it also allows us to
drive the measure much deeper into our lines of
business. It will be used by management to decide the
allocation of resources where they will be most
productive.
Today, we have four large personal and commercial
banking businesses: the UK, the Hong Kong SAR and
mainland China, Brazil and the USA. For these
businesses, we will concentrate on personal wealth
management and developing our commercial business.
We also have seven major financial services
businesses: Argentina, Canada, India, Malaysia,
Singapore, Saudi Arabia and the Middle Eastern
countries covered by The British Bank of the Middle
East. These businesses conduct personal and
commercial banking. We will continue to grow these
areas.
The third category comprises our international
businesses. These act as platforms for cross-border
Group business and some are tomorrow’s major
businesses. We will focus on growing those with
potential and serving our international customers.
Combined with these will be a functional tier —
corporate and investment banking — which will
oversee corporate banking for our largest customers,
including cash management, financial institutions and
parts of trade services. At the moment, our largest
corporate customers deal with us though both our
commercial banks and also our investment banking
17
T H E H S B C G R O U P
Managing for Value (continued)
Managing for Value
operations. We will align corporate and investment
banking much more closely. Increasingly, we will focus
on a customer’s entire business with the Group, to both
their and our advantage.
We will continue to position HSBC as a global brand.
The name HSBC and the Group’s hexagon symbol are
the most visible signs of the new strategy. A brand is
more than simple name recognition. It is a promise of
performance that will help HSBC win repeat business.
Most of the wholly owned commercial banking
subsidiaries have adopted HSBC and our hexagon
symbol as their brand. Building the brand is a
continuous process; changing the name across the world
by 1 January 2000 is a major step in developing it.
To succeed in our strategy, we need to attract, retain
and motivate the very best people. It is a truism that a
company can only be as good as its staff and we have
excellent staff. We intend to align the interests of staff
and shareholders ever more closely. We aim to reward
staff, particularly those who deal face to face with
customers, with a wider stock and options programme,
and to match compensation with sales performance,
where appropriate.
It is rare to read an annual report these days that
does not affirm management’s commitment to creating
shareholder value. But HSBC’s strategy is far more than
just lip service. It gives a clear, explicit commitment to
our shareholders of what management intends to do
and where their company is headed. It is a continuous
process. And implementing and monitoring the strategy
will be key to its successful delivery. In future, we will
keep you updated of our progress through the Annual
Report and other communications.
This is an exciting time for HSBC. The Group is
strong and has immense potential. If we can realise that
potential, then HSBC will indeed be the world’s leading
financial services organisation.
18
T H E H S B C G R O U P
HSBC: Business Principles and Values (continued)
Introduction
HSBC is a global banking and financial services
organisation headquartered in the United Kingdom.
We are owned by approximately 170,000
shareholders in over 90 countries and territories. We
conduct business in a wide variety of social and business
cultures and in a broad range of political environments.
As a commercial organisation, our governing
objective is to provide a satisfactory return on our
shareholders’ capital. We do this by having a talented
and motivated staff who offer our customers competitive
services and products. We meet our financial
obligations, we invest to develop our business for the
future; our investments are made primarily on a
financial basis, but with regard to the principles and
values set out in this document.
HSBC has always striven to maintain the highest
ethical standards; this statement explains our approach.
However, it cannot cover every eventuality.
HSBC’s policy is not to make contributions to
political parties or partisan organisations. HSBC works
co-operatively with host governments and regulators
while remaining politically neutral in all jurisdictions.
HSBC codifies its key business principles and values
in its Group Standards Manual which is in force
throughout our operations. The opening page reads as
follows:
Group Business Principles and Values
The HSBC Group is committed to five Core Business
Principles:
• outstanding customer service;
• effective and efficient operations;
•
strong capital and liquidity;
• conservative lending policy;
•
strict expense discipline;
through loyal and committed employees who make
lasting customer relationships and international
teamwork easier to achieve.
HSBC also operates according to certain Key
Business Values:
•
the highest personal standards of integrity at all
levels;
• commitment to truth and fair dealing;
• hands-on management at all levels;
• openly esteemed commitment to quality and
competence;
• a minimum of bureaucracy;
•
fast decisions and implementation;
• putting the Group’s interests ahead of the
individual’s;
•
•
the appropriate delegation of authority with
accountability;
fair and objective employer;
• a merit approach to recruitment/selection/
promotion;
• a commitment to complying with the spirit and
letter of all laws and regulations wherever we
conduct our business;
•
the promotion of good environmental practice
and sustainable development and commitment to
the welfare and development of each local
community.
HSBC’s reputation is founded on adherence to
these principles and values. All actions taken by a
member of HSBC or staff member on behalf of a
Group company should conform with them.
Additionally, we have Codes of Conduct for staff in
all operations.
Customer Care and Business Integrity
Looking after our customers is basic to all our business
relationships. We promise only what we can deliver
and we strive never to mislead our customers.
We have strict rules against staff accepting from
customers any material personal benefits, including
gifts, favours, services, loans or fees, and we actively
discourage customers from offering any personal
benefits to our staff.
In conducting business with due skill, care and
diligence, HSBC seeks always to comply with both the
letter and the spirit of relevant laws, rules, regulations,
codes and standards of good market practice.
We address any irregularities that arise promptly,
we seek to resolve them promptly in a way that protects
our reputation and minimises financial loss. We believe
in transparency in our financial and regulatory reporting
with swift disclosure of any breaches.
We co-operate with supervisors and regulators to
attain and maintain the highest operating standards to
safeguard the interests of our customers, our
19
T H E H S B C G R O U P
HSBC: Business Principles and Values (continued)
shareholders, our staff and the communities where we
operate.
HSBC supports the general policies set out in the
OECD Guidelines for Multinational Enterprises, which
are designed to ensure that we operate in harmony with
the policies of the countries in which we operate.
We support and comply with the Statement of
Principles issued by the Basle Committee on Banking
Regulations and Supervisory Practices.
We support the policies and procedures of the Vienna
and Strasbourg Conventions against drug-trafficking
and money-laundering, and also the various United
Nations conventions and resolutions combatting
terrorism.
Responsible Financing
Members of Staff
The welfare of our staff is a fundamental concern.
We recruit and promote employees solely on merit
and suitability; we encourage staff to realise their full
potential. While we recognise and reward individual
performance, we foster teamwork in our working
environment as well as encouraging initiative and
innovation.
Our members of staff receive and must abide by
Codes of Conduct, which call for honesty, integrity,
openness and teamwork for the benefit of customers,
shareholders and the communities we serve.
We are committed to providing equality of
opportunity to all staff, regardless of sex, race,
nationality, age, disability, ethnic origin or status, on
the basis of merit and suitability.
Wherever we operate, we play a constructive,
responsible role in aligning our objectives with those
of the local community.
We believe in maintaining effective employee
relations, and we are willing to work with and through
recognised staff representative bodies.
HSBC believes that personal freedom flourishes best
in an environment of economic growth and opportunity.
We support free trade and investment because they are
avenues for the creation of jobs and for the improvement
of living standards. Every country and territory where
we operate has its own character, history and
aspirations; a single standard for their progress would
be difficult to devise.
HSBC retains a pioneering spirit, promoting
international trade and constructive engagement
through its business activities.
We take a careful and limited approach to the
financing of sales of defence equipment. We ensure that
the vendor’s government and other relevant authorities
have granted the necessary licences and approvals.
Every potential transaction is considered on individual
merit and in consultation with colleagues in the country
and region where the equipment may be destined.
We do not participate in financing the manufacture
or export of landmines. We have assisted organisations
which support the victims of anti-personnel landmines.
It is not possible, however, for any financial institution
involved in commercial lending to give an absolute
assurance that none of its customers is an indirect
supplier of component parts of landmines or other
military equipment.
Specific lending and investment policies are
confidential but comply with these standards.
20
HSBC in the Community
We are involved in the well-being of the communities
where we operate through philanthropy and
sponsorship.
Education, particularly for those less fortunate in
society, and the environment are our two principal
causes. Members of HSBC are expected to allocate
75 per cent of their donations and non-commercial
sponsorship budgets to these activities, with the greater
emphasis on educational initiatives which include:
• primary and secondary schooling for under-
privileged children or support for schools in
economically deprived areas;
• programmes to promote international understanding
among young people;
• activities that promote interest in and sensitivity to
other cultures;
•
language programmes, particularly the learning of
Asian languages;
• programmes which encourage youth to have a
greater understanding of business and finance.
These activities are supplemented by direct support for
other good causes. We encourage our staff to help raise
money for charity and to do volunteer work.
T H E H S B C G R O U P
The Environment
HSBC believes that sound business management should
take account of the effects that business has on the
environment, with a view to minimising detrimental
impact. The pursuit of economic growth and a healthy
environment are linked; governments, businesses and
individuals all have a role to play in achieving
sustainable development.
HSBC was among the original signatories of the
United Nations Environment Programme Statement by
Financial Institutions; we play a leadership role in its
ongoing development.
We seek to adopt good environmental practices in
respect of our premises, equipment and consumption
of resources. We incorporate environmental
considerations into credit and risk analysis, and we
expect borrowers to comply with legal and regulatory
requirements.
We support environmental projects in different parts
of the world, including local scientific research,
conservation, recycling and ecology programmes. Our
staff are involved as volunteers in some of these
programmes.
We publish a separate brochure explaining our
Environmental Policy.
Implementation
These principles and values, which apply throughout
the Group’s operations, were affirmed by the Board of
Directors of HSBC Holdings plc at its meeting on
26 March 1999. Senior managers of Group companies
are responsible for ensuring conformity with these
principles and values through employee awareness
programmes, Codes of Conduct and operating
procedures.
21
H S B C H O L D I N G S P L C
Board of Directors and Group General Managers
Directors
J R H Bond, Group Chairman
Age 57. An executive Director since 1990; Group Chief Executive from 1993 to May 1998.
Joined the HSBC Group in 1961; an executive Director of The Hongkong and Shanghai Banking
Corporation from 1988 to 1992. Chairman of Midland Bank plc, HSBC Bank USA (formerly
Marine Midland Bank), HSBC Americas, Inc. and The British Bank of the Middle East. A Director
of The Hongkong and Shanghai Banking Corporation and The Saudi British Bank and a non-
executive Director of the London Stock Exchange and Orange Plc. Chairman of the Institute of
International Finance and a member of the Banking Advisory Group of the International Finance
Corporation.
* Baroness Dunn, DBE, Deputy Chairman and senior non-executive Director
Age 59. Executive Director of John Swire & Sons Limited and a Director of Swire Pacific Limited
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 The Hongkong and Shanghai Banking
Corporation 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 68. 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.
K R Whitson
Age 56. Group Chief Executive. An executive Director since 1994. A Director of Midland Bank
plc since 1992, Chief Executive from 1994 to March 1998 and Deputy Chairman since January
1998. Joined the HSBC Group in 1961. Deputy Chairman of the Supervisory Board of Trinkaus
& Burkhardt KGaA. A Director of The Hongkong and Shanghai Banking Corporation, HSBC
Americas, Inc., Hongkong Bank of Canada and HSBC Roberts S.A. de Inversiones. A non-executive
Director of the Financial Services Authority.
* Lord Butler, GCB, CVO
Age 61. Master, University College, Oxford. A non-executive Director since May 1998. 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
Age 47. A Director of Inchcape plc and Chairman of Inchcape Pacific Limited. A non-executive
Director since May 1998. Chairman of HSBC Private Equity Management Limited and Co-
Chairman of Beijing CAST Information System Technology Co., Ltd. A member of the 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 member of the Economic Advisory Committee to the Financial
Secretary of the Hong Kong SAR. A Director of Hsin Chong Construction Group Ltd., Kader
Holdings Company Limited and Tianjin Development Holdings Limited. A non-executive Director
of The Hongkong and Shanghai Banking Corporation since 1997.
* D E Connolly, OBE
Age 67. Chartered Accountant. A Director of Kowloon-Canton Railway Corporation. A non-
executive Director since 1990 and a non-executive Director of The Hongkong and Shanghai
Banking Corporation from 1985 to May 1997.
22
H S B C H O L D I N G S P L C
W R P Dalton
Age 55. An executive Director since April 1998. 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 1980. President and Chief Executive Officer, Hongkong Bank of Canada from 1992 to
December 1997. A Director of HSBC Investment Bank Holdings plc. A non-executive Director of
MasterCard International Inc. and a non-executive Director and Chairman of Young Enterprise Limited.
D G Eldon
Age 53. An executive Director of the Company since 1 January 1999. Joined the HSBC Group in
1968. Appointed an executive Director and Chief Executive Officer of The Hongkong and Shanghai
Banking Corporation in 1996; Chairman since 1 January 1999. Non-executive Chairman of Hang
Seng Bank Limited and a non-executive Director of Swire Pacific Limited.
D J Flint
Age 43. Group Finance Director. An executive Director since 1995. A Director of HSBC Investment
Bank Holdings plc, HSBC Bank Malaysia Berhad (formerly Hongkong Bank Malaysia Berhad),
HSBC Roberts S.A. de Inversiones and HSBC Bank USA. A member of the Urgent Issues Task
Force of the Accounting Standards Board. A former partner in KPMG.
* W K L Fung, OBE
Age 50. Group Managing Director and Chief Executive Officer of Li & Fung Limited. A non-
executive Director since May 1998. 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 The Hongkong and Shanghai Banking Corporation since 1995.
S K Green
Age 50. Executive Director Investment Banking and Markets. Joined The Hongkong and Shanghai
Banking Corporation in 1982. Group Treasurer from 1992 to February 1998. Chairman of HSBC
Investment Bank Holdings plc and a Director of Midland Bank plc and Guyerzeller Bank AG.
* Lord Marshall
Age 65. Chairman of British Airways Plc, Inchcape plc and BTR Siebe plc. Deputy Chairman of
British Telecommunications plc. A non-executive Director since 1993. Deputy 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 59. 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
Age 60. Chairman of British Steel plc. A non-executive Director since March 1998. A non-executive
Director of Enterprise Oil plc.
23
H S B C H O L D I N G S P L C
Board of Directors and Group General Managers (continued)
* M Murofushi
Age 67. 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 (retiring on 28 May 1999)
Age 70. Chairman of Raglan Properties plc, Jacobs Holdings PLC and Mountcity Holdings 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 The Hongkong and Shanghai Banking Corporation from 1986 to
1992. A non-executive Director of Midland Bank plc since 1992.
* C E Reichardt
Age 67. 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 59. 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 The Hongkong and Shanghai Banking Corporation since 1984 and Deputy Chairman
since 1996.
* Sir Adrian Swire
Age 67. 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. Former Chairman of the International Chamber of Shipping and former President of the
General Council of British Shipping.
* Independent non-executive Directors
D J Shaw
Age 52. An Adviser to the Board since June 1998. Solicitor. A partner in Norton Rose from 1973
to May 1998. A Director of HSBC Investment Bank Holdings plc.
24
H S B C H O L D I N G S P L C
Advisers to the Board
M J Jacobi
Age 47. Joined HSBC Bank USA 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;
former Special Assistant to the President of the United States; and former Member, US Presidential
Advisory Committee on Trade Negotiations.
D J Shaw
Age 52. An Adviser to the Board since June 1998. Solicitor. A partner in Norton Rose from 1973
to May 1998. A Director of HSBC Investment Bank Holdings plc.
Secretary
R G Barber
Age 48. Group Company Secretary since 1990. Joined the HSBC Group in 1980; Corporation
Secretary of The Hongkong and Shanghai Banking Corporation from 1986 to 1992. Company
Secretary of Midland Bank from 1994 to 1996.
Group General Managers
D Beath
Age 60. General Manager and Group Audit Controller. Joined
the HSBC Group in 1960.
C P Langley, OBE
Age 54. Executive Director, The Hongkong and Shanghai Banking
Corporation. Joined the HSBC Group in 1961.
R E T Bennett
Age 47. General Manager and Group Legal Adviser. Joined the
HSBC Group in 1979.
M B McPhee
Age 57. Group General Manager Credit and Risk. Joined
Hongkong Bank of Canada in 1984.
I M Burnett
Age 51. Chief Executive, HSBC Americas, and President and Chief
Executive, HSBC Bank USA. Joined the HSBC Group in 1966.
A Mehta
Age 52. Chief Executive Officer, The Hongkong and Shanghai
Banking Corporation. Joined the HSBC Group in 1968.
V H C Cheng, OBE
Age 50. Executive Director, The Hongkong and Shanghai Banking
Corporation and Chief Executive Officer, Hang Seng Bank. Joined
the HSBC Group in 1978.
A Dixon, OBE
Age 54. Deputy Chairman, The British Bank of the Middle East.
Joined the HSBC Group in 1965.
M F Geoghegan
Age 45. President and Chief Executive Officer, Banco HSBC
Bamerindus. Joined the HSBC Group in 1973.
A P Hope
Age 52. General Manager Group Insurance. Joined Antony Gibbs
& Sons Insurance in 1971.
Y A Nasr
Age 44. President and Chief Executive Officer, Hongkong Bank
of Canada. Joined HSBC Bank USA in 1976.
T W O’Brien
Age 51. Deputy Chairman and Chief Executive Officer, HSBC
Bank Malaysia. Joined the HSBC Group in 1969.
R M J Orgill
Age 60. Group General Manager and Global Head of Corporate
and Institutional Banking. Joined the HSBC Group in 1958.
J C S Rankin
Age 57. General Manager and Chief Executive Officer Singapore,
The Hongkong and Shanghai Banking Corporation. Joined the
HSBC Group in 1960.
A W Jebson
Age 49. Group General Manager Technical Services. Joined the
HSBC Group in 1978.
R A Tennant
Age 56. General Manager Group Human Resources. Joined
Midland Bank in 1960.
25
H S B C H O L D I N G S P L C
Report of the Directors
Results for 1998
The Group reported operating profits before provisions up 6 per cent to US$9,051 million. As a result of an increased
provision for bad and doubtful debts, the Group’s profit for the year attributable to shareholders of the Company was
US$4,318 million, which represented a return of 15.5 per cent on shareholders’ funds but was 21 per cent lower
than 1997.
A first interim dividend of US$0.37 per ordinary share was paid on 8 October 1998. The Directors have declared a
second interim dividend of US$0.555 per ordinary share, making a total distribution for the year of US$2,495 million.
The second interim dividend will be payable on 28 April 1999 in cash in United States dollars, or in sterling or Hong
Kong dollars at exchange rates to be fixed on 16 April 1999, with a scrip dividend alternative. The reserves available for
distribution before accounting for the second interim dividend of US$1,499 million are US$5,412 million.
Further information about the results is given in the consolidated profit and loss account on page 58.
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 5,000 offices in 79 countries and territories in the
Asia-Pacific region, Europe, the Americas, the Middle East and Africa. Taken together, the five largest customers of the
Group do not account for more than 1 per cent of the Group’s income.
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 15.
Following a widespread review in 1998 of the Group’s operations, a new five-year strategy designed to focus the
Group on shareholder value was adopted. An account of the strategy ‘Managing for Value’ can be found on pages
16 to 18.
Capital and Reserves
The following events occurred during the year:
1. 5,326,641 ordinary shares of 75p and 10,574,613 ordinary shares of HK$10 each were issued at par on 29 April
1998 to shareholders who elected to receive new shares in lieu of the 1997 second interim dividend. The value per
share used to calculate shareholders’ entitlements to new shares was 1,787.1p.
2. 1,065,564 ordinary shares of 75p and 3,921,208 ordinary shares of HK$10 each were issued at par on 8 October
1998 to shareholders who elected to receive new shares in lieu of the 1998 first interim dividend. The value per share
used to calculate shareholders’ entitlements to new shares was US$21.348, being the United States dollar equivalent
of 1,303.3p.
3. Options over 1,498,550 ordinary shares of 75p each were awarded at nil consideration on 16 March 1998 under the
Executive Share Option Scheme. The options are exercisable between the third and tenth anniversaries of the award
at a price of 1,883p per share, the market value at the date of the award.
4. Options over 6,130,370 ordinary shares of 75p each were awarded at nil consideration on 6 April 1998 to 27,097
Group employees resident in 41 countries and territories under the Savings-Related Share Option Scheme. The
options are exercisable within six months following the fifth anniversary of the commencement of the relevant
savings contract on 1 August 1998 at a price of 1,566.38p per share, a 15 per cent discount to the market value at the
date of the award.
5. Options over 805,567 ordinary shares of 75p each were awarded at nil consideration on 24 August 1998 for the
benefit of 4,694 US resident Group employees under the Savings-Related Share Option Scheme (USA Section). The
options are exercisable within six months following the fifth anniversary of the commencement of the relevant
savings contract on 1 July 1998 at a price of 1,133.05p per share, a 15 per cent discount to the market value at the
date of the award.
26
H S B C H O L D I N G S P L C
6. 520,421 ordinary shares of 75p each were issued at prices ranging from 541.8p to 1,566.38p per share in connection
with the exercise of options under the Savings-Related Share Option Scheme and options over 3,277,524 ordinary
shares of 75p each lapsed.
7. 731,196 ordinary shares of 75p each were issued at prices ranging from 651.8p to 1,505p per share in connection
with the exercise of options under the Executive Share Option Scheme and options over 55,500 ordinary shares of
75p each lapsed.
8. 1,175,426 ordinary shares of 75p each were issued at prices ranging from 118.43p to 222.68p per share in connection
with the exercise of options under the Midland Bank Savings-Related and Executive Share Option Schemes and
options over 40,329 ordinary shares of 75p each lapsed.
Valuation of Freehold and Leasehold Land and Buildings
The Group’s freehold and long leasehold properties, together with all leasehold properties in the Hong Kong SAR,
were revalued in November 1998 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 US$2,294 million.
Further details are included in Note 21 of the ‘Notes on the Accounts’.
Board of Directors
The objectives of the management structures within the Group, headed by the Board of Directors and led by the Group
Chairman, are to deliver sustainable value to shareholders. Implementation of the strategy set by the Board is delegated
to the Group Executive Committee under the leadership of the Group Chief Executive.
The Board meets regularly and between meetings Directors receive information about the activities of committees
and developments in the Group’s business. All Directors have full and timely access to all relevant information and may
take independent professional advice if necessary.
The Directors who served during the year were J R H Bond, Baroness Dunn, Sir Peter Walters, K R Whitson,
B H Asher, Lord Butler, R K F Ch’ien, D E Connolly, W R P Dalton, D J Flint, W K L Fung, S K Green, Sir Joseph
Hotung, C D Mackay, Lord Marshall, C Miller Smith, Sir Brian Moffat, M Murofushi, Sir Wilfrid Newton, Sir William
Purves, C E Reichardt, H Sohmen, J E Strickland and Sir Adrian Swire.
B H Asher retired on 28 February 1998; Sir William Purves, Sir Joseph Hotung and C D Mackay retired on 29 May
1998; and J E Strickland retired on 31 December 1998.
S K Green was appointed a Director on 1 March 1998; Sir Brian Moffat on 27 March 1998; W R P Dalton on 1 April
1998; and Lord Butler, R K F Ch’ien and W K L Fung were appointed Directors on 2 May 1998.
D G Eldon was appointed a Director on 1 January 1999. Having been appointed since the last Annual General
Meeting, he will retire at the forthcoming Annual General Meeting and offers himself for election.
J R H Bond, D J Flint, Lord Marshall, C Miller Smith, M Murofushi, Sir Wilfrid Newton, C E Reichardt and Sir
Peter Walters will retire by rotation at the Annual General Meeting. With the exception of Sir Wilfrid Newton, who will
retire, they offer themselves for re-election.
Brief biographical particulars for each Director are set out on pages 22 to 24.
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.
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 Group Executive Committee are K R Whitson (Chairman), J R H Bond,
27
H S B C H O L D I N G S P L C
Report of the Directors (continued)
W R P Dalton, D G Eldon, D J Flint and S K Green, all of whom are executive Directors, and I M Burnett, A P Hope,
A W Jebson, M B McPhee, A Mehta and R M J Orgill, all of whom are Group General Managers.
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 Company’s financial reporting, 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, Sir Brian Moffat and C E Reichardt, all of whom are non-executive Directors.
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.
The members of the Remuneration Committee are Baroness Dunn (Chairman), H Sohmen and Sir Peter Walters, all of
whom are non-executive Directors.
Nomination Committee
The Nomination Committee carries out the process of nominating candidates to fill vacancies on the Board of Directors.
Nominations are considered by the Board. All Directors are subject to election by shareholders at the Annual General
Meeting following their appointment and to re-election at least every three years. The members of the Nomination
Committee are the members of the Remuneration Committee, together with the Group Chairman.
Corporate Governance
The Group is committed to high standards of corporate governance. The Company has complied throughout the year
with the provisions of Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong
Kong and with the best practice provisions of the Combined Code on corporate governance introduced by the London
Stock Exchange in June 1998, save that the level of proxies lodged in respect of resolutions at the Annual General
Meeting held in May were not announced at the meeting, but were available to shareholders on request in accordance
with the Company’s policy at that time.
Internal Control
The Directors are responsible for internal 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 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
28
H S B C H O L D I N G S P L C
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, procedures and standards in the areas of finance; legal and regulatory compliance;
internal audit; 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 such internal 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 reporting and the adequacy of the internal control structure.
• Annual reviews of the systems of internal control throughout the Group are conducted against a detailed checklist
which covers internal controls from both a financial and non-financial perspective, and their effectiveness is reported
on to the appropriate audit committee.
The Group Audit Committee has reviewed the effectiveness of the overall system of internal control throughout
1998 and the subsequent period up to 22 February 1999 when the financial statements were signed. The review has
been undertaken before formal guidance has been issued as to the scope of such a review and the procedures to be
undertaken and may, therefore, require some amendment once guidance has been received.
Communication with Shareholders
Communication with shareholders is given high priority. Extensive information about the Group’s activities is provided
in the Annual Report and Accounts and the Interim Report which are sent to shareholders. There is regular dialogue
with institutional investors and enquiries from individuals on matters relating to their shareholdings and the business of
the Group are welcomed and are dealt with in an informative and timely manner. All shareholders are encouraged to
attend the Annual General Meeting or the informal meeting of shareholders held in Hong Kong to discuss the progress
of the Group.
Remuneration
Policy
Within the authority delegated by the Board of Directors, the Remuneration Committee is responsible for determining
the remuneration policy of the Group, including the terms of bonus schemes, share option schemes and other long-term
incentive schemes, and for determining the individual remuneration packages of executive Directors and other senior
Group employees. No Directors are involved in deciding their own remuneration.
The Remuneration 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 Company’s shareholders. The
Remuneration Committee seeks to respond to the variety of environments and circumstances which are faced by different
businesses in different markets at different times.
In determining the terms of annual bonus and incentive schemes, individual remuneration awards, retirement benefit
arrangements, notice periods and severance terms, the Remuneration Committee considers the practices and levels of
remuneration in appropriate comparator companies which operate in similar industry sectors and territories to those in
29
H S B C H O L D I N G S P L C
Report of the Directors (continued)
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.
As part of the recent review of the Group’s five-year strategy, it has been decided to extend the use of the existing
share schemes so that more employees are able to participate in the success they help to create. The vesting of all
awards will be subject to the attainment of total shareholder return targets.
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. Closer alignment with the interests of shareholders is intended to be achieved by extending employee participation
in the existing share schemes.
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 predetermined total shareholder
return targets.
Executive Directors and Group General Managers have been eligible to receive conditional awards under the Restricted
Share Plan since 1996. The Restricted Share Plan will be extended to other senior executives from 1999. Participants in
the Restricted Share Plan are not eligible to participate in the Executive Share Option Scheme, although options previously
granted remain valid.
Participants in the Restricted Share Plan are also eligible to participate in the Savings-Related Share Option Scheme
on the same terms as other eligible employees.
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 R H Bond, who is to retire by rotation and stand for re-election at the forthcoming Annual General Meeting, is
employed on a contract which requires 12 months’ notice to be given by either party.
D J Flint, who is to retire by rotation and stand for re-election at the forthcoming Annual General Meeting, is
employed on a contract which requires 12 months’ notice to be given by the Company and nine months’ notice to be
given by Mr Flint.
D G Eldon, who was appointed a Director on 1 January 1999, will stand for election at the forthcoming Annual
General Meeting. He is employed on a contract which requires three months’ notice to be given by either party.
30
H S B C H O L D I N G S P L C
Directors’ emoluments
The emoluments of the Directors of the Company for 1998 were as follows:
Salary and
other
remuneration
£000
Fees
£000
Benefits
in kind
£000
Discretionary1
bonuses1
£0001
Total
1998
£000
Total
1997
£000
Executive Directors
B H Asher2
J R H Bond
— waived
W R P Dalton3
D J Flint
S K Green4
Sir William Purves5
— waived
J E Strickland6
— waived
K R Whitson
— waived
Non-executive Directors
Lord Butler7
R K F Ch’ien7
D E Connolly
Baroness Dunn
W K L Fung7
Sir Joseph Hotung5
C D Mackay5
Lord Marshall
C Miller Smith
Sir Brian Moffat8
M Murofushi
Sir Wilfrid Newton
C E Reichardt
H Sohmen
— waived
Sir Adrian Swire
Sir Peter Walters
Total (£)
Total (US$)
4
25
(20)
19
25
21
10
(8)
20
(25)
25
(20)
17
92
33
33
30
14
10
25
25
23
25
60
25
25
(30)
25
30
103
494
296
356
293
267
336
377
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14
1
—
7
4
21
578
34
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—1
1351
1001
771
801
1001
—1
901
—1
—1
—1
—1
—1
—1
—1
—1
—1
—1
—1
—1
—1
—1
—1
—1
121
655
(20)
415
465
398
398
(8)
934
(25)
526
(20)
17
92
33
33
30
14
10
25
25
23
25
60
25
25
(30)
25
30
598
626
(20)
—
450
—
731
(20)
958
(25)
478
—
—
—
41
33
—
33
25
25
25
—
25
60
25
25
(30)
25
30
641
1,063
2,522
4,182
659
1,093
5821
9651
4,404
7,303
4,213
6,907
1 These discretionary bonuses are in respect of 1998 and will be paid in 1999.
2 Retired on 28 February 1998.
3 Appointed on 1 April 1998.
4 Appointed on 1 March 1998.
5 Retired on 29 May 1998.
6 The emoluments of J E Strickland include housing and other expatriate benefits in kind which are normal within the location in which
he was employed. J E Strickland retired on 31 December 1998.
7 Appointed on 2 May 1998.
8 Appointed on 27 March 1998.
31
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Executive Directors who are also Directors of The Hongkong and Shanghai Banking Corporation Limited may elect
to receive a fee from either the Company or The Hongkong and Shanghai Banking Corporation Limited. H Sohmen has
elected to waive any fees payable to him by the Company.
1999 conditional awards under the Restricted Share Plan
The Remuneration Committee has decided that conditional awards under the Restricted Share Plan should be made in
1999 and that the Trustee to the Plan should be provided with funds to acquire ordinary shares of 75p each between
22 February and 5 March 1999. The 1999 awards to executive Directors and Group General Managers in respect of
1998 will have an aggregate value at the date of award of £3.025 million and will include awards to the following
values to executive Directors:
J R H Bond
W R P Dalton
D G Eldon
D J Flint
S K Green
K R Whitson
Total
£000
55557
300
175
175
175
175
250
55557
1,250
zzzz
Purpose
The Restricted Share Plan is intended to reward the delivery of sustained financial growth of the Company. So as to
align the interests of Directors and senior employees more closely with those of shareholders, the Restricted Share Plan
links the vesting of 1999 awards to the attainment of predetermined total shareholder return (TSR) targets.
TSR is defined as the growth in share value and declared dividend income during the relevant period. In calculating
TSR, dividend income is assumed to be reinvested in the underlying shares.
The vesting of previous years’ awards was linked to growth in earnings per share. The performance conditions and
vesting rules for those awards are as set out in the Report by the Remuneration Committee in the 1996 and 1997 Annual
Report and Accounts.
To illustrate how the Restricted Share Plan is to be applied for 1999 awards, particulars of the terms are set out below.
Vesting schedule
Having regard to the Company’s size and status within the financial sector, a benchmark has been established which
takes account of:
1.
2.
a peer group of nine banks;
the five largest banks from each of the United States, the United Kingdom, continental Europe and the Far East,
other than any within 1 above; and
3.
the banking sector of the Morgan Stanley Capital International World Index, excluding any within 1 and 2 above.
By combining the above three elements and weighting the average so that 50 per cent is applied to 1, 25 per cent is
applied to 2 and 25 per cent is applied to 3, an appropriate market comparator is determined.
For vesting of the 1999 awards to be achieved, the Company’s TSR over a three-year period must exceed the mean of
the benchmark. The calculation of the share price component within the Company’s TSR will be the average market
price over the 20 trading days commencing on the day when the annual results are announced, which in 1999 was
22 February. The starting point will be, therefore, the average over the period 22 February to 19 March inclusive. TSR
for the benchmark banks will be based on the published share price for 19 March 1999.
If the Company’s TSR exceeds the benchmark mean, but is less than the top quartile of the benchmark, the shares
will be deemed to have vested in full but will be retained by the Trustee for a further two years with release being
32
H S B C H O L D I N G S P L C
dependent upon the participant remaining with the Company. If the Company’s TSR is in the top quartile of the benchmark,
an additional award of 20 per cent of the original shares will be added, to be released to the participants two years later,
again subject to continued employment. The two-year additional retention period is intended to encourage longer-term
shareholding by those concerned.
If the Company’s TSR has not exceeded the benchmark mean at the end of year 3, then the test will be applied over
a four-year period at the end of year 4; if still not attained, then the test will be applied over a five-year period at the end
of year 5. If the test is satisfied in either case, the shares will be released after five years, contingent upon continued
employment. If the test has not been satisfied by the end of year 5, then the particular share award will be forfeited. No
additional shares will be awarded even where the Company’s TSR is in the top quartile where a share award has to rely
on the year 4 or year 5 test in order to vest.
The Remuneration Committee retains discretion to allow early release of share awards in the event of termination of
employment due to retirement; injury, illness or disability; redundancy or death. Awards will be forfeited if the participant
is dismissed or resigns from the Company.
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 Remuneration Committee considers to be anomalous, the right is reserved to the Remuneration Committee to
make such adjustments as in its absolute discretion it deems appropriate to make.
Pensions
The pension entitlements earned by the executive Directors during the year are shown below.
The pension arrangements for J R H Bond, S K Green 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 were, and for D G Eldon are, provided under the HSBC International
Staff Retirement Benefits Scheme. Pension accrues at a rate of one twenty-seventh of pensionable salary per year of
pensionable service.
The pension arrangements for W R P Dalton to contractual retirement age of 60 are provided under the Hongkong
Bank of Canada Pension Plan A at an accrual rate of one thirtieth of pensionable salary per year of pensionable service
and under the HSBC Holdings Overseas (No.1) Pension Plan on a defined contribution basis, with an employer
contribution of £129,000 having been made during 1998.
Accrued annual
pension at
31 December 1998
£000
Increase in accrued
pension during
1998, excluding any
increase for inflation
£000
Personal
contributions
towards pension
£000
J R H Bond
W R P Dalton
S K Green
J E Strickland
K R Whitson
103
218
74
182
87
27
—
22
18
27
—
—
—
11
—
Transfer value
relating to increase in
accrued pension *
£000
434
—
254
12
402
* 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.
In recognition of extended unpensioned UK service, B H Asher, who retired on 28 February 1998, was granted an
unfunded pension of £75,000 per annum, subject to annual review, with effect from 1 March 1998.
In recognition of 51/2 years of unpensioned service in the UK, Sir William Purves, who retired on 29 May 1998, was
granted an unfunded pension of £80,000 per annum, subject to annual review, with effect from 1 June 1998.
33
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Only basic salary is pensionable. No other Director participated in any Group pension schemes and none of the
Directors participating in Group pension schemes is subject to the earnings cap introduced by the 1989 Finance Act.
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:
At 1 January
19981
Total
555557 555555555555555555555555555
Personal
Family
Other2
At 31 December 1998
Corporate2
Ordinary shares of HK$10
J R H Bond
R K F Ch’ien
D E Connolly
W R P Dalton
Baroness Dunn
D G Eldon4
D J Flint
W K L Fung
S K Green
Sir Wilfrid Newton
C E Reichardt
H Sohmen
J E Strickland
Sir Adrian Swire
K R Whitson
Ordinary shares of 75p5
Baroness Dunn
Lord Marshall
Sir Brian Moffat
Sir Wilfrid Newton
J E Strickland
Sir Adrian Swire
Sir Peter Walters
18,259
7,405
15,855
304
20,000
850
1,000
95,834
4,152
3,869
—
820,437
30,987
98,000
1,755
8,000
2,122
1,655
2,000
10,364
8,000
13,005
11.69% subordinated bonds 2002 of £1
500,000
J R H Bond
70,000
Baroness Dunn
Lord Marshall
975
35,000
Sir Wilfrid Newton
Sir Adrian Swire
359
6,500
Sir Peter Walters
18,390
7,405
16,400
314
22,788
850
1,730
95,834
—
4,003
10,000
—
30,805
—
1,814
—
2,196
—
4,500
13,597
—
13,005
500,000
—
975
—
—
6,500
501
—
—
—
—
—
—
—
4,221
—
—
120,666
714
—
—
—
—
1,713
—
—
—
—
—
—
—
—
—
—
—2
—2
—2
—2
—2
—2
—2
—2
—2
—2
—2
749,7712
—2
—2
—2
—2
—2
—2
—2
—2
—2
—2
—
—
—
—
—
—
—2
—2
—2
—2
—2
—2
—2
—2
—2
—2
—2
—2
—2
108,8333
—2
8,0003
—2
—2
—2
—2
8,0003
—2
—
—
—
—
—
—
18,891
7,405
16,400
314
22,788
850
1,730
95,834
4,221
4,003
10,000
870,437
31,519
108,833
1,814
8,000
2,196
1,713
4,500
13,597
8,000
13,005
500,000
—
975
—
—
6,500
1 Or at date of appointment if later.
2 Interests held by private investment companies.
3 Non-beneficial.
4 Interests at 1 January 1999, i.e. date of appointment.
5 Details of additional interests in ordinary shares of 75p each under the Share Option Schemes and Restricted Share Plan are set out
below.
34
H S B C H O L D I N G S P L C
Share options (ordinary shares of 75p)
At 31 December 1998, 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 1998 was 1,630 pence. The highest and lowest market values during the year were
2,025 pence and 982 pence. Market value is the mid-market price quoted on the London Stock Exchange on the
relevant date.
3
J R H Bond
W R P Dalton
D G Eldon5
3
D J Flint
S K Green
J E Strickland
K R Whitson
Options Options Options
held at awarded exercised held at 313 Exercise
price in
pence
during December3
19983
1 January
19981
Options3
year
during
year
Exercisable Exercisable
until4
55555555555555558 5555555555555785555556
721.84 12 Oct 1993 12 Oct 19963 12 Oct 2003
20,181
8 Mar 1994 8 Mar 19973 8 Mar 2004
851.27
20,181
651.80
7 Mar 1995 7 Mar 19983 7 Mar 2005
25,000
541.80 10 Apr 1995 1 Aug 20003 31 Jan 2001
3,183
1 Apr 19993 1 Apr 2006
25,000
20,1813
20,1813
25,0003
3,1832
25,0003
Date of
award
—
—
—
—
—
—
—
—
—
—
1 Apr 1996
1,000.00
from4
7,568
10,091
12,000
2,875
12,000
8,577
10,091
12,000
13,500
12,000
1,271
8,072
12,108
15,000
15,000
1,879
15,136
15,000
15,000
1,271
12,613
20,000
3,183
20,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,5683
10,0913
12,0003
2,8752
12,0003
8,5773
10,0913
12,0003
13,5003
12,0003
1,2712
8,0723
12,1083
15,0003
15,0003
1,8792
15,1363
15,0003
15,0003
1,2712
12,6133
20,0003
3,1832
20,0003
721.84 12 Oct 1993 12 Oct 19963 12 Oct 2003
8 Mar 1994 8 Mar 19973 8 Mar 2004
851.27
651.80
7 Mar 1995 7 Mar 19983 7 Mar 2005
541.80 10 Apr 1995 1 Aug 20003 31 Jan 2001
1 Apr 19993 1 Apr 2006
1 Apr 1996
1,000.00
721.84 12 Oct 1993 12 Oct 19963 12 Oct 2003
8 Mar 1994 8 Mar 19973 8 Mar 2004
851.27
7 Mar 1995 7 Mar 19983 7 Mar 2005
651.80
1 Apr 19993 1 Apr 2006
1 Apr 1996
1,000.00
1,000.00
1,356.18
1 Apr 19993 1 Apr 2006
1 Apr 1996
9 Apr 1997 1 Aug 20023 31 Jan 2003
721.84 12 Oct 1993 12 Oct 19963 12 Oct 2003
8 Mar 1994 8 Mar 19973 8 Mar 2004
851.27
7 Mar 1995 7 Mar 19983 7 Mar 2005
651.80
1 Apr 19993 1 Apr 2006
1 Apr 1996
1,000.00
3 Apr 1996 1 Aug 20013 31 Jan 2002
917.70
851.27
651.80
1,000.00
1,356.18
8 Mar 1994 8 Mar 19973 8 Mar 2004
7 Mar 1995 7 Mar 19983 7 Mar 2005
1 Apr 19993 1 Apr 2006
1 Apr 1996
9 Apr 1997 1 Aug 20023 31 Jan 2003
8 Mar 1994 8 Mar 19973 8 Mar 2004
851.27
651.80
7 Mar 1995 7 Mar 19983 7 Mar 2005
541.80 10 Apr 1995 1 Aug 20003 31 Jan 2001
1 Apr 19993 1 Apr 2006
1 Apr 1996
1,000.00
1 Or at date of appointment if later.
2 Options awarded under the Savings-Related Share Option Scheme.
3 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.
4 May be advanced to an earlier date in certain circumstances, e.g. retirement.
5 Options at 1 January 1999, i.e. date of appointment.
35
H S B C H O L D I N G S P L C
Report of the Directors (continued)
3
Restricted Share Plan (ordinary shares of 75p)
Awards3
Year in
Awards
which
held at
1 January
awards
19981
will vest
555555555555555555555555555555555
Awards
held at
31 December
19982
Awards
vested
during
year
Monetary
value of
made3 awards made
during3
during year
year3
(£000)
J R H Bond
W R P Dalton
D G Eldon5
D J Flint
S K Green
J E Strickland
K R Whitson
7,884
—
4,931
10,000
—
6,121
—
4,931
—
5,917
—
5,917
5,917
—
—3
8,3333
—3
—3
5,5563
—3
6,8963
—3
5,5563
—3
6,6663
—3
—3
6,6663
—
150
—
—
100
—
120
—
100
—
120
—
—
120
—
—
—
—
—
—
—
—
—
—
—
3,060
—
—
8,1563 2001 or 2002
8,6133 2002 or 2003
5,1013 2001 or 2002
2001
10,3454
5,7483 2002 or 2003
6,1213 2001 or 2002
6,8963 2002 or 2003
5,1013 2001 or 2002
5,7483 2002 or 2003
6,1213 2001 or 2002
6,8963 2002 or 2003
—3
—
6,1213 2001 or 2002
6,8963 2002 or 2003
Unless otherwise indicated, vesting of these shares is subject to the performance tests described in the Report of the Remuneration Committee
in the 1996 and 1997 Annual Report and Accounts being satisfied.
1 Or at date of appointment if later.
2 Includes additional shares arising from scrip dividends.
3 Held on date of appointment.
4 Award not subject to performance conditions.
5 Interests at 1 January 1999, i.e. date of appointment.
S K Green has a personal interest in £100,000 of Midland Bank plc 9 per cent subordinated notes 2005, which he held
on the date of his appointment and at the end of the year.
H Sohmen has a corporate interest in £1,200,000 of Midland Bank plc 9 per cent 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.
Interests held by D G Eldon at the date of his appointment as a Director, i.e. 1 January 1999, have been included in the
above tables.
Sir Adrian Swire acquired a non-beneficial interest in an additional 19,000 ordinary shares of HK$10 each on 12
February 1999.
There have been no other changes in Directors’ interests from 31 December 1998 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.
36
H S B C H O L D I N G S P L C
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.
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 1998.
Basic salaries, allowances and benefits in kind
Pension contributions
Bonuses paid or receivable
Total
Their emoluments are within the following bands:
1,£800,001 – 1,£900,000
£1,100,001 – £1,200,000
£1,500,001 – £1,600,000
£2,100,001 – £2,200,000
£2,400,001 – £2,500,000
Employee Involvement
£000
555567
1,816
160
6,204
555567
8,180
zzzzxc
Number of
employees
555567
1
1
1
1
1
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 45,000 Group employees in 43 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 subscribes to the Better Payment Practice Code for all suppliers, the four principles of which are to agree
payment terms at the outset and stick to them; explain payment procedures to suppliers; pay bills in accordance with
any contract agreed with the supplier or as required by law; and tell suppliers without delay when an invoice is contested
and settle disputes quickly.
37
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 1998 represented 23 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 are recorded in the register maintained under section 211 of
the Companies Act 1985:
Interests in ordinary shares of HK$10 each
Hong Kong Monetary Authority
Interests in ordinary shares of 75p each
Standard Life Group
The Prudential Corporation Group of Companies
Legal & General Group
% of class
13.23
5.52
4.75
3.51
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. The Hong Kong Monetary Authority
has informed the Company that the disclosure provisions of the Securities (Disclosure of Interests) Ordinance do not
apply in respect of its interests. However, it has been publicly announced that the Hong Kong SAR Government holds
8.9 per cent of the Company’s total issued ordinary share capital.
Dealings in HSBC Holdings plc Shares
HSBC Investment Bank plc is an intermediary in the shares of the Company in London. In addition, during the year
ended 31 December 1998, a subsidiary undertaking of the Company sold 40,000 ordinary shares of HK$10 each. The
aggregate consideration for the sale was HK$6.4 million.
Connected Transactions
The following constitute connected transactions under the rules of The Stock Exchange of Hong Kong.
In March 1998, HSBC Investment Bank Holdings BV, a wholly owned subsidiary, acquired 312,111 ordinary shares
in HSBC Simpson McKie (Proprietary) Limited, being the remaining 10.16 per cent of the issued ordinary share capital
it did not already own, from 52 employees, including 14 directors, of HSBC Simpson McKie (Proprietary) Limited for
a total consideration of 45 million rand.
In March 1998, HSBC Investment Bank Holdings BV, a wholly owned subsidiary, entered into an agreement with
M Murarka and R Agarwal, holders of the 49 per cent of the share capital of HSBC Batlivala & Karani Securities
Holdings Private Limited not owned by HSBC Investment Bank Holdings BV, to sell their shareholding to third parties
nominated by HSBC Investment Bank Holdings BV for a total consideration of US$17 million. Each new minority
shareholder granted HSBC Investment Bank Holdings BV a call option in relation to their respective holdings.
In March 1998, HSBC Asset Management Asia Pacific Limited, a wholly owned subsidiary, acquired 75,000 ordinary
shares in HSBC Private Equity Management Limited and 250 ordinary shares in HSBC Private Equity Management
Hong Kong Limited, being the remaining 25 per cent of the issued ordinary share capital of these companies it did not
already own, and 1,400 ‘B’ shares in Private Equity Management BVI Limited. The shares were acquired from
D F J Paterson, a former director of the three companies, for a total consideration of US$15 million.
In May 1998, The Hongkong and Shanghai Banking Corporation Limited and Midland Bank plc, both wholly
owned subsidiaries, entered into an agreement with JWL Property Finance Limited, a 75 per cent owned subsidiary of
Midland Bank plc, to vary existing agreements for a total consideration payable to JWL Property Finance Limited of
£8.2 million. In addition, Midland Bank plc sold 3,750 ordinary shares in JWL Property Finance Limited, being 75 per
cent of the issued ordinary share capital, to J W Lloyd, the holder of the remaining 25 per cent, for a total consideration
of £556,000.
38
H S B C H O L D I N G S P L C
In September 1998, HSBC Insurance (Asia-Pacific) Holdings Limited, a wholly owned subsidiary, acquired 175
ordinary shares in HSBC Non-Life Holdings Limited, representing the remaining 17.5 per cent of the issued ordinary
share capital it did not already own, from Actinium Holding Corporation, for a consideration of HK$160 million.
Actinium Holding Corporation was the Trustee of a unit trust in which the family of The Honourable Michael D
Kadoorie, who resigned as a non-executive director of HSBC Non-Life Holdings Limited on completion of the acquisition,
had an indirect interest.
In December 1998, HSBC Investment Bank Holdings BV, a wholly owned subsidiary, agreed to acquire 2,500
shares, representing the remaining 25 per cent of the issued ordinary share capital not already owned by HSBC Group
companies, and approximately 939 bons de jouissance (bonus shares) in Guyerzeller Bank AG for a consideration of
SFr179.5 million, from Holdingmaatschappij Matron BV. Save for holding the above-mentioned securities,
Holdingmaatschappij Matron BV had no connection with the HSBC Group.
Donations
During the year, the Group made charitable donations totalling US$10,845,000. Of this amount, US$3,863,000 was
given for charitable purposes in the United Kingdom.
No political donations were made during the year.
Year 2000 Readiness
The Group recognises that with the approach of the new millennium the inability of systems around the world to
recognise the date change from 31 December 1999 to 1 January 2000 could pose significant issues. The Group has
adopted the Year 2000 conformity requirements issued by the British Standards Institution as its definition of Year 2000
compliance.
The Group has assessed the impact of Year 2000 and does not expect either its operations or service to customers to
be disrupted as a result of the Group’s systems not being Year 2000 compliant. Steering Committees have been formed
in all the key business units and progress on the Year 2000 compliance programme (‘the Year 2000 Programme’) is
reported regularly to their Boards of Directors and to the Group Audit and Executive Committees.
The Year 2000 Programme involves testing all the Group’s relevant systems to ensure that they are Year 2000
compliant and seeking confirmation from suppliers and service providers that their products and services are Year 2000
compliant. The Group is also assessing its customers’ commitment to achieving compliance and is providing information
and assistance to help customers understand the risks and issues. Relevant credit and investment policies have been
revised and relationship managers trained to ensure that Year 2000 risks are taken account of in credit and investment
evaluations.
Substantially all lines of programme code in the Group’s computer systems have already been reviewed for Year
2000 compliance and amended or replaced where necessary. The great majority of these systems have been tested and
are in use. In addition, the small number of computer systems which remain non-compliant are planned to be replaced
by mid-1999 as part of the Group’s existing technology development programme and expenditure.
In other areas of information technology (IT), the Group is reviewing its end-user computing applications, networks,
centralised data systems, and the desktop environment for Year 2000 compliance. Substantially all of the Group’s
end-user computing applications and inventory items related to the Group’s networks have already been made compliant.
Our programme to ensure the hardware and software elements of the Group’s data centre systems have been made Year
2000 compliant is on schedule and substantially complete.
The Group has evaluated the potential effect of the Year 2000 on its non-IT systems, including its facilities and other
business processes. Substantially all of the Group’s facilities and related systems have been investigated and, where not
already compliant, are in the process of being made so compliant. Other business processes are similarly being addressed
across the Group.
Revisions to Group-wide business contingency plans are being finalised to address the perceived risks associated
with the arrival of the Year 2000. These plans include mitigating the effects of any failure to complete remedial work on
critical business systems, business resumption contingency plans to address the possibility of systems failure, and
39
H S B C H O L D I N G S P L C
Report of the Directors (continued)
market resumption contingency plans to address the possibility of the failure of systems or processes outside the Group’s
control. The Group is, however, unable to predict the effect if any of the efforts to address the Year 2000 problem fail.
Lack of readiness on the part of third parties would expose the Group to the potential for loss, impairment of
business processes and activities, and disruption of financial markets. The Group is addressing these risks through
bilateral and multiparty efforts and participates in industry, country and global initiatives.
For more than a decade parts of the Group have been modifying their systems to be Year 2000 compliant when
making other enhancements. The costs of the Year 2000 modifications made as part of such a combined package have
not been separately identified. Costs incurred for the year ended 31 December 1998 were US$113 million (including
US$48 million attributable to incremental external costs). The Group expects that the cost of completing the Year 2000
compliance and testing process will be approximately US$52 million (including US$20 million attributable to incremental
external costs). Costs relating to major systems changes that are not directly related to the Year 2000 but which address
some Year 2000 issues are not included in these costs.
Annual General Meeting
The Annual General Meeting of the Company will be held at the Barbican Hall, Barbican Centre, London EC2 on
Friday, 28 May 1999 at 11.00 a.m.
An informal meeting of shareholders will be held at Level 28, 1 Queen’s Road Central, Hong Kong on Tuesday, 25
May 1999 at 4.00 p.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 determine its remuneration will be
submitted to the forthcoming Annual General Meeting.
On behalf of the Board
R G Barber, Secretary
22 February 1999
40
H S B C H O L D I N G S P L C
Financial Review
Financial Review (continued)
Summary of Financial Performance
Group profit
The HSBC Group made a profit before tax of US$6,571
million in 1998, a fall of US$1,559 million, or 19 per
cent, compared with 1997.
Net interest income of US$11,547 million was
US$603 million, or 6 per cent, higher than 1997. Other
operating income rose by US$843 million, or 11 per
cent, to US$8,508 million.
The Group’s cost:income ratio deteriorated
marginally to 54.9 per cent from 54.0 per cent in 1997
after taking account of exceptional property costs in
the UK as a result of the prospective move to Canary
Wharf.
The charge for bad and doubtful debts was US$2,637
Shareholder ratios
Basic earnings per share decreased by 22 per cent, from
US$2.06 to US$1.61. Diluted earnings per share
decreased by 22 per cent, from US$2.04 to US$1.59.
The headline earnings per share, which is calculated
in accordance with the Institute of Investment
Management and Research Statement of Investment
Practice, decreased by 44 US cents, or 22 per cent. The
headline earnings per share excluded profit on the sale
of tangible fixed assets and subsidiaries and the charge
for amortisation of goodwill.
The return on average shareholders’ funds, at 15.5
per cent, was lower than the 20.7 per cent return in
1997.
Net interest income
An improvement of 6 per cent in net interest income
was achieved in difficult circumstances as the slowdown
in a number of regions in which the Group operates
resulted in only modest loan demand and increased
levels of interest suspended on non-performing loans.
Income levels rose in Latin America (61 per cent) due
to a full year’s contribution from recent acquisitions,
in Europe (5 per cent), were slightly higher in Hong
Kong, and fell by 1 per cent in the rest of Asia-Pacific
and 2 per cent in North America.
Average interest-earning assets increased by US$30
billion, or 8 per cent, to US$406 billion for 1998. The
growth, principally in customer advances and short-
term funds to banks, occurred mainly in Europe, North
America and Hong Kong as demand for advances in
million, which was US$1,623 million higher than in
1997, reflecting the continuing downturn in Asia and
its impact on asset quality in several economies. It
included general provisions of US$10 million,
compared with US$481 million in 1997, which included
the special general provision charge of US$290 million
for Asian risk. In view of the continuing unsettled
economic environment in Asia, this special general
provision has been left intact.
The gains on disposal of investments were US$222
million, US$333 million lower than in 1997.
Profit attributable to shareholders was US$4,318
million in 1998, a fall of 21 per cent.
Shareholders’ funds rose by a net US$322 million
to US$27,402 million, including the retention of
US$1,823 million of Group profits, and the take-up of
scrip dividends and shares issued under options totalling
US$601 million in aggregate. These were partly offset
by a deficit on the revaluation of Group and investment
properties of US$2,033 million.
The Directors have declared a second interim
dividend of US$0.555 per ordinary share (in lieu of a
final dividend) which, together with the first interim
dividend of US$0.370, will make a total distribution
for the year of US$0.925 (1997: US$0.830), an increase
of 11 per cent. The dividend is covered 1.7 times by
attributable profit (1997: 2.5 times).
the weakening economies of the Asia-Pacific region
was modest.
The Group’s net interest margin at 2.84 per cent was
7 basis points lower than for 1997. The increased
Net interest income (US$m)
12,000
10,000
8,000
6,000
4,000
2,000
0
10,944
11,547
9,092
1996
1997
1998
41
41
H S B C H O L D I N G S P L C
Financial Review (continued)
contribution from the Group’s higher margin business
in Latin America only partially offset the impact of
higher levels of interest suspended on non-performing
loans, increased funding costs and the reduced
contribution from net free funds resulting from the
reduction in the ratio of net free funds to average
interest-earning assets.
In Europe, Midland Bank’s UK domestic margin fell
as the impact of competitive pressures on retail liability
products and credit cards resulted in a narrowing in
spread. Growth in average interest-earning assets,
primarily in finer margin lending to large corporate
borrowers and fixed rate mortgage lending, led to a
change in asset mix. The growth in the funding costs
of operating leased assets and an increase in lower
yielding treasury assets also contributed to the lower
margin. An increased contribution from higher levels
of net free funds partially offset the reduction in spread.
Margins in Hong Kong deteriorated as a result of a
combination of higher levels of suspended interest on
non-performing loans and the effect of the periodic
substantial narrowing of the gap between the best
lending rate and the interbank rates. A fall in the average
advances-to-deposits ratio resulting from a slowdown
in the growth in customer advances in the second half
of the year and a change in asset mix as surplus funds
were placed in lower yielding short-term funds to banks
also reduced margins. The effect of increased
competition for customer deposits, resulting in an
increase in funding costs, was also detrimental to
margins. The fall in Hang Seng Bank’s margin was not
as pronounced as for our other banking operations in
Hong Kong as the effect of a higher contribution from
Non-interest income
Non-interest income of US$8,508 million was US$843
million, or 11 per cent, higher than 1997, mainly due
to increases in net fees and commissions and other
operating income. There was strong growth in income
levels in North America (21 per cent), Europe (13 per
cent) and Latin America (50 per cent) due to full year
contributions from the Brazilian and Argentinian
operations acquired during 1997. Hong Kong showed
a small decline and the rest of Asia-Pacific was
unchanged, reflecting the slowdown in economic
activity in the region. Excluding net fees and
commissions, other operating income rose by US$576
million, or 26 per cent, from US$2,196 million in 1997
to US$2,772 million in 1998.
net free funds was greater due to Hang Seng Bank’s
higher ratio of net free funds to average interest-earning
assets.
Margins in the Asia-Pacific operations of The
Hongkong and Shanghai Banking Corporation fell as
the benefit of widening spreads resulting from the
tightening credit environment following the downturn
in the region only partially offset the higher levels of
interest suspended on non-performing loans.
HSBC Bank Malaysia’s (formerly Hongkong Bank
Malaysia) margin was only slightly lower as the effect
of higher levels of interest suspended was largely offset
by an increased contribution from higher levels of net
free funds. The improved margin in The British Bank
of the Middle East was principally due to an increased
contribution from net free funds as the improved spreads
arising from a favourable change in asset mix towards
higher yielding personal and consumer lending was
offset by the increase in levels of interest suspended on
non-performing loans.
In North America, a change in asset mix towards
lower yielding treasury assets, mortgage and corporate
lending, lower levels of suspended interest recoveries
and the effect on short-term lending of a flattening yield
curve all contributed to the fall in HSBC Americas,
Inc.’s margin. In Hongkong Bank of Canada, a change
in asset mix towards lower yielding corporate lending
and the effects of the flattening yield curve on short-
term lending depressed the margin. In addition, a
combination of competitive pressures on deposit pricing
in a tighter market and the resulting increase in the use
of wholesale funding also contributed to the fall in
margin.
million, with significant growth in Europe and Latin
America partly offset by a decline in Hong Kong and
Non-interest income (US$m)
9,000
6,000
3,000
0
1,206
990
5,469
1,623
1,149
5,736
785
800
4,296
1996
1997
1998
Fees and commissions (net)
Other
Net fees and commissions increased by US$267
Dealing profits
42
42
H S B C H O L D I N G S P L C
Financial Review (continued)
55555555555678 55555555555888
1998
1997
Analysis of income from dealing in financial
Total
instruments (US$m)
55555555555555555555555555555555555555555555 555555555555567888888
1,039
Foreign exchange
114
Interest rate derivatives
Debt securities
126
46
Equities and other trading
55555555555555555555555555555555555555555555 555555555555567888888
1,325
zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz zzzzzzzzzzzzzxcvvvvvv
998
78
(61)
(25)
41
36
187
71
953
67
116
13
977
69
200
90
Dealing
profits
Dealing
profits
24
2
84
77
1,336
1,149
990
Total
187
335
Dividend
and net
interest
income
Dividend
and net
interest
income
the rest of Asia-Pacific. The growth in Europe was in
insurance, current accounts, mortgages, cards and
lending to corporate customers. In Latin America, the
growth reflected the development of new customer
products, as well as the fact that 1997 included only
nine months’ trading in Brazil and some five months in
Argentina. In Hong Kong and the rest of Asia-Pacific,
the decline occurred in most countries and business lines
as a result of the current depressed market conditions.
Falls were most noticeable in fees from securities, credit
facilities and cards and, in investment banking, in
corporate finance, underwriting and structured
financing.
Dealing profits increased in 1998 as the Asian
currency turmoil continued through the first half of 1998
and wide margins and high volumes in customer driven
business continued to underpin foreign exchange
revenues. Income from debt securities trading improved
markedly compared to 1997 as credit spreads in Asian
bond markets stabilised. The equities trading business
returned to profit after losses in underwriting and
trading in Hong Kong in 1997.
Operating expenses
For the Group as a whole, operating expenses increased
by US$948 million, of which about half arose in Europe
and half was the result of a full year’s operation of Latin
American businesses acquired during 1997. A small
increase in North America was offset by a similar
decrease in Hong Kong and the rest of Asia-Pacific.
Premises and equipment costs increased in Europe
as a result of the prospective move to Canary Wharf
and the increase in depreciation included the effect of
the growth in operating leased assets. Staff costs rose
modestly as staff numbers increased.
This year saw the first full year of operating expenses
for the Latin American operations which were acquired
during 1997 and the trend of expenses was flat on an
annualised basis.
In Hong Kong and the rest of Asia-Pacific, the
decrease in operating expenses was achieved mainly
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 operating income increased by US$425
million with the majority of the increase being in Europe
and North America. In Europe, other income was
boosted by the rentals receivable on operating leased
assets following the acquisition of Forward Trust Rail
in 1997. Wealth management activities, which include
sales of investment, insurance and private banking
products, also showed strong growth. In North America,
benefit of the settlement with the US Internal Revenue
Service on Brazilian tax credits disallowed in the 1980s
and gain on disposal of credit card portfolios contributed
to the increase, as well as underlying business growth.
by administrative cost savings and there was also a
decrease in staff costs in both regions.
In North America, the increase in operating expenses
was wholly explained by the inclusion of 14 months’
Operating expenses (US$m)
12,000
10,000
8,000
6,000
4,000
2,000
0
719
2,094
1,245
5,998
914
2,315
1,454
6,321
573
1,531
1,018
4,797
1996
1997
1998
Staff costs
Other
Premises and equipment
Depreciation
43
43
H S B C H O L D I N G S P L C
Financial Review (continued)
Staff numbers
Full-time equivalent
Europe
Hong Kong
Rest of Asia-Pacific
North America
Latin America
1998
1997
1996
49,798
24,447
21,116
14,500
26,572
48,595
25,050
19,701
14,499
24,440
47,371
24,428
17,536
13,101
34
Total staff numbers
136,433 132,285 102,470
Bad and doubtful debts
The charge for bad and doubtful debts of US$2,637
million was US$1,623 million higher than 1997,
reflecting the deterioration in credit quality in the poor
economic climate of a number of Asian countries. New
specific provisions increased by US$689 million in
Hong Kong, in part due to a decline in asset values
particularly in the property market, and by US$1,059
million in the rest of Asia-Pacific, principally from
corporate customer provisions for exposures to
Malaysia, Indonesia and Thailand. The continuing
economic uncertainty over Asia also impacted on our
banking operations in Latin America which, coupled
with high domestic interest rates, resulted in credit
weakness in Argentina and, to a lesser extent, in Brazil.
In Europe, there were lower recoveries achieved on the
loan book, in particular from the historical Latin
American debt portfolio in Midland Bank. A large
proportion of the bad debt charge in Europe related to
personal lending in the UK, mainly in consumer finance
and credit cards, while corporate credit experience
remained stable although with some signs of a
weakening outlook. In North America, new specific
provisions were broadly in line with 1997.
The lower net charge of US$10 million in respect
of general provisions principally reflected contraction
Gains on disposal of investments
The Group’s gains on disposal of investments of
US$222 million were US$333 million lower than 1997
which included The Hongkong and Shanghai Banking
Corporation’s profit on the disposal of its investment
in Hong Kong International Terminals. Hang Seng Bank
Taxation
The 1998 effective rate of tax was 27.2 per cent,
compared with 25.3 per cent in 1997. For both years,
the effective rate of tax was below the standard 31 per
cent (1997: 31.5 per cent) rate of UK corporation tax
mainly because of lower rates of tax in major operations
overseas, in particular Hong Kong where profits were
expenses for Hongkong Bank of Canada on its change
in financial year-end; otherwise costs were held to the
same level as the prior year.
The Group’s cost:income ratio deteriorated
marginally to 54.9 per cent from 54.0 per cent in 1997
after taking account of exceptional property costs in
the UK as a result of the prospective move to Canary
Wharf.
Charge for bad and doubtful debts (US$m)
3,000
2,000
1,000
0
2,637
604
1996
290
724
1997
1998
Charge for bad and doubtful debts
Special general provision
of the customer loan portfolio, although enhancements
to the general provision coverage rates were made in
Canada, Malaysia and Brazil. In view of the continuing
unsettled economic environment in Asia, the special
general provision for Asian risk of US$290 million
booked at the end of 1997 has been left intact.
Non-performing customer advances increased by
US$3,464 million to US$8,871 million which
represented 3.7 per cent of gross customer advances
(31 December 1997: 2.2 per cent).
recorded profits on the sale of listed equity investments
of US$8 million (1997: US$76 million). HSBC Private
Equity Europe reported a US$95 million profit from
venture capital investment disposals (1997: US$175
million).
taxed at a rate of 16.0 per cent (1997: 16.5 per cent).
However, this benefit was diluted in 1998 as a result of
such less highly taxed overseas operations representing
a lower proportion of the Group’s 1998 profit. The tax
charge for both years was further reduced by partial
recognition of previously unrecognised tax benefits, but
44
44
H S B C H O L D I N G S P L C
Financial Review (continued)
increased by new unrecognised potential tax benefits,
particularly in 1998 when higher unrelieved trading
losses arose in the rest of Asia-Pacific. The benefit of
tax-free gains in Hong Kong in 1997 was not repeated
in 1998.
Assets
Total assets increased by US$11 billion, primarily due
to debt securities and treasury bills deploying increased
customer deposits. New lending opportunities were
limited, as demand for customer loans in Hong Kong
and the rest of Asia-Pacific decreased as a result of the
contraction in the economies. Balance sheet loans and
advances to customers were also reduced by the impact
of lower financial market transactions and increased
provisions.
Underlying gross lending to customers increased
predominantly in Europe as a result of growth in personal
lending but this was partly offset by a fall in Hong Kong.
There was a decline in customer loans and advances
Analysis of overall tax charge (US$m)
1998
1997
Taxation at UK corporation tax rate
of 31 per cent (1997: 31.5 per cent)
Impact of differently taxed overseas
profits in principal locations
Net unrecognised tax benefits
Tax-free gains
Other items
Overall tax charge
2,037
2,561
(339)
71
—
20
(466)
(61)
(47)
71
1,789
2,058
balances in North America partly as a result of reduced
financial market transactions and the disposal of two
national credit card portfolios.
Decreased reverse repo activity with banks in
Europe, North America and Latin America accounted
for the reduction in loans and advances to banks.
Debt securities held in accrual books showed an
unrecognised gain, net of off-balance-sheet hedges, of
US$298 million (December 1997: US$143 million).
Equity shares included US$1,140 million (December
1997: US$1,044 million) held on investment account,
on which there was an unrecognised gain of US$589
million (December 1997: US$749 million).
Assets 1998 (excluding Hong Kong Government
certificates of indebtness)
Assets 1997 (excluding Hong Kong Government
certificates of indebtness)
Treasury and other
eligible bills
%
US$b
4.6
22.0
Debt securities
14.5
69.2
Loans and advances
to banks
Loans and advances
to customers
18.0
85.3
49.5
235.3
Other
Total
13.4
63.9
100.0
475.7
Treasury and other
eligible bills
%
US$b
3.7
17.2
Debt securities
12.0
55.8
Loans and advances
to banks
Loans and advances
to customers
18.7
86.5
51.9
240.4
Other
Total
13.7
63.6
100.0
463.5
Capital Management
Capital measurement and allocation
The Financial Services Authority (FSA) 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. Responsibility for banking
supervision was transferred from the Bank of England
to the FSA on 1 June 1998. Individual banking
subsidiaries are directly regulated by the appropriate
local banking supervisors, which set and monitor capital
adequacy requirements for them. Similarly, non-
banking subsidiaries may be subject to supervision and
capital requirements of relevant local regulatory
authorities. Since 1988, when the governors of the
Group of Ten central banks, who form the Basle
Committee on Banking Supervision, 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.
45
45
H S B C H O L D I N G S P L C
Financial Review (continued)
Under the European Union’s Own Funds, Solvency
Ratio and Consolidated Supervision Directives, the
FSA requires each bank and banking group to maintain
an individually prescribed ratio of total capital to risk-
weighted assets. Since 30 September 1998, the method
the FSA 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 Amending
Directive (Directive 98/31/EC) to the Capital Adequacy
Directive (CAD2). This modification will allow banks
to calculate capital requirements for market risk in the
trading book using value at risk techniques.
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 a prudent
distribution of that capital between the holding company
and its 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.
The Group’s 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
Group capital structure
The table opposite sets out the analysis of regulatory
capital at the end of 1998 and 1997.
During 1998, the Group’s tier 1 capital ratio
increased from 9.3 per cent to 9.7 per cent and its total
capital ratio decreased from 14.2 per cent to 13.6 per
cent.
Tier 1 capital increased by US$2,071 million from
the level at the end of 1997, mainly due to retained
earnings of US$1,823 million and the take-up of shares
issued in lieu of dividends of US$584 million.
Tier 2 property revaluation reserves decreased due
to the deficit arising on revaluation of Group properties.
Term subordinated debt decreased, primarily as a result
of regulatory amortisation exceeding the issuance of
new debt net of redemptions.
subordinated loan capital. The amount of qualifying
tier 2 capital cannot exceed that of tier 1 capital, and
term subordinated loan capital may not exceed 50 per
cent of tier 1 capital. There are also limitations on the
amount of general provisions which may be included
in the tier 2 capital. Deductions are made from tier 1
capital in respect of goodwill and intangible assets. Total
capital is also reduced by deducting investments in
unconsolidated subsidiaries and associates, investments
in the capital of banks and other regulatory deductions.
Under CAD2, banking operations are categorised
as either trading book (broadly, marked-to-market
activities) or banking book (all other activities) and
risk-weighted assets are determined accordingly.
Banking book risk-weighted assets are measured by
means of a hierarchy of risk weights classified
according to the nature of each asset and counter-
party, taking into account any eligible collateral or
guarantees. Banking book off-balance-sheet items
giving rise to credit, foreign exchange or interest rate
risk are assigned weights appropriate to the product
and the category of the counterparty, taking into
account any eligible collateral or guarantees. Trading
book risk-weighted assets are determined by taking into
account market-related risks, such as foreign exchange,
interest rate and equity position risks, as well as
counterparty risk.
1998
US$m
1997
US$m
Composition of capital
Tier 1:
Shareholders’ funds
Minority interests
Less: property revaluation
Less: reserves
Less: intangible assets and goodwill
27,402
4,275
27,080
4,497
(2,121)
(204)
(4,261)
(35)
Total qualifying tier 1 capital
29,352
27,281
Tier 2:
Property revaluation reserves
General provisions
Perpetual subordinated debt
Term subordinated debt
2,121
1,807
3,276
6,433
4,261
1,785
3,273
6,693
Total qualifying tier 2 capital
13,637
16,012
Unconsolidated investments
Investments in other banks
Other deductions
(1,266)
(503)
(128)
(1,122)
(485)
(124)
41,092
41,562
Risk-weighted assets increased by US$10 billion,
Total capital
reflecting balance sheet growth.
Total risk-weighted assets
301,950
291,985
Capital ratios (per cent)
Total capital
Tier 1 capital
13.6
9.7
14.2
9.3
46
46
H S B C H O L D I N G S P L C
Financial Review (continued)
Structural foreign currency exposure
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
associated companies. Gains or losses on structural
foreign currency exposures are taken to reserves.
The Group’s structural foreign currency exposures
are managed 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 usually
achieved by denominating tier 1 capital broadly in
proportion to the corresponding foreign-currency-
denominated risk-weighted assets at a subsidiary bank
level. HSBC considers hedging structural foreign
currency exposures only in limited circumstances,
including protecting the tier 1 capital ratio or the US
dollar value of capital invested.
As subsidiaries are generally able to balance
adequately foreign currency tier 1 capital with foreign
currency risk-weighted assets, HSBC’s foreign currency
structural exposures are usually unhedged, including
exposures due to foreign-currency-denominated profits
arising during the year. Selective hedges were, however,
Deployment of shareholders’ funds
The shareholders’ funds of HSBC Holdings plc are
deployed mainly in investments in its subsidiaries. At
31 December 1998, the major investments of
shareholders’ funds by legal entity, compared with the
previous year, were as shown in the table.
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 these
retentions, the impact of the property revaluation in
1998 and capital injections to fund expansions in
business operations.
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.
transacted during 1998. There was no material effect
from foreign currency exchange rate movements on
Group or subsidiary tier 1 capital ratios during the year.
Some investments are in underlying currencies
which are linked to the US dollar, being primarily Hong
Kong dollars, UAE dirhams, Saudi riyals, Argentine
pesos and, from September 1998 but not before,
Malaysian ringgit. Those foreign currency investments
which are not in the US dollar or linked currencies
amounted to the foreign currency equivalent of
US$11,053 million (40 per cent of shareholders’ funds)
at 31 December 1998, an increase from US$10,960
million (40 per cent of shareholders’ funds) at 31
December 1997.
The increase in foreign currency investments mainly
reflects profit retentions. This was partly offset by the
impact of property revaluations in 1998 as a result of
the fall in property values in Hong Kong and Singapore.
The Brazilian real has depreciated significantly since
the 1998 year-end. Had the closing balance sheet been
retranslated at the rate on 12 February 1999,
shareholders’ funds would have been reduced by the
equivalent of US$220 million.
Hang Seng Bank – 62.14% owned
(1997: 62.10%)
3,456
3,989
1998
US$m
1997
US$m
The Hongkong and Shanghai
Banking Corporation and other
subsidiaries
The Hongkong and Shanghai
Banking Corporation and
subsidiaries
Midland Bank plc
HSBC Americas, Inc.
The British Bank of the Middle East
HSBC Bank Malaysia Berhad
Hongkong Bank of Canada
Banco HSBC Bamerindus
HSBC Roberts
HSBC Investment Bank plc
Holding company and non-trading
subsidiaries
Other subsidiaries
Associates
6,462
7,776
9,918
7,059
1,857
625
333
530
423
339
538
2,133
3,208
439
11,765
6,459
1,621
549
413
471
475
216
504
1,248
2,921
438
27,402
27,080
47
47
H S B C H O L D I N G S P L C
Financial Review (continued)
Credit and 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 is responsible for the formulation
of high-level credit policies; the 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 risk exposure limits.
In each of the Group’s subsidiaries, local
Industry exposures
Loans and advances to customers are spread throughout
the various industrial sectors, as well as geographically.
Over one-third of loans and advances to customers are
to the personal banking sector with the balance to
commercial enterprises. Residential mortgages now
comprise 26 per cent of the overall portfolio, having
increased by US$2,210 million, or 4 per cent, during
1998. There was strong growth in loans under the Hong
Kong SAR Government Home Ownership Scheme,
which increased by 36 per cent. Other personal banking
advances increased by 6 per cent during 1998, to
US$25,732 million.
Commercial, industrial and international trade loans
decreased by US$1,145 million, or 2 per cent, to
US$61,411 million.
Commercial real estate advances decreased by
US$1,029 million, or 4 per cent, to US$24,116 million
and other property related advances increased by
US$167 million, or 2 per cent, to US$8,249 million.
management is responsible for the quality of its credit
portfolios. Each subsidiary has established a credit
process involving delegated approval authorities and
credit procedures, the objective of which is to build
and maintain risk assets of high quality.
The Group’s credit risk limits to counterparties in
the financial and government sectors are managed
centrally to optimise the use of credit availability and
to avoid excessive risk concentration. Group companies
remain responsible for their own credit exposures. In
addition to the portfolio management undertaken at
Group level, each subsidiary manages its own risk
concentrations on a market sector, geographical and
product basis.
Cross-border risk is controlled through the
imposition of country limits, with sub-limits by maturity
and type of business. Transactions with higher risk
countries are considered on a case-by-case basis.
Special attention is paid to the management of
problem loans. Where deemed appropriate, specialist
units are established to provide intensive management
and control to maximise recoveries of doubtful debts.
Gross loans and advances to customers by
industry exposure
1998
1997
Residential mortgages
Hong Kong SAR
Government Home
Ownership Scheme
Other personal
Commercial, industrial
and international trade
Commercial real estate
Other property related
Government
Non-bank financial
institutions
Settlement accounts
Other commercial*
US$m
62,212
%
25.7
%
US$m
60,002 24.4
6,291
25,732
61,411
24,116
8,249
5,285
11,763
4,963
32,467
2.6
10.6
25.3
9.9
3.4
2.2
4.9
2.0
13.4
4,631
24,175
1.9
9.8
62,556 25.4
25,145 10.2
3.3
1.8
8,082
4,514
21,363
4,339
8.7
1.8
31,360 12.7
Total
242,489 100.0 246,167 100.0
* Other commercial includes advances in respect of agriculture, trans-
port, energy and utilities.
following a substantial reduction in securities trading
business by the end of 1998.
Other advances increased by US$2,502 million, or
Advances to financial institutions other than banks
decreased by US$9,600 million, or 45 per cent,
6 per cent.
48
48
H S B C H O L D I N G S P L C
Financial Review (continued)
Bad debt provisions
Total provisions against loans and advances to
customers amounted to US$6,627 million at 31
December 1998 and represented 2.77 per cent of gross
lending, net of suspended interest and reverse repo
transactions, compared with 2.18 per cent at the end of
1997.
Non-performing customer advances increased by
US$3,464 million to US$8,871 million which
represented 3.7 per cent of gross customer advances
(December 1997: 2.2 per cent).
Total customer provisions cover as a percentage of
non-performing loans and advances decreased from
94.7 per cent at 31 December 1997 to 74.7 per cent at
31 December 1998. This reflected the fact that the most
recently categorised non-performing advances included
advances which are better collateralised, for example,
residential mortgages.
Customer loans and advances (US$m) 1998
1997
Gross loans and advances
Suspended interest
Provisions
242,489 246,167
(614)
(567)
241,922 245,553
(5,132)
(6,627)
Net loans and advances
235,295 240,421
Provisions to customer loans and
advances (%)
Specific provisions
General provisions
— held against Asian risks
— other
Total provisions
Non-performing customer loans
and provisions (US$m)
Non-performing loans
Provisions
Total provisions cover as a
percentage of non-performing
loans and advances
1998
1.93
0.12
0.72
2.77
1997
1.32
0.12
0.74
2.18
1998
1997
8,871
6,627
5,407
5,132
74.7
94.7
Against loans and advances to banks, net of
suspended interest, of US$85,346 million (1997:
US$86,568 million), specific provisions amounted to
US$31 million (1997: US$46 million). Non-performing
loans to banks were US$42 million (1997: US$61
million).
The in-country risk exposure and cross-border
exposure figures in the following table are for the three
Asian countries that have negotiated arrangements with
the International Monetary Fund. They are prepared in
accordance with the Bank of England Country
Exposure Report (Form C1) guidelines. On this basis,
Country risk and cross-border exposure (US$b)
South
5555 555 5557
Korea Thailand
Indonesia
As at 31 December 1998
In-country local currency
obligations
In-country foreign
currency obligations
Net cross-border
obligations
Claims under contracts
in financial derivatives
Total at 31 December 1998
0.2
0.8
0.4
1.2
0.5
0.8
2.3
3.1
1.2
0.7
0.3
1.0
—
55 55 55
0.1
2.3
3.6
zz zz zz
1.4
—
Total at 31 December 1997
2.8
4.1
zz zz zz
1.8
the figures exclude accrued interest and intra-group
exposures.
In-country obligations represent local offices’ on-
balance-sheet exposures to and acceptances given under
facilities opened on behalf of local residents.
Net cross-border obligations represent non-local
offices’ on-balance-sheet exposures to and acceptances
given under facilities opened on behalf of customers
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 risk is controlled centrally through a
well-developed system of country limits, which are
frequently reviewed to avoid concentrations of transfer,
economic or political risks.
On 31 March 1998, a loan agreement was signed
between a group of international banks (including
HSBC Holdings plc) and the Republic of Korea, which
was the first stage of the programme to address South
Korea’s economic problems. The loan agreement
facilitated a voluntary exchange of Korean banks’ short-
term credits to new loans with one, two and three-year
maturities guaranteed by the Republic of Korea.
Subsequent to the completion of the loan exchange,
foreign currency liquidity pressures in South Korea have
been considerably eased, and the sovereign rating of
the country has been reinstated to investment grade.
On 4 June 1998, an agreement was reached between
the Steering Committee of Banks for Indonesia
(including HSBC Holdings plc) and the Indonesia Debt
Negotiation team with respect to the general terms of a
comprehensive programme to address Indonesia’s
external debt problems. The programme consists of
three principal components: (i) the voluntary
maintenance of trade finance by foreign banks to the
49
49
H S B C H O L D I N G S P L C
Financial Review (continued)
Indonesian banking system, effected by the completion
of individual agreements between Bank Indonesia (the
central bank) and the foreign banks during the second
half of 1998; (ii) an exchange offer whereby foreign
banks could exchange specified existing exposures to
Indonesian banks for loans guaranteed by Bank
Indonesia with maturities of one, two, three and four
years, which is evidenced by a number of separate loan
agreements completed during the second half of 1998;
and (iii) ‘INDRA’, the Government of Indonesia’s
Market Risk Management
Market risk
Market risk is the risk that interest rates, foreign
exchange rates or equity 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, exchange
rate and equity derivative instruments, as well as in debt,
equities and other securities. Trading risks arise either
from customer-related business or from position taking.
The Group manages market risk through risk limits
approved by the Group Executive Committee. Group
Market Risk, an independent unit within HSBC
Holdings, develops risk management policies and
measurement techniques, and reviews limit utilisation
on a daily basis.
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 with sufficient derivative product
expertise and appropriate control systems are authorised
to trade derivative products. Limits are set using a
combination of risk measurement techniques, including
position limits, sensitivity limits, as well as value at
risk (VAR) limits at a portfolio level. Similarly, option
risks are controlled through full revaluation limits in
conjunction with limits on the underlying variables that
determine each option’s value.
VAR is a technique which estimates the potential
losses that could occur on risk positions taken due to
movements in market rates and prices over a specified
time horizon and to a given level of confidence. The
Group VAR, calculated on a variance/covariance basis,
uses historical one-day movements in market rates and
prices, a 95 per cent confidence level and takes account
voluntary programme for the provision of foreign
exchange availability to Indonesian corporate obligors
which is applicable on a case by case basis.
Thailand has not entered into any specific
arrangements with the foreign banking community to
restructure its foreign currency obligations, but has
taken positive steps under its IMF programme to
recapitalise its financial system.
of correlations between different markets and rates. The
one-day movement in market prices is calculated by
reference to market data from the last two years.
Aggregation of VAR from different risk types is based
upon the assumption of independence between risk
types.
The Group VAR should be viewed in the context of
the limitations of the methodology used. These include:
• The model assumes that changes in risk factors
follow a normal distribution. This may not be the
case in reality and may lead to an underestimation
of the probability of extreme market movements.
• The use of a one-day holding period assumes that
all positions can be liquidated or hedged in one day.
This does not fully capture the market risk arising
from times of illiquidity, when one-day liquidation
or hedging may not be possible.
• The use of a 95 per cent confidence level does not
take account of any losses that might occur beyond
this level of confidence.
• The use of historical data as a proxy for estimating
future events may not encompass all potential events,
particularly those which are extreme in nature.
• The assumption of independence between risk types
may be incorrect and therefore result in VAR not
fully capturing market risk where correlation
between variables is exhibited.
• VAR is calculated at the close of business with intra-
day exposures not being subject to intra-day VAR
calculations.
• VAR does not necessarily capture all of the higher
order market risks and as such may underestimate
VAR.
50
50
H S B C H O L D I N G S P L C
Financial Review (continued)
The Group VAR should not therefore be viewed as
a maximum amount that the Group can lose on its
market risk positions. The Group recognises these
limitations by augmenting the VAR limits with other
position and sensitivity limit structures, as well as with
stress testing, both on individual portfolios and on a
consolidated basis. The Group’s stress testing regime
provides senior management with an assessment of the
impact of extreme events on the market risk exposures
of the Group.
VAR 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 1998, including accrual
book net interest income and funding related to dealing
positions, was US$7.8 million (US$7.1 million in
1997). The standard deviation of these daily revenues
was US$5.8 million. An analysis of the frequency
distribution of daily revenues shows a maximum daily
loss of US$13 million, with only 20 out of 260 days
showing losses. The most frequent result was a daily
revenue of between US$6 million and US$8 million,
with 50 occurrences. The highest daily revenue was
US$28 million.
Daily distribution of market risk revenues 1998
Group treasury centres
Daily distribution of market risk revenues 1997
Group treasury centres
Number of days
Number of days
60
50
40
30
20
10
1
0
50
30
29
33
30
22
13
9
13
8
5
3 3
60
50
40
30
20
10
5 3
2
1
0
1
32
55
53
29
20
40
26
15
8
32
1 1
1
-14
-12 -10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
-14
-12 -10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
Revenues (US$m)
Revenues (US$m)
Profit and loss frequency
Profit and loss frequency
Foreign exchange exposure
The Group’s foreign exchange exposure arises from
foreign exchange dealing within the Group’s markets
businesses 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 1998 was US$3.2 million
(US$4.8 million at 31 December 1997). The average
for 1998 was US$4.6 million, with a maximum of
US$8.1 million and a minimum of US$2.9 million in
the year. The average one-day foreign exchange revenue
in 1998 was US$4.0 million (US$3.8 million in 1997).
The value at risk and average dealing profit information
noted excludes structural foreign currency exposures,
since related gains or losses are taken through reserves.
51
51
H S B C H O L D I N G S P L C
Financial Review (continued)
Interest rate exposure
The Group’s interest rate exposures comprise those
originating in its treasury activities and those originating
in other banking activities and are managed under limits
described above. Interest rate risk arises in both dealing
portfolios and accrual books.
Value at risk at 31 December 1998 related to treasury
interest rate risk exposures, including accrual book
positions, was US$27.6 million (US$27.8 million at
31 December 1997). The average value at risk for 1998
was US$29.4 million, the maximum was US$51.7
million and the minimum US$16.4 million. The average
daily revenues earned from treasury-related interest rate
activities for 1998 was US$3.8 million (US$3.3 million
for 1997).
The primary source of interest rate risk originating
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’ ALCOs.
Liquidity Management
in other banking activities arises 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. The Asset and Liability Policy
Committee (ALCO) of each major Group subsidiary
assesses the 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 ALCO.
Where appropriate, 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. The primary objective of such interest
rate risk management is to limit potential adverse effects
of interest rate movements on net interest income.
Value at risk at 31 December 1998 related to equity
trading positions was US$2.3 million (31 December
1997: US$3.5 million).
HSBC requires operating entities to manage the
liquidity structure of their assets, liabilities and
commitments so that cash flows are appropriately
balanced and all funding obligations are met when due.
It is the responsibility of local management to ensure
compliance with local regulatory and Group Executive
Committee requirements. Liquidity is managed on a
daily basis by local treasury functions, with the larger
regional treasury sites providing support to smaller
entities where required.
monitored by local ALCOs which report to Group Head
Office on a regular basis. This process includes:
• Projecting cash flows by major currency and a
consideration of the level of liquid assets in relation
thereto;
• Maintenance of balance sheet liquidity ratios;
• Monitoring of depositor concentration both in terms
of the overall funding mix and to avoid undue
reliance on large individual depositors; and
Compliance with liquidity requirements is
• Maintenance of liquidity contingency plans.
Customer accounts and deposits by banks 1998
Customer accounts and deposits by banks 1997
%
US$b
10.0
34.3
32.7
112.3
57.3
100.0
196.7
343.3
Deposits
by banks
Current
Savings
and other
deposits
Total
52
Deposits
by banks
Current
Savings
and other
deposits
Total
%
US$b
11.7
38.9
30.0
100.0
58.3
100.0
194.2
333.1
52
H S B C H O L D I N G S P L C
Financial Review (continued)
Assets, deposits and advances (US$b)
600
400
200
0
402.4
257.1
194.5
99.9
1996
471.7
483.1
294.2
240.4
106.7
1997
308.9
235.3
110.3
1998
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 the
characteristics of which are derived from those of
underlying assets, interest and exchange rates or indices.
They include futures, forwards, swap and options
transactions in the foreign exchange, interest rate and
equity markets. Transactions 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
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 to achieve 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.
The following table gives a summary of the
outstanding notional principal contract amounts with
Core retail deposits (current accounts and savings
deposits payable on demand or at short notice) form a
significant part of HSBC’s overall funding. Considerable
importance is attached to the stability and growth of this
core deposit base, achieved through HSBC’s diverse
geographical retail banking activities. Core retail deposits
accounted for 90.0 per cent of HSBC’s deposit base at 31
December 1998, compared with 88.3 per cent at 31
December 1997. As at 31 December 1998, 76.2 per cent
of HSBC’s customer accounts were deployed in loans and
advances to customers, compared with 81.7 per cent at
31 December 1997. Professional markets are accessed for
the purposes of providing additional funding, maintaining
a presence in local money markets and aligning asset and
liability maturities.
Derivatives contracts with third parties (US$m)
1998
55555557 55555557
Replace-
ment
55555555555555555555666
cost
Exchange rate
Replace-
ment
cost
Contract
amount
Contract
amount
1997
␣ contracts
Interest rate
␣ contracts
Equities
␣ contracts
Total
765,665
8,899 746,969
14,273
1,060,563
7,297 866,546
5,177
29,799
55577 55577 55577 55577
2,017
21,467
18,414 1,635,479
1,856,027
zzzcc zzzcc zzzcc zzzcc
21,964
2,218
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 1997 and 31 December 1998. Contract
amounts shown indicate the volume of transactions
outstanding; they do not represent values at risk.
At 31 December 1998, the total notional principal
of outstanding contracts with third parties was
US$1,856 billion, compared with a value of US$1,635
billion at 31 December 1997. The net increase of
US$221 billion, or 14 per cent, represents a US$194
billion rise in interest rate contracts, a US$19 billion
increase in exchange rate contracts and a US$8 billion
increase in equities contracts.
The replacement cost amount decreased from US$21
billion at 31 December 1997 to US$18 billion at 31
December 1998. An increase of US$2 billion in interest
rate contracts was more than offset by a decrease of
US$5 billion in exchange rate contracts.
The decrease in the replacement cost of exchange
53
53
␣
␣
␣
␣
␣
␣
H S B C H O L D I N G S P L C
Financial Review (continued)
Total derivatives contracts outstanding (US$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.
rate contracts, compared to December 1997, arises
mainly in Hong Kong and Singapore and reflects
reduced volatility in Asian currencies and an increase
of US$1.2 billion in netting in Hong Kong.
The increase in the replacement cost of interest rate
contracts since December 1997 was mainly in interest
rate swaps in London, and reflects lower term interest
rates in major currencies.
The table above provides an analysis of derivatives
by product at 31 December 1998, showing those
contracts undertaken for trading purposes and those
used for asset and liability management purposes (non-
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 to trade derivative products. The
1998
Contract amounts
Trading**
Non-trading†
Mark-to-market values**
Negative
Positive
604,358
97,396
57,034
1,937
(6,354)
(1,644)
(1,232)
55555 55555 55555 55555
(43)
zzzzz zzzzz
(9,273)
71,009
67,749
3,260
—
—
6,145
2,729
—
25
760,725
8,899
(72)
55555 55555
73
zzzzz zzzzz
(9,200)
8,827
532,978
73,784
6,005
(5,194)
423,432
76,889
(262)
55555 55555 55555 55555
(784)
zzzzz zzzzz
(6,240)
84,385
10,601
—
1,292
—
1,033,299
7,297
(413)
55555 55555
299
zzzzz zzzzz
(5,941)
6,884
11,321
16,341
1,813
(3)
(2,364)
55555 55555 55555 55555
(472)
zzzzz zzzzz
(2,839)
742
2,205
—
13
724
—
18
29,475
2,218
(5)
55555 55555
—
zzzzz zzzzz
(2,839)
2,213
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’.
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.
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
54
54
H S B C H O L D I N G S P L C
Financial Review (continued)
Replacement cost of derivatives contracts with third parties
Contract amounts of derviatives contracts with third parties
6555555555555555
Residual maturity
65555555555567888 55678
1997
Less than
1 year
Over
5 years
1-5
years
1998
50
Total
49
7,216 4,400
5555555555555555557 5567
US$m
Total
Governments
193
200
Banks
1,578 13,194 16,559
Non-bank
financial
institutions
— exchanges*
— other
101
1
11
730
691
115
272
284
2,169
1,359
360 2,449
555555555557888
2,431
1,203
393 2,287
2,433 18,414
10,100 5,881
zzzzzzzzzzzcc 55678
21,467
1,418
14,859 5,190
zzzzzzzzzzzcc zzxcv
Other sectors
Total 1998
Total 1997
Residual maturity
55555788555555555555
5555555555555688 556687
1997
1998
Less than
1 year
1-5 Over 5
years
Total
65555555555555555555 556867
US$m
Total
years
Exchange rate,
interest rate
and equities
contracts
— exchanges* 183,499
— other
5555555555555688
— contracts 1,178,685 359,055 96,194 1,633,934 1,478,531
1,362,184 397,612 96,231 1,856,027
zzzczzzzzzzzzccz 556687
1,214,121 353,446 67,912
1,635,479
zzzczzzzzzzzzccz zxvzxc
37 222,093 156,948
Total 1998
Total 1997
38,557
* Exchanges with margining requirements.
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 relation
to a comparable balance sheet risk. 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 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
* Exchanges with margining requirements.
deals only with the most creditworthy counterparties.
The first table above 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 1998 and 31 December
1997. The table shows that the replacement cost of
derivatives is predominantly with banks and under five
years.
The maturity profile of the notional principal values
of third party derivative contracts outstanding as at 31
December 1998 and 31 December 1997 in the second
table above shows that the vast majority of contracts
are executed over the counter and mature within one
year.
Financial Reporting
The accounting policies used in the preparation of the
1998 financial accounts are consistent with the previous
year except as noted below.
During the year, the Group adopted Financial
Reporting Standards (FRS) 9, 10, 11 and 14 as issued
by the Accounting Standards Board. FRS 9, ‘Associates
and joint ventures’, sets out how to identify and account
for strategic investments that are not consolidated. FRS
11, ‘Impairment of fixed assets and goodwill’, details
requirements for the identification, measurement and
recognition of impairment of all fixed assets and good-
will. FRS 14, ‘Earnings per share’, states the method
for calculating basic and diluted earnings per share.
FRS 10, ‘Goodwill and intangible assets’, requires
goodwill arising on the acquisition of subsidiary or
associated undertakings to be capitalised in the balance
sheet. For acquisitions made on or after 1 January 1998,
goodwill is included in the balance sheet in ‘Intangible
fixed assets’ in respect of subsidiary undertakings and
in ‘Interests in associated undertakings’ in respect of
associated undertakings. Capitalised goodwill is
amortised over its estimated useful life on a straight-
line basis.
In addition, the Group has adopted the British
Bankers’ Association revised Statement of Recom-
mended Practice, ‘Advances’. No change in accounting
policy has resulted from the adoption of this revised
statement.
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 changed its reporting
currency from sterling to US dollars with effect from
1 January 1998. For comparative purposes, the 1997
sterling reported profit and loss account has been
translated into US dollars at the applicable quarterly
average exchange rates. The 1997 sterling balance
sheets have been translated into US dollars at the closing
rate.
55
55
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 on page 57, 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 58 to 101, 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
22 February 1999
56
56
H S B C H O L D I N G S P L C
Report of the Auditors, KPMG Audit Plc, to the Members of HSBC Holdings plc
We have audited the financial statements on pages 58 to 101.
Respective responsibilities of Directors and Auditors
The Directors are responsible for preparing the Annual Report, including as described on page 56 of the financial
statements. Our responsibilities, as independent auditors, are established by statute, the Auditing Practices Board, the
Listing Rules of the London Stock Exchange, and by our profession’s ethical guidance.
We report to you our opinion as to whether the financial statements give a true and fair view and are properly
prepared in accordance with the Companies Act. We also report to you if, in our opinion, the Directors’ report is not
consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received
all the information and explanations we require for our audit, or if information specified by law or the Listing Rules
regarding Directors’ remuneration and transactions with the Company is not disclosed.
We review whether the statement on pages 28 and 29 reflects the Company’s compliance with those provisions of
the Combined Code specified for our review by the Stock Exchange, and we report if it does not. We are not required to
form an opinion on the effectiveness of the Company’s corporate governance procedures or its internal controls.
We read the other information contained in the Annual Report, including the corporate governance statement, and
consider whether it is consistent with the audited financial statements. We consider the implications for our report if we
become aware of any apparent misstatements or material inconsistencies with the financial statements.
Basis of audit 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 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 the Group as
at 31 December 1998 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
22 February 1999
57
57
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 1998
1997
US$m
Note
1998
US$m
1998
£m
1998
HK$m
Interest receivable
— interest receivable and similar income
3,378
arising from debt securities
25,293 — other interest receivable and similar income
(17,727)
555688
Interest payable
10,944 Net interest income
156 Dividend income
6,622
(1,153) Fees and commissions payable
Fees and commissions receivable
990 Dealing profits
555688
1,050 Other operating income
18,609 Operating income
(9,337) Administrative expenses
Depreciation and amortisation
(719) — tangible fixed assets
555688
— — goodwill
8,553 Operating profit before provisions
Provisions
(1,014) — provisions for bad and doubtful debts
— provisions for contingent liabilities
(56)
(49) Amounts written off fixed asset investments
555688
and commitments
7,434 Operating profit
112
Share of operating profit in
associated undertakings
Gains on disposal of
555 — investments
29 — tangible fixed assets
555688
8,130 Profit on ordinary activities before tax
(2,058) Tax on profit on ordinary activities
555688
6,072 Profit on ordinary activities after tax
Minority interests
(512) — equity
555688
(73) — non-equity
Profit for the financial year attributable
5,487
(2,206) Dividends
555688
to shareholders
zzzccvv
3,281 Retained profit for the year
US$
zzzccvv
2.06 Basic earnings per ordinary share
zzzccvv
2.04 Diluted earnings per ordinary share
zzzccvv
2.04 Headline earnings per ordinary share
zzzccvv
0.830 Dividends per ordinary share
Movements in reserves are set out in Note 32.
3
5
4,5
21
20
14
28
5
6
8
9
9
9
8
58
2,347
17,926
(13,310)
3,892
29,728
(22,073)
30,147
230,273
(170,977)
55557778 55557778 55557778
89,443
1,146
53,991
(9,559)
8,900
11,425
55557778 55557778 55557778
155,346
(78,158)
11,547
148
6,970
(1,234)
1,149
1,475
6,963
89
4,203
(744)
693
889
20,055
(10,090)
12,093
(6,084)
(904)
(10)
(7,002)
(77)
55557778 55557778 55557778
70,109
(545)
(6)
9,051
5,458
(2,637)
(1,590)
(20,427)
(144)
(85)
(1,115)
(658)
55557778 55557778 55557778
47,909
(87)
(51)
6,185
3,730
136
82
1,053
222
28
133
17
1,720
217
55557778 55557778 55557778
50,899
(13,858)
55557778 55557778 55557778
37,041
6,571
(1,789)
3,962
(1,078)
4,782
2,884
(3,044)
(550)
55557778 55557778 55557778
(237)
(43)
(393)
(71)
4,318
(2,495)
33,447
(19,326)
55557778 55557778 55557778
14,121
zzzzxcv zzzzxcv zzzzxcv
2,604
(1,505)
1,823
1,099
US$
Pence
HK$
1.61
97.1
12.47
zzzzxcv zzzzxcv zzzzxcv
12.31
zzzzxcv zzzzxcv zzzzxcv
12.39
zzzzxcv zzzzxcv zzzzxcv
1.59
96.5
1.60
95.9
7.17
zzzzxcv zzzzxcv zzzzxcv
0.925
55.8
H S B C H O L D I N G S P L C
Consolidated Balance Sheet at 31 December 1998
1997
US$m
ASSETS
2,961 Cash and balances at central banks
5,669
Items in the course of collection from other banks
17,183 Treasury bills and other eligible bills
Hong Kong SAR Government certificates of
8,143
indebtedness
86,522 Loans and advances to banks
240,421 Loans and advances to customers
55,764 Debt securities
3,228 Equity shares
Interests in associated undertakings
899
320 Other participating interests
— Intangible fixed assets
13,034 Tangible fixed assets
33,255 Other assets
4,287
555688
Prepayments and accrued income
471,686 Total assets
zzzccvv
LIABILITIES
8,143 Hong Kong SAR currency notes in circulation
38,947 Deposits by banks
294,189 Customer accounts
4,045
Items in the course of transmission to other banks
27,745 Debt securities in issue
49,676 Other liabilities
4,661 Accruals and deferred income
Provisions for liabilities and charges
939 — deferred taxation
2,133 — other provisions for liabilities and charges
Subordinated liabilities
3,245 — undated loan capital
7,281 — dated loan capital
Minority interests
2,752 — equity
850 — non-equity
3,406 Called up share capital
Share premium account
489
4,262 Revaluation reserves
18,923
27,080
555688
Profit and loss account
Shareholders’ funds
471,686 Total liabilities
zzzccvv
MEMORANDUM ITEMS
Contingent liabilities
4,814 — acceptances and endorsements
20,563 — guarantees and assets pledged as collateral security
104 — other contingent liabilities
555688
25,481
zzzccvv
136,288 Commitments
zzzccvv
John Bond, Group Chairman
Note
10
11
12
13
16
17
18
19
20
21
23
11
24
25
26
27
28
29
30
31
32
32
32
34
34
1998
US$m
3,048
5,911
21,980
1998
£m
1,838
3,564
13,254
1998
HK$m
23,610
45,787
170,257
7,408
85,315
235,295
69,185
4,221
889
309
146
12,108
32,352
4,961
57,382
660,850
1,822,593
535,907
32,696
6,886
2,394
1,131
93,789
250,599
38,428
55557778 55557778 55557778
3,742,309
zzzzxcv zzzzxcv zzzzxcv
4,467
51,445
141,884
41,719
2,545
536
186
88
7,301
19,508
2,991
483,128
291,326
7,408
34,342
308,910
4,206
29,190
48,662
4,805
1,268
2,906
3,247
7,597
4,467
20,708
186,273
2,536
17,602
29,343
2,897
765
1,752
1,958
4,581
57,382
266,013
2,392,816
32,580
226,106
376,936
37,220
9,822
22,510
25,151
58,846
2,315
870
3,443
480
2,120
21,359
27,402
17,932
6,739
26,669
3,718
16,422
165,447
212,256
55557778 55557778 55557778
3,742,309
zzzzxcv zzzzxcv zzzzxcv
1,396
525
2,076
289
1,278
12,880
16,523
483,128
291,326
4,032
23,686
64
2,431
14,283
39
31,232
183,472
496
55557778 55557778 55557778
215,200
zzzzxcv zzzzxcv zzzzxcv
1,135,966
zzzzxcv zzzzxcv zzzzxcv
146,652
88,431
16,753
27,782
59
H S B C H O L D I N G S P L C
Company Balance Sheet at 31 December 1998
1997
US$m
FIXED ASSETS
5 Tangible assets
Investments
25,776 — shares in Group undertakings
730 — loans to Group undertakings
400 — other investments other than loans
555688
26,911
555688
CURRENT ASSETS
Debtors
— money market deposits with Group
1998
US$m
1998
£m
1998
HK$m
8
5
62
Note
21
22
26,935
1,068
1,097
208,639
8,273
8,497
55557778 55557778 55557778
225,471
55557778 55557778 55557778
16,242
644
661
17,552
29,108
2,390
2,042 — other amounts owed by Group undertakings
undertakings
— amounts owed by Group undertakings (falling due
44
2,395
27
1,444
341
18,552
after more than 1 year)
7 — other debtors
366
555688
4,805
Cash at bank and in hand
415 — balances with Group undertakings
555688
5,220
555688
CREDITORS: amounts falling
due within 1 year
(1,085) Amounts owed to Group undertakings
(187) Other creditors
(532) Taxation
(1,332) Proposed dividend
555688
(3,136)
555688
555688
2,084 NET CURRENT ASSETS
28,995 TOTAL ASSETS LESS CURRENT LIABILITIES
CREDITORS: amounts falling
due after more than 1 year
Subordinated liabilities
(1,336) — owed to third parties
(348) — owed to Group undertakings
(219) Amounts owed to Group undertakings
PROVISIONS FOR LIABILITIES
AND CHARGES
(12) Deferred taxation
555688
27,080 NET ASSETS
zzzccvv
CAPITAL AND RESERVES
3,406 Called up share capital
Share premium account
489
18,432 Revaluation reserve
Profit and loss account
4,753
555688
27,080
zzzccvv
John Bond, Group Chairman
60
8
29
28
31
32
32
32
93
5
720
39
55557778 55557778 55557778
19,652
1,530
2,537
56
3
850
6,584
55557778 55557778 55557778
26,236
55557778 55557778 55557778
3,387
2,042
512
(568)
(121)
(131)
(904)
(941)
(201)
(218)
(1,499)
(7,290)
(1,557)
(1,689)
(11,611)
55557778 55557778 55557778
(22,147)
55557778 55557778 55557778
4,089
55557778 55557778 55557778
229,560
(1,724)
(2,859)
17,870
29,636
528
318
(1,343)
(349)
(221)
(810)
(210)
(133)
(10,403)
(2,703)
(1,712)
(321)
(2,486)
55557778 55557778 55557778
212,256
zzzzxcv zzzzxcv zzzzxcv
27,402
16,523
(194)
3,443
480
19,566
3,913
26,669
3,718
151,559
30,310
55557778 55557778 55557778
212,256
zzzzxcv zzzzxcv zzzzxcv
2,076
289
11,798
2,360
16,523
27,402
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 1998
Profit for the financial year attributable to shareholders
Impairment of land and buildings
Unrealised (deficit)/surplus on revaluation of investment properties
— subsidiaries
— associates
Unrealised (deficit) on revaluation of land and buildings
(excluding investment properties)
Exchange and other movements
Total recognised gains and losses for the year
1998
US$m
4,318
(38)
(190)
(56)
1997
US$m
5,487
—
(3)
13
(1,787)
(31)
(112)
(1,106)
55557778 55557778
4,279
zzzzxcv zzzzxcv
2,216
Reconciliation of Movements in Consolidated Shareholders’ Funds for
the Year Ended 31 December 1998
Profit for the financial year attributable to shareholders
Dividends
Other recognised gains and losses relating to the year
New share capital subscribed
Amounts arising on shares issued in lieu of dividends
Goodwill on acquisition of subsidiary and associated undertakings
Net addition to shareholders’ funds
Shareholders’ funds at 1 January
Shareholders’ funds at 31 December
1998
US$m
4,318
(2,495)
1997
US$m
5,487
(2,206)
55557778 55557778
3,281
1,823
(1,208)
17
337
(1,180)
55557778 55557778
(2,102)
17
584
—
322
1,247
27,080
25,833
55557778 55557778
27,080
zzzzxcv zzzzcccv
27,402
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.
61
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 1998
Net cash inflow from operating activities
Dividends received from associated undertakings
Returns on investments and servicing of finance:
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 investments:
Purchase of investment securities
Proceeds from sale of investment securities
Purchase of tangible fixed assets
Proceeds from sale of tangible fixed assets
Note
35
1998
US$m
9,687
1997
US$m
14,352
82
65
(25)
(813)
(29)
(724)
(313)
(65)
55557778 55557778
(339)
(65)
(1,242)
(1,131)
(1,893)
(1,476)
(31,626)
29,779
(1,355)
339
55557778 55557778
(59,814)
50,568
(2,537)
266
Net cash (outflow) from capital expenditure and financial investments
(11,517)
(2,863)
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
(176)
—
(55)
(990)
32
(120)
23
55557778 55557778
18
Net cash (outflow) from acquisitions and disposals
(213)
(1,055)
Equity dividends paid
Net cash (outflow)/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
(Decrease)/Increase in cash
62
36
37
(1,670)
55557778 55557778
(1,744)
(6,840)
6,222
17
—
—
443
(215)
17
50
(98)
740
(318)
55557778 55557778
391
245
6,613
zzzzxcv zzzzcccv
(6,595)
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 provisions of Financial Reporting Standards (‘FRSs’): FRS 9, ‘Associates and joint
ventures’, FRS 10, ‘Goodwill and intangible assets’, FRS 11, ‘Impairment of fixed assets and goodwill’, and FRS
14, ‘Earnings per share’, together with the British Bankers’ Association’s revised Statement of Recommended Practice
(‘SORP’), ‘Advances’. The Group has applied the transitional arrangements of FRS 10 and goodwill previously
eliminated against reserves has not been reinstated.
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 changed its reporting currency from sterling to US dollars with effect from 1 January 1998.
For comparative purposes, the 1997 sterling reported profit and loss account has been translated into US dollars at
the quarterly average exchange rates. The 1997 sterling reported balance sheets have been translated into US dollars
at the closing rate.
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, including those of Hongkong Bank of Canada,
which in previous years has had a 31 October year-end. For Hongkong Bank of Canada, accounts for a period of 14
months have been used in the 1998 consolidated accounts. 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 the People’s Republic 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.
63
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)
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 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 banks’ or ‘Loans and advances to customers’.
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.
ii Interests in associated undertakings are stated at the Group’s attributable share of their net assets.
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 arises on the acquisition of subsidiary or associated undertakings when the cost of acquisition exceeds
the fair value of the Group’s share of separable net assets acquired. For acquisitions made on or after 1 January
1998, goodwill is included in the balance sheet in ‘Intangible fixed assets’ in respect of subsidiary undertakings
and in ‘Interests in associated undertakings’, in respect of associated undertakings. Capitalised goodwill is amortised
over its estimated life on a straight-line basis. For acquisitions prior to 1 January 1998, goodwill was charged
against reserves in the year of acquisition.
At the date of disposal of subsidiary or associated undertakings, any unamortised goodwill or goodwill charged
directly to reserves is included in the Group’s share of net assets of the undertaking in the calculation of the profit
or loss 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
64
H S B C H O L D I N G S P L C
2 Principal accounting policies (continued)
— 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 or over the remaining useful lives.
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 banks’ or ‘Loans and advances to customers’. 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.
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.
65
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)
i Foreign currencies
i Assets and liabilities denominated in foreign currencies are translated into US dollars at the rates of exchange
ruling at the year-end. The results of branches and subsidiary and associated undertakings not reporting in US
dollars are translated into US dollars 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 exchange rate, interest rate and equities contracts which
are marked-to-market are included in ‘Other assets’. Liabilities, including losses, resulting from such contracts, are
included in ‘Other liabilities’.
3 Dividend income
Income from equity shares
Income from participating interests other than associated undertakings
4 Administrative expenses
Staff costs
— wages and salaries
— social security costs
— other pension costs (Note 4b below)
Premises and equipment (excluding depreciation)
Other administrative expenses
a
66
1998
US$m
138
10
1997
US$m
148
8
55557778 55557778
156
zzzzxcv zzzzxcv
148
1998
US$m
1997
US$m
5,440
398
483
5,139
368
491
55557778 55557778
5,998
1,245
2,094
55557778 55557778
9,337
zzzzxcv zzzzxcv
6,321
1,454
2,315
10,090
H S B C H O L D I N G S P L C
4 Administrative expenses (continued)
The average number of persons employed by the Group during the year was made up as follows:
Commercial banking
Investment banking
b Retirement benefits
1998
Number
137,501
7,020
1997
Number
126,554
6,415
55557778 55557778
132,969
zzzzxcv zzzzcccv
144,521
The Group operates some 125 pension schemes throughout the world, covering 87% of the Group’s employees, with
a total pension cost of US$483 million (1997: US$491 million), of which US$223 million (1997: US$223 million)
relates to overseas schemes. Of the overseas schemes, US$23 million (1997: US$34 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 71% 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 US$401 million (1997: US$416 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 US$7,351million. 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 US$496 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.
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 Hongkong and Shanghai Banking Corporation Limited Local Staff Retirement Benefits Scheme, the latest
valuation was made at 31 December 1998 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 US$635 million. On an ongoing basis, the actuarial value of the scheme’s assets
represented 101% of the benefits accrued to members, after allowing for expected future increases in salaries, and
the resulting surplus amounted to US$3 million. On a wind-up basis, the actuarial value of the scheme’s assets
represents 108% of the members’ vested benefits, based on current salaries, and the resulting surplus amounted to
US$46 million. The actuarial method used was 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.
In Brazil, the Banco HSBC Bamerindus S.A. Lump Sum Retirement Benefit Scheme provides retirement benefits
under an unfunded defined benefit scheme. The latest valuation was made at 31 December 1998 and was performed
by Carl de Montigny, Fellow of the Society of Actuaries, of William M Mercer. At that date, the present value of the
accumulated benefit obligation amounted to US$74 million. US$76 million has been provided in these accounts
(Note 28b) and the surplus evidenced by the latest valuation will be spread forward over the expected remaining
67
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
4 Administrative expenses (continued)
service lives of the current employees. The method adopted for this valuation was the projected unit method and the
main assumptions used were a long-term investment return of 5.0% over the rate of inflation per annum, salary
increases of 2.0% over the rate of inflation per annum and post-retirement pension increases at the rate of inflation
per annum.
The Midland Bank Pension Scheme, The Hongkong and Shanghai Banking Corporation Limited Local Staff
Retirement Benefits Scheme and the Banco HSBC Bamerindus S.A. Lump Sum Retirement Benefit Scheme cover
55% (1997: 54%) of the Group’s employees.
The pension cost for defined contribution schemes, which cover 16% (1997: 12%) of the Group’s employees, was
US$52 million (1997: US$36 million).
The Group also provides post-retirement health-care benefits under schemes, mainly in the UK and also in the
United States, Canada and Brazil. The charge relating to these schemes, which are unfunded, is US$30 million for
the year (1997: US$39 million). The latest actuarial review estimated the present value of the accumulated
post-retirement benefit obligation at US$357 million (1997: US$280 million), of which US$240 million (1997:
US$150 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
Gains on the exercise of share options
1998
US$000
1,063
5,275
965
1997
US$000
775
5,091
1,041
55557778 55557778
6,907
zzzzxcv zzzzxcv
185
zzzzxcv zzzzxcv
7,303
—
In addition, there were annual commitments under retirement benefit agreements with former Directors of
US$303,000 (1997: US$170,000). The provision as at 31 December 1998 in respect of unfunded pension obligations
to former Directors amounted to US$5,856,000 (1997: US$2,728,000).
During the year, aggregate contributions to pension schemes in respect of Directors were US$214,000 (1997:
US$292,000).
Discretionary bonuses for Directors are based on a combination of individual and corporate performance and are
determined by the Remuneration Committee. Details of Directors’ remuneration are included in the ‘Report of the
Directors’ (see pages 29 to 37). The cost of the conditional awards under the Restricted Share Plan 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.
Five Directors waived the right to receive emoluments totalling US$171,000 (1997: four Directors US$156,000).
Details of individual Directors’ remuneration are disclosed in the ‘Report of the Directors’ on page 31.
d Auditors’ remuneration
Auditors’ remuneration amounted to US$17.3 million (1997: US$18.0 million). In addition, US$8.3 million (1997:
US$20.3 million) was paid by Group companies to the auditors and their associates for non-audit work analysed as
follows:
68
H S B C H O L D I N G S P L C
4 Administrative expenses (continued)
Regulatory work
Tax services
Consultancy and recruitment
US registration
Acquisition services
Other
1998
US$m
3.5
1.4
1.5
0.4
—
1.5
1997
US$m
3.4
2.1
2.4
—
10.9
1.5
55557778 55557778
20.3
zzzzxcv zzzzxcv
8.3
In 1997, the auditors provided extensive support in the due diligence and integration of Banco HSBC Bamerindus
S.A. The cost of this support constituted substantially all of the amount disclosed above under ‘Acquisition services’.
5
Profit on ordinary activities before tax
Profit on ordinary activities before tax is stated after:
i Income
Aggregate rentals receivable, including capital repayments, under
— finance leases and hire purchase contracts
— operating leases
Income from listed investments
Profits less losses on debt securities and equities dealing
Gains on disposal of investment securities
ii Charges
Charges incurred with respect to subordinated liabilities
Finance charges in respect of finance leases and similar hire
purchase contracts
Hire of plant and machinery
Rentals payable on premises held under operating leases
1998
US$m
1997
US$m
3,458
501
1,987
190
210
814
26
92
429
3,779
415
1,965
(88)
543
753
26
75
436
Gains on the disposal of investments and tangible fixed assets attracted a tax charge of US$45 million (1997:
US$93 million). Of the after-tax amount, US$3 million (1997: US$31 million) is attributable to minority interests.
6 Tax on profit on ordinary activities
The charge for taxation comprises:
United Kingdom corporation tax charge
Relief for overseas taxation
Overseas taxation
Deferred taxation (Note 28)
Associated undertakings
1998
US$m
745
(13)
1997
US$m
960
(149)
55557778 55557778
811
1,109
129
55557778 55557778
2,049
9
55557778 55557778
2,058
zzzzxcv zzzzcccv
732
1,118
(71)
1,779
10
1,789
The Company and its subsidiary undertakings in the UK provide for UK corporation tax at 31.0% (1997: 31.5%).
Overseas tax includes Hong Kong profits tax of US$293 million (1997: US$436 million). Subsidiary undertakings in
Hong Kong provide for Hong Kong profits tax at the rate of 16.0% (1997: 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.
69
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
7
Profit of the Company
The profit of the Company for the year was US$1,072 million (1997: US$1,520 million).
8 Dividends
First interim
Second interim
1998
5555555555777
1997
5555555555777
US$
per share
US$m
US$
per share
US$m
0.370
0.555
874
1,332
55557778 55557778 55557778 55557778
2,206
zzzzxcv zzzzxcv zzzzcccv zzzzcccv
0.325
0.505
996
1,499
2,495
0.830
0.925
Of the first interim dividend for 1998, US$107 million (1997: US$125 million) was settled by the issue of shares. Of the
second interim dividend for 1997, US$477 million (1996: US$212 million) was settled by the issue of shares in 1998.
9 Earnings per ordinary share
Basic earnings per ordinary share is calculated by dividing the earnings of US$4,318 million (1997: US$5,487 million)
by the weighted average number of ordinary shares outstanding in 1998 of 2,689 million (1997: 2,669 million).
Diluted earnings per share is calculated by dividing the basic earnings, which require no adjustment for the effects of
dilutive ordinary potential shares, by the weighted average number of shares outstanding plus the weighted average
number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares in 1998 of
2,708 million (1997: 2,690 million).
Headline earnings per share continues to have widespread acceptance and has been calculated in accordance with the
definition in the Institute of Investment Management Research (‘IIMR’) Statement of Investment Practice No. 1, ‘The
Definition of IIMR Headline Earnings’, as follows:
Basic earnings per ordinary share
Adjustments:
Gains on disposal of tangible fixed assets
Gains on disposal of subsidiary undertaking
Headline earnings per ordinary share
10 Treasury bills and other eligible bills
Treasury bills and similar securities
Other eligible bills
1998
US$
1.61
1997
US$
2.06
(0.01)
—
(0.01)
(0.01)
55557778 55557778
2.04
zzzzcccv zzzzcccv
1.60
1998
US$m
1997
US$m
19,553
2,427
13,840
3,343
55557778 55557778
17,183
zzzzcccv zzzzcccv
21,980
None of the treasury and other eligible bills has been accounted for as an investment security.
70
H S B C H O L D I N G S P L C
11 Hong Kong SAR currency notes in circulation
Excess note issue (HK$57,384 million)
1997
US$m
8,143
zzzzcccv zzzzcccv
1998
US$m
7,408
The note issue was secured by the deposit of funds in respect of which the Government of the Hong Kong Special
Administrative Region certificates of indebtedness are held.
12 Loans and advances to banks
Remaining maturity
— repayable on demand
— 3 months or less but not repayable on demand
— 1 year or less but over 3 months
— 5 years or less but over 1 year
— over 5 years
Specific bad and doubtful debt provisions (Note 14)
Amounts include:
Due from associated undertakings
— unsubordinated
13 Loans and advances to customers
Remaining maturity
— repayable on demand or at short notice
— 3 months or less but not repayable on demand or at short notice
— 1 year or less but over 3 months
— 5 years or less but over 1 year
— over 5 years
General and specific bad and doubtful debt provisions (Note 14)
1998
US$m
11,155
63,986
6,794
2,265
1,146
1997
US$m
17,795
63,382
3,801
703
887
(31)
(46)
55557778 55557778
86,522
zzzzcccv zzzzcccv
85,315
1998
US$m
1997
US$m
31
zzzzcccv zzzzcccv
82
1998
US$m
33,832
39,204
30,251
67,659
70,976
1997
US$m
36,400
48,342
30,497
67,889
62,425
(6,627)
(5,132)
55557778 55557778
240,421
zzzzcccv zzzzcccv
235,295
Amounts include:
Subordinated
Securitised advances not qualifying for linked
presentation under FRS 5 (‘Reporting the
substance of transactions’)
Due from associated undertakings
— unsubordinated
132
zzzzcccv zzzzcccv
119
152
zzzzcccv zzzzcccv
1,143
347
zzzzcccv zzzzcccv
319
71
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
14 Provisions for bad and doubtful debts
At 1 January 1998
Amounts written off
Recoveries of advances written off in previous years
Charge to profit and loss account
Interest suspended during the year
Suspended interest recovered
Exchange and other movements
At 31 December 1998
Included in:
Loans and advances to banks (Note 12)
Loans and advances to customers (Note 13)
At 1 January 1997
Amounts written off
Recoveries of advances written off in previous years
Charge to profit and loss account
Interest suspended during the year
Suspended interest recovered
Exchange and other movements
At 31 December 1997
Included in:
Loans and advances to banks (Note 12)
Loans and advances to customers (Note 13)
Total
Specific
General
Provisions against advances
Suspended
interest
55557778 55557778 55557778 55557778
US$m
702
(458)
—
—
647
(117)
(6)
55557778 55557778 55557778 55557778
768
zzzzcccv zzzzcccv zzzzcccv zzzzcccv
US$m
3,157
(1,398)
172
2,627
—
—
81
US$m
5,178
(1,398)
172
2,637
—
—
69
US$m
2,021
—
—
10
—
—
(12)
4,639
6,658
2,019
31
6,627
55557778
6,658
zzzzcccv
Total
Specific
General
Provisions against advances
Suspended
interest
55557778 55557778 55557778 55557778
US$m
670
(75)
—
—
253
(100)
(46)
55557778 55557778 55557778 55557778
702
zzzzcccv zzzzcccv zzzzcccv zzzzcccv
US$m
4,758
(752)
173
1,014
—
—
(15)
US$m
1,572
—
—
481
—
—
(32)
US$m
3,186
(752)
173
533
—
—
17
5,178
3,157
2,021
46
5,132
55557778
5,178
zzzzcccv
The total of advances, net of suspended interest, on which interest is being placed in suspense, is as follows:
Gross
Net of specific provisions
1997
US$m
3,240
1,206
zzzzcccv zzzzcccv
1998
US$m
6,435
3,148
72
H S B C H O L D I N G S P L C
15 Concentrations of exposure
The Group has the following concentrations of loans and advances to customers:
Total gross advances
to customers:
At 31 December 1998
Residential mortgages
Hong Kong SAR
Government Home
Ownership Scheme
Other personal
Commercial, industrial
and international trade
Commercial real estate
Other property related
Government
Non-bank financial
institutions
Settlement accounts
Other commercial*
Total gross advances
to customers:
At 31 December 1997
Residential mortgages
Hong Kong SAR
Government Home
Ownership Scheme
Other personal
Commercial, industrial
and international trade
Commercial real estate
Other property related
Government
Non-bank financial
institutions
Settlement accounts
Other commercial*
Rest of
Asia-Pacific
North
America
Latin
America
Europe
Hong Kong
Total
5555778 5555777 5555777 5555777 5555777 5555778
US$m
62,212
US$m
13,059
US$m
25,051
US$m
20,716
US$m
2,746
US$m
640
—
12,000
28,224
6,418
2,110
3,381
6,291
4,257
10,952
9,420
2,248
551
—
3,322
13,189
3,601
2,126
567
—
5,265
6,444
4,615
1,591
651
—
888
2,602
62
174
135
6,291
25,732
61,411
24,116
8,249
5,285
4,638
877
15,200
11,763
4,963
32,467
5555778 5555777 5555777 5555777 5555777 5555778
242,489
zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv
2,259
78
7,377
3,238
3,734
3,934
1,527
231
5,071
101
43
885
32,380
93,564
68,484
42,531
5,530
Rest of
Asia-Pacific
North
America
Latin
America
Europe
Hong Kong
Total
5555778 5555777 5555777 5555777 5555777 5555778
US$m
60,002
US$m
13,858
US$m
24,364
US$m
19,133
US$m
2,233
US$m
414
—
10,236
28,277
6,092
2,023
3,530
4,631
4,367
11,947
10,424
2,569
120
—
3,187
14,464
3,660
1,757
277
—
5,597
5,601
4,955
1,585
576
—
788
2,267
14
148
11
4,631
24,175
62,556
25,145
8,082
4,514
5,569
1,248
13,943
21,363
4,339
31,360
5555778 5555777 5555777 5555777 5555777 5555778
246,167
zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv
8,230
2,644
3,811
1,632
211
5,171
5,283
182
7,649
649
54
786
32,592
71,536
90,051
46,857
5,131
* Other commercial includes advances in respect of agriculture, transport, energy and utilities.
The geographical information shown above has been classified by the location of the principal operations of the subsidiary
undertaking, or in the case of The Hongkong and Shanghai Banking Corporation Limited, Midland Bank plc and The
British Bank of the Middle East operations, by the location of the branch responsible for advancing the funds.
73
1998
5555555555777
Market
valuation
1997
5555555555777
Market
valuation
5555777 5555777 5555777 5555777
US$m
Book value
Book value
US$m
US$m
US$m
21,475
1,520
17,306
776
5555777 5555777 5555777 5555777
18,082
zzzzxcv
23,288
zzzzxcv
21,722
1,566
17,122
760
22,995
17,882
13,532
336
5555777
36,863
5555777
8,208
743
5555777
26,833
5555777
4,963
9,536
3,871
5,883
5555777 5555777 5555777 5555777
9,754
zzzzxcv
14,628
zzzzxcv
4,957
9,671
3,806
5,929
14,499
9,735
10,159
7,664
5555777
32,322
5555777
69,185
zzzzxcv
38,202
30,983
5555777
69,185
zzzzxcv
10,583
8,613
5555777
28,931
5555777
55,764
zzzzxcv
25,409
30,355
5555777
55,764
zzzzxcv
124
zzzzxcv
127
zzzzxcv
85
zzzzxcv
(28)
zzzzxcv
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
16 Debt securities
Issued by public bodies
Investment securities
— government securities and US government agencies
— other public sector securities
Other securities
— government securities and US government agencies
— other public sector securities
Issued by other bodies
Investment securities
— bank and building society certificates of deposit
— other debt securities
Other securities
— bank and building society certificates of deposit
— other debt securities
Due within 1 year
Due 1 year and over
Amounts include:
Subordinated debt securities
Unamortised net premiums/(discounts) on
investment securities
74
H S B C H O L D I N G S P L C
16 Debt securities (continued)
Investment securities
— listed on a recognised UK exchange
— listed in Hong Kong
— listed elsewhere
— unlisted
Other securities
— listed on a recognised UK exchange
— listed in Hong Kong
— listed elsewhere
— unlisted
1998
5555555555777
Market
valuation
1997
5555555555777
Market
valuation
5555777 5555777 5555777 5555777
Book value
Book value
US$m
US$m
US$m
US$m
5,675
783
12,670
18,366
6,064
466
8,829
12,477
5555777 5555777 5555777 5555777
27,836
zzzzxcv
5,722
821
12,903
18,470
6,036
481
8,635
12,465
37,916
zzzzxcv
37,494
27,617
5,721
1,004
11,462
13,504
5555777
69,185
zzzzxcv
3,062
642
10,454
13,989
5555777
55,764
zzzzcccv
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
US$37,792 million (1997: US$27,760 million).
Investment securities:
At 1 January 1998
Additions
Disposals and amounts repaid
Provisions made
Amortisation of discounts and premiums
Exchange and other movements
At 31 December 1998
Cost
Book
value
Provisions
5555777 5555777 5555777
US$m
27,617
59,591
(50,279)
(19)
53
531
5555777 5555777 5555777
37,494
zzzzxcv zzzzxcv zzzzxcv
US$m
27,660
59,591
(50,279)
—
53
535
US$m
(43)
—
—
(19)
—
(4)
37,560
(66)
75
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
1998
5555555555777
Market
valuation
1997
5555555555777
Market
valuation
5555777 5555777 5555777 5555777
US$m
Book value
Book value
US$m
US$m
US$m
45
306
122
667
133
697
380
583
5555777 5555777 5555777 5555777
1,793
zzzzcccv
84
623
170
852
44
356
206
438
1,729
zzzzxcv
1,140
1,044
1,400
14
1,550
117
55557777
4,221
zzzzxcv
1,107
80
822
175
5555777
3,228
zzzzcccv
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 152,955 (1997: 249,440) shares in the Company held by subsidiary undertakings as equity
market-makers.
Investment securities:
At 1 January 1998
Additions
Disposals
Provisions made
Provisions released
Provisions written off
Exchange and other movements
At 31 December 1998
18 Interests in associated undertakings
At 1 January 1998
Additions
Retained profits
Disposals
Deficit on revaluation of property
Exchange and other movements
At 31 December 1998
76
Cost
Book
value
Provisions
5555777 5555777 5555777
US$m
1,044
223
(79)
(68)
6
—
14
5555777 5555777 5555777
1,140
zzzzxcv zzzzxcv zzzzxcv
US$m
1,168
223
(92)
—
—
(3)
25
US$m
(124)
—
13
(68)
6
3
(11)
1,321
(181)
1998
US$m
899
48
37
(14)
(94)
13
5555777
889
zzzzxcv
H S B C H O L D I N G S P L C
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:
1998
US$m
647
242
1997
US$m
562
337
5555777 5555777
899
zzzzxcv zzzzccc
408
491
5555777 5555777
899
zzzzxcv zzzzccc
427
462
889
889
Accounts
made up to
5555777
31.12.98
Country of
incorporation
5555777
Hong Kong
Principal
activity
5555777
Property
Barrowgate Limited
British Arab Commercial
Group’s
interest
in equity
capital
5555777
25%
Bank Limited
31.12.98
England
Banking
47%
Issued
equity
capital
5555777
*
US$81m
£32m fully
paid, £5m
nil paid
British Interactive
Broadcasting Limited
31.12.98
England
Digital
interactive
services
20%
†
The Cyprus Popular
Bank Limited
Egyptian British
Bank S.A.E.
Máxima S.A. A.F.J.P.
Mondex Holdings Limited
The Saudi British Bank
Wells Fargo HSBC
31.12.98
Cyprus
Banking
31.12.98
30.6.98
31.12.98
31.12.98
Egypt
Argentina
England
Saudi Arabia
Banking
Pension fund
management
Electronic cash
Banking
Trade Bank, N.A.
31.12.98
United States
Trade finance
World Finance
International Limited
30.6.98
Bermuda
Shipping
* 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.
22%
40%
35%
50%
40%
20%
38%
C£75m
E£101m
ARS98m
†
SR1,600m
¶
US$58m
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$44.5 million 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$1 million) of Wells
Fargo HSBC Trade Bank, N.A. The Group has a 40% economic interest in Wells Fargo HSBC Trade Bank, N.A. by
virtue of the joint agreement under which the Group’s equity capital and preferred stock interests are held.
77
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
19 Other participating interests
Listed other than on a recognised UK exchange or in Hong Kong
Unlisted
Market value of listed securities
Other participating interests in banks
At 1 January 1998
Additions
Disposals
Transfers
Provisions made
Provisions written off
Exchange and other movements
At 31 December 1998
20 Intangible fixed assets
Goodwill
Cost at 1 January 1998
Additions
Exchange movements
Cost at 31 December 1998
Accumulated amortisation at 1 January 1998
Charge to the profit and loss account
Accumulated amortisation at 31 December 1998
Net book value at 31 December 1998 (1997: US$ nil)
1998
US$m
1997
US$m
4
305
5
315
5555777 5555777
320
zzzzxcv zzzzccc
8
zzzzxcv zzzzccc
292
zzzzxcv zzzzccc
287
309
6
Cost
Carrying
value
Provisions
5555777 5555777 5555777
US$m
320
7
(4)
(7)
(4)
—
(3)
5555777 5555777 5555777
309
zzzzxcv zzzzxcv zzzzxcv
US$m
(30)
—
—
—
(4)
6
1
US$m
350
7
(4)
(7)
—
(6)
(4)
(27)
336
Cost
5555777
US$m
—
160
(4)
5555777
156
zzzzccc
Accumulated
amortisation
5555777
US$m
—
(10)
5555777
(10)
5555777
146
zzzzccc
Additions represent goodwill arising on acquisitions of subsidiaries during 1998 which is being amortised over periods
of between 5 and 15 years.
78
H S B C H O L D I N G S P L C
21 Tangible fixed assets
a Group
Freehold
land and
buildings
Long
leasehold
land and
buildings*
Short
leasehold
land and
buildings
Equipment,
fixtures and
fittings
Equipment
on
operating
leases
Total
5555778 5555777 5555777 5555777 5555777 5555778
US$m
US$m
US$m
US$m
US$m
US$m
Cost or valuation at
1 January 1998
Additions
Disposals
Reclassification
Transfer of accumulated
depreciation arising
on revaluation
Impairment of land and
buildings
Deficit on revaluation
Exchange and
2,327
119
(101)
—
(32)
(38)
(81)
3,919
717
(9)
243
(190)
—
(1,355)
3,070
639
(23)
4
(55)
—
(858)
3,678
603
(382)
(247)
—
—
—
3,374
459
(253)
—
—
—
—
16,368
2,537
(768)
—
(277)
(38)
(2,294)
other movements
81
Cost or valuation at 5555778 5555777 5555777 5555777 5555777 5555778
15,609
zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv
31 December 1998
3,604
3,314
2,211
2,778
3,702
(11)
50
24
17
1
Accumulated depreciation
at 1 January 1998
Disposals
Reclassification
Transfer of accumulated
depreciation arising
on revaluation
Charge to the profit and
loss account
Exchange and
other movements
Accumulated
depreciation at
31 December 1998
Net book value at
31 December 1998
Net book value at
31 December 1997
—
6
—
32
(41)
(2)
—
1
(161)
190
(45)
15
(435)
16
—
55
(92)
(3)
(2,187)
340
161
—
(501)
(56)
(712)
167
—
—
(225)
(24)
(3,334)
530
—
277
(904)
(70)
5555778 5555777 5555777 5555777 5555777 5555778
(3,501)
zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv
(2,243)
(459)
(794)
(5)
—
12,108
zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv
2,810
2,206
2,319
3,314
1,459
13,034
zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv zzzzxvv
2,662
2,327
3,919
1,491
2,635
* Included in the cost and net book value of long leasehold land and buildings is a payment on account in respect of a long leasehold
interest of US$695 million (1997: US$ nil).
79
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
21 Tangible fixed assets (continued)
b Company
Cost or valuation at 1 January 1998
Additions
Disposals
Surplus on revaluation
Exchange and other movements
Cost or valuation at 31 December 1998
Accumulated depreciation at 1 January 1998
Disposals
Charge to the profit and loss account
Accumulated depreciation at 31 December 1998
Net book value at 31 December 1998
Net book value at 31 December 1997
c Valuations
Cost or valuation of freehold and long and short
leasehold land and buildings
(excluding investment properties):
At 1998 valuation (1997: at 1997 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
Freehold
land and
buildings
Equipment,
fixtures and
Total
fittings
55557778 55557778 55557778
US$m
6
2
(1)
1
1
55557778 55557778 55557778
9
zzzzxcv zzzzxcv zzzzxcv
US$m
3
2
(1)
—
—
US$m
3
—
—
1
1
4
5
—
—
—
(1)
1
(1)
55557778 55557778 55557778
(1)
zzzzxcv zzzzxcv zzzzxcv
(1)
1
(1)
(1)
—
8
zzzzxcv zzzzxcv zzzzxcv
5
3
5
zzzzcccv zzzzcccv zzzzxcv
2
3
555577775556666777 5577775556665557
Company
Group
1998
1997
5555777 5555777 5555777 5555777
US$m
US$m
US$m
US$m
1998
1997
7,039
676
3
—
5555777 5555777 5555777 5555777
3
zzzzxcv zzzzcccv zzzzxcv zzzzcccv
7,840
732
7,715
8,572
5
—
5
6,190
(863)
—
—
5555777 5555777 5555777 5555777
—
zzzzxcv zzzzcccv zzzzxcv zzzzxcv
4,867
(776)
4,091
5,327
—
—
—
The Group values its non-investment properties on an annual basis. In November 1998, the Group’s freehold and
long leasehold properties, together with all leasehold properties in Hong Kong, were revalued on an existing use
basis or open market value as appropriate 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 US$2,005 million. A deficit of US$1,787 million (net of minority interest of US$218 million) was charged to
reserves at 31 December 1998.
Included within ‘Short leasehold land and buildings’ are the following amounts in respect of assets classed as
improvements to buildings, which are carried at depreciated historical cost:
80
H S B C H O L D I N G S P L C
21 Tangible fixed assets (continued)
At 1 January 1998
Additions
Disposals
Charge for the year
Exchange and other movements
At 31 December 1998
Cost Accumulated
depreciation
5555777 5555777
US$m
(448)
—
114
(42)
20
5555777 5555777
(356)
zzzzxcv zzzzxcv
US$m
738
23
(120)
—
35
676
Net book value at 31 December 1998
(1997: US$290 million)
320
zzzzcccv
The property of the Company was also valued by an independent, professionally qualified valuer on an existing use
basis. The surplus on revaluation of US$1 million has been credited to reserves at 31 December 1998.
d Investment properties
The valuation at which investment properties are included in Group tangible fixed assets, together with the net book
value of these properties calculated under the historical cost basis, is as follows:
55555555555 55555555555
1997
1998
Freehold land and buildings
Short and long leasehold land and buildings
At cost
At valuation
At valuation
At cost
5555777 5555777 5555777 5555777
US$m
41
99
5555777 5555777 5555777 5555777
140
zzzzxcv zzzzxcv zzzzcccv zzzzcccv
US$m
41
546
US$m
41
147
US$m
41
699
188
587
740
Investment properties are valued on an open market value basis at 31 December annually by professional valuers.
Investment properties in the Hong Kong SAR, Macau and mainland China, which represent 90% by value of the
Group’s properties subject to revaluation, were valued by C Y Leung & Company Limited. The valuations were
carried out by qualified valuers who are members of the Hong Kong Institute of Surveyors. As a result of the
revaluation, the net book value of investment properties has decreased by US$289 million (1997: surplus of
US$2 million). A deficit of US$190 million (net of minority interests of US$99 million) has been charged to reserves
at 31 December 1998.
The Company had no investment properties at 31 December 1998 or 1997.
e Group properties leased to customers
Group properties leased to customers, none of which was held by the Company, included US$483 million at
31 December 1998 (1997: US$692 million) let under operating leases, net of accumulated depreciation of
US$21 million (1997: US$21 million).
f Land and buildings occupied for own activities
Net book value
1998
1997
US$m
7,883
zzzzxcv zzzzcccv
US$m
6,420
There were no such assets in the Company at 31 December 1998 or 1997.
81
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
22 Investments
a
At 1 January 1998
Additions
Repayments and redemptions
Amortisation of discounts and premiums
Transfers
Write-up of subsidiary undertakings to
net asset value (Note 32)
Exchange movements
At 31 December 1998
Shares in
Group
undertakings
Total
5555777 5555777 5555777 5555777
US$m
Loans to
Group
undertakings
US$m
US$m
US$m
Other
investments
other than
loans
25,776
17
—
—
—
730
65
—
—
273
400
1,093
(400)
1
—
26,906
1,175
(400)
1
273
1,142
—
1,142
3
5555777 5555777 5555777 5555777
29,100
zzzzxcv zzzzxcv zzzzxcv zzzzxcv
26,935
1,097
1,068
—
—
—
3
‘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 US$2.8 million, after amortisation, of the Company’s own
shares (1997: US$1.6 million) 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 30 and 32 to 33. At 31 December 1998, the
trust held 163,329 shares (1997: 69,097 shares) of nominal value 75p with a market value at that date of US$4,413,494
(1997: US$1,775,323) in respect of these conditional awards.
‘Other investments other than loans’ also includes the Company’s holdings of investments in unlisted US government
agencies discount notes of US$1,094 million (1997: US$ nil) and investments in UK government stock listed on a
recognised UK exchange of US$ nil (1997: US$399 million). The market value of these investments at 31 December
1998 was US$1,094 million (1997: US$410 million).
On the historical cost basis, shares in Group
undertakings would have been included as follows:
Cost less provisions of US$170 million
(1997: US$170 million)
b The principal subsidiary undertakings of the Company are:
Europe
The British Bank of the Middle East
Forward Trust Group Limited
HSBC Gibbs Limited
HSBC Investment Bank plc
Midland Bank plc
Midland Life Limited
Samuel Montagu & Co. Limited
Guyerzeller Bank AG (indirect minority)*
Trinkaus & Burkhardt KGaA
1998
US$m
1997
US$m
23,643
zzzzxcv zzzzcccv
23,659
Country of
Issued
incorporation
equity
or registration
capital
5555777 5555777 5555777
Principal
activity
England
England
England
England
England
England
England
Switzerland
Banking
Finance
Insurance
Investment
banking
Banking
Insurance
Private
banking
Banking
£150m
£265m
£3m
£180m
£797m
£14m
£112m
SFr5m
(partnership limited by shares, 73.47% owned)
Germany
Banking
DM131m
82
H S B C H O L D I N G S P L C
22 Investments (continued)
Hong Kong
Hang Seng Bank Limited (62.14% owned)
The Hongkong and Shanghai Banking
Corporation Limited
HSBC Insurance Limited
HSBC Investment Bank Asia Limited
Wayfoong Finance Limited
Rest of Asia-Pacific
HongkongBank of Australia Limited
HSBC Bank Malaysia Berhad
North America
Hongkong Bank of Canada
HSBC Americas, Inc.
HSBC Securities, Inc.
Marine Midland Bank
Latin America
Banco HSBC Bamerindus S.A.
HSBC Banco Roberts S.A.
HSBC Bamerindus Seguros S.A. (99.64% owned)
La Buenos Aires Compañia Argentina de Seguros
S.A. (98.68% owned)
* 15.82% owned by Trinkaus & Burkhardt KGaA
† Issued equity capital is less than US$1 million
Country of
Issued
equity
incorporation
or registration
capital
555567777 5555777 5555777
Principal
activity
Hong Kong
Banking HK$9,566m
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Banking HK$16,254m
HK$125m
HK$770m
Insurance
Investment
banking
Finance
HK$300m
Australia
Malaysia
Banking
Banking
A$500m
M$100m
Canada
United States
United States
United States
Banking
Holding
company
Investment
banking
Banking
C$75m
— †
— †
US$185m
Brazil
Argentina
Brazil
Banking
Banking
Insurance
BRL875m
ARS220m
BRL244m
Argentina
Insurance
ARS21m
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 (including Hongkong Bank of Canada, which in previous years has had a 31 October year-end) except for
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 fair value adjustments made in 1997 in respect of the acquisition of selected assets, liabilities and subsidiaries of
Banco Bamerindus do Brasil were provisional pending completion of the intervention period. On 25 March 1998,
the final date of completion of the intervention period, Banco HSBC Bamerindus S.A. assumed pension plan and life
and health insurance provisions previously the responsibility of Banco Bamerindus do Brasil until that date.
Cash of US$377 million, being the fair value of these liabilities (Note 28b), was transferred to Banco HSBC Bamerindus
S.A. from the Central Bank to meet the obligations. No other significant adjustments to the fair values have been
made. No adjustment was required to goodwill.
83
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
23 Other assets
Bullion
Assets, including gains, resulting from off-balance-sheet
interest rate, exchange rate and equities contracts
which are marked-to-market
Current taxation recoverable
Deferred taxation (Note 28)
Long-term assurance assets attributable to policyholders (Note 27)
Other accounts
1998
US$m
309
1997
US$m
324
18,206
140
195
7,582
5,920
21,669
115
96
6,741
4,310
5555777 5555777
33,255
zzzzxcv zzzzcccv
32,352
Included in the above are 2,489,911 (1997: 2,458,506) shares in the Company held by subsidiary undertakings as part
of their insurance and retirement funds for the benefit of the policyholders.
The composition of the net tangible assets relating to long-term assurance and retirement funds is analysed as follows:
Loans and advances to banks — with Group companies
Debt securities
Equity shares
Other assets
Prepayments and accrued income
Other liabilities
24 Deposits by banks
Repayable on demand
With agreed maturity dates or periods of notice, by remaining maturity:
— 3 months or less but not repayable on demand
— 1 year or less but over 3 months
— 5 years or less but over 1 year
— over 5 years
1998
US$m
261
2,757
2,811
2,354
40
(641)
1997
US$m
296
2,660
2,513
2,352
40
(1,120)
5555777 5555777
6,741
zzzzxcv zzzzcccv
7,582
1998
US$m
12,599
1997
US$m
11,498
17,298
3,282
1,061
102
21,847
4,798
700
104
5555777 5555777
38,947
zzzzxc zzzzcccv
34,342
Amounts include:
Due to associated undertakings
Due to other participating interests
79
zzzzxcv zzzzccc
47
—
zzzzxcv zzzzccc
4
84
H S B C H O L D I N G S P L C
25 Customer accounts
Repayable on demand
With agreed maturity dates or periods of notice, by remaining maturity:
— 3 months or less but not repayable on demand
— 1 year or less but over 3 months
— 5 years or less but over 1 year
— over 5 years
Amounts include:
Due to associated undertakings
26 Debt securities in issue
Bonds and medium-term notes, by remaining maturity:
— within 1 year
— between 1 and 2 years
— between 2 and 5 years
— over 5 years
Other debt securities in issue, by remaining maturity:
— 3 months or less
— 1 year or less but over 3 months
— 5 years or less but over 1 year
— over 5 years
1998
US$m
136,722
1997
US$m
134,988
148,597
16,417
5,136
2,038
140,278
14,103
3,459
1,361
5555777 5555777
294,189
zzzzxcv zzzzccc
308,910
40
zzzzxcv zzzzccc
29
1998
US$m
1997
US$m
1,895
1,752
3,409
165
1,100
468
3,002
231
5555777 5555777
4,801
7,221
10,025
7,537
4,007
400
10,933
7,443
4,470
98
5555777 5555777
27,745
zzzzcccv zzzzxcv
29,190
85
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
27 Other liabilities
Short positions in securities:
Treasury bills and other eligible bills
Debt securities
— government securities
— other public sector securities
— other debt securities
Equity shares
Liabilities, including losses, resulting from off-balance-sheet
interest rate, exchange rate and equities contracts
which are marked-to-market
Current taxation
Obligations under finance leases
Dividend payable by the Company
Long-term assurance liabilities attributable to policyholders (Note 23)
Other liabilities
Obligations under finance leases fall due as follows:
— within 1 year
— between 1 and 5 years
— over 5 years
1998
US$m
1,627
1997
US$m
1,729
8,732
94
524
674
7,161
40
949
810
5555777 5555777
10,689
11,651
19,615
1,273
310
1,499
7,582
6,732
21,959
1,886
293
1,332
6,741
6,776
5555777 5555777
49,676
zzzzxcv zzzzxcv
48,662
33
7
270
21
10
262
5555777 5555777
293
zzzzxcv zzzzxcv
310
28 Provisions for liabilities and charges
a Deferred taxation
i Deferred taxation is provided for in accordance with the Group’s accounting policy in Note 2g.
Group
Company
5555777 5555777
US$m
12
(24)
331
2
5555777 5555777
321
zzzzxcv zzzzxcv
US$m
843
(71)
331
(30)
1,073
At 1 January 1998
Credit to profit and loss account (Note 6)
Advance corporation tax utilised
Exchange and other movements
At 31 December 1998
86
H S B C H O L D I N G S P L C
28 Provisions for liabilities and charges (continued)
Included in ‘Provision for liabilities and charges’
Included in ‘Other assets’ (Note 23)
Net deferred taxation provision
Comprising:
Short-term timing differences
Leasing transactions
Relief for tax losses
Advance corporation tax on dividends proposed
Provision for additional UK tax on profit
remittances from overseas
Other items
5555777555555 55555555555
Company
Group
1998
US$m
1997
US$m
1998
US$m
1997
US$m
1,268
(195)
12
—
5555777 5555777 5555777 5555777
12
zzzzxcv zzzzxcv zzzzxcv zzzzxcv
939
(96)
321
—
1,073
321
843
(21)
985
(11)
—
30
891
(12)
(331)
—
—
—
—
—
—
—
(331)
232
(112)
233
110
5555777 5555777 5555777 5555777
12
zzzzxcv zzzzxcv zzzzxc zzzzxcvv
233
32
232
89
1,073
321
843
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 US$304 million provision for a potential UK tax charge established upon the acquisition of
Midland, US$232 million remained at 31 December 1998 (1997: US$233 million).
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 1998, there were potential future tax benefits of approximately US$380 million (1997:
US$410 million) in respect of trading losses, allowable expenditure charged to the profit and loss account but not
yet allowed for tax and capital losses which have not been recognised because recoverability of the potential
benefits is not considered certain.
b Other provisions for liabilities and charges
Provisions
for pension
and other post-
retirement
obligations
Provisions
for
contingent
liabilities and
commitments
Insurance
and other
provisions
Total
5555777 5555777 5555777 5555777
US$m
2,133
377
1,290
(974)
143
(63)
5555777 5555777 5555777 5555777
2,906
zzzzxcv zzzzxcv zzzzxcv zzzzxcv
US$m
501
—
144
(62)
(227)
(61)
US$m
1,306
—
1,097
(876)
320
14
US$m
326
377
49
(36)
50
(16)
1,861
750
295
At 1 January 1998
Provisions assumed (Note 22c)
Charge to the profit and loss account
Provisions utilised
Transfers
Exchange and other movements
At 31 December 1998
Pension provisions assumed relate to amounts transferred to Banco HSBC Bamerindus S.A. which were previously
the responsibility of Banco Bamerindus do Brasil until 25 March 1998. This transfer arose on completion of the
intervention period.
None of the above provisions relates to the Company (1997: US$ nil).
87
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
29 Subordinated liabilities
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
1998
US$m
1997
US$m
—
3,247
—
3,245
5555777 5555777
3,245
5555777 5555777
3,247
1,343
6,254
1,336
5,945
5555777 5555777
7,281
5555777 5555777
7,597
1,343
9,501
1,336
9,190
5555777 5555777
10,526
zzzzxc zzzzxcv
10,844
624
266
2,072
4,635
66
588
1,509
5,118
5555777 5555777
7,281
zzzzxcv zzzzccc
7,597
The total subordinated borrowings of the Company are as follows:
1998
US$m
1997
US$m
685
408
250
681
405
250
5555777 5555777
1,336
1,343
349
348
5555777 5555777
1,684
zzzzxcv zzzzccc
1,692
1,034
658
681
1,003
5555777 5555777
1,684
zzzzxcv zzzzccc
1,692
£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
88
H S B C H O L D I N G S P L C
29 Subordinated liabilities (continued)
At 31 December 1998, the following other Group subordinated borrowings were US$200 million or over:
US$1,200m
US$750m
US$500m
US$500m
£250m
US$400m
HK$3,000m
US$350m
£200m
£200m
US$300m
US$300m
US$300m
US$300m
£150m
£150m
£150m
¥24.8b
US$200m
US$200m
US$200m
US$200m
Primary capital subordinated undated floating rate notes
Undated floating rate primary capital notes
Undated floating rate primary capital notes
7.625% subordinated notes 2006
Subordinated unsecured floating rate notes 2001
8.625% subordinated notes 2004
Subordinated collared (7% to 9%) floating rate notes 2003
7.4% subordinated guaranteed notes 2003
9% subordinated notes 2005
6.5% subordinated notes 2023*
Undated floating rate primary capital notes (Series 3)
6.95% subordinated notes 2011
7.65% subordinated notes 2025
7% fixed rate subordinated notes 2006
9.25% step-up undated subordinated notes
8.625% step-up undated subordinated notes
Subordinated step-up coupon floating rate notes 2007
Fixed rate (5.0% to 5.5%) subordinated loans 2004
7.808% capital securities 2026
8.38% capital securities 2027
Guaranteed floating rate notes 1999
Floating rate subordinated notes 2000
1998
US$m
1,200
750
500
500
414
400
388
350
332
327
300
300
300
298
248
248
248
218
200
200
200
200
1997
US$m
1,200
750
500
500
412
400
388
350
329
—
300
300
300
298
247
247
247
189
200
200
200
200
Other subordinated liabilities less than US$200m
1,380
1,433
5555777 5555778888888
9,190
zzzzxcv zzzzxcv
9,501
* The proceeds of the issue of 6.5% subordinated notes 2023 were used to support the development of Midland and to strengthen further
Midland’s capital base.
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 Financial Services Authority, 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%.
30 Minority interests — non-equity
Preference shares issued by subsidiaries:
US$875m
Non-cumulative preference shares
1997
US$m
850
zzzzxcv zzzzxcv
1998
US$m
870
89
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
31 Called up share capital
Authorised:
The authorised ordinary share capital of the Company at 31 December 1998 and 1997 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 1998 and
1997, the authorised preference share capital of the Company is £500 million divided into 500 million non-cumulative
preference shares of £1 each.
Issued:
At 1 January 1998
Shares issued under option schemes
Shares issued in lieu of dividends
Exchange movements
At 31 December 1998
Number of
75p
shares
5555577 5555777
Number of
HK$10
shares
1,801,612,569
—
14,495,821
—
874,130,350
2,427,043
6,392,205
—
5555577 5555777
1,816,108,390
882,949,598
zzzzzx zzzzxcv
US$m
5555777
3,406
3
27
7
5555777
3,443
zzzzccc
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 Group’s Executive and
Savings-Related Share Option Schemes and Midland’s Executive and Savings-Related Share Option Schemes are as
follows:
31 December 1998
31 December 1997
32 Reserves
Number of shares
46,150,679
43,496,592
Period of exercise
1999 to 2008
1998 to 2007
Exercise price
£1.1843 to £23.395
£1.1843 to £23.395
Associated
undertakings
5555777 5555777 5555777
US$m
Company
US$m
US$m
Group
489
14
(27)
4
—
—
—
—
5555777 5555777 5555777
—
zzzzxcv zzzzxcv zzzzxcv
489
14
(27)
4
480
480
Share premium account:
At 1 January 1998
Shares issued under option schemes
Shares issued in lieu of dividends and associated issue costs
Exchange movements
At 31 December 1998
90
H S B C H O L D I N G S P L C
32 Reserves (continued)
Revaluation reserves:
— Investment property revaluation reserve
At 1 January 1998
Unrealised deficit on revaluation of land and buildings
Transfer from revaluation reserve
Realisation on disposal of properties
Exchange and other movements
At 31 December 1998
— Revaluation reserve:
At 1 January 1998
Realisation on disposal of properties
Impairment of land and buildings
Unrealised (deficit)/surplus on revaluation of Group properties
Transfer of depreciation from profit and loss account reserve
Transfer to investment property revaluation reserve
Net increase in attributable net assets of subsidiary undertakings
Exchange and other movements
At 31 December 1998
Total revaluation reserves
Profit and loss account:
At 1 January 1998
Retained profit/(deficit) for the year
Transfer of depreciation to revaluation reserve
Realisation on disposal of properties
Arising on shares issued in lieu of dividends
Exchange and other movements
At 31 December 1998
Associated
undertakings
5555777 5555777 5555777
US$m
Company
US$m
US$m
Group
516
(246)
59
(1)
—
104
(56)
—
—
—
5555777 5555777 5555777
48
5555777 5555777 5555777
—
—
—
—
—
328
—
3,746
(12)
(38)
(1,787)
(52)
(59)
—
(6)
8
—
—
—
—
—
—
—
5555777 5555777 5555777
8
5555777 5555777 5555777
18,432
—
—
1
—
—
1,142
(9)
19,566
1,792
56
zzzzxcv zzzzxcv zzzzxcv
19,566
2,120
18,923
1,823
52
13
584
(36)
163
126
—
—
—
(42)
5555777 5555777 5555777
247
zzzzxcv zzzzxcv zzzzxcv
4,753
(1,423)
—
—
584
(1)
21,359
3,913
In 1998, the Group adopted FRS 10, ‘Goodwill and intangible assets’. Prior to 1 January 1998, goodwill amounting to
US$5,136 million has been charged against reserves in respect of acquisitions of subsidiaries in prior years.
Many of the Group’s banking subsidiary and associated undertakings operate under local regulatory jurisdictions which
could potentially restrict the amount of reserves which can be remitted to the Company in order to maintain local
regulatory capital ratios. In addition, as stated in Note 28a (ii) above, the remittance of reserves may result in further
taxation liabilities.
91
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
33 Analysis of total assets and total liabilities
a Assets and liabilities denominated in foreign currency
Denominated in US dollars
Denominated in currencies other than US dollars
Total assets
Denominated in US dollars
Denominated in currencies other than US dollars
Total liabilities
1998
US$m
1997
US$m
154,124
329,004
169,346
302,340
5555777 5555777
471,686
zzzzxcv zzzzccc
483,128
142,672
340,456
172,362
299,324
5555777 5555777
471,686
zzzzxcv zzzzxcv
483,128
b Assets subject to sale and repurchase transactions
Total assets subject to sale and repurchase transactions
1997
US$m
10,104
zzzzxc zzzzcccv
1998
US$m
15,204
c Assets leased to customers
Loans and advances to customers
Tangible fixed assets — equipment on operating leases (Note 21a)
1998
US$m
7,723
2,810
1997
US$m
7,665
2,662
5555777 5555777
10,327
zzzzxcv zzzzccc
10,533
The cost of assets acquired during 1998 for letting to customers under finance leases and hire purchase contracts by
the Group amounted to US$3,522 million (1997: US$4,477 million).
d Assets charged as security for liabilities
The Group has pledged assets as security for liabilities included under the following headings:
Deposits by banks
Customer accounts
Debt securities in issue
Other liabilities
Amount of liability secured
5555555555777
1997
US$m
399
1,985
1,125
1,650
5555777 5555777
5,159
zzzzxcv zzzzxcv
1998
US$m
807
1,678
1,790
1,652
5,927
The amount of assets pledged to secure these amounts is US$15,196 million (1997: US$13,685 million). This is
mainly made up of items included in ‘Debt securities’ and ‘Treasury bills and other eligible bills’ of US$11,790
million (1997: US$10,302 million).
92
H S B C H O L D I N G S P L C
34 Memorandum items
a Group
Contingent liabilities:
Acceptances and
endorsements
Guarantees and assets
pledged as
collateral security:
— guarantees and
— irrevocable letters
— of credit
Other contingent
liabilities
Commitments:
Documentary credits
and short-term
trade-related
transactions
Forward asset
purchases and
forward forward
deposits placed
Undrawn note issuing
and revolving
underwriting
facilities
Undrawn formal
standby facilities,
credit lines and
other commitments
to lend:
— over 1 year
— 1 year and under
1998
55555555555555557 55555555555555557
Risk-
weighted
amount
5555777 5555777 555577 5555777 555577 5555777
US$m
Credit
equivalent
amount
Credit
equivalent
amount
Risk-
weighted
amount
Contract
amount
Contract
amount
US$m
US$m
US$m
US$m
US$m
1997
4,032
3,202
3,151
4,814
3,498
3,383
23,686
18,427
16,618
20,563
15,590
13,787
64
79
5555777 5555777 555577 5555777 555577 5555777
17,249
zzzzxcv zzzzxcv zzzzxvv zzzzxvvv zzzzxv zzzzxvvv
19,823
27,782
21,693
25,481
19,192
104
104
64
54
5,927
1,973
1,166
8,396
2,327
1,745
893
623
212
1,187
966
445
405
203
203
148
74
74
27,028
112,399
12,233
—
5555777 5555777 5555777 555577 555577 555577
14,497
zzzzxcv zzzzxcv zzzzxc zzvzzccv zzzzccv zzzzccv
26,357
100,200
13,505
—
12,606
—
13,171
—
146,652
136,288
16,538
16,304
14,187
The table above gives the nominal principal amounts, credit equivalent amounts and risk-weighted amounts of off-
balance-sheet transactions. The credit equivalent amounts are calculated for the purposes of deriving the risk-weighted
amounts. These are assessed in accordance with the Financial Services Authority’s guidelines which implement the
Basle agreement on capital adequacy and depend on the status of the counterparty and the maturity characteristics.
Contingent liabilities and commitments are credit-related instruments which include acceptances, letters of credit,
guarantees and commitments to extend credit. The contractual amounts represent the amounts at risk should the
contract be fully drawn upon and the client default. Since a significant portion of guarantees and commitments are
expected to expire without being drawn upon, the total of the contract amounts is not representative of future
liquidity requirements.
93
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
34 Memorandum items (continued)
Exchange rate, interest rate and equities
contracts
Exchange rate contracts
Interest rate contracts
Equities contracts
1998
555578555555777 55557855555577
Contract Replacement
cost
5555777 5555777 5555777 5555777
US$m
Contract Replacement
cost
amount
amount
US$m
US$m
US$m
1997
14,273
zzzzxcv zzzzxcv zzzzxcv zzzzxcv
765,665
746,969
8,899
5,177
zzzzxcv zzzzxcv zzzzxcv zzzzxcv
1,060,563
866,546
7,297
2,017
zzzzxcv zzzzxcv zzzzxcv zzzzxcv
29,799
21,964
2,218
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
US$760,725 million (1997: US$741, 692 million) contract amount of exchange rate contracts, US$1,033,299 million
(1997: US$828,405 million) contract amount of interest rate contracts and US$29,475 million (1997:
US$21,770 million) contract amount of equities contracts which were made for trading purposes. The remaining
exchange rate, interest rate and equities contracts were made for non-trading purposes. Non-trading contracts are
also made with Group counterparties and further analysis of the Group’s trading and non-trading contracts is provided
in the ‘Financial Review’ on page 54.
The notional or contractual amounts of these instruments indicate the volume of transactions outstanding at the
balance sheet date; they do not represent amounts at risk.
Replacement cost of contracts represents the mark-to-market assets on all contracts with a positive value, i.e. an
asset to the Group. Replacement cost is therefore a close approximation of the credit risk for these contracts as at the
balance sheet date. The actual credit risk is monitored internally and is the sum of positive mark-to-market value and
an estimate for the future fluctuation risk, using a future risk factor.
b Company
The Company had no contingent liabilities (1997: US$ nil). 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 41:
Rest of
Hong Kong Asia-Pacific
North
America
Latin
America
Europe
Total
5555777 5555777 5555777 5555777 5555777 5555777
US$m
US$m
US$m
US$m
US$m
US$m
27,782
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
13,607
2,858
4,598
6,170
549
25,481
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
12,410
2,782
6,351
3,651
287
146,652
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
27,363
57,880
20,883
38,200
2,326
136,288
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
21,061
53,188
18,919
41,623
1,497
Contract amounts
Contingent liabilities
1998
1997
Commitments
1998
1997
94
H S B C H O L D I N G S P L C
35 Reconciliation of operating profit to net cash flow from operating activities
1998
US$m
1997
US$m
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
Amortisation of discounts and premiums
Provisions for bad and doubtful debts
Loans written off net of recoveries
Provisions for liabilities and charges
Provisions utilised
Provisions assumed
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
6,185
(667)
220
26
814
914
(53)
2,637
(1,226)
1,290
(974)
377
85
7,434
(577)
1,241
26
753
719
(36)
1,014
(579)
236
(172)
—
49
5555777 5555777
10,108
9,628
(242)
(4,797)
(5,418)
3,731
(4,442)
1,027
(4,804)
14,721
161
1,445
(295)
(1,028)
(569)
(2,366)
7,352
(35,147)
(4,001)
(5,390)
5,063
25,115
800
6,298
5,843
1,246
5555777 5555777
14,352
zzzzcccv zzzzcccv
9,687
* 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.
36 Changes in financing during the year
Balance at 1 January 1998
Shares issued in lieu of dividends
Issued during the year
Repaid during the year
Net cash inflow from financing
Exchange and other movements
Balance at 31 December 1998
Subordinated
Share
premium
loan capital
5555777 5555777 5555777 5555777
Ordinary
shares
Preference
shares*
US$m
10,526
—
443
(215)
228
US$m
850
—
—
—
—
US$m
3,406
27
3
—
3
US$m
489
(27)
14
—
14
90
4
5555777 5555777 5555777 5555777
480
zzzzxcv zzzzxcv zzzzxcv zzzzxcv
10,844
3,443
870
20
7
* Preference shares in issue are in subsidiary undertakings (Note 30).
95
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
37 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 1998, these amounted to US$2,557 million (1997: US$3,027 million).
b Changes in cash during the year
Balance at 1 January
Net cash (outflow)/inflow before the effect of foreign
exchange movements
Effect of foreign exchange movements
Balance at 31 December
1998
US$m
20,756
1997
US$m
15,105
(6,595)
42
6,613
(962)
5555777 5555777
20,756
zzzzcccv zzzzcccv
14,203
c Analysis of the balances of cash as classified in the consolidated balance sheet
Cash and balances at central banks
Loans and advances to banks
38 Litigation
1998
US$m
3,048
11,155
1997
US$m
2,961
17,795
5555777 5555777
20,756
zzzzxcv zzzzxcv
14,203
The Group, through a number of its subsidiary undertakings, is named in and is defending legal actions in various
jurisdictions arising from its normal business. No material adverse impact on the financial position of the Group is
expected to arise from these proceedings.
39 Capital commitments
Expenditure contracted for
Expenditure authorised by Directors but not contracted for
1998
US$m
576
115
1997
US$m
163
124
5555777 5555777
287
zzzzxc zzzzxcvv
691
There were no capital commitments in respect of the Company (1997: US$ nil).
40 Lease commitments
At the year-end, annual commitments under non-cancellable operating leases were:
1998
US$m
1997
US$m
Leasehold land and buildings
Operating leases which expire:
— within 1 year
— between 1 and 5 years
— over 5 years
96
33
149
125
38
145
122
5555777 5555777
305
zzzzxcv zzzzxcv
307
H S B C H O L D I N G S P L C
40 Lease commitments (continued)
Equipment
Operating leases which expire:
— within 1 year
— between 1 and 5 years
1998
US$m
1997
US$m
6
21
8
17
5555777 5555777
25
zzzzxcv zzzzxcv
27
The Company had no commitments under operating leases at 31 December 1998 (1997: none).
41 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.
Due to the expansion of the Group’s operations in Latin America, the presentation of the segmental analysis by principal
geographic region has been revised. The results for ‘Continental Europe’ and ‘United Kingdom’ are reported under
‘Europe’ and those relating to the geographic regions of ‘Latin America’ and ‘North America’ previously disclosed
under ‘Americas’, are separately disclosed. 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 The Hongkong and Shanghai Banking Corporation Limited, 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:
Europe
Hong Kong
Rest of Asia-Pacific
North America
Latin America
Add: Hong Kong SAR Government
certificates of indebtedness
Total assets
Net assets:
Europe
Hong Kong
Rest of Asia-Pacific
North America
Latin America
Total net assets
At 31 December 1997
At 31 December 1998
555555555577788 55555555557778
%
38.6
30.2
12.4
15.2
3.6
5555777 5555777 5555777 5555777
100.0
zzzzxcv
US$m
178,581
140,204
57,325
70,598
16,835
US$m
190,823
149,127
57,253
63,903
14,614
%
40.2
31.3
12.0
13.4
3.1
100.0
zzzzxcv
475,720
463,543
7,408
5555777
483,128
zzzzxcv
8,143
5555777
471,686
zzzzxcv
At 31 December 1997
At 31 December 1998
555555555577788 55555555557778
%
36.0
42.7
8.1
10.7
2.5
5555777 5555777 5555777 5555777
100.0
zzzzxcv zzzzxc zzzzxcv zzzzxcvv
US$m
9,744
11,555
2,202
2,892
687
US$m
12,098
9,427
2,186
2,494
1,197
%
44.2
34.4
8.0
9.1
4.3
27,080
27,402
100.0
97
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
41 Segmental analysis (continued)
Profit on ordinary activities before tax:
Year ended
31 December 1998
Interest receivable
Interest payable
Net interest income
Dividend income
Fees and
Europe
Total
5555777 5555777 5555777 5555777 5555777 5555777
US$m
Hong Kong
US$m
US$m
US$m
US$m
US$m
Rest of
Asia-Pacific
North
America
Latin
America
11,762
(7,755)
34,852
(23,305)
5555777 5555777 5555777 5555777 5555777 5555777
11,547
10,934
(7,462)
4,196
(2,941)
5,121
(3,503)
2,839
(1,644)
1,255
1,618
4,007
3,472
1,195
commissions receivable
3,793
79
44
984
2
677
14
669
9
941
148
7,064
(1,328)
1,149
1,706
5555777 5555777 5555777 5555777 5555777 5555777
(111)
413
33
(698)
342
853
(148)
310
383
(298)
8
252
(73)
76
185
20,286
(11,235)
5555777 5555777 5555777 5555777 5555777 5555777
5,045
(1,851)
2,269
(1,052)
8,376
(5,197)
2,489
(1,424)
2,107
(1,711)
3,179
3,194
1,217
1,065
396
9,051
(369)
(747)
(1,219)
(109)
(193)
(2,637)
(96)
—
(37)
(10)
(1)
(144)
(16)
(85)
5555777 5555777 5555777 5555777 5555777 5555777
6,185
2,698
2,390
(50)
(11)
(57)
946
201
(1)
—
—
23
91
2
20
136
250
5555777 5555777 5555777 5555777 5555777 5555777
186
(2)
13
14
39
6,571
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
2,884
2,427
987
234
39
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
Share of operating
profit in associated
undertakings
Gains on disposal of
investments and
tangible fixed assets
Profit on ordinary
activities before tax
98
H S B C H O L D I N G S P L C
41 Segmental analysis (continued)
Europe
Total
5555777 5555777 5555777 5555777 5555777 5555777
US$m
Hong Kong
US$m
US$m
US$m
US$m
US$m
Rest of
Asia-Pacific
North
America
Latin
America
9,883
(6,052)
29,664
(18,720)
5555777 5555777 5555777 5555777 5555777 5555777
10,944
1,895
(1,153)
3,857
(2,589)
9,225
(5,771)
4,804
(3,155)
3,831
1,268
1,649
3,454
742
77
59
3
9
8
156
3,457
1,242
765
671
587
6,722
(1,253)
990
1,235
5555777 5555777 5555777 5555777 5555777 5555777
(696)
420
594
(143)
203
295
(215)
1
227
(111)
319
36
(88)
47
83
18,794
(10,241)
5555777 5555777 5555777 5555777 5555777 5555777
7,683
(4,688)
2,371
(1,360)
2,280
(1,077)
1,350
(1,201)
5,110
(1,915)
2,995
3,195
1,203
1,011
(69)
(223)
(615)
(79)
149
(28)
8,553
(1,014)
(22)
(12)
(12)
(6)
(4)
(56)
15
(49)
5555777 5555777 5555777 5555777 5555777 5555777
7,434
2,919
2,919
(41)
(18)
926
571
(5)
—
99
14
31
74
—
(7)
112
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
Provisions for bad
and doubtful debts
Provisions for contingent
liabilities and
commitments
Amounts written off
fixed asset
investments
Operating profit
Share of operating
profit in associated
undertakings
Gains on disposal of
investments and
tangible fixed assets
Profit on ordinary
activities before tax
584
5555777 5555777 5555777 5555777 5555777 5555777
(10)
268
296
24
6
8,130
zzzzxc zzzzxc zzzzxc zzzzxcv zzzzxc zzzzxc
3,201
3,246
651
950
82
Total interest receivable and total interest payable include intra-Group interest of US$1,232 million (1997:
US$993 million). Fees and commissions receivable and fees and commissions payable include intra-Group items of
US$94 million (1997: US$100 million). Other operating income and operating expenses include intra-Group items
of US$231 million (1997: US$185 million).
99
H S B C H O L D I N G S P L C
Notes on the Accounts (continued)
41 Segmental analysis (continued)
b By class of business
Investment banking
555555555557 8888858785555555557 6755555555557
Commercial banking
Total
1998
US$m
1997
US$m
1998
US$m
1997
US$m
1998
US$m
1997
US$m
Profit on ordinary
activities before tax
Total assets
Net assets
8,130
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
6,571
7,733
6,190
381
397
471,686
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
451,864
483,128
459,681
19,822
23,447
27,080
zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc zzzzxc
25,566
25,772
27,402
1,514
1,630
The 1997 figures have been restated to reflect the sale of Guyerzeller Bank AG from a commercial banking subsidiary
to an investment banking subsidiary.
42 Related party transactions
a Transactions, arrangements and agreements involving Directors and others
Particulars of transactions, arrangements and agreements entered into by subsidiary undertakings of the Company
with Directors and connected persons and companies controlled by them and with officers of the Company disclosed
pursuant to section 232 of the Companies Act 1985 are as follows:
1998
55555555555 555555555577
US$m
Number
Number
US$m
1997
Directors and connected persons
and companies controlled by them:
Loans and credit card transactions
(including US$159,000 in credit card
transactions (1997: US$61,000) and
US$57,900,000 in guarantees
(1997: US$52,034,000))
Officers:
Loans and credit card transactions
(including US$104,000 in credit card
transactions (1997: US$99,000) and US$ nil in
guarantees (1997: US$ nil))
639
zzzzxcv zzzzxcv zzzzxc zzzzxc
871
82
62
10
zzzzxcv zzzzxcv zzzzxc zzzzxc
19
29
15
Particulars of Directors’ transactions are recorded in a register held at the Registered Office of the Company which is
available for inspection by members.
100
H S B C H O L D I N G S P L C
42 Related party transactions (continued)
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: investments in associated undertakings; principal associated undertakings and interests in loan capital
— Notes 24 and 25: amounts due to associated undertakings.
Pension funds
At 31 December 1998, US$12.7 billion (1997: US$11.0 billion) of Group pension fund assets were under management
by Group companies of which US$989 million (1997: US$842 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 US$23 million (1997: US$18 million). The Group’s pension funds
had deposits of US$343 million (1997: US$152 million) with banking subsidiaries within the Group.
43 Foreign currency amounts
The Hong Kong dollar and sterling figures shown in the consolidated profit and loss account and the balance sheets are
for information only. They are translated from US dollars at the average rate of exchange for the year ended 31 December
1998 and the closing rate at that date respectively. These were as follows:
US$1.00 = HK$
US$1.00 = £
44 UK and Hong Kong accounting requirements
Average rate Closing rate
7.746
0.603
7.746
0.603
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, except as set out
below.
The presentation of the cash flow statement is 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’.
In accordance with Financial Reporting Standard 11 ‘Impairment of Fixed Assets and Goodwill’, no charge has been
made in the profit and loss account in respect of those decreases in the valuation of Group properties that do not
represent impairments. If the Group had prepared its financial statements under Hong Kong Statement of Standard
Accounting Practice 17 ‘Property, plant and equipment’, US$150 million would have been charged to the profit and
loss account in respect of valuations below depreciated historical cost (of which US$15 million relates to minority
interests).
45 Approval of accounts
These accounts were approved by the Board of Directors on 22 February 1999.
101
H S B C H O L D I N G S P L C
Taxation of Shares and Dividends
1. Cash Dividends
From 1 January 1993, when the Company became UK resident for UK taxation purposes, to 6 April 1999, the date
when advance corporation tax (ACT) was abolished, HSBC Holdings plc had to account to the UK Inland Revenue for
ACT when the Company paid a dividend. From 6 April 1999, following the demise of ACT, the Company is subject to
replacement corporation tax reform rules whereby the Company will be required to pay corporation tax on its UK
taxable profits on a current year instalment basis.
Regardless of the ACT change, 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 UK income tax liability will arise on the receipt of a
dividend from the Company. Individual shareholders who are liable to UK income tax at the higher rate on UK dividend
income (40 per cent to 5 April 1999, 32.5 per cent thereafter) will be taxed on the combined amount of the dividend and
the tax credit (20 per cent to 5 April 1999, 10 per cent thereafter). The tax credit will then be available for set-off against
the higher rate liability, leaving net higher rate tax of 25 per cent of the cash dividend to pay (both before and after 5
April 1999). From 6 April 1999 individual UK-resident shareholders will not be entitled to any tax credit repayment,
unless the dividend income arises in a Personal Equity Plan (PEP) or Individual Savings Account (ISA), and then only
for a five-year period to 5 April 2004.
Although non-UK-resident shareholders are generally not entitled to any repayment of the tax credit in respect of
any UK dividend received, some such shareholders may be so entitled under the provisions of a double taxation agreement
between the country of residence and the United Kingdom. However, the reduction in tax credit from 20 per cent to 10
per cent referred to above will mean that in most cases no amount of the tax credit will in practice be repayable.
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 1997 second
interim dividend and the 1998 first interim dividend was set out in the Secretary’s letters to shareholders of 20 March
and 28 August 1998. 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 £17.871 for the 1997 second interim dividend and US$21.348/£12.667 for
the 1998 first interim dividend.
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 £1.36
Midland Bank plc
£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, subject to scrip issues made since 6 April 1998 being treated for tax as a separate holding.
Any capital gain arising on a disposal will also be adjusted to take account of indexation allowance and tapering relief.
If in doubt, shareholders are recommended to consult their professional advisers.
102
H S B C H O L D I N G S P L C
Shareholder Information
Financial Calendar 1999
Publication of Annual Report and Accounts
Second interim dividend payable
Annual General Meeting
Announcement of interim results
Annual General Meeting
16 April
28 April
28 May
2 August
The 1999 Annual General Meeting will be held at the Barbican Hall, Barbican Centre, London EC2 on Friday,
28 May 1999 at 11.00 a.m.
Dividends
The Directors have declared a second interim dividend of US$0.555 per ordinary share (in lieu of a final dividend)
which, together with the first interim dividend of US$0.37 already paid, will make a total distribution for the year of
US$0.925 per share, an increase of 11 per cent on 1997. Information on the HSBC scrip dividend scheme and currencies
in which the cash dividend may be paid is contained in the form and circular sent to shareholders on 19 March 1999.
Proposed Share Capital Restructuring and New York Stock Exchange Listing
At the AGM, shareholders will be asked to approve a restructuring of the share capital to facilitate a listing on the New
York Stock Exchange to supplement the existing primary listings on the London and Hong Kong stock exchanges. They
will also be asked to give the Board authority to purchase the Company’s own shares although there is no current
intention to do so.
To facilitate the New York listing, the Directors propose to consolidate the two existing classes of ordinary shares of
HK$10 each and 75p each into one class of ordinary shares denominated in US dollars. Shareholders will receive three
new ordinary shares of US$0.50 each for each existing ordinary share of HK$10 or 75p. It is envisaged that the new
shares will be issued in July 1999.
Postal Share-Dealing Service
For shareholders on the UK register, a low-cost postal share-dealing service for buying and selling the Company’s
shares is available from Midland Stockbrokers, a member of the HSBC Group. Details are available from:
Midland Stockbrokers
Mariner House, Pepys Street
London EC3N 4DA
Telephone: 0171 260 0300
Facsimile: 0171 260 7556
Shareholder Enquiries
Any matters relating to your shareholding — e.g. transfer of shares, change of name or address, lost share certificates
and dividend cheques — should be sent in writing to the registrars:
UK
or
Computershare Services PLC
PO Box 435, Owen House
8 Bankhead Crossway North
Edinburgh EH11 4BR
Hong Kong Central Registration Hong Kong Limited
Rooms 1901-5, Hopewell Centre
183 Queen’s Road East
103
H S B C H O L D I N G S P L C
Shareholder Information (continued)
Investor Relations
Enquiries may be directed to:
Senior Manager Investor Relations
HSBC Holdings plc
10 Lower Thames Street
London EC3R 6AE
UK
Telephone: 44 0171 260 7252
Facsimile: 44 0171 260 9041
Annual Report and Accounts 1998
Further copies may be obtained by writing to either of the following departments.
For those in Europe, the Americas, Middle East and Africa:
Group Corporate Affairs
HSBC Holdings plc
10 Lower Thames Street
London EC3R 6AE
UK
For those in Asia-Pacific:
Group Public Affairs
The Hongkong and Shanghai Banking Corporation Limited
1 Queen’s Road Central
Hong Kong
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
Web Site
This Annual Report and Accounts, and other information on the HSBC Group, may be viewed on our web site:
www.hsbc.com
104
T H E H S B C G R O U P
HSBC International Network
)
m
a
u
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105
T H E H S B C G R O U P
HSBC 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.hsbc.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
HSBC Bank Malaysia Berhad
(formerly 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
106
Hongkong Bank of Canada
CANADA
Head Office
885 West Georgia Street
Vancouver, BC V6C 3E9
Telephone: 1 604 685-1000
Facsimile: 1 604 641-1849
HSBC Banco Roberts S.A.
ARGENTINA
25 de Mayo 258
1002 Buenos Aires
Telephone: 54 1-334 3968
Facsimile: 54 1-334 6404
HSBC Bank USA
(formerly Marine Midland Bank)
UNITED STATES OF AMERICA
Corporate Headquarters
One HSBC 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
HSBC Private Equity Europe Limited
UNITED KINGDOM
Vintner’s Place
68 Upper Thames Street
London EC4V 3BJ
Telephone: 44 0171-336 9955
Facsimile: 44 0171-336 9961
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
HSBC Building
3-11-1 Nihonbashi
Chuo-ku
Tokyo 103
Telephone: 81 3 5203 3111
Facsimile: 81 3 5203 3699
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
T H E H S B C G R O U P
INVESTMENT BANKING — PRIVATE BANKING
AND TRUSTEE
The British Bank of the Middle East
SWITZERLAND
Quai General Guisan 2, 1204 Geneva
Telephone: 41 22 818 05 11
Facsimile: 41 22 818 05 12
HSBC Securities, Inc.
UNITED STATES OF AMERICA
140 Broadway, New York,
NY 10005
Telephone: 1 212 825-6780
Facsimile: 1 212 825-3861
FINANCE
The British Bank of the Middle East
Midland 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
Midland Bank plc
HSBC Greenwell
UNITED KINGDOM
Thames Exchange
10 Queen Street Place
London EC4R 1BQ
Telephone: 44 0171-336 3000
Facsimile: 44 0171-220 7113
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 HSBC 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 Insurance Company
Limited
HONG KONG
20/F, World-wide House
19 Des Voeux Road Central
Telephone: 852 2525 2151
Facsimile: 852 2845 9180
Hang Seng Life Limited
HONG KONG
5/F, 83 Des Voeux Road Central
Telephone: 852 2825 3212
Facsimile: 852 2530 3223
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
Facsimile: 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 HSBC 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
107
© HSBC Holdings plc 1999
Published by Group Corporate Affairs, HSBC Holdings plc,
London
Designed by Group Public Affairs, The Hongkong and Shanghai
Banking Corporation Limited, Hong Kong
Printed by R R Donnelley-Pindar, Feltham, United Kingdom, on
environmentally friendly, totally chlorine-free paper
Photography credits
Cover (from top, left to right):
Background: Group Public Affairs stock, Hong Kong; copyright
© 1996 PhotoDisc, Inc; Rene Mejia, Manila; K Paterson,
Edinburgh; Paul Hu, Hong Kong; Jocelyn Carlin, Auckland;
Claudio Elisabetsky, Rio de Janeiro; Shahin Jalali, Dubai;
R Ian Lloyd, Singapore; Claudio Elisabetsky, Curitiba;
Fi McGhee, London
Page 3: Mark Larkin, London
Page 6: Marty Heitner, New York
Page 8 (clockwise from top left): Jocelyn Carlin, Auckland;
Fi McGhee, London; Fi McGhee, London;
Verachi Jianrungsin, Bangkok; R Ian Lloyd, Singapore; Paul
Hu, Hong Kong; R Moran, Leeds
Page 11 (clockwise from top left): Shahin Jalali, Dubai;
Paul Hu, Hong Kong; Sharvini Patel, Mumbai;
Verachi Jianrungsin, Bangkok; Sharvini Patel, Mumbai;
R Ian Lloyd, Singapore; Fi McGhee, London; R Ian Lloyd,
Singapore
Page 13 (from top, left to right): R Ian Lloyd, Singapore;
Paul Hu, Hong Kong (background); Verachi Jianrungsin,
Bangkok; Shahin Jalali, Dubai; Claudio Elisabetsky,
São Paulo (background); Jocelyn Carlin, Auckland;
Bob Davis, Hong Kong
Page 17 (from top, left to right): Claudio Elisabetsky, Curitiba;
Shahin Jalali, Dubai; Claudio Elisabetsky, Curitiba; Jocelyn
Carlin, Auckland; Fi McGhee, London; Jocelyn Carlin,
Auckland; Rene Mejia, Manila;
R Ian Lloyd, Singapore
Pages 22-25: all photographs by Fi McGhee except
R K F Ch’ien, D G Eldon and W K L Fung by Jackie Wan;
and M Murofushi by Masaki Uchida
Stock number 91216-8
108
HSBC Holdings plc
10 Lower Thames Street, London EC3R 6AE, United Kingdom