HSBC
Annual Report 2001

Plain-text annual report

HSBC Holdings plc Annual Report and Accounts H S B C H O L D I N G S P L C Table of Contents Page Page Financial Highlights................................................1 Board of Directors and Senior Management ... 127 Five-Year Comparison............................................3 Report of the Directors ...................................... 131 Cautionary Statement Regarding Forward-Looking Statements ................................5 Statements of Directors’ Responsibilities in Relation to Financial Statements....................... 158 Certain Defined Terms ...........................................6 Independent Auditors’ Report .......................... 159 Information about the Enforceability of Judgements Made in the United States .................6 Financial Statements .......................................... 160 Exchange Controls and Other Limitations Affecting Security Holders .....................................6 Description of Business ...........................................7 Description of Property ........................................33 Legal Proceedings ................................................ 34 Financial Review .................................................. 35 Other Information...............................................121 Notes on the Financial Statements .................... 165 Taxation of Shares and Dividends .................... 269 Shareholder Information ................................... 272 Organisational Structure ................................... 276 SEC 20-F Cross-Reference Sheet and Glossary............................................................... 277 Index .................................................................... 280 This document comprises the Annual Report and Accounts 2001 and the Annual Report on Form 20-F 2001 to the US Securities and Exchange Commission (‘SEC’) for HSBC Holdings plc and its subsidiary and associated undertakings. It contains the Directors’ Report and Financial Statements, together with the Auditors’ Report thereon, as required by the UK Companies Act 1985. The Annual Review 2001 of HSBC Holdings plc is published as a separate document. H S B C H O L D I N G S P L C Financial Highlights HSBC prepares its financial statements in accordance with UK Generally Accepted Accounting Principles (‘UK GAAP’). It uses the US dollar as its reporting currency because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts its business. Following its listing on the New York Stock Exchange, HSBC also reconciles certain financial information to US Generally Accepted Accounting Principles (‘US GAAP’) which differ in certain aspects from UK GAAP as explained on page 245. HSBC judges its own performance by comparing cash returns on cash invested. Cash basis items are derived by adjusting reported earnings to eliminate the impact of the amortisation of goodwill arising on acquisitions. For the year (cash basis) Operating profit before provisions ................................................... Profit on ordinary activities before tax............................................. Profit attributable to shareholders .................................................... For the year (as reported) Operating profit before provisions ................................................... Profit on ordinary activities before tax............................................. Profit attributable to shareholders .................................................... Dividends......................................................................................... At year-end Shareholders’ funds ......................................................................... Capital resources.............................................................................. Customer accounts and deposits by banks ....................................... Total assets....................................................................................... Risk-weighted assets........................................................................ Per ordinary share Cash earnings................................................................................... Basic earnings .................................................................................. Diluted earnings............................................................................... Dividends......................................................................................... Net asset value at year-end............................................................... Share information US$0.50 ordinary shares in issue (million)...................................... Market capitalisation........................................................................ Closing market price per share......................................................... 2001 US$m 11,283 8,807 6,213 10,484 8,000 5,406 (4,467) 45,979 50,854 503,631 695,877 391,478 US$ 0.67 0.59 0.58 0.480 4.91 2000 US$m 10,996 10,300 7,153 10,486 9,775 6,628 (4,010) 45,570 50,964 487,122 673,814 383,687 US$ 0.81 0.76 0.75 0.435 4.92 9,355 US$109bn £8.06 9,268 US$136bn £9.85 HSBC Benchmark Total shareholder return to 31 December 2001* – over 1 year.................................................................................. – since 1 January 1999† ................................................................ 85 173 92 125 * † Total shareholder return (‘TSR’) is defined on page 146. HSBC’s governing objective is to beat the TSR of its defined benchmark, with a minimum objective to achieve double TSR over a five-year period beginning on 1 January 1999. 1 H S B C H O L D I N G S P L C Financial Highlights (continued) Performance ratios On a cash basis Return on invested capital*.............................................................. Return on net tangible equity† ......................................................... Post-tax return on average tangible assets........................................ Post-tax return on average risk-weighted assets .............................. Reported earnings – after goodwill amortisation Return on average shareholders’ funds ............................................ Post-tax return on average assets .................................................... Post-tax return on average risk-weighted assets .............................. Efficiency and revenue mix ratios Cost:income ratio (excluding goodwill amortisation)...................... As a percentage of total operating income: – net interest income ..................................................................... – other operating income .............................................................. – net fees and commissions........................................................... – dealing profits ............................................................................ Capital ratios – tier 1 capital ............................................................................... – total capital................................................................................. 2001 % 12.1 19.5 1.06 1.86 11.4 0.92 1.65 56.4 56.9 43.1 28.9 6.5 9.0 13.0 2000 % 16.4 24.0 1.33 2.26 16.5 1.24 2.11 55.3 55.8 44.2 29.8 6.6 9.0 13.3 See page 48 for definition. Cash basis attributable profit divided by average shareholders’ funds after deduction of average purchased goodwill. * † 2 H S B C H O L D I N G S P L C Five-Year Comparison At year-end Share capital...................................... Shareholders’ funds .......................... Capital resources............................... Customer accounts............................ Undated subordinated loan capital .... Dated subordinated loan capital........ Loans and advances to customers* ... Total assets........................................ For the year Net interest income ........................... Other operating income..................... Operating profit before provisions .... Provisions for bad and doubtful debts............................................ Pre-tax profits ................................... Profit attributable to shareholders ..... Dividends.......................................... Per ordinary share† Cash earnings.................................... Basic earnings ................................... Diluted earnings................................ Dividends.......................................... Net asset value ................................. Share information† US$0.50 ordinary shares in issue ...... Financial ratios Dividend payout ratio ....................... Post-tax return on average total assets ........................................... Return on average shareholders’ funds ........................................... Average shareholders’ funds to average total assets...................... Capital ratios Tier 1 capital ..................................... Total capital ...................................... 1997 1998 1999 2000 2001 US$m US$m US$m US$m US$m 3,406 27,080 41,562 294,189 3,245 7,281 240,421 471,686 10,944 7,665 8,553 (1,014) 8,130 5,487 (2,206) 3,443 27,402 41,092 308,910 3,247 7,597 235,295 483,128 11,547 8,508 9,051 (2,637) 6,571 4,318 (2,495) 4,230 33,408 44,270 359,972 3,235 12,188 253,567 569,139 11,990 9,012 9,653 (2,073) 7,982 5,408 (2,872) US$ US$ US$ 0.69 0.69 0.68 0.277 3.37 0.54 0.54 0.53 0.308 3.38 0.66 0.65 0.65 0.340 3.95 4,634 45,570 50,964 427,069 3,546 12,676 289,837 673,814 13,723 10,850 10,486 (932) 9,775 6,628 (4,010) US$ 0.81 0.76 0.75 0.435 4.92 4,678 45,979 50,854 449,991 3,479 12,001 308,649 695,877 14,725 11,163 10,484 (2,037) 8,000 5,406 (4,467) US$ 0.67 0.59 0.58 0.480 4.91 8,028m 8,067m 8,458m 9,268m 9,355m % 40.2 1.37 20.7 5.98 9.3 14.2 % 57.8 0.98 15.5 5.71 9.7 13.6 % 53.1 1.20 17.5 6.24 8.5 13.2 % 60.5 1.33 16.5 6.49 9.0 13.3 % 82.6 0.92 11.4 6.78 9.0 13.0 3 * † Net of suspended interest and provisions for bad and doubtful debts. Per share amounts reported here and throughout the document reflect the share capital reorganisation on 2 July 1999 H S B C H O L D I N G S P L C Five-Year Comparison (continued) Amounts in accordance with US GAAP 1997 1998 1999 2000 2001 US$m US$m US$m US$m US$m 5,306 2,007 3,934 2,328 4,889 2,617 6,236 3,137 4,911 4,394 Income statement data for the year Net income available for ordinary shareholders ................................ Dividend ........................................... Balance sheet data at 31 December Total assets........................................ Shareholders’ equity ......................... 476,183 28,240 488,856 30,351 574,588 35,930 680,076 48,072 698,312 48,444 Per ordinary share Basic earnings ................................... Diluted earnings................................ Cash earnings.................................... Dividends.......................................... Net asset value at year-end ............... US$ 0.66 0.66 0.70 0.25 3.52 US$ 0.49 0.48 0.53 0.29 3.75 US$ 0.59 0.58 0.63 0.31 4.25 US$ 0.71 0.70 0.80 0.34 5.19 US$ 0.53 0.53 0.67 0.48 5.18 4 H S B C H O L D I N G S P L C Cautionary Statement Regarding Forward-Looking Statements This Annual Report contains certain forward-looking statements with respect to the financial condition, results of operations and business of HSBC. Statements that are not historical facts, including statements about HSBC’s beliefs and expectations, are forward-looking statements. Words such as ‘expects’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’, ‘reasonably possible’ and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made, and you should not assume that they have been revised or updated in the light of new information or future events. Written and/or oral forward-looking statements may also be made in the periodic reports to the Securities and Exchange Commission on Forms 6-K, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials and in oral statements made by HSBC’s Directors, officers or employees to third parties, including financial analysts. Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These factors include, among others: • changes in general economic conditions in the markets where HSBC operates, such as: − − − changes in foreign exchange rates, in both market exchange rates (for example, between the US dollar and the pound sterling) and government-established exchange rates (for example, between the Hong Kong dollar and the US dollar); volatility in interest rates, including in Asia and Latin America; and volatility in equity markets, including in the smaller and less liquid trading markets in Asia and Latin America. • changes in governmental policy and regulation, including: − − − − − the monetary, interest rate and other policies of central banks and bank regulatory authorities, including the UK Financial Services Authority, the Bank of England, the Hong Kong Monetary Authority, the Board of Governors of the US Federal Reserve System, the European Central Bank, the French Banking Commission and the central banks of other leading economies or in markets where HSBC operates; increased competition resulting from legislation permitting new types of affiliations between banks and financial services companies, including securities firms, particularly in the United States; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; general changes in government policy that may significantly influence investor decisions in particular markets in which HSBC operates; and other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for HSBC’s products and services. • • • the ability of the Government of Argentina through reform of monetary, fiscal and exchange rate policy to restore economic stability within the country and thereby attracting international support for the measures necessary to restructure debt obligations and create a viable financial system; the effects of competition in the markets where HSBC operates. HSBC expects competition to intensify as a result of, among other things, technological advances and the introduction of the euro; and the success of HSBC in adequately identifying and managing the risks it faces (through hedging and other techniques), which depends on, among other things, its ability to anticipate events that cannot be captured by the statistical models it uses. Trends and factors that are expected to particularly affect HSBC’s results of operations are described in the ‘Financial Review’. 5 H S B C H O L D I N G S P L C Certain Defined Terms Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’ means HSBC Holdings together with its subsidiary undertakings. Within this document the Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’ or ‘Hong Kong SAR’. Where reference to constant currency is made, comparative data, as expressed in the functional currencies of HSBC’s operations, has been translated at current period exchange rates. Information About the Enforceability of Judgements Made in the United States HSBC Holdings is a public limited company incorporated in England and Wales. Most of HSBC Holdings’ Directors and executive officers live outside the United States. Most of the assets of HSBC Holdings’ Directors and executive officers and a substantial portion of HSBC Holdings’ assets are located outside the United States. As a result, it may not be possible to serve process on such persons or HSBC Holdings in the United States or to enforce judgements obtained in US courts against them or HSBC Holdings based on civil liability provisions of the securities laws of the United States. There is doubt as to whether English courts would enforce: • • certain civil liabilities under US securities laws in original actions; or judgements of US courts based upon these civil liability provisions. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in the United Kingdom. Exchange Controls and Other Limitations Affecting Security Holders There are currently no UK laws, decrees or regulations which would prevent the transfer of capital or remittance of dividends and other payments to holders of HSBC Holdings’ securities who are not residents of the United Kingdom. There are also no restrictions under the laws of the United Kingdom or the terms of the Memorandum and Articles of Association of HSBC Holdings concerning the right of non-resident or foreign owners to hold HSBC Holdings’ securities or, when entitled to vote, to do so. 6 H S B C H O L D I N G S P L C Description of Business Introduction HSBC is one of the largest banking and financial services organisations in the world, with a market capitalisation of US$109 billion at 31 December 2001. At the end of 2001, HSBC had total assets of US$696 billion and shareholders’ equity of US$46 billion. For the year ended 31 December 2001, HSBC’s operating profit was US$7 billion on revenues of US$26 billion. HSBC is a strongly capitalised banking group with a total capital ratio of 13.0 per cent and a tier 1 capital ratio of 9.0 per cent as at 31 December 2001. Headquartered in London, HSBC operates through long-established businesses in five regions: Europe; Hong Kong; rest of Asia-Pacific, including the Middle East and Africa; North America; and Latin America. Within each of these geographical regions, the principal businesses operate essentially as domestic banks and typically have a large retail deposit base, together with strong liquidity and capital ratios, and provide services to personal, commercial and large corporate and institutional customers. By using HSBC’s highly efficient technological links, all businesses are able to access HSBC’s wide range of products and services and adapt them to local customer needs. In addition, in certain key locations – London, Hong Kong, New York, Geneva, Paris and Düsseldorf – HSBC has significant investment and private banking operations which, together with its commercial banks, enable HSBC to service the full range of requirements of its high net worth personal and large corporate and institutional customers. Through its global network of some 7,000 offices in 81 countries and territories, HSBC provides a comprehensive range of financial services to personal, commercial, corporate, institutional and investment and private banking clients. As part of its strategy, HSBC created a global brand in 1998, using HSBC and its hexagon symbol in most of its areas of operation. HSBC’s largest and best-known subsidiaries and their primary areas of operation are: • The Hongkong and Shanghai Banking Corporation Limited Hong Kong SAR, with an extensive network throughout Asia- Pacific. • Hang Seng Bank Hong Kong SAR Limited (‘Hang Seng Bank’) • HSBC Bank plc United Kingdom • Crédit Commercial de France (‘CCF’) • HSBC Bank USA France New York State in the United States • HSBC Bank Brasil Brazil S.A.-Banco Múltiplo (‘HSBC Bank Brasil’) • HSBC Private Banking Holdings (Suisse) S.A. (‘HSBC Republic Suisse’) Switzerland, France, Luxembourg, Guernsey and Monaco (through various subsidiaries) Management and resources HSBC recognises that the substantial customer and asset base of its banking operations reflects years of trust and goodwill. Through its many years of operation, HSBC has developed a reputation for placing great value on long-term relationships with its clients, and of observing the principles of sound and conservative banking. HSBC organises and delivers its banking products and services in a way that aims to retain local authority while capitalising on the advantages that flow from being an international organisation. HSBC believes that this combination of centralisation and local responsibility permits it to remain responsive to local needs while providing customers with access to the services and strength of a worldwide financial institution. HSBC allocates resources, including capital, management time, human resources and information technology, according to a range of factors, such as size and complexity of the operation, growth prospects and the contribution made by each area. Economic profit is used by HSBC’s management to decide where to allocate resources so that they will be most productive. 7 H S B C H O L D I N G S P L C Description of Business (continued) HSBC considers the quality of its management to be one of its principal strengths. HSBC’s management is an international meritocracy which combines detailed knowledge of local markets with a global perspective. By long-standing tradition and continued policy, HSBC recruits most executives for long-term careers with the organisation. HSBC attaches great importance to cultivating its own talent and to promoting from within the organisation. It values team work and a collective management style. Senior management succession is seamless. Lines of communication are kept short and speed of decision- making is emphasised. Strategy HSBC aims to become the world’s leading financial services organisation. HSBC’s goal is to balance earnings between stable, mature economies and the faster-growing, but more volatile, emerging markets. To achieve this, HSBC has developed a strategy of ‘Managing for Value’ designed to build on its achievements. This strategy is evolutionary and has four key components: To concentrate on delivering ‘wealth management’ to key markets around the world. Wealth management means deepening relationships with personal customers beyond the provision of a simple cheque account and lending products. HSBC will offer these customers the full range of financial services and products, including savings, pensions, investments and insurance. In none of HSBC’s primary markets is this business fully mature and there are strong growth prospects. To grow its commercial business. This market consists of a wide range of businesses, including major companies, trading enterprises, professional practices, charities, entrepreneurs and smaller businesses. HSBC has been very successful in this market and aims to build on its strengths, in particular by making sure its customers have access to a full range of products and services. To integrate corporate and investment banking services for HSBC’s largest customers. A major effort has been to align more closely HSBC’s traditional corporate banking and credit services with the skill base and professional expertise available from its investment bank. The alignment of these businesses will help • • • 8 • HSBC meet the requirements of its clients – some of the world’s largest and most successful companies. To establish HSBC and the hexagon symbol as a global brand. This major initiative, begun in 1998 has been successful in making the name, HSBC, and the hexagon symbol a familiar sight around the world. HSBC aims to make the HSBC brand universally synonymous with its core values of integrity, trust and excellent customer service. HSBC’s strategy focuses principally on organic growth, but it also allows for opportunistic acquisitions where these meet certain stringent criteria. HSBC’s approach to acquisitions is based on added value. When considering acquisition opportunities, HSBC applies strict criteria and takes full account of the fact that the price paid determines the rate of return to shareholders. Over the years, HSBC has successfully acquired a number of businesses which have provided access to new markets or an opportunity to expand existing business lines. HSBC uses its strong capital base and depth of management resources to develop such businesses into long-term generators of wealth for its shareholders. HSBC’s strategy calls for a continuous focus on its customers, providing them with secure, transparent and competitive services in the forms most attractive to them. One of HSBC’s primary initiatives in this area is its HSBC Premier service, launched simultaneously in 17 countries and territories in March 2000. The HSBC Premier service is a new international service for HSBC’s most valuable personal customers. The 464,000 HSBC Premier customers worldwide have available to them a dedicated team of relationship managers, HSBC Premier centres in selected locations around the world, and 24-hour call centre support. To further service its high net worth customers, HSBC has successfully integrated its major private banking operations into an international private banking arm which bears the name HSBC Republic. HSBC seeks to position itself as one of the world’s top five private banks. HSBC intends to remain at the forefront of its industry and recognises the importance of the internet as one of a number of exciting new media, which will become an integral part of its service. HSBC believes that e-commerce has changed the fabric of the financial services sector and views it as an opportunity to attract new customers from all over the world and to serve its existing customers better. E-commerce will enable HSBC to reconfigure its business in ways which provide higher quality customer services in a more efficient manner. As an international group, HSBC plans to link its customers to the full range of international services and manage their processing wherever it chooses; HSBC views this as a sustainable competitive advantage. History and development The founding member of HSBC, The Hongkong and Shanghai Banking Corporation was established in Hong Kong and Shanghai in 1865. The bank expanded rapidly, with an emphasis on building up representation in China and the rest of the Asia- Pacific region, while also establishing a presence in the major financial and trading centres in Europe and America. Changes in the post-Second World War era saw a scaling back of operations in China. In the mid- 1950s, The Hongkong and Shanghai Banking Corporation embarked on a strategy of pursuing profitable growth through acquisition as well as organic development – a combination that has remained a key feature of HSBC’s approach ever since. The Hongkong and Shanghai Banking Corporation purchased The Mercantile Bank of India Limited and The British Bank of the Middle East (now HSBC Bank Middle East) in 1959, increasing HSBC’s interests in the rest of Asia-Pacific and the Middle East. In 1965, The Hongkong and Shanghai Banking Corporation acquired a 51 per cent interest (subsequently increased to 62.14 per cent) in Hang Seng Bank, consolidating its position in Hong Kong. Hang Seng Bank, founded in 1933, is the second- largest listed bank in Hong Kong. By the early 1980s, The Hongkong and Shanghai Banking Corporation, having established itself as the pre- eminent international financial services provider across the Asia-Pacific region, began to direct greater attention to expansion elsewhere, particularly Europe and the United States. In the late 1970s and the 1980s, The Hongkong and Shanghai Banking Corporation began to focus its acquisition strategy on the United Kingdom, purchasing full ownership of the UK merchant bank Antony Gibbs in 1980, which brought with it an insurance business and an established broker in the Lloyd’s of London insurance market. To enhance its capital markets capabilities, The Hongkong and Shanghai Banking Corporation acquired a controlling interest in the well-known London-based international securities company, James Capel & Co. Limited, in 1986. The Hongkong and Shanghai Banking Corporation entered the US market in 1980 by acquiring a 51 per cent interest in Marine Midland (now HSBC USA Inc.) and the remaining interest in 1987. Carroll, McEntee & McGinley Inc. (renamed HSBC Securities (USA) Inc.), a primary government securities dealer in the United States, was acquired in 1983. Marine Midland acquired JP Morgan’s US dollar clearing business at the end of 1996 and First Federal Savings and Loan Association of Rochester in 1997, both of which were integrated into existing operations. In 1981, The Hongkong and Shanghai Banking Corporation incorporated its existing Canadian operations as Hongkong Bank of Canada, one of the first foreign-owned banks in Canada. HSBC Bank Canada, headquartered in Vancouver, has since made numerous acquisitions, expanding rapidly to become the largest foreign-owned bank in Canada and the seventh-largest overall at 31 December 2001. In 1987, The Hongkong and Shanghai Banking Corporation purchased a 14.9 per cent interest in Midland Bank plc (now HSBC Bank plc), established in 1836 and one of the United Kingdom’s principal clearing banks. In 1991, HSBC Holdings plc was established as the parent company of HSBC and, in 1992, HSBC Holdings purchased the remaining interests in Midland. In connection with this acquisition, HSBC’s head office was transferred from Hong Kong to London in January 1993 and the Bank of England became HSBC’s principal regulator. In 1997, HSBC assumed selected assets, liabilities, and subsidiaries of Banco Bamerindus do Brasil S.A. following the intervention of the Central Bank of Brazil. Headquartered in Curitiba, Banco Bamerindus do Brasil S.A. was the fifth-largest bank in Brazil (measured by assets), with the second- largest branch network in the country at the time of acquisition. HSBC also acquired Grupo Roberts, based in Buenos Aires and one of the largest privately owned financial services groups in 9 H S B C H O L D I N G S P L C Description of Business (continued) Argentina, in two stages, completing the purchase in 1997. In 2000, HSBC Investment Bank Brasil, consisting of the former operations of Banco CCF Brasil S.A., was integrated under HSBC Bank Brasil management following the acquisition of CCF. In December 1999, HSBC acquired Republic New York Corporation (‘RNYC’), subsequently merged with HSBC USA Inc., and Safra Republic Holdings S.A. (‘SRH’). Then in August 2000, the acquisition of Chase Manhattan Bank’s branch operations in Panama was completed followed by HSBC Bank plc’s transfer of ownership of its existing Panama business to HSBC Bank USA. As a result of these acquisitions, HSBC has grown its market position substantially. For example, HSBC is now the third-largest bank operating in New York State and is the largest lender to corporations in Panama and the Colon Free Zone. To expand its base in the euro zone, in October 2000, HSBC completed its acquisition of 99.98 per cent of the issued share capital of CCF, a major French banking group, with businesses in personal, corporate and investment banking. The acquisition of CCF represented a unique opportunity for HSBC to acquire a well-managed, fast growing French bank and to establish a significant base in continental Europe while serving HSBC’s strategic objectives by significantly increasing its personal wealth management business and by enhancing its corporate and investment banking capabilities. During 2000, HSBC increased its stake in Egyptian British Bank S.A.E. from 40 per cent to 90 per cent and subsequently changed its name to HSBC Bank Egypt S.A.E in January 2001. The stake was further increased to 94.5 per cent in December 2001. In December 2000, HSBC completed the acquisition of PCIB Savings Bank, which HSBC has renamed HSBC Savings Bank (Philippines) Inc. The bank complements HSBC’s existing operations in the Philippines and focuses on providing financial services to personal and middle-market customers through its 16 branches in the metro Manila area. In March 2001 HSBC, through CCF, completed the acquisition of 89.6 per cent of Banque Hervet from the French Finance Ministry. An additional 8.3 per cent was acquired in July 2001. Banque Hervet is a Paris-based specialist commercial and consumer bank with 87 branches and over 100,000 customers. 10 In May 2001, the Merrill Lynch HSBC joint venture opened its full broking business for individuals in the United Kingdom. In May 2001, HSBC reached agreement to sell its 93.3 per cent stake in Crédit International d’Egypte (‘CIE’), an Egyptian commercial bank primarily engaged in corporate banking acquired as part of the acquisition of CCF, to Crédit Agricole Indosuez and the El Mansour and El Maghraby groups. In June 2001, Charterhouse Development Capital Holdings Limited (‘CDC’), the management company for the Charterhouse venture capital funds, was sold to the existing CDC management team. In August 2001, HSBC completed its acquisition of a 97 per cent interest in China Securities Investment Trust Corporation (‘CSIT’). CSIT is Taiwan’s leading asset management company with approximately US$2.6 billion of assets under management and about 88,000 high net-worth retail and institutional clients. In October 2001, HSBC acquired Demirbank TAS (‘Demirbank’) from the Savings Deposit Insurance Fund in Turkey. The entity was merged with HSBC’s existing Turkish operation, HSBC Bank AS, in December 2001 creating a combined entity with a balance sheet of US$2.35 billion and capital of US$250 million. In November 2001, HSBC acquired the NRMA Building Society Limited from NRMA Insurance Group Limited. The acquisition included A$1.8 billion (US$923 million) of residential mortgages and approximately A$1 billion (US$531 million) in customer deposits. In addition, the business includes some 70,000 VISA credit card accounts as well as personal and car loan customers. Also in November 2001, HSBC Holdings plc signed a three-year contract for American Express to supply travellers’ cheques through HSBC branches, making this contract the largest global agreement of its type for the American Express Travellers Cheque Group. American Express will also be responsible for the delivery of foreign exchange currency to all HSBC branches in the UK and also to HSBC Bank plc’s UK subsidiary, First Direct. Customers will be able to encash their American Express travellers’ cheques, bought from HSBC, at all HSBC branches worldwide free of any commission charge. In December 2001, HSBC agreed to acquire an eight per cent equity stake in the Bank of Shanghai for RMB518 million (approximately US$63 million) in cash. The Bank of Shanghai was established in mainland China in 1995. It had assets of RMB96,325 million (approximately US$11,639 million) as at 31 December 2000, 196 branches throughout Shanghai and 4,500 staff. The bank serves a broad range of customers and provides personal and corporate banking services as well as payment, trade finance and treasury services. As each acquisition has been made, HSBC has focused on integrating its newly acquired operations with its existing business with a view to maximising the synergy between the various components. International Managers, a group of approximately 400 mobile executives with wide international experience and committed to long-term careers overseas within HSBC, are key to this integration process. E-banking In recent years, HSBC has been reconfiguring its operations for the internet and putting in place some major building blocks. In 2001, some US$2.5 billion was spent by HSBC on technology, including a significant proportion on dotcom initiatives. HSBC will be one of the first to provide customers with services via the internet on a multi-product, cross- border basis. HSBC’s overall electronic banking customer base now exceeds 3 million, representing growth of over 100 per cent in 2001, with services available through the internet, personal digital assistants (‘PDAs’), mobile phones (short message service (‘SMS’) and wireless application protocol (‘WAP’) based services), television and private network connections. HSBC e-banking services are currently offered in 17 countries and 21 businesses across the world. Customers in over 150 countries and territories have accessed HSBC’s sites in 2001 with an average daily number of customer visits at over 210,000, a running rate of 76,650,000 visits a year. In 2001 HSBC launched a number of new major customer services in the e-channel. The investment in a new generation hsbc.com centre has seen HSBC launch its first dedicated business proposition aimed at the Small and Medium Enterprise (‘SME’) market place. The initial launch has been to the UK market with rollout to Hong Kong, USA and Canada in 2002. Another major e-initiative in 2001 was the announcement of a strategic agreement between HSBC and Yahoo! Inc to deliver a co-branded person-to-person payments system called ‘Yahoo! PayDirect from HSBC’ to Yahoo! and HSBC customers around the world. The Yahoo! PayDirect from HSBC system allows anyone with an e-mail address and a bank account or credit card to securely send money to another party. The technology was pioneered in the US on-line auction markets and has a large loyal user base. An operations centre was established in Buffalo upstate New York and the system was successfully launched in the latter part of 2001. Rollout of the system to other countries during 2002 is in progress. Further investment in Customer Relationship Management (‘CRM’) capability throughout 2001 has given HSBC the capability to provide additional intelligent services to customers. In HSBC Bank plc the ‘Individual Solutions’ capability allows tailored messaging to be delivered to customers via all channels. 11 H S B C H O L D I N G S P L C Description of Business (continued) Geographical regions Profit before tax split by geographical region Year ended 31 December 2001 3,883 3,542 4,000 3,000 2,000 1,000 0 -1,000 Europe North America Latin America 1,088 481 -994 Hong Kong Rest of Asia-Pacific Total assets* split by geographical region As at 31 December 2001 Europe Hong Kong North America Rest of Asia Pacific Latin America % 43.3 25.6 19.9 9.0 2.2 * Excludes Hong Kong SAR Government certificates of indebtedness Europe Europe contributed US$3,542 million, or 44 per cent, to HSBC’s profit on ordinary activities before tax in 2001 compared with US$3,658 million in 2000. The United Kingdom contributed US$3,147 million in 2001 compared with US$3,127 million in 2000. HSBC’s main subsidiaries in Europe are HSBC Bank plc, Crédit Commercial de France and HSBC Private Banking Holdings (Suisse) S.A. HSBC Bank plc In the United Kingdom, HSBC Bank plc provides a comprehensive range of banking and related financial services to personal, commercial and corporate customers. Headquartered in London, HSBC Bank plc has over 6 million personal current accounts and a network of 1,666 branches in the United Kingdom, including 42 outlets in 12 supermarkets. HSBC Bank plc has approximately 16 per cent of the personal current account market in England and Wales. At 31 December 2001, on a consolidated basis, HSBC Bank plc’s total assets were US$293 billion, total customer accounts were US$172 billion and total net customer loans were US$129 billion. HSBC Bank plc’s strategy is to build long-term customer relationships by listening to customers, understanding their needs and delivering the most effective solutions. In following this strategy, the bank is investing in several ways: in improving customer relationship management systems, in telephone and internet services, in developing innovative and flexible products and in building a reputation for fair pricing. Customers can now choose to do their banking through branches, the telephone, the internet, mobile phones and ATMs. HSBC Bank plc aims to provide a consistently high standard of service across all these channels. Telephone services are increasingly popular with customers, with a 21 per cent increase in calls in 2001. Internet banking, launched in 2000, now has approximately 770,000 customers and 5 million transactions were undertaken in 2001. Customers also have access to approximately 3,000 HSBC Bank plc ATM machines, over 36,000 cash machines through the UK LINK network and over 600,000 ATM machines worldwide. HSBC Bank plc’s personal banking services include personal current and savings accounts, loans and mortgages, wealth management services including private clients, card services, and First Direct. In 2001, HSBC Bank plc secured its highest share of net new mortgage business, 4.4 per cent compared with 3 per cent in 2000. Low interest rates are expected to keep the remortgage market busy, encouraging existing borrowers to seek the best rates from lenders. The bank should continue to be well placed to take advantage of these market opportunities. In 2001, HSBC Bank plc further developed its product offerings to personal customers. These included ‘HomeStart’, an innovative mortgage appealing to first time buyers, allowing the customer to pay interest only for three years and the ‘Performance Plus ISA’ for customers looking to re- invest proceeds from the tax-exempt special savings accounts (Tessas). Annual fee charges on the bank’s credit card and gold Visa credit card were removed in 2000 and charges to customers for cash machine withdrawals on debit cards from UK machines within the LINK network were removed on 1 January 2001. In 1989, HSBC Bank plc launched First Direct, then the United Kingdom’s first full banking service by telephone, 24 hours a day, 365 days a year. First Direct has continued to grow in 2001 attracting 75,000 new customers. Its e-channel services have attracted around 40 per cent of First Direct’s customers online by end of 2001 and 125,000 new customers logged onto its internet banking service in 2001. It also introduced online share dealing and travel, motor and home insurance. In January 2001, the bank launched ‘capital’, which offers a telephone-based Independent Financial Advice service and online and telephone access to carefully selected investment and protection products. In July 2001, First Direct launched ‘smartmortgage’ which links customer savings, cheque and home loan accounts. HSBC Bank plc’s commercial banking operation offers an extensive range of services including current accounts, deposits, lending, asset finance and leasing, trade services, equity finance, cross-border payments and cash management. The bank remains committed to serving its commercial customers through the branch network, complemented by internet and telephone banking. Business telephone banking registrations increased by 45 per cent on 2000 and business internet banking was launched in January 2002, offering customers easier access to banking services and products. HSBC continues to experience strong demand for Hexagon, its world- leading electronic banking service for business customers, with over 56,000 users. HSBC Bank plc has a traditional strength in providing trade and international banking services, including bespoke finance and technology-based solutions and has seen average balance growth of 13 per cent. HSBC Bank plc’s wide range of expertise helps business owners and directors manage their business and personal wealth efficiently through to retirement and HSBC Bank plc also offers business protection products such as key man insurance and partnership protection. In April 2001, HSBC Bank plc launched its stakeholder pension and is now one of the largest providers in the United Kingdom with a 6.5 per cent market share. HSBC Bank plc manages corporate and institutional clients through a number of specialist industry groups. Its core banking services have been aligned with investment banking products and activities are co-ordinated across HSBC, making maximum use of its international network to win important cross-border business. HSBC Bank plc’s major dealing room in London serves as the hub for HSBC’s European network of treasury and capital markets operations. It delivers a high quality tailored service to HSBC’s corporate, commercial and institutional clients. The major product areas are money markets, foreign exchange and fixed income. These are complemented by activities in exchange traded futures and through HSBC Bank USA Inc. in precious metals and banknotes. The promotion of the HSBC brand, investment in European infrastructure and acquisitions in Europe have opened new possibilities for core banking business and the provision of private banking and wealth management services to executives of institutional clients. New products and internet-based offerings are also being developed to enhance the bank’s service to customers. This close working in support of the client has helped result in a steady flow of new business opportunities during a period when mergers and acquisition activity was much reduced. As an industry leader, HSBC Bank plc has been among the first banks to pilot Continuous Linked Settlement services in 2001, which when fully launched in 2002, will significantly reduce foreign exchange risk. Within institutional banking, HSBC Bank plc’s global custody division offers comprehensive global, regional European and UK sub-custodian services in 70 markets worldwide. Assets under custody were over US$1,000 billion at 31 December 2001. HSBC is proposing to make a change in legal structure by transferring the investment banking business of HSBC Investment Bank plc to HSBC Bank plc. A private bill was submitted to Parliament in November 2001 to facilitate the required legal changes. The overall aim of the restructuring is to align investment banking activities with those of commercial and corporate banking, a key strategic aim for HSBC. 13 H S B C H O L D I N G S P L C Description of Business (continued) Crédit Commercial de France Acquired in 2000, Crédit Commercial de France is the fourth-largest non-mutual bank in France and is HSBC’s flagship in continental Europe, with businesses in personal, corporate and investment banking, asset management and private banking. Headquartered in Paris, CCF serves over one million personal customers and important corporate and institutional business clients and has a significant presence in other European markets. CCF has a network of 778 branches in France, 94 more than in 2000. At 31 December 2001, CCF’s total assets were US$62 billion, total customer deposits were US$23 billion and total net customer loans were US$26 billion under UK GAAP. CCF’s strategy is to focus on the fastest growing and most profitable market segments. CCF is a leading bank in ‘mass affluent’ personal retail banking in France, with more than 80 per cent of its clients concentrated in middle and upper income brackets and 90 per cent of its branches in France concentrated in the four regions with the highest growth potential for banking activity: Paris, Rhône- Alpes, Provence-Alpes-Côte d’Azur and Languedoc Roussillon. In corporate banking, CCF concentrates on the most profitable high added-value segments of the market. In asset management and private banking, CCF has specific subsidiaries dedicated to serving the most profitable client categories in the highest added-value sectors. CCF’s retail and commercial banking operations comprise the parent company CCF, with 215 branches, and a network of ten regional banks, with a total of 563 branches. Each regional bank operates in a specific geographical area, under its own brand name, with very strong local positions. During 2001, CCF acquired 97.9 per cent of Banque Hervet from the French state, a retail bank with 87 branches, which enhances its position mainly in the Parisian region. CCF offers products and services through a number of complementary distribution channels, including online, telephone and mobile phone banking. CCF’s online brokerage service was launched in 1999, providing CCF customers and non-customers alike with trading opportunities on the Paris Bourse and financial information including stock quotes, French and international newswires and research. CCF’s online credit company, Netvalor, offers credit for large household purchases directly to 14 consumers through its dedicated consumer credit site, 123credit.com. CCF networks also offer high quality products and services to medium-sized French corporates and, in the regional subsidiaries, to entrepreneurs. CCF offers its customers a number of online account management products and services, including trade account management, business intelligence, centralised corporate treasury management, electronic payments systems and the recovery of unpaid receivables, all branded under its ‘Elys’ product line. In addition, CCF provides secure payment facilities that permit merchants to manage order and inventory functions and conduct bank transactions simultaneously. CCF provides equipment and finance leasing through Loxxia, a joint venture with Crédit Lyonnais, which has approximately 10 per cent of the French leasing market. Through its Corporate Banking division, CCF offers account management, credit, cash management and stock custody services to the 50 largest French institutional and corporate groups and to international clients. The Corporate Banking division is very active in providing trade financing, export credit facilities and financing backed by public and private sector credit support. CCF provides equity and corporate finance services, with teams integrated within HSBC. CCF advises on transactions involving notably French, British and international clients across a wide range of industries including retailing, chemicals, pharmaceuticals, utilities, steel, aerospace, automobiles, banking, finance and insurance, electronics and entertainment. CCF has been one of the most active French banks advising on privatisations in France and in emerging markets in Africa and Eastern Europe, where it has built a strong reputation. CCF is actively involved in significant debt and equity offerings, including initial public offerings on the Paris Bourse. CCF also actively provides asset financing as well as structured financing for well-known corporates. Through a specialised subsidiary, CCF provides investment advice and third-party fund management in connection with commercial and residential real estate investment. This subsidiary is involved in the UK Government’s public-private partnership programme, with specific mandates ranging from hospital to communications services. CCF provides asset management services other extensions of credit on a collateralised basis. primarily through four full-service fund management firms which serve institutional clients, as well as retail networks, with proprietary or non-proprietary products. CCF is particularly strong in providing equity and diversified products and in corporate savings plans. CCF offers a wide range of insurance products, including comprehensive health insurance, personal property casualty insurance and, through Erisa, its partnership with Swiss Life, homeowners’ insurance. CCF has grown its private banking business both organically and through the selective acquisition of a number of specialist institutions, including Banque du Louvre and Banque Eurofin in Paris and Banque Dewaay in Brussels. At the end of 2001, CCF’s funds under management were US$52 billion. HSBC Private Banking Holdings (Suisse) S.A. In December 2000, as part of the strategic restructuring of HSBC’s private banking operations, a new holding company, HSBC Private Banking Holdings (Suisse) S.A., was formed in Switzerland. The reorganisation of HSBC’s existing international private banking operations continued to be a principal focus of activity during 2001 in order to provide a stable platform to market high quality services and products and to enable cost savings to be effected through a rationalisation of operations. The integration proceeded successfully without loss of clients, assets or personnel in the face of intense market competition for both clients and employees. At 31 December 2001, subsidiary banks of HSBC Republic Suisse were located in Switzerland, Monaco, Guernsey, Hong Kong, Luxembourg and Nassau and, together with their respective branches in Hong Kong, Singapore and Nassau, represented some 73 per cent of the international HSBC Republic business. HSBC Republic is the principal international private banking division of HSBC, with operations in 50 locations in the Americas, Asia, Europe and the Middle East, and with funds under management exceeding US$150 billion at 31 December 2001. Client services include deposits and funds transfer; tax and trustee structures; asset and trust management; mutual funds; currency and securities transactions; lending; letters of credit; guarantees and HSBC Republic continued to build on its global strategy with strategic imperatives closely echoing HSBC’s client-focused approach. HSBC Republic’s client base requires a highly differentiated service, provided through a combination of geographical presence and specialised bankers. HSBC Republic, working in collaboration with other members of HSBC, is able to provide its clients with not only private banking, trust and wealth management services, but a comprehensive range of financial services, including corporate banking, investment banking and insurance. Global industry practices, such as diamonds and jewellery and sports and media, have been established to channel the delivery of services to these specialised private banking client sectors. Key achievements in 2001 include the establishment of a global investment fund management process (advisory and discretionary), a private banking treasury in Asia and in Europe, distinctive alternative investment fund management capabilities (including the successful US$180 million launch of a listed fund of hedge funds HSBC Global Absolute Limited), and an international credit function to support lending for HSBC’s distinctive clients. The international tax and trustee business has been strengthened. In parallel, key functional capabilities have been reinforced, particularly those of Operations, Human Resources and Information Technology. Working with HSBC Asset Management, Treasury and Insurance, HSBC Republic has sought shared initiatives for the benefit of clients. Most importantly, these have included structured investment products and tax effective life insurance products with an international trust component. Turkey Demirbank TAS was acquired from the Turkish Banking Regulator in October 2001 and then merged with HSBC Bank A.S. The purchase included the acquisition of Demir Yatirim, Demirbank’s fund management and stockbroking subsidiary. The combined business, operating under the HSBC name, has a network of 168 branches and offices in 38 cities providing personal, corporate, treasury, capital markets, stockbroking, fund management and investment banking services across the Turkish market, through a multi-channel delivery system including the internet, ATMs and call centres. 15 H S B C H O L D I N G S P L C Description of Business (continued) Hong Kong Hong Kong contributed US$3,883 million, or 49 per cent, of HSBC’s profit on ordinary activities before tax in 2001 compared with US$3,691 million in 2000. HSBC’s principal banking subsidiaries in the Hong Kong SAR are The Hongkong and Shanghai Banking Corporation Limited and Hang Seng Bank, in which HSBC has a 62.14 per cent stake. The Hongkong and Shanghai Banking Corporation is the largest bank incorporated in Hong Kong and HSBC’s flagship bank in the Asia-Pacific region. It is also one of the Hong Kong SAR’s three note-issuing banks, accounting for more than 64 per cent of the Hong Kong banknotes in circulation in 2001. The Hongkong and Shanghai Banking Corporation has a substantial market share in Hong Kong and operates through 212 outlets in 177 locations. Hang Seng Bank has more than 150 branches and automated banking centres in the Hong Kong SAR. Both banks offer their personal customers an extensive range of financial services with the aim of satisfying customers’ needs to grow, manage and protect their wealth. Following the successful launch of the HSBC Premier service in 2000, HSBC added seven HSBC Premier Centres and 200 personal bankers during 2001 to meet the demands of a growing client base and to offer tailored wealth management solutions to HSBC Premier customers. Hang Seng Bank’s Prestige Banking and the Bank- In-One Account provide a combination of banking, investment and financial services in one package. To reach out to different customer segments, the M.I.Kid Account, targeting parents with young children, and Femina Banking, an integrated account targeting women, were launched in 2001. The final phase of interest rate deregulation in Hong Kong, relating to interest on demand deposits, came into effect on 3 July 2001. HSBC introduced revised account services and pricing structures to encourage customers to consolidate their account relationships with HSBC and free banking options for customers who choose to use lower costing electronic and internet banking channels. In 2001’s uncertain investment market, HSBC achieved strong sales of unit trusts with the promotion of 13 guaranteed/capital-secured funds designed to meet customers’ demands to protect their investment capital but maximise their potential return in the low interest rate environment. Insurance business is a key 16 focus in HSBC’s wealth management strategy. Significant growth in insurance premiums was achieved following the expansion of the dedicated sales force and the use of telephone sales. Hang Seng Bank also continued to widen its investment and insurance product range to enhance its wealth management services. The launch in 2001 of 14 investment funds, which included 12 capital- guaranteed funds, was well received and increased the total number of sub-funds in the Hang Seng Investment Series to 31. In a year of intense competition for quality assets, HSBC succeeded in acquiring a leading market share in credit card issuing. Including credit cards issued by Hang Seng Bank, HSBC remained the largest card issuer in Hong Kong with 2.7 million cards in circulation, and led the market in cardholder sales and outstandings. To improve operational and cost efficiency, a new and enhanced card processing system was developed and implemented, and application processing was migrated to HSBC’s processing centre in Guangzhou. HSBC provides a comprehensive range of banking products and services to meet the needs of large and small businesses in Hong Kong, including trade services, payments and cash management services, investments, insurance, electronic banking, leasing and factoring, and custody business. For companies with more sophisticated finance needs, investment banking and capital market services are available. In 2001 there were significant investments in special products and servicing channels tailored for business customers. These investments included physical and electronic service outlets, as well as additional staff resources, and will continue in 2002 with particular emphasis on delivering bespoke internet banking for small and medium-sized businesses. Such developments demonstrate HSBC’s commitment to business customers regardless of size. Following the introduction of the Mandatory Provident Fund (MPF) scheme in December 2000, HSBC has used its banking infrastructure as a competitive advantage to good effect and its extensive distribution network has been complemented by an award-winning MPF internet site. As a result, HSBC has acquired the largest market share of MPF business in Hong Kong. Since the inception of online@hsbc in August 2000, HSBC has acquired the largest online banking market share in Hong Kong with nearly 300,000 registered users at the end of December 2001. Online@hsbc achieved differentiation in the market through its wide range of services, including online share trading, IPO registration and primary bonds subscription services, insurance product applications, instant approval of personal loans, and electronic bill presentation and payment services, and has won many awards. Hang Seng Bank’s comprehensive range of internet banking services has become an important part of Hang Seng’s multi-channel delivery network. At the end of 2001, more than 173,000 customers were registered for its e-Banking Services, internet transactions had grown to about 9 per cent of total transactions, and online share trading accounted for 51 per cent of total securities transactions. Hang Seng Bank continues to enhance its e-Banking Services to meet customer expectations. Rest of Asia-Pacific (including the Middle East) The rest of Asia-Pacific region contributed US$1,088 million, or 14 per cent, to HSBC’s profit on ordinary activities before tax in 2001 compared with US$1,265 million in 2000. Asia-Pacific HSBC conducts business elsewhere in the Asia- Pacific region primarily through branches and subsidiaries of The Hongkong and Shanghai Banking Corporation Limited, with particularly strong coverage in mainland China, India, Indonesia, Korea, Singapore, Taiwan and Thailand; through HSBC Bank Australia Limited in Australia; and HSBC Bank Malaysia Berhad, which has the largest presence of any foreign-owned bank in Malaysia. Both The Hongkong and Shanghai Banking Corporation and Hang Seng Bank operate in mainland China, offering personal banking services and numerous commercial services. HSBC was one of the first foreign banks permitted to conduct business in renminbi. Following China’s entry to the World Trade Organisation, banking regulations will be relaxed to allow foreign banks also to provide foreign currency services to mainland Chinese companies and individual Chinese citizens. Both HSBC and Hang Seng Bank are well prepared and positioned to take advantage of any such relaxation. The Hongkong and Shanghai Banking Corporation’s network in mainland China spans 11 major cities, comprising nine branches, in Beijing, Dalian, Guangzhou, Qingdao, Shanghai, Shenzhen, Tianjin, Wuhan and Xiamen, a sub-branch in Puxi, Shanghai, and representative offices in Chengdu and Chongqing. In addition, during the year, HSBC became a member of the Shanghai ATM network, comprising 17 domestic and foreign banks, which offers services through more than 2,000 ATMs throughout the city. HSBC proposes to launch internet banking in mainland China in 2002. To help alleviate the pressure in processing capacity faced by HSBC’s Guangzhou Service Centre, a second centre will begin operations in the first quarter of 2002 in Shanghai. An agreement to acquire an 8 per cent equity stake in the Bank of Shanghai, which has 196 branches across Shanghai and 4,500 staff, was signed in December. Hang Seng Bank operates branches in Guangzhou, Shanghai, Shenzhen and Fuzhou, and representative offices in Beijing and Xiamen in mainland China. Hang Seng Insurance Company Limited opened a representative office in Shenzhen in April 2001. Upon the granting of its application to engage in renminbi business, Hang Seng Bank’s branch in Shanghai will offer renminbi banking services. Applications to open a branch in Nanjing and to upgrade the Beijing representative office to a branch have been submitted. An application to operate internet banking services in mainland China is planned. Hang Seng Securities Limited has submitted applications for the purpose of obtaining B share-trading seats on the Shanghai and Shenzhen stock exchanges and setting up a representative office in Shanghai. HSBC’s strategy elsewhere in Asia-Pacific is focused on providing products and services that meet the wealth management requirements of the mid and upper customer segments. The Hongkong and Shanghai Banking Corporation’s approach is to differentiate its products from those offered by the local competition by leveraging HSBC’s worldwide experience and expertise. Across the region, this strategy continues to be pursued aggressively, with ongoing investment in upgrading and expanding HSBC’s personal banking and cards operations. Internet banking services were successfully launched in 10 countries during 2001 and these will be enhanced significantly through a planned series of online product and service implementations throughout 2002. During 2001, new branches were 17 H S B C H O L D I N G S P L C Description of Business (continued) opened in Australia, India, Indonesia, Korea, New Zealand, Sri Lanka and Taiwan. The branch network is supplemented by an extensive ATM network, and telephone and internet banking services, giving customers a comprehensive range of channels through which to deal with HSBC. The number of personal banking customers grew during 2001 from 1.5 million to 1.7 million. Continued rapid expansion is also anticipated in credit card issuing in 2002 following the success in 2001 in increasing cards in issue from 2 million to 2.7 million, and there will be significant investment in staff numbers, training and systems to support this growth over the course of 2002. Very good progress was made during 2001 in providing insurance and investment products to customers and a strong foundation has been laid on which to build accelerated growth in these products in 2002. Organic growth is supplemented by acquisition where a suitable opportunity exists to purchase an operation that will further enhance the products and services available to customers. During 2001, HSBC acquired a finance company in Brunei, an asset management company in Taiwan, and a building society in Australia, all of which have now been successfully integrated with HSBC’s existing operations. HSBC operations in Brunei have been further enhanced with the establishment of an offshore banking unit and an Islamic finance centre. In Singapore, the qualifying full bank licence awarded by the Monetary Authority of Singapore, which will enable HSBC to expand the retail banking services it can offer to customers in this location, came into effect on 1 January 2002. HSBC will continue to expand its regional processing capabilities, building on the existing sites in India and China. A programme has been established to migrate high cost processing to these lower cost sites progressively which will produce not only cost benefits but will enhance processing effectiveness with the centralisation of expertise. Middle East HSBC’s operations in the region are conducted primarily through HSBC Bank Middle East, HSBC Bank Egypt S.A.E. (94.5 per cent owned), British Arab Commercial Bank Limited (46.5 per cent owned) and The Saudi British Bank (40 per cent owned). HSBC’s branch network in the region consists of 134 branches and offices primarily in the United Arab Emirates and Saudi Arabia and also in 18 Egypt, Bahrain, Jordan, Lebanon, Morocco, Oman, Qatar, Iran and the Palestinian Autonomous Area. In addition to their core corporate banking services, HSBC’s Middle East operations focus on personal banking, private banking for high net-worth individuals and the rapidly developing field of Islamic finance. North America North America contributed US$481 million, or 6 per cent, of HSBC’s profit on ordinary activities before tax in 2001 compared with US$850 million in 2000. HSBC’s principal banking subsidiaries in North America are HSBC Bank USA and HSBC Bank Canada. United States At 31 December 2001, HSBC Bank USA had assets of US$87 billion and deposits of US$57 billion and was the twelfth-largest bank holding company in the United States, ranked by total assets, and the third- largest depositary institution in New York State, serving over two million customers. HSBC Bank USA is engaged in general commercial banking business, offering a full range of banking products and services to individuals, including high-net-worth individuals, corporations, institutions and governments. Through HSBC Bank USA, HSBC has the largest branch network in New York State, where it has over 415 branches, as well as two branches in Pennsylvania, eight branches in Florida and three branches in California. Selected commercial and consumer banking products are offered on a national basis, including mortgage servicing to over 3,000 brokers and 48 states. As a result of the acquisition of RNYC in December 1999, HSBC provides the fifth-largest factoring service in the United States, has doubled assets under administration and greatly enhanced HSBC’s global treasury and foreign exchange businesses. It is now also a world leader in banknotes and precious metals trading. At 31 December 2001, HSBC Bank USA’s customer base included more than 2 million personal and 180,000 commercial and institutional customers. Through its participation in the joint venture Wells Fargo HSBC Trade Bank with Wells Fargo Bank, HSBC offers trade-related financing throughout the western United States. Through HSBC’s international network, HSBC Bank USA offers its customers access to the global markets and services of HSBC. treasury and capital markets business, servicing the needs of domestic and international clients). As part of its strategy of providing customers with multiple choices for product and service delivery, HSBC Bank USA offers a comprehensive internet banking service. At 31 December 2001, more than 275,000 customers had registered for the service, up from approximately 80,000 at year-end 2000. The HSBC Bank USA web site, us.hsbc.com, where customers can apply for accounts, conduct financial planning and link to online services, receives over 30,000 visits daily. During 2001, hsbc.com launched its first business applications. The hsbc.com program has been designed to maximise the ability to offer any or all services to any or all customers. hsbc.com provides a common presentation and browser capability. By adopting this approach, it enhances the choices our customers have in selecting how they want to do business, while reducing our cost of providing the services. All the key systems, which provide core services, are planning on integrating with hsbc.com over the next five years. HSBC Bank USA has a considerable presence and is the largest lender to corporations in Panama, with 17 branches. In August 2000 HSBC acquired the 11 branches and US$747 million of assets of Chase Manhattan Bank’s branch operations in Panama, which was followed by the transfer on 1 January 2001 of HSBC Bank plc’s existing Panama business to HSBC Bank USA. Canada HSBC Bank Canada had over 160 branches and subsidiary offices in Canada and two in the United States as at 31 December 2001 and offers a wide range of products and services to targeted segments in the financial services market. The organisation and structure of HSBC Bank Canada’s operations are customer-driven and integrated both across service and product lines and internationally through HSBC’s international network. HSBC Bank Canada operates through three major business segments: personal financial services and wealth management; commercial financial services; and wholesale banking (Corporate and Institutional Banking services for the domestic and cross-border financial requirements of HSBC’s large domestic and cross- border clients, and Treasury and Markets which encompasses the Canadian operations of HSBC’s During 2001, HSBC Bank Canada opened ServicePlus East, a regional call centre located in Ontario, to provide a better service to customers in central and eastern Canada. In addition, HSBC Bank Canada acquired Crédit Lyonnais Canada and CCF Canada which enhanced HSBC’s position in the Canadian financial services marketplace. Customers have access through various networks to over 35,000 ATMs in Canada. HSBC Bank USA and HSBC Bank Canada collaborate in joint marketing initiatives targeted at clients who conduct cross-border trade. Latin America Latin America contributed a loss of US$994 million to HSBC’s profit on ordinary activities before tax in 2001 compared with a profit of US$311 million in 2000. Despite economic volatility in the region with consequential high interest rates, HSBC views Latin America as a banking and insurance market that is still developing and, as such, offers a growth opportunity to an international financial services institution with extensive resources, such as HSBC. Brazil HSBC Bank Brasil, which is headquartered in Curitiba, has an extensive domestic network, with over 1,600 branches and offices, 3.3 million personal customers and over 230,000 business and institutional customers. HSBC’s goal is to use this network, the third-largest of the private banks in Brazil, as a platform to expand personal banking services and cross-sell other products and services, particularly insurance, funds management and leasing services. HSBC operates the eighth-largest insurance business in Brazil, offering life, auto, property, casualty and health insurance. As part of HSBC’s overall cross-selling strategy, the staff of HSBC Bank Brasil’s insurance and banking offices are being located together and trained to sell each other’s products. Following the acquisition of CCF, HSBC Bank Brasil assumed management control of Banco CCF Brasil S.A. in October 2000 (now known as HSBC Investment Bank Brasil S.A.-Banco Múltiplo). The business complements HSBC’s existing capital 19 H S B C H O L D I N G S P L C Description of Business (continued) market and insurance operations and brings significant additions to HSBC’s private banking and asset management operations in Brazil. Total assets under management were US$9 billion at 31 December 2001, making HSBC the fifth-largest fund manager in Brazil. Argentina HSBC Bank Argentina S.A. (formerly HSBC Banco Roberts S.A.) is the sixth-largest private bank in Argentina in terms of deposits and assets and the eighth largest in terms of loans. HSBC has a network of more than 160 offices in Argentina and a total staff of over 5,000 employees. HSBC also owns one of the largest insurance businesses in Argentina, HSBC La Buenos Aires, and through its subsidiaries HSBC Máxima and HSBC New York Life offers pensions and life assurance. HSBC’s Argentinian health care subsidiary, HSBC Salud, provides pre- paid medical services and is the fourth-largest pre- paid health care company in Argentina (in terms of membership) and the leading one in the corporate market. Since its founding in 1960, HSBC Bank Argentina S.A. has maintained its commercial focus on the upper and middle corporate market and has developed its retail base in an ever-increasing market, initially by targeting the management and employees of its corporate customers. HSBC has developed a high standard of service for its personal banking business through the introduction of automated telephone banking and PC banking, the expansion of its ATM network and a new home page (www.hsbc.com.ar). HSBC Bank Argentina has a network of 67 branches throughout the country and offers a wide range of financial products and services, specifically corporate banking, middle market banking, trade financing, leasing, custody services, treasury and investment banking and personal banking. Lines of business In accordance with its strategy of ‘Managing for Value’, HSBC has started to analyse the results of its businesses by customer segments, products or management responsibility. This line of business reporting provides additional and complementary data to HSBC’s segmental reporting, which is by geographical region. 20 Personal Financial Services The Personal Financial Services segment covers individual customers, including those who are self- employed. Internationally oriented high net worth individuals and their families who choose the differentiated services offered within Private Banking are not included in this segment. The personal customer segment comprises some 29 million customers world-wide. Within this figure, more than 460,000 are classified as HSBC Premier customers who represent the most valuable personal customer segment. Through its extensive branch network, HSBC provides a wide range of banking and related financial services to its personal customers. Principal products and services for personal customers include current chequing and savings accounts, loans and home finance, cards, insurance and investment services, including securities trading. Services are increasingly delivered via the telephone and internet. A comprehensive financial planning service, covering customers’ investment, retirement and personal and asset protection needs is offered through specialist financial planning managers. HSBC services its most valuable personal customers through its HSBC Premier service, now available in 23 countries and territories. The key components of the HSBC Premier service, in addition to the standard range of personal banking products and services, are: • Dedicated relationship management • Over 140 HSBC Premier centres world-wide • • 24-hour priority telephone access 24-hour global travel assistance As at 31 December 2001, HSBC had total personal customer deposits of US$230 billion and total personal customer loans and advances, net of suspended interest and provisions for bad and doubtful debts, of US$115 billion. HSBC sells and distributes a range of insurance products, including life, loan protection and ill-health protection insurance, as well as pensions, investments and savings, principally through its locally based banking subsidiaries. HSBC is a broker for life and pensions insurance, general insurance and reinsurance and an underwriter for property, casualty, life, pensions and health insurance. HSBC is currently focused on increasing its personal insurance products, and cross-selling these to its personal customer base utilising its branch network, local sales forces, direct telephone capabilities and internet delivery channels. Commercial Banking The Commercial Banking segment covers middle market and smaller commercial relationships which fall between the Personal Financial Services and Corporate and Institutional Banking segments. Commercial Banking comprises some 1.8 million customers world-wide and includes incorporated businesses, trading entities, partnerships, sole traders, clubs and associations. Similar to the Personal Financial Services segment, HSBC provides a wide range of banking and related financial services to its commercial customers through its extensive branch network. Principal products and services for commercial customers include current and savings accounts, corporate and purchasing cards and loans. Treasury services are also available to commercial customers. Relationship managers maintain prime contact with customers and direct and co-ordinate access to HSBC’s comprehensive range of services. Relationships are managed either at local branch level or through a network of commercial banking centres. As at 31 December 2001, HSBC had total commercial customer deposits of US$81 billion and total commercial customer loans and advances, net of suspended interest and provisions for bad and doubtful debts, of US$82 billion. Trade services. HSBC has more than 130 years of trade services experience and expertise. This core business is supported by HSBC’s branch network throughout the Asia-Pacific region, Europe, the Americas and the Middle East, making HSBC one of the world’s largest trade finance and services organisations. Offering a complete range of traditional documentary credit, collections and financing products, as well as specialised services such as insured export finance, factoring and forfaiting, HSBC seeks to bring value to its customer partnerships – with solutions that are tailored to meet their requirements, supported by HSBC’s highly automated systems. Leasing, finance and factoring. HSBC provides leasing, finance (including instalment and invoice finance) and factoring services, primarily to commercial customers in the United Kingdom, Hong Kong, the United States and France. HSBC has established special divisions to finance commercial vehicles, plant and equipment, materials handling, machinery and large, complex leases. It also provides services for consumer finance and small businesses. Payments and cash management. HSBC is a leading provider of payments, collections, liquidity management and account services world-wide, enabling financial institutions and corporate customers to manage their cash efficiently on a global basis. HSBC’s ability to provide high-quality cash management services is enhanced by its extensive network of offices and strong domestic capabilities in many countries, including direct access to local clearing systems. A key component of HSBC’s market leadership in cash management is the continuing innovation and flexibility in electronic delivery using internet-enabled, file transfer or PC- based technology, to best suit the client’s needs. Insurance. HSBC is able to offer business customers a range of insurance protection, employee benefits and pension schemes to meet the needs of the business itself, of its employees and also to fulfil the statutory obligations of the company. HSBC provides these products either as manufacturer or as supplier of third party products and acts either as intermediary (broker, agent or consultant) or direct supplier. The range of products and services includes: property damage; business interruption/loss of profits; public and products liability; employers liability; professional liability/directors and officers liability; group life, pension schemes, healthcare schemes; key man life insurance; car fleet; goods in transit; trade credit protection; risk management and insurance due diligence reviews; and actuarial/employee benefit consultancy. Corporate, Investment Banking and Markets This segment covers HSBC’s Corporate and Institutional Banking and Investment Banking and Markets businesses. The results of these businesses are shown together to reflect the role of HSBC’s Investment Banking and Markets operation in providing integrated solutions to the major international clients of the Corporate and 21 H S B C H O L D I N G S P L C Description of Business (continued) Institutional Banking business. Corporate and Institutional Banking HSBC’s Corporate and Institutional Banking (CIB) business is responsible for the delivery of products and services to 1,200 of HSBC’s major international corporate and bank and non-bank institutional clients. With dedicated offices in over 40 countries and access to HSBC’s presence and capabilities, it serves over 25,000 subsidiaries and offices of these major clients in more than 80 countries and territories. Directed and co-ordinated as a global business, a dedicated group of 900 relationship managers and analysts together with product executives from around the world form individual Client Service Teams, focused on understanding and supporting the client’s business and financial needs. Corporate and Institutional Banking offers the full range of HSBC’s wholesale banking products and services many of which are described more fully under the Commercial Banking and Investment Banking and Markets sections. Banking products. General banking products and services includes lending and deposit taking and related services. Leasing, with an emphasis on ‘big ticket’ transactions, finance and factoring are also provided by specialist units. A key component of HSBC’s leasing activities involves the provision of passenger rolling stock under operating leases to privatised train operators in the United Kingdom. Transaction banking products. These include trade services with an emphasis on our specialised Trade Solutions product and payments and cash management with an emphasis on international and regional as well as in-country services. Also included is securities services, where HSBC is one of the world’s leading custodians providing custodian and clearing services to domestic and cross-border investors. In addition, our securities services also provide debt and equity issuer services, trustee and stock lending facilities. Insurance Services. Through HSBC Insurance, clients have access to the largest independent brokerage alliance in the world. A similar range of services as that provided to Commercial Banking is provided to corporate and institutional clients. However, risks at this level are often more complex and insurance needs more diverse. HSBC is, therefore, able to provide a range 22 of insurance solutions through designing comprehensive programmes tailored to meet the requirements of most large insured. These might include: • All types of property, liability and accident • Aviation risks • Marine risks (hull and transit) • Crime exposures (fraud, etc) • Political risks • Oil and gas (specialised exposures) • Contingency • Captive management • Multinational programmes • Product contamination and recall • Executive security. The majority of these risks would be insured with suitable security external to HSBC’s own underwriters but in certain locations, including Hong Kong, Singapore, Brazil and Argentina, may be insured by HSBC’s own insurance companies. Principally these services are provided through HSBC’s insurance broking subsidiaries. Investment Banking and Markets Investment Banking and Markets comprises HSBC’s treasury and capital markets businesses, investment banking, merchant banking, private banking, asset management and private equity operations. The business employs more than 17,000 staff and has offices in 55 countries with principal dealing rooms located in London, New York, the Hong Kong SAR and Paris, supported by key operations in Tokyo, Singapore, São Paulo and Düsseldorf and a number of smaller operations across the globe. Treasury and Capital Markets. HSBC’s treasury and capital markets business provides treasury and debt capital markets products and services to supranationals, central banks, corporations, institutional and private investors, financial institutions and other market participants. The products and services available to these clients include foreign exchange, currency, interest rate, bond and other specialised derivatives, government and non-government fixed income and money- market instruments, primary debt issuance to corporate and government bodies, precious metals, exchange-traded futures and options broking and bank notes. Global Investment Banking Division. This business provides advisory services in connection with mergers and acquisitions, asset disposal, equity capital, stock exchange listings, privatisation and capital restructuring. In addition to a wide variety of equity research, sales and trading services available to institutional, corporate and retail clients, HSBC’s investment banking business offers an integrated service in equity derivative, convertible and portfolio trading. Merchant Banking. HSBC’s Merchant Banking business encompasses project and export finance, aviation and structured finance, syndicated finance, Amanah Finance and HSBC Equator. Project and Export Finance offers non-recourse financing to exporters, importers, and financial institutions, working closely with all major export credit agencies. Aviation and structured finance provides advice and financing for complex and tax efficient investment facilities, utilising our global operations to facilitate cross-border transactions. Syndicated Finance has been integrated into HSBC’s debt financing and advisory platform, which draws together structured finance, syndicated finance, debt capital and advisory services while building up on existing links with other areas of investment banking and markets including equity securities, fixed income and project and export finance. Amanah Finance develops and structures products that are consistent with Islamic laws for its private client, institutional and corporate customers. HSBC Equator provides merchant, investment banking, and commercial trading services throughout sub-Saharan Africa. Private Equity. HSBC offers institutional investors in Europe, Asia and the Americas the opportunity to invest in unquoted equities. The opportunity to invest in unlisted companies arises in situations such as management buy-outs, management buy-ins, acquisitions as principal, corporate restructurings, acquisition finance and development capital. Asset Management. HSBC provides global investment advisory and fund management services through its principal fund management operations in Europe, North America, Latin America, Australia and Asia. HSBC provides large institutional clients with a tailored approach to managing their assets, with active segregated and pooled portfolio management on a global, regional, asset class or country-specific basis. HSBC also structures retail products to match customer investment preferences at terms and pricing which are transparent and competitive. HSBC offers smaller institutions and private investors a wide range of mutual funds and other pooled investment vehicles, including unit trusts, mutual funds, offshore umbrella funds and Individual Savings Accounts (‘ISAs’). Insurance Services. A relatively narrow range of specialist insurance services is provided to clients of the Investment Bank, particularly to Private Equity clients and purchasers, acquiring businesses through mergers and acquisitions. These services are generally limited to those provided by HSBC Insurance Brokers Limited mostly in the United Kingdom and might include warranty insurance, prospectus liability and property programmes. Private Banking With 4,900 employees working in 50 locations. Private Banking provides world class financial services to high net worth individuals and their families, through four distinct businesses: • HSBC Republic, HSBC’s principal international private banking division; • HSBC Guyerzeller, a traditional Swiss private bank focusing on discretionary management and trustee services; • CCF Private Banking, with its strong presence in the euro zone; and • HSBC Trinkaus & Burkhardt, providing banking and fund services in Germany, Luxembourg and Hong Kong. Client services include deposits and funds transfer; tax and trustee structures; asset and trust management; mutual funds; currency and securities transactions; lending; letters of credit; guarantees and other extensions of credit on a collateralised basis. The high net worth client requires a highly differentiated service, provided through a combination of geographical presence and specialised bankers. Working in collaboration with other members of HSBC, the private bank is able to provide its clients with not just private banking, trust, and wealth management services, but a 23 H S B C H O L D I N G S P L C Description of Business (continued) comprehensive range of financial services, including corporate banking, investment banking and insurance. Working with HSBC Asset Management, Group Treasury and Group Insurance, Private Banking has sought shared initiatives for the benefit of clients. Most importantly these have included structured investment products and tax-effective life insurance products with an international trust component. Other The other business line includes: • • • • income and expenses of wholesale insurance operations; the results of head office operations, including income earned on the deployment of centrally held capital resources and stewardship costs of HSBC’s head office operations. This also includes certain regulatory and operational liquidity costs incurred for the benefit of operational entities as a whole and not directly attributable to individual business lines; the results of centrally held investment companies and portfolios; and a number of individually significant unusual items, including the impact of the Princeton Note provision and the exceptional bad debt provisions and currency redenomination losses in Argentina. Competitive environment HSBC Holdings and its subsidiaries face intense competition in all the markets they serve. HSBC competes with other major financial institutions, including commercial banks, savings and loan associations, credit unions, consumer finance companies, major retailers, brokerage firms and investment companies providing commercial banking products and services, and with investment banks and the investment banking operations of commercial banks providing investment banking products and services. Global factors Consolidation in the banking industry The trend towards bank consolidations, at both the national and international levels, is creating a broader 24 range of banks capable of competing directly with HSBC in an increasing number of markets worldwide in which previously only HSBC and a few other global banks offered the full range of banking services. Limited market growth In HSBC’s key markets, the United Kingdom, France, the United States and Hong Kong, there is limited market growth in the provision of basic financial and banking services. There is, however, growth potential in the provision of a full range of financial services. Advances in technology Technological innovations, including new and expanding information and communication technologies, are altering radically HSBC’s range of competitors, as specialist providers and non financial organisations begin to offer financial services without the need of a traditional physical branch network. Such innovations increase the pressure on traditional banks to maintain and enhance service quality and also to make the investments required to offer similar services. HSBC is actively adapting its business to allow customers to access its full range of services in the manner they wish: through the internet, interactive TV, mobile phones, WAP, telephone banking or the branch system. Regional factors Europe Despite limited market growth, an increasing number of new entrants continue to enter the market in the United Kingdom, including a number of telephone banking and internet banking service providers. Life assurers and de-mutualised building societies that have become banks are now direct competitors of HSBC Bank plc. Several established UK banks have also decided to launch separately branded internet banks in addition to their existing services. An investigation into the supply of banking services to small and medium-sized businesses was referred to the UK Competition Commission in April 2000. The 19 month-long investigation concluded on 19 October 2001 when the full report was presented to the Secretary of State for Trade and Industry. We still await publication of this report. In September 2001, the Office of Fair Trading (‘OFT’) announced that it proposes to make a decision that the level of interchange fees among MasterCard/Europay members (which includes HSBC Bank plc) infringes UK competition law. Both MasterCard/Europay and HSBC have made written representations to the OFT and a final decision is awaited. France After a good year in 2000, retail and commercial banking showed a considerable resilience to the more difficult conditions in 2001. Moreover, the lending market remains highly competitive and margins continue to be squeezed although there are signs that the market is stabilising. Hong Kong Competition from locally incorporated and foreign banks remains fierce, particularly for quality customers and quality assets. Competition for credit cards and consumer assets has remained strong as banks have looked to consumer lending to replace mortgage loan growth and to achieve a higher return on assets. This trend is likely to continue through 2002. Pressure for consolidation of banks is likely to continue into the year and may result in fewer, but larger, competitors vying for market share. Deregulation of brokerage commissions will increase pressure on securities trading revenues. As market leaders, The Hongkong and Shanghai Banking Corporation Limited and Hang Seng Bank are well placed to meet these challenges. Rest of Asia-Pacific (including Middle East) The competitive environment varies greatly across the region, depending on the level of regulation, number of entrants and the maturity of the markets. Competition remains intense throughout the Middle East with a large number of banks serving relatively small populations in each country. The global economic slowdown, together with the events of 11 September 2001 have affected many economies around the region as oil income and tourist revenues have declined. Against this background financial markets in many countries are undergoing rapid change and management believes HSBC is well placed to benefit from the diverse opportunities that these changes will bring. In most markets in the region, local banks dominate while foreign-owned banks have a relatively small market share typically focused on trade finance and servicing branches of multinational companies. Nevertheless, foreign banks can attract a disproportionate share of high net-worth and professional customers due to their extensive range of services, international connections, advanced technology and financial strength. In most countries in the region, the relatively young population and maturing sophistication in financial services are expected to provide growth opportunities for HSBC. While several foreign competitors have reduced their involvement in the region due to the economic slowdown, HSBC continues to command respect by maintaining its commitment to the region and supporting its long-term relationships. North America In the United States, mergers and acquisitions in the banking, insurance and securities industries have brought consolidation, conglomeration and a blending of services. HSBC Bank USA also faces vigorous competition from a large number of non- bank suppliers of financial services that have found new and effective ways to meet the financial demands of customers. Many of these institutions are not subject to the same laws and regulations imposed on HSBC Bank USA. The Gramm-Leach-Bliley Act of 1999 (‘GLBA’) took effect on 11 March 2000. GLBA enables banks, securities firms and insurance companies to enter into combinations that permit a single financial services organisation to offer a more complete line of financial products and services. GLBA established functional regulation which could impact the way certain securities and securities-related activities of banks are conducted. Under the so-called ‘push-out’ provisions of GLBA, securities brokerage and certain investment advisory activities have to be conducted through SEC- registered affiliates of banks, unless the activities come within certain exceptions to such provisions. The SEC has deferred the effective date of an interim final rule providing guidance on ‘push out’ until 12 May 2002. On 26 October 2001 President Bush signed into law a new statute, the USA Patriot Act, that imposes substantial new money-laundering detection and monitoring requirements on US banks and US broker dealers. Certain of the requirements became effective on 25 December 2001; other requirements 25 H S B C H O L D I N G S P L C Description of Business (continued) become effective on various dates in 2002. Substantial new regulations will be issued to implement the USA Patriot Act. Significant new requirements for information gathering, record keeping and ongoing monitoring are likely to be imposed by the regulations. Latin America There are over 180 banks in Brazil operating through a network of over 24,000 branches and offices. Consolidation in the local banking industry is under way, increasingly involving foreign banks (at the end of 2001 there were 56 banks in Brazil with foreign ownership interests). With a population of 169 million and an estimated 67 per cent of the active population ‘unbanked’, growth opportunities in the retail sector, in particular, appear favourable in the medium/long term. In comparison with more developed markets, insurance penetration in Brazil is fairly low and is heavily concentrated in the non-life sector. HSBC’s ability to cross-sell both life assurance and general insurance products through its extensive branch network means that it is well- placed to take advantage of this economic and competitive environment. In Argentina, international competitors are providing the greatest competition in core banking services and insurance with most of the major banks having substantial foreign ownership interests. The recently announced changes in the Argentine financial markets will have a profound impact on commercial and personal financial needs. HSBC, with its broad national network and sales force, is one of only two or three groups in Argentina still capable of providing a full financial service to its clients and is well-placed both as a provider of personal financial services and in capital markets. In view of the current economic crisis in Argentina HSBC continues to monitor closely developments impacting the financial system. At present, HSBC expects to continue to operate in Argentina although political events may cause it to reassess its present policy and may require it to take additional actions including significant restructuring of its Argentine operations. Employees As at 31 December 2001, HSBC had approximately 180,000 employees (including part-time employees) worldwide (of whom approximately 59,000 work in 26 the United Kingdom, 14,000 in France, 25,000 in Hong Kong, 14,000 in the United States and 21,000 in Brazil), compared with approximately 172,000 at 31 December 2000 and 154,000 at 31 December 1999. HSBC estimates that approximately one-half of its labour force worldwide is unionised. Most significant concentrations of union membership occur in the United Kingdom, Brazil (where union membership is a requirement under national employment legislation) and France. Management believes that the current relationship between HSBC and its employees is harmonious, as it has been in the past. HSBC has not experienced any material strikes or work stoppages within the past five years. Regulation and supervision HSBC’s operations throughout the world are regulated and supervised by the relevant central banks and regulatory authorities in each of the jurisdictions in which HSBC has offices, branches or subsidiaries. These authorities impose certain reserve and reporting requirements and controls (for example, capital adequacy, depositor protection, and prudential supervision) on banks. In addition, a number of countries in which HSBC operates impose additional limitations on (or that affect) foreign or foreign-owned or controlled banks and financial institutions, including: restrictions on the opening of local offices, branches or subsidiaries and the types of banking and non-banking activities that may be conducted by those local offices, branches or subsidiaries; restrictions on the acquisition of local banks or requiring a specified percentage of local ownership; and restrictions on investment and other financial flows entering or leaving the country. Changes in the supervisory and regulatory regimes of the countries where HSBC operates, particularly in Asia, will determine to some degree HSBC’s ability to expand into new markets, the services and products that HSBC will be able to offer in those markets and how HSBC structures specific operations. The most important jurisdictions that regulate and supervise HSBC’s activities are the United Kingdom, Hong Kong, the United States and France. The UK Financial Services Authority (‘FSA’) supervises HSBC on a consolidated basis. Additionally, each operating bank within HSBC is regulated by local supervisors. Thus, The Hongkong and Shanghai Banking Corporation Limited and Hang Seng Bank Limited are supervised by the Hong Kong Monetary Authority (the ‘Monetary Authority’), HSBC Bank plc and HSBC Investment Bank plc by the FSA, Crédit Commercial de France S.A. by the French Banking Commission and HSBC Bank USA by the Board of Governors of the Federal Reserve Board (the ‘Federal Reserve Board’), the Federal Deposit Insurance Corporation (the ‘FDIC’) and the State of New York Banking Department. United Kingdom regulation and supervision UK banking institutions are subject to multiple regulations. Until N2 (midnight on 30 November 2001), the primary UK statutes were the UK Banking Act 1987 (‘UK Banking Act’), and the Financial Services Act 1986 (the ‘FS Act’). Since N2, financial institutions in the UK have been subject to a new regulatory regime and the primary UK statute is now the Financial Services and Markets Act 2000 (‘FSMA’). In addition, other UK primary and secondary banking legislation is derived from European Union (‘EU’) directives relating to banking, securities, investment and sales of personal financial services. The FSA has been responsible for authorising and supervising UK banking institutions since 1 June 1998, when the Bank of England Act 1998 transferred responsibility for, among other things, banking supervision from the Bank of England to the FSA. Prior to N2, other organisations retained separate duties that the FSA assumed under the FSMA. Entities conducting investment business in the UK were required to join one or more self-regulating organisations (‘SROs’) to which the FSA provided staff under contract, or be directly authorised by the FSA. Under FSMA certain SROs vested with duties under the FS Act were merged into the FSA. The FSA acted as the ‘lead regulator’ in monitoring compliance with the capital requirements for banks’ securities and investment businesses. The most important SROs for HSBC Bank plc were: the Personal Investment Authority, which regulated the retail life, pensions and investments business; the Securities and Futures Authority, which regulated the custody business, branch share dealing and treasury and capital markets services and activities; and the Investment Management Regulatory Organisation, which regulated HSBC Bank plc’s collective investment scheme trusteeship activities. From N2, the FSA assumed responsibility for regulating all investment business in the UK from retail life and pensions business to custody, branch share dealing and treasury and capital markets activity. FSA regulations (and prior to N2, the UK Banking Act and the relevant SROs) establish the minimum criteria for authorisation for banks and investment businesses in the UK. FSA regulations set out reporting (and, as applicable, consent) requirements with regard to large individual exposures and large exposures to related borrowers. The FSA may obtain independent reports, usually from the auditors of the authorised institution, as to the adequacy of systems governing internal control as well as systems governing records and accounting. The FSA may also object, on prudential grounds, to persons who hold, or intend to hold, 10 per cent or more of the voting power of a financial institution. The regulatory framework of the UK banking system has traditionally been based on co-operation between the FSA and authorised institutions. The FSA monitors authorised institutions through interviews and the review of periodically required reports relating to financial and prudential matters. The FSA meets regularly with HSBC’s senior executives to confirm that HSBC adheres to the FSA’s prudential guidelines. The FSA and senior executives in the UK regularly discuss fundamental matters relating to HSBC’s business in the UK and internationally, such as strategic and operating plans, risk control, loan portfolio composition and organisational changes. The FSA is the supervisor of HSBC on a consolidated basis and in this capacity receives information on the capital adequacy of, and sets requirements for, HSBC as a whole. Further details on capital measurement are included in ‘Capital Management’ on pages 118 to 120. HSBC Bank plc and HSBC Investment Bank plc are HSBC’s principal authorised institutions in the UK. Prior to N2, depositors and investors were covered by the Deposit Protection Fund which applied to deposits with authorised institutions in the UK and the Investors Compensation Scheme which applied to clients of authorised investment firms. Under FSMA, from N2 these bodies and others 27 H S B C H O L D I N G S P L C Description of Business (continued) merged to become the Financial Services Compensation Scheme which covers deposits with authorised institutions in the UK, investment business and contracts of insurance. Institutions authorised to accept deposits and conduct investment business are required to contribute to the funding of the scheme. In the event of the insolvency of an authorised institution, depositors were previously entitled to receive 90 per cent of their protected deposits, subject to a maximum payment to any one depositor of £18,000 (or €20,000 if greater) and are now entitled to receive 100% of the first £2,000 of a claim plus 90% of any further amount up to £33,000 (the maximum amount payable being £31,700). Payments under the Scheme in respect of investment business compensation remain unchanged and are limited to 100% of the first £30,000 of a claim plus 90% of any further amount up to £20,000 (the maximum amount payable being £48,000). Hong Kong regulation and supervision Banking in Hong Kong is subject to the provisions of the Banking Ordinance of Hong Kong (Chapter 155) (the ‘Banking Ordinance’), and to the powers, functions and duties ascribed by the Banking Ordinance to the Monetary Authority. The principal function of the Monetary Authority is to promote the general stability and effective working of the banking system in Hong Kong. The Monetary Authority is responsible for supervising compliance with the provisions of the Banking Ordinance. Other committees, appointed by and serving under terms defined by the Chief Executive of Hong Kong (‘the Chief Executive’), advise the Chief Executive. They include the Banking Advisory Committee, chaired by the Financial Secretary of Hong Kong (the ‘Financial Secretary’), which advises the Chief Executive regarding fully-licensed banks and acts as a general advisory committee, and the Deposit-taking Companies Advisory Committee, which advises the Chief Executive regarding deposit-taking companies and restricted-licence banks. The Chief Executive has the power to give directions to the Monetary Authority, which the Banking Ordinance requires the Monetary Authority and the Financial Secretary to follow. The Monetary Authority has responsibility for authorising banks, and has discretion to attach conditions to its authorisation. The Monetary Authority’s approach to banking supervision involves an understanding of a bank's business and 28 financial position and of its management systems for assessing, monitoring and controlling its exposure to various forms of risk. The Monetary Authority requires that banks or their holding companies file regular prudential returns and holds regular discussions with the management of the banks to review their operations. The Monetary Authority may also conduct ‘on site’ examinations of banks, and in the case of banks incorporated in Hong Kong, of any local and overseas branches and subsidiaries. The Monetary Authority may conduct the examination without prior notice, on its own initiative or at the initiative of the holders of either one-third of the issued shares or of the holders of one-tenth of the gross total deposit liabilities of that institution in Hong Kong or a sum equal to the aggregate of the paid-up share capital of the institution and its published reserves, whichever is greater, subject to the submission of evidence to justify the examination. The Monetary Authority requires all authorised institutions to have adequate systems of internal control and requires the institutions’ external auditors, upon request, to report on those systems and other matters such as the accuracy of information provided to the Monetary Authority. In addition, the Monetary Authority may from time to time conduct tripartite discussions with banks and their external auditors. The Monetary Authority may on its own initiative suspend authorisation of an institution for up to 14 days and, after consultation with the Financial Secretary, for up to six months, which may be renewed for an additional six months if it considers it necessary. The Monetary Authority may revoke authorisation in the event of an institution's non-compliance with the provisions of the Banking Ordinance. These provisions require, among other things, the furnishing of accurate, non-misleading reports. The Banking Ordinance requires that banks submit to the Monetary Authority certain returns and other information and establishes certain minimum standards and ratios relating to capital adequacy (see below), liquidity, capitalisation, limitations on shareholdings, exposure to any one customer, unsecured advances to persons affiliated with the bank and holdings of interests in land, with which banks must comply. The Monetary Authority is also empowered to monitor the activities of overseas branches or representative offices of Hong Kong- incorporated banks, and must approve the establishment or acquisition of overseas subsidiaries. The Monetary Authority may also examine the books, accounts and transactions of overseas subsidiaries. Hong Kong fully implemented the capital adequacy standards established by the Basel Convergence Agreement in 1989. The Banking Ordinance currently provides that banks incorporated in Hong Kong maintain a capital adequacy ratio (calculated as the ratio (expressed as a percentage) of its capital base to its risk-weighted exposure) of at least 8 per cent. For banks with subsidiaries, the Monetary Authority is empowered to require that the ratio be calculated on a consolidated basis, or on both consolidated and unconsolidated bases. If circumstances require, the Monetary Authority is empowered to increase the minimum capital adequacy ratio (up to 12 per cent for fully-licensed banks and 16 per cent for deposit-taking companies and restricted-licence banks), after consultation with the bank. The Banking Ordinance contains detailed provisions regarding calculation of the capital base of the bank and the risk factors which are applied to various categories of assets and off-balance-sheet exposures in order to determine risk-weighted exposure. As in the United Kingdom, the total regulatory capital of a bank, and limits on the extent to which different types of capital may be included in the calculation of total regulatory capital, is determined based on ‘tiers’ of capital. In the event of a bank’s insolvency or likely difficulty in meeting its obligations, the Monetary Authority has the power to appoint a manager, who is empowered to do all things necessary to manage the affairs of the institution. The Monetary Authority, which may deny the acquisition of voting share capital of over 10 per cent in a bank, and may attach conditions to its approval thereof, can effectively control changes in the ownership and control of Hong Kong-incorporated financial institutions. In addition, the Monetary Authority has the power to divest controlling interests in a bank from a person if they are no longer deemed to be fit and proper, or if they may otherwise threaten the interests of depositors or potential depositors. The Monetary Authority may also object to a person becoming or remaining an ‘indirect controller’ (a person in accordance with whose directions the directors of the relevant bank are accustomed to act) of a bank incorporated in Hong Kong. To facilitate more effective co-operation with other financial supervisory authorities, the Banking Ordinance enables the Monetary Authority to assist and co-operate with other financial supervisory authorities in Hong Kong and abroad. The Banking Ordinance’s secrecy provisions permit the exchange of information with such other authorities, and also permit the Monetary Authority to disclose information to the Chief Executive, the Financial Secretary, the Secretary for Financial Services, and other financial officials, where the Monetary Authority thinks such disclosure would benefit depositors or where the disclosure would aid the other officials in the performance of their duties and is not contrary to the interests of the depositors or the public. US regulation and supervision HSBC is subject to extensive federal and state supervision and regulation in the United States. Banking laws and regulations of the Federal Reserve Board, the FDIC and the State of New York Banking Department govern many aspects of HSBC’s US business. HSBC and its US operations are subject to supervision, regulation and examination by the Federal Reserve Board because HSBC is a bank holding company under the US Bank Holding Company Act of 1956 (the ‘BHCA’) as a result of its ownership of HSBC Bank USA. HSBC Bank USA, as a New York state-chartered bank, is a member of the Federal Reserve System and subject to regulation, supervision and examination by both the Federal Reserve Board and the State of New York Banking Department. The deposits of HSBC Bank USA are insured by the FDIC and are subject to relevant FDIC regulation. The BHCA and the International Banking Act of 1978 (‘IBA’) impose certain limits and requirements on the US activities and investments of HSBC and certain companies in which it holds direct or indirect investments. HSBC is generally prohibited from acquiring, directly or indirectly, ownership or control of more than 5 per cent of the voting shares of any company engaged in the United States in activities other than banking and certain activities closely related to banking. Following the enactment of the Gramm-Leach-Bliley Act, effective 11 March 2000, and HSBC’s election to be treated as a financial holding company thereunder, HSBC’s permitted activities in the United States have been expanded, enabling it to offer a more complete line of financial products and services. HSBC is also generally 29 H S B C H O L D I N G S P L C Description of Business (continued) prohibited from acquiring, directly or indirectly, ownership or control of more than 5 per cent of the voting shares of, or substantially all the assets of, or exercising control over, any US bank or bank holding company without the prior approval of the Federal Reserve Board. However, as a qualifying foreign banking organisation under Federal Reserve Board regulations, HSBC may engage in the United States in certain limited non-banking activities and hold certain investments that would otherwise not be permissible under US law. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the ‘Riegle-Neal Act’) permits a bank holding company or foreign banking organisation, with Federal Reserve Board approval, to acquire a bank located in a state other than the organisation’s US ‘home’ state, subject to certain restrictions, and a national or state-chartered bank to merge across state lines or to establish or acquire branches in other states, subject to various state law requirements or restrictions. In general, the Riegle-Neal Act provides a non-US bank with interstate branching and expansion rights similar to those of a US national or state-chartered bank located in its ‘home’ state. The United States is a party to the Basel Convergence Agreement and US banking regulatory authorities have adopted risk-based capital requirements for US banks and bank holding companies that are generally consistent with the agreement. In addition, US bank regulatory authorities have adopted ‘leverage’ capital requirements that generally require US banks and bank holding companies to maintain a minimum amount of capital in relation to their balance sheet assets (measured on a non-risk-weighted basis). In January 2001, the Federal Reserve Board determined that, as a general matter, a US bank holding company that is owned and controlled by a foreign bank that is a financial holding company that the Federal Reserve Board has determined to be well capitalised and well managed will not be required to comply with the Federal Reserve Board’s capital adequacy guidelines. HSBC may rely, and would intend to continue to rely, on the Federal Reserve Board’s flexibility with respect to the capital adequacy requirements applicable to intermediate bank holding companies owned and controlled by a financial holding company. HSBC Bank USA, like other FDIC-insured 30 banks, is required to pay assessments to the FDIC for deposit insurance under the FDIC’s Bank Insurance Fund (calculated using a risk-based assessment system) and to fund the Financing Corporation (a governmental entity established to fund past financial assistance provided to insured savings associations). These assessments are based on deposit levels and other factors. The Federal Deposit Insurance Corporation Improvement Act of 1991 (‘FDICIA’) provides for extensive regulation of depository institutions (such as HSBC Bank USA and its parent holding companies), including requiring federal banking regulators to take ‘prompt corrective action’ in respect of FDIC-insured banks that do not meet minimum capital requirements. For this purpose, FDICIA establishes five tiers of institutions: well capitalised; adequately capitalised; undercapitalised; significantly undercapitalised; and critically undercapitalised. As an insured bank’s capital level declines and the bank falls into lower categories (or if it is placed in a lower category by the discretionary action of its supervisor), greater limits are placed on its activities and federal banking regulators are authorised (and, in many cases, required) to take increasingly more stringent supervisory actions, which could ultimately include the appointment of a conservator or receiver for the bank (even if it is solvent). In addition, FDICIA generally prohibits an FDIC-insured bank from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be undercapitalised. If an insured bank becomes undercapitalised, it is required to submit to federal regulators a capital restoration plan guaranteed by the bank’s holding company. The guarantee is limited to 5 per cent of the bank’s assets at the time it becomes undercapitalised or, should the undercapitalised bank fail to comply with the plan, the amount of the capital deficiency at the time of failure, whichever is less. If an undercapitalised bank fails to submit an acceptable plan, it is treated as if it were significantly undercapitalised. Significantly undercapitalised banks may be subject to a number of requirements and restrictions, including requirements to sell sufficient voting stock to become adequately capitalised, requirements to reduce total assets and restrictions on accepting deposits from correspondent banks. Critically undercapitalised depository institutions are subject to appointment of a receiver or conservator. As at 31 December 2001, HSBC Bank USA was categorised as well capitalised under Federal Reserve Board regulations. French regulation and supervision French banking law (the ‘Banking Law’) sets forth the conditions under which credit institutions, including banks, may operate in France and vests related supervisory and regulatory powers in certain administrative authorities: the National Credit and Securities Council, the Banking and Financial Regulatory Committee, the Credit Institutions and Investment Firms Committee and the Banking Commission. The National Credit and Securities Council, which is chaired by the Minister of Economic Affairs and Finance, studies the operating conditions of the banking and financial system, notably in its relations with customers and in the management of payment systems and participates in the formulation of national credit and monetary policy. The Banking and Financial Regulatory Committee, which is chaired by the Minister of Economic Affairs and Finance, establishes general rules for the conditions under which credit institutions and investment firms operate, including management standards, financial ratios and credit policy and determination of capital requirements. In addition, the Banking and Financial Regulatory Committee advises the Accounting Regulatory Committee, which is charged with establishing accounting principles, on proposed changes to accounting principles. The Credit Institutions and Investment Firms Committee, which is chaired by the Governor of the Bank of France, grants banking and investment firms licences and makes other specific decisions and grants specific exemptions as provided in applicable banking regulations. The Banking Commission, which is chaired by the Governor of the Bank of France, is responsible for the supervision of credit institutions and certain investment firms and the enforcement of laws and regulations applicable to them. Banks are required to submit periodic (either monthly or quarterly) accounting reports to the Banking Commission concerning the principal areas of their activity. The Banking Commission may also request additional information which it deems necessary and may carry out on-site inspections. The reports permit close monitoring of the condition of each bank and also facilitate computation of the total deposits of all banks and their use. Where regulations have been violated, the Banking Commission may act as an administrative court and impose sanctions which may include deregistration of a bank, resulting in closure. The Banking Commission also has the power to appoint a temporary administrator to manage provisionally a bank which it deems to be mismanaged. The principal regulations applicable to deposit banks such as CCF are minimum capital ratio requirements, equity and permanent resources (certain long-term assets denominated in euros) ratios, risk diversification and liquidity, as well as monetary policy, restrictions on equity investments and reporting requirements. CCF’s commercial banking operations in France are also significantly affected by monetary policies established from time to time by the European Central Bank in coordination with the Bank of France. French credit institutions are required to maintain on deposit with the Bank of France a percentage, fixed by the European Central Bank and calculated monthly, of various categories of demand and short-term deposits and are prohibited from paying interest on certain demand deposits and on deposits with a maturity of less than one month. French credit institutions are subject to restrictions on equity investments. An equity investment by a French institution that represents more than 10 per cent of the share capital or votes available to the shareholdings of the company in which an investment is made or provides, or is acquired with a view to providing, a ‘significant influence’ in such company must comply with requirements applicable to ‘qualifying shareholdings.’ Subject to certain specified exemptions for short-term investments and investments in financial institutions and insurance companies, no qualifying shareholding may exceed 15 per cent of regulatory capital of the credit institution making the investment and aggregate qualifying shareholdings held by that credit institution may not exceed 60 per cent of its regulatory capital. French regulations permit only licensed credit institutions to engage in banking activities on a regular basis. Institutions licensed as banks are not permitted to engage, on a regular basis, in activities 31 H S B C H O L D I N G S P L C Description of Business (continued) other than banking, bank-related activities and a limited number of non-banking activities determined pursuant to the regulations issued by the Banking and Financial Regulatory Committee. Total revenues from non-banking activities are limited in the aggregate to a maximum of 10 per cent of total net banking revenues. Credit institutions must also report monthly (and, with respect to lease financings, quarterly) to the Bank of France the names and related amounts of certain customers (only for companies and individuals engaged in commercial activities) having loan utilisation exceeding €76,000. The Bank of France then returns to each credit institution a list stating, as to that credit institution's customers, total loan utilisations from all reporting credit institutions. Credit institutions must make periodic reports to the Banking Commission summarising their activities during the relevant period with detailed breakdowns by category, including an income statement, and certain additional data relating to operations such as the number of employees, client accounts and branches. All credit institutions operating in France are required by law to operate a deposit guarantee mechanism for customers of commercial banks, except branches of European Economic Area banks which are covered by their home country’s guarantee system. The contribution of each credit institution is calculated on the basis of the aggregate deposits and one-third of the gross customer loans held by such credit institution. This contribution is weighted by solvency criteria. In the event of the insolvency of an authorised institution, the limit on compensation for each depositor is €70,000. French credit institutions are required to establish appropriate internal control systems, including with respect to risk management and the creation of appropriate audit trails. The institution must prepare an annual report for review by the institution’s board of directors and the Banking Commission regarding the institution’s internal procedures and the measurement and monitoring of the institution’s exposure. 32 H S B C H O L D I N G S P L C Description of Property At 31 December 2001, HSBC had some 7,000 branches, representative and similar offices worldwide, of which approximately 3,100 were located in Europe, 400 in Hong Kong, 700 in North America, 1,600 in Brazil and 250 in the rest of Latin America. Additionally, properties with a net book value of US$556 million were held for investment purposes. Of the total net book value of HSBC properties, more than 70 per cent were owned or held under long-term leases. Further details are included in Note 25 of the ‘Notes on the Financial Statements’. HSBC values its properties on an annual basis and updates their balance sheet values accordingly. On 19 October 1998, HSBC Bank plc, a subsidiary of HSBC Holdings, entered into an agreement to lease a building being developed by Canary Wharf Limited. The construction of the building has been completed. This building, located at Canary Wharf, London, will accommodate under one roof approximately 8,500 staff from various HSBC businesses and HSBC headquarters operations located in London. The 999 year leasehold interest will have a cost of around US$800 million including funding costs. Further fit-out to be completed by HSBC Bank plc will have a substantially fixed cost of around US$420 million. In the run-up to and post- completion and occupation of the new building, HSBC will manage its leased and owned surplus London city properties through assignment, leasing or sale into the market, as appropriate. 33 At hearings held on 7 and 9 January 2002 the court entered the restitution order agreed to by RNYSC and the US Attorney’s Office and also approved the related settlement between HSBC and the Princeton Receiver. Promptly thereafter 17 lawsuits filed in the federal court in Manhattan by 51 Princeton noteholders against HSBC USA Inc., RNYSC and others were dismissed pursuant to the previously-announced settlements, terminating the plaintiffs’ claims for damages arising from unpaid Princeton Notes with face amounts totalling approximately US$1 billion. RNYSC has also reached settlements with seven additional Princeton noteholders who did not file suit. The after tax cost to date of the settlement is within the range of the price reduction taken by Republic’s largest stockholders, companies controlled by the late Mr. Edmond Safra, at the time of HSBC’s acquisition of Republic. Two of the noteholders, whose civil suits seek damages arising from unpaid Princeton Notes with face amounts totalling approximately US$125 million, are not included in the settlement and their civil suits will continue. The US Government excluded one of them from the restitution order because that noteholder is being criminally prosecuted in Japan for its conduct relating to its Princeton Notes, and excluded the other because the sum it is likely to recover from the Princeton Receiver exceeds its losses attributable to its funds transfers with RNYSC as calculated by the US Government. Under the regulatory settlements RNYSC agreed with the Securities and Exchange Commission to the revocation of its broker-dealer registration and with the Commodity Futures Trading Commission to the revocation of various commodities-related licenses and the payment of a US$5 million civil monetary penalty. It is also expected that RNYSC will shortly reach an agreement with The New York Mercantile Exchange resolving Princeton-related matters. H S B C H O L D I N G S P L C Legal Proceedings HSBC, through a number of its subsidiary undertakings, is named in and is defending legal actions in various jurisdictions arising from its normal business. None of the above proceedings is regarded as material litigation. On 17 December, 2001, HSBC USA Inc. announced that it had settled civil law suits brought by 51 of the 53 Japanese plaintiffs who have asserted claims arising from the involvement of its subsidiary, Republic New York Securities Corporation (‘RNYSC’), with its customers Princeton Global Management Ltd. and affiliated entities and their Chairman Martin Armstrong (the ‘Princeton Note Matter’). It also announced that it had resolved all of the previously reported regulatory and criminal investigations arising from the Princeton Note Matter. The Princeton Note Matter came to light prior to HSBC’s acquisition of Republic New York Corporation, RNYSC’s parent, in December 1999. As part of the resolution, RNYSC, now a dormant subsidiary, pleaded guilty in federal court in Manhattan to two federal criminal charges arising from the misconduct of certain of its former executives in assisting Martin Armstrong’s scheme to defraud numerous purchasers of Princeton Notes, which Armstrong offered for sale in Japan. Following the acquisition by HSBC, RNYSC ceased active business during the year 2000, and the employment of all the RNYSC executives associated with RNYSC’s misconduct was terminated. The United States Attorney’s Office in its public filing acknowledged HSBC’s ‘exemplary cooperation’ and recommended to the Court that no criminal fine be imposed on RNYSC. Instead, RNYSC agreed to the imposition of a restitution order requiring it to make payments totalling approximately US$569 million to Princeton noteholders, as compensation for their out-of-pocket losses. Since RNYSC’s capital was about US$81 million, HSBC USA Inc. agreed to pay the remaining amount of compensation due to the noteholders in exchange for their termination of the pending civil litigation against HSBC USA Inc. and RNYSC, and in connection with the United States Attorney’s Office commitment not to pursue any claims against RNYSC’s parent company or its banking affiliate. In addition, the settling Princeton noteholders can expect to receive payments totalling approximately US$72 million from assets held by Princeton’s court- appointed receiver. 34 H S B C H O L D I N G S P L C Financial Review The following discussion is based on, and should be read in conjunction with the Financial Statements and the notes thereto included elsewhere in this Annual Report. The Financial Statements are prepared in accordance with UK GAAP, which varies in certain significant respects from US GAAP. For a discussion of the differences and a reconciliation of certain UK GAAP amounts to US GAAP, see Note 50 of the ‘Notes on the Financial Statements’. Introduction HSBC operates through its long-established businesses in five regions: Europe; Hong Kong; Rest of Asia-Pacific, including the Middle East and Africa; North America; and Latin America. Each of these businesses operates domestic banking operations in its region providing services to personal, commercial and corporate customers. In key locations including London, New York, Hong Kong and Paris, HSBC has treasury and capital markets operations to service its base of large commercial and institutional clients. HSBC has witnessed growth in its asset base and operating profits over the past several years, fuelled by an expansion of services and an added-value acquisition strategy. On 31 December 1999, HSBC completed the acquisitions of RNYC and SRH. These acquisitions strengthened HSBC’s presence in New York and significantly improved HSBC’s private banking capability. As the acquisitions were only completed at the year-end, RNYC and SRH’s profits for 1999 were not included in HSBC’s 1999 results. In July 2000, HSBC acquired CCF, a major French banking group, with businesses in personal, corporate and investment banking. Goodwill of US$9 billion arose on the acquisition of CCF and is being amortised over 20 years commencing July 2000. HSBC’s attributable profit of US$5,406 million in 2001 was 18 per cent lower than 2000 principally as a result of an exceptional charge of US$1,120 million relating to the situation in Argentina, providing for the Princeton Note settlement, and after absorbing a US$282 million increase in goodwill amortisation due to the recent acquisitions. Operating profit before provisions and goodwill amortisation increased by 3 per cent over 2000 to over US$11 billion in 2001. Organic growth, particularly in Hong Kong and Europe, together with the benefit of recent acquisitions more than offset the significant increase in investment expenditure to support future business growth. Credit costs at US$2,037 million in 2001 included US$600 million additional general provision in respect of Argentina and were 119 per cent higher than in 2000. Excluding Argentina, the new provision requirements grew as economic conditions weakened and there were lower releases from general provisions as the 2000 charge had benefited from the release of US$174 million of the Asian special general provision raised in 1997. HSBC’s financial performance and business operations are affected at the local, regional and global level by general economic conditions, technological innovations, changes in the legal and regulatory regime and increasing competition within the financial services industry. Adverse changes in economic conditions can reduce demand for HSBC’s products and services, impair the credit quality of its borrowers and counterparties and increase the level of HSBC’s bad debt charge. HSBC’s financial performance can also be affected by both actual changes in, and speculation about, market exchange rates, such as the US dollar- pound sterling exchange rate, and government- established exchange rates, particularly the managed exchange rates between the Hong Kong dollar and the US dollar, and the Argentine peso and the US dollar. In 2001 significant speculation over the ability of Argentina to maintain its fixed parity link with the US dollar led to exceptionally high sovereign risk spreads on Argentine debt, ultimately precipitating default and the move to a floating exchange rate regime. As part of the management of the resulting crisis the Argentine government has redenominated various historical US dollar assets and liabilities within the financial system. The asymmetry in rates applied led to a destruction of capital within the banking sector necessitating severe capital and liquidity controls. It is uncertain how the Government of Argentina’s promise to compensate for this will be met or how and in what timeframe the Argentine banking system can be restructured to operate viably in the future. HSBC’s operations are also affected by other 35 H S B C H O L D I N G S P L C Financial Review (continued) changes in the laws, regulations and policies of governmental authorities, particularly central banks and bank regulatory authorities in its most important markets: the FSA, the Bank of England, the Hong Kong Monetary Authority, the US Federal Reserve Board, the European Central Bank and the French Banking Commission. Such authorities may impose increased reserve or capital levels, restrictions on investment and other financial flows and restrictions on certain banking activities, as well as make more general changes in governmental policy, which may significantly impact HSBC by reducing available business opportunities, increasing HSBC’s cost of compliance and, in some markets where HSBC operates, eroding investor confidence. HSBC has economic, financial market, credit, legal, political and other specialists who monitor economic and market conditions and government policies and actions. However, because of the difficulty involved in predicting with accuracy changes in economic or market conditions or in governmental policies and actions, HSBC cannot fully anticipate the effects that such changes might have on its financial performance and business operations. HSBC believes that the most important external factors affecting its business in 2002 will be the slower rate of growth of the US economy and the effect this will have on other economies, particularly those which depend on exports to the United States. The US financial markets, as well as being exposed to economic uncertainties, face unprecedented risks from lack of confidence, as investors review and assess the consequences of the collapse of the technology and telecoms ‘bubbles’ and the accounting shocks best illustrated in the collapse of Enron. The impact of the current economic collapse in Argentina and the way this is dealt with in the international community could also have significant consequences in other emerging markets and could materially impact the availability of finance to these markets. In addition, continuing intense competition in the United Kingdom together with increasing regulatory intervention may also affect the business. 36 Summary Figures in US$m Net interest income.............. Other operating income ....... Year ended 31 December 2001 14,725 11,163 2000 13,723 10,850 1999 11,990 9,012 Total operating income...... 25,888 24,573 21,002 Operating expenses excluding goodwill amortisation ..... Goodwill amortisation ......... Operating profit before (14,605 ) (799 ) (13,577 ) (510 ) (11,313 ) (36 ) provisions....................... 10,484 10,486 9,653 Provisions for bad and doubtful debts ................. (2,037 ) (932 ) (2,073 ) Provisions for contingent liabilities and commitments .................. Loss from foreign currency redenomination in Argentina ........................ Amounts written off fixed asset investments ............ (649 ) (71 ) (143 ) (520 ) (125 ) – (36 ) – (28 ) Operating profit................. 7,153 9,447 7,409 Share of operating loss in joint ventures .......................... Share of operating profit in associates ........................ Gains on disposal of: – investments..................... – tangible fixed assets........ Profit on ordinary activities before tax....................... Tax on profit on ordinary (91 ) (51 ) 164 754 20 75 302 2 – 123 450 – 8,000 9,775 7,982 activities.......................... (1,574 ) (2,238 ) (2,038 ) Profit on ordinary activities after tax ......................... 6,426 7,537 5,944 Minority interests................. (1,020 ) (909 ) (536 ) Profit attributable to shareholders .................. 5,406 6,628 5,408 Cash basis profit before tax* 8,807 10,300 8,018 Cash basis profit attributable to shareholders* .................. 6,213 7,153 5,444 * Cash based measurements are after excluding the impact of goodwill amortisation. Year ended 31 December 2001 compared with year ended 31 December 2000 In the sections which follow, analysis of these results highlights the contribution from CCF, acquired on 28 July 2000, and the impact of a stronger US dollar on translating revenues and costs arising in other currencies, each of which is significant to an understanding of HSBC’s performance in 2001. HSBC made a profit on ordinary activities before tax of US$8,000 million in 2001, a decrease of US$1,775 million, or 18 per cent, compared with 2000. On a cash basis, profit before tax decreased by US$1,493 million, or 14 per cent, compared with 2000. At constant exchange rates, cash basis profit before tax was 12 per cent lower than 2000. Net interest income of US$14,725 million in 2001 was US$1,002 million, or 7 per cent, higher than 2000, with a large part of this increase due to the inclusion of CCF for a full year. Net interest income in North America was US$250 million, or 12 per cent, higher than 2000 mainly reflecting growth in average interest-earning assets and the benefit of lower funding costs. Other operating income rose by US$313 million, or 3 per cent, to US$11,163 million compared with 2000. This increase was primarily driven by the acquisition of CCF and by growth in wealth management income which offset falls in securities- related fee and commission income. Operating expenses, excluding goodwill amortisation, were US$1,028 million, or 8 per cent, higher than 2000. This increase principally reflected recent acquisitions. HSBC’s cost: income ratio, excluding goodwill amortisation, increased to 56.4 per cent compared with 55.3 per cent in 2000, reflecting the cost structures of new acquisitions and investment in the expanding wealth management business and IT. The charge for bad and doubtful debts was US$2,037 million in 2001, which was US$1,105 million higher than in 2000. This mainly reflected the US$600 million general provision against Argentine exposure and specific provisions made against a small number of corporate borrowers. Other provisions included a loss of US$520 million arising from the foreign currency redenomination in Argentina and a charge of US$575 million for the Princeton Note Matter. The US$91 million share of operating losses in joint ventures principally reflected continuing start- up costs of Merrill Lynch HSBC, now operational in the UK, Canada and Australia. The charge for amounts written-off fixed asset investments arose mainly from venture capital investments and holdings of emerging technology stocks. Gains on disposal of investments of US$754 million included profit on the sale of HSBC’s 20 per cent stake in British Interactive Broadcasting and the investment in Modern Terminals Limited. In addition, disposal gains of US$170 million were realised from sales of investment debt securities to adjust to changes in interest rate conditions. Year ended 31 December 2000 compared with year ended 31 December 1999 HSBC made a profit on ordinary activities before tax of US$9,775 million in 2000, an increase of US$1,793 million, or 22 per cent, compared with 1999. On a cash basis, profit before tax increased by US$2,282 million, or 28 per cent, compared with 1999. Net interest income of US$13,723 million in 2000 was US$1,733 million higher than 1999, with a large part of this increase due to the acquisitions of RNYC, SRH and CCF. Net interest income in Hong Kong in 2000 was US$262 million, or 7 per cent, higher than 1999 mainly reflecting the placement of increased customer deposits. Other operating income rose by US$1,838 million, or 20 per cent, to US$10,850 million compared with 1999. This increase was driven by the acquisitions of RNYC, SRH and CCF, together with underlying growth in fee income, particularly in Hong Kong and, at constant exchange rates, in the UK bank. Operating expenses, excluding goodwill amortisation, were US$2,264 million, or 20 per cent, higher than 1999. Excluding the impact of the recent acquisitions, there were increases in Hong Kong, mainly related to the launch of the Mandatory Provident Fund and e-banking initiatives, and in the rest of Asia-Pacific and Latin America, to support business growth. In addition, at constant exchange rates, there were underlying increases in Europe, mainly reflecting growth in the wealth management business, IT and IT-related costs directed at improved customer service. In addition, profit- related pay increased in investment banking in line with the improved performance. HSBC’s cost:income ratio, excluding goodwill amortisation, increased to 55.3 per cent compared with 53.9 per cent in 1999, reflecting the cost structures of new acquisitions and of the expanding wealth management business. 37 H S B C H O L D I N G S P L C Financial Review (continued) The charge for bad and doubtful debts was US$932 million in 2000, which was US$1,141 million lower than in 1999, reflecting improved economic conditions, lower interest rates in Asia and strong liquidity in all markets. The US$51 million share of operating losses in joint ventures principally reflects start-up costs of the new joint venture with Merrill Lynch to establish an online, investment led, broking and banking service for the mass affluent. Net interest income Year ended 31 December 2001 Year ended 31 December 2000 US$m 5,563 4,165 1,482 % US$m 4,988 3,997 1,367 37.7 28.3 10.1 Year ended 31 December 1999 % 35.3 31.2 10.3 % US$m 4,231 3,735 1,240 36.3 29.1 10.0 2,402 1,113 16.3 7.6 2,152 1,219 15.7 8.9 1,687 1,097 14.1 9.1 Europe ............... Hong Kong ........ Rest of Asia- Pacific ........... North America ... Latin America .... Net interest income........... 14,725 100.0 13,723 100.0 11,990 100.0 Net interest income (US$m) 14,725 13,723 11,990 18,000 15,000 12,000 9,000 6,000 3,000 0 2001 2000 1999 Figures in US$m Net interest income ............... Average interest-earning Year ended 31 December 2001 14,725 2000 13,723 1999 11,990 assets................................ 579,665 516,185 419,225 Gross interest yield (per cent)1 ........................ Net interest spread (per cent) 2 ........................ Net interest margin (per cent)3 ........................ 6.08 2.09 2.54 7.31 2.10 2.66 6.97 2.31 2.86 1 2 3 Gross interest yield is the average interest rate earned on average interest-earning assets (AIEA). Net interest spread is the difference between the average interest rate earned on average interest-earning assets and the average interest rate paid on average interest-bearing funds. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Year ended 31 December 2001 compared with year ended 31 December 2000 Net interest income in 2001 was US$1,002 million, or 7 per cent, higher than 2000 at US$14,725 million 38 with a large part of this increase due to the inclusion for a full year of CCF. At constant exchange rates and excluding CCF, net interest income was 7 per cent higher than 2000 reflecting growth across all geographical regions. In Europe, net interest income at US$5,563 million was US$575million higher than in 2000 primarily due to the inclusion for a full year of CCF and improved spreads on treasury investment opportunities. Net interest income in Hong Kong at US$4,165 million was US$168 million higher than in 2000 reflecting growth in average customer deposits. Widening interest spreads, particularly on residential mortgages and treasury investment opportunities resulted in net interest income in North America increasing by US$250 million to US$2,402 million. Average interest-earning assets at US$579.7 billion (of which US$55.4 billion relates to CCF) increased by US$63.5 billion, or 12 per cent. Excluding the effect of acquisitions, there was organic growth in Hong Kong driven principally by the placement of customer deposits, together with personal lending growth in the United Kingdom, the United States, Canada, Singapore, Taiwan, India and the Philippines. At 2.54 per cent, HSBC’s net interest margin was 12 basis points lower than for 2000 mainly reflecting the impact of CCF’s lower margin business. In addition, for HSBC as a whole an increasingly liquid balance sheet, and a reduced benefit from net free funds as interest rates fell, also impacted the net interest margin. The fall in interest rates, however, improved the net interest margin in two of our largest domestic operations, the United Kingdom and the United States, as margins in our treasury activities widened as funding costs reduced. In Hong Kong, the third of our large domestic operations, the net interest margin in The Hongkong and Shanghai Banking Corporation was largely unchanged as a reduction in suspended interest, net of releases and recoveries, and improved margins on treasury activities offset the impacts of a more liquid balance sheet, reduced benefit of net free funds and reduced interest spreads on Hong Kong dollar deposits. In Hang Seng Bank, the fall in net interest margin resulted primarily from a lower benefit from net free funds as interest rates fell. HSBC is moving increasingly to differentiated product pricing. This competitive approach reflects the value to HSBC of our most loyal customers and has resulted in narrower spread on a number of products, particularly mortgages and savings products. The benefit of this strategy is seen in the mix and volume of HSBC’s core current account and savings products, particularly in the United Kingdom, Hong Kong and the United States. Year ended 31 December 2000 compared with year ended 31 December 1999 Net interest income was US$1,733 million, or 14 per cent, higher in 2000 than 1999 primarily due to the acquisitions of RNYC, SRH and CCF. There was growth across all geographical regions. In Hong Kong, net interest income was US$262 million, or 7 per cent, higher which mainly reflected the placement of increased customer deposits and an improved mix of lower costing liabilities. The increase was achieved despite muted loan demand and intense competition in the residential mortgage market which reduced interest earned on mortgages by some US$170 million. In the United Kingdom, there was underlying growth of US$173 million, or 6 per cent, generated by balance sheet growth, again with strong growth in savings balances. At constant exchange rates, net interest income would have been US$2,060 million, or 18 per cent, higher than 1999. Average interest-earning assets increased by US$97 billion, or 23 per cent, largely as a result of acquisitions. Excluding acquisitions, there was organic growth in Hong Kong driven principally by the placement of customer deposits, together with personal lending growth in the United Kingdom, Brazil, Korea, India and Taiwan. At 2.66 per cent, HSBC’s net interest margin was 20 basis points lower than for 1999. The major impact on HSBC’s net interest margin was mix, driven by the very liquid balance sheets in the recent acquisitions, and the related funding costs of these acquisitions. The impact of mix was compounded by a reduction of spread on savings products in the United Kingdom and on residential mortgages in the United Kingdom and Hong Kong. The effect of the downward pressures was partly offset by increased recoveries of previously suspended interest, together with an increased contribution from net free funds. 53.5 16.9 10.7 10.3 8.6 100.0 1999 157 6,017 797 67 197 238 511 353 181 494 1,539 9,012 Year ended 31 December 2000 Year ended 31 December 1999 % % US$m % US$m Other operating income Year ended 31 December 2001 US$m By geographical segment Europe................... 6,056 Hong Kong............ 1,852 Rest of Asia- 53.1 16.2 5,922 1,790 Pacific .............. 1,137 North America ...... 1,456 919 Latin America ....... 11,420 10.0 12.7 8.0 1,085 1,317 953 100.0 11,067 Intra-HSBC elimination ....... (257 ) (217 ) Other operating income.............. 11,163 10,850 53.5 16.2 9.8 11.9 8.6 100.0 4,936 1,552 983 949 790 9,210 (198 ) 9,012 Year ended 31 December 2001 2000 Figures in US$m By income category: Dividend income ................... Fees and commissions (net) .. Dealing profits – foreign exchange ................ – interest rate derivatives....... – debt securities..................... – equities and other trading – operating leased assets rental income.................... – general insurance underwriting (net)............. – increase in value of long-term insurance business............................ – other................................... 186 7,470 1,120 159 311 95 1,685 465 373 251 733 197 7,311 965 57 281 323 481 360 195 680 1,626 1,299 Total other operating income 11,163 10,850 1,822 1,716 Analysis of fees and commissions receivable and payable Year ended 31 December Figures in US$m Account services .................. Credit facilities..................... Remittances.......................... Cards ................................... Imports/exports .................... Underwriting........................ Insurance.............................. Mortgage servicing rights..... Trust income ........................ Broking income.................... Global custody ..................... Maintenance income on operating leases ............... Other ................................... Total fees and commissions receivable ....................... Less: fees payable ................ Net fees and commissions ..................... 2001 1,620 628 246 1,116 524 135 668 78 114 928 308 165 2,226 2000 1,536 613 225 1,070 540 203 570 69 185 1,208 291 176 1,891 1999 1,319 522 214 935 480 180 525 45 145 948 235 208 1,393 8,756 (1,286 ) 8,577 (1,266 ) 7,149 (1,132 ) 7,470 7,311 6,017 39 H S B C H O L D I N G S P L C Financial Review (continued) Other operating income (US$m) 12,000 10,000 8,000 6,000 4,000 2,000 0 186 1,822 1,685 197 1,716 1,626 7,470 7,311 157 1,539 1,299 6,017 2001 2000 1999 Fees and commissions (net) Other Dealing profits Dividend income Year ended 31 December 2001 compared with year ended 31 December 2000 Other operating income in 2001 was US$313 million, or 3 per cent, higher than in 2000 at US$11,163 million and included other operating income of US$1,822 million. At constant exchange rates and excluding CCF, other operating income was 2 per cent higher than 2000 reflecting good growth in wealth management income which offset the falls in broking and other securities-related fee and commission income from the less favourable conditions in the equity markets. Net fees and commissions at US$7,470 million represented 29 per cent of total operating income against 30 per cent in 2000 and were US$159 million, or 2 per cent, higher than 2000. At constant exchange rates and excluding CCF, net fees and commissions were 1 per cent higher than in 2000. As part of HSBC’s competitive positioning and consistent with the pricing changes on loan and deposit products referred to above, our customers also benefited from a number of fee reductions during 2001, particularly in HSBC Bank plc’s UK Banking. In the United Kingdom, eliminating mortgage loan to valuation fees reduced revenues by US$7 million, the elimination of ATM withdrawal fees benefited customers by US$49 million and overdraft fees fell by US$41 million as unauthorised overdrafts fell, as we have made it easier for customers to obtain authorised borrowings. Offsetting these reductions, UK Banking achieved good growth in wealth management with income rising by 9 per cent, reflecting increased income from life, pension and investment business, general insurance income and private clients. 40 In Hong Kong and the rest of Asia-Pacific, there was encouraging growth in wealth management income, particularly in fee income from the sale of unit trusts, reflecting the successful sale of capital- guaranteed products. Credit card fees grew by US$39 million, or 11 per cent, following the growth in the number of credit cards issued. In the United States, the harmonisation of product lines between HSBC and the former Republic Bank of New York and the increase in volume of annuities sold contributed to the 15 per cent increase in fee income. In addition insurance revenues also increased by 44 per cent compared to 2000. In Latin America, fee income benefited from the initiatives taken to increase wealth management revenue. Fee income in Brazil, at constant exchange rates, was US$79 million, or 28 per cent, higher with good growth in revenue from asset management activities and success in cross-sales to existing customers through the retails branch. Revenues from investment banking, broking income, corporate finance activities and other securities-related activities were substantially lower than those earned in the buoyant equity markets during the first half of 2000. Dealing profits held up well, despite less favourable conditions in the equity markets, as performance in debt securities and interest rate trading improved. Foreign exchange trading was bolstered by CCF. Year ended 31 December 2000 compared with year ended 31 December 1999 Net fees and commissions at US$7,311 million in 2000 represented 30 per cent of total operating income against 29 per cent in 1999 and were US$1,294 million, or 22 per cent, higher than 1999. This increase was driven by the recent acquisitions, together with the benefit of buoyant equity markets in the first half of the year which led to a 22 per cent increase in broking income and a 17 per cent increase in global custody income compared with 1999. In Hong Kong, fees from credit facilities were 40 per cent higher in 2000 and there was further growth due to wealth management initiatives. In Europe, at constant exchange rates, there was underlying growth in the UK bank reflecting wealth management initiatives and higher fee income from cards, corporate banking and global safe custody. At constant exchange rates, HSBC’s net fees and commissions in 2000 would have been 27 per cent higher than in 1999. Dealing profits at US$1,626 million were US$327 million higher than in 1999, over half of which was attributable to the recent acquisitions. Increased foreign exchange profits reflected higher volumes in customer-driven business in both the United Kingdom and Hong Kong. Dealing profits also benefited from a recovery of 69 per cent of the provisions made in 1999 against a Korean corporate’s bonds upon liquidation of the position. Other income was US$177 million higher at US$1,716 million mainly due to the recent acquisitions, together with the impact of the transfer of Argentina’s pension and life businesses from associated undertakings to subsidiaries in 1999. Operating expenses Year ended 31 December 2001 US$m By geographical segment Year ended 31 December 2000 Year ended 31 December 1999 % % US$m % US$m Europe.................. 7,288 Hong Kong........... 2,140 Rest of Asia- Pacific.............. 1,397 North America...... 2,488 Latin America....... 1,549 14,862 Goodwill amortisation Europe.................. Hong Kong........... Rest of Asia- 632 – Pacific.............. North America...... Latin America....... Intra-HSBC 8 142 17 799 49.1 14.4 6,518 1,986 47.3 14.4 5,445 1,896 1,292 9.4 2,363 16.7 10.4 1,635 100.0 13,794 1,148 9.4 1,582 17.1 11.8 1,440 100.0 11,511 47.3 16.5 10.0 13.7 12.5 100.0 348 1 5 143 13 510 9 – 14 3 10 36 elimination....... (257 ) (217 ) (198 ) Total operating expenses .......... 15,404 14,087 11,349 Year ended 31 December Figures in US$m By expense category: Staff costs............................. Premises and equipment (excluding depreciation) .. Other administrative expenses .......................... 2001 8,553 1,639 3,279 2000 8,057 1,480 2,959 1999 6,692 1,329 2,329 Administrative expenses*... 13,471 12,496 10,350 Depreciation and amortisation – tangible fixed assets........... – goodwill ............................ 1,134 799 1,081 510 963 36 Total operating expenses... 15,404 14,087 11,349 Cost:income ratio (excluding goodwill amortisation)..... 56.4 55.3 53.9 * Includes US$156 million (2000: US$121 million; 1999 US$164 million) of restructuring costs. Operating expenses (US$m) 18,000 15,000 12,000 9,000 6,000 3,000 0 1,933 3,279 1,639 8,553 1,591 2,959 1,480 8,057 999 2,329 1,329 6,692 2001 2000 1999 Staff costs Other Premises and equipment Depreciation and amortisation Staff numbers (full-time equivalent) Europe................................... Hong Kong............................ Rest of Asia-Pacific .............. North America ...................... Latin America ....................... Total staff numbers .............. As at 31 December 2001 73,326 24,654 26,259 18,518 28,292 171,049 2000 69,629 24,204 22,919 18,965 25,907 161,624 1999 53,861 23,932 21,375 19,498 27,181 145,847 Year ended 31 December 2001 compared with year ended 31 December 2000 Operating expenses were US$1,317 million higher than in 2000. This increase was mainly driven by the recent acquisitions together with a related US$289 million increase in goodwill amortisation. In Europe, costs, excluding goodwill amortisation, increased by US$770 million compared with 2000 and included US$128 million of restructuring costs. At constant exchange rates, costs in 2001, excluding goodwill amortisation, were US$1,023 million, or 16 per cent, higher than in 2000, of which the inclusion of CCF’s cost base accounted for US$769 million. Business expansion and increased information technology-related expenditure to support business development projects lay at the heart of the cost increase. In Hong Kong, costs in 2001, excluding goodwill amortisation increased by US$154 million, or 8 per cent, compared with 2000. Staff costs increased by 10 per cent mainly to support business expansion in personal financial services, particularly in credit card and Mandatory Provident Fund products. Operating expenses, other than staff costs, rose by 5 per cent to support wealth management expansion and for the development of e-banking initiatives. 41 H S B C H O L D I N G S P L C Financial Review (continued) In the rest of Asia-Pacific, operating expenses, excluding goodwill amortisation, increased by US$105 million, or 8 per cent, compared with 2000. At constant exchange rates, the increase was 16 per cent. Recent acquisitions accounted for some US$31 million of the cost increase. The remaining growth in costs reflected higher staff numbers to support business expansion, particularly in personal financial services and wealth management initiatives together with a doubling of complement in our shared service centres in India and mainland China. Operating costs, excluding goodwill amortisation, in North America were US$125 million, or 5 per cent, higher than in 2000. Of this increase, US$164 million related to development costs associated with hsbc.com. The underlying change in operating costs was a decrease of 1 per cent. This principally reflected a 2 per cent fall in the domestic cost base of HSBC Bank USA with a reduced level of restructuring charges offset by business expansion costs. In Latin America, operating expenses at constant exchange rates were US$152 million, or 11 per cent, higher than in 2000. This mainly reflected the acquisition of CCF Brazil and restructuring costs. As economic conditions become less certain in the region, further cost controls were put in place to restrain cost growth. The Group’s global processing initiatives continue to develop with some 2000 staff employed at HSBC’s global processing centres in China and India at 31 December 2001. HSBC’s cost: income ratio, excluding goodwill amortisation, was 56.4 per cent in 2001, reflecting the cost structure of new acquisitions and investment in the expanding wealth management businesses and IT. Year ended 31 December 2000 compared with year ended 31 December 1999 Operating expenses were US$2,738 million higher than in 1999. This increase was mainly driven by the recent acquisitions together with a related US$474 million increase in goodwill amortisation. Costs in the United States, excluding goodwill amortisation, were US$781 million higher, principally as a result of the acquisition of RNYC. During 2000, acquisition related cost savings were realised in most support and administrative functions 42 and, to a lesser extent, in some front line businesses. Compensation and benefit packages were harmonised. In Europe, costs, excluding goodwill amortisation, increased by US$1,073 million compared with 1999. At constant exchange rates, costs in 2000, excluding goodwill amortisation, would have been US$1,454 million, or 29 per cent, higher than 1999, of which acquisitions accounted for US$947 million. There were underlying increases in HSBC Bank plc and in investment banking. In HSBC Bank plc, there was increased spending reflecting growth in wealth management business and IT and IT-related costs to support development projects directed at improved customer service, particularly new distribution channels. In investment banking, profit-related pay increased in line with improved business performance. In Hong Kong, costs in 2000, excluding goodwill amortisation, were US$90 million higher than in 1999 with the increase mainly related to the launch of the Mandatory Provident Fund, expanded marketing programmes and e-banking initiatives. In the rest of Asia-Pacific, cost growth was to support business expansion. In addition, marketing spend increased as the economies recovered. Increased costs in Latin America reflected business growth, restructuring to achieve operating efficiencies and the transfer to subsidiary status of the Argentine pensions and life business in 1999. Global processing is now operational in China and India with some 1,000 staff employed at two global processing centres. A global e-procurement project has also been established. These initiatives will enhance HSBC’s productivity through economies of scale and processing efficiencies. HSBC’s cost:income ratio, excluding goodwill amortisation, was 55.3 per cent in 2000, reflecting the cost structures of the new acquisitions and of the expanding wealth management businesses. Provisions for bad and doubtful debts Year ended 31 December 2001 US$m By geographical segment: 441 Europe.................. Hong Kong........... 197 Rest of 21.6 9.7 Year ended 31 December 2000 Year ended 31 December 1999 % % US$m % US$m 348 248 37.3 26.6 438 585 21.1 28.2 Asia-Pacific – normal ............... – release of special general provision.......... North America...... Latin America....... – normal .......... – additional general provision against Argentine exposures ...... 172 8.4 159 17.1 809 39.1 – 287 – 14.1 (174 ) 147 (18.7 ) 15.8 340 16.7 204 21.9 – 108 133 – 5.2 6.4 600 2,037 29.5 100.0 – 932 – 100.0 – 2,073 – 100.0 Figures in US$m Loans and advances to customers – specific charge new provisions ..................... releases and recoveries ......... – general charge/(release) special provision reflecting Asian risk raised in 1997.. additional provision against Argentinian exposure....... other ..................................... Year ended 31 December 2001 2000 1999 2,670 (1,206 ) 1,464 2,293 (1,083 ) 1,210 2,993 (869 ) 2,124 – 600 (27 ) 573 (174 ) – (106 ) (280 ) – – (47 ) (47 ) Customer bad and doubtful debt charge ............ 2,037 930 2,077 Loans and advances to banks – net specific charge/(release)................ – 2 (4 ) Total bad and doubtful debt charge .............................. 2,037 932 2,073 Customer bad debt charge as a percentage of closing gross loans and advances 0.64% 0.31% 0.85% Year ended 31 December 2001 compared with year ended 31 December 2000 The bad and doubtful debt charge at US$2,037 million in 2001 was US$1,105 million higher than in 2000. The increase was dominated by a US$600 million additional general provision against Argentine exposure together with higher new specific provisions requirements in Indonesia, Brazil, Argentina and France. In the United Kingdom, there was a less favourable economic environment particularly in the manufacturing sector although there were lower new specific provisions reported against personal lending. In France, there were new specific provisions required for a small number of corporate borrowers and on retail and commercial portfolios. Elsewhere in Europe, the increase in new specific provisions arose on corporate borrowers. In Hong Kong, the charge for new specific provisions was largely unchanged with an increase in provisions against personal customers mainly offset by lower charges against corporate borrowers. Mortgage delinquency rates remained low. Non- performing advances as a percentage of total customer advances improved to 2.9 per cent, compared with 3.8 per cent at the end of 2000. The significant change in the net customer bad and doubtful debt charge for Asia-Pacific is accounted for by the release of part of the special general provision in 2000. New specific provisions were slightly higher than in 2000 reflecting further provisioning on existing non-performing loans due to the current political and economic uncertainties in Indonesia and on an energy sector corporate exposure in India. This was partly offset by lower new specific provisions required in Malaysia, mainland China and the Middle East. Releases and recoveries were higher than 2000, mainly as a result of the liquidation of security held against a loan to Olympia and York. Credit quality deteriorated modestly in North America during 2001. There were lower new specific provisions required in the United States notwithstanding provisions against an exposure to an energy sector corporate and HSBC Bank USA’s principal airline exposure. New specific provisions were higher in Canada following the deterioration of a small number of commercial facilities. Although in terms of non-performing loans, overall credit quality in North America remained stable in 2001, it is still too early to determine the medium to longer-term effect that the events of 11 September, the impact on market liquidity of the Enron collapse and the general economic slowdown may have on the overall credit portfolio. The bad debt charge in Latin America reflected the recent severe economic deterioration in Argentina where unprecedented political and economic uncertainty caused us to raise general provisions by US$600 million. In addition, new specific provisions in Argentina were US$64 million higher than in 43 possible implications for the Asian economies as a whole, the balance of the special general provision has been transferred to augment the general bad debt provision. In North America, although the overall quality of the portfolio remained sound, non-performing loans rose slightly due to some deterioration in the quality of leveraged credits: these constituted a small portion of outstanding advances. In Latin America, non-performing loans rose due to severe economic conditions in Argentina, the inclusion of new business acquired in Panama and as a result of the expansion of profitable consumer lending in Brazil. At 31 December 2000, non-performing customer advances represented 3.5 per cent of gross customer advances compared with 4 per cent at 31 December 1999. Provisions for bad and doubtful debts as a percentage of average gross loans and advances to customers Average gross loans and advances to customers are allocated to geographical segment by the location of the principal operations of the lending subsidiary or, in the case of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, HSBC Bank Middle East and HSBC Bank USA operations, by location of the lending branch. In each of the years, the provisions for bad and doubtful debts on loans and advances to banks expressed as a percentage of average gross loans and advances to banks is nil. H S B C H O L D I N G S P L C Financial Review (continued) 2000. In Brazil, provisioning requirements rose by US$75 million (at constant exchange rates US$80 million) following growth in the lending portfolio. Year ended 31 December 2000 compared with year ended 31 December 1999 The bad and doubtful debt charge at US$932 million in 2000 was US$1,141 million lower than in 1999. The decrease was driven by a sharp fall in new specific provisions against customer advances, together with increased releases and recoveries, including a US$174 million release of the special general provision raised in 1997 against Asian risk. New specific provisions against customer advances declined by 23 per cent to US$2,293 million compared with 1999. This reflected improved economic conditions and lower interest rates in Asia and strong liquidity in all major markets. There was continuing progress in loan workouts to achieve releases and recoveries. In the United Kingdom, underlying credit quality remained stable with the lower net charge reflecting a higher level of recoveries, and no individually significant provisions in 2000. The charge for credit losses in France was minimal, consistent with prior periods and reflective of the quality of CCF’s business. Asset quality in Hong Kong reflected the improved economic conditions, with increased provisions for residential mortgage loans more than offset by lower provisions for other personal lending and corporate accounts. Delinquency rates for residential mortgages remained low. Non-performing customer advances decreased in the rest of Asia-Pacific due to a combination of write-offs, credit upgrades and recoveries. The net charge for bad and doubtful debts for exposures to mainland China related companies was only US$3 million compared with a charge in 1999 of US$306 million. There were net releases of provisions against exposures to customers booked in Indonesia, Thailand and Singapore. In Malaysia, the bad debt charge rose slightly in the second half of the year due to lower than expected recoveries caused by delays in debt restructuring stemming from a weak stock market; as compared to 1999 the provisions charge in Malaysia was US$256 million lower. In 2000, 60 per cent of the special general provision of US$290 million made in 1997 in respect of Asia was released. In view of the slowdown in the US economy and its 44 Provisions for bad and doubtful debts as a percentage of average gross loans and advances to customers Europe % Hong Kong % Rest of Asia Pacific % North America % Latin America % Total % 0.60 0.66 1.86 0.57 6.21 0.86 Year ended 31 December 2001 New provisions...... Releases and recoveries ......... (0.24 ) (0.36 ) (1.31 ) (0.14 ) (1.90 ) (0.39 ) Net charge for specific provisions ......... 0.36 0.30 0.55 0.43 4.31 0.47 Total provisions charged................. Amounts written off net of recoveries ........... Year ended 31 December 2000 New provisions...... Releases and 0.33 0.29 0.55 0.41 13.25 0.65 0.28 0.88 0.93 0.39 4.98 0.61 0.53 0.68 1.70 0.65 4.72 0.81 recoveries ......... (0.28 ) (0.31 ) (1.16 ) (0.17 ) (1.56 ) (0.39 ) Net charge for specific provisions ......... 0.25 0.37 0.54 0.48 3.16 0.42 Total provisions charged................. Amounts written off net of recoveries ........... Year ended 31 December 1999 New provisions...... Releases and 0.28 0.37 (0.05 ) 0.25 3.19 0.32 0.35 0.64 1.39 0.45 1.28 0.58 0.78 1.09 3.48 0.54 3.82 1.24 recoveries ......... (0.35 ) (0.15 ) (0.83 ) (0.23 ) (1.30 ) (0.36 ) Net charge for specific provisions ......... 0.43 0.94 2.65 0.31 2.52 0.88 Total provisions charged................. Amounts written off net of recoveries ........... 0.45 0.88 2.61 0.25 2.64 0.86 0.30 0.37 0.95 0.28 1.33 0.42 Gains on disposals of investments Figures in US$m Gains/(losses) on disposal of: – equity investments ............. – debt securities.................... – part of a business ............... – other participating interests ........................... – associates........................... – subsidiaries........................ – other .................................. Year ended 31 December 2001 2000 1999 305 170 – 4 257 21 (3 ) 754 228 66 (11 ) (11 ) – – 30 302 439 – 10 – 3 (2 ) – 450 Year ended 31 December 2001 compared with year ended 31 December 2000 During 2001, HSBC made 15 business acquisitions and completed 10 business disposals. Gains on disposals of investments of US$754 million included a profit of US$200 million on the sale of HSBC’s stake in British Interactive Broadcasting (‘BiB’) to BSkyB. HSBC’s European results were bolstered by gains on the disposal of the stake in Quilter and by profits in Germany on the sale of the majority stake in our fledgling internet broker Pulsiv and ERGO. In Hong Kong we made gains on the sale of HSBC’s investment in Modern Terminals Limited and the disposal of our 50 per cent stake in Central Registration Hong Kong Limited to the other 50 per cent shareholder, Computershare. In the United States, we realised significant gains, substantially in the first half of the year, on the sale of a number of mortgage-backed and other debt securities as long-term portfolios were adjusted to respond to changed economic circumstances, particularly the potential loss of value from mortgage refinancing. Similar, but smaller gains were achieved in other locations. Year ended 31 December 2000 compared with year ended 31 December 1999 HSBC Private Equity disposed of a number of equity investments from its portfolio in 2000, realising profits of US$61 million compared with US$114 million in 1999. The investment bank in Asia recorded profits on disposal of investments of US$95 million in 2000 compared with US$205 million in 1999. Taxation Figures in US$m Year ended 31 December 2001 2000 UK corporation tax charge ... Overseas taxation ................. Deferred taxation ................. Joint ventures ....................... Associates ............................ Total charge for taxation ...... Effective taxation (per cent) Standard UK corporation tax rate (per cent) ..................... 416 1,570 (425 ) (13 ) 26 1,574 19.7 30.0 856 1,468 (78 ) (7 ) (1 ) 2,238 22.9 30.0 1999 596 1,313 129 – – 2,038 25.5 30.25 45 H S B C H O L D I N G S P L C Financial Review (continued) Analysis of overall tax charge Figures in US$m Taxation at UK corporate tax rate of 30.0% (2000:30.0% 1999: 30.25%)...................... Impact of differently taxed overseas profits in principal locations................................... Unrecognised (previously unrecognised) tax benefits .... Tax free gains ........................... Argentine losses........................ Goodwill amortisation............... Other items ............................... Year ended 31 December 2001 2000 1999 2,400 2,932 2,415 (616 ) (498 ) (418 ) (499 ) (102 ) 336 263 (208 ) 1,574 (137 ) (15 ) – 172 (216 ) 2,238 35 – – 11 (5 ) 2,038 Year ended 31 December 2001 compared with year ended 31 December 2000 HSBC Holdings and its subsidiary undertakings in the United Kingdom provided for UK corporation taxation at 30 per cent, the rate for the calendar year 2001 (2000: 30 per cent). Overseas tax included Hong Kong profits tax of US$450 million (2000: US$478 million), provided at a rate of 16 per cent (2000: 16 per cent) on the profits assessable in Hong Kong. Other overseas taxation was provided for in the countries of operation at the appropriate rates of taxation. HSBC’s effective tax rate of 19.7 per cent in 2001 was lower than that for 2000 (22.9 per cent) mainly as a result of profit mix, untaxed disposal gains and resolution of a number of tax uncertainties allowing recognition of previously unrecognised benefits. As a result of changes in the UK basis of taxation of overseas income, there was a release of the remaining balance of a deferred tax provision previously held in respect of additional UK tax on profit remittances from overseas. Settlement of a number of outstanding tax computations allowed release of related tax contingencies including one relating to a material capital allowance claim. In addition, certain capital gains have been covered by previously unrecognised capital losses, allied to the fact that tax-free gains in Hong Kong were greater in 2001 than in 2000. North American operations represented a lower percentage of HSBC’s profits in 2001 than in 2000. No tax relief has been assumed in 2001 for the additional general bad debt provision in respect of Argentina. At 31 December 2001, there were potential future tax benefits of US$220 million (2000: US$350 million) in respect of trading losses, allowable expenditure charged to the profit and loss account 46 but not yet allowable for tax and capital losses which have not yet been recognised because realisation of the benefits is not considered certain. Year ended 31 December 2000 compared with year ended 31 December 1999 HSBC Holdings and its subsidiary undertakings in the United Kingdom provided for UK corporation tax at 30 per cent, the rate for the calendar year 2000, compared with 30.25 per cent in 1999. Overseas tax included Hong Kong profits tax of US$478 million, compared with US$367 million in 1999, provided at a rate of 16.0 per cent for both years on the profits assessable in Hong Kong. Other overseas taxation was provided for in the countries of operation at the appropriate rates of taxation. At 31 December 2000, there were potential future tax benefits of approximately US$350 million compared with US$520 million at 31 December 1999, in respect of trading losses, allowable expenditure charged to the profit and loss account but not yet allowed for tax and capital losses which have not been recognised because realisation of the benefits is not considered certain. Asset deployment At 31 December 2001 At 31 December 2000 US$m % US$m 308,649 44.9 289,837 Loans and advances to customers......... Loans and advances to banks................ Debt securities ...... Treasury bills and other eligible bills .................. Equity shares ........ Intangible fixed assets ................. Other .................... Hong Kong SAR Government certificates of indebtedness .... 104,641 160,579 17,971 8,057 14,581 72,762 687,240 8,637 Total assets ........... 695,877 Loans and advances to customers include: – reverse repos...... – settlement 14,823 accounts ........... 11,761 Loans and advances to banks include: – reverse repos...... – settlement accounts ........... 10,926 4,433 15.2 23.4 126,032 132,818 2.6 1.2 2.1 10.6 100.0 23,131 8,104 15,089 70,610 665,621 8,193 673,814 12,158 6,954 12,341 6,745 % 43.5 18.9 20.0 3.5 1.2 2.3 10.6 100.0 Assets 2001 (excluding Hong Kong Government certificates of indebtedness) % US$bn Treasury and other eligible bills 2.6 18.0 Debt securities 23.4 160.6 Loans and advances to banks 15.2 Loans and advances to customers 44.9 104.6 308.6 Other Total 13.9 95.4 100.0 687.2 Assets 2000 (excluding Hong Kong Government certificates of indebtedness) % US$bn Treasury and other eligible bills 3.5 23.1 Debt securities 20.0 132.8 Loans and advances to banks 18.9 Loans and advances to customers 43.5 126 289.8 Other Total 14.1 93.9 100.0 665.6 31 December 2001 compared with 31 December 2000 HSBC’s total assets at 31 December 2001 were US$696 billion, an increase of US$22 billion, or 3 per cent, since 31 December 2000; at constant exchange rates, the increase was US$39 billion, or 6 per cent. The growth attributable to acquisitions was US$7 billion. HSBC’s balance sheet remained highly liquid, reflecting further strong growth in customer deposits and limited credit demand in some countries. Approximately 45 per cent of the balance sheet was deployed in customer loans and advances which was one per cent higher than at 31 December 2000. At constant exchange rates, gross loans and advances to customers (excluding loans to the financial sector) at 31 December 2001 were US$16 billion, or 6 per cent, higher than at 31 December 2000. Personal lending grew by 10 per cent and constituted 39 per cent of gross customer lending at 31 December 2001, compared with 39 per cent at 31 December 2000. This reflected the acquisitions of Banque Hervet and NRMA Building Society as well as strong organic growth in the UK, United States, Malaysia, Taiwan, Korea and India. Loans and advances to the commercial and corporate customer base (excluding Governments) grew by 2 per cent reflecting muted loan demand from this sector. At 31 December 2001, assets held by the Group as custodian amounted to US$1,300 billion. Custody is the safe-keeping and administration of securities and financial instruments on behalf of others. Funds under management amounted to US$284 billion at 31 December 2001. Debt securities and equity shares Debt securities held in the accruals book at 31 December 2001 showed an unrecognised gain, net of off-balance-sheet hedges, of US$885 million compared with an unrecognised gain of US$711 million at 31 December 2000. Equity shares included US$4,755 million held on investment account, compared with US$4,638 million at 31 December 2000, on which there was an unrecognised gain of US$539 million compared with US$1,135 million at 31 December 2000. Funds under management Funds under management of US$284 billion were US$11 billion, or 4 per cent, lower than at 31 December 2000. During the year, both our asset management and private banking businesses attracted net funds inflows. However, the sale of specialised CCF fund managing businesses, the fall in global equity markets and the impact of the continued strengthening of the US dollar on our sterling and euro denominated funds, have resulted in a fall in the value of funds under management. Funds under management At 1 January 2001 ................................................................ Additions ............................................................................. Withdrawals ......................................................................... Value change........................................................................ Exchange and other.............................................................. US$bn 295 79 (51 ) (25 ) (14 ) At 31 December 2001 .......................................................... 284 Economic profit HSBC’s internal performance measures include economic profit, a measure which compares the return on the amount of capital invested in HSBC by its shareholders with the cost of that capital. HSBC prices that cost of capital internally and the 47 Analysis by geographical segment Profit on ordinary activities before tax by segment Year ended 31 December 2000 1999 2001 US$m Europe .................. 3,542 Hong Kong ........... 3,883 Rest of Asia- Pacific.............. 1,088 481 North America...... of which % US$m 3,658 3,691 44.3 48.5 % US$m 3,322 3,054 37.4 37.8 13.6 6.0 1,265 850 12.9 8.7 – 3.2 329 959 – 318 % 41.6 38.3 4.1 12.0 – 4.0 Princeton ......... Latin America....... of which (575 ) (994 ) (7.2 ) (12.4 ) – 311 Argentina provisions ........ (1,120 ) 8,000 Total (14.0 ) 100.0 – 9,775 – 100.0 – 7,982 – 100.0 Total assets by segment 31 December 2001 31 December 2000 US$m Total assets* Europe .................................. 297,701 Hong Kong ........................... 175,652 Rest of Asia- Pacific............................... 62,151 North America...................... 136,526 15,210 Latin America....................... 687,240 Total % US$m 43.3 295,274 25.6 176,545 9.0 56,676 19.9 118,053 19,073 2.2 100.0 665,621 % 44.4 26.5 8.5 17.7 2.9 100.0 * Excluding Hong Kong SAR Government certificates of indebtedness. The results of operations by lines of business are included in the following segmental disclosures in the appropriate geographical segment. A separate commentary is provided on the aggregate results of each line of business on pages 72 to 78. In the analysis of profit by geographical segment which follows, the total of operating income and operating expenses includes intra-HSBC items of US$257 million in 2001, US$217 million in 2000 and US$198 million in 1999. H S B C H O L D I N G S P L C Financial Review (continued) difference between that cost and post-tax profit attributable to ordinary shareholders is the amount of economic profit generated. Economic profit is used by management as one of the measures to decide where to allocate resources so that they will be most productive. HSBC internally emphasises the trend in economic profit within business units rather than absolute amounts in order to concentrate focus on external factors rather than measurement bases. As a result of this, HSBC has consistently used a benchmark cost of capital of 12.5 per cent on a consolidated basis. Given recent changes in interest rates and in the composition of HSBC, HSBC believes that its true cost of capital on a consolidated basis is now 10.5 per cent. HSBC plans to continue to use the figure of 12.5 per cent to ensure consistency and to help comparability. Economic profit fell by US$1,924 million, or 113 per cent, compared with 2000 reflecting the settlement of the Princeton Note Matter, the exceptional provisions in respect of Argentina and higher invested equity following the acquisition of CCF. Measurement of economic profit involves a number of assumptions and, therefore, management believe that the trend over time is more relevant than the absolute economic profit reported for a single period. Economic profit 2001 2000 US$m % US$m % Average invested capital....................... 51,933 43,744 Return on invested capital*..................... 6,274 12.1 7,174 16.4 After charging: Princeton settlement ...... Additional Argentine general provisions and losses ................. Benchmark cost of (323 ) (0.6 ) (1,120 ) (2.2 ) – – – – capital....................... (6,492 ) (12.5 ) (5,468 ) (12.5 ) Economic profit ............ (218 ) (0.4 ) 1,706 3.9 * Return on invested capital is based on cash-based attributable profit adjusted for depreciation attributable to revaluation surpluses. Average invested capital is measured as shareholders’ funds after adding back goodwill amortised and goodwill previously written-off directly to reserves and deducting property revaluation reserves. This measure broadly reflects cash invested capital. 48 Europe Cash basis profit before tax Year ended 31 December Figures in US$m UK banking .......................... France................................... International banking............ Treasury and capital markets HSBC Private Banking Holdings (Suisse) SA....... HSBC Trinkaus & Burkhardt......................... Other* .................................. 2001 2,394 587 278 487 211 133 92 2000 2,205 176 426 305 290 133 486 1999 2,123 – 401 265 – 155 387 4,182 4,021 3,331 * Other primarily relates to other operating subsidiaries and the holding company sub-group. 1999 4,231 93 3,424 543 876 4,936 9,167 (3,220 ) (545 ) (1,122 ) (558 ) (5,445 ) (9 ) (5,454 ) Year ended 31 December Figures in US$m Net interest income........ Dividend income ........... Net fees and commissions ................................. Dealing profits............... Other income................. Other operating income . 2001 5,563 116 4,210 708 1,022 6,056 2000 4,988 84 4,100 787 951 5,922 Total operating income 11,619 10,910 Staff costs...................... Premises and equipment Other ............................. Depreciation .................. Goodwill amortisation ... Operating expenses........ Operating profit before provisions ................ Provisions for bad and doubtful debts ........... Provisions for contingent liabilities and commitments ............ Amounts written off fixed asset investments ...... (4,227 ) (786 ) (1,619 ) (656 ) (7,288 ) (632 ) (7,920 ) (3,862 ) (651 ) (1,374 ) (631 ) (6,518 ) (348 ) (6,866 ) 3,699 4,044 3,713 (441 ) (348 ) (438 ) (30 ) (90 ) (67 ) (23 ) (114 ) (20 ) Operating profit........... 3,138 3,606 3,141 Share of operating (loss) in joint ventures Share of operating profits/ (losses) in associates . Gains on disposal of investments and tangible fixed assets ............... Profit on ordinary activities before tax* (79 ) 42 441 3,542 * of which United Kingdom 3,147 (51 ) (45 ) 148 3,658 3,127 – (1 ) 182 3,322 2,707 Year ended 31 December 2001 2000 1999 Share of HSBC’s pre-tax profits (cash basis) (per cent) .......................... 47.5 Share of HSBC’s pre-tax profits (per cent)............... 44.3 39.0 37.4 41.5 41.6 Cost:income ratio (excluding goodwill amortisation) (per cent) .... Period-end staff numbers 62.7 59.7 59.4 (full-time equivalent )....... 73,326 69,629 53,861 Bad and doubtful debts Figures in US$m Loans and advances to customers – specific charge new provisions ...................... releases and recoveries .......... – general (release)/charge...... Customer bad and doubtful Year ended 31 December 2001 2000 1999 802 (325 ) 477 (36 ) 607 (304 ) 303 43 764 (343 ) 421 19 debt charge ....................... 441 346 440 Loans and advances to banks – net specific (release)/charge ................ – 2 (2 ) Total bad and doubtful debt charge......................... 441 348 438 Customer bad debt charge as a percentage of closing gross loans and advances . 0.32% 0.3% 0.4% Figures in US$m Assets Loans and advances to customers (net) Loans and advances to banks (net) ........ Debt securities, treasury bills and other eligible bills...................................... Total assets ........................................... Liabilities Deposits by banks ................................. Customer accounts ................................ At 31 December 2001 At 31 December 2000 133,380 40,641 66,255 297,701 36,908 169,371 129,143 45,040 63,280 295,274 43,888 159,505 Year ended 31 December 2001 compared with year ended 31 December 2000 Economic activity in Europe slowed with industrial production contracting in all major economies and job cuts affected consumer spending to varying degrees in most countries in the Eurozone. There are increasing signs that the fourth quarter of 2001 marked the low point in the Eurozone’s economic cycle and there is expected to be a gradual recovery 49 H S B C H O L D I N G S P L C Financial Review (continued) in 2002 as the cuts in interest rates, made during 2001, take effect and real incomes are boosted by further declines in inflation. The United Kingdom continued to register strong GDP growth, expected to be 2.2 per cent, in 2001. Disparities within the United Kingdom economy widened as consumer spending boosted by very low interest rates, high employment levels and continued strong house price inflation masked an industrial recession given the global slowdown and continued high level of sterling. However, expected downward pressures on households, as the squeeze on company profits forces job redundancies and an increased vulnerability to interest rate rises from higher levels of debt, are expected to cause a slowdown in 2002. France is expected to register strong GDP growth of 2.1 per cent in 2001. France saw considerable growth in consumer spending and in fixed investment. The growth in French consumer spending reflected lower unemployment, as a result of labour market reforms in the first part of 2001. Unemployment, after falling to a 17 year low in the first quarter of 2001 trended higher in the fourth quarter reflecting the effects of global slowdown on the French economy. Germany is the only major European economy to have registered an outright recession in 2001, albeit a very modest one. GDP growth for 2001, forecast to be 0.8 per cent, reflected the effects of over supply in the construction sector following the post-unification boom and the lagged impact of higher interest rates in 1999/2000. Despite the global downturn, German exports held up reasonably well. The main disappointment was the weakness in consumer spending, despite large income tax cuts, and a fall in capital spending, in both construction and plant and machinery. European operations contributed US$3,542 million to HSBC’s profit before tax in 2001 and represented 44.3 per cent of pre-tax profits. On a cash basis, Europe’s pre-tax profits were US$4,182 million, US$161 million, or 4 per cent higher than in 2000 reflecting the first full year contribution from CCF. At constant exchange rates, cash earnings (excluding CCF) were slightly lower compared with 2000 as a result of significantly lower revenues from securities, related commissions and corporate finance. The process of integration of CCF is now complete and has generated the additional revenues 50 expected when the transaction was announced. This, together with a higher level of costs savings will result in our €150 million post-tax synergy target being exceeded. During 2001 management responsibility for HSBC’s businesses in France, Spain, Italy, Belgium and the Netherlands was transferred to CCF, whilst CCF’s Private Banking operations in Switzerland, Monaco and Luxembourg were merged within HSBC Republic Suisse. Within France, the HSBC hexagon symbol has now been put on all branches in the CCF network and most of the investment banking businesses have been rebranded. Banque Hervet, which was acquired by CCF, has more than 100,000 customers and 87 branches mainly in the greater Paris area and the central region of France. This acquisition will strengthen CCF’s wealth management and commercial banking businesses. Banque Hervet contributed US$39 million to cash basis profit before tax. In October 2001 HSBC, through HSBC Bank, acquired Demirbank TAS in Turkey at a cost of US$353 million. Following the acquisition of Demirbank, the fifth largest bank in Turkey, HSBC now has a network of 168 branches and offices in 38 cities across Turkey and offers a full range of financial services. Demirbank made a positive contribution in the two months of ownership to HSBC European results. The following commentary on the Europe results is based on constant exchange rates. Net interest income was US$788 million, or 17 per cent, higher at US$5,563 million of which US$593 million was attributable to CCF. The underlying increase was principally attributable to significantly higher net interest income in treasury and capital markets, growth in UK Banking and Turkey, the latter on short-term money market business due to volatile local market conditions. These increases were partly offset by a fall in net interest income in HSBC Republic Suisse reflecting a reduction in the benefit of net free funds from falling interest rates. CCF’s net interest income of US$889 million (2000: US$296 million for five months) reflected a full year trading period including the acquisition of Banque Hervet. Interest income was proportionally higher than the previous year due to growth in customer advances in both CCF’s retail branches and regional banking subsidiaries. Net interest income also benefited from a slight improvement in credit spreads. In UK Banking, net interest income was 2 per cent higher than in 2000. Balance sheet growth of 29 per cent was achieved in personal savings products, 8 per cent in personal current accounts and 14 per cent in business current accounts. The benefit of these higher deposits was reduced by the impact of HSBC Bank plc’s product repricing which resulted in narrower spreads on a number of products, particularly savings accounts and residential mortgages. HSBC Bank plc’s mortgage advances were US$2.5 billion, or 13 per cent, higher than 2000 reflecting an increase in new lending and improved retention of existing customers. Net interest income earned in treasury and capital markets increased strongly compared to 2000. This increase was primarily due to earnings on money market business which benefited from reduced funding costs as short-term lending rates declined. In addition, the deployment of surplus liquidity in increasing holdings of investment grade corporate bonds also benefited net interest income. Other operating income at US$6,056 million was US$370 million, or 7 per cent, higher than in 2000. Excluding CCF, other operating income at US$4,982 million was US$168 million, or 3 per cent lower than in 2000 reflecting reduced dealing profits and lower broking and other securities-related fee income from investment banking activities. These were partly offset by increased wealth management and corporate banking fees particularly in UK Banking. CCF’s other operating income was US$1,074 million in 2001 compared with US$536 million for the five months of 2000. Net fee income at US$781 million, US$415 million higher than the five month contribution in 2000 reflected a full year trading period including the acquisition of Banque Hervet. Net fee income was adversely affected by lower equity market related activities, and in spite of strong growth in Commercial and Corporate Banking and Capital Markets fees. That growth results both from good customer demand and the synergies allowed by the integration of CCF within HSBC. This integration also helped HSBC to strongly improve its positioning in the eurobond market. In addition, CCF’s dealing profits of US$190 million, US$105 million higher than the five month contribution in 2000 reflected a full year trading period, good results in Treasury and Capital Markets and a less favourable performance in securities trading. In UK Banking, other operating income at US$2,976 million was 4 per cent higher than in 2000, notwithstanding the bank’s decision to remove charges for debit card withdrawals from ATM machines in the LINK network, on which US$49 million gross income was earned in 2000, and withdrawal of the loan to valuation fees on mortgages. The increase reflected growth in wealth management, higher fee income from cards and higher corporate banking fees. Wealth management income increased by US$66 million, or 9 per cent, compared with 2000. Within this, notwithstanding the depressed market for investment products, income from life, pensions and investment products increased by US$45 million, or 16 per cent of which US$27 million related to non-recurring elements in the calculation of profits on long-term assurance business. General insurance income increased by 9 per cent primarily through the sale of income protection products. Personal account overdraft fees and mortgage fees were reduced compared with 2000. Overdraft fees declined by US$41 million, reflecting a reduction in unauthorised overdrafts. Mortgage fees were US$7 million lower than 2000, mainly due to the removal of loan to valuation fees. Corporate banking fees increased by 7 per cent benefiting from the bank’s strategy of aligning corporate and investment banking services. In addition, increased transaction volumes resulted in a 14 per cent increase in fee income from cards. In treasury and capital markets, other operating income was US$52 million, or 14 per cent, lower than 2000. This was primarily due to lower income in gilts trading, which did not repeat the strong performance of the first half of 2000 and the costs associated with the interest rate hedge on the increased holdings of investment grade corporate bonds. In investment banking, there were significantly lower levels of fee income from broking and other- securities related income as the high market volumes and favourable stock market movements in the first half of 2000 were followed by eighteen months of declining volumes in primary and secondary equity markets and declines in merger and acquisition activity. Dealing profits in equity trading business were also lower as volumes fell sharply, reflecting the adverse market conditions. 51 H S B C H O L D I N G S P L C Financial Review (continued) Operating expenses before goodwill amortisation at US$7,288 million were US$1,023 million, or 16 per cent, higher than in 2000. CCF’s operating expenses before goodwill amortisation were US$1,424 million (2000: US$674 million for five months) in 2001. Excluding CCF, operating expenses before goodwill amortisation at US$5,847 million were US$256 million higher than 2000. About a third of this related to increased information technology-related expenditure. CCF operating costs of US$1,424 million (2000: US$674 million for five months) reflected a full year trading period and the acquisition of Banque Hervet, together with strict cost control. Excluding changes in corporate structure and on a full year basis, operating costs increased by only 1.7 per cent, mainly from non-recurring expenses. Staff costs at US$4,227 million were US$521 million higher than 2000 (of which US$448 million related to CCF). In UK Banking staff costs increased by 7 per cent to US$1,922 million as staff numbers were increased to support business development and higher business volumes, including wealth management activities and customer telephone services. Additional IT staff numbers have supported service improvement projects, particularly relating to expanding delivery channels including the internet. Profit-related remuneration reflected the higher revenues generated in treasury and capital markets, offset by lower payments as revenues declined in securities related and corporate finance activities. Non-staff costs grew by US$502 million (of which US$303 million related to CCF) to US$3,061 million, including an increase in information technology-related expenditure and an increase in the cost of services contracted out, primarily relating to the outsourcing of HSBC Bank plc’s cash and cheque processing services. Higher costs in Greece and Turkey reflected the acquisition of additional branches and in Turkey of Demirbank. The charge for bad and doubtful debts was US$110 million, or 33 per cent, higher at US$441 million. Of this US$81 million was attributable to CCF. In UK Banking the charge for bad and doubtful debts was US$57 million, or 15 per cent, lower than in 2000. New specific provisions, recoveries and releases were in line with 2000 as underlying credit quality remained stable. Lower levels of new specific provisions were raised for 52 First Direct and on credit card advances but new provisions for commercial loans were slightly higher and reflected problems seen in the manufacturing sector and weakening in business confidence. In HSBC Republic Suisse, an increase in new provisions against a corporate exposure in the Channel Islands was offset by the release of general provisions. This release reflects the reassessment of the historical risk factors associated with higher quality private bank lending. CCF’s charge for bad and doubtful debts of US$77 million (2000: US$4 million release for five months) remains at a moderate level illustrating the good quality of CCF loan book in spite of some deterioration in the airline industry. Provisions for contingent liabilities were US$36 million lower at US$30 million. The 2000 comparative included a charge in UK Banking for the amount of redress potentially payable to customers who may have been disadvantaged when transferring from or opting out of occupational pension schemes. Amounts written off fixed asset investments of US$90 million arose mainly from venture capital investments and holdings of emerging technology stocks. The share of operating losses in joint ventures primarily reflected HSBC’s share of losses in Merrill Lynch HSBC’s European operations. The 2000 comparatives for the share of operating losses in associated undertakings included losses of US$76 million in respect of HSBC Bank plc’s 20 per cent shareholding in BiB. Gains on disposal of fixed assets of US$441 million included the US$200 million profit in the first half of 2001, on the sale of HSBC Bank plc’s 20 per cent shareholding in BiB. HSBC’s European results were also bolstered by gains on disposal of the stake in Quilter and by profits in Germany on the sale of our fledgling internet broker Pulsiv and ERGO. Year ended 31 December 2000 compared with year ended 31 December 1999 European operations contributed US$3,658 million to HSBC’s profit before tax in 2000 and represented 37 per cent of pre-tax profits. Cash earnings were US$4,021 million in 2000, US$690 million, or 21 per cent, higher than in 1999. At constant exchange rates, cash earnings were US$925 million higher than 1999, of which CCF contributed US$169 million, HSBC Republic Suisse, US$290 million and RNYC and SRH, US$197 million. The following commentary on Europe's results is based on constant exchange rates. Net interest income was US$1,040 million, or 26 per cent, higher at US$4,998 million of which some US$800 million was attributable to the recent acquisitions. The underlying increase was principally attributable to growth in UK Banking and income earned on funds raised in anticipation of the CCF acquisition, together with smaller increases in Offshore Banking and Turkey, the latter due to increased spreads reflecting local market conditions. These increases were partly offset by a US$147 million, or 40 per cent, decrease in Treasury and Capital Markets’ money market business caused by a flattening of the yield curve and higher short-term funding costs, together with the maturing of high yielding assets. In UK Banking, net interest income at US$3,222 million was 6 per cent higher than 1999 reflecting balance growth in personal and commercial current accounts, personal savings and personal and commercial lending. HSBC Bank plc’s repricing of variable rate mortgages contributed to mortgage growth of US$1.7 billion, with a decline in mortgage spread. Spread was also reduced on savings products reflecting competitive pricing. The effect on UK Banking’s margin of the reduction in spread was partly mitigated by a greater benefit from free funds. Other operating income was US$1,335 million, or 29 per cent, higher than in 1999 of which recent acquisitions accounted for some US$750 million. The underlying increase reflected growth in UK Banking, Treasury and Capital Markets and Investment Banking, together with smaller increases in Offshore Banking, due to the successful launches of funds products, and HSBC Trinkaus & Burkhardt KGaA largely due to increased commission income on equity transactions. In UK Banking, other operating income at US$3,001 million was 8 per cent higher than 1999, primarily reflecting growth in wealth management income and higher fee income from cards, corporate banking and global safe custody fees. Wealth management income showed a significant increase compared with 1999, up 14 per cent, from US$673 million to US$764 million. Within this, general insurance income increased by 7 per cent and private client income by 18 per cent. Life, pension and investment income increased by US$56 million, or 16 per cent, of which US$15 million was the benefit of a reduction in the discount rate, used to calculate the net present value of future earnings inherent in policies in force, from 12.5 per cent to 11.5 per cent. Global safe custody fee income increased by 36 per cent compared with 1999, benefiting from high transaction volumes in 2000, the acquisition of new customers and growth in assets under custody. Higher fee and other income was also generated by growth in personal current account and overdraft fees, increased card income and higher corporate banking fee income, mainly due to HSBC Bank plc’s involvement in a buoyant mergers and acquisitions market. In Treasury and Capital Markets, other operating income was US$386 million, 61 per cent higher than 1999. Foreign exchange income increased by 45 per cent reflecting higher volumes, particularly in respect of customer activities. Much of this was realised from an increase in business in the regional treasury centres, where income increased by 40 per cent. Fixed income results also improved notably in gilts and derivatives activity, linking with an increase in debt origination. The currency options business also expanded during 2000 with an increased presence in the euro zone following the absorption of RNYC’s trading activities. In Investment Banking, there were higher equity commissions reflecting increased global equity volumes. Fee income also rose, reflecting growth in Corporate Finance where business transacted with HSBC's corporate client base increased significantly. Operating expenses, excluding goodwill amortisation, were US$1,073 million, or 20 per cent, higher than in 1999 of which some US$947 million was due to the recent acquisitions. In UK Banking, operating expenses increased by US$258 million, or 8 per cent, to US$3,510 million and the cost:income ratio remained at 56.4 per cent. Staff costs increased by US$127 million, or 7 per cent, to US$1,935 million, reflecting growth in staff numbers to support growth in the wealth management business and increased business volumes, in addition to the effect of annual pay increases and incentive costs. Additional IT staff have supported development projects integral to the continued improvement in customer service, 53 H S B C H O L D I N G S P L C Financial Review (continued) particularly in relation to new delivery channels. As a result of business growth, HSBC Bank plc employed 3 per cent more staff on average during 2000. Non- staff costs increased by US$130 million, or 9 per cent. They were incurred primarily to support business development, including internet banking initiatives and continued branch services improvement. Increased business volumes also contributed to higher expenditure, including IT processing capacity. Increased marketing costs included higher card loyalty scheme costs. Operating expenses also increased in Investment Banking, where profit-related remuneration reflected the improved performance, and in Offshore Banking, which reflected increased staff numbers in support of expansion. These increases were partly offset by a US$255 million, or 5 per cent, reduction in Treasury and Capital Markets due to improved operating efficiencies in the front and back offices. The charge for bad and doubtful debts was US$62 million lower than 1999 at US$348 million. In UK Banking, the charge for bad and doubtful debts was US$397 million, US$73 million, or 16 per cent, lower than in 1999. There was a reduction of US$129 million in new provisions, with lower provisioning against corporate lending, mainly due to a small number of large provisions in 1999. Provisions were also lower against card balances and in First Direct. General provisions increased by US$42 million due to balance sheet growth. The credit environment remains satisfactory, but a small number of business and personal customers continue to face difficulties from market pressures and unforeseen changes in financial circumstances. Provisions for contingent liabilities were US$37 million lower at US$67 million partly due to a lower charge in UK Banking for the amount of redress potentially payable to customers who may have been disadvantaged when transferring from or opting out of occupational pensions schemes. The US$47 million share of operating losses in joint ventures principally reflects start-up costs of the new joint venture with Merrill Lynch to establish an online, investment led, broking and banking service for the mass affluent. The net US$49 million share of operating losses in associated undertakings include losses of US$76 million reflecting HSBC Bank plc’s 20 per cent shareholding in British Interactive Broadcasting (‘BiB’) and the associated investment in building its 54 digital interactive television services, ‘Open....’. In July 2000, HSBC Bank plc agreed to sell its investment in BiB to BSkyB. Hong Kong Year ended 31 December Figures in US$m Net interest income............... Dividend income .................. Net fees and commissions..... Dealing profits...................... Other income ........................ Other operating income ........ 2001 4,165 26 1,172 218 436 1,852 Total operating income....... 6,017 Staff costs ............................. Premises and equipment ....... Other .................................... Depreciation ......................... Goodwill amortisation .......... Operating expenses............... (1,279 ) (234 ) (428 ) (199 ) (2,140 ) – (2,140 ) 2000 3,997 34 1,168 229 359 1,790 5,787 (1,166 ) (218 ) (412 ) (190 ) (1,986 ) (1 ) (1,987 ) 1999 3,735 39 964 211 338 1,552 5,287 (1,145 ) (262 ) (299 ) (190 ) (1,896 ) – (1,896 ) Operating profit before provisions........................ 3,877 3,800 3,391 Provisions for bad and doubtful debts .................. (197 ) (248 ) (585 ) Provisions for contingent liabilities and commitments ................... Amounts written off fixed 6 asset investments ............. (18 ) (10 ) (9 ) 2 (5 ) Operating profit.................. 3,668 3,533 2,803 Share of operating profit in associated undertakings.... 17 Gains on disposal of investments and tangible fixed assets ...................... 198 21 137 15 236 Profit on ordinary activities before tax ........ 3,883 3,691 3,054 Share of HSBC’s pre-tax profits (cash basis) (per cent).......................... 44.1 Share of HSBC’s pre-tax profits (per cent) .............. 48.5 35.9 37.8 38.1 38.3 Cost:income ratio (excluding goodwill amortisation) (per cent).......................... Period-end staff numbers 35.6 34.3 35.9 (full-time equivalent) ....... 24,654 24,204 23,932 Bad and doubtful debts Figures in US$m Loans and advances to customers – specific charge new provisions ..................... releases and recoveries ......... – general (release)/charge ..... 449 (243 ) 206 (9 ) Customer bad and doubtful debt charge ...................... 197 Total bad and doubtful debt charge .............................. 197 Year ended 31 December 2001 2000 1999 454 (207 ) 247 1 248 248 720 (101 ) 619 (34 ) 585 585 Customer bad debt charge as a percentage of closing gross loans and advances . 0.29% 0.37% 0.90% Figures in US$m Assets Loans and advances to customers (net)... Loans and advances to banks (net) ......... Debt securities, treasury bills and other At 31 December 2001 67,359 42,516 eligible bills ...................................... 49,625 At 31 December 2000 64,369 57,154 38,913 Total assets (excluding Hong Kong SAR Government certificates of indebtedness) ..................................... 175,652 176,545 Liabilities Deposits by banks................................... Customer accounts ................................. 3,271 146,544 2,220 146,394 Year ended 31 December 2001 compared with year ended 31 December 2000 Despite large interest rate cuts, the Hong Kong economy contracted through most of 2001 as consumer spending was hit by rising unemployment and a weak property market. The ongoing deflation kept demand for consumption and investment loans weak. Hong Kong’s operations contributed US$3,883 million to HSBC’s cash basis profit before tax, an increase of US$191 million, or 5 per cent, compared with 2000, and represented 48.5 per cent of HSBC’s cash basis profit before tax. Net interest income increased by US$168 million, or 4 per cent, to US$4,165 million in 2001, primarily reflecting a switch from interbank lending to corporate bonds, the placement of increased average customer deposits in debt securities and increased spreads on treasury activities. In addition, successful marketing campaigns to target growth in credit card loans and wider spreads on foreign currency customer deposits also contributed to the increase in net interest income. This was partly offset by reduced spreads on residential mortgages and Hong Kong dollar deposits and subdued corporate loan demand. The combination of increased market liquidity and shortage of quality lending opportunities reduced margins earned on corporate loans. Driven by continued growth in average customer deposits, average interest-earning assets in Hong Kong increased by 6 per cent. However with little demand for new lending, these deposits together with the switch from interbank lending, funded a significant increase in debt securities. Despite intense mortgage price competition and subdued demand for corporate loans, there was a small increase in average customer loans principally credit card advances, term lending and residential mortgages. The success of focused marketing initiatives was reflected in an increase of over 23 per cent in average credit card advances, with the number of credit cards now in issue increasing from 2.5 million to some 2.7 million at 31 December 2001. For The Hongkong and Shanghai Banking Corporation in Hong Kong the net interest margin at 2.48 per cent (one basis point higher) was largely unchanged from 2000. Spread improved by 18 basis points mainly due to a combination of reduced funding costs on treasury activities, increased higher- yielding credit card balances and widening of spreads on foreign currency deposits. In addition, a reduction in the level of suspended interest, net of releases and recoveries, accounted for six basis points of the improvement in spread. This was partly offset by reduced spreads on Hong Kong dollar savings and time deposits and residential mortgage loans. The contribution from net free funds fell by 17 basis points due to lower average interest rates during the year. In Hang Seng Bank, the net interest margin decreased to 2.56 per cent, 12 basis points lower than 2000. Spread improved by nine basis points mainly due to the benefits of a higher spread on increased holdings of fixed rate investment securities, growth in lower-cost customer deposits and a wider gap between the Hong Kong best lending rate (‘BLR’) and interbank rates. These positive effects were partly offset by a further decline in mortgage yields and reduced spreads on term deposits. The contribution from net free funds fell by 21 basis points due to lower average interest rates during the year. 55 H S B C H O L D I N G S P L C Financial Review (continued) Continued price competition in the residential loan market resulted in further reductions in the average yield on the residential mortgage portfolio. Excluding Government Home Ownership Scheme loans and staff loans, the average yield earned by The Hongkong and Shanghai Banking Corporation in Hong Kong on this portfolio fell to 86 basis points below BLR in 2001, before accounting for the effect of cash incentive payments, compared with 27 basis points below BLR in 2000. Hang Seng Bank saw its average yield on the residential mortgage portfolio fall to 84 basis points below BLR in 2001, compared with 26 basis points below BLR in 2000. Other operating income was US$62 million, or 3 per cent, higher than 2000. Within other operating income, insurance income increased by US$48 million, or 28 per cent, reflecting significant growth in new life insurance business. HSBC’s operations in Hong Kong increased market share with growth of over 90 per cent in individual life insurance premiums. The Mandatory Provident Fund (‘MPF’) products launched in December 2000 now provide MPF services to over 770,000 individuals. Dealing profits were US$11 million lower than in 2000 as increased profits on interest rate derivatives trading were offset by losses on the mark-to-market of corporate debt securities as credit spreads widened in the latter part of 2001 on the back of reduced corporate earnings in the current economic environment. Net fees and commissions at US$1,172 million were slightly higher when compared with US$1,168 million in 2000. Securities and stockbroking fee income fell sharply by US$59 million, or 28 per cent, due to lower stock market volumes reflecting the poor market sentiment. In addition, stock market- related revenues were also affected by an increase in the volume of customer trades being executed via the internet. Over 60 per cent of all trades are now transacted through this low cost channel. There was an encouraging increase in fee income from the sale of unit trust products, reflecting the successful sale of capital guaranteed funds during 2001. Fee income from sales of unit trusts in HSBC’s Hong Kong operations increased by US$71 million, or over 140 per cent, compared to 2000. In addition, fee income from cards increased by US$13 million, or 6 per cent following the increase in number of cards in issue in Hong Kong. Operating expenses excluding goodwill increased by US$154 million, or 8 per cent, 56 compared with 2000. Staff costs increased by US$113 million, or 10 per cent. The increase in staff numbers in Hong Kong of 450 to 24,654 at 31 December 2001, which supported business expansion in credit card advances and Mandatory Provident Fund products and salary increments were the main contributors to this increase. In addition, US$42 million of the increased staff costs related to higher retirement benefit costs mainly in Hang Seng Bank where additional payments were made to maintain the fully funded position of the staff retirement benefit scheme. Operating expenses, other than staff costs, increased by US$41 million, or 5 per cent, mainly in advertising and marketing expenses to support various initiatives, including the promotion of credit cards, launch of capital guaranteed funds and other personal banking products and development costs relating to e-banking initiatives. The charge for provisions for bad and doubtful debts decreased by US$51 million compared with 2000. The charge for new specific provisions was largely unchanged. An increase in new provision levels for personal customers, to reflect the underlying risks within the consumer portfolio as targeted growth in personal lending led to an expected and corresponding increase in delinquencies, was offset by lower charges against corporate customers. Mortgage delinquency rates however remained low in absolute terms. Releases and recoveries of specific provisions were higher than 2000 mainly in The Hongkong and Shanghai Banking Corporation in Hong Kong. Non-performing advances as a percentage of total advances improved to 2.9 per cent, compared with 3.8 per cent at the end of 2000. Gains on disposal of investments and tangible fixed assets amounted to US$198 million, an increase of US$61 million compared with 2000. During the first half of 2001, HSBC’s operations in Hong Kong disposed of their interest in Modern Terminals and a 50 per cent shareholding in Central Registration. These were augmented by gains on disposals of other investment securities throughout 2001. Year ended 31 December 2000 compared with year ended 31 December 1999 Hong Kong’s economy registered double-digit growth in the first three quarters of 2000. High real interest rates depressed domestic activity and the local property market and, with loan demand remaining sluggish, there was intense competition in the residential mortgage sector leading to exceptional levels of remortgaging. Hong Kong operations contributed US$3,691 million to HSBC’s profit before tax. On a cash basis, Hong Kong operations contributed US$3,692 million to HSBC’s cash basis profit before tax, an increase of 21 per cent compared with 1999, and represented 36 per cent of HSBC’s cash basis profit before tax. Net interest income increased by US$262 million, or 7 per cent, to US$3,997 million, which primarily reflected the placement of increased customer deposits. Driven by continued growth in customer deposits, there were increases in most categories of average interest-earning assets particularly debt securities and other liquid assets. For the bank in Hong Kong, average advances to customers fell by 4 per cent due to a reduction in residential mortgages as a result of intense price competition and also due to muted demand for corporate loans. Hang Seng Bank achieved growth of 7 per cent in average customer advances, reflecting the success of its efforts to increase corporate and personal lending. The success of focused marketing initiatives by both banks was reflected in strong growth in average card balances which grew by 27 per cent in the bank in Hong Kong and 14 per cent in Hang Seng Bank. Average customer deposits in Hong Kong grew by 9 per cent in the bank in Hong Kong and 10 per cent in Hang Seng Bank in 2000. For the bank in Hong Kong, net interest margin for 2000 remained unchanged at 2.47 per cent. Spread narrowed by five basis points largely due to the adverse effect of reduced mortgage spreads and the increased commercial surplus which was placed in lower yielding debt securities and money market loans. These factors were partly offset by the positive effect of a reduction in suspended interest, net of releases and recoveries, which accounted for an improvement of five basis points in spread, and wider Hong Kong dollar time deposit spreads. Cash incentive payments on new mortgage loans, which amounted to US$14 million in 2000, an increase of US$8 million compared to 1999, have been written off as deductions from net interest income. The contribution from net free funds increased by five basis points as a result of both increased net free funds and higher average interest rates. In Hang Seng Bank, the net interest margin reduced by 19 basis points compared with 1999 to 2.68 per cent. Spread narrowed by 17 basis points as pressure on mortgage spreads and a fall in the average advances-to-deposits ratio more than outweighed the benefits of growth in lower cost savings accounts, an improvement in the spreads earned on time deposits, and the widening of the gap between the Hong Kong best lending rate (‘BLR’) and interbank rates. Continued price competition in the residential mortgage market throughout the year resulted in a reduction in the average yield of the residential mortgage portfolio, excluding Government Home Ownership Scheme loans and staff loans, in the bank in Hong Kong to 27 basis points below BLR in 2000, compared with 58 basis points above BLR in 1999 (before accounting for the effect of cash incentive payments). Similarly the average yield on the residential mortgage portfolio in Hang Seng Bank was 26 basis points below BLR in 2000, compared with 49 basis points above BLR in 1999. In aggregate, US$171 million of income on the mortgage product in 2000 was foregone as a result of this repricing. Other operating income increased by US$238 million, or 15 per cent. Within other operating income, the success of initiatives to expand fee generating services led to an increase in net fees and commissions of US$204 million, or 21 per cent, over 1999. This included a marked increase in income from wealth management initiatives. Total operating income from the insurance businesses and commissions on sale of retail investment funds and on securities transactions executed for personal customers increased by 32 per cent compared with 1999. Fees from credit facilities increased by US$43 million, or 40 per cent, to US$151 million with good growth in both the bank in Hong Kong and in Hang Seng Bank. Fee income from securities and stockbroking increased by US$46 million, or 28 per cent, to US$213 million largely as a result of the buoyant Hong Kong stock market in the first part of 2000. Additionally, there was an increase of US$26 million, or 15 per cent, in fee income from cards as a result of successful marketing initiatives which led to a net increase in the card base in Hong Kong of 32 per cent during 2000. Dealing profits were US$18 million, or 9 per cent, higher than 1999, principally attributable to the release of provisions against 57 H S B C H O L D I N G S P L C Financial Review (continued) Korean bonds which had been provided for in the investment bank in 1999 and higher foreign exchange profits as a result of increased corporate business volumes, partly offset by mark-to-market losses on bonds in the Investment Bank and the bank in Hong Kong. Operating expenses increased by US$91 million, or 5 per cent, and included US$87 million in costs, mainly attributable to staff costs and advertising and promotion expenses relating to the launch of the Mandatory Provident Fund in Hong Kong. This represented an increase of US$65 million compared with 1999. Staff costs were held broadly at the same level as last year. Increases in staff costs in the investment bank, due to higher profit-related remuneration, and in HBSC Insurance, due to the launch of the Mandatory Provident Fund, were offset by a reduction in Hang Seng Bank as a result of lower headcount and reductions in pension costs in the bank. Operating expenses, other than staff costs, increased by US$70 million, or 9 per cent, mainly in advertising and marketing expenses and development costs relating to HSBC's e-banking initiatives. Premises and equipment expenses were reduced compared with 1999, reflecting lower rental expenses. Provisions for bad and doubtful debts decreased significantly by US$337 million, or 58 per cent. The charge for new specific provisions decreased by US$266 million to US$454 million whilst releases and recoveries increased by US$106 million to US$207 million, the latter mainly in respect of corporate customers. The net bad debt charge for the year fell from 90 basis points of advances in 1999 to 37 basis points in 2000. There was a small net release of provisions for bad and doubtful debts in respect of lending to mainland China related companies booked in Hong Kong in 2000 compared with a charge of US$142 million in 1999. The net charge for specific provisions for personal lending in Hong Kong decreased reflecting the improved economic conditions: increased provisions for residential mortgages were more than offset by decreased provisions for other personal lending. Delinquency rates for residential mortgages in 2000 remained low. Non-performing advances as a percentage of total advances decreased from 4.8 per cent at 31 December 1999 to 3.8 per cent at 31 December 2000 58 as a result of a reduction in non-performing advances, due to a combination of write-offs, upgrades and recoveries, and an increase in total advances to customers. Rest of Asia-Pacific (including the Middle East) Year ended 31 December Figures in US$m Net interest income............... Dividend income .................. Net fees and commissions..... Dealing profits...................... Other income ........................ Other operating income ........ Total operating income Staff costs ............................. Premises and equipment Other .................................... Depreciation ......................... Goodwill amortisation .......... Operating expenses............... Operating profit before 2001 1,482 3 681 395 58 1,137 2,619 (771 ) (143 ) (401 ) (82 ) (1,397 ) (8 ) (1,405 ) 2000 1,367 3 710 324 48 1,085 2,452 (733 ) (137 ) (343 ) (79 ) (1,292 ) (5 ) (1,297 ) 1999 1,240 2 645 300 36 983 2,223 (642 ) (127 ) (309 ) (70 ) (1,148 ) (14 ) (1,162 ) provisions........................ 1,214 1,155 1,061 Provisions for bad and doubtful debts .................. (172 ) Provisions for contingent liabilities and commitments ................... Amounts written off fixed asset investments ............. (43 ) (11 ) 15 5 (3 ) Operating profit.................. 988 1,172 Share of operating loss in joint venture..................... Share of operating profit in associates ......................... Gains/(losses) on disposal of investments and tangible fixed assets ...................... Profit on ordinary (5 ) 99 6 – 100 (7 ) (809 ) (30 ) (1 ) 221 – 94 14 activities before tax ........ 1,088 1,265 329 Share of HSBC’s pre-tax profits (cash basis) (per cent)................................. 12.4 Share of HSBC’s pre-tax profits (per cent) .............. 13.6 12.3 12.9 4.3 4.1 Cost:income ratio (excluding goodwill amortisation) (per cent).... Period-end staff numbers 53.3 52.7 51.6 (full-time equivalent) ....... 26,259 22,919 21,375 Bad and doubtful debts Figures in US$m Loans and advances to customers – specific charge new provisions ..................... releases and recoveries ......... – general release ................... Customer bad and doubtful Year ended 31 December 2001 2000 1999 577 (406 ) 171 1 543 (370 ) 173 (188 ) 1,084 (259 ) 825 (14 ) debt (release)/charge ........ 172 (15 ) 811 Loans and advances to banks – net specific (releases)..... Total bad and doubtful debt – – (2 ) charge/(release)................ 172 (15 ) 809 Customer bad debt charge as a percentage of closing gross loans and advances .......... 0.52% – 2.55% Figures in US$m Assets Loans and advances to customers (net)... Loans and advances to banks (net) ......... Debt securities, treasury bills and other eligible bills ...................................... Total assets............................................. Liabilities Deposits by banks................................... Customer accounts ................................. At 31 December 2001 At 31 December 2000 30,666 11,253 13,623 62,151 4,010 45,498 28,641 11,197 11,705 56,676 4,080 42,516 Year ended 31 December 2001 compared with year ended 31 December 2000 Growth slowed sharply across most of the Asia- Pacific region in the first half of the year as exports and investment were hit by the global downturn, in electronics in particular. Inflationary pressures continued to ease and interest rates were generally declining. By the end of the year there were signs that the worst of the industrial downturn was over, particularly in the high-tech exposed countries such as Korea. While growth in China has also slowed modestly, it continued to outperform the rest of the region by a large margin with GDP growth of 7.3 per cent. India was the next strongest economy in the region with growth of about 5 per cent. HSBC’s operations in the rest of the Asia-Pacific region contributed US$1,096 million of HSBC’s cash basis profit before tax, a decrease of US$174 million, or 14 per cent, compared with 2000. At constant exchange rates, cash basis profit before tax was 10 per cent lower than 2000. The fall in profits mainly resulted from a net release of customer bad and doubtful debt provisions in 2000 which benefited from the release of US$174 million from the special general provision. At constant exchange rates, cash basis operating profits before provisions were 11 per cent higher than in 2000. Net interest income was US$115 million, or 8 per cent (at constant exchange rates 13.7 per cent) higher than in 2000. The increase reflected growth in higher-yielding personal lending, increased spreads on treasury activities and recoveries of previously suspended interest. There was solid growth in personal lending, reflecting the successful development of wealth management businesses in several countries, with increases in Taiwan, Singapore, Korea, India, New Zealand, Brunei, Malaysia and Australia. Spreads widened in Singapore and Japan mainly due to strong treasury performance and in mainland China as a result of previously suspended interest. Subdued corporate loan demand and intense competition for the limited quality lending opportunities available in some countries in the region resulted in reduced net interest margins as excess deposit-driven growth in average interest-earning assets was placed in lower- yielding money market loans and debt securities. Other operating income increased by US$52 million, or 5 per cent, (at constant exchange rates by 13 per cent) compared to 2000. Net fees and commissions were US$29 million lower than in 2000 (but 3 per cent higher at constant exchange rates). The focus on expanding HSBC’s personal banking operations, most notably in the Philippines, Taiwan, India, Indonesia and the Middle East, resulted in an increase of 23 per cent at constant exchange rates (or 16 per cent on a reported basis) in credit card fee income. Securities and stockbroking income fell by some 26 per cent (at constant exchange rates some 18 per cent) reflecting subdued stock market activity across the region. Dealing profits increased by US$71 million due to increased profits on interest rate derivatives (which benefited from increased volatility in interest rates), particularly in India, Indonesia, Singapore, the Philippines, Japan, and Thailand. There were also increased profits on debt securities trading in Singapore and India. Operating expenses on a cash basis increased by US$105 million, or 8 per cent, (at constant exchange rates by 16 per cent) compared with 2000. The growth in staff costs (at constant exchange rates 12 per cent) reflected increased staff numbers to support business expansion and notably increased transfer of back office processing from overseas to premises in 59 H S B C H O L D I N G S P L C Financial Review (continued) Hyderabad and Guangzhou. Over the past year, HSBC has expanded its operations in Australia, the Philippines, Egypt, Taiwan and Brunei through acquisitions and opened some 13 new branches in seven countries in the rest of the Asia-Pacific region. The growth in other expenses (20 per cent, at constant exchange rates) reflected acquisitions and increased marketing expenditure promoting personal banking products. In aggregate recent acquisitions accounted for some US$31 million of the increase in operating expenses. The significant change in the net charge for customer bad and doubtful debt provisions is accounted for by the impact of the release of the Asian special general provision in 2000. New specific provisions reflected further provisioning on existing non-performing loans in Indonesia due to heightened current political and economic uncertainties, and on an energy sector related corporate exposure in India. Offsetting these items were falls in the level of new specific provisions required in Malaysia, mainland China and the Middle East. Releases and recoveries were US$36 million higher than in 2000, mainly as a result of the liquidation of security held against a loan to Olympia and York. This recovery helped boost the pre-tax profit of HSBC’s operations in Singapore to US$270 million, US$51 million, or 23 per cent, higher than 2000. Net interest income was US$12 million higher than in 2000. This resulted from the combination of an improved net interest margin as spreads on deposits widened and surplus deposits were placed in higher- earning investment securities together with a good performance by treasury. Fee income was only slightly lower than 2000 as fees from advisory services and the sale of capital protected funds partially offset the fall in stockbroking and credit facilities income. Higher profits from bond trading resulted in a 23 per cent increase in dealing profits. Operating expenses reflecting higher performance related bonus provisions, salary increments, the costs of the voluntary severance scheme and increased contributions to the central provident fund were US$32 million higher. In India, pre-tax profits were in line with those earned in 2000. Dealing profits increased by US$19 million, or 49 per cent, as anticipated movements in interest rates increased dealing profits from debt securities and interest rate derivatives. Fee income was 2 per cent higher as growth in credit card fees 60 offset falls in securities and stockbroking income from subdued stock market activities. Operating expenses were US$23 million higher, reflecting the expansion of the development of the Group’s global processing operations in Hyderabad together with higher performance related staff costs. Costs in respect of the former were largely offset by other operating income received for these services. The opening of two new branches, together with the expansion of the processing centre in Hyderabad resulted in an increased headcount of some 1,000 during the year. Bad and doubtful debt provisions increased by US$12 million mainly due to exposure to an energy sector related company. Advances to customers grew by US$125 million, or 9 per cent, with strong growth in personal lending and to the commercial and industrial and public sectors. In mainland China, HSBC’s operations returned to profitability reporting pre-tax profit of US$33 million for 2001 compared with a loss of US$26 million in 2000. The receipt of previously suspended interest resulted in a significant increase in net interest income. Increased operating expenses reflected increased headcount arising on business expansion in personal financial services preparing for opportunities which will arise as China’s banking markets open post its accession to the World Trade Organisation together with expansion of the global processing centre in Guangzhou. Costs in respect of the latter were largely offset by other operating income received for these services. Business expansion together with development of the processing centre at Guangzhou resulted in an increased headcount of some 500 during the year. Consistent with the recovery of suspended interest there was a net release in bad debt provisions for 2001 compared with a charge of US$24 million in 2000. In Malaysia, HSBC Bank Malaysia reported profits before tax of US$131 million, an increase of US$15 million, 13 per cent higher than in 2000. This was largely attributable to a lower level of provisions for bad and doubtful debts. Against a backdrop of subdued corporate loan demand, intense price competition and reduced lending margins net interest income of US$171 million was slightly lower than in 2000. However HSBC Bank Malaysia exceeded targeted growth in residential mortgages (up US$569 million, an increase of 91 per cent) and in credit card loans (up US$70 million and reflecting a 50 per cent increase in the number of credit cards in issue) following successful promotional campaigns. As a consequence the net interest margin improved by 5 basis points to 2.76 per cent. Spread widened by 17 basis points mainly due to the impact of higher yielding residential mortgage and credit card loans and lower cost of funds in a falling interest rate environment. The contribution from net free funds fell by 12 basis points reflecting lower interest rates and a reduced volume of interest free account balances as foreign investors repatriated surplus funds. Other operating income of US$91 million was US$7 million higher than in 2000. The continuing focus on expanding HSBC’s personal banking operations generated a 15 per cent increase in credit card fee income to US$26 million. Higher profits from bond trading and higher volumes of foreign exchange transactions resulted in a 13 per cent increase in dealing profits to US$34 million. Operating expenses at US$134 million were US$15 million higher than 2000. Operating expenses, other than staff costs increased by 31 per cent mainly due to an increase in marketing initiatives to support strategic repositioning to focus more on Personal Financial Services. Provisions for bad and doubtful debts decreased by US$26 million to US$7 million. Non-performing customer loans have decreased by US$126 million or 18 per cent since 31 December 2000 as a result of a combination of credit upgrades following loan restructurings, recoveries and write-offs. The Middle Eastern operations of HSBC Bank Middle East benefited from the expansion of fee income from personal banking business and a lower charge for bad and doubtful debt provisions. Cash basis pre-tax profits were US$40 million, 23 per cent higher than in 2000. Net interest income was in line with 2000 as the benefit of increased levels of average interest-earning assets offset a fall in net interest margin. Intense competition for the limited quality lending opportunities resulted in a fall in average customer advances as scheduled repayments were received. As a result growth in average interest-earning assets of US$301 million or 4 per cent, was deposit-driven and was placed in lower-yielding money market loans. The 12 basis point fall in net interest margin to 3.84 per cent reflected the more liquid balance sheet and a lower contribution from net free funds in the falling interest rate environment. Anticipating the pressure on lending income growth HSBC Bank Middle East focused marketing activity on fee based products generating net fee income US$15 million, or 19 per cent, higher than 2000 as a result of growth in personal banking products. This was the major contributor to growth in other operating income of US$20 million, or 17 per cent higher than in 2000. HSBC’s financial planning management service (which provides savings, retirement, education and protection planning services in six countries in the region) contributed US$10 million of net fees in its first full year of operations, an increase of US$7 million. Credit card fee income increased by US$3 million, or 15 per cent, following fresh promotion of credit card products, backed by the launch of a new loyalty programme and a virtual card which facilitates secure financial internet transactions. The number of credit cards in issue increased by 25 per cent and average outstanding credit card advances were 18 per cent higher. Funds sold to customers rose by 51 per cent to US$272 million compared with 2000. A wider range of trade, cash management and institutional products also contributed to the increase in other operating income. The expansion of the personal banking sales teams and the related strengthening of the credit function across the region drove staff costs higher and was the principal contributor to operating expenses being US$19 million, or 11 per cent, higher than in 2000. Investment in new products (including the card loyalty programme), costs associated with centralisation of regional back office processes in Dubai and investment in internet service capabilities also contributed to increased operating expenses. The bank’s new internet service was soft launched in the United Arab Emirates in November 2001and a full regional launch to customers is planned for the second half of 2002. The individually significant bad debt provisions which burdened HSBC Bank Middle East in 2000 were not repeated and as a result the charge for bad and doubtful debt provisions was 30 per cent lower. This also reflected an increased level of recoveries following investment in strengthening the credit systems and collection processes. Elsewhere, HSBC operations in Korea and Thailand each contributed in excess of US$50 million to pre-tax profits and HSBC’s operations in 61 H S B C H O L D I N G S P L C Financial Review (continued) Taiwan, the Philippines and Mauritius each contributed in excess of US$25 million to pre-tax profits. Following investment to take HSBC’s stake in HSBC Bank Egypt from 40 per cent to 94.5 per cent HSBC’s return on a pre-tax basis grew to US$19 million. HSBC’s associates, The Saudi British Bank and British Arab Commercial Bank, contributed US$96 million to cash basis pre-tax profits. In Lebanon, losses of US$31 million were suffered on an operation which has subsequently been closed. In addition, increased levels of credit provisions raised against a small number of customers reduced the contribution from operations in Australia and resulted in losses being reported in Indonesia. Year ended 31 December 2000 compared with year ended 31 December 1999 Some countries in the region experienced economic or political uncertainties, while other Asian economies such as South Korea and Singapore continued to rebound on strong overseas demand. China also performed strongly, especially on the trade front. Our operations in the rest of Asia-Pacific contributed US$1,270 million, or 12 per cent, of HSBC's cash basis profit before tax. The marked improvement in profitability was largely as a result of lower bad debt charges. Evidence of continuing improvement in economic conditions in the region in both halves of 2000 led to the release of US$174 million, or 60 per cent, of the special general provision made in 1997 against Asian risk. In view of the slowdown in the US economy and its implications for the Asian economies as a whole, the balance remaining has now been transferred to augment the general provision for bad and doubtful debts. Net interest income was US$127 million higher than in 1999. This increase reflected contributions from the former RNYC operations in Singapore and Australia, lower levels of suspended interest and growth in higher yielding personal lending. There was solid growth in average interest-earning assets in several countries, most notably Korea, India and Taiwan due to the expansion of our personal banking business. Other operating income was US$102 million, or 10 per cent, higher than 1999. Improved economic 62 conditions and expanded personal business in several countries, notably Korea, India and Taiwan, led to an increase of 10 per cent in fee income, with fees from cards and account services 22 per cent and 30 per cent higher than 1999, respectively. Fee income from securities was US$22 million, or 13 per cent, lower than 1999 mainly in the bank in Indonesia, the Philippines and Thailand, reflecting subdued stock market activity. Operating expenses increased by US$135 million, or 12 per cent, over 1999 reflecting higher headcount and continued investment to support business expansion. Staff costs per employee increased by 11 per cent to US$34,000 mainly due to higher variable bonus provisions and pay rises in a number of countries around the region. There was a net release of US$15 million of provisions for bad and doubtful debts in 2000 compared with a net charge of US$809 million in 1999, due to both a significantly lower charge for new specific provisions and the release of 60 per cent of the special general provision which had been made at the end of 1997. Our operations in Thailand and Indonesia, the two countries which suffered the largest bad debt losses in 1998, both had net releases of provisions in 2000, as did Singapore. The pre-tax profits of our operations in Singapore at US$219 million, were US$90 million, or 70 per cent, better than 1999. There was a net release of bad debt provisions of US$11 million in 2000 compared with a charge of US$48 million in 1999. The improvement in the regional economy has resulted in a substantial reduction in the level of new specific provisions and increased releases of bad and doubtful debt provisions. Loan demand remained subdued, although there was encouraging growth in corporate deposits. In India, our operations benefited from the expansion of the personal banking business. Pre-tax profits at US$87 million were US$38 million, or 76 per cent, higher than 1999. Net interest income increased by US$27 million, or 38 per cent, from 1999 largely as a result of a sharp increase in higher yielding personal lending. Total personal lending grew by 94 per cent since the end of 1999 with residential mortgages increasing by 166 per cent following an intensive marketing campaign. Additionally, net interest income benefited from higher net free funds as a result of increased interest- free balances from corporate customers in the securities custody and clearing business. Dealing profits improved by US$12 million, or 44 per cent, with higher profits on interest rate derivatives trading and foreign exchange. Operating expenses rose by US$17 million, or 24 per cent, as a result of continued investment required to support the growth in business. In mainland China, the pre-tax loss of US$26 million was US$101 million lower than last year. Provisions for bad and doubtful debts and the costs of opening new branches continued to be the main factors affecting results during the year. The net charge for bad and doubtful debts in 2000 against mainland China related companies booked in branches in Hong Kong, China and Macau was only 1 per cent of the charge made in 1999. In Malaysia, HSBC Bank Malaysia reported profits before tax of US$116 million compared to a pre-tax loss of US$125 million in 1999. The charge for bad and doubtful debts and contingent liability provisions was US$243 million, or 91 per cent, lower than in 1999. increase in net interest income of 6 per cent during the year. However, strong growth in customer deposits, combined with a marginal increase in personal lending opportunities, contributed to an overall fall in interest margin to 3.95 per cent as surplus funds were deployed in the interbank market and funding costs increased. Growth in personal banking and trade related fee income contributed to an 8 per cent growth in net fees. Dealing profits were slightly lower as foreign trade flows in the region reduced opportunities in both retail and commercial foreign exchange dealings. Other income was sharply higher than in 1999 following the receipt of income from Saudi British Bank. Operating expenses, particularly staff costs, were 8 per cent higher than in 1999. The increase in staff costs reflected increased headcount resulting from the expansion of personal banking direct sales teams around the region and the introduction of qualified personal financial planning staff in the UAE as part of HSBC’s wealth management strategy. Net interest income was slightly lower as intense The charge for bad and doubtful debts during the competition for the limited quality lending opportunities restricted growth in average interest- earning assets and reduced lending margins. The net interest margin was slightly worse than in 1999 as a 5 basis point fall in interest spread was almost completely offset by an increased contribution from higher levels of net free funds. The narrowing in the interest spread was caused by a combination of pressure on lending margins and a change in asset mix as surplus funds were placed at lower yields with the Central Bank and invested through the money market. Other operating income was 5 per cent higher than in 1999. An improving economic environment, together with a focus on expanding our personal banking operations, resulted in a 29 per cent increase in card fee income. In addition, higher dealing profits from the sale of debt securities as bond prices rose also contributed to the increase. Operating expenses were in line with those in 1999. The Middle Eastern operations of HSBC Bank Middle East reported an increase in pre-tax profits of US$19 million, 12 per cent higher than in 1999. Growth in personal lending, credit card advances and commercial overdrafts contributed to an overall year was sharply lower than in 1999 reflecting a smaller number of significant individual provisions, and an improvement in vehicle finance delinquencies in the UAE. Elsewhere, operations in Indonesia, Korea and Thailand each contributed in excess of US$50 million pre-tax profits. In addition, operations in Taiwan, the Philippines and Australia, each contributed in excess of US$25 million to pre-tax profits. North America Cash basis profit before tax Figures in US$m HSBC Bank USA (excl Princeton)........................ HSBC Markets USA ............ Other USA operations .......... USA operations.................... Canadian operations ............. Princeton Note settlement ... Group internet development – hsbc.com . Intermediate holding companies ....................... Year ended 31 December 2001 1,273 (6 ) 13 1,280 230 1,510 (575 ) (161 ) (151 ) 623 2000 871 35 5 911 236 1,147 – – (154 ) 993 1999 682 8 8 698 165 863 – – 99 962 63 H S B C H O L D I N G S P L C Financial Review (continued) Year ended 31 December Figures in US$m Net interest income ............... Dividend income................... Net fees and commissions ..... Dealing profits ...................... Other income ........................ Other operating income......... Total operating income Staff costs ............................. Premises and equipment........ Other .................................... Depreciation.......................... Goodwill amortisation........... Operating expenses ............... Operating profit before 2001 2,402 29 898 324 205 1,456 3,858 (1,412 ) (317 ) (640 ) (119 ) (2,488 ) (142 ) (2,630 ) 2000 2,152 68 853 218 178 1,317 3,469 (1,390 ) (307 ) (552 ) (114 ) (2,363 ) (143 ) (2,506 ) 1999 1,687 12 593 181 163 949 2,636 (884 ) (247 ) (382 ) (69 ) (1,582 ) (3 ) (1,585 ) provisions ........................ 1,228 963 1,051 Provisions for bad and doubtful debts................... (287 ) (147 ) (108 ) Provisions for contingent liabilities and commitments.................... – other................................... – Princeton Note settlement . Amounts written off fixed asset investments.............. (7 ) (575 ) (5 ) 1 – – (1 ) – – Operating profit .................. 354 817 942 Share of operating losses in joint venture ..................... Share of operating profit/(losses) in associates ......................... Gains on disposal of investments and tangible fixed assets....................... (7 ) 5 129 Profit on ordinary activities before tax......... 481 Share of HSBC’s pre-tax profits (cash basis) (per cent) .......................... Share of HSBC’s pre-tax profits (cash basis excl. Princeton) (per cent) ........ 7.1 13.8 Share of HSBC’s pre-tax profits (per cent)............... 6.0 – (2 ) 35 850 9.6 9.6 8.7 – 4 13 959 12.0 12.0 12.0 Cost:income ratio (excluding goodwill amortisation) (per cent) .......................... Period-end staff numbers (full-time equivalent basis)................................ 64.5 68.1 60.0 18,518 18,965 19,498 64 Bad and doubtful debts Figures in US$m Loans and advances to customers – specific charge new provisions...................... releases and recoveries ......... – general (release)................. 402 (98 ) 304 (17 ) Customer bad and doubtful debt charge....................... 287 Total bad and doubtful debt charge .............................. 287 Year ended 31 December 2001 2000 1999 387 (102 ) 285 (138 ) 147 147 231 (100 ) 131 (23 ) 108 108 Customer bad debt charge as a percentage of closing gross loans and advances 0.39% 0.24% 0.20% Figures in US$m Assets Loans and advances to customers (net)... Loans and advances to banks (net).......... Debt securities, treasury bills and other eligible bills ....................................... Total assets ............................................. Liabilities Deposits by banks................................... Customer accounts.................................. At 31 December 2001 At 31 December 2000 72,064 7,864 45,200 136,526 60,835 9,279 36,770 118,053 7,602 80,022 7,221 68,389 Year ended 31 December 2001 compared with year ended 31 December 2000 The United States economy continued to deteriorate in 2001 with investment spending significantly down, particularly in the technology sectors. Despite rising unemployment, consumer spending remained resilient, boosted by lower interest rates as the Federal Reserve Bank cut short-term interest rates 11 times during the year. Although these sharply lower interest rates led to rising consumer debt, demand for corporate loans continued to weaken. For 2001 as a whole, GDP growth slowed to 1.1 per cent compared to growth of 4.1 per cent in 2000. Weaker growth and lower oil prices resulted in a sustained decline in inflation to just 1.5 per cent by the end of 2001. In New York State, unemployment has risen from a cyclical low of 4 per cent early in 2001 to 6 per cent by the end of 2001. The year was marked by the tragic events on 11 September. In New York City, HSBC responded immediately to the tragedy with a number of donations and programs to assist with the rebuilding of the community. Although HSBC Bank USA’s branch at Five World Trade Center was destroyed we were fortunate that none of our employees was killed or injured. As contingency plans were activated, communications and business activities were resumed and the resilience of New York as a city and its inhabitants was awe-inspiring to observe. Although the direct impact on HSBC’s profitability was small the effect of 11 September will remain with our staff and the Group owes a large debt of gratitude for the exemplary way they have continued to deal with our customers and the broader community in New York. Unsurprisingly, given Canada’s extremely high dependence on the US economy for trade and investment flows, Canada also registered weaker activity in 2001. Aggressive interest rate cuts limited the extent of the downturn but rising unemployment fed through into weaker consumer spending and poor corporate profits which kept investment spending weak. The Canadian dollar was slightly weaker relative to the US dollar at the end 2001. HSBC’s operations in North America contributed US$1,510 million to cash basis profit before tax; US$363 million, or 32 per cent, higher than in 2000. Non-trading items most notably the cost of the Princeton Note settlement and development costs of US$164 million incurred on HSBC’s ‘e’ commerce platform hsbc.com in its development centre in New York caused reported profit before tax to fall by US$369 million, or 43 per cent, to US$481 million. HSBC Bank USA’s operations in the United States reported an increase of US$402 million, or 46 per cent, in cash basis profit before tax (excluding the provision for Princeton Note settlement) in 2001, due largely to increased levels of net interest income and gains on disposal of securities, principally mortgage-backed. HSBC’s Canadian operations cash basis pre-tax profit of US$230 million in 2001 was US$6 million lower compared with 2000. At constant exchange rates, HSBC’s Canadian operations cash basis pre-tax profits were US$3 million higher than in 2000 as increased levels of net interest income offset higher charges for bad and doubtful debts and the losses incurred by the Canadian operations of the Merrill Lynch HSBC joint venture. Net interest income increased by US$250 million, or 12 per cent to US$2,402 million when compared to 2000. In the United States net interest income was US$222 million higher than in 2000. The increase in net interest income in HSBC Bank USA’s domestic operations of US$269 million, or 15 per cent, was partly offset by a decline in HSBC Markets USA. HSBC Bank USA’s domestic operations average interest-earning assets increased by US$4.4 billion, of which US$2.6 billion reflected strong growth in residential mortgages as home- owners took the opportunity, as interest rates fell, to re-mortgage at lower rates. Spreads on residential mortgages however widened as the steeper yield curve allowed the increase in average-interest earning assets to be funded with low costing customer deposits. In addition, spreads on treasury investment operations widened due to higher levels of available net free funds and the effects of the 11 interest rate cuts during the year. However, the net interest income decline in HSBC Markets USA reflected the impact of trading strategies during the year where funding costs were incurred as part of arbitrage operations. Net interest income was lower by US$50 million while dealing profits rose by US$86 million. Net interest income in Canada was US$28 million, or 6 per cent, higher than in 2000 (10.6 per cent at constant exchange rates) and reflected the effects of the combination of higher levels of average interest-earning assets, primarily residential mortgages, and a widening in interest spread. Other operating income was US$139 million higher than in 2000 with a solid increase in dealing profits. Dealing profits at US$324 million were US$106 million, or 49 per cent, higher than in 2000. As noted above HSBC Markets USA reported a US$86 million, or 92 per cent, increase in profits on debt securities and US treasury activities over 2000. In addition, HSBC Bank USA reported increased profits on foreign exchange trading. The dealing profits in HSBC’s Canadian operations were lower than in 2000 as operations were scaled back in the unsettled market conditions. Fee income at US$898 million was US$45 million higher than in 2000. In the United States, the harmonisation of product lines between HSBC and the former Republic Bank of New York, the volume of annuities sold (a product which is especially attractive in a low rate environment) and other wealth management initiatives all contributed to a 15.2 per cent increase in fee income. There was also a 44 per cent increase in insurance revenue when compared to 2000. Fee income in Canada, excluding the contribution to 2000 of HSBC Invest Direct (Canada) Inc (which was transferred to the Merrill Lynch HSBC joint venture in the fourth quarter of 65 H S B C H O L D I N G S P L C Financial Review (continued) 2000), was US$16 million lower than in 2000 as a 13 per cent increase in personal and commercial services revenues only partly offset lower levels of broking and capital market fees in weaker equity stock markets. As part of its strategy of providing customers with multiple choices for product and service delivery, HSBC Bank USA now offers a comprehensive Internet Banking service. At 31 December 2001, more than 275,000 customers had registered for the service, up from approximately 80,000 at year-end 2000. The HSBC Bank USA web site, us.hsbc.com, where customers can apply for accounts, conduct financial planning and link to online services, receives over 37,000 visits daily. During 2001, HSBC’s second generation strategic internet banking platform being developed in the United States hsbc.com launched its first business applications. The hsbc.com program has been designed to maximise the ability to offer any or all of our services to any or all of our customers. hsbc.com provides a common presentation and browser capability. By adopting this approach, we enhance the choices our customers have in selecting how they want to do business with us, while reducing our cost of providing the services. All the key systems, which provide our core services, are planning on integrating with hsbc.com over the next five years. Operating expenses, excluding goodwill amortisation, of US$2,488 million in 2001 were US$125 million, or 5 per cent higher than for 2000. Of this increase, US$164 million related to development costs associated with hsbc.com. Excluding these costs and adjusting for the transfer of HSBC InvestDirect (Canada) Inc, underlying costs were US$29 million, or 1 per cent, lower than in 2000. HSBC Markets USA’s operating expenses increased by US$58 million all of which related to higher staff costs reflecting higher levels of performance-related bonuses on improved trading revenues together with additional headcount building on the successful trading platform in place. Operating expenses in the domestic operations of HSBC Bank USA were 2 per cent lower compared to 2000. A reduced level of acquisition related restructuring charges in 2001 was offset by business expansion in treasury, wealth management and e- commerce, and increased marketing expenses. Higher depreciation expense resulting from infrastructure improvements represents a delayed 66 restructuring charge. In Canada, excluding HSBC Invest Direct Inc’s costs in 2000, operating expenses were US$29 million lower, or 6 per cent, of which US$24 million related to lower staff costs mainly lower performance related bonuses as a result of lower levels of trading revenues in the scaled back equity operations. Lower volumes of transaction- driven costs and continuing efforts to improve operational efficiencies reduced other operating expenses by US$5 million. Credit quality deteriorated modestly during 2001. In the United States new specific provisions of US$313 million, were US$25 million lower than in 2000 and took into account requirements against an exposure to a corporate customer in the energy sector. An increase in new specific provisions in Canada of US$40 million related to the deterioration of a small number of commercial facilities, notably in the telecommunications sector. Releases and recoveries were consistent with 2000 and the net increase in the bad and doubtful debt charge of US$140 million reflects the release of general provision in the United States in 2000 not repeated in 2001. In terms of non-performing loans overall credit quality remained stable in 2001 with non-performing loans at 31 December 2001 at US$627 million compared with US$643 million at 31 December 2000. It is, however, still too early to determine the medium to longer-term effect that the events of 11 September, the impact on market liquidity of the Enron collapse and the general economic slowdown may have on the overall credit portfolio. Gains on disposal of investments amounted to US$129 million, an increase of US$94 million compared with 2000. During the year, but substantially in the first half, HSBC’s operations in the United States sold mortgage-backed securities to reduce exposure to refinancing mortgages in a declining interest rate environment. Year ended 31 December 2000 compared with year ended 31 December 1999 Economic growth in the United States in 2000 was strong at 5 per cent with inflation at 3.4 per cent. In New York State, where the majority of HSBC’s business is done, personal incomes grew 4.8 per cent in the first three quarters of 2000, compared to 6.7 per cent for the national economy. The Canadian economy remained strong in 2000 as GDP increased 5.0 per cent in real terms. The unemployment rate was 6.8 per cent (nearly a 25 year low) and inflation rose slightly to 2.7 per cent. The Canadian dollar was slightly higher relative to the US dollar at year-end 2000. HSBC’s operations in North America contributed US$850 million, or 9 per cent, to HSBC's profit before tax compared with US$959 million in 1999. The decrease is mainly due to the funding cost of debt injected into the United States as part of the financing of the RNYC acquisition and the related goodwill amortisation charge. In addition, US$271 million profits of RNYC are reported in other geographical segments. Cash earnings were US$993 million in 2000 compared with US$962 million in 1999. In the United States, following the acquisition of RNYC on 31 December 1999, the year 2000 was largely one of efficiently integrating RNYC within HSBC’s existing operations. During 2000, HSBC Bank USA emphasised customer retention and the growth of its wealth management business. Customer deposits in HSBC Bank USA were up 5 per cent compared with 31 December 1999 and funds under management were up US$3.6 billion, or 14 per cent, to US$30.3 billion at 31 December 2000. Total customer holdings, both on and off balance sheet, for International Private Banking increased by more than 18 per cent compared with 31 December 1999. Canadian operations reported cash basis pre-tax profits 43 per cent higher in 2000 than in 1999. Net interest income increased by US$465 million, or 28 per cent, compared with 1999. In the United States, interest-earning assets more than doubled following the RNYC acquisition. The benefit of this increase was partly offset by a reduced margin due to the dilutive impact of RNYC’s lower margin but high quality balance sheet and the funding costs of the acquisition. In Canada, net interest income was US$85 million, or 23 per cent, higher compared with 1999. This was achieved through continued loan growth, especially in commercial advances, and an improved net interest margin together with the benefit of the acquisition of the former RNYC operations in Canada. The improvement in net interest margin in Canada resulted from the continued focus on loan pricing, asset repricing ahead of deposits as prime base rates increased in the first half, and the benefit of lower funding costs as less reliance was placed on wholesale deposits. Other operating income at US$1,317 million in 2000 was US$368 million, or 39 per cent, higher than 1999. In the United States, revenues from domestic wealth management exceeded US$200 million during 2000, up 18 per cent compared with the combined results of the two organisations in 1999. Life insurance revenues in 2000 more than doubled compared with 1999. Aside from wealth management, other fees and commissions were stable. In Canada, other operating income increased by US$37 million, or 15 per cent, compared with 1999. This increase was mainly driven by higher securities commissions generated by retail client transactions, particularly in the strong equity markets in the first half of the year. Mutual fund fee income also increased due to higher net sales volumes and increases in market values. Corporate finance fees also benefited from the favourable market conditions in 2000. A lower contribution from structured equity transactions led to lower dealing profits in Canada compared with 1999. Operating expenses increased by US$921 million in 2000 compared with 1999. In the United States, operating costs were US$871 million higher than in 1999 principally due to the acquisition of RNYC. Acquisition related cost savings were realised in most support and administrative areas and to a lesser extent in certain front line businesses. Approximately 75 per cent of the targeted domestic savings as a result of the merger were realised and another 15 per cent identified. In conjunction with the rationalisation efforts of both front and back office operations, investments were made in employee compensation and benefit programmes and in operations and technology. Year-end 2000 results included US$74 million of restructuring costs. Consolidation of most premises and a majority of systems took place throughout 2000, but it is anticipated that some further restructuring costs will be incurred in 2001 and additional related cost savings will be realised. Operating expenses in Canada were US$55 million, or 12 per cent, higher in 2000 compared with 1999. The increase was primarily attributable to RNYC operations and performance-related compensation and volume driven expenses reflecting the increased securities commission income. The cost:income ratio, excluding amortisation of goodwill and intangible assets, fell to 65.6 per cent, an improvement of 4.4 67 H S B C H O L D I N G S P L C Financial Review (continued) per cent over 1999. Latin America Provisions for bad and doubtful debts were Cash basis profit before tax Figures in US$m Brazil.................................... Argentina.............................. Chile .................................... Mexico ................................. Panama ................................. Other .................................... Year ended 31 December 2001 136 (1,152 ) 17 14 11 (3 ) (977 ) 2000 208 112 8 9 2 (15 ) 324 Year ended 31 December Figures in US$m Net interest income............... 2001 1,113 Dividend income .................. Net fees and commissions..... Dealing profits...................... Other income ........................ Other operating income ........ 12 509 40 358 919 2000 1,219 8 480 68 397 953 1999 244 65 12 – 5 2 328 1999 1,097 11 391 64 324 790 Total operating income 2,032 2,172 1,887 Staff costs ............................. Premises and equipment ....... Other .................................... Depreciation ......................... Goodwill amortisation .......... Operating expenses............... (864 ) (159 ) (448 ) (78 ) (1,549 ) (17 ) (1,566 ) (906 ) (167 ) (495 ) (67 ) (1,635 ) (13 ) (1,648 ) (801 ) (148 ) (415 ) (76 ) (1,440 ) (10 ) (1,450 ) Operating profit before provisions........................ 466 524 437 Provisions for bad and doubtful debts .................. (940 ) (204 ) (133 ) Loss from foreign currency redenomination in Argentina ......................... Amounts written off fixed (520 ) asset investments ............. (1 ) – (1 ) – (2 ) Operating (loss)/profit ........ (995 ) 319 302 Share of operating profit in associated undertakings.... Gains/(losses) on disposal of investments and tangible fixed assets ...................... (Loss)/profit on ordinary 1 – 1 (9 ) 11 5 activities before tax ........ (994 ) 311 318 Share of HSBC’s pre-tax profits (cash basis) (per cent)................................. (11.1 ) Share of HSBC’s pre-tax profits (per cent) .............. (12.4 ) 3.2 3.2 4.1 4.0 Cost:income ratio (excluding goodwill amortisation) (per cent) Period-end staff numbers 76.2 75.3 76.3 (full-time equivalent) ....... 28,292 25,907 27,181 US$39 million higher than in 1999. In the United States, provisions were made in 2000 of US$138 million, compared with US$90 million in 1999, partly attributable to some deterioration in the quality of leveraged credits which constitute a small portion of outstanding advances. The allowance for credit losses of over US$500 million represents coverage against non-accrual loans of 124 per cent. In Canada, due to the continuing strong economy and good credit quality, provisions for credit losses remained low. 68 Bad and doubtful debts Figures in US$m Loans and advances to customers – specific charge new provisions ..................... releases and recoveries ......... – additional general charge for Argentine exposure .... – general charge/(release) ..... Customer bad and doubtful debt charge ...................... Total bad and doubtful debt charge .............................. Customer bad debt charge as a percentage of closing gross loans and advances . Year ended 31 December 2001 2000 1999 440 (134 ) 306 600 34 940 940 302 (100 ) 202 – 2 204 204 194 (66 ) 128 – 5 133 133 15.03% 2.75% 2.25% Figures in US$m Assets Loans and advances to customers (net)....... Loans and advances to banks (net) ............. Debt securities, treasury bills and other eligible bills ........................................... Total assets................................................. Liabilities Deposits by banks....................................... Customer accounts ..................................... At 31 December 2001 At 31 December 2000 5,180 2,367 3,847 15,210 1,849 8,556 6,849 3,362 5,281 19,073 2,644 10,265 Year ended 31 December 2001 compared with year ended 31 December 2000 The main focus in Latin America has been Argentina, where following the inability to secure a financing package from the International Monetary Fund (‘IMF’), the Argentine government introduced measures to restrict the withdrawal of US dollar denominated deposits and the transfer of monies abroad. Following the declaration of a state of siege by the Argentine government, in late December, the president and the three subsequent incumbents resigned within a space of two weeks. In January 2002 the new president, Eduardo Dulhalde, formally announced that Argentina would default on its sovereign debt and at the same time announced the “pesification” of certain in-country US dollar denominated assets and liabilities. In addition, after a brief period of dual exchange rates (with a floating rate for financial transactions and a fixed rate for trade), the fixed exchange rate policy of one-to-one parity with the US dollar was abandoned and the peso moved to a freely floating basis. Against this background of uncertainty and turmoil the Argentine economy contracted by around 5 per cent in 2001, the third successive year of recession. This economic downturn is forecast to worsen during 2002. Encouragingly, despite the Argentine crisis, the Brazilian economy remained relatively stable. Initially the Argentine crisis prompted a sharp devaluation of the real which prompted the Central bank to raise interest rates by 375 basis points, between January 2001 and July 2001, to control inflationary pressures and dampen domestic demand. In the fourth quarter, a combination of sharp cuts in US interest rates and an improved Brazilian current account balance resulted in the real recovering to be only 15.6 per cent lower against the US dollar over the course of 2001. It is anticipated that GDP growth in 2001 was around 2 per cent (compared to forecast growth of 4 per cent) with inflation slightly higher at 7.7 per cent compared with 5.97 per cent in 2000. HSBC’s operations in Latin America reported a cash basis pre-tax loss of US$977 million in 2001 compared with a cash basis pre–tax profit of US$324 million in 2000. In view of the continuing unsettled and deteriorating economic environment in Argentina, the bad debt charge arising on HSBC’s Argentine exposure was US$737 million, US$681 million higher than that in 2000, and included a US$600 million additional general provision charge raised against this exposure. In addition, the 2001 pre-tax loss included a loss of US$520 million arising from the pesification of HSBC Argentina’s US dollar assets and liabilities at mandatory differing rates of exchange which destroyed capital in the Argentine banking system. In Brazil, cash basis profit before tax of US$136 million, US$72 million lower than in 2000, reflected curtailment in the rate of credit expansion during 2001 as a consequence of volatility in foreign exchange and interest rate markets reflecting concerns over the Argentine economy, energy shortages and political uncertainties. At constant exchange rates, cash basis pre-tax profits in Brazil were only US$28 million lower than in 2000. The following commentary on Latin America’s results is based on constant exchange rates. Net interest income in Latin America at US$1,113 million was US$86 million higher than in 2000. In Brazil net interest income was US$98 million, or 14 per cent, higher than in 2000 reflecting increased levels of corporate and retail lending (principally arising from the full years contribution from CCF’s Brazilian operations) and holdings of US dollar linked securities to take advantage of wider spreads from lower funding costs. This was partly offset by a decline in HSBC Bank Brasil’s net 69 H S B C H O L D I N G S P L C Financial Review (continued) interest margin reflecting a change in asset mix to an increase in the proportion of less risky but lower- yielding assets. In Argentina, net interest income was US$17 million lower than in 2000 and reflected higher funding costs on rising interest rates. In Panama, net interest income, following the acquisition in the second half of 2000 of Chase Manhattan Bank branches, was US$29 million higher than in 2000. Other operating income of US$919 million was US$89 million, or 10.7 per cent, higher than in 2000 with an increase of US$109 million in fee income. In Brazil, fee income increased by US$79 million, or 27.6 per cent, as the HSBC Brazilian operation continued to develop wealth management business, particularly asset management activities, and the successful cross-sales of products to existing customers through the retail branch network. Fees from asset management grew by 48 per cent compared to 2001 and at 31 December 2001 funds under management stood at US$9.0 billion (US$3.9 billion of which arose from the acquisition of CCF Brasil). In total, funds under management by our Brazilian operations now rank fifth largest in Brazil. Life insurance premia grew by 24 per cent and now represent 36 per cent (34 per cent in 2000) of total insurance premia. In Argentina, fee income was US$30 million, or 32.6 per cent, higher than in 2000. Initiatives taken to improve revenue mix were reflected in higher levels of fees from credit cards and asset management. In addition, fee income reflected fees earned from being an arranger and market-maker for Argentine government bond auctions. The increased contribution from fee income was partly offset by lower levels of dealing profits. Brazil’s dealing profits of US$20 million were US$7 million lower than in 2000 as losses were incurred on interest rate trading positions as interest rates rose. These losses were only partly offset by higher levels of dealing profits on foreign exchange and debt securities trading. Argentina reported dealing losses of US$6 million compared to dealing profits of US$16 million in 2000. This resulted from difficult trading conditions as a result of volatility in foreign exchange rates and losses on bond positions. HSBC’s Argentine pensions, healthcare and life insurance businesses also reported falls in income as rising unemployment and collapsing economic conditions led to a 6 per cent fall in healthcare membership, reduced contributions to pensions funds 70 and a reduction in annuities business. Operating expenses, excluding goodwill amortisation, of US$1,549 million were US$152 million, or 10 per cent, higher than 2000. In Brazil operating expenses of US$1,023 million, were higher by US$141 million reflecting the acquisition of CCF Brasil and restructuring provisions. As economic conditions became less certain cost controls were put in place to restrain operating expense growth with a number of contracts renegotiated. Investment in electronic distribution channels continued and HSBC Bank Brasil’s internet and wireless banking services expanded with a twofold increase in the number of registered Internet Bank users since December 2000, to 420,000 performing on average 1.9 million on-line transactions a month. The newer Wireless Services, which encompass e-mail, Cellular and Palm Banking, have 24,000 users, a 40 per cent increase since June 2001. In Argentina, cost controls were rigorously enforced and the increase in operating expenses of US$11 million was due mainly to the write-down to market value of certain properties now considered to be permanently impaired. Provisions for bad and doubtful debts of US$940 million increased by US$768 million compared to 2000. In Brazil, the significant increase in provisioning requirements of US$80 million reflected a change in the lending portfolio mix. Targeted growth in the high margin personal lending portfolio led to an expected and corresponding increase in delinquencies and provisioning levels rose to reflect the underlying risks within the consumer portfolio. In Argentina, provisions for bad and doubtful debts rose substantially to reflect the disastrous economic conditions and financial uncertainties. This is reflected in the US$681 million increase in the bad and doubtful debt provisions to US$737 million compared to US$56 million in 2000. Year ended 31 December 2000 compared with year ended 31 December 1999 HSBC’s operations in Latin America contributed US$324 million to HSBC’s cash basis profit before tax in 2000, in line with 1999, which included exceptional profits earned from the volatility in the Brazilian financial markets in the first half of 1999. On 1 August, HSBC Bank USA completed the acquisition of Chase Manhattan's branch operations in Panama. The 11 branches acquired added US$752 million of assets. In Brazil, a more favourable economic background in 2000, coupled with the focus on delivering HSBC’s Global Strategic goals in Brazil, resulted in a strong performance in 2000. Brazilian operations (excluding Banco CCF Brasil S.A.) contributed US$206 million to pre-tax profits in 2000. Second half pre-tax profits of US$84 million were US$38 million lower than the first half reflecting higher credit costs and restructuring charges of US$17 million incurred to achieve further operational efficiencies and to integrate Banco CCF Brazil. The economic environment in the second half of 2000 was characterised by concerns over the Argentinian economy and a greater perceived likelihood of a sharp US slowdown. Despite volatility in the Brazilian foreign exchange and interest rate markets, Brazil’s economic fundamentals remained steady with GDP growth of 4 per cent and inflation at 5.97 per cent, in line with the Government's target for 2000, and an improvement on 8.64 per cent inflation in 1999. The improved economic environment allowed interest rates to fall by nearly 300 basis points from December 1999. HSBC’s strategy of embracing internet technology in the delivery of its services has developed rapidly in Brazil. HSBC Brasil has offered internet banking since 1998 to its personal and small business customers and has 200,000 registered users. As of November 2000, internet based services were extended to include WAP access through Brazil’s cellular phone network. In Argentina, a negative economic environment, exacerbated by higher oil prices and US economic uncertainty, produced an increase in the Argentine risk premium of up to 10 per cent. Since the end of the year, the spread on Argentinian government paper has fallen by 90 basis points. Although GDP growth for the year ended 31 December 2000 improved markedly over 1999, when it fell by 4 per cent, it was still negative and thus adversely impeded opportunities for growth. Nevertheless, the bank in Argentina continued to follow its strategy of creating an integrated financial services group and, despite the economic recession, HSBC’s Argentinian operations achieved pre-tax profits of US$107 million compared to US$67 million in 1999. Net interest income in Latin America at US$1,219 million in 2000 was US$122 million higher than in 1999 with the largest increases in Brazil and Argentina, together with smaller increases due to the Panama acquisition and the former RNYC operations in Mexico and Uruguay. In Brazil, net interest income was US$886 million, 5 per cent higher than in 1999. This reflected a 20 per cent increase in average interest-earning assets with robust growth achieved in interest-earning commercial and retail assets, particularly in the areas of consumer credit and corporate working capital loans. There was a decline in the net interest margin of 168 basis points principally due to lower interest rates. In Argentina, net interest income was US$262 million, US$16 million higher than 1999, principally as a result of higher volumes of investment securities than in 1999. The economic uncertainty had an impact on both the volume of the lending portfolio and overall rates. The funding base continued to grow, but this growth was largely deployed in liquid assets causing spreads to drop from 5.54 per cent to 4.95 per cent because of a more liquid asset mix and increased borrowing rates. Other operating income was US$163 million higher than 1999 with Argentina contributing US$77 million and Brazil US$53 million to the increase. In Argentina, initiatives taken to improve both the volume and quality of the earnings stream included cross selling marketing campaigns, the launch of an incentives and rewards programme and a drive to improve service quality, in particular for bancassurance and HSBC Premier clients. Actions taken in prior years to curtail unprofitable motor portfolios and increase the use of scoring in sales of new products helped La Buenos Aires, the general insurance business, to achieve an improved underwriting profit of US$2.4 million despite weak market conditions. An improved result was also reported in the life assurance and annuity business. Total funds under management grew by some 39 per cent from 1999 to 2000, from US$3.1 billion to US$4.3 billion, principally within the pension plan administrator, Maxima. Mutual funds also grew and, despite the economic recession, market share improved from 5.9 per cent to 6.1 per cent reaching fifth position in the rankings. Brazilian operations continued to develop their wealth management business, in the form of insurance and asset management products, and growing commercial and retail business. Asset Management operations in Brazil also continued to expand as a result of organic growth and the addition 71 H S B C H O L D I N G S P L C Financial Review (continued) of Banco CCF Brasil SA (‘CCF Brasil’). Funds under management stood at US$10.8 billion as at December 2000, compared with US$4.1 billion as at the end of 1999. CCF Brasil contributed US$5.6 billion of this increase. In total, funds under management by our Brazilian operations now rank fourth largest in Brazil, as at June 2000, compared to tenth at December 1999. Operating expenses at US$1,648 million in 2000 were US$198 million higher than in 1999. Operating expenses in Brazil were US$56 million higher than in 1999. Cost increases reflected business growth and restructuring to achieve operating efficiencies and integrate CCF Brasil with HSBC’s existing operations in Brazil. In Argentina, expenses rose by US$55 million to US$445 million. Staff costs grew by US$48 million as a result of a higher headcount and an increase in average salaries and bonuses. Controls were put in place to restrain operating expense growth with a number of contracts renegotiated in areas such as communications and mailing and marketing campaigns. These initiatives together with other one off impacts partially offset the higher staff costs. The cost:income ratio improved slightly to 73 per cent. Provisions for bad and doubtful debts increased by US$71 million compared with 1999. In Brazil, there was a significant increase in provisioning requirements in the second half of the year reflecting changes in asset mix. Strong growth in the consumer book brought with it a corresponding increase in delinquencies and provisioning levels rose to reflect the underlying risks within the consumer portfolio. Provisioning on consumer lending was adequately covered by the interest revenue earned on these products and it is HSBC policy to make a full provision for delinquent consumer credit after 180 days. In Argentina, provisions for bad and doubtful debts in 2000 of US$56 million represented 2.1 per cent of average loans and advances to customers and were US$18 million lower than 1999 although still impacted by the weak economic environment. Non- performing loans at US$579 million were US$215 million higher than December 1999 reflecting the weak economy. Consistent with HSBC’s strong focus on capital management, Brazil paid dividends and capital repatriations of US$179 million during the year, bringing total dividends and remitted capital since December 1998 to US$373 million. 72 CCF Brasil made a small contribution to HSBC pre-tax profits. Analysis by line of business The data presented on pages 73 and 74 reflects an analysis of HSBC’s results and of certain key balance sheet amounts, according to the lines of business described on pages 20 to 24. This provides additional and complementary analysis to HSBC’s segmental reporting by geographic region. The results are presented in accordance with the accounting policies used in the preparation of HSBC’s consolidated financial statements. HSBC’s operations are closely integrated and, accordingly, the presentation of line of business data includes internal allocations of certain items of income and expenses. These allocations include the costs of certain support services and head office functions, to the extent that these can be meaningfully attributed to operational business lines. While such allocations have been made on a systematic basis they necessarily involve a degree of subjectivity. Where relevant, income and expense amounts presented include the results of inter-company and inter-business line transactions. Such transactions are generally undertaken on arm’s-length terms. Inter- business line funding and placement of surplus funds is generally undertaken at market interest rates.The reported results of each line of business include the funding benefit of the shareholders’ funds allocated to that business. Shareholders’ funds are generally allocated to lines of business on the basis of economic capital measures including the relative risk weighted assets of each operation. Key balance sheet data is presented below. Comparative data for line of business reporting is presented for 2000 only, as it is not practicable to produce this data for 1999. The data previously presented analysing HSBC’s performance between commercial and investment banking is no longer presented, as this does not reflect the way that HSBC now analyses its business. In the analysis of profit by line of business which follows, total operating income and operating expenses include intra-HSBC items of US$1,083 million in 2001 and US$940 million in 2000. These amounts represent the other operating income and expenses arising from inter-company transactions within and between HSBC’s geographic regions. These items have been eliminated in arriving at total amounts for other income and operating expenses in the tables below. Accordingly the total amounts for Profit on ordinary activities before tax – cash basis these lines are less than the sum of the reported business lines. Figures in US$m Year ended 31 December 2001 Net interest income................................................ Personal Financial Services 6,876 Commercial Banking 3,821 Corporate, Investment Banking and Markets 3,418 Dividend income ................................................... Net fees and commissions ..................................... Dealing profits....................................................... Other income......................................................... Other operating income ......................................... 5 2,962 53 856 3,876 Total operating income ....................................... 10,752 7 1,671 103 422 2,203 6,024 138 2,117 1,411 568 4,234 7,652 Private Banking 530 4 596 124 63 787 1,317 Other 80 32 124 (6 ) 996 1,146 1,226 Total 14,725 186 7,470 1,685 1,822 11,163 25,888 Operating expenses (excluding goodwill amortisation)..................................................... (6,608 ) (3,036 ) (3,899 ) (891 ) (1,254 ) (14,605 ) Operating profit before provisions ..................... 4,144 Provisions for bad and doubtful debts.................... Argentine general provision................................... Provisions for contingent liabilities and commitments .................................................... Princeton Note provision ....................................... Loss from currency redenomination in Argentina.. Amounts written off fixed asset investments ......... (772 ) – (17 ) – – (5 ) 2,988 (662 ) – 16 – – (1 ) 3,753 (34 ) – (14 ) – – (72 ) Operating profit................................................... 3,350 2,341 3,633 Share of operating profit/(loss) in joint ventures and associates ................................................... Gains on disposal of investments and tangible fixed assets ....................................................... Profit/(loss) on ordinary activities before tax (56 ) 210 34 10 43 354 426 29 – (46 ) – – (2 ) 407 – 5 (28 ) 2 (600 ) (13 ) (575 ) (520 ) (45 ) 11,283 (1,437 ) (600 ) (74 ) (575 ) (520 ) (125 ) (1,779 ) 7,952 60 195 81 774 (cash basis) ...................................................... 3,504 2,385 4,030 412 (1,524 ) 8,807 Share of HSBC’s pre-tax profits (cash basis) (per cent).................................................................. Cost:income ratio (excluding goodwill 39.8% 27.1% 45.8% 4.7% (17.4% ) 100.0% amortisation) (per cent)..................................... 61.5% 50.4% 51.0% 67.7% 102.3% 56.4% Year ended 31 December 2001 Personal Financial Services Commercial Banking Corporate, Investment Banking and Markets Europe................................................................... Hong Kong............................................................ Rest of Asia-Pacific............................................... North America....................................................... Latin America........................................................ 1,091 1,631 80 653 49 986 726 277 372 24 1,438 1,244 725 438 185 Private Banking 310 84 (16 ) 37 (3 ) Other 357 198 30 (877 ) (1,232 ) Total 4,182 3,883 1,096 623 (977 ) Profit/(loss) on ordinary activities before tax (cash basis) ...................................................... 3,504 2,385 4,030 412 (1,524 ) 8,807 Selected balance sheet data (third party items only) at 31 December 2001 Figures in US$m Loans and advances to customers (net) ....................... Personal Financial Services 114,982 Commercial Banking 81,999 Corporate, Investment Banking and Markets 99,254 Private Banking 11,005 Other 1,409 Total 308,649 Customer deposits....................................................... 229,903 81,038 88,612 50,233 205 449,991 The following assets and liabilities were also significant to Corporate, Investment Banking and Markets Loans and advances to banks (net) .............................. Debt securities, treasury bills and other eligible bills... Deposits by banks ....................................................... 83,312 155,330 49,785 73 H S B C H O L D I N G S P L C Financial Review (continued) Profit on ordinary activities before tax – cash basis Figures in US$m Year ended 31 December 2000 Net interest income ................................................ Personal Financial Services 6,530 Commercial Banking 3,541 Corporate, Investment Banking and Markets 2,849 Dividend income.................................................... Net fees and commissions ...................................... Dealing profits ....................................................... Other income ......................................................... Other operating income.......................................... 1 2,753 97 760 3,611 Total operating income ........................................ 10,141 3 1,579 82 368 2,032 5,573 148 2,287 1,370 610 4,415 7,264 Operating expenses (excluding goodwill amortisation) ..................................................... (6,390 ) (2,636 ) (3,814 ) Operating profit before provisions (cash basis) . Provisions for bad and doubtful debts .................... Provisions for contingent liabilities and commitments..................................................... Amounts written off fixed asset investments .......... 3,751 (602 ) (31 ) – 2,937 (202 ) 5 2 3,450 (146 ) (10 ) (33 ) Operating profit (cash basis) ............................... 3,118 2,742 3,261 Share of operating profit/(loss) in joint ventures and associates.................................................... Gains on disposal of investments and tangible fixed assets........................................................ Profit on ordinary activities before tax (cash (96 ) 15 26 12 59 243 basis) ................................................................ 3,037 2,780 3,563 Private Banking 547 2 541 110 50 703 1,250 (714 ) 536 (6 ) – (4 ) 526 2 19 547 Other 256 43 151 (33 ) 868 1,029 1,285 Total 13,723 197 7,311 1,626 1,716 10,850 24,573 (963 ) (13,577 ) 322 24 (35 ) (1 ) 310 48 15 373 10,996 (932 ) (71 ) (36 ) 9,957 39 304 10,300 Share of HSBC’s pre-tax profits (cash basis) (per cent) .................................................................. 29.5% 27.0% 34.6% 5.3% 3.6% 100.0% Cost:income ratio (excluding goodwill amortisation) (per cent) ..................................... 63.0% 47.3% 52.5% 57.1% 74.9% 55.3% Year ended 31 December 2000 Personal Financial Services Commercial Banking Corporate, Investment Banking and Markets Private Banking Europe ................................................................... Hong Kong ............................................................ Rest of Asia-Pacific ............................................... North America ....................................................... Latin America ........................................................ 624 1,680 189 507 37 1,139 781 376 376 108 1,501 1,012 666 213 171 Profit on ordinary activities before tax (cash basis) ................................................................ 3,037 2,780 3,563 406 85 (1 ) 49 8 547 Other 351 134 40 (152 ) – Total 4,021 3,692 1,270 993 324 373 10,300 Selected balance sheet data (third party items only) at 31 December 2000 Figures in US$m Loans and advances to customers (net) ........................ Personal Financial Services 104,655 Commercial Banking 79,103 Corporate, Investment Banking and Markets 92,845 Private Banking 11,182 Other 2,052 Total 289,837 Customer deposits........................................................ 216,454 82,113 80,417 47,611 474 427,069 The following assets and liabilities were also significant to the Corporate, Investment Banking and Markets Loans and advances to banks (net) ............................... Debt securities, treasury bills and other eligible bills.... Deposits by banks ........................................................ 100,073 134,823 55,700 74 Year ended 31 December 2001 compared with year ended 31 December 2000 All commentary is made on a cash basis, that is excluding the impact of goodwill amortisation. Personal Financial Services Personal Financial Services contributed US$3,504 million to pre-tax profits in 2001 and represented 39.8 per cent of such profits. Growth in pre-tax profits over 2000 amounted to US$467million, an increase of 15 per cent. This was driven by good growth in operating profits before provisions with revenues rising 6 per cent against cost growth of 3 per cent. Reflecting significant growth in personal lending, provisions for bad and doubtful debts rose US$170 million an increase of 28 per cent. Disposal gains were exceptionally high as a result of the disposal of the Group’s interest in British Interactive Broadcasting. Net interest income increased by US$346 million or 5 per cent. Within this, net interest income in Europe rose by US$217 million, mainly reflecting the inclusion of a full year’s income for CCF in 2001. Excluding the impact of CCF, net interest income in Europe was effectively flat. In the UK, the benefit of customer deposit growth was offset by the impact on margins of competitive pricing initiatives in mortgages and savings accounts. In Hong Kong net interest income rose by US$41 million as the benefits of increased credit card lending and wider spreads on non-Hong Kong dollar lending were largely offset by lower spreads on Hong Kong Dollar savings and deposit accounts and on residential mortgages. Net interest income for the Rest of Asia-Pacific rose by US$53 million with encouraging growth in most entities in the region. In North America increased net interest income of US$96m reflected wider margins as funding costs fell more quickly than lending, particularly mortgage lending, repriced. The decline in funding costs was further helped by a switch by depositors away from fixed rate CDs to lower-paying savings and current accounts. Net fees and commissions rose by US$209 million or 8 per cent on the year. US$128 million of this rise was in Europe, again mainly reflecting the inclusion of a full year of results for CCF. Fees in the UK fell slightly as lower overdraft fees and the effect of removing ATM fees on the LINK network and mortgage valuation fees were only partially offset by growth in wealth management income and fees on investment products. Net fees in Hong Kong were up by US$76 million, with outstanding success in fees earned from sales of capital-guaranteed funds. In North America fee income was effectively unchanged; strongly rising wealth management income and fees from high levels of mortgage augmentation were offset by increased write-offs of mortgage servicing rights as mortgage prepayments rose in response to falling interest rates. The mortgage business also suffered losses on instruments held as hedges against the value of mortgage servicing rights; such losses are reflected in dealing profits. Overall the mortgage business generated positive net interest and non-interest income. Other income rose by US$96 million, primarily in Hong Kong due to strong growth in life insurance income fees and the growth in embedded value in this business. Operating expenses increased by US$218 million or 3 per cent, mainly reflecting a US$139 million rise in staff costs and US$43 million of increased premises and equipment expenses. In Europe, expenses rose by US$229 million, mainly due to the inclusion of a full year’s costs for CCF. Excluding this increase, costs in Europe were down. In constant currency terms, the UK bank’s staff costs rose 4 per cent due to annual pay rises and increased headcount in wealth management and customer telephone services. Costs in Hong Kong increased by US$147 million, reflecting increased marketing and IT costs, together with the impact of annual salary increments and expansion of the cards business and Mandatory Provident Fund services. In the rest of Asia-Pacific, a US$96 million rise in costs included increased costs following acquisitions and branch openings, higher costs associated with the expansion of wealth management services, costs of mortgage incentives in Malaysia and branch expansion in a number of countries. Operating costs declined by US$72 million in North America mainly due to the non-recurrence of restructuring costs associated with the RNYC acquisition in 2000, partly offset by increased wealth management expenses together with lower performance-based salaries in Canada. Costs in Latin 75 H S B C H O L D I N G S P L C Financial Review (continued) America were lower by US$182 million, mainly due to the effect of exchange rate changes in Brazil. Local currency costs were up slightly in Brazil, reflecting higher transactional taxes. Provisions for bad and doubtful debts rose from US$602 million to US$772 million. In Europe lower provisions (down by US$58 million), partly reflected improved recovery procedures in First Direct and the cards portfolio. Provisions in Hong Kong rose by US$94 million as the weakening economic environment led to an increase in personal bankruptcies and this, together with a rise in card lending, resulted in increased provisions on credit cards. Provisions in the Rest of Asia-Pacific rose by US$84 million, with higher charges in Taiwan and the non-recurrence of the benefit seen in 2000 from the release of part of the Asia special general provision. Latin American loan losses rose by US$37 million, including US$11 million in Argentina due to the economic situation in the country. Latin American provisioning excludes the exceptional provision taken against 2001 results following the formal default of sovereign debt and the pesification of the banking system. Brazil’s growing provisioning requirements reflected planned expansion of the personal lending portfolio in 2000. Provisions for contingent liabilities and commitments saw a US$17 million charge in the year, compared with US$31 million in 2000, all of which arose in Europe. The 2001 charge included US$13 million relating to CCF. Losses from associated undertakings reduced by US$40 million, mainly reflecting the sale of British Interactive Broadcasting which also contributed US$202 million to profit on disposal of fixed asset investments. In other associates and joint ventures, an improved performance in Cyprus partly offset higher losses in Merrill Lynch HSBC and lower profits in the personal banking business of Saudi British Bank. Commercial The commercial line of business contributed US$2,385 million to pre-tax profits in 2001 and represented 27.1 per cent of such profits. Pre-tax profits were US$395 million lower, a decline of 14 per cent reflecting higher net provisions for bad and doubtful debts as recoveries fell and the impact of the release of the Asian special general provision in 2000 was not repeated. Operating profits before 76 provisions were up slightly, by US$51 million or 2 per cent. Net interest income increased by US$280 million or 8 per cent. Net interest income in Europe rose by US$254 million, mainly reflecting the inclusion of a full year’s income for CCF in 2001. Excluding the impact of CCF, net interest income in Europe was down slightly, mainly due to foreign exchange movements. Underlying net interest income in the UK was broadly unchanged, as significant growth in UK commercial loans and deposits was offset by falling margins due to lower base rates and increased competitive pressures. Net interest income in Hong Kong fell slightly, by US$44 million, due to lower margins on current account deposits. The Rest of Asia-Pacific saw a small rise in net interest income as the benefit of lower funding costs in the Middle East offset lower margins in Singapore. North America saw strong growth in net interest income, which rose by US$82 million reflecting organic growth, increased commercial deposit levels and improved margins in commercial real estate lending. Net fees and commissions rose by US$92 million or 6 per cent against 2000. The main part of this rise was in Europe, again mainly reflecting the impact of including a full year of results for CCF. Fees in the UK were broadly flat in constant currency terms. Operating expenses increased by US$400 million or 15 per cent, within which US$227 million reflected a rise in staff costs and US$64 million increased premises and equipment. Again, the inclusion of a full impact for CCF was the main contributor. Provisions for bad and doubtful debts rose sharply from US$202 million to US$662 million. Of the increase in Europe (up by US$171 million), US$60 million related to CCF, with the remainder mainly reflecting higher provisions in the UK due to the less favourable economic environment and pressures on UK manufacturing industry. Provisions in the Rest of Asia-Pacific rose by US$123 million, notably due to further charges in Indonesia and the non-recurrence of the benefit seen in 2000 from the release of the special general provision. In North America provisions rose by US$98 million, reflecting losses in receivables lending and equipment lending. Canada also experienced increased loan losses, particularly to one name in the telecommunications sector. Latin American loan losses rose by US$68 million, including US$58 million in Argentina, with increased losses in Brazil. Corporate, Investment Banking and Markets Corporate, Investment Banking and Markets contributed US$4,030 million of pre-tax profits in 2001 representing 45.8 per cent of such profits. Compared with 2000, pre-tax profits were US$467 million higher, an increase of 13 per cent, driven by lower bad debt charges and a substantial increase in net interest income in the markets business in the falling interest rate environment. Net interest income increased by US$569 million or 20 per cent. The increase reflected a number of factors; money market income was strong, as treasury was positioned to take advantage of falling rates, treasury also improved its yield by shifting part of its holding of liquid assets from government bonds to high quality corporate bonds. Increased equity swap activity generated additional cash deposits and in a number of emerging markets, notably Turkey, treasury operations benefited from high interest rates and volatile market conditions in 2001. Net fees and commissions declined by US$170 million or 7 per cent on the year. A year of severely adverse conditions in global new equity issues and financial advisory markets and lower turnover on the world’s stock exchanges significantly reduced revenues in these areas. However, in debt capital markets progress in the continuing alignment of client service teams, and from the combination of strengths of CCF with HSBC in euro and sterling markets, generated stronger revenues from a much improved market position. Dealing profits rose by US$41 million with foreign exchange and interest rate products compensating for lower revenues in equities and equity derivatives trading. Dealing profits in North America were particularly strong, up by US$172 million, reflecting investment to strengthen the Group’s capabilities in a number of areas, including foreign exchange, interest rate derivatives and structured products. Latin America’s dealing profits were down by US$54 million, mainly reflecting lower profits in Argentina and the impact of foreign currency translation movements on the profits reported by Brazil. In regional markets outside the major centres, India, Turkey, Japan, Thailand and the Philippines all produced strong results. Operating expenses increased by US$85 million or 2 per cent, essentially reflecting the inclusion of a full year’s results for CCF offset by currency translation impacts. Provisions for bad and doubtful debts fell by US$112 million to US$34 million. Higher provisions in the United States were offset by lower requirements in Hong Kong, together with a large write-back of provisions held against the historical Olympia and York exposure as the security held against this investment was sold. Amounts written off fixed asset investments amounted to US$72 million, reflecting write-downs of private equity and other investments. The significant increase in profits on disposal of investments from US$243 million to US$354 million reflected a number of disposals in Europe including Quilter by CCF and Pulsiv and ERGO by HSBC Trinkaus. In Hong Kong, disposal profits in 2001 included the Group’s investment in Hong Kong Central Registration and certain investment securities. In North America, the business sought to reduce its exposure to future interest rate movements by realising mortgage-backed and other investment debt securities which resulted in a large increase in disposal profit, from US$33 million in 2000 to US$133 million in 2001. Private Banking Private Banking contributed US$412 million to pre- tax profits in 2001 which represented 4.7 per cent of such profits. These profits were US$135 million or 25 per cent lower than in 2000, reflecting a decline in customer activity, lower disposal gains and costs associated with restructuring the business. Net interest income declined by US$17 million or 3 per cent. Offsetting the effect of a full year’s income from CCF entities, the underlying change mainly reflects a switch to lower yielding assets and a lower benefit from free capital as interest rates fell and a more conservative risk profile was taken. Net fees and commissions rose by US$55 77 H S B C H O L D I N G S P L C Financial Review (continued) million or 10 per cent on the year. US$40 million of this rise occurred in Europe again mainly due to the impact of including a full year of results for CCF. North America increased fee income by US$25 million on fees generated from increased assets under management. Operating expenses increased by US$177 million or 25 per cent and included a US$144 million rise in staff costs and US$33 million of increased premises and equipment expenses. The greatest increase in costs was in Europe, where expenses rose by US$139 million, mainly due to the inclusion of a full year’s costs for CCF. Excluding CCF, costs in Europe were up by US$51 million, in part relating to the cost of restructuring the Group’s private banking operations during 2001 and the expansion of headcount as part of business growth. There was a net write-back of provisions for bad and doubtful debts, amounting to US$29 million, against a net charge of US$6 million in 2000. The reduction reflected a write-back of general provisions in Switzerland following a review of the level of provisions held in the light of historical loan loss experience. The US$46 million of provisions for contingent liabilities and commitments included US$31 million relating to CCF’s operation in Lebanon, now closed, and smaller amounts relating to a number of individual items of litigation. Private Banking achieved US$5 million of gains on the disposal of fixed asset investments, compared with US$19 million in 2000. Other The main items reported under Other are the income and expenses of wholesale insurance operations, certain property activities, unallocated investment activities including hsbc.com, centrally held investment companies and HSBC’s holding company and financing operations. The results include net interest earned on free capital held centrally and operating costs incurred by the head office operations in providing stewardship and central management services to HSBC. A number of exceptional items are also reported in this segment including the impact of the Princeton Note provision and exceptional bad debt provisions and currency redenomination losses in Argentina. Net fees and commissions and other income of 78 the Group’s wholesale insurance operations amounted to US$321 million in 2001 and US$281 million in 2000. UK GAAP compared with US GAAP Under US GAAP, HSBC’s net income was US$4,911 million in 2001, US$6,236 million in 2000 and US$4,889 million in 1999, compared with US$5,406 million in 2001, US$6,628 million in 2000 and US$5,408 million in 1999 under UK GAAP. Under US GAAP, shareholders’ equity as at 31 December was US$48,444 million in 2001, US$48,072 million in 2000 and US$35,930 million in 1999, compared with US$45,979 million in 2001, US$45,570 million in 2000 and US$33,408 million in 1999 under UK GAAP. Differences result from the different treatment of lease financing, debt swaps, shareholders’ interest in long-term assurance fund, pension costs, stock-based compensation, goodwill, internal software costs, revaluation of property, purchase accounting adjustments, accruals accounted derivatives, foreign exchange gains on investment securities, fair value adjustment for securities available-for-sale, dividends payable, own shares held and deferred taxation. See Note 50 of the ‘Notes on the Accounts’. Future accounting developments The Accounting Standards Board (UK GAAP) and the Financial Accounting Standards Board (US GAAP) have issued the following accounting standards, which become effective in future financial statements. HSBC is currently reviewing the likely impact of these statements. UK GAAP FRS 17 ‘Retirement benefits’ was issued in December 2000 and will be fully effective for HSBC’s 2003 financial statements. FRS 17 when applied in full will replace SSAP 24 ‘Accounting for pension costs’, UITF Abstract 6 ‘Accounting for post-retirement benefits other than pensions’ and UITF Abstract 18 ‘Pension costs following the 1997 tax changes in respect of dividend income’. There are also amendments to other accounting standards and UITF Abstracts. • • • • FRS 17 prescribes the following: the accounting for defined contribution schemes remains unchanged; in respect of defined benefit schemes, financial statements reflect at fair value the assets and, at actuarial valuation using the projected unit method, the liabilities arising from an employer’s retirement benefit obligations and any related funding; in respect of defined benefit schemes, the operating costs of providing retirement benefits to employees are recognised in the accounting period(s) in which the benefits are earned by the employees, and the related finance costs and any other changes in value of the assets and liabilities are recognised in the accounting periods in which they arise; and the financial statements contain adequate disclosure of the cost of providing retirement benefits and the related gains, losses, assets and liabilities. FRS 17 requires additional disclosure in HSBC’s 2001 year-end financial statements with regard to the closing balance sheet position under the standard. Additional disclosure required in HSBC’s 2002 year- end financial statements relates to the opening and closing balance sheet position under FRS 17 together with the performance statement items. The profit and loss account items comprise the current service cost, expected rate of return on assets and interest cost. Actuarial gains and losses will be recognised in reserves through the Statement of Total Consolidated Recognised Gains and Losses. The primary statement impact will be recognised initially from 1 January 2003. FRS 19 ‘Deferred tax’ was issued in December 2000 and will be effective for HSBC’s 2002 financial statements. FRS 19 replaces SSAP 15 ‘Accounting for deferred tax’ and there are some amendments to other accounting standards. The objective of FRS 19 is to ensure that future tax consequences of past transactions and events are recognised as liabilities or assets in the financial statements and that the financial statements disclose any other special circumstances that may have an effect on future tax charges. In practice deferred tax will generally be provided in the accounts for all timing differences, subject to recoverability of deferred tax assets. Currently deferred tax assets and liabilities are recognised only to the extent they are expected to crystallise. The adoption of FRS 19 represents a change of accounting policy. Therefore, a prior year adjustment will be required in the 2002 financial statements to restate the comparative figures as if FRS 19 had always been applicable. The effect on the balance sheet as at 31 December 2001 and 2000 will be as follows: Assets and liabilities To increase deferred tax assets by ......... To (increase)/decrease deferred tax liabilities by...................................... To decrease net deferred tax liabilities by ......................................................... Reserves To increase profit and loss account by... To decrease goodwill by ....................... 2001 US$m 535 (36 ) 499 290 209 499 2000 US$m 501 505 1,006 797 209 1,006 The effect on the profit and loss account for the years ended 31 December 2001 and 31 December 2000 will be as follows: To increase the taxation charge by ........ 2001 US$m 507 2000 US$m 106 The effect on goodwill amortisation is immaterial. The increase in HSBC’s tax charge for 2001 as restated above can be explained as follows: • reversal of a benefit taken in 2001 under SSAP 15 in respect of deferred tax assets attributable to prior years under FRS19; reversal of a benefit taken in 2001 under SSAP 15 in respect of the release of a provision for additional UK tax on remittances from overseas attributable to prior years under FRS 19; and establishment of a provision required under FRS19 in respect of a possible clawback of capital allowances. • • US GAAP SFAS 141 ‘Business Combinations’ requires that all business combinations initiated after 30 June 2001 be accounted for under the purchase method of accounting; the use of the pooling-of-interests method of accounting is eliminated. SFAS 141 79 incurred and then charged to the profit and loss account over the useful economic life of the asset. Adoption is not expected to have a material impact on HSBC’s US GAAP financial statements. SFAS 144 ‘Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of’ was issued in October 2001. The Statement supersedes SFAS 121 and is effective for fiscal years beginning after 15 June 2002 although early adoption is encouraged. SFAS 144 retains many of the fundamental principles of SFAS 121 but differs from it in that it excludes goodwill and intangible assets from its provisions and provides greater direction relating to the implementation of its principles. Adoption is not expected to have a material impact on HSBC’s US GAAP financial statements. H S B C H O L D I N G S P L C Financial Review (continued) also establishes how the purchase method is to be applied for business combinations completed after 30 June 2001. This guidance is similar to previous US GAAP, however, SFAS 141 establishes additional disclosure requirements for transactions occurring after its effective date. SFAS 141 will also require HSBC to evaluate, at 1 January 2002, its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and to make any necessary reclassifications in order to conform with the new criteria for recognition apart from goodwill. This review is not expected to have a material impact on HSBC’s US GAAP financial statements. SFAS 142 ‘Goodwill and Other Intangible assets’ was issued in July 2001. The Statement is effective for fiscal years beginning after 15 December 2001 and may not be retroactively applied to financial statements of prior periods. During a transition period from 1 July to 31 December 2001 goodwill associated with business combinations completed before 1 July 2001 will continue to be amortised. SFAS 142 requires that goodwill should not be amortised but should be tested for impairment annually at the reporting unit level by applying a fair-value-based test. Goodwill will no longer be tested for impairment under SFAS 121 ‘Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of’. HSBC will adopt SFAS 142 on 1 January 2002, at which time approximately US$20 billion goodwill at cost will be held with an unamortised net book value of US$17 billion. The estimated increase in net income for the year ended 31 December 2002 due to the non-amortisation of goodwill under SFAS 142 is US$1,005 million. The increase in net income due to the non- amortisation of goodwill would have been US$1.3 billion for the year ended 31 December 2001. HSBC is currently reviewing the impact of applying impairment testing in accordance with SFAS 142. SFAS 143 ‘Accounting for Asset Retirement Obligations’ was issued in August 2001. The Statement is effective for fiscal years beginning after June 15 2002 although early adoption is encouraged. SFAS 143 requires that the fair value of an asset retirement obligation be recognised in the balance sheet in the period in which it is 80 Average balance sheet and net interest income Average balances and the related interest are shown for the domestic operations of HSBC’s principal commercial banks by geographic region with all other commercial banking and investment banking balances and transactions included in ‘Other operations’. Additional information on the basis of preparation is set out in the notes on page 89. Year ended 31 December 2001 Year ended 31 December 2000 Year ended 31 December 1999 Average balance Interest income Average balance Interest income Yield Average balance Interest income Yield US$m US$m % US$m US$m % US$m US$m Yield % Assets Short-term funds and loans to banks Europe HSBC Bank plc (i)........... HSBC Republic 13,841 Holdings (Suisse) ........ 10,529 803 488 787 905 5.80 18,667 1,084 5.81 16,278 772 4.74 4.63 8,927 520 6.25 4.69 7,368 20,862 471 1,317 5.83 6.39 6.31 – – – – – – 19,706 1,108 5.62 12,600 19,285 23,455 1,129 4.81 27,352 1,906 6.97 25,825 1,608 6.23 5,710 1,346 1,846 3,845 1,574 3,136 1,306 268 43 78 179 64 85 206 4.69 6,350 3.19 4.23 4.66 4.07 2.71 15.77 1,842 1,432 4,141 1,395 3,198 1,039 351 57 91 247 83 147 159 746 10,977 110,196 39 710 5,784 5.23 824 11,295 6.47 5.25 114,692 51 881 7,365 5.53 7,086 3.09 6.35 5.96 5.95 4.60 15.30 6.19 7.80 6.42 1,373 1,339 3,080 1,217 1,790 672 748 12,899 92,013 367 51 69 154 57 78 116 39 782 5,201 5.18 3.70 5.17 4.99 4.69 4.38 17.23 5.18 6.06 5.65 89,987 6,056 6.73 87,684 6,721 7.67 82,135 6,007 7.31 Holdings (Suisse). ...... 2,695 112 4.16 2,728 139 25,559 28,673 1,705 1,688 6.67 5.89 11,679 27,515 776 2,279 5.10 6.64 8.28 – – – – – – 25,859 2,112 8.17 Hong Kong Rest of Asia- Pacific Crédit Commercial de France ......................... Hang Seng Bank .............. The Hongkong and Shanghai Banking Corporation Limited .... The Hongkong and Shanghai Banking Corporation Limited .... HSBC Bank Malaysia Berhad ......................... HSBC Bank Middle East . North America HSBC USA Inc................ HSBC Bank Canada ....... HSBC Markets Inc........... Latin America HSBC Bank Brasil........... HSBC Bank Argentina S.A. ............. Other operations .......................................... Loans and advances to customers Europe HSBC Bank plc (i)........... HSBC Republic Hong Kong Rest of Asia- Pacific Crédit Commercial de France ......................... Hang Seng Bank .............. The Hongkong and Shanghai Banking Corporation Limited .... The Hongkong and Shanghai Banking Corporation Limited .... HSBC Bank Malaysia Berhad ......................... HSBC Bank Middle East . North America HSBC USA Inc................ HSBC Bank Canada ....... HSBC Markets Inc........... Latin America HSBC Bank Brasil........... HSBC Bank Argentina S.A. ............. Other operations .......................................... 37,142 2,324 6.26 34,863 3,095 8.88 38,189 3,066 8.03 20,343 1,351 6.64 19,149 1,483 7.74 20,592 1,361 3,829 4,668 41,457 14,731 7,197 2,879 2,122 15,222 242 410 2,815 988 183 896 371 745 296,504 19,886 6.32 8.78 6.79 6.71 2.54 31.12 3,702 4,854 37,626 14,170 5,821 2,706 17.48 2,263 15,233 4.89 6.71 269,993 237 464 2,983 1,056 277 908 350 761 6.41 9.56 7.93 7.45 4.76 33.56 4,206 4,475 23,401 12,930 3,957 1,800 15.47 2,723 4.99 12,925 296 420 1,833 872 153 658 373 987 21,529 7.97 233,192 18,138 6.61 7.03 9.39 7.83 6.75 3.87 36.55 13.70 7.64 7.78 81 H S B C H O L D I N G S P L C Financial Review (continued) Assets (continued) Trading securities Europe HSBC Bank plc (i) .......... HSBC Republic Holdings (Suisse). ....... Crédit Commercial de France ......................... 13,275 Hong Kong Rest of Asia- Pacific Hang Seng Bank.............. The Hongkong and Shanghai Banking Corporation Limited.... The Hongkong and Shanghai Banking Corporation Limited.... HSBC Bank Malaysia Berhad......................... 223 North America HSBC USA Inc ............... HSBC Bank Canada ........ HSBC Markets Inc .......... 3,898 475 17,439 Latin America HSBC Bank Brasil .......... HSBC Bank Argentina S.A............... 104 116 Other operations.......................................... 1,974 Investment securities Europe HSBC Bank plc (i) .......... HSBC Republic 14,939 Holdings (Suisse). ....... 11,376 Hong Kong Rest of Asia- Pacific Crédit Commercial de France ......................... Hang Seng Bank.............. The Hongkong and Shanghai Banking Corporation Limited.... The Hongkong and Shanghai Banking Corporation Limited.... HSBC Bank Malaysia Berhad......................... HSBC Bank Middle East. North America HSBC USA Inc ............... HSBC Bank Canada ........ HSBC Markets Inc .......... Latin America HSBC Bank Brasil .......... HSBC Bank Argentina S.A............... Other operations.......................................... 82 Year ended 31 December 2001 Year ended 31 December 2000 Year ended 31 December 1999 Average balance Interest income Average balance Interest income Average balance Interest income Yield Yield US$m US$m % US$m US$m % US$m US$m Yield % 18,352 963 5.25 7,380 – 761 – 508 40 – 179 3.83 5.26 3,135 210 467 11 218 13 6.33 12,760 655 5.13 6.15 6.95 6.41 – – 68 – – 4 – – 5.88 10,667 545 5.11 6,742 450 6.67 2,201 147 6.66 2,042 5.53 1,433 6.91 1,078 113 7 181 19 877 8 16 135 99 7 105 11 660 23 21 195 1,826 188 10,879 95 192 3.14 4.64 4.00 5.03 7.69 13.79 6.84 4.92 2,009 153 34,463 2,238 76 907 174 10,526 173 68 2,526 3.64 5.75 5.85 6.07 24.21 10.94 7.61 6.49 69,326 3,412 30,557 1,698 851 611 130 453 5.70 20,573 1,231 5.98 18,610 1,057 5.68 5.37 5.36 5.31 8,424 3,285 6,003 593 180 395 7.04 5.48 6.59 – – – – – – 5,249 307 5.85 2,425 8,529 24,937 1,173 4.70 18,026 974 5.40 12,660 595 4.70 8,587 475 5.53 6,203 418 6.74 4,184 733 755 19,244 2,105 17 2,745 949 5,481 28 48 1,232 99 1 462 113 365 102,822 6,041 3.82 6.36 6.40 4.70 5.88 676 692 19,952 2,209 16 16.83 2,781 808 6,678 11.91 6.66 5.88 29 55 1,403 127 1 467 86 492 4.26 7.95 7.03 5.75 6.25 16.79 688 604 4,461 2,327 16 3,026 10.64 462 7.37 10,658 96,326 6,451 6.70 62,945 4,062 73 4 51 8 572 50 6 128 314 37 54 263 131 1 697 45 561 6.73 4.72 5.58 4.61 5.43 28.66 8.86 5.07 5.56 7.52 5.36 8.94 5.90 5.64 8.31 23.05 9.85 5.26 6.45 Assets (continued) Other interest-earning assets Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i)........... HSBC Republic Holdings (Suisse). ....... Crédit Commercial de France.......................... Hang Seng Bank .............. The Hongkong and Shanghai Banking Corporation Limited .... The Hongkong and Shanghai Banking Corporation Limited .... HSBC Bank Malaysia Berhad ......................... HSBC Bank Middle East . North America HSBC USA Inc................ HSBC Bank Canada ....... HSBC Markets Inc........... Latin America HSBC Bank Brasil........... HSBC Bank Argentina S.A.............. Year ended 31 December 2001 Year ended 31 December 2000 Year ended 31 December 1999 Average balance Interest income Average balance Interest income Yield Average balance Interest income Yield US$m US$m % US$m US$m % US$m US$m Yield % 2,981 218 7.31 2,522 287 1,586 1,081 85 82 56 29.62 1,915 5.17 5.18 45 1,335 183 124 3 92 7.26 5,496 293 5.33 6.48 6.67 6.89 – – 1,459 – – 87 – – 5.95 7,958 353 4.44 9,890 487 4.92 8,351 426 5.10 4,799 181 3.77 5,599 201 3.59 2,837 130 72 915 665 – 54 370 50 4 46 46 3 2 20 5 5.56 5.03 6.92 – 3.70 5.41 30 905 1,159 – 153 302 10.00 4 3 60 96 3 8 31 1 11.52 6.63 8.28 – 5.23 10.26 25.00 16 844 145 – 311 140 – 1 47 7 – 16 25 – 4.59 8.18 5.57 5.18 – 4.98 18.00 – Other operations .......................................... (20,001 ) (963) 4.81 (23,148 ) (1,129) 4.88 (19,081 ) (927 ) 4.86 817 138 16.89 711 163 22.93 518 105 20.27 Total interest-earning assets Europe HSBC Bank plc (i)........... 140,100 HSBC Republic 8,891 6.35 136,826 9,686 7.08 135,279 8,784 6.49 Holdings (Suisse). ....... 24,887 1,296 5.21 22,173 1,387 Crédit Commercial de France.......................... Hang Seng Bank .............. The Hongkong and 55,445 58,329 3,212 3,142 5.79 5.39 25,512 55,925 1,648 4,096 6.26 6.46 7.32 – – – – – – 52,341 3,618 6.91 Shanghai Banking Corporation Limited .... 104,159 5,524 5.30 96,873 6,912 7.13 87,226 5,842 6.70 Hong Kong Rest of Asia- Pacific The Hongkong and Shanghai Banking Corporation Limited .... HSBC Bank Malaysia Berhad ......................... HSBC Bank Middle East . North America HSBC USA Inc................ HSBC Bank Canada ....... HSBC Markets Inc........... Latin America HSBC Bank Brasil........... HSBC Bank Argentina S.A. .............. Other operations .......................................... Summary 41,481 2,388 5.76 38,734 2,552 6.59 35,777 2,245 5.22 7.11 6.44 6.21 4.12 21.50 6,444 7,883 64,704 17,962 20,067 6,923 333 670 4,834 1,280 1,093 1,588 5.17 8.50 7.47 7.13 5.45 6,359 7,262 31,994 16,648 16,600 22.94 5,811 389 590 2,308 1,068 820 1,546 6,203 8,184 69,109 18,885 27,843 7,404 3,983 13,653 324 582 4,453 1,173 1,148 1,592 544 992 13.66 4,091 509 12.44 4,001 463 11.58 7.27 12,068 1,158 9.60 19,927 1,531 579,665 35,261 6.08 516,185 37,746 7.31 419,225 29,204 6.28 6.11 8.13 7.21 6.42 4.94 26.60 7.68 6.97 Total interest-earning assets ........................ 579,665 Provisions for bad and doubtful debts ......... (7,816 ) Non interest-earning assets.......................... 124,900 35,261 37,746 6.08 516,185 (7,980 ) 107,480 7.31 419,225 (7,060 ) 83,137 29,204 6.97 Total assets & interest income..................... 696,749 35,261 5.06 615,685 37,746 6.13 495,302 29,204 5.90 83 H S B C H O L D I N G S P L C Financial Review (continued) Assets (continued) Distribution of average total assets: Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i) .......... HSBC Republic Holdings (Suisse). ....... Crédit Commercial de France ......................... Hang Seng Bank.............. The Hongkong and Shanghai Banking Corporation Limited.... The Hongkong and Shanghai Banking Corporation Limited.... HSBC Bank Malaysia Berhad......................... HSBC Bank Middle East. North America HSBC USA Inc ............... HSBC Bank Canada ....... HSBC Markets Inc .......... Latin America HSBC Bank Brasil .......... HSBC Bank Argentina S.A............... Other operations (including consolidation adjustments)............................................ Year ended 31 December 2001 % Year ended 31 December 2000 % 25.1 3.8 10.1 8.8 19.3 6.9 0.9 1.2 12.3 2.9 5.5 1.4 0.7 1.1 27.9 3.8 4.8 9.6 20.5 7.0 1.0 1.4 12.5 3.1 3.9 1.4 0.8 2.3 Year ended 31 December 1999 % 33.1 – – 11.1 23.9 7.9 1.3 1.6 7.0 3.6 4.1 1.5 0.9 4.0 100.0 100.0 100.0 84 Year ended 31 December 2001 Year ended 31 December 2000 Year ended 31 December 1999 Average balance Interest expense Average balance Interest Expense Cost Average balance Interest expense Cost Liabilities and shareholders’ funds US$m US$m % US$m US$m % US$m US$m Deposits by banks * Cost % HSBC Bank plc (i)........... HSBC Republic Holdings (Suisse). ....... Crédit Commercial de 13,890 1,708 451 66 France.......................... 17,393 1,136 256 9 3.25 12,725 3.86 2,158 6.53 3.52 11,534 632 668 103 644 37 5.25 13,796 482 3.49 4.77 5.58 5.79 – – 859 – – 43 – – 5.03 1,933 70 3.62 1,911 113 5.93 2,277 111 4.86 Europe Hong Kong Rest of Asia- Pacific Hang Seng Bank .............. The Hongkong and Shanghai Banking Corporation Limited .... The Hongkong and Shanghai Banking Corporation Limited .... HSBC Bank Malaysia Berhad ......................... HSBC Bank Middle East . North America HSBC USA Inc................ HSBC Bank Canada ....... HSBC Markets Inc........... Latin America HSBC Bank Brasil........... HSBC Bank Argentina S.A. .............. Other operations .......................................... Customer accounts * Europe HSBC Bank plc (i)........... HSBC Republic Hong Kong Rest of Asia- Pacific Hang Seng Bank .............. The Hongkong and Shanghai Banking Corporation Limited .... The Hongkong and Shanghai Banking Corporation Limited .... HSBC Bank Malaysia Berhad ......................... HSBC Bank Middle East . North America HSBC USA Inc................ HSBC Bank Canada ....... HSBC Markets Inc........... Latin America HSBC Bank Brasil........... HSBC Bank Argentina S.A. .............. 2,757 32 315 3,702 439 3,654 1,177 432 5,506 146 1 14 100 18 114 106 29 199 53,194 2,459 5.30 1,956 51 326 2,776 374 2,791 920 425 5,664 3.13 4.44 2.70 4.10 3.12 9.01 6.71 3.61 4.62 109 1 21 102 21 131 101 35 270 5.57 2,578 108 2.26 6.44 3.67 5.61 4.69 10.98 8.24 4.76 57 235 1,061 1,053 1,842 705 472 5,623 3 14 43 54 87 101 22 181 44,243 2,356 5.33 30,558 1,249 90,055 3,300 3.66 88,360 4,037 4.57 84,554 3,292 3.89 Holdings (Suisse). ....... 20,839 Crédit Commercial de France.......................... 12,174 937 665 4.50 16,421 7,181 5.46 3.01 965 421 5.88 5.86 5.05 – – – – – – 43,835 1,962 4.48 49,842 1,502 47,432 2,397 81,484 2,219 2.72 75,534 3,651 4.83 69,255 3,040 4.39 25,581 4,456 6,311 45,817 12,876 7,820 4,086 2,689 969 145 250 1,609 474 295 598 226 3.79 22,994 1,117 4.86 20,658 3.25 3.96 3.51 3.68 3.77 4,360 5,937 41,966 12,314 4,427 14.64 4,275 2,854 8.40 4.44 146 331 1,951 593 234 553 191 3.35 5.58 4.65 4.82 5.29 4,290 5,412 11,737 11,177 5,333 12.94 3,715 2,690 6.69 5.08 934 175 272 290 464 253 559 170 Other operations .......................................... 23,919 1,062 22,972 1,168 21,083 1,196 * Further analysis is given on pages 123 and 124. 387,949 14,251 3.67 357,027 17,755 4.97 283,739 12,607 4.18 4.66 5.82 4.05 5.14 4.72 14.39 4.73 3.22 4.09 4.52 4.07 5.03 2.47 4.16 4.74 15.05 6.34 5.67 4.44 85 H S B C H O L D I N G S P L C Financial Review (continued) Liabilities and shareholders’ funds (continued) CDs and other money market instruments* Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i) .......... HSBC Republic Holdings (Suisse). ....... Crédit Commercial de France ......................... Hang Seng Bank.............. The Hongkong and Shanghai Banking Corporation Limited.... The Hongkong and Shanghai Banking Corporation Limited.... HSBC Bank Malaysia Berhad......................... HSBC Bank Middle East. North America HSBC USA Inc ............... HSBC Bank Canada ....... Latin America HSBC Bank Brasil .......... HSBC Bank Argentina S.A. ............. Other operations.......................................... Loan capital Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i) .......... HSBC Republic Holdings (Suisse). ........... Crédit Commercial de France.............................. The Hongkong and Shanghai Banking Corporation Limited........ The Hongkong and Shanghai Banking Corporation Limited........ North America HSBC USA Inc ............... HSBC Bank Canada ........ Latin America HSBC Bank Brasil .......... HSBC Bank Argentina S.A............... Year ended 31 December 2001 Year ended 31 December 2000 Year ended 31 December 1999 Average balance Interest Expense Average balance Interest expense Cost Average Balance Interest expense Cost US$m US$m % US$m US$m % US$m US$m Cost % 1,257 – 5,547 2,040 65 – 262 94 5.17 1,284 – 4.72 4.61 – 2,489 2,195 79 – 136 147 6.15 4,617 280 6.06 – 5.46 6.71 – – 1,511 – – 98 – – 6.52 3,851 242 6.28 3,933 291 7.39 4,203 260 6.18 1,298 121 – 2,030 2,193 29 284 475 67 6 – 92 104 4 21 3 19,125 960 5.16 1,397 175 – 2,192 1,589 53 113 539 4.96 – 4.53 4.74 13.79 7.39 0.63 5.02 82 8 – 72 91 5 10 22 5.87 1,605 4.29 – 3.28 5.73 9.43 8.85 4.17 148 47 9,571 1,321 4 – 376 81 9 3 477 67 – – 18 5.08 6.08 6.38 4.98 5.04 7.83 – 4.79 5.52 15,959 943 5.91 23,403 1,293 10,136 625 6.17 9,445 668 7.07 9,148 589 6.44 – – – 91 2,939 163 5.55 1,093 8 58 8.79 5.31 – – – – – – 1,805 99 5.48 1,820 121 6.64 1,862 107 5.74 6 12.77 47 3,969 1,272 208 245 280 80 11 24 7.05 6.29 5.29 9.80 4.44 5.84 107 5,271 1,628 72 281 4,771 13 462 107 12.15 8.76 6.57 8 11.11 27 322 9.61 6.75 109 1,826 1,360 82 272 3,898 24,579 1,794 7.30 18,557 1,219 12 109 90 10.93 5.96 6.58 9 10.67 24 279 9.01 7.16 6.57 Other operations.......................................... 5,952 264 26,573 1,552 * Further analysis is given on page 125. 86 Year ended 31 December 2001 Year ended 31 December 2000 Year ended 31 December 1999 Average balance Interest expense Average balance Interest expense Cost Average balance Interest expense Cost US$m US$m % US$m US$m % US$m US$m Cost % 10,273 525 5.11 10,849 582 5.36 8,601 461 5.36 Liabilities and shareholders’ funds (continued) Other interest-bearing liabilities Europe HSBC Bank plc (i)........... HSBC Republic Holdings (Suisse). ....... 1,152 Crédit Commercial de France.......................... 6,496 Hong Kong Rest of Asia- Pacific Hang Seng Bank .............. The Hongkong and Shanghai Banking Corporation Limited .... The Hongkong and Shanghai Banking Corporation Limited .... HSBC Bank Malaysia Berhad ......................... HSBC Bank Middle East . 869 40 46 North America HSBC USA Inc................ HSBC Bank Canada ....... HSBC Markets Inc........... 7,425 374 16,568 Latin America HSBC Bank Brasil........... HSBC Bank Argentina S.A. .............. 633 80 69 92 42 5.99 1.42 4.83 840 118 251 30 6 14 3.57 5.08 5.67 – – 223 – – 11 – – 4.75 7,367 309 4.19 6,009 342 5.78 3,048 170 5.59 7,433 273 3.67 8,153 385 4.72 7,158 1 4 462 16 740 133 2.50 8.70 6.22 4.28 4.47 21.01 19 23.75 80 96 9,767 406 12,634 261 102 4 6 603 20 681 49 19 4.86 6.25 6.17 4.93 5.39 18.77 18.63 443 127 3,673 479 9,517 422 187 362 29 7 175 25 486 46 24 Other operations .......................................... (30,800 ) (1,371) 27,956 1,314 4.45 4.70 (30,359 ) (1,566) 5.16 (20,851 ) (950) 19,207 1,175 6.12 13,027 846 5.05 6.44 5.51 4.76 5.22 5.11 11.02 12.83 4.56 6.49 87 H S B C H O L D I N G S P L C Financial Review (continued) Liabilities and shareholders’ funds (continued) Total interest-bearing liabilities Year ended 31 December 2001 Year ended 31 December 2000 Year ended 31 December 1999 Average balance Interest expense Average balance Interest expense Cost Average balance Interest expense Cost US$m US$m % US$m US$m % US$m US$m Cost % Europe HSBC Bank plc (i) .......... 125,611 HSBC Republic 4,966 3.95 122,663 6,034 4.92 120,716 5,104 4.23 Holdings (Suisse). ....... 23,699 1,072 4.52 19,510 1,106 44,549 53,007 2,318 1,647 5.20 3.11 22,415 50,510 1,265 2,595 5.67 5.64 5.14 – – – – – – 46,428 2,114 4.55 Hong Kong Rest of Asia- Pacific Crédit Commercial de France ......................... Hang Seng Bank.............. The Hongkong and Shanghai Banking Corporation Limited.... The Hongkong and Shanghai Banking Corporation Limited.... HSBC Bank Malaysia Berhad......................... HSBC Bank Middle East. North America HSBC USA Inc ............... HSBC Bank Canada ....... HSBC Markets Inc. ......... Latin America HSBC Bank Brasil .......... HSBC Bank Argentina S.A............... Other operations.......................................... 96,440 2,939 3.05 89,207 4,518 5.08 80,647 3,688 4.57 37,116 1,461 3.94 34,607 1,706 4.93 32,108 1,497 4,649 6,672 62,943 17,154 28,042 6,133 3,730 5,052 153 268 2,543 692 1,149 852 319 157 3.29 4.02 4.04 4.03 4.10 4,666 6,359 61,972 16,311 19,852 13.89 5,581 8.55 3.11 3,775 3,587 159 358 3,190 832 1,046 716 282 216 3.40 5.63 5.15 5.10 5.27 4,938 5,822 27,868 15,390 16,692 12.83 4,928 7.47 6.03 3,619 10,128 215 296 1,094 701 826 716 241 722 514,797 20,536 3.99 461,015 24,023 5.21 369,284 17,214 4.66 4.35 5.08 3.93 4.56 4.95 14.53 6.67 7.13 4.66 Total interest-bearing liabilities................... 514,797 20,536 3.99 461,015 24,023 5.21 369,284 17,214 4.66 Non interest-bearing current accounts......... 36,090 Shareholders’ funds & other non interest- bearing liabilities..................................... 145,862 27,199 127,471 21,976 104,042 Total liabilities & interest expense .............. 696,749 20,536 2.95 615,685 24,023 3.90 495,302 17,214 3.48 88 Net interest margin Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i)........... HSBC Republic Holdings (Suisse). ....... Crédit Commercial de France.......................... Hang Seng Bank .............. The Hongkong and Shanghai Banking Corporation Limited .... The Hongkong and Shanghai Banking Corporation Limited .... HSBC Bank Malaysia Berhad ......................... HSBC Bank Middle East . North America HSBC USA Inc................ HSBC Bank Canada ........ HSBC Markets Inc........... Latin America HSBC Bank Brasil........... HSBC Bank Argentina S.A. .............. Other operations .......................................... HSBC margin .............................................. Notes Year ended 31 December 2001 Year ended 31 December 2000 Year ended 31 December 1999 % 2.80 0.90 1.61 2.56 2.48 2.23 2.76 3.84 2.76 2.55 0.00 9.99 5.65 6.12 2.54 % 2.67 1.27 1.50 2.68 2.47 2.18 2.71 3.96 2.54 2.49 0.23 12.60 5.55 7.80 2.66 % 2.72 – – 2.87 2.47 2.09 2.73 4.06 3.79 2.21 (0.04) 14.29 5.55 4.06 2.86 (i) Excluding HSBC Republic Holdings (Suisse) and Crédit Commercial de France. (ii) Average balances are based on daily averages for the principal areas of HSBC’s banking activities with monthly or less frequent averages used elsewhere. (iii) ‘Loans accounted for on a non-accrual basis’ and ‘Loans on which interest has been accrued but suspended’ have been included in ‘Loans and advances to banks’ and ‘Loans and advances to customers’. Interest income on such loans is included in the consolidated profit and loss account to the extent it has been received. (iv) Balances and transactions with fellow subsidiaries are reported gross in the principal commercial banking entities within ‘Other interest-earning assets’ and ‘Other interest bearing-liabilities’ as appropriate and the elimination entries included within ‘Other operations’ in those two categories. (v) Other than as noted in (iv) above, ‘Other operations’ comprise the operations of the principal commercial banking entities outside their domestic markets and all other banking operations. (vi) Non-equity minority interests are included within shareholders’ funds and other non interest-bearing liabilities and the related coupon payments are included within minority interests in the profit and loss account. 89 H S B C H O L D I N G S P L C Financial Review (continued) Analysis of changes in net interest income The following table allocates changes in net interest income between volume and rate for 2001 compared with 2000, and for 2000 compared with 1999. Changes due to a combination of volume and rate are allocated to rate. 2001 compared with 2000 Increase/(decrease) 2000 compared with 1999 Increase/(decrease) 2001 US$m Volume US$m Rate US$m 2000 US$m Volume US$m Rate US$m 1999 US$m 803 488 787 905 (280 ) (1) 1,084 93 334 (100 ) (125) (18) (312) 520 471 1,317 113 520 471 65 199 772 – – – – 144 1,108 1,129 (272 ) (505) 1,906 95 203 1,608 268 43 78 179 64 85 206 39 710 (35 ) (15 ) 26 (18 ) 11 (3 ) 41 (5 ) (25 ) (48) 1 (39) (50) (30) (59) 6 (7) (146) 351 57 91 247 83 147 159 51 881 (38) 17 5 53 8 62 63 4 (97) 5,784 (289 ) (1,292) 7,365 1,282 22 (11) 17 40 18 7 (20) 8 196 882 367 51 69 154 57 78 116 39 782 5,201 6,056 112 1,705 1,688 177 (842) 6,721 (2 ) (25) 7 922 96 (687) 2,279 139 776 406 139 776 135 308 6,007 – – 32 – – 2,112 2,324 202 (973) 3,095 (267) 296 3,066 1,351 242 410 2,815 988 183 896 371 745 92 8 (18 ) 304 42 65 58 (22 ) (1 ) (224) (3) (36) (472) (110) (159) (70) 43 (15) 1,483 237 464 2,983 1,056 277 908 350 761 (95) (35) 36 1,114 84 72 331 (63) 176 19,886 2,114 (3,757) 21,529 2,862 217 (24) 8 36 100 52 (81) 40 (402) 529 1,361 296 420 1,833 872 153 658 373 987 18,138 Interest income Short-term funds and loans to banks Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i) .................. HSBC Republic Holdings (Suisse). .............................. Crédit Commercial de France.................................. Hang Seng Bank...................... The Hongkong and Shanghai Banking Corporation Limited................................ The Hongkong and Shanghai Banking Corporation Limited................................ HSBC Bank Malaysia Berhad . HSBC Bank Middle East......... North America HSBC USA Inc. ...................... HSBC Bank Canada ................ HSBC Markets Inc .................. Latin America HSBC Bank Brasil .................. HSBC Bank Argentina S.A. .... Other operations.................................................. Loans and advances to customers Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i) .................. HSBC Republic Holdings (Suisse)................................. Crédit Commercial de France................................... Hang Seng Bank...................... The Hongkong and Shanghai Banking Corporation Limited ................................. The Hongkong and Shanghai Banking Corporation Limited ................................. HSBC Bank Malaysia Berhad . HSBC Bank Middle East......... North America HSBC USA Inc. ...................... HSBC Bank Canada ................ HSBC Markets Inc .................. Latin America HSBC Bank Brasil .................. HSBC Bank Argentina S.A. .... Other operations.................................................. 90 Interest income (continued) Trading securities Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i)................... HSBC Republic Holdings (Suisse)................................ Crédit Commercial de France .................................. Hang Seng Bank ...................... The Hongkong and Shanghai Banking Corporation Limited ................................ The Hongkong and Shanghai Banking Corporation Limited ................................ HSBC Bank Malaysia Berhad . North America HSBC USA Inc........................ HSBC Bank Canada ................ HSBC Markets Inc................... Latin America HSBC Bank Brasil................... HSBC Bank Argentina S.A. .... Other operations .................................................. Investment securities Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i)................... HSBC Republic Holdings (Suisse)................................ Crédit Commercial de France .................................. Hang Seng Bank ...................... The Hongkong and Shanghai Banking Corporation Limited ................................ The Hongkong and Shanghai Banking Corporation Limited ................................ HSBC Bank Malaysia Berhad . HSBC Bank Middle East ......... North America HSBC USA Inc........................ HSBC Bank Canada ................ HSBC Markets Inc................... Latin America HSBC Bank Brasil................... HSBC Bank Argentina S.A. .... Other operations .................................................. 2001 compared with 2000 Increase/(decrease) 2000 compared with 1999 Increase/(decrease) 2001 US$m Volume US$m Rate US$m 2000 US$m Volume US$m Rate US$m 1999 US$m (276) 88 655 963 – 508 40 694 (11 ) 705 34 (198) – (415) (7) 467 11 218 13 11 218 8 545 262 (167) 450 302 113 7 181 19 877 8 16 135 42 1 119 17 398 2 (8 ) (3 ) (28) (1) (43) (9) (181) (17) 3 (15) 99 7 105 11 660 23 21 153 3,412 2,264 (1,090) 2,238 851 611 130 453 (337 ) (43) 1,231 208 (47 ) 166 (190) (3) (108) 593 180 395 24 6 51 1 19 (22) 11 (26) 217 111 593 180 44 – – 1 1 2 (3) 3 2 69 (5) 4 51 323 63 – – 44 1,173 373 (174) 974 252 127 475 28 48 1,232 99 1 462 113 365 6,041 161 2 5 (50 ) (6 ) – (6 ) 15 (88 ) 435 (104) (3) (12) (121) (22) – 1 12 (39) (845) 418 29 55 1,403 127 1 467 86 492 152 (1) 8 914 (7) – (56) 34 (210) 6,451 2,154 (48) (7) (7) 226 3 – (174) 7 141 235 – – 4 147 73 4 51 8 572 50 6 128 1,698 1,057 – – 307 595 314 37 54 263 131 1 697 45 561 4,062 91 H S B C H O L D I N G S P L C Financial Review (continued) Interest expense Deposits by banks 2001 compared with 2000 Increase/(decrease) 2000 compared with 1999 Increase/(decrease) 2001 US$m Volume US$m Rate US$m 2000 US$m Volume US$m Rate US$m 1999 US$m Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i) .................. HSBC Republic Holdings (Suisse)................................ Crédit Commercial de France.................................. 451 66 1,136 Hang Seng Bank...................... The Hongkong and Shanghai Banking Corporation Limited................................ The Hongkong and Shanghai Banking Corporation Limited ............................... HSBC Bank Malaysia Berhad . HSBC Bank Middle East......... North America HSBC USA Inc. ...................... HSBC Bank Canada ................ HSBC Markets Inc .................. Latin America HSBC Bank Brasil .................. HSBC Bank Argentina S.A. .... Other operations.................................................. Customer accounts Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i) .................. HSBC Republic Holdings (Suisse)................................ Crédit Commercial de France.................................. Hang Seng Bank...................... The Hongkong and Shanghai Banking Corporation Limited ............................... The Hongkong and Shanghai Banking Corporation Limited ............................... HSBC Bank Malaysia Berhad . HSBC Bank Middle East......... North America HSBC USA Inc. ...................... HSBC Bank Canada ................ HSBC Markets Inc .................. Latin America HSBC Bank Brasil .................. HSBC Bank Argentina S.A. .... 9 70 146 1 14 100 18 114 106 29 199 2,459 3,300 937 665 1,502 969 145 250 1,609 474 295 598 226 61 (21 ) 327 (22 ) (278) (16) 165 (6) 668 103 644 37 (37) 223 482 103 644 (11) – – 5 – – 43 1 (44) 113 (18) 20 111 45 – (1 ) 34 4 41 28 1 (8 ) 477 77 260 293 122 (8) – (6) (36) (7) (58) (23) (7) (63) 109 1 21 102 21 131 101 35 270 (374) 2,356 (814) (288) (49) 4,037 965 421 (1,017) 2,397 (26) – 5 69 (35) 45 31 (2) 1 560 148 965 421 161 27 (2) 2 (10) 2 (1) (31) 15 88 547 108 3 14 43 54 87 101 22 181 1,249 597 3,292 – – – – 274 1,962 126 3 21 179 27 179 (24 ) (11 ) 48 (274) (4) (102) (521) (146) (118) 69 46 1,117 146 331 1,951 593 234 553 191 (154) 1,168 106 3 26 747 47 (43) 84 10 107 77 (32) 33 914 82 24 (90) 11 934 175 272 290 464 253 559 170 (135) 1,196 Other operations.................................................. 1,062 14,251 1,538 (5,042) 17,755 3,254 1,894 12,607 92 2,219 288 (1,720) 3,651 276 335 3,040 Interest expense CDs and other money market instruments Europe Hong Kong Rest of Asia- Pacific HSBC Bank plc (i)................... Crédit Commercial de France .................................. Hang Seng Bank ...................... The Hongkong and Shanghai Banking Corporation Limited ................................ The Hongkong and Shanghai Banking Corporation Limited ................................ HSBC Bank Malaysia Berhad . HSBC Bank Middle East ......... North America HSBC USA Inc........................ HSBC Bank Canada ................ Latin America HSBC Bank Brasil................... HSBC Bank Argentina S.A. .... Other operations Loan capital Europe 960 187 HSBC Bank plc (i)................... HSBC Republic Holdings (Suisse)................................ Crédit Commercial de France .................................. 625 – 163 49 (8 ) 98 2001 compared with 2000 Increase/(decrease) Volume US$m 2001 US$m Rate US$m 2000 compared with 1999 Increase/(decrease) Volume US$m 2000 US$m Rate US$m 65 262 94 242 67 6 – 92 104 4 21 3 (2 ) 167 (10 ) (12) (41) (43) 79 136 147 (202) 136 45 1 – 4 (6 ) (43) 291 (17) 48 (6 ) (2 ) – (5 ) 35 (2 ) 15 (3 ) (9) – – 25 (22) 1 (4) (16) (170) (92) – 7 82 8 – 72 91 5 10 22 (11) 2 (3) (367) 14 4 10 8 943 (411) 668 8 58 19 8 58 12 (3) – (38) 10 1 – (4) 61 60 – – 1999 US$m 280 – 98 260 81 9 3 477 67 – – 18 1,293 589 – – Hong Kong The Hongkong and Shanghai Banking Corporation Limited ................................ Rest of Asia- Pacific The Hongkong and Shanghai Banking Corporation Limited ................................ North America HSBC USA Inc........................ HSBC Bank Canada ................ Latin America HSBC Bank Brasil................... HSBC Bank Argentina S.A. .... Other operations .................................................. 99 (1 ) (21) 121 (2) 16 107 6 280 80 11 24 264 1,552 (7 ) (114 ) (23 ) 15 (3 ) 80 146 – (68) (4 (12) – (138) (388) 13 462 107 8 27 322 1,794 – 205 18 (1) 1 62 396 1 148 (1) – 2 (19) 179 12 109 90 9 24 279 1,219 (i) Excluding HSBC Republic Holdings (Suisse) and Crédit Commercial de France. 93 H S B C H O L D I N G S P L C Financial Review (continued) Risk management All of HSBC’s activities involve analysis, evaluation and management of some degree of risk or combination of risks. The most important types of risk are credit risk (which includes cross-border risk), liquidity risk, market risk and operational risk. Market risk includes foreign exchange, interest rate and equity price risks. HSBC’s risk management policy is designed to identify and analyse credit risk, liquidity and market risk, operational risk and other risks, to set appropriate risk limits, and to monitor these risks and limits continually by means of reliable and up-to- date administrative and information systems. HSBC continually modifies and enhances its risk management policies and systems to reflect changes in markets and products. Training, individual responsibility and accountability and a disciplined cautious and conventional culture of control lie at the heart of HSBC’s management of risk. The Group Executive Committee, comprising executive Directors and Group General Managers appointed by the Board of Directors, formulates risk management policy, monitors risk and regularly reviews the effectiveness of HSBC’s risk management policies. Credit risk management Credit risk is the risk that a customer or counterparty will be unable or unwilling to meet a commitment that it has entered into with HSBC. It arises principally from lending, trade finance, treasury and leasing activities. HSBC has dedicated standards, policies and procedures to control and monitor all such risks. Within Group Head Office, Group Credit and Risk is mandated to provide high level centralised management of credit risk for HSBC on a global basis. Group Credit and Risk is headed by a Group General Manager who reports to the Group Chief Executive, and its responsibilities include the following: • Formulation of high level credit policies. These are embodied in HSBC standards with which all HSBC subsidiaries are required to comply in formulating their own more detailed credit policies and procedures, which are written in each HSBC subsidiary’s dedicated credit policy 94 manuals. The credit policies and procedures are monitored by Group Credit and Risk. • Establishment and maintenance of HSBC’s large credit exposure policy which sets controls at the HSBC level on exposures to customers and customer groups and on other risk concentrations. HSBC’s policy, which is designed to be more conservative than the internationally accepted regulatory standards, is required to be adopted by all the banking subsidiaries within HSBC. • Issue of lending guidelines which provide HSBC subsidiaries with clear guidance on HSBC’s attitude towards and appetite for lending to, amongst others, different market sectors, industries and products. Each HSBC subsidiary and major business unit is required to produce its own lending guidelines which conform with the HSBC guidelines and which are regularly updated and provided to all credit and marketing executives. • An independent review and objective assessment of risk. Group Credit and Risk undertakes an independent assessment of all commercial non- bank credit facilities over designated limits originated by all HSBC’s subsidiaries, prior to the facilities being offered to the customer. The business may not proceed without the concurrence of Group Credit and Risk. Similarly, renewals and reviews of commercial non-bank facilities over designated levels are subject to review by and concurrence of Group Credit and Risk. • Control of exposures to banks and financial institutions. HSBC’s credit and settlement risk limits to counterparties in the financial and government sectors are approved centrally to optimise the use of credit availability and to avoid excessive risk concentration. A dedicated unit within Group Credit and Risk controls and manages these exposures on a global basis using centralised systems and automated processes. Full authority is devolved to this unit by the respective HSBC subsidiaries. • Control of cross-border exposures. Control of country and cross-border risk is also managed by a dedicated unit within Group Credit and Risk using centralised systems, through the imposition of country limits with sub-limits by maturity and type of business. Country limits are determined by taking into account economic and political factors, together with local business knowledge. Transactions with countries deemed to be higher risk are considered on a case-by- case basis. • Control of exposure to certain industries. Group Credit and Risk controls HSBC’s exposure to the shipping and aviation industries, and closely monitors exposures to other industries or products such as telecoms and commercial real estate. Controls, such as restrictions on new business or the capping of exposure within HSBC subsidiaries, may be introduced where necessary. • Maintenance of HSBC’s universal facility grading process. HSBC’s grading structure contains seven grades, the first three of which are applied to differing levels of satisfactory risk. Of the four unsatisfactory grades, grades 6 and 7 are non-performing loans. In the case of banks, the grading structure involves 9 tiers, five of which cover satisfactory risk. It is the responsibility of the final approving executive to approve the facility grade. Facility grades are subject to frequent review and amendments, where necessary, are required to be undertaken promptly. • Review of efficiency and effectiveness of subsidiaries’ credit approval processes. Regular reports are provided to Group Credit and Risk on the credit quality of the local portfolios and corrective action is taken where necessary. • Reporting to senior executives on aspects of the HSBC loan portfolio. Reports are produced for senior management, including the Group Executive Committee, Group Audit Committee and the Board, covering: − − − − − – risk concentrations and exposures to industry sectors; large customer group exposures; emerging market debt and provisioning; large non-performing accounts and provisions; specific segments of the portfolio: commercial real estate, telecoms, aviation, shipping, credit cards, as well as ad hoc reviews as necessary; and country limits and cross-border exposures. • Management and direction of credit-related systems initiatives. HSBC has a centralised database of large corporate, sovereign and bank facilities and is currently rolling out a new standard corporate credit application system. • Provision of advice and guidance to HSBC’s subsidiaries. In order to promote best practice throughout HSBC, advice is given and procedures approved where necessary on numerous credit-related issues such as: − − − − − − regulatory issues; environmental policy; credit scoring; new products; training courses; and credit-related reporting. • Primary interface for credit-related issues on behalf of HSBC Holdings with external parties including the Bank of England and the UK Financial Services Authority (‘FSA’), the rating agencies and corporate analysts and counterparts in the world’s major banks and non-bank financial institutions. In each of HSBC’s subsidiaries, local management is responsible for the quality of its credit portfolio. Each major subsidiary has an appointed Chief Credit Officer, who reports to the local Chief Executive Officer, with a functional reporting line to the Group General Manager, Group Credit and Risk. Each subsidiary has established a credit process involving credit policies, procedures and lending guidelines conforming with HSBC requirements, and credit approval authorities delegated from the Board of Directors of HSBC Holdings to the local Chief Executive Officer. The objective is to build and maintain risk assets of high quality where risk and return are commensurate. Each subsidiary is responsible for the assets in its portfolio, including any subject to central control by Group Credit and Risk, and for managing its own risk concentrations on a market sector, geographical and product basis. Each HSBC subsidiary has systems in place to control and monitor its exposures at the customer and counterparty level. Special attention is paid to the management of problem loans. Where deemed appropriate, specialist units are established by HSBC subsidiaries to provide intensive management and control in order to maximise recoveries of doubtful debts. Regular audits of subsidiaries’ credit processes are undertaken by HSBC’s Internal Audit function. 95 H S B C H O L D I N G S P L C Financial Review (continued) Such audits include consideration of the completeness and adequacy of credit manuals and lending guidelines, together with an in-depth analysis of a representative sample of accounts in the portfolio to assess the quality of the loan book and other exposures. Individual accounts are reviewed to ensure that the facility grade is appropriate, that credit procedures have been properly followed and that where an account is non-performing, provisions raised are adequate. Internal Audit will discuss any facility grading they consider should be revised at the end of the audit and their subsequent recommendations for revised grades must then be assigned to the facility. Loan portfolio Loans and advances to customers are spread across the various industrial sectors, as well as geographically. At constant exchange rates, loans and advances to customers (excluding the finance sector and settlement accounts) grew by 6.2 per cent during 2001. Within this growth, personal lending grew by 10.0 per cent and loans and advances to the commercial and corporate customer base grew by 3.3 per cent. Residential mortgages increased by US$6.5 billion to US$78.2 billion and comprised 25 per cent of total gross customer loans at 31 December 2001. Residential mortgages in Europe increased by US$3.2 billion, of which US$2.9 billion arose in UK Banking on the back of increased market share. Residential mortgage lending in Hong Kong reversed the decline seen in the last 3 years and was in line with 2000 as HSBC captured a greater share of the remortgaging market. Residential mortgage loans made under the Hong Kong SAR Government Home Ownership Scheme (‘GHOS’) increased by US$0.8 billion substantially in the first half of 2001. The level of new GHOS mortgage lending will be lower in future years as the Government of Hong Kong has temporarily suspended the construction of new homes under this scheme. In the Rest of Asia-Pacific, residential mortgages grew by US$1.4 billion with strong growth in Malaysia, Taiwan, Singapore, Korea and India supplemented by acquisition related growth in Australia following the purchase of the NRMA Building Society Limited. In North America, residential mortgage lending grew strongly by US$2.2 billion as mortgage volumes soared as interest rates fell. 96 Other personal lending increased to approximately 12.3 per cent of the overall loan portfolio. Personal lending grew by US$1.3 billion in Hong Kong. Strong growth was also achieved in consumer lending in the United Kingdom, in France by both organic growth and from acquisitions, and in personal lending in Singapore and several other countries in Asia-Pacific. These increases reflected the greater focus on this sector of the market. Commercial lending grew in Europe mainly due to the acquisition of Banque Hervet. In Hong Kong, the Rest of Asia-Pacific and North America corporate loan demand was muted Areas of special interest Telecoms industry exposure The table below sets out HSBC’s exposure to the telecoms industry in terms of outstanding advances. Telecoms industry exposure is a designated special category of exposure and is controlled under agreed caps. The exposure analysed below is well spread across geographical markets reflecting HSBC’s international footprint. Telecoms exposure as a percentage of total loans and advances was 2.1 per cent as at 31 December 2001 as compared with 2.2 per cent as at 31 December 2000. This exposure had the following characteristics: Investment grade under HSBC gradings............ Under one year remaining maturity ...... Telecom operators........... Telecom manufacturers... Non-performing accounts....................... of which provided ....... Percentage of telecoms industry exposure At 31 December 2001 At 31 December 2000 85 47 70 30 2 55 95 73 81 19 1 66 The slight deterioration in the credit quality of the telecoms industry portfolio is mainly due to the downgrading of two accounts. Argentina HSBC’s banking operations’ exposure to Argentina as at 31 December 2001 amounted to US$3.3 billion. Of this amount, US$2.8 billion was in-country exposure, including US$0.8 billion of loan exposures to the Argentine Government received in exchange for debt securities. These figures are prepared in accordance with the Bank of England Country Exposure Report (Form C1) guidelines and therefore exclude the exposures of insurance subsidiaries. HSBC’s insurance subsidiaries’ exposures to Argentina as at 31 December 2001 amounted to total assets of US$0.7 billion, of which US$0.4 billion related to long-term assurance assets attributable to policyholders, mainly comprising loans to the Argentine Government received in exchange for debt securities. Non-performing loans net of suspended interest were US$313 million, against which specific provisions outstanding were US$191 million. Additional general provisions of US$600 million were raised at the end of 2001 to take account of the substantially increased risk within the portfolio subsequent to the collapse in economic conditions in Argentina following its default on sovereign debt. HSBC will continue to closely monitor developments in Argentina and their effects on other economies in the region. At present, HSBC expects to continue to operate in Argentina although political events may cause it to reassess its present policy and may require it to take additional actions, including significant restructuring of its Argentine operations. Further deterioration in the Argentine economic and political situation, could also lead to further provisions and losses in the region for HSBC. Analysis of loans and advances to customers by geographical region and by type of customer The following tables analyse loans by industry sector and by the location of the principal operations of the lending subsidiary or, in the case of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, HSBC Bank Middle East and HSBC Bank USA operations, by the location of the lending branch. Europe US$m Hong Kong US$m Rest of Asia-Pacific † US$m North America US$m Latin America † US$m Gross loans by customer type as a % of total gross loans % Provisions for bad and doubtful debts US$m Gross loans and advances to customers US$m 27,282 23,125 – 21,065 48,347 38,476 9,475 3,630 2,393 20,510 74,484 11,329 2,361 13,690 8,123 6,227 37,475 9,662 8,474 4,710 543 6,349 29,738 1,546 223 1,769 5,134 – 4,280 9,414 11,282 2,412 2,174 900 5,559 22,327 908 189 1,097 21,809 – 6,113 27,922 8,600 5,826 3,990 725 4,203 23,344 12,524 8,984 21,508 865 78,215 – 1,440 2,305 2,138 128 90 778 644 3,778 166 4 170 8,123 39,125 125,463 70,158 26,315 14,594 5,339 37,265 153,671 26,473 11,761 38,234 24.7 2.6 12.3 39.6 22.1 8.3 4.6 1.7 11.7 48.4 8.3 3.7 12.0 (248 ) – (1,208 ) (1,456 ) (2,262 ) (235 ) (315 ) (18 ) (1,008 ) (3,838 ) (206 ) – (206 ) 31 December 2001 Personal: Residential mortgages ...................... Hong Kong SAR Government Home Ownership Scheme............ Other personal .................................. Total personal................................... Corporate and commercial: Commercial, industrial and international trade ........................ Commercial real estate ..................... Other property-related ...................... Government...................................... Other commercial* ........................... Total corporate and commercial Financial: Non-bank financial institutions......... Settlement accounts .......................... Total financial .................................. Total gross loans and advances to customers..................................... 136,521 68,982 32,838 72,774 6,253 317,368 100.0 (5,500 ) General provisions............................ Suspended interest............................ Total................................................. (558 ) 316,810 (2,661 ) (8,161 ) * † Other commercial includes advances in respect of agriculture, transport, energy and utilities. Further analysis is given on page 100. 97 H S B C H O L D I N G S P L C Financial Review (continued) Europe † Hong Kong US$m US$m Rest of Asia- Pacific US$m North America US$m Latin America US$m Gross loans by customer type as a % of total gross loans % Provisions for bad and doubtful debts US$m Gross loans and advances to customers † US$m 24,048 23,121 3,723 19,641 1,099 71,632 – 20,537 44,585 38,012 10,053 3,121 2,572 19,570 73,328 10,374 3,946 14,320 7,353 4,923 35,397 – 3,860 7,583 – 6,694 26,335 9,584 8,293 3,850 130 7,459 29,316 1,664 142 1,806 11,644 2,773 1,816 574 5,516 22,323 683 361 1,044 8,831 6,865 4,053 710 3,710 24,169 8,593 2,464 11,057 – 1,517 2,616 3,246 127 175 55 980 4,583 188 41 229 7,353 37,531 116,516 71,317 28,111 13,015 4,041 37,235 153,719 21,502 6,954 28,456 24.0 2.5 12.5 39.0 23.9 9.4 4.4 1.4 12.4 51.5 7.2 2.3 9.5 (324 ) – (1149 ) (1,473 ) (2,663 ) (307 ) (376 ) (44 ) (924 ) (4,314 ) (278 ) – (278 ) 31 December 2000 Personal: Residential mortgages ......................... Hong Kong SAR Government Home Ownership Scheme......................... Other personal..................................... Total personal ..................................... Corporate and commercial: Commercial, industrial and international trade........................... Commercial real estate........................ Other property-related......................... Government ........................................ Other commercial*.............................. Total corporate and commercial .......... Financial: Non-bank financial institutions Settlement accounts............................. Total financial..................................... Total gross loans and advances to customers ....................................... 132,233 66,519 30,950 61,561 7,428 298,691 100.0 (6,065 ) General provisions .............................. Suspended interest .............................. Total.................................................... 31 December 1999 Personal: Residential mortgages ......................... Hong Kong SAR Government Home Ownership Scheme......................... Other personal..................................... Total personal ..................................... Corporate and commercial: Commercial, industrial and international trade........................... Commercial real estate........................ Other property-related......................... Government ........................................ Other commercial*.............................. Total corporate and commercial .......... Financial: Non-bank financial institutions Settlement accounts............................. Total financial..................................... Total gross loans and advances to (687 ) 298,004 22,047 23,614 3,028 16,942 766 66,397 – 16,668 38,715 27,380 6,519 2,020 3,405 17,982 57,306 7,227 2,827 10,054 6,565 4,409 34,588 – 3,748 6,776 – 5,857 22,799 9,762 8,987 2,093 140 6,874 27,856 2,262 114 2,376 12,317 3,353 2,034 749 5,349 23,802 1,047 200 1,247 8,914 5,709 4,097 726 4,466 23,912 6,380 619 6,999 – 1,024 1,790 2,470 255 168 153 867 3,913 209 9 218 6,565 31,706 104,668 60,843 24,823 10,412 5,173 35,538 136,789 17,125 3,769 20,894 (2,102 ) (8,167 ) (228 ) – (921 ) (1,149 ) (2,468 ) (248 ) (319 ) (90 ) (1,143 ) (4,268 ) (275 ) – (275 ) 25.3 2.5 12.1 39.9 23.2 9.5 3.1 2.0 14.4 52.2 6.5 1.4 7.9 customers ....................................... 106,075 64,820 31,825 53,710 5,921 262,351 100.0 (5,692 ) General provisions .............................. Suspended interest .............................. Total.................................................... (788 ) 261,563 (2,304 ) (7,996 ) Other commercial includes advances in respect of agriculture, transport, energy and utilities. The figures for 31 December 2000 have been presented on a consistent basis with 31 December 2001 for residential mortgages and other personal lending. * † 98 Europe US$m Hong Kong US$m Rest of Asia- Pacific US$m North America US$m Latin America US$m Gross loans by customer type as a % of total gross loans % Provisions for bad and doubtful debts US$m Gross loans and advances to customers US$m 20,716 25,051 2,746 13,059 640 62,212 – 12,000 32,716 28,224 6,418 2,110 3,381 15,200 55,333 4,638 877 5,515 6,291 4,257 35,599 – 3,322 6,068 – 5,265 18,324 10,952 9,420 2,248 551 7,377 30,548 2,259 78 2,337 13,189 3,601 2,126 567 5,071 24,554 1,527 231 1,758 6,444 4,615 1,591 651 3,934 17,235 3,238 3,734 6,972 – 888 1,528 2,602 62 174 135 885 3,858 101 43 144 6,291 25,732 94,235 61,411 24,116 8,249 5,285 32,467 131,528 11,763 4,963 16,726 25.7 2.6 10.6 38.9 25.3 9.9 3.4 2.2 13.4 54.2 4.9 2.0 6.9 (156 ) – (789 ) (945 ) (1,973 ) (232 ) (194 ) (141 ) (967 ) (3,507 ) (156 ) – (156 ) 31 December 1998 Personal: Residential mortgages ......................... Hong Kong SAR Government Home Ownership Scheme ......................... Other personal ..................................... Total personal...................................... Corporate and commercial: Commercial, industrial and international trade ........................... Commercial real estate ........................ Other property-related ......................... Government......................................... Other commercial* .............................. Total corporate and commercial .......... Financial: Non-bank financial institutions Settlement accounts ............................. Total financial ..................................... Total gross loans and advances to customers........................................ 93,564 68,484 32,380 42,531 5,530 242,489 100.0 (4,608 ) General provisions............................... Suspended interest............................... Total.................................................... 31 December 1997 Personal: Residential mortgages ......................... Hong Kong SAR Government Home Ownership Scheme ......................... Other personal ..................................... Total personal...................................... Corporate and commercial: Commercial, industrial and international trade ........................... Commercial real estate ........................ Other property-related ......................... Government......................................... Other commercial* .............................. Total corporate and commercial .......... Financial: Non-bank financial institutions Settlement accounts ............................. Total financial ..................................... Total gross loans and advances to (567 ) 241,922 19,133 24,364 2,233 13,858 414 60,002 – 10,236 29,369 28,277 6,092 2,023 3,530 13,943 53,865 5,569 1,248 6,817 4,631 4,367 33,362 – 3,187 5,420 – 5,597 19,455 11,947 10,424 2,569 120 7,649 32,709 5,283 182 5,465 14,464 3,660 1,757 277 5,171 25,329 1,632 211 1,843 5,601 4,955 1,585 576 3,811 16,528 8,230 2,644 10,874 – 788 1,202 2,267 14 148 11 786 3,226 649 54 703 4,631 24,175 88,808 62,556 25,145 8,082 4,514 31,360 131,657 21,363 4,339 25,702 (2,019 ) (6,627 ) (58 ) – (509 ) (567 ) (1,047 ) (240 ) (102 ) (148 ) (923 ) (2,460 ) (84 ) – (84 ) 24.4 1.9 9.8 36.1 25.4 10.2 3.3 1.8 12.7 53.4 8.7 1.8 10.5 customers........................................ 90,051 71,536 32,592 46,857 5,131 246,167 100.0 (3,111 ) General provisions............................... Suspended interest............................... Total.................................................... (614 ) 245,553 (2,021 ) (5,132 ) 99 H S B C H O L D I N G S P L C Financial Review (continued) Customer loans and advances by principal area within rest of Asia-Pacific and Latin America Residential mortgages US$m Other Personal US$m Property- related US$m Commercial, industrial and international trade and other US$m 31 December 2001 Loans and advances to customers (gross) Singapore ............................................................. Australia and New Zealand .................................. Malaysia .............................................................. Middle East.......................................................... Indonesia.............................................................. South Korea ......................................................... Thailand ............................................................... Japan.................................................................... Mainland China.................................................... India..................................................................... Taiwan ................................................................. Other.................................................................... Total of rest of Asia-Pacific ................................. Brazil ................................................................... Argentina ............................................................. Panama ................................................................ Other.................................................................... Total of Latin America......................................... 536 1,539 1,196 31 5 597 32 1 22 125 843 207 5,134 276 263 317 9 865 879 281 435 1,415 48 56 56 53 – 254 364 439 4,280 1,140 140 159 1 1,440 916 1,225 455 920 31 14 35 288 384 18 3 297 4,586 57 59 57 45 218 3,025 2,109 2,400 2,934 757 516 659 1,119 1,456 1,161 931 1,771 18,838 1,484 1,584 * 386 276 3,730 * includes US$774 million of loan exposures to the Argentine Government received in exchange for debt securities. 31 December 2000 Loans and advances to customers (gross) Singapore ............................................................. Australia and New Zealand .................................. Malaysia .............................................................. Middle East.......................................................... Indonesia.............................................................. South Korea ......................................................... Thailand ............................................................... Japan.................................................................... Mainland China.................................................... India..................................................................... Taiwan ................................................................. Other.................................................................... Total of rest of Asia-Pacific ................................. Brazil ................................................................... Argentina ............................................................. Panama ................................................................ Other.................................................................... Total of Latin America......................................... Residential mortgages US$m Other Personal US$m Property- related US$m Commercial, industrial and international trade and other US$m 497 1,064 627 29 3 485 34 4 29 85 696 170 3,723 344 459 290 6 1,099 770 101 368 1,602 17 47 49 92 – 214 298 302 3,860 1,076 285 153 3 1,517 1,069 1,243 540 666 34 28 48 265 332 15 7 342 4,589 63 145 48 46 302 3,077 2,157 2,455 2,750 821 698 753 1,332 1,226 1,119 790 1,600 18,778 2,008 1,808 444 250 4,510 Total US$m 5,356 5,154 4,486 5,300 841 1,183 782 1,461 1,862 1,558 2,141 2,714 32,838 2,957 2,046 919 331 6,253 Total US$m 5,413 4,565 3,990 5,047 875 1,258 884 1,693 1,587 1,433 1,791 2,414 30,950 3,491 2,697 935 305 7,428 100 Analysis of loans and advances to banks by geographical region 31 December 2001........................................ Suspended interest......................................... Total.............................................................. 31 December 2000......................................... Suspended interest......................................... Total.............................................................. 31 December 1999......................................... Suspended interest......................................... Total.............................................................. 31 December 1998......................................... Suspended interest......................................... Total.............................................................. 31 December 1997......................................... Suspended interest......................................... Total.............................................................. Europe US$m 40,665 Hong Kong US$m Rest of Asia-Pacific US$m North America US$m Latin America US$m 42,516 11,253 7,864 2,367 45,072 57,154 11,197 9,279 3,362 29,395 53,778 10,024 4,503 2,402 22,713 44,938 11,433 4,523 1,740 22,471 36,725 11,993 10,563 4,827 Gross loans and advances to banks US$m Provisions for bad and doubtful debts US$m 104,665 (2 ) 104,663 126,064 (2 ) 126,062 100,102 (1 ) 100,101 85,347 (1 ) 85,346 86,579 (11 ) 86,568 (22 ) (30 ) (24 ) (31 ) (46 ) Provisions for bad and doubtful debts It is HSBC’s policy that each operating company will make provisions for bad and doubtful debts promptly where required and on a prudent and consistent basis. Generally this policy results in provisioning that matches or exceeds the requirements of all relevant regulatory bodies. Loans are designated as non-performing as soon as management has doubts as to the ultimate collectability of principal or interest or when contractual payments of principal or interest are 90 days overdue. When a loan is designated as non- performing, interest will be suspended (see below) and a specific provision raised if required. However, the suspension of interest may be deferred for up to 12 months in either of the following situations: • where cash collateral is held covering the total of principal and interest due and the right to set- off is legally sound; or • where the value of net realisable tangible security is considered more than sufficient to cover the full repayment of all principal and interest due and credit approval has been given to the rolling-up or capitalisation of interest payments. This exception is used infrequently. There are two basic types of provision, specific and general, each of which is considered in terms of the charge and the amount outstanding. Specific provisions Specific provisions represent the quantification of actual and expected losses from identified accounts and are deducted from loans and advances in the balance sheet. Other than where provisions on smaller balance homogenous loans are assessed on a portfolio basis, the amount of specific provision raised is assessed on a case-by-case basis. The amount of specific provision raised is HSBC’s estimate of the amount needed to reduce the carrying value of the asset to the expected ultimate net realisable value and, in reaching a decision, consideration is given, among other things, to the following factors: • • • the financial standing of the customer, including a realistic assessment of the likelihood of repayment of the loan within an acceptable period and the extent of HSBC’s other commitments to the same customer; the realisable value of any security for the loan; the costs associated with obtaining repayment and realisation of the security; and 101 H S B C H O L D I N G S P L C Financial Review (continued) • if loans are not in local currency, the ability of the borrower to obtain the relevant foreign currency. Where specific provisions are raised on a portfolio basis, the level of provisioning takes into account management’s assessment of the portfolio’s structure, past and expected credit losses, business and economic conditions, and any other relevant factors. The principal portfolios evaluated on a portfolio basis are credit cards and other unsecured consumer lending products. HSBC has in place a minimum provisioning standard for all consumer lending products based on time of delinquency. For portfolios of non-mortgage personal lending, the policy, which is based on historical loss experience, is to have provided 100 per cent after 180 days delinquency. General provisions General provisions augment specific provisions and provide cover for loans which are impaired at the balance sheet date but which will not be identified as such until some time in the future. HSBC requires operating companies to maintain a general provision which is determined taking into account the structure and risk characteristics of each company’s loan portfolio. Historical levels of latent risk are regularly reviewed by each operating company to determine that the level of general provisioning continues to be appropriate. Where entities operate in a significantly higher risk environment, an increased level of general provisioning will apply, taking into account local market conditions and economic and political factors. General provisions are deducted from loans and advances to customers in the balance sheet but, unlike specific provisions, are included in tier 2 capital when calculating HSBC’s capital base for regulatory purposes. Loans on which interest is suspended Provided that there is a realistic prospect of interest being paid at some future date, interest on non- performing loans is charged to the customer’s account. However, the interest is not credited to the profit and loss account but to an interest suspense account in the balance sheet which is netted against the relevant loan. On receipt of cash (other than from the realisation of security), suspended interest is recovered and taken to the profit and loss account. A 102 specific provision of the same amount as the interest receipt is then raised against the principal balance. Amounts received from the realisation of security are applied to the repayment of outstanding indebtedness, with any surplus used to recover any specific provisions and then suspended interest. Non-accrual loans Where the probability of receiving interest payments is remote, interest is no longer accrued and any suspended interest balance is written off. Loans are not reclassified as accruing until interest and principal payments are up-to-date and future payments are reasonably assured. 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. Outstanding provisions Aggregate customer bad and doubtful debt provisions at 31 December 2001 were in line with 31 December 2000 and at US$8.2 billion represented 2.57 per cent of gross customer advances compared with 2.73 per cent at 31 December 2000. In Hong Kong and the Rest of Asia-Pacific, continuing resolution of previously provided debt contributed to outstanding provisions falling by US$533 million as amounts were charged off. This fall was offset in Latin America where the stock of provisions rose by US$492 million, in essence reflecting the US$600 million additional provision raised in respect of Argentine risk. Excluding Argentina, general provisions reduced slightly to 0.71 per cent of gross customer lending (excluding reverse repo transactions and settlement accounts). In Argentina, general provisions were augmented by US$600 million in view of the severe economic conditions and political turmoil culminating in the declaration of a default by the Government. Following this substantial increase general provision coverage stood at 30.7 per cent of customer lending at 31 December 2001 or 49.7 per cent of customer lending excluding the loans outstanding from the Argentine Government which arose as a result of a swap of Government bonds from domestic creditors. The following tables show details of the movements in HSBC(cid:146)s provisions for bad and doubtful debts by location of lending office for each of the past five years. A discussion of the material movements in the charge for provisions by region is included within the analysis of results for geographical segments on pages 48 to 72. Europe US$m 3,025 Hong Kong US$m 1,802 Rest of Asia- Pacific US$m 2,091 North America US$m Latin America US$m 723 556 2001 Provisions at 1 January ..................................................... Amounts written off: Banks ............................................................................ Commercial, industrial and international trade .............. Real estate..................................................................... Non-bank financial institutions ..................................... Governments................................................................. Other commercial.......................................................... Residential mortgages ................................................... Other personal............................................................... Total amounts written off.............................................. Recoveries of amounts written off in previous years: Commercial, industrial and international trade .............. Real estate..................................................................... Non-bank financial institutions ..................................... Governments................................................................. Other commercial.......................................................... Residential mortgages ................................................... Other personal............................................................... Total recoveries............................................................. Charge to profit and loss account: Banks ............................................................................ Commercial, industrial and international trade .............. Real estate..................................................................... Non-bank financial institutions ..................................... Governments................................................................. Other commercial.......................................................... Residential mortgages ................................................... Other personal............................................................... General provisions ........................................................ Total charge .................................................................. Foreign exchange and other movements .......................... (5 ) (123 ) (27 ) (5 ) – (54 ) (4 ) (224 ) (442 ) 12 1 – – 17 1 34 65 (1 ) 164 (35 ) (2 ) (2 ) 143 (47 ) 257 (36 ) 441 (22 ) Provisions at 31 December................................................ 3,067 Provisions against banks: Specific provisions........................................................ Provisions against customers: Specific provisions........................................................ General provisions* ...................................................... Provisions at 31 December................................................ Provisions against customers as a % of gross loans and advances to customers: Specific provisions........................................................ General provisions ........................................................ Total ................................................................................. 22 2,204 841 3,067 1.61 0.62 2.23 – (238 ) (29 ) (53 ) – (34 ) (121 ) (155 ) (630 ) 1 2 3 – 12 5 8 31 – 15 16 (20 ) – (84 ) 111 168 (9 ) 197 8 1,408 – 856 552 1,408 1.24 0.80 2.04 – (256 ) (18 ) (5 ) – (48 ) (7 ) (93 ) (427 ) 11 1 1 – 99 – 26 138 – 157 (6 ) (14 ) – (58 ) 10 82 1 172 (22 ) 1,952 – 1,786 166 1,952 5.44 0.51 5.95 – (103 ) (10 ) (3 ) – (107 ) (2 ) (93 ) (318 ) 18 – – – 11 – 14 43 – 91 2 2 (3 ) 141 1 70 (17 ) 287 (27 ) 708 – 275 433 708 0.38 0.59 0.97 – (33 ) (4 ) (1 ) – (215 ) (13 ) (95 ) (361 ) 3 – – – 1 – 4 8 – 57 7 – – 100 17 125 634 940 (95 ) 1,048 – 379 669 1,048 6.06 10.70 † 16.76 * General provisions are allocated to geographical segments based on the location of the office booking the provision. Consequently, the general provision booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in the rest of Asia-Pacific, as well as those booked in Hong Kong. † Includes US$600 million of additional general provisions held against Argentine loans. Total US$m 8,197 (5 ) (753 ) (88 ) (67 ) – (458 ) (147 ) (660 ) (2,178 ) 45 4 4 – 140 6 86 285 (1 ) 484 (16 ) (34 ) (5 ) 242 92 702 573 2,037 (158 ) 8,183 22 5,500 2,661 8,183 1.73 0.84 2.57 103 H S B C H O L D I N G S P L C Financial Review (continued) 2000 Provisions at 1 January ..................................................... Amounts written off: Banks............................................................................ Commercial, industrial and international trade.............. Real estate .................................................................... Non-bank financial institutions ..................................... Governments ................................................................ Other commercial ......................................................... Residential mortgages................................................... Other personal .............................................................. Total amounts written off.............................................. Recoveries of amounts written off in previous years: Commercial, industrial and international trade.............. Real estate .................................................................... Non-bank financial institutions ..................................... Governments ................................................................ Other commercial ......................................................... Residential mortgages................................................... Other personal .............................................................. Total recoveries ............................................................ Charge to profit and loss account: Banks............................................................................ Commercial, industrial and international trade.............. Real estate .................................................................... Non-bank financial institutions ..................................... Governments ................................................................ Other commercial ......................................................... Residential mortgages................................................... Other personal .............................................................. General provisions........................................................ Total charge.................................................................. Foreign exchange and other movements†......................... Provisions at 31 December ............................................... Provisions against banks: Specific provisions ....................................................... Provisions against customers: Specific provisions ....................................................... General provisions*...................................................... Provisions at 31 December ............................................... Provisions against customers as a % of gross loans and advances to customers: Specific provisions ....................................................... General provisions........................................................ Total ................................................................................. Europe US$m 2,153 (9 ) (154 ) (27 ) (2 ) (37 ) (68 ) (5 ) (181 ) (483 ) 4 7 3 3 4 1 32 54 2 87 (9 ) 1 (19 ) (3 ) 1 245 43 348 953 3,025 30 2,135 860 3,025 1.61 0.65 2.26 Hong Kong US$m 1,887 (cid:150) (202 ) (9 ) (8 ) (cid:150) (68 ) (82 ) (73 ) (442 ) 3 (cid:150) (cid:150) (cid:150) 4 1 8 16 (cid:150) 81 40 (cid:150) (cid:150) (30 ) 101 55 1 248 93 1,802 (cid:150) 1,241 561 1,802 1.87 0.84 2.71 Rest of Asia- Pacific US$m 2,686 North America Latin America US$m 857 US$m 437 (cid:150) (191 ) (58 ) (3 ) (cid:150) (149 ) (5 ) (88 ) (494 ) 3 2 2 (cid:150) 23 (cid:150) 19 49 (cid:150) 107 19 (3 ) (cid:150) (18 ) 5 63 (188 ) (15 ) (135 ) 2,091 (cid:150) 1,929 162 2,091 6.23 0.53 6.76 (cid:150) (96 ) (13 ) (cid:150) (cid:150) (97 ) (4 ) (90 ) (300 ) 1 3 1 (cid:150) 11 (cid:150) 15 31 (cid:150) 84 10 (2 ) (cid:150) 75 9 109 (138 ) 147 (12 ) 723 (cid:150) 262 461 723 0.43 0.75 1.18 (cid:150) (37 ) (3 ) (cid:150) (cid:150) (15 ) (7 ) (30 ) (92 ) 2 (cid:150) (cid:150) (cid:150) 1 1 6 10 (cid:150) 48 5 2 (cid:150) 26 12 109 2 204 (3 ) 556 (cid:150) 498 58 556 6.70 0.78 7.48 Total US$m 8,020 (9 ) (680 ) (110 ) (13 ) (37 ) (397 ) (103 ) (462 ) (1,811 ) 13 12 6 3 43 3 80 160 2 407 65 (2 ) (19 ) 50 128 581 (280 ) 932 896 8,197 30 6,065 2,102 8,197 2.03 0.70 2.73 * General provisions are allocated to geographical segments based on the location of the office booking the provision. Consequently, the general provision booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in the rest of Asia-Pacific, as well as those booked in Hong Kong. † Other movements include amounts transferred in on the acquisition of CCF of US$882 million. 104 1999 Provisions at 1 January ..................................................... Amounts written off: Commercial, industrial and international trade .............. Real estate..................................................................... Non-bank financial institutions ..................................... Governments................................................................. Other commercial.......................................................... Residential mortgages ................................................... Other personal............................................................... Total amounts written off.............................................. Recoveries of amounts written off in previous years: Banks ............................................................................ Commercial, industrial and international trade .............. Real estate..................................................................... Non-bank financial institutions ..................................... Governments................................................................. Other commercial.......................................................... Other personal............................................................... Total recoveries............................................................. Charge to profit and loss account: Banks ............................................................................ Commercial, industrial and international trade .............. Real estate..................................................................... Non-bank financial institutions ..................................... Governments................................................................. Other commercial.......................................................... Residential mortgages ................................................... Other personal............................................................... General provisions ........................................................ Total charge .................................................................. Foreign exchange and other movements .......................... Provisions at 31 December................................................ Provisions against banks: Specific provisions........................................................ Provisions against customers: Specific provisions........................................................ General provisions* ...................................................... Provisions at 31 December................................................ Provisions against customers as a % of gross loans and advances to customers: Specific provisions........................................................ General provisions ........................................................ Total ................................................................................. Europe US$m 1,932 Hong Kong US$m 1,554 Rest of Asia- Pacific US$m 2,181 North America US$m Latin America US$m 594 397 (89 ) (25 ) (1 ) (cid:150) (43 ) (2 ) (222 ) (382 ) (cid:150) 15 2 20 11 10 32 90 (2 ) 155 (14 ) 11 (62 ) 19 (cid:150) 312 19 438 75 2,153 24 1,411 718 2,153 1.33 0.68 2.01 (146 ) (14 ) (cid:150) (cid:150) (15 ) (3 ) (78 ) (256 ) (cid:150) 1 (cid:150) (cid:150) (cid:150) 1 8 10 (cid:150) 273 96 45 (cid:150) 42 86 77 (34 ) 585 (6 ) (130 ) (32 ) (35 ) (cid:150) (49 ) (5 ) (62 ) (313 ) 1 1 2 (cid:150) (cid:150) 1 13 18 (2 ) 414 86 75 (cid:150) 169 7 74 (14 ) 809 (9 ) 1,887 2,686 (cid:150) 1,428 459 1,887 2.20 0.71 2.91 (cid:150) 2,221 465 2,686 6.98 1.46 8.44 (33 ) (2 ) (2 ) (cid:150) (12 ) (10 ) (106 ) (165 ) (cid:150) 3 13 (cid:150) (cid:150) 9 19 44 (cid:150) 59 (18 ) 1 (2 ) 11 1 79 (23 ) 108 276 857 (cid:150) 254 603 857 0.47 1.12 1.59 (36 ) (1 ) (cid:150) (cid:150) (14 ) (4 ) (15 ) (70 ) (cid:150) 2 (cid:150) (cid:150) (cid:150) (cid:150) 1 3 (cid:150) 45 4 (cid:150) (cid:150) 33 8 38 5 133 (26 ) 437 (cid:150) 378 59 437 6.38 1.00 7.38 * General provisions are allocated to geographical segments based on the location of the office booking the provision. Consequently, the general provision booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in the rest of Asia-Pacific, as well as those booked in Hong Kong. Total US$m 6,658 (434 ) (74 ) (38 ) (cid:150) (133 ) (24 ) (483 ) (1,186 ) 1 22 17 20 11 21 73 165 (4 ) 946 154 132 (64 ) 274 102 580 (47 ) 2,073 310 8,020 24 5,692 2,304 8,020 2.17 0.88 3.05 105 H S B C H O L D I N G S P L C Financial Review (continued) 1998 Provisions at 1 January ..................................................... Amounts written off: Banks............................................................................ Commercial, industrial and international trade.............. Real estate .................................................................... Non-bank financial institutions ..................................... Governments ................................................................ Other commercial ......................................................... Residential mortgages................................................... Other personal .............................................................. Total amounts written off.............................................. Recoveries of amounts written off in previous years: Commercial, industrial and international trade.............. Real estate .................................................................... Non-bank financial institutions ..................................... Governments ................................................................ Other commercial ......................................................... Other personal .............................................................. Total recoveries ............................................................ Charge to profit and loss account: Banks............................................................................ Commercial, industrial and international trade.............. Real estate .................................................................... Non-bank financial institutions ..................................... Governments ................................................................ Other commercial ......................................................... Residential mortgages................................................... Other personal .............................................................. General provisions........................................................ Total charge.................................................................. Foreign exchange and other movements .......................... Provisions at 31 December ............................................... Provisions against banks: Specific provisions ....................................................... Provisions against customers: Specific provisions ....................................................... General provisions*...................................................... Provisions at 31 December ............................................... Provisions against customers as a % of gross loans and advances to customers: Specific provisions ....................................................... General provisions........................................................ Total ................................................................................. Europe US$m 2,076 Hong Kong US$m 934 Rest of Asia- Pacific US$m 1,300 North America US$m Latin America US$m 629 239 (24 ) (147 ) (54 ) (2 ) (10 ) (203 ) (3 ) (190 ) (633 ) 28 25 1 1 4 27 86 4 67 (54 ) (1 ) (cid:150) 60 (cid:150) 245 48 369 34 1,932 28 1,286 618 1,932 1.37 0.66 2.03 (cid:150) (34 ) (10 ) (cid:150) (cid:150) (50 ) (cid:150) (47 ) (141 ) 1 (cid:150) (cid:150) (cid:150) 3 5 9 (cid:150) 361 105 45 (cid:150) 107 59 88 (18 ) 747 5 1,554 (cid:150) 1,059 495 1,554 1.55 0.72 2.27 (4 ) (19 ) (18 ) (cid:150) (cid:150) (300 ) (1 ) (55 ) (397 ) 6 1 (cid:150) (cid:150) (cid:150) 9 16 5 679 113 43 (cid:150) 272 27 88 (8 ) 1,219 43 2,181 3 1,701 477 2,181 5.26 1.47 6.73 (cid:150) (32 ) (13 ) (cid:150) (cid:150) (19 ) (10 ) (122 ) (196 ) 3 21 1 (cid:150) 14 22 61 (cid:150) 48 (45 ) (cid:150) 1 4 8 129 (36 ) 109 (9 ) 594 (cid:150) 223 371 594 0.53 0.87 1.40 (cid:150) (3 ) (cid:150) (cid:150) (cid:150) (4 ) (cid:150) (24 ) (31 ) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 70 2 (cid:150) (cid:150) 26 9 62 24 193 (4 ) 397 (cid:150) 339 58 397 6.13 1.05 7.18 Total US$m 5,178 (28 ) (235 ) (95 ) (2 ) (10 ) (576 ) (14 ) (438 ) (1,398 ) 38 47 2 1 21 63 172 9 1,225 121 87 1 469 103 612 10 2,637 69 6,658 31 4,608 2,019 6,658 1.90 0.83 2.73 * General provisions are allocated to geographical segments based on the location of the office booking the provision. Consequently, the general provision booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in the rest of Asia-Pacific, as well as those booked in Hong Kong 106 1997 Provisions at 1 January ..................................................... Acquisition of subsidiaries................................................ Amounts written off: Banks ............................................................................ Commercial, industrial and international trade .............. Real estate..................................................................... Non-bank financial institutions ..................................... Governments................................................................. Other commercial.......................................................... Residential mortgages ................................................... Other personal............................................................... Total amounts written off.............................................. Recoveries of amounts written off in previous years: Banks ............................................................................ Commercial, industrial and international trade .............. Real estate..................................................................... Non-bank financial institutions ..................................... Governments................................................................. Other commercial.......................................................... Other personal............................................................... Total recoveries............................................................. Charge to profit and loss account: Banks ............................................................................ Commercial, industrial and international trade .............. Real estate..................................................................... Non-bank financial institutions ..................................... Governments................................................................. Other commercial.......................................................... Residential mortgages ................................................... Other personal............................................................... General provisions* ...................................................... Total charge .................................................................. Foreign exchange and other movements .......................... Provisions at 31 December................................................ Provisions against banks: Specific provisions........................................................ Provisions against customers: Specific provisions........................................................ General provisions† ...................................................... Provisions at 31 December................................................ Provisions against customers as a % of gross loans and advances to customers: Specific provisions........................................................ General provisions ........................................................ Total ................................................................................. Europe US$m 2,412 (cid:150) (1 ) (113 ) (91 ) (1 ) (cid:150) (10 ) (1 ) (138 ) (355 ) 1 29 12 14 (cid:150) 3 28 87 (4 ) 119 (33 ) (22 ) (151 ) 5 5 165 (15 ) 69 (137 ) 2,076 45 1,455 576 2,076 1.62 0.64 2.26 Hong Kong US$m 763 (cid:150) (cid:150) (34 ) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (29 ) (63 ) (cid:150) 5 (cid:150) (cid:150) (cid:150) (cid:150) 3 8 (cid:150) 72 7 2 (cid:150) 7 (cid:150) 30 105 223 3 934 (cid:150) 423 511 934 0.59 0.72 1.31 Rest of Asia- Pacific US$m North America US$m Latin America US$m 844 (cid:150) (cid:150) (30 ) (5 ) (cid:150) (cid:150) (1 ) (1 ) (19 ) (56 ) (cid:150) 2 1 12 (cid:150) (cid:150) 5 20 (cid:150) 116 13 23 (cid:150) 28 7 31 397 615 (123 ) 1,300 1 812 487 1,300 2.49 1.50 3.99 739 (cid:150) (cid:150) (24 ) (31 ) (cid:150) (19 ) (21 ) (10 ) (156 ) (261 ) (cid:150) 11 12 (cid:150) 1 15 19 58 (cid:150) (12 ) (16 ) (2 ) (17 ) 9 4 141 (28 ) 79 14 629 (cid:150) 218 411 629 0.46 0.88 1.34 (cid:150) 228 (cid:150) (17 ) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (17 ) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 1 (cid:150) (cid:150) (cid:150) 1 (cid:150) 4 22 28 (cid:150) 239 (cid:150) 203 36 239 3.96 0.70 4.66 * † Includes a special general provision of US$290 million reflecting the unsettled economic environment in the Asia-Pacific region. General provisions are allocated to geographical segments based on the location of the office booking the provision. Consequently, the general provision booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in the rest of Asia-Pacific, as well as those booked in Hong Kong Total US$m 4,758 228 (1 ) (218 ) (127 ) (1 ) (19 ) (32 ) (12 ) (342 ) (752 ) 1 47 25 26 1 18 55 173 (4 ) 296 (29 ) 1 (168 ) 50 16 371 481 1,014 (243 ) 5,178 46 3,111 2,021 5,178 1.26 0.82 2.08 107 H S B C H O L D I N G S P L C Financial Review (continued) Provisions against loans and advances to customers Total provisions to gross lending* Specific provisions........................... General provisions (cid:150) held against Argentine risk............ (cid:150) other.............................................. Total provisions ............................... 31 December 2001 % 31 December 2000 % 1.90 0.21 0.71 2.82 2.17 (cid:150) 0.75 2.92 * Net of suspended interest, reverse repo transactions and settlement accounts. Risk elements in the loan portfolio The SEC requires disclosure of credit risk elements under the following headings that reflect US accounting practice and classifications: • • • loans accounted for on a non-accrual basis; accruing loans contractually past due 90 days or more as to interest or principal; and troubled debt restructurings not included in the above. HSBC, however, classifies loans in accordance with UK accounting practice which differs from US practice as follows: Suspended interest Under the UK Statement of Recommended Practice on Advances, UK banks continue to charge interest on doubtful debts where there is a realistic prospect of recovery. This interest is credited to a suspense account and is not included in the profit and loss account. In the United States, loans on which interest has been accrued but suspended would be included in risk elements as loans accounted for on a non- accrual basis. Assets acquired in exchange for advances Under US GAAP, assets acquired in exchange for advances in order to achieve an orderly realisation are usually reported in a separate balance sheet category, (cid:145)Owned Real Estate(cid:146). Under UK GAAP, these assets are reported within loans and advances. Troubled debt restructurings US GAAP requires separate disclosure of any loans whose terms have been modified due to problems with the borrower. Such disclosures may be discontinued after the first year if the new terms were in line with market conditions at the time of the restructuring and the borrower has remained current 108 with the new terms. In addition, US banks typically write off problem lending more quickly than is the practice in the United Kingdom. This practice means that HSBC(cid:146)s reported level of credit risk elements is likely to be higher than for a comparable US bank. Potential problem loans Credit risk elements also cover potential problem loans. These are loans where known information about possible credit problems of borrowers causes management serious doubts as to the borrowers(cid:146) ability to comply with the loan repayment terms. At 31 December 2001, all loans and advances in Argentina, and all cross-border loans to Argentina, which were not included as part of total risk elements have been designated as potential problem loans. There were no other significant potential problem loans at 31 December 2001. 31 December 2001 US$m 31 December 2000 US$m 9 9,649 9,658 23 10,372 10,395 84.7% 78.9% Non-performing loans and advances* Banks.................................... Customers............................. Total non-performing loans and advances .......................... Total provisions cover as a percentage of non-performing loans and advances .......... * Net of suspended interest. Total non-performing loans to customers decreased by US$723 million during 2001. At 31 December 2001, non-performing loans represented 3.0 per cent of total lending compared with 3.5 per cent at 31 December 2000. Underlying credit quality remained stable both in the UK and in France although there was some weakening of business confidence. In Hong Kong, non-performing loans decreased by US$494 million during 2001. This reflected the impact of write-offs and recoveries, some improvement in the corporate loan book offset partially by an increase in delinquency in personal lending. In the Rest of Asia-Pacific, non-performing loans decreased by US$356 million during 2001, mainly due to the recovery achieved on the historical Olympia & York loans. The level of non-performing loans in North America remained largely unchanged notwithstanding a weaker economic environment. In Latin America, there was an increase in non- performing loans in 2001 in local currency terms in Brazil reflecting both targeted growth in consumer lending and a generally weaker economy. In Argentina, there was an increase in non-performing loans in local currency terms during the year due to the economic deterioration although this was offset by all fully provided loans being written off. As at 31 December 2001, the impact of the economic crisis had not yet caused individual accounts to become non-performing against contractual terms. Recognising the likely deterioration in the portfolio all exposure not already classified as non-performing has been classified as (cid:145)potential problem loans(cid:146) against which an additional US$600 million provision was raised. The following table provides an analysis of risk elements in the loan portfolios as at 31 December for the past five years: 31 December 2001 US$m 31 December 2000 US$m 31 December 1999 US$m 31 December 1998 US$m 31 December 1997 US$m Loans accounted for on a non-accrual basis: Europe.......................................................... Hong Kong................................................... Rest of Asia-Pacific...................................... North America.............................................. Latin America............................................... Total non-accrual loans ................................ Loans on which interest has been accrued but suspended: Europe.......................................................... Hong Kong................................................... Rest of Asia-Pacific...................................... North America.............................................. Latin America............................................... Total suspended interest loans ...................... Assets acquired in exchange for advances: Europe.......................................................... Hong Kong................................................... Rest of Asia-Pacific...................................... North America.............................................. Total assets acquired in exchange for advances .................................................. Total non-performing loans .......................... Troubled debt restructurings: Europe.......................................................... Hong Kong................................................... Rest of Asia-Pacific ..................................... North America.............................................. Latin America............................................... Total troubled debt restructurings ................. Accruing loans contractually past due 90 days or more as to principal or interest: Europe.......................................................... Hong Kong................................................... Rest of Asia-Pacific...................................... North America ............................................. Latin America............................................... Total accruing loans contractually past due 90 days or more ...................................... Total risk elements: Europe.......................................................... Hong Kong................................................... Rest of Asia-Pacific...................................... North America.............................................. Latin America............................................... Total risk elements ....................................... Provisions for bad and doubtful debts as a % of total risk elements ................................ 2,052 213 195 593 429 3,482 1,553 1,795 2,497 20 162 6,027 84 19 32 14 149 9,658 – 381 131 3 144 659 15 98 38 44 55 250 3,704 2,506 2,893 674 790 10,567 1,985 236 429 606 571 3,827 1,389 2,259 2,627 18 181 6,474 25 26 24 19 94 10,395 (cid:150) 395 231 5 144 775 11 76 66 64 82 299 3,410 2,992 3,377 712 978 11,469 1,176 163 435 550 447 2,771 1,514 2,898 3,097 18 149 7,676 27 72 2 17 118 10,565 (cid:150) 266 138 9 146 559 21 84 54 59 58 276 2,738 3,483 3,726 653 800 11,400 1,092 77 344 546 355 2,414 1,243 2,443 2,691 24 48 6,449 28 (cid:150) (cid:150) 22 50 8,913 22 187 68 1 18 296 1 121 69 30 67 288 2,386 2,828 3,172 623 496 9,497 1,064 22 181 564 260 2,091 1,558 597 1,076 39 (cid:150) 3,270 72 (cid:150) (cid:150) 35 107 5,468 98 6 38 6 (cid:150) 148 49 91 79 57 57 333 2,841 716 1,374 701 317 5,949 77.4 71.5 70.3 70.1 87.0 As at 31 December 2001, there were potential problem loans of US$2,604 million in respect of Argentine loans. 109 H S B C H O L D I N G S P L C Financial Review (continued) Interest forgone on non-performing lendings Interest income that would have been recognised under the original terms of the non-accrual, suspended interest and restructured loans, amounted to approximately US$640 million in 2001 compared with US$955 million in 2000, US$946 million in 1999, US$811 million in 1998 and US$411 million in 1997. Interest income of approximately US$261 million from such loans was recorded in 2001, compared with US$324 million in 2000, US$328 million in 1999, US$192 million in 1998 and US$232 million in 1997. Non-performing customer loans* and related specific provisions outstanding by geographical segment Non- performing loans 2001 Specific provisions 2001 Non- performing loans 2000 Specific provisions 2000 US$m 3,682 2,028 2,723 625 591 9,649 US$m 2,204 856 1,786 275 379 5,500 US$m 3,376 2,521 3,081 642 752 10,372 US$m 2,135 1,241 1,929 262 498 6,065 Europe.................. Hong Kong........... Rest of Asia- Pacific ............. North America ..... Latin America ...... * Net of suspended interest. 31 December 2001 Germany ...................................................... United States................................................ France .......................................................... The Netherlands........................................... Hong Kong .................................................. Italy.............................................................. Canada ......................................................... Japan ............................................................ Banks US$bn 22.0 5.1 8.1 6.9 0.8 8.3 5.6 3.4 Country distribution of outstandings and cross- border exposures HSBC controls the risks associated with cross-border lending, essentially the risk of foreign currency required for payments not being available to local residents, through a central process of internal country limits which are determined by taking into account both economic and political risks. Exposure to individual countries and cross-border exposure in aggregate is kept under continuous review. The following tables analyse in-country foreign currency and cross-border outstandings by type of borrower to countries which individually represent in excess of 1 per cent of HSBC(cid:146)s total assets. Classification is based upon the country of residence of the borrower but recognises the transfer of country risk in respect of third party guarantees or residence of the head office where the borrower is a branch. In accordance with the Bank of England Country Exposure Report (Form C1) guidelines, outstandings comprise loans and advances (excluding settlement accounts), amounts receivable under finance leases, acceptances, commercial bills, certificates of deposit and debt and equity securities (net of short positions), and exclude accrued interest and intra- HSBC exposures. Outstandings to counterparties in the United Kingdom, HSBC Holdings(cid:146) country of domicile, are not recorded on Form C1 and have not been disclosed below. Government and official institutions US$bn Other US$bn Total US$bn 2.1 9.8 1.5 0.3 0.7 1.5 2.2 4.4 2.4 9.6 4.1 3.4 9.0 0.6 1.5 0.8 26.5 24.5 13.7 10.6 10.5 10.4 9.3 8.6 110 31 December 2000 United States............................................... Germany ..................................................... France ......................................................... Italy............................................................. Hong Kong ................................................. Canada ........................................................ The Netherlands.......................................... Japan........................................................... 31 December 1999 United States............................................... Germany ..................................................... France ......................................................... Hong Kong ................................................. Japan........................................................... Canada ........................................................ The Netherlands.......................................... Italy............................................................. Banks US$bn 6.3 18.4 10.0 7.3 1.0 7.7 7.1 4.5 Banks US$bn 6.5 19.0 9.8 0.8 3.9 6.1 6.7 5.7 Government and official institutions US$bn Other US$bn Total US$bn 10.3 0.9 1.9 3.8 0.6 2.2 0.1 2.6 6.0 1.3 3.8 0.7 10.0 1.4 2.1 0.5 22.6 20.6 15.7 11.8 11.6 11.3 9.3 7.6 Government and official institutions US$bn Other US$bn Total US$bn 12.7 (0.3) 2.4 0.2 4.8 0.8 ― 0.1 5.7 1.6 1.4 10.4 0.4 1.2 1.2 0.3 24.9 20.3 13.6 11.4 9.1 8.1 7.9 6.1 As at 31 December 2001, HSBC had in-country foreign currency and cross-border outstandings to counterparties in Australia of between 0.75% and 1% of total assets. The aggregate in-country foreign currency and cross-border outstandings were US$6.0 billion. As at 31 December 2000, HSBC had in-country foreign currency and cross-border outstandings to counterparties in Australia, and Switzerland of between 0.75% and 1% of total assets. The aggregate in-country foreign currency and cross-border outstandings were: Australia: US$6.5 billion; and Switzerland: US$6.0 billion. As at 31 December 1999, HSBC had in-country foreign currency and cross-border outstandings to counterparties in Australia, Belgium and Switzerland of between 0.75% and 1% of total assets. The aggregate in-country foreign currency and cross- border outstandings were: Australia: US$5.4 billion; Belgium: US$4.4 billion; and Switzerland: US$4.4 billion. 111 H S B C H O L D I N G S P L C Financial Review (continued) Liquidity management Liquidity relates to the ability of a company to meet its obligations as they fall due. Management of liquidity in HSBC therefore is carried out at local level in individual companies instead of on a consolidated basis because the range of currencies, markets and time zones across which HSBC operates means that resources may not readily be transferred across HSBC to meet liquidity needs. HSBC requires operating entities to maintain a strong liquidity position and 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. Compliance with liquidity requirements is monitored by local Asset and Liability Policy Committees 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 strong 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 • maintenance of liquidity contingency plans. These plans include the identification of early indicators of liquidity problems and actions which are to be taken to improve the liquidity position at this stage, together with the actions which the entity can take to maintain liquidity in a crisis situation while minimising the long-term impact on its business. Current accounts and savings deposits payable on demand or at short notice form a significant part of HSBC(cid:146)s overall funding. HSBC places considerable importance on the stability of these deposits, which is achieved through HSBC(cid:146)s diverse geographical retail banking activities and by 112 maintaining depositor confidence in HSBC(cid:146)s capital strength. Professional markets are accessed for the purposes of providing additional funding, maintaining a presence in local money markets and optimising asset and liability maturities. HSBC HSBC funds itself essentially by raising customer deposits in local markets and makes limited use of wholesale market funding; indeed HSBC is a liquidity provider to financial markets placing significantly more funds with other banks than it borrows. While consolidated figures are not useful for management purposes, they do provide a broad overview of the nature of HSBC’s liquidity position. Of total liabilities of US$696 billion, funding from customers amounted to US$450 billion, of which US$441 billion was contractually repayable within one year. However in practice, although many customer accounts are contractually repayable on demand or at short notice, deposit balances remain stable as in the normal course deposits and withdrawals will offset each other as long as customers have no doubts that their funds will be available when required. Other liabilities include US$54 billion deposits by banks (US$51 billion repayable within one year), US$32 billion of short positions in securities and US$27 billion of securities in issue. Assets available to meet these liabilities, and to cover outstanding commitments to lend (US$199 billion), include cash, central bank balances, items in course of collection and treasury and other bills (US$30 billion); loans to banks (US$105 billion (cid:150) including US$102 billion repayable within one year) and loans to customers (US$309 billion (cid:150) including US$152 billion repayable within one year). A proportion of customer loans contractually repayable within one year will be extended in the normal course of business. In addition, HSBC held US$161 billion of debt securities marketable at that value. Of these assets, some US$31 billion of debt securities and treasury and other bills have been pledged to secure liabilities. HSBC(cid:146)s ability to sell securities together with its access to alternative funding sources such as inter-bank markets or securitisation, would be the routes through which HSBC would meet unexpected outflows in excess of available liquid assets. Asset, deposits and advances (US$bn) 695.9 673.8 450.0 427.1 308.6 265.2 289.8 258.8 569.1 360.0 253.6 210.1 700 600 500 400 300 200 100 0 2001 2000 1999 Debt securities and loans and advances to banks Loans and advances to customers Customer accounts Total assets HSBC(cid:146)s strong liquidity is demonstrated by the surplus of its lending to other banks over its borrowings from banks. As HSBC is a net lender to the inter-bank market, which is much more sensitive than customers to credit ratings, a limited credit rating downgrade of HSBC should not significantly impair its liquidity. HSBC does not use securitisations as a material source of off-balance-sheet funding for its ongoing businesses. Other than in respect of its operations in Argentina, HSBC is not aware of any conditions that are reasonably likely to negatively affect the liquidity of individual group companies. The actions taken by HSBC(cid:146)s operations in Argentina to manage its liquidity are detailed in the discussion of Argentina on pages 96 and 97. Customer accounts and deposits by banks 2001 Deposits by banks Current Savings and other deposits Total % US$bn 10.7 53.6 34.1 171.8 55.2 278.2 100.0 503.6 Customer accounts and deposits by banks 2000 Deposits by banks Current Savings and other deposits Total % US$bn 12.3 60.1 30.5 148.6 57.2 278.5 100.0 487.2 HSBC Holdings HSBC Holdings’ primary source of cash is dividends from its directly and indirectly held subsidiaries. The ability of these subsidiaries to pay dividends or loan or advance monies to HSBC Holdings depends, among other things, on their respective regulatory capital requirements, statutory reserves, and their financial and operating performance. The diversity of HSBC(cid:146)s activities means that HSBC Holdings is not dependent on a single source of profits to generate dividends. HSBC Bank plc and The Hongkong and Shanghai Banking Corporation, which currently provide most of the cash paid up to HSBC Holdings, are themselves diversified banking businesses. At 31 December 2001, the short term liabilities of HSBC Holdings plc totalled US$4.5 billion, including US$2.7 billion in respect of the proposed second interim dividend for 2001. In practice, shareholders may elect to receive their dividend entitlement in scrip rather than cash so that the full amount of the proposed dividend is not paid out. Short term assets of US$5.5 billion, consisting mainly of cash at bank and money market deposits of US$3.4 billion, and other amounts due from HSBC undertakings (including dividends) of US$1.8 billion, exceeded short term liabilities and no additional funding was required. HSBC Holdings actively manages the cash flows from its subsidiaries to maximise the amount of cash held at the holding company and non-trading subsidiary levels and expects to continue to do so in the future. With its accumulated liquid assets, HSBC Holdings believes that dividends from subsidiaries, coupled with debt and equity financing, will enable it to meet anticipated cash obligations. 113 H S B C H O L D I N G S P L C Financial Review (continued) Market risk management Market risk is the risk that foreign exchange rates, interest rates or equity and commodity prices will move and result in profits or losses to HSBC. 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). Trading positions are valued on a marked to market basis. In liquid portfolios, the market values are determined by reference to independently sourced mid-market prices where it is reasonable to assume the positions could be sold at that price. In those instances where markets are less liquid and/or where positions have been held for extended periods, portfolios will be valued by reference to bid or offer prices as appropriate. In relation to certain products, such as over- the counter derivative instruments, there are no independent prices quoted in the markets. In these circumstances market values are determined by reference to standard industry models, which typically utilise discounted cash flow techniques to derive the market value. The models may be in-house developed or software vendor packages. In valuing transactions, prices may be amended in respect of those positions considered illiquid, having recognition of the size of the position vis-a-vis the normal market trading volume in that product. The main valuation sources are securities prices, foreign exchange rates, and interest rate yield curves. In excess of 95 per cent of HSBC(cid:146)s derivative transactions are in plain vanilla instruments, primarily comprising interest rate and foreign exchange contracts, where the marked to market values are readily determinable by reference to independent prices and valuation quotes, as described above. In the limited number of circumstances, where standard industry models are not available, and where there is no directly relevant market quotation, HSBC has developed its own proprietary models for the purposes of performing valuations. Such circumstances normally would be where HSBC has 114 tailored a transaction to meet a specific customer need. The models used are checked by Finance and Operations departments and are subject to audit review on an ongoing basis to ensure that the model assumptions are, and remain, valid over the transaction life which is generally less than five years. HSBC makes markets in exchange rate and interest rate instruments, as well as in debt, equities and other securities. Trading risks arise either from customer-related business or from position taking. HSBC manages market risk through risk limits approved by the Group Executive Committee. Traded Markets Development and Risk, an independent unit within the Investment Banking and Markets operation, 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 ((cid:145)VAR(cid:146)) limits at a portfolio level. Similarly, options risks are controlled through full revaluation limits in conjunction with limits on the underlying variables that determine each option(cid:146)s value. Trading VAR VAR is a technique that 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. HSBC(cid:146)s VAR, predominantly calculated on a variance/co-variance basis, uses historical movements in market rates and prices, a 99 per cent confidence level, a 10-day holding period and takes account of correlations between different markets and rates within the same risk type and is calculated daily. The 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. HSBC(cid:146)s VAR should be viewed in the context of Trading VAR for HSBC for 2000 was: 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 10-day holding period assumes that all positions can be liquidated or hedged in 10 days. This may not fully reflect the market risk arising from times of severe illiquidity, when a 10-day holding period may be insufficient to fully liquidate or hedge all positions; the use of a 99 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 not always hold 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 on an HSBC basis; and • VAR does not necessarily capture all of the higher order market risks and may underestimate real market risk exposure. HSBC 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. HSBC(cid:146)s stress testing regime provides senior management with an assessment of the impact of extreme events on the market risk exposures of HSBC. Trading VAR for HSBC for 2001 was: Minimum Maximum Average for the At 31 during the during the year end 2001 US$m year end 2001 US$m December 2001 US$m At 31 year end December 2000 US$m 2001 US$m Total trading activities ............... 122.0 60.8 173.4 102.2 Foreign exchange trading positions ... 13.3 Interest rate trading positions ............... 111.7 Equities trading positions ............... 45.5 1.8 48.1 27.4 50.6 160.2 79.6 22.1 86.7 41.9 75.0 19.1 58.9 39.9 Combined HSBC At 31 Excluding former Republic operations At 31 Minimum Maximum during during The year The year US$m US$m Average For the year US$m December December 2000 US$m 2000 US$m Total trading activities ............... Foreign exchange trading positions ... Interest rate trading positions ............... Equities trading positions ............... 75.0 19.1 58.9 39.9 64.8 17.2 45.0 39.9 44.5 8.9 32.2 23.6 83.7 26.8 66.4 53.4 63.1 16.6 46.9 36.2 Trading VAR for CCF is included in the above table from the date of acquisition. Trading VAR for the former Republic operations at 31 December 2000 was US$23.2 million on a variance/co-variance basis. On a historical simulation approach, trading VAR for the former Republic operations at 31 December 2000 was US$11.7 million, the maximum during 2000 was US$37.1 million, the minimum US$9.3 million and the average US$18.8 million. The scope of calculation of VAR on the former Republic operations was refined at 30 June 2000, following a review of its basis, to be more consistent with that of the rest of HSBC. The maximum, minimum and average on a historical simulation approach for each half year are set out below: Former Republic operations Total trading First half 2000 US$m 37.1 12.5 22.7 Second half 2000 US$m 19.1 9.3 13.6 Maximum in the half-year ........... Minimum in the half-year ............ Average for the half-year ............ The average daily revenue earned from market risk-related treasury activities in 2001, including accrual book net interest income and funding related to dealing positions, was US$13.9 million, compared with US$10.0 million for 2000. The standard deviation of these daily revenues was US$7.7 million compared with US$4.4 million in 2000. An analysis of the frequency distribution of daily revenues shows that there were eleven days with negative revenues during 2001. The most frequent result was a daily revenue of between US$18 million and US$19 million with 20 occurrences. The highest daily revenue was US$41 million. 115 H S B C H O L D I N G S P L C Financial Review (continued) Daily distribution of market risk revenues in 2001 Daily distribution of market risk revenues 2000 Number of days Number of days 59 52 46 28 16 11 22 16 7 0 1 1 -4 0 4 8 12 16 20 24 28 32 36 40 44 60 50 40 30 20 10 0 50 40 30 20 10 0 46 46 48 33 27 12 6 16 11 5 6 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 1 0 0 1 Revenues (US$m) Revenues (US$m) Profit and loss frequency Profit and loss frequency Foreign exchange exposure HSBC(cid:146)s foreign exchange exposures comprise trading exposures and structural foreign currency translation exposure. Trading exposure Foreign exchange trading exposures comprise those which arise from foreign exchange dealing within Treasury, and currency exposures originated by commercial banking businesses in HSBC. 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. VAR on foreign exchange trading positions is shown in the table on page 115. The average one-day foreign exchange revenue in 2001 was US$3.0 million compared with US$2.8 million in 2000. Structural currency exposure HSBC(cid:146)s main operations are in the United Kingdom, Hong Kong, France, the United States and Brazil, although it also has operations elsewhere in Europe, the rest of Asia-Pacific, North America and Latin America. The main operating (or functional) currencies in which HSBC(cid:146)s business is transacted are, therefore, sterling, Hong Kong dollars, euros, US dollars and Brazilian reais. Since the currency in which HSBC Holdings prepares its consolidated financial statements is US dollars, HSBC(cid:146)s consolidated balance sheet is affected by movements in the exchange rates between these functional currencies and the US 116 dollar. These currency exposures are referred to as structural currency exposures. Translation gains and losses arising from these exposures are recognised in the statement of total consolidated recognised gains and losses. These exposures are represented by the net asset value of the foreign currency equity and subordinated debt investments in subsidiaries, branches and associated undertakings. HSBC(cid:146)s structural foreign currency exposures are managed with the primary objective of ensuring, where practical, that HSBC(cid:146)s and individual banking subsidiaries(cid:146) tier 1 capital ratios are protected from the effect of changes in exchange rates. This is usually achieved by holding qualifying 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, to protect the tier 1 capital ratio or the US dollar value of capital invested. Such hedging would be undertaken using forward foreign exchange contracts or by financing with borrowings in the same currencies as the functional currencies involved. As subsidiaries are generally able to balance adequately foreign currency tier 1 capital with foreign currency risk-weighted assets, HSBC(cid:146)s foreign currency structural exposures are usually unhedged, including exposures due to foreign- currency-denominated profits arising during the year. Selective hedges were, however, transacted during 2001. There was no material effect from foreign currency exchange rate movements on HSBC or, outside of Argentina, subsidiary tier 1 capital ratios during the year. In Argentina the mandatory pesification of formerly US dollar denominated assets and liabilities at differing exchange rates destroyed capital within the banking system and in the case of HSBC Argentina created a structured loss of US$520 million. Discussions are taking place with the Government of Argentina regarding compensation for this loss but it is currently unclear how, to what extent and in what timescale such compensation might be delivered. Details of HSBC(cid:146)s structural foreign currency exposures are given in Note 40 in the (cid:145)Notes on the Financial Statements(cid:146). Interest rate exposure HSBC(cid:146)s interest rate exposures comprise those originating in its treasury trading activities and structural interest rate exposures; both are managed under limits described on page 114. Interest rate risk arises on both trading positions and accrual books. The average daily revenues earned from treasury-related interest rate activities for 2001 were US$10.3 million compared with US$6.5 million for 2000. The interest rate risk on interest rate trading positions is set out in the trading VAR table on page 115. Structural interest rate risk Structural interest rate risk arises from the differing repricing characteristics of commercial banking assets and liabilities, including non-interest bearing liabilities such as shareholders(cid:146) funds and some current accounts. Each operating entity assesses the structural interest rate risks which arise in its business and either transfers such risks to its local treasury unit for management or transfers the risks to separate books managed by the local asset and liability management committee ((cid:145)ALCO(cid:146)). Local ALCOs regularly monitor all such interest rate risk positions, subject to interest rate risk limits agreed with HSBC Holdings. In the course of managing interest rate risk, quantitative techniques and simulation models are used where appropriate to identify and 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. Assuming no management action in response to interest rate movements, an immediate hypothetical 100 basis points parallel fall in all yield curves worldwide on 1 January 2002 would decrease planned net interest income for the 12 months to 31 December 2002 by US$196 million while a hypothetical 100 basis points parallel rise in all yield curves would decrease planned net interest income by US$200 million. Rather than assuming that all interest rates move together, HSBC(cid:146)s interest rate exposures can be grouped into currency blocs whose interest rates are considered more likely to move together. The sensitivity of net interest income for 2002 can then be described as follows: Figures in US$ m Change in 2002 projected net interest income US dollar bloc Sterling bloc Asian bloc Latin American bloc +100 basis points shift in yield curves −100 basis points shift in yield curves 18 (165 ) (47 ) 12 (140 ) (78 ) (1 ) 5 Euro bloc (30 ) 30 Total 2002 (200 ) (196 ) Total 2001 (139 ) 92 The change in HSBC(cid:146)s sensitivity to a fall of 100 basis points is mainly because further interest rate cuts in the US dollar and Asian blocs at 31 December 2001 would not offer scope to reduce rates on current and savings accounts by as much as the full 100 basis points in view of the already low rates payable on these liabilities, so compressing the margins on these products. The projections assume that rates of all maturities move by the same amount and, therefore, do not reflect the potential impact on net interest income of some rates changing while others remain unchanged. The projections also make other simplifying assumptions, including an assumption that all positions run to maturity. In practice, these exposures are actively managed. Equities exposure HSBC(cid:146)s equities exposure comprises trading equities, forming the basis of VAR, and long-term equity investments. The latter are reviewed annually by the Group Executive Committee and regularly 117 H S B C H O L D I N G S P L C Financial Review (continued) monitored by the subsidiaries(cid:146) ALCOs. VAR on equities trading positions is set out in the trading VAR table on page 115. Operational risk management Operational risk is the risk of loss arising through fraud, unauthorised activities, error, omission, inefficiency, systems failure or from external events. It is inherent to every business organisation and covers a wide spectrum of issues. HSBC manages this risk through a controls- based environment in which processes are documented, authorisation is independent and where transactions are reconciled and monitored. This is supported by an independent programme of periodic reviews undertaken by internal audit and peer benchmarking studies which ensure that HSBC stays in line with best practice and takes account of lessons learned from publicised operational failures within the financial services industry. With effect from the beginning of 2001, operational risk losses are formally monitored quarterly. In each of HSBC(cid:146)s subsidiaries local management is responsible for establishing an effective and efficient operational control environment in accordance with HSBC standards so that HSBC(cid:146)s assets are adequately protected, and whereby the operational risks have been identified and adequate risk management procedures maintained to control those risks. HSBC maintains and tests contingency facilities to support operations in the event of disasters. Additional reviews and tests were conducted following the terrorist events of 11 September 2001 to incorporate lessons learned in the operational recovery from those circumstances. Insurance cover is arranged to mitigate potential losses associated with certain operational risk events. Capital management and allocation Capital measurement and allocation The Financial Services Authority ((cid:145)FSA(cid:146)) is the supervisor of HSBC on a consolidated basis and, in this capacity, receives information on the capital adequacy of, and sets capital requirements for, HSBC as a whole. Individual banking subsidiaries are directly regulated by the appropriate local banking supervisors, which set and monitor capital adequacy requirements for them. Similarly, non- 118 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 agreed to guidelines for the international convergence of capital measurement and standards, the banking supervisors of HSBC(cid:146)s major banking subsidiaries have exercised capital adequacy supervision in a broadly similar framework. Under the European Union(cid:146)s Banking Consolidation Directive, the FSA requires each bank and banking group to maintain an individually prescribed ratio of total capital to risk-weighted assets. 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(cid:146)s Amending Directive (Directive 98/31/EC) to the Capital Adequacy Directive ((cid:145)CAD2(cid:146)). This modification allows banks to calculate capital requirements for market risk in the trading book using VAR techniques. Capital adequacy is measured by the ratio of HSBC(cid:146)s capital to risk-weighted assets, taking into account both balance sheet assets and off-balance- sheet transactions. HSBC(cid:146)s capital is divided into two tiers: tier 1, comprising shareholders(cid:146) funds excluding revaluation reserves, innovative tier 1 securities and minority interests in tier 1 capital; and tier 2, comprising general loan loss provisions, property revaluation reserves, qualifying subordinated loan capital and minority interests in tier 2 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 tier 2 capital. Deductions in respect of goodwill and intangible assets are made from tier 1 capital, and in respect of unconsolidated investments, investments in the capital of banks and other regulatory deductions are made from total capital. 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 weightings classified according to the nature of each asset and counterparty, 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 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. HSBC capital management It is HSBC(cid:146)s policy to maintain a strong capital base to support the development of HSBC(cid:146)s business. HSBC seeks to maintain a prudent balance between the different components of its capital and, in HSBC Holdings, between the composition of its capital and that of its investment in subsidiaries. This is achieved by each subsidiary managing its own capital within the context of an approved annual plan which determines the optimal amount and mix of capital to support planned business growth and to meet local regulatory capital requirements. Capital generated in excess of planned requirements is paid up to HSBC Holdings normally by way of dividends and represents a source of strength for HSBC. It is HSBC policy that HSBC Holdings is primarily a provider of equity capital to its subsidiaries with such equity investment substantially funded by HSBC Holdings own equity issuance. Non-equity tier 1 and subordinated debt requirements of major subsidiaries are normally met by their own market issuance within HSBC guidelines regarding market and investor concentration, cost, market conditions, timing and the effect on the components and maturity profile of HSBC capital. Subordinated debt requirements of other HSBC companies are provided internally. HSBC recognises the impact on shareholder returns of the level of equity capital employed within HSBC and seeks to maintain a prudent balance between the advantages and flexibility afforded by a strong capital position and the higher returns on equity possible with greater leverage. In the current environment HSBC uses a benchmark tier 1 capital ratio of 8 per cent in considering its long term capital planning. Source and application of tier 1 capital Movement of tier 1 capital Opening tier 1 capital........................... Attributable profits............................... add back: goodwill amortisation ......... Dividends............................................. add back: shares issued in lieu of dividends......................................... Other movement in goodwill deducted. Shares issued........................................ Issue of innovative tier 1 capital........... Redemption of preference shares ......... Other (including exchange movements)..................................... Closing tier 1 capital ............................ 2001 US$m 34,620 5,406 807 (4,467 ) 866 (199 ) 112 – (825 ) (1,247 ) 35,073 2000 US$m 28,533 6,628 525 (4,010 ) 944 (9,372 ) 8,794 3,512 (cid:150) (934 ) 34,620 Movement in risk-weighted assets Opening risk-weighted assets............... Movements .......................................... Closing risk-weighted assets ................ 383,687 7,791 391,478 336,126 47,561 383,687 Capital structure The table below sets out the analysis of regulatory capital at the end of 2001 and 2000. Composition of capital Tier 1: Shareholders(cid:146) funds .............................. Minority interests.................................. Innovative tier 1 securities .................... Less : property revaluation reserves ...... goodwill capitalised and intangible assets.......................................... own shares held*.............................. 2001 US$m 2000 US$m 45,979 3,515 3,467 (2,271 ) 45,570 4,419 3,512 (2,611 ) (14,989 ) (628 ) (15,597 ) (673 ) Total qualifying tier 1 capital ................ 35,073 34,620 Tier 2: Property revaluation reserves ................ General provisions ................................ Perpetual subordinated debt ................. Term subordinated debt......................... Minority interest in tier 2 capital ........... 2,271 2,091 3,338 9,912 693 2,611 2,132 3,531 10,224 697 Total qualifying tier 2 capital ................ 18,305 19,195 Unconsolidated investments.................. Investments in other banks ................... Other deductions ................................... (1,781 ) (627 ) (116 ) (1,463 ) (1,241 ) (147 ) Total capital .......................................... 50,854 50,964 Total risk-weighted assets ..................... 391,478 383,687 Capital ratios (per cent): Total capital .......................................... Tier 1 capital......................................... 13.0 9.0 13.3 9.0 * This principally reflects shares held in trust available to fulfil HSBC’s obligations under employee share option plans. The above figures were computed in accordance with the EU Banking Consolidation Directive. 119 H S B C H O L D I N G S P L C Financial Review (continued) Tier 1 capital increased by US$0.5 billion. Retained profits on a cash basis (excluding goodwill amortisation) contributed US$1.7 billion. Part of this capital generation was utilised to redeem preference shares outstanding in HSBC Bank plc which had become uneconomic in the current low interest rate environment. These redemptions are reflected in the reduction of minority interests and amounted to US$0.8 billion. Tier 2 capital fell by US$0.9 billion. US$0.5 billion of this reduction reflected net redemptions and regulatory amortisation of term and perpetual subordinated debt. Property revaluation reserves were also lower by US$0.3 billion. Total risk-weighted assets increased by US$7.8 billion in 2001 substantially reflecting loan growth and a switch in the deployment of surplus liquidity from interbank placement to corporate bonds. Additionally, the acquisitions of Banque Hervet, NRMA Building Society and Demirbank added to risk-weighted asset growth. Risk-weighted assets by principal subsidiary In order to give an indication as to how HSBC(cid:146)s capital is deployed, the table below analyses the disposition of risk-weighted assets by principal subsidiary. The risk-weighted assets are calculated using FSA rules and exclude intra-HSBC items. 2001 US$m 2000 US$m Hang Seng Bank Limited...... 31,992 31,775 The Hongkong and Shanghai Banking Corporation Limited and other subsidiaries....... The Hongkong and Shanghai Banking Corporation Limited and subsidiaries................ HSBC Bank plc (excluding CCF and HSBC Private Banking Holdings (Suisse) S.A.).... HSBC Private Banking Holdings (Suisse) S.A.* .................. CCF 80,492 77,107 112,484 108,882 113,643 113,778 14,611 35,706 10,433 35,460 HSBC Bank plc .................... 163,960 159,671 HSBC USA Inc .................... 53,945 54,220 HSBC Bank Middle East ...... HSBC Bank Malaysia Berhad 5,699 4,215 5,243 4,041 HSBC Bank Canada ............. 14,400 14,241 HSBC Latin American operations HSBC Holdings sub-group ... Other 8,044 966 9,470 420 27,765 27,499 HSBC risk-weighted assets... 391,478 383,687 * The comparative figures for 31 December 2000 relate to HSBC Republic. The private banking businesses of HSBC were restructured during the period and the risk-weighted assets reported for HSBC Private Banking Holdings (Suisse) S.A. are not directly comparable to figures previously reported under HSBC Republic. 120 H S B C H O L D I N G S P L C Other information Loan maturity and interest sensitivity analysis There follows a geographic analysis of loan maturity and interest sensitivity by loan type on a contractual repayment basis as at 31 December 2001. All amounts are net of suspended interest. Maturity of 1 year or less Loans and advances to banks* ............................... Commercial loans to customers – Commercial, industrial and international trade .. – Real estate and other property related ................ – Non-bank financial institutions .......................... – Governments ...................................................... – Other commercial ............................................... Hong Kong SAR Government Home Ownership Scheme............................................. Residential mortgages and other personal loans .... Europe Hong Kong Rest of Asia- Pacific North America Latin America Total US$m US$m US$m US$m US$m US$m 38,917 42,503 10,785 7,798 2,351 102,354 23,762 5,842 9,554 400 13,368 7,135 4,677 891 32 2,207 9,271 2,686 752 368 3,622 5,240 3,228 12,090 551 11,638 1,704 132 136 1 444 47,112 16,565 23,423 1,352 31,279 52,926 14,942 16,699 32,747 2,417 119,731 – 12,838 522 8,126 – 3,376 – 5,751 – 1,373 522 31,464 Loans and advances to customers .......................... 65,764 23,590 20,075 38,498 3,790 151,717 Total loans maturing in one year or less ................ 104,681 66,093 30,860 46,296 6,141 254,071 Maturity after 1 year but within 5 years Loans and advances to banks ................................. Commercial loans to customers – Commercial, industrial and international ........... – Real estates and other property related............... – Non-bank financial institutions .......................... – Governments ...................................................... – Other commercial ............................................... Hong Kong SAR Government Home..................... Residential mortgages and other personal loans .... 1,331 13 450 39 16 1,849 10,101 4,768 1,201 892 5,035 21,997 – 12,132 2,168 6,873 628 508 2,878 13,055 1,840 8,080 1,686 1,417 140 341 1,665 5,249 – 2,480 2,835 4,041 317 66 1,272 8,531 – 8,283 367 58 27 91 153 696 – 468 17,157 17,157 2,313 1,898 11,003 49,528 1,840 31,443 Loans and advances to customers .......................... 34,129 22,975 7,729 16,814 1,164 82,811 Total loans maturing after 1 year but within 5 years ................................................................ 35,460 22,988 8,179 16,853 1,180 84,660 * Excludes sight balances with central banks 121 H S B C H O L D I N G S P L C Other information (continued) Europe Hong Kong Rest of Asia- Pacific North America Latin America Total US$m US$m US$m US$m US$m US$m Maturity after 1 year but within 5 years (continued) Interest rate sensitivity of loans and advances to banks and commercial loans to customers: – Fixed interest rate ............................................... – Variable interest rate .......................................... 5,121 18,210 133 12,936 Total....................................................................... 23,331 13,069 Maturity after 5 years Loans and advances to banks ................................. Commercial loans to customers – Commercial, industrial and international trade .. – Real estate and other property related ................ – Non-bank financial institutions .......................... – Governments ...................................................... – Other commercial ............................................... Hong Kong SAR Government Home Ownership Scheme ............................................................... Residential mortgages and other personal loans .... Loans and advances to customers .......................... 415 – 4,569 2,484 565 1,101 4,449 13,168 – 23,361 36,529 272 1,576 23 3 1,463 3,337 4,990 13,883 22,210 2,399 3,299 5,698 18 204 439 9 191 418 1,261 – 3,545 4,806 3,559 5,010 8,569 200 512 712 11,412 39,967 51,379 27 – 460 526 2,547 117 108 275 3,573 – 13,889 17,462 62 27 4 686 38 817 – 458 1,275 5,633 7,073 718 2,089 6,643 22,156 4,990 55,136 82,282 Total loans maturing after 5 years.......................... 36,944 22,210 4,824 17,489 1,275 82,742 Interest rate sensitivity of loans and advances to banks and commercial loans to customers: – Fixed interest rate ............................................... – Variable interest rate .......................................... Total....................................................................... 3,777 9,806 13,583 39 3,298 3,337 411 869 1,280 2,282 1,317 3,599 68 749 817 6,577 16,039 22,616 122 Deposits The following table analyses the average amount of bank and customer deposits and certificates of deposit (‘CDs’) and other money market instruments (which are included within ‘debt securities in issue’ in the balance sheet) together with the average interest rates paid thereon for each of the past three years. The geographical analysis of average deposits is based on the location of the office in which the deposits are recorded and excludes balances with HSBC companies. The ‘Other’ category includes securities sold under agreements to repurchase. 2001 Year ended 31 December 2000 1999 Average Balance Average Rate Average balance Average rate Average balance Average rate US$m % US$m % US$m Deposits by banks Europe Demand and other – non-interest bearing.................. Demand – interest bearing ........................................ Time.......................................................................... Other ......................................................................... Total.......................................................................... Hong Kong Demand and other – non-interest bearing.................. Demand – interest bearing ........................................ Time.......................................................................... Other ......................................................................... Total.......................................................................... Rest of Asia-Pacific Demand and other – non-interest bearing.................. Demand – interest bearing ........................................ Time.......................................................................... Other ......................................................................... Total.......................................................................... North America Demand and other – non-interest bearing.................. Demand – interest bearing ........................................ Time.......................................................................... Other ......................................................................... Total.......................................................................... Latin America Demand and other – non-interest bearing.................. Demand – interest bearing ........................................ Time.......................................................................... Other ......................................................................... Total.......................................................................... Total Demand and other – non-interest bearing.................. Demand – interest bearing ........................................ Time.......................................................................... Other ......................................................................... Total.......................................................................... 8,184 5,130 20,672 10,437 44,423 1,085 1,740 495 43 3,363 596 600 2,820 556 4,572 1,438 2,954 1,557 3,895 9,844 158 924 1,031 341 2,454 11,461 11,348 26,575 15,272 64,656 – 3.4 5.5 3.9 – 3.6 4.1 3.2 – 4.4 5.7 4.3 – 2.5 3.6 3.2 – 10.8 4.5 12.5 – 3.9 5.4 3.9 3,842 6,402 14,981 8,895 34,120 945 1,581 1,075 12 3,613 692 525 2,485 252 3,954 722 2,323 875 2,984 6,904 200 810 862 181 2,053 6,401 11,641 20,278 12,324 50,644 – 4.5 5.9 4.3 – 5.7 6.4 9.8 – 4.0 6.7 5.6 – 3.4 5.1 4.8 – 12.1 6.9 13.6 – 4.9 6.0 4.6 4,406 3,593 8,654 5,814 22,467 988 2,133 1,015 11 4,147 411 537 2,966 310 4,224 483 1,024 1,136 2,029 4,672 146 524 553 259 1,482 6,434 7,811 14,324 8,423 36,992 % – 2.2 3.5 3.9 – 4.7 5.4 3.9 – 2.7 4.1 6.1 – 4.0 5.1 4.8 – 7.1 8.0 19.6 – 3.5 4.1 4.7 123 H S B C H O L D I N G S P L C Other information (continued) Customer accounts Europe Demand and other – non-interest bearing.................. Demand – interest bearing......................................... Savings...................................................................... Time .......................................................................... Other ......................................................................... 2001 Average Balance US$m 26,084 62,475 24,305 43,637 5,177 Total .......................................................................... 161,678 Hong Kong Demand and other – non-interest bearing.................. Demand – interest bearing......................................... Savings...................................................................... Time .......................................................................... Other ......................................................................... 5,804 53,470 76,277 8,361 434 Total .......................................................................... 144,346 Rest of Asia-Pacific Demand and other – non-interest bearing.................. Demand – interest bearing......................................... Savings...................................................................... Time .......................................................................... Other ......................................................................... Total .......................................................................... North America Demand and other – non-interest bearing.................. Demand – interest bearing......................................... Savings...................................................................... Time .......................................................................... Other ......................................................................... Total .......................................................................... Latin America Demand and other – non-interest bearing.................. Demand – interest bearing......................................... Savings...................................................................... Time .......................................................................... Other ......................................................................... Total .......................................................................... Total Demand and other – non-interest bearing.................. Demand – interest bearing......................................... Savings...................................................................... Time .......................................................................... Other ......................................................................... Total .......................................................................... CDs and other money market instruments Europe ....................................................................... Hong Kong................................................................ Rest of Asia-Pacific................................................... North America........................................................... Latin America ........................................................... 4,328 10,930 22,023 6,006 1,008 44,295 14,133 5,314 42,588 7,348 11,579 80,962 1,288 1,643 5,908 364 518 9,721 51,637 133,832 171,101 65,716 18,716 441,002 6,828 5,902 1,653 4,223 520 Total .......................................................................... 19,126 Average Rate % – 3.0 4.5 4.8 8.6 – 2.0 3.3 3.8 4.5 – 2.1 4.5 4.3 2.9 – 4.1 3.2 5.2 3.7 – 13.9 10.7 3.6 5.9 – 2.7 3.9 4.7 5.1 4.8 5.1 5.4 4.6 8.6 5.0 Year ended 31 December 2000 1999 Average balance US$m 19,521 55,269 21,204 45,587 1,440 143,021 5,465 46,208 76,503 6,477 353 135,006 4,301 8,749 20,128 7,141 775 41,094 7,947 3,765 38,707 7,841 8,818 67,078 1,071 932 6,391 360 379 9,133 38,305 114,923 162,933 67,406 11,765 395,332 3,821 6,163 1,890 3,781 304 15,959 Average rate % – 3.6 5.7 5.9 5.6 – 4.2 5.2 5.8 7.0 – 3.0 5.3 5.6 4.8 – 5.4 3.9 7.4 5.6 – 15.8 9.5 11.1 6.7 – 4.0 5.2 6.1 5.7 6.5 6.4 5.8 4.3 9.9 5.9 Average balance US$m 14,471 48,235 17,426 30,381 538 111,051 4,760 41,960 71,251 5,421 393 123,785 3,506 6,827 18,122 7,302 632 36,389 5,785 2,045 18,531 1,615 6,500 34,476 608 463 5,590 169 338 7,168 29,130 99,530 130,920 44,888 8,401 312,869 4,709 5,714 2,075 10,898 7 23,403 Average rate % – 2.9 4.9 5.1 3.7 – 3.6 4.9 4.7 4.6 – 2.9 5.0 4.5 3.2 – 3.3 2.9 5.8 9.5 – 18.2 11.1 5.2 9.2 – 3.3 4.9 4.9 8.4 6.0 6.3 5.1 5.0 10.9 5.5 124 Certificates of deposit and other time deposits At 31 December 2001 the maturity analysis of certificates of deposit and other wholesale time deposits, by remaining maturity, was as follows: 3 months or less After 3 months but within 6 months After 6 months but within 12 months Europe Certificates of deposit ........... Time deposits: – banks ................................. – customers........................... Total...................................... Hong Kong Certificates of deposit ........... Time deposits: – banks ................................. – customers........................... Total...................................... Rest of Asia-Pacific Certificates of deposit ........... Time deposits: – banks ................................. – customers........................... Total...................................... North America Certificates of deposit ........... Time deposits: – banks ................................. – customers........................... Total...................................... Latin America Certificates of deposit ........... Time deposits: – banks ................................. – customers........................... Total...................................... Total Certificates of deposit ........... Time deposits: – banks ................................. – customers........................... Total...................................... US$m 4,318 16,586 38,256 59,160 1,094 476 7,828 9,398 602 1,488 5,628 7,718 – 1,525 5,749 7,274 224 446 164 834 6,238 20,521 57,625 84,384 US$m US$m 230 1,706 1,476 3,412 269 6 342 617 138 357 179 674 – 247 315 562 4 254 20 278 641 2,570 2,332 5,543 99 723 1,157 1,979 1,123 – 44 1,167 41 191 81 313 – 371 180 551 – 68 35 103 1,263 1,353 1,497 4,113 After 12 months US$m 4 1,180 3,473 4,657 3,811 6 44 3,861 123 543 314 980 – – 130 130 – 1 – 1 Total US$m 4,651 20,195 44,362 69,208 6,297 488 8,258 15,043 904 2,579 6,202 9,685 – 2,143 6,374 8,517 228 769 219 1,216 3,938 1,730 3,961 9,629 12,080 26,174 65,415 103,669 The geographical analysis of deposits is based on the location of the office in which the deposits are recorded and excludes balances with HSBC companies. The majority of certificates of deposit and time deposits are in amounts of US$100,000 and over or the equivalent in other currencies. 125 H S B C H O L D I N G S P L C Other information (continued) Short-term borrowings HSBC includes short-term borrowings within customer accounts, deposits by banks and debt securities in issue and does not show short-term borrowings separately on the balance sheet. Short-term borrowings are defined by the SEC as Federal funds purchased and securities sold under agreements to repurchase, commercial paper and other short- term borrowings. Securities sold under agreements to repurchase are the only significant short-term borrowings of HSBC. The following table provides additional information with respect to HSBC’s securities sold under agreements to repurchase for each of the past three years. Outstanding at 31 December.......................................................... Average amount outstanding during the year ................................ Maximum quarter-end balance outstanding during the year .......... Weighted average interest rate during the year .............................. Weighted average interest rate at the year-end .............................. Year ended 31 December 2001 US$m 16,882 23,850 24,901 4.9% 5.1% 2000 US$m 16,312 15,374 16,313 7.5% 6.6% 1999 US$m 13,139 14,669 13,139 7.4% 6.4% 126 H S B C H O L D I N G S P L C Board of Directors and Senior Management Directors Sir John Bond, Group Chairman Age 60. An executive Director since 1990; Group Chief Executive from 1993 to 1998. Joined HSBC in 1961; an executive Director of The Hongkong and Shanghai Banking Corporation Limited from 1988 to 1992. Chairman of HSBC Bank plc, HSBC USA Inc., HSBC Bank USA and HSBC Bank Middle East and a Director of The Hongkong and Shanghai Banking Corporation Limited. Chairman of the Institute of International Finance and a Director of Ford Motor Company. A member of the Court of the Bank of England. * The Baroness Dunn, DBE, Deputy Chairman and senior non-executive Director Age 62. Executive Director of John Swire & Sons Limited and a Director of Swire Pacific Limited and Marconi 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 Limited from 1981 to 1996. Former Senior Member of the Hong Kong Executive Council and Legislative Council. † Sir Brian Moffat, OBE, Deputy Chairman and senior independent non-executive Director Age 63. Chairman of Corus Group plc. A non- executive Director since 1998. A member of the Court of the Bank of England and a non-executive Director of Enterprise Oil plc. K R Whitson Age 58. Group Chief Executive. An executive Director since 1994. A Director of HSBC Bank plc since 1992, Chief Executive from 1994 to 1998 and Deputy Chairman since 1998. Joined HSBC in 1961. Chairman of Merrill Lynch HSBC Limited, HSBC Bank A.S. and Deputy Chairman of the Supervisory Board of HSBC Trinkaus & Burkhardt KGaA. A Director of The Hongkong and Shanghai Banking Corporation Limited, HSBC USA Inc. and HSBC Bank Canada. A non-executive Director of the Financial Services Authority. † The Lord Butler, GCB, CVO Age 64. Master, University College, Oxford and a non-executive Director of Imperial Chemical Industries plc. A non-executive Director since 1998. Chairman of HSBC in the Community Advisory Panel. Secretary of the Cabinet and Head of the Home Civil Service in the United Kingdom from 1988 to 1998. † R K F Ch’ien, CBE Age 50. Executive Chairman of chinadotcom corporation and its subsidiary, hongkong.com corporation. A non-executive Director since 1998. Chairman of HSBC Private Equity (Asia) Limited and a Director of MTR Corporation Limited, Inchcape plc and Inmarsat Ventures Plc. A member of the Executive Council of the Hong Kong SAR. Chairman of the Hong Kong/Japan Business Co- operation Committee and the Advisory Committee on Corruption of the Independent Commission Against Corruption. A non-executive Director of The Hongkong and Shanghai Banking Corporation Limited since 1997. C F W de Croisset Age 58. An executive Director since 2000. Chairman and Chief Executive Officer of Crédit Commercial de France S.A. Joined Crédit Commercial de France S.A. in 1980 having previously held senior appointments in the French civil service. A Director of HSBC Bank plc. W R P Dalton Age 58. An executive Director since 1998. Director and Chief Executive of HSBC Bank plc since 1998. Joined HSBC in 1980. President and Chief Executive Officer, HSBC Bank Canada from 1992 to 1997. Deputy Chairman of Merrill Lynch HSBC Limited and a Director of Crédit Commercial de France S.A., HSBC Investment Bank Holdings plc, HSBC Private Banking Holdings (Suisse) S.A. and HSBC Bank Malta p.l.c. Vice-President of the Chartered Institute of Bankers. A non-executive Director of MasterCard International Inc. and a non-executive Director and Chairman of Young Enterprise Limited. D G Eldon Age 56. An executive Director since 1999. Joined HSBC in 1968. Appointed an executive Director and Chief Executive Officer of The Hongkong and Shanghai Banking Corporation Limited in 1996; Chairman since 1999. Non-executive Chairman of Hang Seng Bank Limited and a non-executive Director of Swire Pacific Limited and MTR Corporation Limited. 127 H S B C H O L D I N G S P L C Board of Directors and Senior Management (continued) D J Flint † Sir John Kemp-Welch Age 46. Group Finance Director. An executive Director since 1995. A Director of HSBC Investment Bank Holdings plc, HSBC Bank Malaysia Berhad, HSBC USA Inc. and HSBC Bank USA. A member of The Accounting Standards Board and the Standards Advisory Council of the International Accounting Standards Committee Foundation. A former partner in KPMG. † W K L Fung, OBE Age 53. Group Managing Director and Chief Executive Officer of Li & Fung Limited. A non- executive Director since 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 Limited since 1995. S K Green Age 53. Executive Director Investment Banking and Markets. An executive Director since 1998. Joined HSBC in 1982. Group Treasurer from 1992 to 1998. Chairman of HSBC Investment Bank Holdings plc and a Director of HSBC Bank plc, Crédit Commercial de France S.A., HSBC Guyerzeller Bank AG, HSBC USA Inc., HSBC Bank USA, HSBC Private Banking Holdings (Suisse) S.A. and HSBC Trinkaus & Burkhardt KGaA. † S Hintze Age 57. Independent consultant. Former Chief Operating Officer of Barilla S.P.A. and former Senior Vice President of Nestlé S.A. A non- executive Director since 1 March 2001. With Mars Incorporated from 1972 to 1993, latterly as Executive Vice President of M&M/Mars in New Jersey. A W Jebson Age 52. Group IT Director. An executive Director since 2000. Joined HSBC in 1978. A Director of Merrill Lynch HSBC Limited. Non-executive Deputy Chairman of CLS Services Limited. 128 Age 65. Former Joint Senior Partner of Cazenove & Co and former Chairman of the London Stock Exchange. A non-executive Director since 2000. † The Lord Marshall Age 68. Chairman of British Airways Plc and Invensys plc. A non-executive Director since 1993. A non-executive Director of HSBC Bank plc from 1989 to 1994. † Sir Mark Moody-Stuart, KCMG Age 61. Director and former Chairman of The ‘Shell’ Transport and Trading Company, plc. Former Chairman of the Committee of Managing Directors of the Royal Dutch/Shell Group of Companies. A Director of Accenture, a Governor of Nuffield Hospitals and President of the Liverpool School of Tropical Medicine. Member of the UN Secretary General's Advisory Council for the Global Compact. A non-executive Director since 1 March 2001. † M Murofushi Age 70. Chairman of ITOCHU Corporation. A non- executive Director since 1992. Honorary 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. † C E Reichardt Age 70. Currently Vice Chairman and Chairman of the Finance Committee of Ford Motor Company. Retired Chairman and Chief Executive of Wells Fargo & Company. A non-executive Director since 1996. In addition to Ford Motor Company, a Director of HCA – The Healthcare Company; ConAgra, Inc.; McKesson HBOC, Inc.; Newhall Management Corporation and PG&E Corporation. * H Sohmen, OBE Age 62. Chairman of World-Wide Shipping Agency Limited, World-Wide Shipping Group Limited, World Maritime Limited, World Shipping and Investment Company Limited and World Finance International Limited. A non-executive Director since 1990. A non-executive Director of The Hongkong and Shanghai Banking Corporation Limited since 1984 and Deputy Chairman since 1996. † Sir Adrian Swire Age 70. 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. * † Non-executive Director Independent non-executive Director Adviser to the Board D J Shaw Age 55. An Adviser to the Board since 1998. Solicitor. A partner of Norton Rose from 1973 to 1998. A Director of HSBC Investment Bank Holdings plc and HSBC Private Banking Holdings (Suisse) S.A. Senior Management R G Barber Age 51. Group Company Secretary since 1990. Joined HSBC in 1980; Corporation Secretary of The Hongkong and Shanghai Banking Corporation Limited from 1986 to 1992. Company Secretary of HSBC Bank plc from 1994 to 1996. D Beath Age 63. Group General Manager, Internal Audit. Joined HSBC in 1960. Appointed a Group General Manager in 1993. R E T Bennett Age 50. Group General Manager, Legal and Compliance. Joined HSBC in 1979. Appointed a Group General Manager in 1998. Z J Cama Age 54. Chief Executive Officer, The Hongkong and Shanghai Banking Corporation Limited, India. Joined HSBC in 1968. Appointed a Group General Manager in August 2001. V H C Cheng, OBE Age 53. Executive Director, The Hongkong and Shanghai Banking Corporation Limited and Chief Executive Officer, Hang Seng Bank Limited. Joined HSBC in 1978. Appointed a Group General Manager in 1995. R J Arena A Dixon, OBE Age 53. Group General Manager, Global e-business. Joined HSBC in 1999. Appointed a Group General Manager in 2000. Age 57. Deputy Chairman, HSBC Bank Middle East. Joined HSBC in 1965. Appointed a Group General Manager in 1995. D W Baker C-H Filippi Age 59. Chief Operating Officer and Director, HSBC Bank plc. Joined HSBC in 1962. Appointed a Group General Manager in 1999. Age 49. Group General Manager and Global Head of Corporate and Institutional Banking. Joined HSBC in 1987. Appointed a Group General Manager in November 2001. C C R Bannister M F Geoghegan Age 43. Chief Executive Officer, Group Private Banking. Joined HSBC in 1994. Appointed a Group General Manager in August 2001. Age 48. President and Chief Executive Officer, HSBC Bank Brasil S.A.-Banco Múltiplo. Joined HSBC in 1973. Appointed a Group General Manager in 1997. . 129 H S B C H O L D I N G S P L C Board of Directors and Senior Management (continued) E W Gill T W O’Brien, OBE Age 55. Chief Executive Officer, The Hongkong and Shanghai Banking Corporation Limited, Singapore. Joined HSBC in 1968. Appointed a Group General Manager in 2000. M J G Glynn Age 50. President and Chief Executive Officer, HSBC Bank Canada. Joined HSBC in 1982. Appointed a Group General Manager in August 2001. S T Gulliver Age 42. Group General Manager, Treasury and Capital Markets, Investment Banking, Asia-Pacific. Joined HSBC in 1980. Appointed a Group General Manager in 2000. A P Hope Age 55. Group General Manager, Insurance. Joined HSBC in 1971. Appointed a Group General Manager in 1996. D D J John Age 51. Deputy Chairman and Chief Executive Officer, HSBC Bank Malaysia Berhad. Joined HSBC in 1972. Appointed a Group General Manager in 2000. M B McPhee Age 60. Group General Manager, Credit and Risk. Joined HSBC in 1984. Appointed a Group General Manager in 1997. A Mehta Age 55. Chief Executive Officer, The Hongkong and Shanghai Banking Corporation Limited. Joined HSBC in 1968. Appointed a Group General Manager in 1991. Y A Nasr Age 47. President and Chief Executive Officer, HSBC USA Inc. and HSBC Bank USA. Joined HSBC in 1976. Appointed a Group General Manager in 1998. 130 Age 54. Group General Manager, Strategic Development. Joined HSBC in 1969. Appointed a Group General Manager in 1992. R C F Or Age 52. General Manager, The Hongkong and Shanghai Banking Corporation Limited. Joined HSBC in 1972. Appointed a Group General Manager in 2000. K Patel Age 53. Chairman, Global Investment Banking Division, HSBC Investment Bank plc. Joined HSBC in 1984. Appointed a Group General Manager in 2000. R C Picot Age 44. Joined HSBC in 1993. Group Chief Accountant since 1995. J C S Rankin Age 60. Group General Manager, Human Resources. Joined HSBC in 1960. Appointed a Group General Manager in 1990. Dr S Rometsch Age 63. Chairman of the Managing Partners, HSBC Trinkaus & Burkhardt KGaA. Joined HSBC in 1983. Appointed a Group General Manager in August 2001. M R P Smith, OBE Age 45. Chairman and Chief Executive Officer, HSBC Argentina Holdings S.A. Joined HSBC in 1978. Appointed a Group General Manager in 2000. I A Stewart Age 43. Head of Investment Banking and Markets, Americas. Joined HSBC in 1980. Appointed a Group General Manager in 2000. P E Stringham Age 52. Group General Manager, Marketing. Joined HSBC in January 2001 as Head of Group Marketing. Appointed a Group General Manager in August 2001. H S B C H O L D I N G S P L C Report of the Directors Results for 2001 HSBC reported operating profit before provisions was in line with 2000 at US$10,484 million. HSBC(cid:146)s profit for the year attributable to shareholders of HSBC Holdings was US$5,406 million, an 11.4 per cent return on shareholders(cid:146) funds. A first interim dividend of US$0.19 per ordinary share was paid on 9 October 2001. The Directors have declared a second interim dividend of US$0.29 per ordinary share in lieu of a final dividend, making a total distribution for the year of US$4,467 million. The second interim dividend will be payable on 7 May 2002 in cash in United States dollars, or in sterling or Hong Kong dollars at exchange rates to be determined on 29 April 2002, with a scrip dividend alternative. The reserves available for distribution before accounting for the second interim dividend of US$2,700 million are US$7,925 million. Further information about the results is given in the consolidated profit and loss account on page 160. Principal activities and business review Through its subsidiary and associated undertakings, HSBC provides a comprehensive range of banking and related financial services through an international network of some 7,000 offices in 81 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. Taken together, the five largest customers of HSBC do not account for more than 2 per cent of HSBC(cid:146)s income. On 3 March 2001, HSBC completed the acquisition of 89.6 per cent of Banque Hervet, a Paris based specialist commercial and consumer bank, for (cid:128)473 million (US$443 million) from the French Finance Ministry. An additional 8.3 per cent was acquired in July for (cid:128)42 million (US$38 million). On 30 October 2001, HSBC completed the purchase of Demirbank T.A.S from the Savings Deposits Insurance Fund in Turkey for US$353 million in cash. On 29 December 2001, an agreement to acquire an eight per cent equity stake in the Bank of Shanghai for RMB517.92 million (US$62.6 million) was signed. A review of the development of the business of HSBC undertakings during the year, and an indication of likely future developments are given in the (cid:145)Description of Business(cid:146) on pages 7 to 32. HSBC(cid:146)s five-year strategy, launched in December 1998, is designed to focus on shareholder value. The results of the first three years of the strategy reflect solid progress in implementing (cid:145)Managing for Value(cid:146). HSBC Holdings(cid:146) governing objective is to exceed the total shareholder return of a benchmark comprising a peer group of financial institutions, with a minimum objective of doubling shareholder return over the five-year period. Total shareholder return for the first three years was 173 per cent, compared to 125 per cent for the benchmark (starting point 100 per cent on 31 December 1998). An explanation of the basis of calculation of total shareholder return can be found on page 146. Capital and reserves The following events occurred during the year: Scrip dividends 1. 62,155,303 ordinary shares of US$0.50 each were issued at par on 2 May 2001 to shareholders who elected to receive new shares in lieu of the 2000 second interim dividend. The market value per share used to calculate shareholders(cid:146) entitlements to new shares was US$11.8617, being the United States dollar equivalent of £8.292. 2. 10,766,892 ordinary shares of US$0.50 each were issued at par on 9 October 2001 to shareholders who elected to receive new shares in lieu of the 2001 first interim dividend. The market value per share used to calculate shareholders(cid:146) entitlements to new shares was US$11.9717, being the United States dollar equivalent of £8.228. All-Employee share plans 3. 2,312,407 ordinary shares of US$0.50 each were issued at prices ranging from £1.8060 to £6.7536 per share in connection with the exercise of options under the HSBC Holdings Savings-Related Share Option Plan. Options over 7,092,927 ordinary shares of US$0.50 each lapsed. 4. 1,514,682 ordinary shares of US$0.50 each were issued at prices ranging from £3.2530 to 131 H S B C H O L D I N G S P L C Report of the Directors (continued) £6.5187 per share in connection with the exercise of options under the HSBC Holdings Savings-Related Share Option Scheme: USA Section. 5. The HSBC Qualifying Employee Share Ownership Trust ("the QUEST") was established in 1999 to satisfy options exercised by UK participants of the HSBC Holdings Savings-Related Share Option Plan. At 1 January 2001, the QUEST held 10,337,081 ordinary shares of US$0.50 each. During 2001, HSBC QUEST Trustee (UK) Limited, the corporate trustee of the QUEST, subscribed for 3,343,173 ordinary shares of US$0.50 each at market values ranging from £6.65 to £10.84, using funds from those employees who exercised options under the HSBC Holdings Savings-Related Share Option Plan. In addition, 8,774,315 ordinary shares were transferred from the QUEST to employees who exercised options under the HSBC Holdings Savings-Related Share Option Plan. At 31 December 2001, the QUEST held 4,905,939 ordinary shares of US$0.50 each. 6. Under the authority granted by shareholders at the Annual General Meeting in 2000, 2,947,120 ordinary shares of US$0.50 each were issued at (cid:128)11.6611 in connection with a Plan d(cid:146)Epargne Entreprise for the benefit of non-UK resident employees of CCF and its subsidiaries. 7. Options over 28,831,641 ordinary shares of US$0.50 each were awarded at nil consideration on 11 April 2001 to 57,874 HSBC employees resident in 53 countries and territories under the HSBC Holdings Savings-Related Share Option Plan. The options are exercisable within six months following the third or fifth anniversary of the commencement of the relevant savings contracts on 1 August 2001 at a price of £6.7536 per share, a 20 per cent discount to the average market value over the five business days immediately preceding the date of the invitation. Discretionary share incentive plans 8. 3,387,580 ordinary shares of US$0.50 each were issued at prices ranging from £2.1727 to £7.7984 per share in connection with the exercise of options under the HSBC Holdings Executive Share Option Scheme. Options over 3,599,388 ordinary shares of US$0.50 each lapsed. 132 9. Options over 50,973,462 ordinary shares of US$0.50 each were awarded at nil consideration on 23 April 2001 under the HSBC Holdings Group Share Option Plan. The options are exercisable between the third and 10th anniversaries of the award at a price of £8.7120 per share, the average market value over the five business days immediately preceding the date of the award. 10. Options over 383,505 ordinary shares of US$0.50 each were awarded at nil consideration on 30 August 2001 under the HSBC Holdings Group Share Option Plan. The options are exercisable between the third and 10th anniversaries of the award at a price of £8.228 per share, the average market value over the five business days immediately preceding the date of the award. Options over 986,972 ordinary shares of US$0.50 each lapsed. Authority to repurchase shares 11. At the Annual General Meeting in 2001 shareholders gave authority for the Company to make market repurchases of up to 926,985,000 ordinary shares of US$0.50 each. Your Directors have not exercised this authority. Employee share option plans In order to align the interests of staff with those of shareholders, share options are awarded to employees under all-employee share plans and discretionary share incentive plans. The following are particulars of outstanding employee share options, including those held by employees working under employment contracts that are regarded as "continuous contracts" for the purposes of the Hong Kong Employment Ordinance. No options have been granted to substantial shareholders, suppliers of goods or services, or in excess of the individual limit for each share plan. The total number of new HSBC Holdings shares that may be issued or become issuable under all the share option plans in any ten year period is 848,847,000 ordinary shares of US$0.50 each (approximately 9 per cent of HSBC Holdings issued ordinary share capital on 4 March 2002). Within this limit not more than 5 per cent of the issued ordinary share capital of HSBC Holdings from time to time may be put under option under the HSBC Holdings Group Share Option Plan and the HSBC Holdings Restricted Share Plan 2000 in any ten year period (approximately 467,750,000 ordinary shares of US$0.50 each on 4 March 2002). Particulars of options held by Directors of HSBC Holdings are set out on pages 152 and 153. All-Employee share plans The HSBC Holdings Savings-Related Share Option Plan, HSBC Holdings Savings-Related Share Option Plan: Overseas Section, and previously the HSBC Holdings Savings-Related Share Option Scheme: USA Section, are all-employee share plans under which eligible HSBC employees (those with six months continuous service from July to December of the year preceding the date of grant) are granted options (at nil consideration) to acquire HSBC Holdings ordinary shares of US$0.50 each. Employees may make monthly contributions up to £250 (or equivalent) over a period of three or five years which may be used, on the third or fifth anniversary of completion of the relevant savings contract, to exercise the options; alternatively the employee may elect to have the savings (plus interest) repaid in cash. The options are exercisable within six months following the third or fifth anniversary of the commencement of the relevant savings contract. In the case of redundancy, retirement on grounds of injury or ill health, retirement at age 50 or over, the transfer of employing business to another party, or a change of control of employing company, options may be exercised before completion of the relevant savings contract. Under the HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings- Related Share Option Plan: Overseas Section the option exercise price is determined by reference to the average market value of the ordinary shares on the five business days immediately preceding the invitation date, then applying a discount of up to 20 per cent. The Plans will terminate on 26 May 2010 unless the Directors resolve to terminate the Plans at an earlier date. HSBC Holdings Savings-Related Share Option Plan HSBC Holdings ordinary shares of US$0.50 each Date of award 10 Apr 1995 3 Apr 1996 9 Apr 1997 6 Apr 1998 1 Apr 1999 10 Apr 2000 11 Apr 2001 11 Apr 2001 Exercise price (£) Exercisable from Exercisable until Options at 1 January 2001 1.8060 1 Aug 2000 31 Jan 2001 174,885 3.0590 4.5206 5.2212 5.3980 6.0299 6.7536 6.7536 1 Aug 2001 1 Aug 2002 1 Aug 2003 1 Aug 2004 1 Aug 2005 1 Aug 2004 1 Aug 2006 31 Jan 2002 31 Jan 2003 31 Jan 2004 31 Jan 2005 31 Jan 2006 31 Jan 2005 31 Jan 2007 8,401,212 9,105,269 10,126,329 13,404,231 17,017,874 (cid:150) (cid:150) Options awarded during year1 (cid:150) Options exercised during year 2 144,502 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 4,508,903 9,420,599 8,280,796 153,839 98,112 95,889 45,156 1,798 411 Options lapsed during year Options at 31 December 2001 30,383 47,897 229,941 418,521 627,143 1,097,009 255,189 199,078 (cid:150) 72,519 8,721,489 9,609,696 12,681,199 15,875,709 4,251,916 9,221,110 1 2 The closing price per share on 10 April 2001 was £8.42. The weighted average closing price of the securities immediately before the dates on which options were exercised was £8.175. 133 H S B C H O L D I N G S P L C Report of the Directors (continued) HSBC Holdings Savings-Related Share Option Plan: Overseas Section HSBC Holdings ordinary shares of US$0.50 each Date of award 10 Apr 1995 3 Apr 1996 9 Apr 1997 6 Apr 1998 1 Apr 1999 10 Apr 2000 11 Apr 2001 11 Apr 2001 Exercise price (£) Exercisable from Exercisable until Options at 1 January 2001 1.8060 1 Aug 2000 31 Jan 2001 368,277 3.0590 4.5206 5.2212 5.3980 6.0299 6.7536 6.7536 1 Aug 2001 1 Aug 2002 1 Aug 2003 1 Aug 2004 1 Aug 2005 1 Aug 2004 1 Aug 2006 31 Jan 2002 31 Jan 2003 31 Jan 2004 31 Jan 2005 31 Jan 2006 31 Jan 2005 31 Jan 2007 1,730,415 5,934,075 3,606,515 13,742,217 30,072,891 (cid:150) (cid:150) Options awarded during year1 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 11,441,215 3,460,924 Options exercised during year2 367,416 1,647,006 83,277 30,313 74,696 62,166 1,345 (cid:150) Options lapsed during year Options at 31 December 2001 861 37,926 154,692 182,354 797,338 2,236,726 777,869 (cid:150) (cid:150) 45,483 5,696,106 3,393,848 12,870,183 27,773,999 10,662,001 3,460,924 1 2 The closing price per share on 10 April 2001 was £8.42. The weighted average closing price of the securities immediately before the dates on which options were exercised was £8.585. HSBC Holdings Savings-Related Share Option Scheme: USA Section HSBC Holdings ordinary shares of US$0.50 each Date of award 16 Aug 1996 12 Aug 1997 24 Aug 1998 10 Aug 1999 Exercise price (£) 3.2530 6.5187 3.7768 6.3078 Exercisable from 1 Jul 2001 1 Jul 2002 1 Jul 2003 1 Jul 2004 Exercisable until 31 Dec 2001 31 Dec 2002 31 Dec 2003 31 Dec 2004 Options at 1 January 2001 2,380,633 1,329,944 2,414,761 1,502,733 Options exercised during year1 1,499,434 9,356 2,880 3,012 Options at 31 December 2001 881,199 1,320,588 2,411,881 1,499,721 No options were awarded or lapsed during the year. 1 The weighted average closing price of the securities immediately before the dates on which options were exercised was £8.165. Discretionary share incentive plans The HSBC Holdings Group Share Option Plan, and previously the HSBC Holdings Executive Share Option Scheme, are discretionary share incentive plans under which HSBC employees, based on performance criteria and potential, are granted options (at nil consideration) to acquire HSBC Holdings ordinary shares of US$0.50 each. Since 1996 the vesting of these awards has been subject to the attainment of pre-determined performance criteria, except within CCF (which was acquired in 2000) where performance criteria will be phased in. The maximum value of options which may be granted to an employee in any one year (together with any Performance Share Awards under the HSBC Holdings Restricted Share Plan 2000) is 150 per cent of the employee’s annual salary at the date of grant plus any bonus paid for the previous year. In exceptional circumstances this could be raised to 225 per cent. Subject to achievement of the performance condition, options are exercisable between three and ten years from the date of grant. Employees of a subsidiary that is sold or transferred out of HSBC may exercise options awarded under the HSBC Holdings Group Share Option Plan within six months regardless of whether the performance condition is met. The terms of the HSBC Holdings Group Share Option Plan were amended in 2001 so that the exercise price of options granted under the Plan in 2002 and beyond would be the higher of the average market value of the ordinary shares on the five business days prior to the grant of the option or the market value of the ordinary shares on the date of grant of the option. The HSBC Holdings Group Share Option Plan will terminate on 26 May 2005 unless the Directors resolve to terminate the Plan at an earlier date. 134 HSBC Holdings Executive Share Option Scheme HSBC Holdings ordinary shares of US$0.50 each Date of award Exercise price (£) Exercisable from Exercisable until 12 Oct 1993 8 Mar 1994 7 Mar 1995 1 Apr 1996 13 Aug 1996 24 Mar 1997 12 Aug 1997 16 Mar 1998 29 Mar 1999 10 Aug 1999 31 Aug 1999 3 Apr 2000 2.4062 2.8376 2.1727 3.3334 3.8270 5.0160 7.7984 6.2767 6.3754 7.4210 7.8710 7.4600 12 Oct 1996 8 Mar 1997 7 Mar 1998 1 Apr 1999 13 Aug 1999 24 Mar 2000 12 Aug 2000 16 Mar 2001 29 Mar 2002 10 Aug 2002 31 Aug 2002 3 Apr 2004 12 Oct 2003 8 Mar 2004 7 Mar 2005 1 Apr 2006 13 Aug 2006 24 Mar 2007 12 Aug 2007 16 Mar 2008 29 Mar 2009 10 Aug 2009 31 Aug 2009 3 Apr 2010 Options at 1 January 2001 101,409 453,678 957,000 2,212,812 16,500 2,413,960 35,250 4,182,900 67,624,872 280,500 4,000 31,696,502 Options exercised during year1 Options lapsed during year Options at 31 December 2001 24,216 127,137 348,000 495,102 16,500 411,769 5,625 842,026 841,557 (cid:150) (cid:150) 275,648 45,408 75,681 24,750 73,500 (cid:150) 114,200 15,000 185,850 2,136,159 15,750 (cid:150) 913,090 31,785 250,860 584,250 1,644,210 (cid:150) 1,887,991 14,625 3,155,024 64,647,156 264,750 4,000 30,507,764 1 The weighted average closing price of the securities immediately before the dates on which options were exercised was £8.60. The HSBC Holdings Executive Share Option Scheme was replaced by the HSBC Holdings Group Share Option Plan on 26 May 2000. No options have been granted under the Scheme since that date. HSBC Holdings Group Share Option Plan HSBC Holdings ordinary shares of US$0.50 each Date of award 4 Oct 2000 23 Apr 2001 30 Aug 2001 Exercise price (£) Exercisable from Exercisable until 4 Oct 2003 9.6420 4 Oct 2010 8.7120 23 Apr 2004 23 Apr 2011 8.2280 30 Aug 2004 30 Aug 2011 Options at 1 January 2001 455,299 (cid:150) (cid:150) Options awarded during year (cid:150) 50,973,4621 383,5052 Options exercised during year Options lapsed during year Options at 31 December 2001 (cid:150) (cid:150) (cid:150) 11,777 967,095 8,100 443,522 50,006,367 375,405 1 2 The closing price per share on 20 April 2001 was £8.765. The closing price per share on 29 August 2001 was £8.25. Crédit Commercial de France S.A. and subsidiary company plans The following are outstanding options, granted at nil consideration (unless otherwise indicated), to acquire shares in CCF and its subsidiaries. CCF was acquired on 28 July 2000. During 2001, 441,000 options over CCF shares were exercised and the resultant shares exchanged for cash. On exercise of all remaining options held by CCF employees, the CCF shares will be exchanged for HSBC Holdings ordinary shares of US$0.50 each. Further details are given in Note 35 of the ’Notes on the Financial Statements’. With the exception of Banque Eurofin and Banque du Louvre (as set out below), no subsidiary company granted options over its own shares during the year. 135 H S B C H O L D I N G S P L C Report of the Directors (continued) Crédit Commercial de France shares of €5 each Date of award 4 May 1993 23 Jun 1994 22 Jun 1995 9 May 1996 7 May 1997 29 Apr 1998 7 Apr 1999 12 Apr 2000 Exercise price((cid:128)) Exercisable from Exercisable until 33.69 4 May 1995 4 May 2003 32.78 34.00 35.52 37.05 73.50 81.71 142.50 23 Jun 1996 22 Jun 1997 9 May 1998 7 Jun 2000 7 Jun 2000 7 Jun 2000 1 Jan 2002 23 Jun 2004 22 Jun 2005 9 May 2006 7 May 2007 29 Apr 2008 7 Apr 2009 12 Apr 2010 Options at 1 January 2001 Options exercised during year Options lapsed during year Options at 31 December 2001 725 15,000 87,300 610,000 555,000 673,400 796,700 907,500 625 (cid:150) 29,000 488,174 1,000 (cid:150) 2,000 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 47,000 100 15,000 58,300 121,826 554,000 673,400 794,700 860,500 Crédit Commercial du Sud Ouest shares of €15.25 each Date of award 1 Oct 1996 7 Nov 1997 8 Jul 1998 9 Sep 1999 7 Jun 2000 Banque Chaix shares of €16 each Date of award 20 Dec 1996 28 Oct 1997 10 Jul 1998 21 Jun 1999 7 Jun 2000 Exercise price((cid:128)) 80.49 85.68 90.25 95.89 102.29 Exercisable from 1 Oct 2001 7 Nov 2002 8 Jul 2003 9 Sep 2004 7 Jun 2005 Exercisable until 1 Apr 2002 7 Nov 2003 8 Jan 2004 9 Mar 2005 7 Dec 2005 Options at 1 January 2001 Options exercised during year Options lapsed during year Options at 31 December 2001 7,500 5,625 7,500 7,500 7,500 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 1,125 (cid:150) (cid:150) (cid:150) (cid:150) 6,375 5,625 7,500 7,500 7,500 Exercise price((cid:128)) 82.78 88.73 94.52 100.31 105.94 Exercisable from 20 Dec 2000 28 Oct 2001 10 Jul 2002 21 Jun 2004 7 Jun 2005 Exercisable until 20 Mar 2002 28 Jan 2003 10 Oct 2003 21 Dec 2004 7 Dec 2005 Options at 1 January 2001 Options exercised during year Options lapsed during year Options at 31 December 2001 10,000 10,000 10,000 10,000 10,000 10,000 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 10,000 10,000 10,000 10,000 Banque Dupuy de Parseval shares of €20 each Exercise price((cid:128)) 32.01 33.31 34.76 36.36 39.48 Exercisable from 3 Mar 2002 1 Jul 2003 1 Jul 2004 3 Apr 2005 8 Jun 2005 Exercisable until 3 Jun 2002 1 Oct 2003 1 Oct 2004 3 Jul 2005 8 Sept 2005 Options at 1 January 2001 Options exercised during year Options lapsed during year Options at 31 December 2001 5,000 5,000 5,000 5,000 5,000 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 5,000 5,000 5,000 5,000 5,000 Date of award 3 Mar 1997 1 Jul 1998 1 Jul 1999 3 Apr 2000 8 Jun 2000 136 Union de Banques a Paris shares of €16 each Exercise price((cid:128)) Exercisable Exercisable from until 19.06 19.97 33.54 47.81 3 Jul 2002 3 Jan 2003 25 Nov 2003 25 May 2004 22 Nov 2004 22 May 2005 12 Jul 2005 12 Jan 2006 Date of award 3 Jul 1997 25 Nov 1998 22 Nov 1999 12 Jul 2000 Banque de Savoie shares of €16 each Date of award 24 Dec 1998 9 Sep 1999 14 Jun 2000 Exercise price((cid:128)) 61.85 64.79 69.52 Exercisable Exercisable from until 24 Dec 2003 24 Jun 2004 9 Sep 2004 9 Mar 2005 14 Jun 2005 14 Dec 2005 Banque de Baecque Beau shares of no par value Exercise price((cid:128)) 32.88 61.66 Exercisable Exercisable from until 17 Oct 2002 17 Oct 2003 22 Dec 2003 22 Dec 2005 Options at 1 January 2001 47,850 27,900 27,900 28,400 Options at 1 January 2001 5,000 5,000 5,100 Options at 1 January 2001 28,500 11,500 Options exercised Options Options at lapsed 31 December during year during year 2001 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 47,850 27,900 27,900 28,400 Options exercised Options Options at lapsed 31 December during year during year 2001 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 5,000 5,000 5,100 Options exercised Options Options at lapsed 31 December during year during year 2001 (cid:150) (cid:150) (cid:150) (cid:150) 28,500 11,500 Exercise price((cid:128)) 415 415 Exercisable Exercisable Options at 1 January Options exercised Options Options at lapsed 31 December from until 2001 during year during year 2001 22 Dec 2004 22 Dec 2006 19 Dec 2005 19 Dec 2007 2,410 4,180 (cid:150) (cid:150) (cid:150) 700 2,410 3,480 CCF Banque Privee Internationale shares of no par value Date of award 9 Mar 2000 Banque Eurofin shares of €16 each Date of award 30 Nov 19981 21 Dec 1999 15 May 2001 Exercise price((cid:128)) Exercisable Exercisable Options at 1 January Options exercised Options Options at lapsed 31 December from until 2001 during year during year 2001 116.93 9 March 2005 31 Dec 2010 18,000 (cid:150) (cid:150) 18,000 Exercise Exercisable Exercisable January Options at 1 Options awarded Options exercised Options Options at lapsed 31 December price((cid:128)) from until 2001 during year during year during year 2001 25.92 30 Nov 2001 29 Nov 2003 48.78 21 Dec 2000 21 Dec 2009 143,483 66,000 (cid:150) (cid:150) 93.60 15 May 2002 15 May 2011 (cid:150) 60,000 136,283 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 7,200 66,000 60,000 1 Consideration of €1.52 per share paid on grant of option . 137 Date of award 17 Oct 1997 22 Dec 2000 Netvalor shares of €415 each Date of award 22 Dec 1999 19 Dec 2000 H S B C H O L D I N G S P L C Report of the Directors (continued) Banque du Louvre shares of no par value Date of award 31 Mar 1999 7 Sep 2001 Exercise Exercisable Exercisable 1 January Options at Options awarded Options exercised Options Options at lapsed 31 December price((cid:128)) from until 2001 during year during year during year 2001 68.65 1 Jul 2000 31 Mar 2009 43,750 (cid:150) 20,750 154.75 7 Sep 2005 7 Oct 2007 (cid:150) 78,600 (cid:150) 5,400 (cid:150) 17,600 78,600 Sinopia Asset Management shares of €0.5 each Date of award 24 Jun 1997 18 Mar 1998 22 Mar 1999 15 Oct 1999 18 Feb 2000 Exercise price((cid:128)) 6.13 8.61 21.85 18.80 18.66 Exercisable Exercisable 1 January exercisable lapsed 31 December Options at Options Options Options at from until 2001 during year during year 24 Jun 2002 24 Dec 2002 18 Mar 2003 18 Sep 2003 22 Mar 2004 22 Sep 2004 15 Oct 2004 15 Apr 2005 91,200 94,400 87,500 45,000 18 Feb 2005 18 Aug 2005 126,000 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 6,500 (cid:150) 5,500 2001 91,200 94,400 81,000 45,000 120,500 Valuation of freehold and leasehold land and buildings HSBC(cid:146)s freehold and long leasehold properties, together with all leasehold properties in the Hong Kong SAR, were revalued in September 2001 in accordance with HSBC(cid:146)s policy of annual valuation. As a result of this revaluation, the net book value of land and buildings has decreased by US$271 million. Dalton, D G Eldon, D J Flint, W K L Fung, S K Green, S Hintze, A W Jebson, Sir John Kemp- Welch, Lord Marshall, C Miller Smith, Sir Mark Moody-Stuart, M Murofushi, C E Reichardt, H Sohmen and Sir Adrian Swire. Sir Peter Walters and D E Connolly retired on 25 May 2001; C Miller Smith retired on 31 December 2001. Further details are included in Note 25 of the (cid:145)Notes on the Financial Statements(cid:146). S Hintze and Sir Mark Moody-Stuart were appointed Directors on 1 March 2001. Board of Directors The objectives of the management structures within HSBC, headed by the Board of Directors of HSBC Holdings 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 Directors receive information between meetings about the activities of committees and developments in HSBC(cid:146)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 Sir John Bond, Baroness Dunn, Sir Brian Moffat, Sir Peter Walters, K R Whitson, Lord Butler, R K F Ch(cid:146)ien, D E Connolly, C F W de Croisset, W R P 138 Sir John Bond, D G Eldon, D J Flint, Lord Marshall, M Murofushi, C E Reichardt and Sir Adrian Swire will retire by rotation at the forthcoming Annual General Meeting. With the exception of M Murofushi, C E Reichardt and Sir Adrian Swire, who will retire, they offer themselves for re-election. Brief biographical particulars for each Director are set out on pages 127 to 129. 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 HSBC Holdings or any of its subsidiary undertakings. Board Committees The Board has appointed a number of committees consisting of certain Directors and Group General Managers. The following are the principal committees: Group Executive Committee Corporate Governance 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), Sir John Bond, C F W de Croisset, W R P Dalton, D G Eldon, D J Flint, S K Green and A W Jebson, all of whom are executive Directors, and R J Arena, C-H Filippi, A P Hope, M B McPhee, A Mehta and Y A Nasr, all of whom are Group General Managers. Group Audit Committee The Group Audit Committee meets regularly with HSBC(cid:146)s senior financial, internal audit, legal and compliance management and the external auditor to consider HSBC Holdings 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 Brian Moffat (Chairman), R K F Ch’ien, Sir John Kemp-Welch, and C E Reichardt, all of whom are independent 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 Lord Marshall (Chairman), W K L Fung, Sir John Kemp- Welch and Sir Mark Moody-Stuart, all of whom are independent non-executive Directors. Lord Marshall succeeded Sir Peter Walters as Chairman of the Remuneration Committee in May 2001. He will step down from the Committee at the year end. 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 Baroness Dunn (Chairman), Sir John Bond, H Sohmen and Sir Brian Moffat. HSBC is committed to high standards of corporate governance. HSBC Holdings has complied throughout the year with the best practice provisions of the Combined Code on corporate governance appended to the Listing Rules of the Financial Services Authority and with the provisions of Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong. Internal control The Directors are responsible for internal control in HSBC and for reviewing its effectiveness. Procedures have been designed for safeguarding assets against unauthorised use or disposition; for maintaining proper accounting records; and for the reliability of financial information used within the business or for publication. Such procedures are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material errors, losses or fraud. The procedures also enable HSBC Holdings to discharge its obligations under the Handbook of Rules and Guidance issued by the Financial Services Authority, HSBC(cid:146)s lead regulator, which came into effect on 1 December 2001. The key procedures that the Directors have established are designed to provide effective internal control within HSBC and accord with the Internal Control Guidance for Directors on the Combined Code issued by the Institute of Chartered Accountants in England and Wales. Such procedures have been in place throughout the year and up to 4 March 2002, the date of approval of the Annual Report and Accounts. In the case of companies acquired during the year, including Demirbank T.A.S, which has been integrated into HSBC Bank A.S., the internal controls in place have been reviewed against HSBC(cid:146)s benchmarks since the companies were acquired and they are being integrated into HSBC(cid:146)s systems. HSBC(cid:146)s key internal control procedures 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 HSBC Holdings or by the Group Executive Committee under powers delegated by the Board. Sub-delegation of authority from 139 H S B C H O L D I N G S P L C Report of the Directors (continued) the Group Executive Committee to individuals requires these individuals, within their respective delegation, to maintain a clear and appropriate apportionment of significant responsibilities and to oversee the establishment and maintenance of systems of controls appropriate to the business. The appointment of executives to the most senior positions within HSBC requires the approval of the Board of Directors of HSBC Holdings. • Functional, operating, financial reporting and certain management reporting standards are established by Group Head Office management for application across the whole of HSBC. 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 HSBC to identify, control and report on the major risks including credit, changes in the market prices of financial instruments, liquidity, operational error, unauthorised activities 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 HSBC 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 as compared with the related plan are prepared throughout HSBC each quarter. A strategic plan is prepared by major operating subsidiaries every three years. • 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 140 subsidiaries. In addition, functional management in Group Head Office has been given responsibility to set policies, procedures and standards in the areas of finance; legal and regulatory compliance; internal audit; human resources; credit; market risk; operational risk; computer systems and operations; property management; and for certain global product lines. • Policies and procedures to guide subsidiary companies and management at all levels in the conduct of business to avoid reputational risk are established by the Board of HSBC Holdings, the Group Executive Committee, subsidiary company boards, board committees or senior management. Reputational risks can arise from ethical, social or environmental issues, or as a consequence of operational risk events. As a banking group, HSBC’s good reputation depends upon the way in which it conducts its business but it can also be affected by the way in which clients, to which it provides financial services, conduct their business. • The internal audit function, which is centrally controlled, monitors compliance with policies and standards and the effectiveness of internal control structures across the whole of HSBC. The work of the internal audit function is focused on areas of greatest risk to HSBC as determined by a risk management approach. The head of this function reports to the Group Chairman and the Group Audit Committee. The Group Audit Committee has kept under review the effectiveness of this system of internal control and has reported regularly to the Board of Directors. The key processes used by the Committee in carrying out its reviews include regular reports from the heads of key risk functions; the production and regular updating of summaries of key controls applied by subsidiary companies measured against HSBC benchmarks which cover all internal controls, both financial and non-financial; annual confirmations from chief executives of principal subsidiary companies that there have been no material losses, contingencies or uncertainties caused by weaknesses in internal controls; internal audit reports; external audit reports; prudential reviews; and regulatory reports. The Directors, through the Group Audit Committee, have conducted an annual review of the effectiveness of HSBC(cid:146)s system of internal control covering all controls, including financial, operational and compliance controls and risk management. Reputational, Strategic and Operational Risk HSBC continues to develop its policies and procedures for safeguarding against reputational, strategic and operational risks. This is an evolutionary process in which account will be taken of The Association of British Insurers(cid:146) recently issued guidance on best practice when responding to social, ethical and environmental (SEE) risks. The safeguarding of HSBC(cid:146)s reputation is of paramount importance to its continued prosperity and is the responsibility of every member of staff. HSBC has always believed in the highest standards of conduct and, as a matter of routine, takes account of reputational risks to its business. The training of Directors on appointment will include reputational matters. Reputational risks, including SEE matters, are considered and assessed by the Board, Group Executive Committee, subsidiary company boards, board committees or senior management during the formulation of policy and the establishment of HSBC standards. Standards on all major aspects of business are set for HSBC or for individual subsidiary companies, businesses and functions. These policies, which form an integral part of the internal control systems, are communicated through manuals and statements of policy promulgated through internal communications. The policies include environmental, ethical and social policies and set out operational procedures in areas of reputational risk, ranging from the money laundering deterrence programme to health and safety rules. The policy manuals address risk issues in detail and co- operation between head office departments and businesses ensures a strong relationship between HSBC(cid:146)s risk management system and its corporate social responsibility practices. Internal controls are an integral part of how HSBC conducts its business. HSBC(cid:146)s manuals and statements of policy are the foundation of these internal controls. There is a strong process to ensure controls operate effectively. Any significant failings are reported through the control mechanisms, internal audit and compliance functions to subsidiary company audit committees and the Group Audit Committee, which keeps under review the effectiveness of the system of internal controls and reports regularly to HSBC Holdings(cid:146) Board. In addition, all Group businesses and major functions are required to review their control procedures and to make regular reports of losses arising from operational risks. KPMG recently assisted HSBC in developing systems to quantify the key direct environmental impact of HSBC(cid:146)s principal UK operations. This third party scrutiny of the reporting system supports HSBC’s internal risk management procedures. HSBC is a participant in the Dow Jones Sustainability, FTSE4Good and Business in Environment indices. Health and Safety The maintenance of appropriate health and safety standards throughout HSBC is a key responsibility of all managers and HSBC is committed to actively managing all health and safety risks associated with its business. HSBC’s objectives are to identify, remove, reduce or control material risks of fires and of accidents or injuries to employees and visitors. Health and safety policies, Group standards and procedures are set by Group Fire and Safety and are implemented by Health Safety and Fire Co- ordinators based in each country in which HSBC operates. Following the events of 11 September health and safety arrangements, including those to combat terrorist activity, were reviewed. As a result, enhanced procedures have been promulgated and levels of preparedness improved. Communication with shareholders Communication with shareholders is given high priority. Extensive information about HSBC(cid:146)s activities is provided in the Annual Report and Accounts, Annual Review 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 HSBC 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 HSBC. 141 H S B C H O L D I N G S P L C Report of the Directors (continued) Remuneration Policy In common with most businesses, HSBC(cid:146)s performance depends on the quality and commitment of its people. Accordingly, the Board(cid:146)s stated strategy is to attract, retain and motivate the very best people. In a business that is based on trust and relationships, HSBC(cid:146)s broad policy is to look for people who want to make a long-term career with the organisation because trust and relationships are built over time. Remuneration is an important component in people(cid:146)s decisions on which company to join, but it is not the only one; it is HSBC(cid:146)s experience that people are attracted to an organisation with good values, fairness, the potential for success and the scope to develop a broad, interesting career. Within the authority delegated by the Board of Directors, the Remuneration Committee is responsible for determining the remuneration policy of HSBC including the terms of bonus plans, share option plans and other long-term incentive plans, and for agreeing the individual remuneration packages of executive Directors and other senior Group employees. No Directors are involved in deciding their own remuneration. The Remuneration Committee applies the following key principles: • • • • to pay against a market of comparative organisations to offer fair and realistic salaries with an important element of variable pay based on relative performance to have as many top-performers as possible at all levels within HSBC participating in some form of long-term share plan for new employees only, since 1996, to follow a policy of moving progressively from defined benefit to defined contribution Group pension schemes. Basic salary and benefits Salaries are reviewed annually in the context of individual and business performance, market practice, internal relativities and competitive market 142 pressures. Allowances and benefits are largely determined by local market practice. Annual performance-related payments The level of performance-related variable pay depends upon the performance of HSBC Holdings, constituent businesses and the individual concerned. Key measures of success include achievement of financial goals, concerning both revenue generation and expense control; customer relationships; full utilisation of professional skills; and adherence to HSBC(cid:146)s ethical standards. HSBC has a long history of paying close attention to its customers in order to provide value for shareholders. This has been achieved by ensuring that the interests of HSBC and its staff are aligned with those of its shareholders and that HSBC(cid:146)s approach to risk management serves the interests of all. Closer alignment with the interests of shareholders is being achieved by extending employee participation in the existing share plans. Bonus ranges are reviewed in the context of prevailing market practice and overall remuneration. Long-term share plans In order to align the interests of staff with those of shareholders, share options are awarded to employees under the HSBC Holdings Group Share Option Plan and the HSBC Holdings savings-related share option plans. When share options are granted, which are to be satisfied by the issue of new shares, the impact on existing equity is shown in diluted earnings per share on the face of the consolidated profit and loss account, with further details being disclosed in Note 11 of the (cid:145)Notes on the Financial Statements(cid:146). The dilutive effect of exercising all outstanding share options would be only 0.5 per cent of basic earnings per share. For the majority of employees, the vesting of share awards under the HSBC Holdings Group Share Option Plan is subject to the attainment of total shareholder return ((cid:145)TSR(cid:146)) targets. Separate arrangements are currently in place for employees of CCF. 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. The HSBC Holdings Restricted Share Plan 2000 is intended to align the interests of executives with those of shareholders by linking executive awards to the creation of superior shareholder value. This is achieved by focusing on predetermined targets. The shares awarded are normally held under restrictions for five years and are transferred to the individuals only after attainment of a performance condition which demonstrates the sustained and above average financial performance of HSBC. Executive Directors and Group General Managers have been eligible to receive conditional awards of Performance Shares under the HSBC Holdings Restricted Share Plan and the HSBC Holdings Restricted Share Plan 2000 since 1997. The award of Performance Shares under these plans was extended to other senior executives from 1999. In appropriate circumstances, employees may receive awards under the HSBC Holdings Restricted Share Plan 2000 and the HSBC Holdings Group Share Option Plan. Participants in these Plans are also eligible to participate in the HSBC Holdings savings-related share option plans on the same terms as other eligible employees. As part of HSBC(cid:146)s strategy, the use of the existing share plans has been extended so that more employees participate in the success they help to create. In the UK, the HSBC Holdings UK Share Ownership Plan, which enables employees to purchase HSBC Holdings shares from pre-tax salary, was established during the year. In addition, employees in France may participate in a Plan d’ Epargne Entreprise through which they may subscribe for HSBC Holdings shares. Directors and Senior Management HSBC Holdings(cid:146) Board is currently composed of 13 non-executive Directors and eight executive Directors. With businesses in 81 countries and territories, HSBC aims to attract Directors with a variety of different experience, both in its key markets and internationally. The Board currently includes nationals of seven different countries. The eight executive Directors and 26 Group General Managers have in total more than 750 years of service with HSBC. Directors' fees Directors(cid:146) fees are regularly reviewed and compared with other large international companies. The current basic fee of £35,000 per annum is at the median of HSBC Holdings(cid:146) peer group. In addition, non- executive Directors receive the following fees for serving on certain Committees: Chairman, Audit Committee Member, Audit Committee £10,000 p.a. £7,500 p.a. During 2001 five Audit Committee meetings were held. A Director’s commitment to each meeting can be as much as 15 hours. Chairman, Remuneration Committee £10,000 p.a. Member, Remuneration Committee £5,000 p.a. During 2001, seven meetings of the Remuneration Committee were held. Chairman of the HSBC in the Community Advisory Panel £5,000 p.a. Executive Directors’ remuneration HSBC(cid:146)s operations are large, diverse and international; for example, less than 40 per cent of net income is derived from the United Kingdom. The executive Directors are experienced executives with detailed knowledge of the financial services business in various countries. In many cases there has been a need to attract them from abroad to work in the United Kingdom. It became clear to the Board over two years ago that executive Directors(cid:146) total remuneration had fallen steadily behind the competition. This became apparent from (cid:145)league tables(cid:146) in the press, surveys from remuneration consultants, comparisons with top executives in acquired companies such as Republic Bank of New York and CCF and, perhaps above all, from the fact that some of the next generation of top management, due to the need to retain market competitiveness in certain overseas locations, were already being paid more than the current executive Directors. The Remuneration Committee has appointed Towers Perrin, who have wide experience of international companies, to conduct an annual top executive remuneration survey. Other consultants are used from time to time to validate their broad findings. The survey conducted in 2000 confirmed the need to make major changes in order to bring total remuneration to the chosen competitive position for this group of executives, i.e. the 75th percentile of market comparators. Recent information shows that even with the action taken, total remuneration for this group remains below the 75th percentile in 2001. 143 H S B C H O L D I N G S P L C Report of the Directors (continued) There are four key components of executive Directors(cid:146) remuneration: i Salary In 2001, all executive Directors(cid:146) salaries, which had been consistently below market for some time, were raised substantially. Average increases for UK-based executive Directors in 2002 will be 2.45 per cent of basic salary. ii Annual Cash Bonus Cash bonuses for executive Directors and members of Senior Management are based on two key factors: individual performance taking account of, as appropriate, results against plan of the business unit or performance of the support function for which the individual has responsibility; and Group performance measured by operating profit before tax against plan. The Remuneration Committee has discretion to eliminate extraordinary items when assessing bonuses, if the main cause did not arise during the current bonus year. Commencing in 2002, combining these two key performance factors will result in cash bonuses ranging from 35 per cent to 250 per cent of basic salary (against Group performance ranging from within 10 per cent of plan to 50 per cent above plan). iii Long Term Incentive Plan (LTIP) Executive Directors and members of Senior Management have been eligible to receive conditional awards of Performance Shares under the HSBC Holdings Restricted Share Plan and the HSBC Holdings Restricted Share Plan 2000 since 1997. Full details of the 2002 conditional awards to executive Directors, together with vesting arrangements, are set out on page 146. It is the Remuneration Committee(cid:146)s current intention that the annual value of awards to executive Directors and members of Senior Management will not as a general rule exceed 100 per cent of earnings (defined as base salary and bonus in respect of the previous performance year). In appropriate circumstances, executive Directors and members of Senior Management may receive awards under the HSBC Holdings Restricted Share Plan 2000 and the HSBC Holdings Group Share Option Plan. Participants in these plans are also eligible to participate in the HSBC Holdings savings-related share option plans on the same terms as other eligible employees. In line with prevailing practice in France and arrangements made at the time of the acquisition of CCF, C F W de Croisset will receive an award of options to acquire shares under the HSBC Holdings Group Share Option Plan, instead of an award under the HSBC Holdings Restricted Share Plan 2000; particulars are set out on page 146. iv Pension Arrangements The pension entitlements earned by the executive Directors during the year are set out on pages 149 and 150. 144 Directors’ emoluments The emoluments of the Directors of HSBC Holdings for 2001 were as follows: Salary and other remuneration £000 Fees £000 Benefits in kind £000 Discretionary bonuses 1 £000 Executive Directors Sir John Bond .................. C F W de Croisset ............ W R P Dalton................... D G Eldon3....................... D J Flint ........................... S K Green ........................ AW Jebson....................... K R Whitson .................... Non-executive Directors Lord Butler....................... R K F Ch(cid:146)ien5 .................. D E Connolly6(cid:133)(cid:133)(cid:133)... Baroness Dunn................. W K L Fung ..................... S Hintze7 .......................... Sir John Kemp-Welch...... Lord Marshall .................. C Miller Smith8 ................ Sir Brian Moffat............... Sir Mark Moody-Stuart7... M Murofushi .................... C E Reichardt................... H Sohmen ........................ (cid:150) waived........................... Sir Adrian Swire .............. Sir Peter Walters6 ............. Total (£) ........................... 35 35 35 22 35 35 35 35 40 164 18 35 62 29 44 43 43 45 31 35 43 28 (35) 35 19 981 Total (US$) ...................... 1,412 984 342 554 389 555 454 429 767 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 1 (cid:150) 23 643 8 8 1 13 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 800 232 (cid:150) 2 150 4 250 300 250 700 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) Total 2001 £000 1,820 609 612 1,204 848 797 715 1,515 40 164 18 35 62 29 44 43 43 45 31 35 43 28 (35) 35 19 Total 2000 £000 1,600 228 546 1,152 813 767 645 1,342 40 158 43 35 62 (cid:150) 12 40 35 45 (cid:150) 35 43 27 (35) 35 45 4,474 6,441 697 1,004 2,682 3,861 8,834 12,718 7,748 11,741 1 2 3 4 5 6 7 8 These discretionary bonuses are in respect of 2001 and will be paid in 2002. In return for the prior waiver of bonus, the employer contribution into the pension scheme has been increased by the amount (£300,000) which would otherwise have been paid. The emoluments of D G Eldon include housing and other expatriate benefits in kind that are normal within the location in which he is employed. Of the amount shown, 50 per cent has been awarded in cash and 50 per cent will be awarded in Restricted Shares with a three-year restricted period. Includes fees as non-executive Chairman of HSBC Private Equity (Asia) Limited. Retired on 25 May 2001. Appointed on 1 March 2001. Retired on 31 December 2001. 145 H S B C H O L D I N G S P L C Report of the Directors (continued) H Sohmen has elected to waive any fees payable to him by HSBC Holdings. Executive Directors are normally permitted to retain only one Directors’ fee from HSBC. Executive Directors who are also Directors of The Hongkong and Shanghai Banking Corporation Limited may elect to receive a fee from either HSBC Holdings or The Hongkong and Shanghai Banking Corporation Limited. The aggregate remuneration of Directors and Senior Management for the year ended 31 December 2001 was US$55,686,000. A fee of £25,000 (2000: £25,000) was paid to Sir Wilfrid Newton, a former Director, in respect of his role as Chairman of the HSBC Bank plc committee overseeing the construction of the new HSBC headquarters. Restricted Share Plan The Remuneration Committee has proposed to the Trustee of the HSBC Holdings Restricted Share Plan 2000 that conditional awards of Performance Shares under the Plan should be made in 2002. The Trustee to the Plan will be provided with funds to acquire ordinary shares of US$0.50 each between 4 March and 15 March 2002. The 2002 awards proposed for executive Directors and members of Senior Management in respect of 2001 would have an aggregate value at the date of award of £9.585 million including awards to the following values to executive Directors: Sir John Bond .......................................... W R P Dalton........................................... D G Eldon ................................................ D J Flint ................................................... S K Green ................................................ A W Jebson.............................................. K R Whitson ............................................ Total......................................................... £000 950 600 400 600 750 700 750 4,750 No share options will be granted under the HSBC Holdings Group Share Option Plan in respect of 2001 to the executive Directors listed above; they have not received share option awards since the HSBC Holdings Restricted Share Plan was introduced. No award under the HSBC Holdings Restricted Share Plan 2000 will be made to C F W de Croisset 146 in respect of 2001. Mr de Croisset will instead receive an award of options to acquire 206,000 ordinary shares of US$0.50 each under the Group Share Option Plan. Purpose The HSBC Holdings Restricted Share Plan 2000 is intended to reward the delivery of sustained financial growth of HSBC Holdings. So as to align the interests of the Directors and senior employees more closely with those of shareholders, the HSBC Holdings Restricted Share Plan 2000 links the vesting of 2002 awards to the attainment of predetermined 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 awards made in 1997 and 1998 was linked to growth in earnings per share, details of which are set out in the 1996 and 1997 Annual Report and Accounts. Based on performance over the four-year period to December 2000, 50 per cent of Performance Shares awarded in 1997 vested in 2001 and 50 per cent were forfeited. The Performance Shares awarded in 1998 have not passed their performance condition and will be re- tested in 2003. From 1999, the vesting of awards was linked to the attainment of predetermined TSR targets. Particulars of the terms applicable in 2002 are set out below. Particulars of executive Directors’ interests in shares held in the Restricted Share Plan are set out on page 154. Vesting schedule Having regard to HSBC Holdings(cid:146) size and status within the financial sector, a benchmark has been established which takes account of: 1. a peer group of nine banks (ABN AMRO Holding N.V., Citigroup Inc., Deutsche Bank A.G., J. P. Morgan Chase & Co., Lloyds TSB Group plc, Oversea-Chinese Banking Corporation Limited, Mitsubishi Tokyo Financial Group Inc., Standard Chartered PLC, The Bank of East Asia, Limited) weighted by market capitalisation; 2. 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, weighted by market capitalisation; and 3. the banking sector of the Morgan Stanley Capital International World Index, excluding any within 1 and 2 above, weighted by market capitalisation. 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 benchmark is determined. The extent to which awards will vest will be determined by reference to HSBC Holdings(cid:146) TSR measured against the benchmark TSR. The calculation of the share price component within HSBC Holdings(cid:146) TSR will be the average market price over the 20 trading days commencing on the day when the annual results are announced, which in 2002 is 4 March. The starting point will be, therefore, the average over the period 4 March to 2 April inclusive. TSR for the benchmark constituents will be based on their published share prices for 2 April 2002. If HSBC Holdings(cid:146) TSR over the performance period exceeds the benchmark TSR, awards with a value at the date of grant of up to 100 per cent of an employee(cid:146)s earnings or less will vest. For higher value awards, the greater of 50 per cent of the award or the number of shares, the value of which at the date of grant equates to 100 per cent of the employee(cid:146)s earnings, will vest at this level of performance. If HSBC Holdings(cid:146) TSR over the performance period places it within the upper quartile in the ranked list, these higher value awards will vest in full after five years. For performance between the median and the upper quartile, vesting will be on a straight line basis. The level of awards will continue to be determined by the Remuneration Committee. The initial performance period will be three years. If the upper quartile performance target is achieved at the third anniversary of the date of grant, but not if it is achieved later, an additional award equal to 20 per cent of the initial performance share award will be made and will vest at the same time as the original award to which it relates. However, regardless of whether the upper quartile target is achieved on the third, fourth or fifth anniversary, full vesting and transfer of the shares will not generally occur until the fifth anniversary. As a secondary condition, options and awards will only vest if the Remuneration Committee is satisfied that HSBC Holdings(cid:146) financial performance has shown a sustained improvement in the period since the date of grant. Awards will vest immediately in cases of death or if the business is no longer part of HSBC Holdings. The Remuneration Committee retains discretion to recommend early release of the shares to the Trustee in the event of redundancy, retirement on grounds of injury or ill health or retirement at age 50 or over. Awards will normally be forfeited if the participant is dismissed or resigns from HSBC. Where events occur which cause the Remuneration Committee to consider that the performance condition has become unfair or impractical, the right is reserved to the Remuneration Committee to make such adjustments as in its absolute discretion it deems appropriate to make. It will be determined in March 2002 whether the initial performance target for the Performance Shares awarded in 1999 has been met. The following chart shows HSBC(cid:146)s performance against the benchmark TSR to 31 December 2001. 147 H S B C H O L D I N G S P L C Report of the Directors (continued) Total Shareholder Return 200% 190% 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 19 M ar 99 30 A pr 99 30 Jun 99 31 A ug 99 29 O ct 99 31 D ec 99 29 F eb 00 28 A pr 00 30 Jun 00 31 A ug 00 31 O ct 00 29 D ec 00 28 F eb 01 30 A pr 01 29 Jun 01 31 A ug 01 31 O ct 01 31 D ec 01 Benchmark TSR HSBC TSR Service contracts and terms of appointment W R P Dalton is employed on a rolling contract No executive Director has a service contract with HSBC Holdings 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(cid:146)s salary and benefits in kind save as referred to below. Sir John Bond, who is to stand for re-election at the forthcoming Annual General Meeting, is employed on a rolling contract dated 1 January 1993 which requires 12 months(cid:146) notice to be given by either party. There are no provisions for compensation upon early termination of the contract. C F W de Croisset has a contract of employment dated 7 January 1980 that was in force before he joined the Board of CCF. The contract has no set term but provides for three months(cid:146) notice to be given by either party. Under the terms of the contract Mr de Croisset would be entitled to receive one month’s salary for each year of service with CCF on termination of his employment with CCF. However, in accordance with French legal requirements and practice, this contract is suspended while he serves as an executive Director of CCF. dated 5 January 1998 which requires 12 months(cid:146) notice to be given by either party. There are no provisions for compensation upon early termination of the contract. D G Eldon, who is to stand for re-election at the forthcoming Annual General Meeting, is employed on a rolling contract dated 1 January 1968 which requires three months(cid:146) notice to be given by either party. There are no provisions for compensation upon early termination of the contract. D J Flint, who is to stand for re-election at the forthcoming Annual General Meeting, is employed on a rolling contract dated 29 September 1995 which requires 12 months(cid:146) notice to be given by the Company and nine months(cid:146) notice to be given by Mr Flint. There are no provisions for compensation upon early termination of the contract. S K Green is employed on a rolling contract dated 9 March 1998 which requires 12 months(cid:146) notice to be given by either party. There are no provisions for compensation upon early termination of the contract. 148 A W Jebson is employed on a rolling contract dated 14 January 2000 which requires 12 months(cid:146) notice to be given by either party. There are no provisions for compensation upon early termination of the contract. K R Whitson is employed on a rolling contract dated 1 August 1992 which requires 12 months(cid:146) notice to be given by either party. There are no provisions for compensation upon early termination of the contract. Members of Senior Management are employed on service contracts which generally provide for a term of service expiring at the end of a period of up to two years, or the individual(cid:146)s sixtieth birthday, whichever is earlier. Non-executive Directors are appointed for fixed terms not exceeding three years, subject to their re- election by shareholders at the intervening Annual General Meetings. Non-executive Directors(cid:146) terms of appointment will expire in 2003 (cid:150) Baroness Dunn and H Sohmen; and 2004 (cid:150) Lord Butler, R K F Ch(cid:146)ien, W K L Fung, S Hintze, Sir John Kemp- Welch, Lord Marshall, Sir Brian Moffat and Sir Mark Moody-Stuart. M Murofushi, C E Reichardt and Sir Adrian Swire will retire at the forthcoming Annual General Meeting. 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 HSBC. 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 HSBC company by which the executive Director is employed, unless otherwise approved by the Remuneration Committee. Pensions With three exceptions (see notes on C F W de Croisset, D J Flint and W R P Dalton), the executive Directors are members of defined benefit pension schemes, having joined HSBC at a time when these were the norm. There are separate schemes for UK- based and overseas-based employees; the UK scheme has a normal retirement age of 60; retirement ages for overseas schemes vary in accordance with local legislation and practice. The pension arrangements for Sir John Bond, S K Green, A W Jebson and K R Whitson to contractual retirement age of 60 are provided under the HSBC Bank (UK) Pension Scheme. The pensions accrue at a rate of one-thirtieth of pensionable salary per year of pensionable service in the United Kingdom. In addition, supplementary provision is made for S K Green, via an employer contribution to a personal pension plan, with £1,123 having been made during 2001 (2000: £3,395). C F W de Croisset is eligible for pension benefits which are supplementary to those accrued under the French State and Compulsory arrangements. The amount of this additional pension, payable from age 60, currently accrues at the rate of (cid:128)6,098 per annum for each year of service (maximum 18 years) as an executive Director of CCF. The whole cost of this benefit is met by CCF. The pension arrangements for W R P Dalton to contractual retirement age of 60 are provided on a defined benefit basis (details of which are set out in the table below) under the HSBC Canada Pension Plan A, at an accrual rate of one-thirtieth of pensionable salary per year of pensionable service until his transfer to the UK. Since taking up his appointment in the UK, he has joined the HSBC Holdings Overseas (No.1) Pension Plan on a defined contribution basis, with an employer contribution during 2001 (including a bonus waiver of £300,000) of £429,000 (2000: £453,511). The pension arrangements for D J Flint to contractual retirement age of 60 are provided through an executive allowance paid to fund personal pension arrangements set at 30 per cent of basic salary. This is supplemented through the HSBC Holdings plc Funded Unapproved Retirement Benefits Scheme on a defined contribution basis with an employer contribution during 2001 of £78,150 (2000: £69,825). The intention of these arrangements is to provide benefits broadly comparable to an accrual rate of one-thirtieth of pensionable salary per year of pensionable service. The pension arrangements 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. 149 H S B C H O L D I N G S P L C Report of the Directors (continued) Accrued annual pension at 31 December 2001 £000 270 48 251 3 230 140 106 221 Increase in accrued pension during 2001, excluding any increase for inflation £000 74 3 (cid:150) 15 27 28 63 Personal contributions towards pension £000 (cid:150) (cid:150) (cid:150) 13 (cid:150) (cid:150) (cid:150) Transfer value relating to increase in accrued pension £0001 1,395 2 32 (cid:150) 292 353 352 1,093 Sir John Bond ..................... C F W de Croisset............... W R P Dalton...................... D G Eldon4.......................... S K Green ........................... A W Jebson......................... K R Whitson ....................... 1 2 3 4 The transfer value represents a liability of HSBC’s pension funds and not a sum paid or due to the individual; it cannot therefore meaningfully be added to annual remuneration. On attaining age 60, Sir John Bond has been able, under the terms of the scheme, to retire at any time with an immediate pension equal to his accrued pension. This immediate pension entitlement amounted to £257,000 per annum. Entitlement unchanged at C$560,000 – difference over 2001 reflects movement in exchange rates only. On attaining age 53, Mr Eldon has been able, under the terms of the scheme, to retire at any time with an immediate pension equal to his accrued pension. This immediate pension entitlement amounted to £211,000 per annum Only basic salary is pensionable. No other Director participated in any Group pension schemes and none of the Directors participating in Group (cid:145)approved(cid:146) pension schemes is subject to the earnings cap introduced by the 1989 Finance Act. Pension payments totalling £329,000 (2000: £319,000) were made to four former Directors of HSBC Holdings (B H Asher, R Delbridge, Sir Brian Pearse and Sir William Purves); of this £164,000 (2000: £159,000) was paid by HSBC Bank plc to two of them as former Directors of the bank. The aggregate amount set aside or accrued to provide pension, retirement or similar benefits for Directors and Senior Management for the year ended 31 December 2001 was US$3,449,000. Directors’ interests According to the registers of Directors(cid:146) interests maintained by HSBC Holdings pursuant to section 325 of the Companies Act 1985 and section 29 of the Securities (Disclosure of Interests) Ordinance, the Directors of HSBC Holdings at the year-end had the following interests, all beneficial unless otherwise stated, in the shares and loan capital of HSBC: 150 Personal At 31 December 2001 Corporate Family Other Total At 1 January 2001 HSBC Holdings ordinary shares of US$0.50 Sir John Bond1 R K F Ch(cid:146)ien C F W de Croisset1 W R P Dalton1 Baroness Dunn D G Eldon1 D J Flint1 W K L Fung S K Green1 A W Jebson1 Sir John Kemp-Welch Lord Marshall C Miller Smith4 Sir Brian Moffat Sir Mark Moody-Stuart C E Reichardt H Sohmen Sir Adrian Swire K R Whitson1 265,767 23,116 32,847 12,534 127,316 3,819 19,643 328,000 13,414 (cid:150) 256,800 6,980 452 5,289 5,840 3 30,000 2,715,144 44,000 15,413 270,676 23,671 34,170 21,484 107,477 12,592 29,321 328,000 114,068 20,859 25,000 7,261 452 5,289 5,000 30,000 (cid:150) (cid:150) 101,484 HSBC Holdings 11.69 per cent subordinated bonds 2002 of £1 Sir John Bond A W Jebson Lord Marshall 500,000 100,000 975 500,000 100,000 975 3,165 (cid:150) (cid:150) (cid:150) (cid:150) 827 852 (cid:150) 13,736 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 840 (cid:150) 372,656 20,000 20,000 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) ― (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 2,442,488 5 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 24,000 2 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 306,800 2 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 24,000 2 (cid:150) 273,841 23,671 34,170 21,484 131,477 13,419 30,173 328,000 127,804 20,859 331,800 7,261 452 5,289 5,840 30,000 2,815,144 44,000 121,484 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 500,000 100,000 975 1 2 3 4 5 Details of additional interests in ordinary shares of US$0.50 each under the share option plans and Restricted Share Plan are set out below. Non-beneficial. Interests at 1 March 2001 - date of appointment. Retired on 31 December 2001. Interests held by private investment companies. Sir John Bond has a personal interest in £290,000 of HSBC Capital Funding (Sterling 1) L.P. 8.208 per cent Non-cumulative Step-up Perpetual Preferred Securities, which he held throughout the year. D G Eldon has a personal interest in 300 Hang Seng Bank Limited ordinary shares of HK$5.00 each, which he held throughout the year. S K Green has a personal interest in (cid:128)75,000 of HSBC Holdings plc 5‰ per cent Subordinated Notes 2009 and in £100,000 of HSBC Bank plc 9 per cent Subordinated Notes 2005, which he held throughout the year. H Sohmen has a corporate interest in £1,200,000 of HSBC Bank plc 9 per cent Subordinated Notes 2005, in US$3,000,000 of HSBC Bank plc Senior Subordinated Floating Rate Notes 2009, in US$3,000,000 of HSBC Capital Funding (Dollar 1) L.P. 9.547 per cent Non- cumulative Step-up Perpetual Preferred Securities, Series 1 and in US$2,900,000 of HSBC Finance Nederland BV 7.40 per cent securities 2003,which he held throughout the year. As Directors of CrØdit Commercial de France S.A., C F W de Croisset, W R P Dalton and S K Green, each have a personal interest in 10 shares of (cid:128)5 each in that company but have waived their rights to receive dividends. Mr Green and Mr Dalton acquired their interest in these shares during the year. On cessation of this directorship, the Directors have undertaken to transfer these shares to HSBC. 151 H S B C H O L D I N G S P L C Report of the Directors (continued) Share options At 31 December 2001, the undernamed Directors held options to acquire the number of HSBC Holdings ordinary shares of US$0.50 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 HSBC Holdings savings-related share option plans in 2001 are exercisable at a 20 per cent discount to the market value at the date of award and those awarded before 2001 at a 15 per cent discount. There are no remaining performance criteria conditional upon which the outstanding options are exercisable. The market value of the ordinary shares at 31 December 2001 was £8.06. The highest and lowest market values during the period were £10.92 and £6.08. Market value is the mid-market price derived from the London Stock Exchange Daily Official List on the relevant date. Options held at 1 January 2001 75,000 2,798 Options awarded during year – – Options exercised during year (cid:150) (cid:150) Options held at 31 December 2001 75,000 2 2,798 3 Exercise Date of price in £ award 3.3334 1 Apr 1996 6.0299 10 Apr 2000 Exercisable from 1 1 Apr 1999 1 Aug 2005 Exercisable until 1 Apr 2006 31 Jan 2006 Sir John Bond....... C F W de Croisset (cid:150) 206,000 4 W R P Dalton....... D G Eldon ............ D J Flint ............... S K Green............. A W Jebson.......... K R Whitson ........ 22,704 30,273 36,000 36,000 2,798 36,000 40,500 27,000 3,813 24,216 36,324 45,000 45,000 5,637 3 (cid:150) 15,000 22,500 (cid:150) 37,839 60,000 60,000 2,798 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 2,498 3 (cid:150) (cid:150) 1,434 3 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 24,216 5 36,324 5 45,000 5 (cid:150) 5,637 6 (cid:150) 15,000 7 (cid:150) (cid:150) 37,839 8 60,000 8 (cid:150) (cid:150) 206,000 8.7120 23 Apr 2001 23 Apr 2004 23 Apr 2011 22,704 30,273 36,000 36,000 2 2,798 3 36,000 40,500 2 27,000 2 3,813 3 (cid:150) (cid:150) (cid:150) 45,000 2 (cid:150) 2,498 (cid:150) 22,500 2 1,434 (cid:150) (cid:150) 60,000 2 2,798 3 12 Oct 1993 2.4062 8 Mar 1994 2.8376 7 Mar 1995 2.1727 1 Apr 1996 3.3334 6.0299 10 Apr 2000 12 Oct 1996 8 Mar 1997 7 Mar 1998 1 Apr 1999 1 Aug 2005 12 Oct 2003 8 Mar 2004 7 Mar 2005 1 Apr 2006 31 Jan 2006 2.1727 3.3334 7 Mar 1995 1 Apr 1996 7 Mar 1998 1 Apr 1999 7 Mar 2005 1 Apr 2006 3.3334 4.5206 1 Apr 1996 9 Apr 1997 1 Apr 1999 1 Aug 2002 1 Apr 2006 31 Jan 2003 12 Oct 1993 2.4062 8 Mar 1994 2.8376 7 Mar 1995 2.1727 1 Apr 1996 3.3334 3.0590 3 Apr 1996 6.7536 11 Apr 2001 12 Oct 1996 8 Mar 1997 7 Mar 1998 1 Apr 1999 1 Aug 2001 1 Aug 2006 12 Oct 2003 8 Mar 2004 7 Mar 2005 1 Apr 2006 31 Jan 2002 31 Jan 2007 7 Mar 1995 2.1727 3.3334 1 Apr 1996 6.7536 11 Apr 2001 7 Mar 1998 1 Apr 1999 1 Aug 2004 7 Mar 2005 1 Apr 2006 31 Jan 2005 8 Mar 1994 2.8376 7 Mar 1995 2.1727 3.3334 1 Apr 1996 6.0299 10 Apr 2000 8 Mar 1997 7 Mar 1998 1 Apr 1999 1 Aug 2005 8 Mar 2004 7 Mar 2005 1 Apr 2006 31 Jan 2006 1 May be advanced to an earlier date in certain circumstances, e.g. retirement. 2 The exercise of these options was 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. This condition has been satisfied. Options awarded under the HSBC Holdings Savings-Related Share Option Plan. Options awarded under the HSBC Holdings Group Share Option Plan. At the date of exercise, 1 March 2001, the market value per share was £9.04. At the date of exercise, 23 August 2001, the market value per share was £8.13. At the date of exercise, 16 August 2001, the market value per share was £8.30. At the date of exercise, 14 March 2001, the market value per share was £8.22. 3 4 5 6 7 8 152 Upon acquisition of CCF in 2000, HSBC Holdings ordinary shares of US$0.50 each were purchased by the HSBC Holdings General Employee Benefit Trust. These shares may be exchanged for CCF shares upon the exercise of CCF employee share options in the same ratio as the Exchange Offer for CCF (13 HSBC Holdings ordinary shares of US$0.50 for each CCF share). As a potential beneficiary of the Trust, C F W de Croisset has a technical interest in all of the shares held by the Trust. At 31 December 2001, the Trust held CCF shares of €5 each 38,788,413 HSBC Holdings plc ordinary shares of US$0.50 each. At 31 December 2001, C F W de Croisset held the following options to acquire CCF shares of (cid:128)5 each. On exercise of these options each CCF share will be exchanged for 13 HSBC Holdings ordinary shares of US$0.50 each. The options were granted by CCF for nil consideration at a 5 per cent discount to the market value at the date of award. There are no performance criteria conditional upon which the outstanding options are exercisable. Options held at 1 January 2001 Exercise price per share(€) Options held at 31 December 2001 Equivalent HSBC Holdings ordinary shares of US$0.50 each at 31 December 2001 Date of award Exercisable from 10,000 30,000 30,000 30,000 30,000 28,000 28,000 32.78 34.00 35.52 37.05 73.50 81.71 142.50 10,000 30,000 30,000 30,000 30,000 28,000 28,000 1 130,000 390,000 390,000 390,000 390,000 364,000 364,000 23 Jun 1994 22 Jun 1995 9 May 1996 7 May 1997 29 Apr 1998 7 Apr 1999 12 Apr 2000 23 Jun 1996 22 Jun 1997 9 May 1998 7 Jun 2000 7 Jun 2000 7 Jun 2000 1 Jan 2002 Exercisable until 23 Jun 2004 22 Jun 2005 9 May 2006 7 May 2007 29 Apr 2008 7 Apr 2009 12 Apr 2010 1 The exercise of this option was conditional upon continued employment with CCF until 1 January 2002 which has now been satisfied. No options over CCF shares of (cid:128)5 each were awarded to or exercised by C F W de Croisset during the year. At 31 December 2001, executive Directors and Senior Management held, in aggregate, options to subscribe for 1,866,530 ordinary shares of US$0.50 each in HSBC Holdings under the HSBC Holdings Executive Share Option Scheme, HSBC Holdings Group Share Option Plan and HSBC Holdings savings-related share option plans. These options are exercisable between 2002 and 2011 at prices ranging from £2.1727 to £8.712. 153 H S B C H O L D I N G S P L C Report of the Directors (continued) Restricted Share Plan HSBC Holdings ordinary shares of US$0.50 Sir John Bond .... W R P Dalton..... D G Eldon .......... D J Flint ............ S K Green.......... A W Jebson....... K R Whitson ..... Awards held at 1 January 2001 25,921 27,397 53,210 78,624 – 16,211 18,267 31,039 35,739 – 19,453 21,917 31,039 6,805 35,739 (cid:150) (cid:150) 16,211 18,267 31,039 32,164 (cid:150) 19,453 21,917 31,039 35,739 – 10,808 9,134 26,605 28,590 (cid:150) 19,453 21,917 44,342 50,034 (cid:150) Awards Monetary value of made awards made during year (£000) during year (cid:150) (cid:150) (cid:150) (cid:150) 73,683 (cid:150) (cid:150) (cid:150) (cid:150) 42,105 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 42,105 6,353 (cid:150) (cid:150) (cid:150) (cid:150) 52,631 (cid:150) (cid:150) (cid:150) (cid:150) 73,683 (cid:150) (cid:150) (cid:150) (cid:150) 63,157 (cid:150) (cid:150) (cid:150) (cid:150) 57,894 (cid:150) (cid:150) (cid:150) (cid:150) 700 (cid:150) (cid:150) (cid:150) (cid:150) 400 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 400 59 (cid:150) (cid:150) (cid:150) (cid:150) 500 (cid:150) (cid:150) (cid:150) (cid:150) 700 (cid:150) (cid:150) (cid:150) (cid:150) 600 (cid:150) (cid:150) (cid:150) (cid:150) 550 Awards vested during year 1 12,961 (cid:150) (cid:150) (cid:150) (cid:150) 8,106 (cid:150) (cid:150) (cid:150) (cid:150) 9,727 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 8,106 (cid:150) (cid:150) (cid:150) (cid:150) 9,727 (cid:150) (cid:150) (cid:150) (cid:150) 5,404 (cid:150) (cid:150) (cid:150) (cid:150) 9,727 (cid:150) (cid:150) (cid:150) (cid:150) Monetary value of awards vested Awards held at 31 during year 1 December 2001 2 (£000) 107 (cid:150) (cid:150) (cid:150) (cid:150) 67 (cid:150) (cid:150) (cid:150) (cid:150) 80 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 67 (cid:150) (cid:150) (cid:150) (cid:150) 80 (cid:150) (cid:150) (cid:150) (cid:150) 44 (cid:150) (cid:150) (cid:150) (cid:150) 80 (cid:150) (cid:150) (cid:150) (cid:150) (cid:150) 28,501 55,353 81,791 76,651 (cid:150) 19,003 32,290 37,178 43,801 3 (cid:150) 22,799 32,290 7,079 37,178 43,801 6,454 4 (cid:150) 19,003 32,290 33,460 54,751 (cid:150) 22,799 32,290 37,178 76,651 (cid:150) 9,502 27,677 29,742 65,701 (cid:150) 22,799 46,128 52,049 60,226 Year in which awards may vest Date of award (cid:150) 14 Mar 1997 2 Mar 1998 2002 or 2003 2004 4 Mar 1999 2005 10 Mar 2000 2006 12 Mar 2001 14 Mar 1997 (cid:150) 2 Mar 1998 2002 or 2003 2004 4 Mar 1999 2005 10 Mar 2000 2006 12 Mar 2001 14 Mar 1997 (cid:150) 2 Mar 1998 2002 or 2003 2004 4 Mar 1999 2003 3 Apr 2000 2005 10 Mar 2000 2006 12 Mar 2001 2004 30 Apr 2001 (cid:150) 14 Mar 1997 2 Mar 1998 2002 or 2003 2004 4 Mar 1999 2005 10 Mar 2000 2006 12 Mar 2001 (cid:150) 14 Mar 1997 2 Mar 1998 2002 or 2003 2004 4 Mar 1999 2005 10 Mar 2000 2006 12 Mar 2001 (cid:150) 14 Mar 1997 2 Mar 1998 2002 or 2003 2004 4 Mar 1999 2005 10 Mar 2000 2006 12 Mar 2001 (cid:150) 14 Mar 1997 2 Mar 1998 2002 or 2003 2004 4 Mar 1999 2005 10 Mar 2000 2006 12 Mar 2001 Unless otherwise indicated, vesting of these shares is subject to the performance tests described in the ‘Report of the Directors’ in the 1998, 1999 and 2000 Annual Report and Accounts being satisfied. 1 Based on performance over the four-year period to 31 December 2000, 50 per cent of share awards vested and 50 per cent were forfeited. At the date of vesting, 14 March 2001, the market value per share was £8.22. The market value per share (adjusted for the share capital reorganisation implemented on 2 July 1999) on 14 March 1997, the date of award, was £5.28. Includes additional shares arising from scrip dividends. 50 per cent of D G Eldon’s 1999 discretionary bonus was awarded in Restricted Shares with a three-year restricted period. 50 per cent of D G Eldon's 2000 discretionary bonus was awarded in Restricted Shares with a three-year restricted period. 2 3 4 154 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. Subsequent to the end of the year, the beneficial interests of each of Sir John Bond, W R P Dalton, D J Flint, S K Green and K R Whitson increased following the acquisition by Computershare Trustee Limited of 31 HSBC Holdings ordinary shares of US$0.50 each through contributions to the HSBC UK Share Ownership Plan. There have been no other changes in Directors(cid:146) interests from 31 December 2001 to the date of this Report. Any subsequent changes up to the last practicable date before the publication of the (cid:145)Notice of Annual General Meeting(cid:146) will be set out in the notes to that Notice. At 31 December 2001, Directors and Senior Management held, in aggregate, beneficial interests in 10,209,572 HSBC Holdings ordinary shares of US$0.50 each (0.11 per cent of the issued ordinary shares). Employees’ emoluments Set out below is information in respect of the five individuals, who are not Directors of HSBC Holdings, whose emoluments (excluding commissions or bonuses related to the revenue or profits generated by employees individually or collectively with others engaged in similar activities) were the highest in HSBC for the year ended 31 December 2001. Basic salaries, allowances and benefits in kind ................................ Pension contributions.......................... Bonuses paid or receivable ................. Compensation for loss of office (cid:150) contractual ....................................... (cid:150) other ............................................... Total (£) ............................................. Total (US$) ........................................ £000 1,108 64 16,550 13,330 (cid:150) 31,052 44,704 Their emoluments are within the following bands: £4,300,001 (cid:150) £4,400,000 £5,600,001 (cid:150) £5,700,000 £6,000,001 (cid:150) £6,100,000 £7,400,001 (cid:150) £7,500,000 £7,500,001 (cid:150) £7,600,000 Number of Employees 1 1 1 1 1 Employee involvement HSBC Holdings 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 HSBC(cid:146)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 HSBC is further encouraged through participation in bonus and share option plans as appropriate. About half of all HSBC employees now participate in one or more of HSBC(cid:146)s employee share plans. Employment of disabled persons HSBC Holdings 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 is 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 HSBC Holdings 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; to explain payment procedures to suppliers; to pay bills in accordance with any contract agreed with the supplier or as required by law; and to tell suppliers without delay when an 155 H S B C H O L D I N G S P L C Report of the Directors (continued) invoice is contested and settle disputes quickly. Copies of, and information about, the Code are available from: The Department of Trade and Industry, No. 1 Victoria Street, London SW1 0ET. It is HSBC Holdings(cid:146) practice to organise payment to its suppliers through a central accounts function operated by its subsidiary undertaking, HSBC Bank plc. Included in the balance with HSBC Bank plc is the amount due to trade creditors which, at 31 December 2001, represented 14 days(cid:146) 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 According to the register maintained under section 211 of the Companies Act 1985, the Hong Kong Special Administrative Region Government ((cid:145)Hong Kong SAR Government(cid:146)) had an interest on 4 May 2001 in 374,358,891 HSBC Holdings ordinary shares of US$0.50, representing 4.01 per cent of the ordinary shares in issue at that date. In addition, the Hong Kong SAR Government had an interest in units in the Tracker Fund of Hong Kong ((cid:145)TraHK(cid:146)), which it holds with the intention of meeting its obligations to distribute loyalty bonus units to eligible investors under the terms of the Loyalty Bonus Scheme outlined in the prospectus for TraHK. As a consequence, the Hong Kong SAR Government has an undivided interest in all the ordinary shares of HSBC Holdings in TraHK(cid:146)s portfolio, but has no ability to exercise any voting rights in respect of those shares. To the best of the Hong Kong SAR Government(cid:146)s knowledge, TraHK(cid:146)s portfolio on 4 May 2001 held 87,439,636 HSBC Holdings ordinary shares, representing 0.94 per cent of the ordinary shares in issue at that date, giving the Hong Kong SAR Government a 4.95 per cent interest overall. The Hong Kong SAR Government first disclosed an interest in HSBC Holdings(cid:146) ordinary shares under section 211 of the Companies Act 1985 on 1 September 1998, at which time it had an interest in 239,506,537 HSBC Holdings ordinary shares of HK$10 each, representing 13.23 per cent of the HK$10 ordinary shares in issue at that date. 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. 156 Dealings in HSBC Holdings plc shares Save for dealings by HSBC Investment Bank plc, trading as a intermediary in HSBC Holdings(cid:146) shares in London, neither HSBC Holdings nor any subsidiary undertaking has bought, sold or redeemed any securities of HSBC Holdings during the 12 months ended 31 December 2001. Connected transactions The following constituted connected transactions under the rules of The Stock Exchange of Hong Kong Limited. In September 2001, HSBC CCF Asset Management Group SA, a subsidiary of HSBC Holdings, acquired 16.3 per cent of the capital of Sinopia Asset Management S.A. ((cid:145)Sinopia(cid:146)) from three of its corporate directors for a consideration of (cid:128)30.344 million, increasing HSBC Holdings(cid:146) interest to 76.7 per cent. Other directors of Sinopia were able to participate in a cash public offer at the same price of (cid:128)27.5 per share, which further increased HSBC Holdings’ interest to 99.88 per cent. In December 2001, CCF, a subsidiary of HSBC Holdings, acquired 25.1 per cent of the capital of FinanciŁre Groupe Dewaay S.A. from a corporate director for a consideration of (cid:128)68.75 million, increasing HSBC Holdings’ interest to 100 per cent. HSBC in the Community Since 1999 Lord Butler has, at the Board(cid:146)s request, taken a policy overview of HSBC in the Community, the principal objectives of which are to support primary and secondary education for the underprivileged and the Environment. In addition, Lord Butler is Chairman of the HSBC Education Trust, which began operation early in 2001. Considerable progress continues to be made in these important areas. On 21 February 2002, HSBC(cid:146)s five-year partnerships, called (cid:145)Investing in Nature’, with Botanic Gardens Conservation International, Earthwatch and WWF, were announced. Investing in Nature will breathe new life into rivers, protect endangered species, and fund conservation research and education around the world. HSBC has committed to providing US$50 million in funding over five years in supporting these partnerships. Donations During the year, HSBC made charitable donations totalling US$30,647,000. Of this amount, US$11,156,000 was given for charitable purposes in the United Kingdom. No political donations were made during the year. It is not proposed that HSBC’s longstanding policy of not making contributions to any political party be changed but, as a precautionary measure in the light of the wide definitions in The Political Parties, Elections and Referendums Act 2000, resolutions to permit HSBC Holdings and HSBC Bank plc to make political donations and incur political expenditure up to a maximum aggregate sum of £250,000 and £50,000 respectively will be proposed at the 2002 Annual General Meeting. Annual General Meeting The Annual General Meeting of HSBC Holdings will be held at the Barbican Hall, Barbican Centre, London EC2 on Friday 31 May 2002 at 11.00 am. An informal meeting of shareholders will be held at Level 28, 1 Queen(cid:146)s Road Central, Hong Kong on Tuesday 28 May 2002 at 4.00 pm. A live webcast of the Annual General Meeting will be available on www.hsbc.com. From shortly after the conclusion of the Meeting until 30 June 2002 a recording of the proceedings will be available on www.hsbc.com. Auditor KPMG Audit Plc has expressed its willingness to continue in office and the Board recommends that it be reappointed. A resolution proposing the reappointment of KPMG Audit Plc as auditor of HSBC Holdings 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 4 March 2002 157 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 Auditors’ statement of their responsibilities set out in its report on page 159, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the Auditors 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 HSBC Holdings plc together with its subsidiary undertakings as at the end of the financial year and of the profit or loss for the financial year. They are also required to present additional information for US shareholders. Accordingly, these financial statements are framed to meet both UK and US requirements, including those of the United States Securities and Exchange Commission, to give a consistent view to all shareholders. 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 HSBC 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 160 to 268, HSBC Holdings has used appropriate accounting policies, consistently applied, save as disclosed in the ‘Notes on the Financial Statements’, 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 HSBC Holdings keeps accounting records which disclose with reasonable accuracy the financial position of HSBC Holdings 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 HSBC and to prevent and detect fraud and other irregularities. On behalf of the Board R G Barber, Secretary 4 March 2002 158 H S B C H O L D I N G S P L C Independent Auditors’ Report to the Members of HSBC Holdings plc We have audited the financial statements on pages 160 to 268. Respective responsibilities of Directors and Auditors The Directors are responsible for preparing the Annual Report and Annual Report on Form 20F. As described on page 158 this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards; the Directors have also presented additional information under US requirements. Our responsibilities, as independent auditors, are established by statute in the United Kingdom, Auditing Standards generally accepted in the United Kingdom and the United States, the Listing Rules of the UK Financial Services Authority, the United States Securities and Exchange Commission 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 1985. We also report to you if, in our opinion, the Directors’ report is not consistent with the financial statements, if HSBC Holdings plc (‘HSBC Holdings’) has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if the information specified by law or the Listing Rules regarding Directors’ remuneration and transactions with HSBC Holdings together with its subsidiary undertakings (‘HSBC’) is not disclosed. We review whether the statement on pages 139 to 141 reflects HSBC Holdings’ compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of HSBC’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report and Accounts, 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 generally accepted in the United Kingdom and the United States. 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 HSBC’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit process provides a reasonable basis for our opinion. United Kingdom opinion In our opinion the financial statements give a true and fair view of the state of affairs of HSBC Holdings and HSBC as at 31 December 2001 and of the profit of HSBC for the year then ended and have been properly prepared in accordance with the Companies Act 1985. United States opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HSBC and HSBC Holdings as at 31 December 2001 and 2000, and the results of HSBC’s operations and cash flows for each of the years in the three-year period ended 31 December 2001, in conformity with generally accepted accounting principles in the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected HSBC’s results of operations for each of the years in the three- year period ended 31 December 2001 and shareholders’ equity as of 31 December 2001 and 2000 to the extent summarised in Note 50 of ‘Notes on the Financial Statements’. KPMG Audit Plc Registered Auditor Chartered Accountants, London 4 March 2002 159 H S B C H O L D I N G S P L C Financial Statements Consolidated profit and loss account for the year ended 31 December 2001 Note 2001 US$m 2000 US$m 1999 US$m Interest receivable – interest receivable and similar income arising from debt securities............................................................. – other interest receivable and similar income .............. Interest payable .............................................................. Net interest income ...................................................... Dividend income............................................................ Fees and commissions receivable .................................. Fees and commissions payable ...................................... Dealing profits ............................................................... Other operating income.................................................. Operating income......................................................... Administrative expenses ................................................ Depreciation and amortisation – tangible fixed assets ................................................... – goodwill ..................................................................... Operating profit before provisions............................. Provisions – provisions for bad and doubtful debts ........................ – provisions for contingent liabilities and commitments .............................................................. Loss from foreign currency redenomination in Argentina ............................................................... Amounts written off fixed asset investments ................. Operating profit ........................................................... Share of operating loss in joint ventures ........................ Share of operating profit in associates ........................... Gains on disposal of – investments................................................................. – tangible fixed assets ................................................... 3 4 7 5,7 25 24 17 32 6 Profit on ordinary activities before tax ...................... Tax on profit on ordinary activities................................ 7 8 Profit on ordinary activities after tax......................... Minority interests: – equity.......................................................................... – non-equity ................................................................. Profit attributable to shareholders ............................. Dividends....................................................................... Retained profit for the period ..................................... Basic earnings per ordinary share .................................. Diluted earnings per ordinary share ............................... Cash earnings per ordinary share ................................... Dividends per ordinary share ......................................... 10 11 11 11 10 8,590 26,671 (20,536) 14,725 186 8,756 (1,286) 1,685 1,822 25,888 7,458 30,288 (24,023) 13,723 197 8,576 (1,265) 1,626 1,716 24,573 4,373 24,831 (17,214) 11,990 157 7,149 (1,132) 1,299 1,539 21,002 (13,471) (12,496) (10,350) (1,134) (799) 10,484 (2,037) (649) (520) (125) 7,153 (91) 164 754 20 8,000 (1,574) 6,426 (579) (441) 5,406 (4,467) 939 US$ 0.59 0.58 0.67 0.480 (1,081) (510) 10,486 (963) (36) 9,653 (932) (2,073) (71) – (36) 9,447 (51) 75 302 2 9,775 (2,238) 7,537 (558) (351) 6,628 (4,010) 2,618 US$ 0.76 0.75 0.81 0.435 (143) – (28) 7,409 – 123 450 – 7,982 (2,038) 5,944 (460) (76) 5,408 (2,872) 2,536 US$ 0.65 0.65 0.66 0.340 Movements in reserves are set out in Note 36. The accompanying notes are an integral part of the Consolidated Financial Statements. 160 Consolidated balance sheet at 31 December 2001 ASSETS Cash and balances at central banks ............................................................. Items in the course of collection from other banks ..................................... Treasury bills and other eligible bills.......................................................... Hong Kong SAR Government certificates of indebtedness ........................ Loans and advances to banks ...................................................................... Loans and advances to customers ............................................................... Debt securities............................................................................................. Equity shares............................................................................................... Interests in joint ventures : gross assets ...................................................... : gross liabilities................................................. Interests in associates.................................................................................. Other participating interests ........................................................................ Intangible fixed assets................................................................................. Tangible fixed assets................................................................................... Other assets ................................................................................................ Prepayments and accrued income ............................................................... Total assets.................................................................................................. LIABILITIES Hong Kong SAR currency notes in circulation........................................... Deposits by banks ....................................................................................... Customer accounts...................................................................................... Items in the course of transmission to other banks ..................................... Debt securities in issue................................................................................ Other liabilities ........................................................................................... Accruals and deferred income..................................................................... Provisions for liabilities and charges – deferred taxation...................................................................................... – other provisions for liabilities and charges.............................................. Subordinated liabilities – undated loan capital................................................................................. – dated loan capital..................................................................................... Minority interests – equity....................................................................................................... – non-equity................................................................................................ Called up share capital ................................................................................ Share premium account............................................................................... Other reserves ............................................................................................. Revaluation reserves ................................................................................... Profit and loss account ................................................................................ Shareholders’ funds .................................................................................... Total liabilities ............................................................................................ MEMORANDUM ITEMS Contingent liabilities................................................................................... – acceptances and endorsements ................................................................ – guarantees and assets pledged as collateral security................................ – other contingent liabilities ....................................................................... Note 12 13 15 16 19 20 21 22 23 24 25 27 13 28 29 30 31 32 33 34 35 36 36 36 36 39 2001 US$m 6,185 5,775 17,971 8,637 104,641 308,649 160,579 8,057 2,168 (1,876) 292 1,056 120 14,581 13,521 38,247 7,566 695,877 8,637 53,640 449,991 3,798 27,098 72,623 7,149 1,109 3,883 3,479 12,001 2,199 4,291 4,678 3,373 8,770 2,271 26,887 45,979 2000 US$m 5,006 6,668 23,131 8,193 126,032 289,837 132,818 8,104 2,242 (1,959) 283 1,085 126 15,089 14,021 35,562 7,859 673,814 8,193 60,053 427,069 4,475 27,956 63,114 9,270 1,251 3,332 3,546 12,676 2,138 5,171 4,634 3,305 8,786 2,611 26,234 45,570 695,877 673,814 4,219 39,817 9 44,045 5,160 33,968 14 39,142 Commitments.............................................................................................. 39 198,459 182,716 Sir John Bond, Group Chairman. The accompanying notes are an integral part of the Consolidated Financial Statements. 161 H S B C H O L D I N G S P L C Financial Statements (continued) HSBC Holdings balance sheet at 31 December 2001 FIXED ASSETS Tangible assets............................................................................................ Investments – shares in HSBC undertakings.................................................................. – loans to HSBC undertakings ................................................................... – other investments other than loans .......................................................... – own shares............................................................................................... CURRENT ASSETS Debtors – money market deposits with HSBC undertakings ................................... – other amounts owed by HSBC undertakings........................................... – amounts owed by HSBC undertakings (falling due after more than 1 year)...................................................................................................... – other debtors............................................................................................ Cash at bank and in hand – balances with HSBC undertakings .......................................................... CREDITORS: amounts falling due within 1 year Amounts owed to HSBC undertakings ....................................................... Other creditors ............................................................................................ Subordinated liabilities ............................................................................... Proposed dividend ...................................................................................... NET CURRENT ASSETS........................................................................ TOTAL ASSETS LESS CURRENT LIABILITIES.............................. CREDITORS: amounts falling due after more than 1 year Subordinated liabilities – owed to third parties................................................................................ – owed to HSBC undertakings ................................................................... Amounts owed to HSBC undertakings ....................................................... PROVISIONS FOR LIABILITIES AND CHARGES........................... Deferred taxation ........................................................................................ NET ASSETS ............................................................................................ CAPITAL AND RESERVES Called up share capital ................................................................................ Share premium account............................................................................... Revaluation reserve..................................................................................... Reserve in respect of obligations under CCF share options........................ Profit and loss account ................................................................................ Sir John Bond, Group Chairman. The accompanying notes are an integral part of the Financial Statements. Note 25 26 33 10 33 32 35 36 36 36 36 162 2001 US$m 7 49,353 4,172 441 555 54,528 2,685 1,794 301 8 4,788 728 5,516 (973) (184) (599) (2,700) (4,456) 1,060 55,588 (2,221) (3,856) (3,434) (98) 45,979 4,678 3,373 32,172 480 5,276 45,979 2000 US$m 10 46,395 5,406 289 564 52,664 2,650 1,090 90 33 3,863 751 4,614 (1,714) (216) – (2,627) (4,557) 57 52,721 (2,860) (3,903) (215) (173) 45,570 4,634 3,305 31,652 496 5,483 45,570 Statement of total consolidated recognised gains and losses for the year ended 31 December 2001 Profit for the financial year attributable to shareholders .............. Unrealised (deficit)/surplus on revaluation of investment properties: – subsidiaries ............................................................................... – associates.................................................................................. Unrealised (deficit)/surplus on revaluation of land and buildings (excluding investment properties): – subsidiaries ............................................................................... – associates.................................................................................. Exchange and other movements................................................... 2001 US$m 5,406 (18) (5) (227) – (1,242) 2000 US$m 6,628 6 8 357 4 (1,064) 1999 US$m 5,408 (45) (1) 371 – (622) Total recognised gains and losses for the year ............................. 3,914 5,939 5,111 Reconciliation of movements in consolidated shareholders’ funds for the year ended 31 December 2001 Profit for the financial year attributable to shareholders .............. Dividends..................................................................................... Other recognised gains and losses relating to the year ................ New share capital subscribed, net of costs................................... New share capital issued in connection with the acquisition of CCF .......................................................................................... Reserve in respect of obligations under CCF share options......... Amounts arising on shares issued in lieu of dividends ................ Capitalised reserves arising on issue of shares to a qualifying employee share ownership trust (‘QUEST’) ............................ Net addition to shareholders’ funds ............................................. 2001 US$m 5,406 (4,467) 939 (1,492) 112 – (16) 866 – 409 Shareholders’ funds at 1 January ................................................ 45,570 Shareholders’ funds at 31 December........................................ 45,979 2000 US$m 6,628 (4,010) 2,618 (689) 488 8,629 496 944 (324) 12,162 33,408 45,570 1999 US$m 5,408 (2,872) 2,536 (297) 3,273 – – 679 (185) 6,006 27,402 33,408 No note of historical cost profits and losses has been presented as there is no material difference between HSBC’s results as disclosed in the consolidated profit and loss account and the results on an unmodified historical cost basis. The accompanying notes are an integral part of the Consolidated Financial Statements. 163 H S B C H O L D I N G S P L C Financial Statements (continued) Consolidated cash flow statement for the year ended 31 December 2001 Net cash inflow from operating activities Dividends received from associates 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 and maturities of investment securities ................................................................................... Purchase of tangible fixed assets .................................. Proceeds from sale of tangible fixed assets................... Net cash (outflow)/inflow from capital expenditure and financial investments.................................................. Acquisitions and disposals: Net cash (outflow)/inflow from acquisition of and increase in stake in subsidiary undertakings............................ Net cash inflow from disposal of subsidiary undertakings ................................................................................... Payment to Republic and Safra Republic shareholders Purchase of interest in associated undertakings and other participating interests ................................................ Proceeds from disposal of associated undertakings and other participating interests................................. Net cash (outflow)/inflow from acquisitions and disposals ...................................................................... Equity dividends paid .................................................... Net cash (outflow)/inflow before financing .................. Financing: Issue of ordinary share capital ...................................... Issue of perpetual preferred securities........................... Own shares acquired by employee share ownership trust Redemption of preference share capital Subordinated loan capital issued................................... Subordinated loan capital repaid................................... Note 41 2001 US$m 12,915 113 (27) (1,116) (472) (599) (2,214) (2,106) 2000 US$m 15,223 88 (26) (1,217) (443) (105) (1,791) (2,290) 1999 US$m 21,544 86 (25) (809) (668) (76) (1,578) (1,575) (148,826) (175,176) (108,376) 145,361 (1,873) 557 180,044 (1,663) 383 91,385 (1,169) 209 (4,781) 3,588 (17,951) (834) 687 26 – (154) 79 (883) (3,528) (484) 112 – – (825) 456 (965) (1,222) (1,706) 333 (9,733) (54) 138 (8,629) (2,193) 3,996 164 3,626 (556) – 948 (708) 3,474 7,470 725 – – (123) 28 630 (1,938) (782) 3,088 – – – 2,101 (599) 4,590 3,808 Net cash (outflow)/inflow from financing .................... (Decrease)/increase in cash............................................ 42 43 The accompanying notes are an integral part of the Consolidated Financial Statements 164 H S B C H O L D I N G S P L C Notes on the Financial Statements 1 Basis of preparation (a) The financial statements 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 financial statements are prepared in accordance with the special provisions of Part VII Chapter II of the UK Companies Act 1985 (‘the Act’) relating to banking groups. The consolidated financial statements comply with Schedule 9 and the financial statements of HSBC Holdings comply with Schedule 4 to the Act. As permitted by Section 230 of the Act, no profit and loss account is presented for HSBC Holdings. HSBC has adopted the provisions of the UK Financial Reporting Standard (‘FRS’) FRS 18 ‘Accounting Policies’, and the transitional arrangements of FRS 17 ‘Retirement benefits’, which require additional disclosures only. The accounts have been prepared in accordance with the Statements of Recommended Accounting Practice (‘SORPs’) issued by the British Bankers’ Association (‘BBA’) and Irish Bankers’ Federation (‘IBF’) and with the SORP ‘Accounting issues in the asset finance and leasing industry’ issued by the Finance & Leasing Association (‘FLA’). The SORP issued by the Association of British Insurers (‘ABI’) ‘Accounting for insurance business’ does not address the present valuation of internally generated long-term assurance business. HSBC is primarily a banking group, rather than an insurance group, and, consistent with other banking groups preparing consolidated financial statements complying with Schedule 9 to the Act, values its long-term assurance businesses using the Embedded Value method. This method includes a prudent valuation of the discounted future earnings expected to emerge from business currently in force, taking into account factors such as recent experience and general economic conditions, together with the surplus retained in the long-term assurance funds. (b) The preparation of financial information requires the use of estimates and assumptions about future conditions. This is particularly so in the development of provisions for bad and doubtful debts. Making reliable estimates of the ability of customers and other counterparties to repay is often difficult even in periods of economic stability and becomes more difficult in periods of economic volatility such as exists in several of HSBC’s markets. Therefore, while management believes it has employed all available information to estimate adequate allowances for all identifiable risks in the current portfolios, there can be no assurance that the provisions for bad and doubtful debts or other provisions will prove adequate for all losses ultimately realised. (c) The consolidated financial statements of HSBC comprise the financial statements of HSBC Holdings and its subsidiary undertakings. Financial statements of subsidiary undertakings are made up to 31 December. In the case of the principal banking and insurance subsidiaries of HSBC Bank Argentina, whose financial statements are made up to 30 June annually to comply with local regulations, HSBC uses audited interim financial statements, drawn up to 31 December annually. The consolidated financial statements include the attributable share of the results and reserves of joint ventures and associates, based on financial statements made up to dates not earlier than six months prior to 31 December. All significant intra-HSBC transactions are eliminated on consolidation. (d) HSBC’s financial statements are prepared in accordance with UK generally accepted accounting principles (‘UK GAAP’), which differ in certain respects from US generally accepted accounting principles (‘US GAAP’). For a discussion of significant differences between UK GAAP and US GAAP and a reconciliation to US GAAP of certain amounts see Note 50. In addition, certain disclosures in the Notes on the Financial Statements have been made to comply with US reporting requirements. 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 2 (b)). Fee and commission income is accounted for in the period when receivable, except where it is charged to cover 165 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) the costs of a continuing service to, or risk borne for, the customer, or is interest in nature. In these cases, it is recognised on an appropriate basis over the relevant period. (b) Loans and advances and doubtful debts It is HSBC’s policy that each operating company will make provisions for bad and doubtful debts promptly where required and on a prudent and consistent basis. Loans are designated as non-performing as soon as management has doubts as to the ultimate collectibility of principal or interest or when contractual payments of principal or interest are 90 days overdue. When a loan is designated as non-performing, interest will be suspended (see below) and a specific provision raised if required. However, the suspension of interest may exceptionally be deferred for up to 12 months past due in the following situations: − where cash collateral is held covering the total of principal and interest due and the right of set-off is legally sound; or − where the value of net realisable tangible security is considered more than sufficient to cover the full repayment of all principal and interest due and credit approval has been given to the rolling-up or capitalisation of interest payments. There are two basic types of provision, specific and general, each of which is considered in terms of the charge and the amount outstanding. Specific provisions Specific provisions represent the quantification of actual and expected losses from identified accounts and are deducted from loans and advances in the balance sheet. Other than where provisions on smaller balance homogenous loans are assessed on a portfolio basis, the amount of specific provision raised is assessed on a case by case basis. The amount of specific provision raised is HSBC’s conservative estimate of the amount needed to reduce the carrying value of the asset to the expected ultimate net realisable value, and in reaching a decision consideration is given, among other things, to the following factors: − − − − the financial standing of the customer, including a realistic assessment of the likelihood of repayment of the loan within an acceptable period and the extent of HSBC’s other commitments to the same customer; the realisable value of any security for the loan; the costs associated with obtaining repayment and realisation of the security; and if loans are not in local currency, the ability of the borrower to obtain the relevant foreign currency. Where specific provisions are raised on a portfolio basis, the level of provisioning takes into account management’s assessment of the portfolio's structure, past and expected credit losses, business and economic conditions, and any other relevant factors. The principal portfolios evaluated on this basis are credit cards and other consumer lending products. General provisions General provisions augment specific provisions and provide cover for loans which are impaired at the balance sheet date but which will not be identified as such until some time in the future. HSBC requires operating companies to maintain a general provision which is determined taking into account the structure and risk characteristics of each company’s loan portfolio. Historical levels of latent risk are regularly reviewed by each operating company to determine that the level of general provisioning continues to be appropriate. Where entities operate in a significantly higher risk environment, an increased level of general provisioning will apply taking into account local market conditions and economic and political factors. General provisions are deducted from loans and advances to customers in the balance sheet. 166 Loans on which interest is being suspended Provided that there is a realistic prospect of interest being paid at some future date, interest on non-performing loans is charged to the customer’s account. However, the interest is not credited to the profit and loss account but to an interest suspense account in the balance sheet which is netted against the relevant loan. On receipt of cash (other than from the realisation of security), suspended interest is recovered and taken to the profit and loss account. A specific provision of the same amount as the interest receipt is then raised against the principal balance. Amounts received from the realisation of security are applied to the repayment of outstanding indebtedness, with any surplus used to recover any specific provisions and then suspended interest. Non-accrual loans Where the probability of receiving interest payments is remote, interest is no longer accrued and any suspended interest balance is written off. Loans are not reclassified as accruing until interest and principal payments are up-to-date and future payments are reasonably assured. 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) Treasury bills, debt securities and equity shares Treasury bills, 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 so as to give a constant rate of return. 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 treasury bills, debt securities, equity shares and short positions in securities are included in the balance sheet at market value. Changes in the market value of such assets and liabilities are recognised in the profit and loss account as ‘Dealing profits’ as they arise. For liquid portfolios market values are determined by reference to independently sourced mid-market prices. In certain less liquid portfolios securities are valued by reference to bid or offer prices as appropriate. Where independent prices are not available, market values may be determined by discounting the expected future cash flows using an appropriate interest rate adjusted for the credit risk of the counterparty. In addition, adjustments are made for illiquid positions where appropriate. 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’. 167 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) (d) Subsidiary undertakings, joint ventures, associates and other participating interests (i) HSBC Holdings’ investments in subsidiary undertakings are stated at net asset values, including attributable goodwill. Changes in net assets of subsidiary undertakings are accounted for as movements in the revaluation reserve. (ii) Interests in joint ventures are stated at HSBC’s share of gross assets, including attributable goodwill, less HSBC’s share of gross liabilities. (iii) Interests in associates are stated at HSBC’s share of net assets, including attributable goodwill. (iv) 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 HSBC’s business, other than subsidiary undertakings, joint ventures or associates. Other participating interests are stated at cost less any permanent diminution in value. (v) Goodwill arises on the acquisition of subsidiary undertakings, joint ventures or associates when the cost of acquisition exceeds the fair value of HSBC’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, in ‘Interests in joint ventures’ in respect of joint ventures and in ‘Interests in associates’ in respect of associates. 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. Capitalised goodwill is tested for impairment when necessary by comparing the present value of the expected future cash flows from an entity with the carrying value of its net assets, including attributable goodwill. At the date of disposal of subsidiary undertakings, joint ventures or associates, any unamortised goodwill or goodwill charged directly to reserves is included in HSBC’s share of net assets of the undertaking in the calculation of the gain 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 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) HSBC 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 HSBC 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 168 recognised over the periods of the leases so as to give a constant rate of return on the net cash investment in the leases, taking into account tax payments and receipts associated with the leases. (ii) Where HSBC 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 HSBC is the lessor, are included in ‘Tangible fixed assets’. The residual values of equipment on operating leases are regularly monitored. Provision is made to the extent that the carrying value of equipment is impaired through residual values not being fully recoverable. 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 HSBC operates a number of pension and other post-retirement benefit schemes throughout the world. 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. Since 1 January 1993, the cost of providing post-retirement health-care benefits, which is assessed in accordance with the advice of qualified actuaries, has been 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 which is being charged to the profit and loss account in equal instalments over 20 years. (i) Foreign currencies (i) Assets and liabilities denominated in foreign currencies are translated into US dollars at the rates of exchange ruling at the year-end. The results of branches, subsidiary undertakings, joint ventures and associates not reporting in US dollars are translated into US dollars at the average rates of exchange for the year. Further information on the translation of assets and liabilities in Argentina is set out in Note 6. (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 HSBC in the foreign exchange, interest rate and equity markets. Netting is applied where a legal right of set-off 169 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) exists. Mark-to-market assets and liabilities are presented gross, with netting shown separately. Accounting for these instruments is dependent upon whether the transactions are undertaken for trading or non- trading purposes. Trading transactions Trading transactions include transactions undertaken for market-making, to service customers’ needs and for proprietary purposes, as well as any related hedges. 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. Off-balance-sheet trading transactions are valued by reference to an independent liquid price where this is available. For those transactions where there are no readily quoted prices, which predominantly relates to over the counter transactions, market values are determined by reference to independently sourced rates, using valuation models. Adjustments are made for illiquid positions where appropriate. 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’. Non-trading transactions Non-trading transactions are those which are held for hedging purposes as part of HSBC’s risk management strategy against assets, liabilities, positions or cash flows measured on an accruals basis. Non-trading transactions include qualifying hedges and positions that synthetically alter the characteristics of specified financial instruments. 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. To qualify as a hedge, a derivative must effectively reduce the price or interest rate risk of the asset, liability or anticipated transaction to which it is linked and be designated as a hedge at inception of the derivative contract. Accordingly, changes in the market value of the derivative must be highly correlated with changes in the market value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. If these criteria are met, the derivative is accounted for on the same basis as the underlying hedged item. Derivatives used for hedging purposes include swaps, forwards and futures. Interest rate swaps are also used to alter synthetically the interest rate characteristics of financial instruments. In order to qualify for synthetic alteration, a derivative instrument must be linked to specific individual, or pools of similar, assets or liabilities by the notional principal and interest rate risks of the associated instruments, and must achieve a result that is consistent with defined risk management objectives. If these criteria are met, accruals based accounting is applied, i.e. income or expense is recognised and accrued to the next settlement date in accordance with the contractual terms of the agreement. Any gain or loss arising on the termination of a qualifying derivative is deferred and amortised to earnings over the original life of the terminated contract. Where the underlying asset, liability or position is sold or terminated, the qualifying derivative is immediately marked-to-market through the profit and loss account. Derivatives that do not qualify as hedges or synthetic alterations at inception are marked-to-market through the profit and loss account, with gains and losses included within ‘Dealing profits’. (k) Long-term assurance business The value placed on HSBC’s interest in long-term assurance business includes a prudent valuation of the discounted future earnings expected to emerge from business currently in force, taking into account factors such 170 as recent experience and general economic conditions, together with the surplus retained in the long-term assurance funds. These are determined annually in consultation with independent actuaries and are included in ‘Other assets’. Changes in the value placed on HSBC’s interest in long-term assurance business are calculated on a post-tax basis and reported in the profit and loss account as part of ‘Other operating income’ after adjusting for taxation. Long-term assurance assets and liabilities attributable to policyholders are recognised in HSBC’s accounts in ‘Other assets’ and ‘Other liabilities’. 3 Dividend income Income from equity shares........................................................... Income from participating interests other than joint ventures and associates........................................................................... 4 Analysis of income from dealing in financial instruments 2001 Dividend and net Dealing interest profits Total income US$m US$m US$m 1,121 1,120 1 159 311 95 1,685 20 174 75 270 179 485 170 Dealing profits US$m 965 57 281 323 1,955 1,626 Foreign exchange.... Interest rate derivatives ........... Debt securities ........ Equities and other trading ................. 2001 US$m 184 2 186 2000 US$m 195 2 197 1999 Dividend and net interest income US$m 21 7 81 66 Dealing profits US$m 797 67 197 238 Total US$m 983 73 442 375 1999 US$m 145 12 157 Total US$m 818 74 278 304 1,873 1,299 175 1,474 2000 Dividend and net interest income US$m 18 16 161 52 247 5 Administrative expenses (a) Staff costs – wages and salaries .............................................................. – social security costs ............................................................ – other pension costs (Note 5(b) below) ............................... Premises and equipment (excluding depreciation)................. Other administrative expenses ............................................... 2001 US$m 7,329 613 611 8,553 1,639 3,279 13,471 2000 US$m 7,139 454 464 8,057 1,480 2,959 12,496 1999 US$m 5,845 355 492 6,692 1,329 2,329 10,350 171 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) The average number of persons employed by HSBC during the year was made up as follows: Europe.................................................................................... Hong Kong............................................................................. Rest of Asia-Pacific ............................................................... North America ....................................................................... Latin America ........................................................................ 2001 Number 77,435 25,081 25,142 20,363 28,661 176,682 2000 Number 68,208 24,446 22,020 20,737 27,217 162,628 1999 Number 58,164 24,391 20,936 16,070 27,336 146,897 (b) Retirement benefits HSBC has continued to account for pensions in accordance with Statement of Standard Accounting Practice (‘SSAP’) 24 ‘Accounting for pension costs’ and the disclosures given in (i) are those required by that standard. FRS 17 ‘Retirement benefits’ was issued in November 2000 but will not be mandatory for HSBC until the year ended 31 December 2003. Prior to this, phased transitional disclosures are required from 31 December 2001. These disclosures, to the extent not given in (i), are set out in (ii). (i) HSBC Pension Schemes HSBC operates some 144 pension schemes throughout the world, covering 92% of HSBC’s employees, with a total pension cost (including healthcare benefits) of US$611 million (2000: US$464 million; 1999: US$492 million;), of which US$371 million (2000: US$235 million; 1999: US$223 million) relates to overseas schemes. Of the overseas schemes, US$48 million (2000: US$49 million; 1999:US$25 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 51% of HSBC’s employees, with assets, in the case of most of the larger schemes, held in trust or similar funds separate from HSBC. The pension cost relating to these schemes was US$428 million (2000: US$341 million; 1999: US$368 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 HSBC’s pension schemes vary according to the economic conditions of the countries in which they are situated. In the United Kingdom, the HSBC Bank (UK) Pension Scheme covers employees of HSBC Bank plc and certain other employees of HSBC. 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 1999 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$10,888 million. The actuarial value of the assets represented 104% of the benefits accrued to members, after allowing for expected future increases in earnings, and the resulting surplus amounted to US$346 million. The method adopted for this valuation was the projected unit method and the main assumptions used were a long-term investment return of 6.85% per annum, salary increases of 4.0% per annum, equity dividend increases and rental growth of 3.5% per annum, and post-retirement pension increases of 2.5% per annum. In consultation with the actuary, the surplus has been used to reduce the employers’ long-term contribution rate of 19.9% to 16.9% of pensionable salaries (1999: 16.1%). This is based on spreading the surplus over the expected future working lifetime of current members (13 years). However, in view of the volatility experienced in investment markets, HSBC is reviewing its funding plan in consultation with the independent Scheme Actuary. The next actuarial valuation is due as at 31 December 2002. In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme covers employees of The Hongkong and Shanghai Banking Corporation Limited and certain other employees of HSBC. The 172 scheme comprises a funded defined benefit scheme and a defined contribution scheme. The latter was established on 1 January 1999 for new employees. The latest valuation of the defined benefit scheme was made at 31 December 2001 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 HSBC Holdings. At that date, the market value of the defined benefit scheme’s assets was US$815 million. On an ongoing basis, the actuarial value of the scheme’s assets represented 112% of the benefits accrued to members, after allowing for expected future increases in salaries, and the resulting surplus amounted to US$90 million. On a wind-up basis, the actuarial value of the scheme’s assets represents 120% of the members’ vested benefits, based on current salaries, and the resulting surplus amounted to US$135 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 7% per annum and salary increases of 6% per annum. In the United States, the HSBC Bank USA Pension Plan (the ‘principal scheme’) covers employees of HSBC Bank USA and certain other employees of HSBC. The latest valuation of the principal scheme was made at 1 January 2001 by R G Gendron and K G Leister, Fellows of the Society of Actuaries, of Hewitt Associates LLC. At that date, the market value of the principal scheme’s assets was US$850 million. The actuarial value of the assets represented 117% of the benefits accrued to members, after allowing for expected future increases in earnings, and the resulting surplus amounted to US$122 million. The method employed for this valuation was the projected unit credit method and the main assumptions used were a discount rate of 7.75% per annum and average salary increases of 5.15% per annum. The HSBC Bank (UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefits Scheme and the HSBC Bank USA Pension Plan cover 42% (2000: 45%, 1999: 46%) of HSBC’s employees. The pension cost for defined contribution schemes, which cover 41% (2000: 24%; 1999: 26%) of HSBC’s employees, was US$144 million (2000: US$81 million; 1999: US$87 million). (ii) FRS 17 Retirement Benefits At 31 December 2001 the assumptions used to calculate scheme liabilities for HSBC’s main defined benefit pension schemes under FRS 17 are: Discount rate Inflation assumption % 5.9 6.5 7.25 5.9 10.25 5.5 4.5-6.25 % 2.5 4.0 2.75 2.5 5.0 2.0 1.5-2.0 Rate of increase for pensions in payment and deferred pension % 2.5 N/A N/A 2.5 5.0 2.0 1.5-2.0 Rate of pay increase % 3.75 6.0 4.0 4.25 6.05 3.5 2.5-3.5 United Kingdom......................................... Hong Kong ................................................. United States .............................................. Jersey.......................................................... Brazil .......................................................... France ......................................................... Other........................................................... 173 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) The assets in the defined benefit schemes and the expected rates of return are: HSBC Bank (UK) Pension Scheme Other Schemes Expected rate of return at 31 December 2001 % Value at 31 December 2001 US$m Expected rate of return at 31 December 2001 % Value at 31 December 2001 US$m Equities................................................. Bonds ................................................... Other..................................................... 7.5 5.1 4.0 Total market value of assets ................. Present value of scheme liabilities ....... Deficit in the schemes .......................... Related deferred tax asset..................... Net pension liability ............................. Less: net amounts provided in the balance sheet for unfunded schemes. Net unprovided pension liability .......... 7,451 1,329 865 9,645 (10,736) (1,091) 327 (764) 9.7 6.0 3.4 1,652 1,212 221 3,085 (3,739) (654)* 166 (488) 356 (132) * Of the deficit in other schemes, US$738 million relates to schemes in deficit and US$84 million relates to schemes in surplus. Of the schemes in deficit, US$565 million relates to unfunded pension schemes in respect of which a provision, net of deferred tax, of US$356 million has been made. In relation to main schemes, there is a surplus of US$17 million in HSBC Group Hong Kong Local Staff Retirement Benefit Scheme and a deficit of US$48 million in HSBC Bank USA Pension Plan. The net pension liability will have a consequent effect on reserves when FRS17 is fully implemented. HSBC Bank (UK) Pension Scheme HSBC notes that the shortfall of assets represents 10 per cent of the value of the pension liabilities assessed by reference to the assumptions adopted for FRS 17 purposes. If the rate of return of the assets of the Scheme is around 0.6 per cent per annum above the assumed discount rate, that is the yield on a corporate bond rated AA, over the remaining lifetime of the Scheme, the shortfall revealed at 31 December 2001 will be removed by the asset outperformance. HSBC considers that, bearing in mind the investment policy being followed, this represents a relatively modest level of outperformance over the long-term. The funding policy for the Scheme is reviewed on a systematic basis in consultation with the independent Scheme Actuary in order to ensure that the funding contributions from the sponsoring employers are appropriate to meet the liabilities of the Scheme over the long-term. The current statutory minimum funding level is comfortably over 100%. Most of the employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme. HSBC Holdings is unable to identify its share of the underlying assets and liabilities of this scheme attributable to its employees. 174 (iii) Post-retirement healthcare benefits HSBC also provides post-retirement healthcare benefits under schemes, mainly in the United Kingdom and also in the United States, Canada and Brazil. The charge relating to these schemes, which are unfunded, is US$39 million for the year (2000: US$42 million; 1999: US$37 million). The latest full actuarial valuations of the liability were carried out at dates between 31 December 1999 and 31 December 2001 by independent qualified actuaries and have been updated to 31 December 2001 as necessary. This actuarial review (in accordance with FRS17) estimated the present value of the accumulated post- retirement benefit obligation at US$404 million (2000: US$411 million; 1999: US$379 million), of which US$269 million (2000: US$253 million; 1999: US$232 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 2001 were price inflation of 2.5% per annum, health-care claims cost escalation of 7.5% per annum and a discount rate of 5.9% per annum. Under FRS 17, the deferred tax asset related to the unprovided liability of US$135 million would be US$47 million. (c) Directors’ emoluments The aggregate emoluments of the Directors of HSBC Holdings, 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.................................. Vesting of Restricted Share Plan awards .............................. 2001 US$000 1,412 7,445 3,861 12,718 1,990 756 2000 US$000 1,362 6,525 3,854 11,741 4,187 491 1999 US$000 1,076 5,024 1,107 7,207 460 0 In addition, there were payments under retirement benefit agreements with former Directors of US$472,000 (2000: US$483,000; 1999: US$435,000). The provision as at 31 December 2001 in respect of unfunded pension obligations to former Directors amounted to US$6,281,000 (2000: US$6,535,000; 1999: US$5,627,000). During the year, aggregate contributions to pension schemes in respect of Directors were US$1,462,000 (2000: US$798,000; 1999: US$402,000). Discretionary bonuses for Directors are based on a combination of individual and corporate performance and are determined by the Remuneration Committee. 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. Details of Directors’ remuneration, share options and conditional awards under the Restricted Share Plan are included in the ‘Report of the Directors’ on pages 142 to 154. (d) Auditors’ remuneration Auditors’ remuneration amounted to US$24.3 million (2000: US$25.8 million; 1999: US$19.9 million). In addition, US$13.3 million (2000: US$15.0 million; 1999: US$17.7 million) was paid by HSBC companies to the HSBC Holdings’ auditor and its associates for non-audit work analysed as follows: 175 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 2001 US$m 2000 US$m 1999 US$m Independent attestation Audit reports for US and other non-UK reporting............................................................. Review of information for publication including work in connection with securities issuance ...... Reviews and reporting under regulatory requirements (including interim profits review) .............................................................. Financial advice Acquisition due diligence .................................... Group reorganisations.......................................... Taxation services ................................................. Financial systems ................................................. Consultancy services............................................ Other .................................................................... 0.2 0.4 5.0 5.6 0.6 0.6 2.1 0.8 1.9 1.7 7.7 Total non-audit fees paid to auditors ................... 13.3 0.1 0.5 3.7 4.3 5.2 0.5 2.1 0.3 0.8 1.8 10.7 15.0 0.2 0.2 5.3 5.7 7.3 – 3.2 0.1 0.5 0.9 12.0 17.7 Of fees paid to auditors for non-audit work, US$0.4 million were capitalised (2000: US$4.8 million; 1999: US$0.7 million). 6 Loss from foreign currency redenomination in Argentina A loss of US$520 million arose on the redenomination by the Argentine Government of certain in-country US dollar assets and liabilities into pesos at mandatory but different rates of exchange. In December 2001, the Argentine Government announced that it was considering removing the fixed exchange rate of parity between the peso and the US dollar. The banking system was then effectively closed as a number of different proposals for currency and monetary reform were considered and rejected. In early January 2002, the Argentine Government presented proposals for a redenomination of certain US dollar customer loans, restrictions on access to customer deposits and introduced a dual exchange rate system. The foreign exchange market officially reopened on 11 January 2002 and the free market exchange rate on that date (US dollar 1: Peso 1.65) has been taken as providing the most relevant evidence of the value of the peso at the year-end. The original proposals for pesification of customer loans were, however, modified and on 3 February 2002, the Argentine Government announced that all US dollar-denominated customer loans would be converted to pesos at par. In addition, US dollar-denominated Argentine Government obligations and customer deposits were to be converted to pesos at a rate of 1.40. The relevant in-country Argentine US dollar-denominated assets and liabilities have been translated into pesos using these exchange rates as they provide the most relevant evidence of the conditions existing at the year-end. The overall loss arises from the asymmetric treatment of assets and liabilities within Argentina most notably because US dollar assets converted at par were funded by either US dollar-denominated domestic deposits which were translated to pesos at a rate of 1.40 or through external US dollar liabilities raised offshore. Encompassed within the aggregate loss on redenomination is the effective impairment of the Argentine Government US dollar obligations (including those exchanged for loans in November 2001) which were redenominated to pesos at a rate of 1.40. 176 7 Profit on ordinary activities before tax (a) Profit on ordinary activities before tax is stated after: 2001 US$m 2000 US$m 1999 US$m (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 .................... 3,458 465 4,761 347 475 2,956 481 4,534 456 324 (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 1,074 1,216 27 90 516 26 92 467 3,260 511 2,187 442 439 826 26 75 442 Gains on the disposal of investments and tangible fixed assets attracted a tax charge of US$114 million (2000: US$82 million;1999: US$93 million). Of the after-tax amount, US$18 million (2000: US$11 million; 1999: US$6 million) is attributable to minority interests. 8 Tax on profit on ordinary activities The charge for taxation comprises: United Kingdom corporation tax charge......................................... Relief for overseas taxation ............................................................ Overseas taxation ............................................................................ Deferred taxation (Note 32) ............................................................ Joint ventures .................................................................................. Associates ....................................................................................... 2001 US$m 956 (540) 416 1,570 (425) 1,561 (13 ) 26 1,574 2000 US$m 1,826 (970) 856 1,468 (78) 2,246 (7) (1) 2,238 1999 US$m 883 (287) 596 1,313 129 2,038 – – 2,038 177 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) HSBC Holdings and its subsidiary undertakings in the United Kingdom provide for UK corporation tax at 30.0% (2000: 30.0%;1999: 30.25%). Overseas tax includes Hong Kong profits tax of US$450 million (2000: US$478 million; 1999: US$367 million). Subsidiary undertakings in Hong Kong provide for Hong Kong profits tax at the rate of 16.0% (2000: 16.0%; 1999: 16.0%) on the profits for the year assessable in Hong Kong. Other overseas subsidiary undertakings and overseas branches provide for taxation at the appropriate rates in the countries in which they operate. The tax charge in 2001 benefited from increased tax-free gains in Hong Kong, a material capital gain in the UK covered by previously unrecognised capital losses, prior year tax credits as a result of settlement of prior year computations, and the release of valuation reserves against a number of potential deferred tax assets in light of a demonstrated record of relevant tax capacity. Offsetting this, no tax relief was assumed in respect of the exceptional charges in respect of Argentina. Analysis of overall tax charge: Taxation at UK corporate tax rate of 30.0% (2000: 30.0%, 1999: 30.25%) .......................................................................... Impact of differently taxed overseas profits in principal locations Unrecognised/(previously unrecognised) tax benefits ................. Tax free gains................................................................................ Argentine losses............................................................................ Goodwill amortisation .................................................................. Other items.................................................................................... Overall tax charge ......................................................................... 9 Profit of HSBC Holdings Profit on ordinary activities before tax.......................................... Tax credit on profit on ordinary activities..................................... Profit for the financial year attributable to shareholders ....... 2001 US$m 2,400 (616) (499) (102) 336 263 (208) 1,574 2001 US$m 3,211 183 3,394 2000 US$m 2,932 (498) (137) (15) – 172 (216) 2,238 2000 US$m 4,224 227 4,451 1999 US$m 2,415 (418) 35 – – 11 (5) 2,038 1999 US$m 2,478 87 2,565 Profit on ordinary activities before tax includes dividend income from subsidiary undertakings for the years ended 31 December as follows: Bank.............................................................................................. Non-bank ...................................................................................... 10 Dividends 2001 US$m 2,156 1,251 2000 US$m 1,727 2,598 1999 US$m 1,776 742 First interim.................................... Second interim ............................... 2001 2000 1999 US$ per share 0.190 0.290 0.480 US$m 1,767 2,700 4,467 US$ per share 0.150 0.285 0.435 US$m 1,383 2,627 4,010 US$ per share 0.133 0.207 0.340 US$m 1,118 1,754 2,872 178 Of the first interim dividend for 2001, US$129 million (2000: US$476 million; 1999: US$229 million) was settled by the issue of shares. Of the second interim dividend for 2000, US$737 million; (1999: US$468 million, 1998: US$450 million) was settled by the issue of shares in 2001. 11 Earnings per ordinary share Basic earnings per ordinary share was calculated by dividing the earnings of US$5,406 million (2000: US$6,628 million; 1999: US$5,408 million) by the weighted average number of ordinary shares, excluding own shares held, outstanding in 2001 of 9,237 million (2000: 8,777 million; 1999: 8,296 million). Diluted earnings per share was calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on ordinary conversion of dilutive potential ordinary shares (being share options outstanding not yet exercised) in 2001 of 9,336 million (2000: 8,865 million; 1999: 8,374 million). The effect of dilutive share options on the weighted average number of ordinary shares in issue is as follows: Average number of shares in issue ............................................... Savings-Related Share Option Plan .............................................. Executive Share Option Scheme................................................... Restricted Share Plan .................................................................... CCF share options......................................................................... Average number of shares in issue assuming dilution .................. Number of shares (millions) 2001 9,237 46 4 27 22 9,336 2000 8,777 57 5 17 9 8,865 1999 8,296 63 5 10 – 8,374 Of the total number of employee share options existing at year-end, the following were not included in the dilution calculation above because they were antidilutive: Antidilutive share options ............................................................. Number of shares (millions) 2001 – 2000 – 1999 79 The cash earnings per share was calculated by dividing the basic earnings, after adding back the amortisation of goodwill, by the weighted average number of ordinary shares outstanding, excluding own shares held. The Directors consider that this supplementary figure provides a useful additional indication of performance. Basic earnings per ordinary share ................................................. Adjustments: Amortisation of goodwill.............................................................. Cash earnings per ordinary share .................................................. 2001 US$ 0.59 0.08 0.67 2000 US$ 0.76 0.05 0.81 1999 US$ 0.65 0.01 0.66 The impact in 2001 of the Princeton Note Matter, the loss from the foreign currency redenomination in Argentina and the additional general provision on Argentine risk was to reduce both basic and cash earnings per ordinary share by the following amounts: Princeton Note Matter .................................................................................................. Loss from foreign currency redenomination in Argentina............................................ Additional general provision on Argentine risk ........................................................... US$ 0.03 0.06 0.06 179 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 12 Treasury bills and other eligible bills Treasury bills and similar securities .......................................................................... Other eligible bills ..................................................................................................... 2001 US$m 17,180 791 17,971 2000 US$m 19,373 3,758 23,131 Of the total treasury and other eligible bills, US$12,902 million (2000: US$15,862 million) are non-trading book items; these are mainly short-term in maturity and are analysed below. Investment securities: At 1 January 2001 ................................................................................................................................ Additions ............................................................................................................................................. Acquisition of subsidiaries .................................................................................................................. Disposals and amounts repaid.............................................................................................................. Amortisation of discounts and premiums ............................................................................................ Exchange and other movements .......................................................................................................... Cost and book value US$m 15,862 53,392 92 (56,293) 466 (617) At 31 December 2001 ......................................................................................................................... 12,902 The book value of treasury bills and other eligible bills, analysed by type of borrower, is as follows: Available-for-sale US Treasury and Government agencies ..................................................................... UK Government......................................................................................................... Hong Kong SAR Government ................................................................................... Other governments..................................................................................................... Corporate debt and other securities............................................................................ 2001 US$m 2,303 3,013 2,181 4,907 498 12,902 2000 US$m 2,165 2,716 2,007 7,416 1,558 15,862 The following tables provide an analysis of gross unrealised gains and losses for available-for-sale treasury bills and other eligible bills: Gross unrealised gains Gross unrealised losses Market valuation US$m 2,304 3,019 2,183 4,911 498 US$m – – – (3) – (3) 12,915 US$m 1 6 2 7 – 16 31 December 2001 US Treasury and Government agencies ............. UK Government................................................. Hong Kong SAR Government ........................... Other governments............................................. Corporate debt and other securities.................... Carrying value US$m 2,303 3,013 2,181 4,907 498 12,902 180 31 December 2000 US Treasury and Government agencies ............ UK Government................................................ Hong Kong SAR Government .......................... Other governments............................................ Corporate debt and other securities................... Carrying value US$m 2,165 2,716 2,007 7,416 1,558 15,862 Gross unrealised gains US$m Gross unrealised losses US$m 1 – – 13 – 14 – (15) – (6) (24) (45) Market valuation US$m 2,166 2,701 2,007 7,423 1,534 15,831 The maturities of available-for-sale treasury bills and other eligible bills at 31 December 2001 are analysed as follows: 1 year or less .............................................................................................................. 5 years or less but over 1 year .................................................................................... 10 years or less but over 5 years ................................................................................ Carrying value US$m 12,652 225 25 12,902 Market valuation US$m 12,663 225 27 12,915 The following table provides an analysis of contractual maturities and weighted average yields of available-for-sale treasury bills and other eligible bills as at 31 December 2001. US Treasury and Government agencies ............... UK Government................................................... Hong Kong SAR Government ............................. Other governments............................................... Corporate debt and other securities...................... Within one year Amount US$m 2,282 3,013 2,181 4,693 483 Yield % 1.7 3.7 2.2 2.5 5.2 After one but within five years Yield Amount % US$m – – – – – – 8.1 210 6.7 15 After five but within ten years Yield Amount US$m % 9.5 21 – – – – – 4 – – 12,652 225 25 13 Hong Kong SAR currency notes in circulation The Hong Kong Special Administrative Region currency notes in circulation are secured by the deposit of funds in respect of which the Government of the Hong Kong Special Administrative Region certificates of indebtedness are held. 14 Credit risk management HSBC’s credit risk management process is discussed in the ‘Financial Review’ section in the paragraph headed ‘Credit risk management’ on pages 94 to 96. 181 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 15 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 17) ................................................ Amounts include: Due from joint ventures – unsubordinated ....................................................................................................... Due from associates – unsubordinated ....................................................................................................... 16 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 17)............................. Amounts include: Subordinated advances .............................................................................................. Securitised advances not qualifying for linked presentation under FRS 5 ‘Reporting the Substance of Transactions’............................................................. Due from joint ventures – unsubordinated ....................................................................................................... Due from associates – subordinated ........................................................................................................... – unsubordinated ....................................................................................................... 2001 US$m 16,039 72,785 13,530 1,849 460 (22) 104,641 8 147 2001 US$m 51,980 61,851 37,886 82,811 82,282 (8,161) 308,649 149 678 879 10 215 2000 US$m 19,332 90,546 13,650 1,797 737 (30) 126,032 – 66 2000 US$m 45,726 58,556 37,123 77,201 79,398 (8,167) 289,837 170 1,835 85 – 239 Securitisation transactions Loans and advances to customers include balances that have been securitised. Certain of these balances meet the requirements for linked presentation under FRS 5. The non-recourse finance has been netted against customer loans as follows: Customer loans .......................................................................................................... Non-recourse finance ................................................................................................ Funding provided by HSBC 182 2001 US$m 1,865 (1,659) 206 2000 US$m – – – HSBC has securitised a designated portion of its corporate loan portfolio. The transaction was effected through a declaration of trust in favour of Clover Securitisation Limited. Clover Securitisation Limited holds its beneficial interest in the trust for Clover Funding No. 1 plc, Clover Funding No. 2 plc, Clover Funding No. 3 plc (collectively ‘Clover Funding’) and HSBC. To fund the acquisition of this beneficial interest, Clover Funding has issued US$1,865 million floating rate notes (‘FRN’). The offering circulars for the FRNs stated that they are the obligations of Clover Funding only and are not guaranteed by, or the responsibility of, any other party. A linked presentation has been adopted in accordance with FRS 5. Non-returnable proceeds of US$1,659 million received by HSBC from Clover Funding have been deducted from ‘Loans and advances to customers’. Clover Securitisation Limited has entered into swap agreements with HSBC under which Clover Securitisation Limited pays the floating rate of interest on the loans and receives interest linked to 3 month LIBOR. The proceeds generated from the loans are used in priority to meet the claims of the FRN holders, and amounts payable in respect of the interest rate swap arrangements, after the payment of trustee and administration expenses. There is no provision whatsoever, either in the financing arrangements or otherwise, whereby HSBC has a right or obligation either to keep the loans and advances on repayment of the finance or to repurchase them at any time other than in certain circumstances where HSBC is in breach of warranty. HSBC is not obliged to support any losses that may be suffered by the FRN holders and does not intend to provide such support. HSBC has taken up US$51 million of subordinated FRNs that are repayable after payments in respect of senior FRNs, and has made subordinated loans to Clover Funding that are repayable after all other payments. Interest is payable on the subordinated FRNs and subordinated loans conditional upon Clover Funding having funds available. Clover Securitisation Limited’s entire share capital is held by Clover Holdings Limited. Clover Funding’s entire share capital is held by Clover Holdings Limited. Clover Holdings Limited’s entire share capital is held by trustees under the terms of a trust for charitable purposes. HSBC recognised net income of US$3 million, which comprised interest receivable of US$45 million and interest payable and other expenses US$42 million, in respect of Clover Funding during the year. 183 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 17 Provisions for bad and doubtful debts Provisions against advances Specific US$m 6,095 (2,178) 285 1,464 – – – (144) 5,522 General US$m 2,102 – – 573* – – 7 (21) 2,661 At 1 January 2001 ............................................. 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............................ Acquisition of subsidiaries ............................... Exchange and other movements ....................... At 31 December 2001 ...................................... Included in: Loans and advances to banks (Note 15)............ Loans and advances to customers (Note 16)..... * includes an additional general provision of US$600 million for Argentinian exposures. Provisions against advances Specific US$m 5,716 (1,811) 160 1,212 – – 941 (123) 6,095 General US$m 2,304 – – (280) – – 146 (68) 2,102 At 1 January 2000 .............................................. Amounts written off........................................... Recoveries of advances written off in previous years ................................................................. Charge/(credit) to profit and loss account.......... Interest suspended during the year..................... Suspended interest recovered............................. Acquisition of subsidiaries ................................ Exchange and other movements ........................ At 31 December 2000 ........................................ Included in: Loans and advances to banks (Note 15)............. Loans and advances to customers (Note 16)...... Suspended interest US$m 1,016 (437) – – 542 (228) – (32) 861 Suspended Interest US$m 1,073 (370) – – 689 (291) 2 (87) 1,016 Total US$m 8,197 (2,178) 285 2,037 – – 7 (165) 8,183 22 8,161 8,183 Total US$m 8,020 (1,811) 160 932 – – 1,087 (191) 8,197 30 8,167 8,197 184 At 1 January 1999............................................. Amounts written off ......................................... Recoveries of advances written off in previous years................................................................ Charge/(credit) to profit and loss account ........ Interest suspended during the year.................... Suspended interest recovered ........................... Acquisition of subsidiaries ............................... Exchange and other movements ....................... At 31 December 1999....................................... Included in: Loans and advances to banks............................ Loans and advances to customers..................... Provisions against advances Specific US$m 4,639 (1,186) 165 2,120 – – 37 (59) 5,716 General US$m 2,019 – – (47) – – 329 3 2,304 Suspended Interest US$m 768 (162) – – 723 (251) – (5) 1,073 Total US$m 6,658 (1,186) 165 2,073 – – 366 (56) 8,020 24 7,996 8,020 The total of customer advances, net of suspended interest, on which interest is being placed in suspense, is as follows: Gross............................................................................................. Net of specific provisions............................................................. 2001 US$m 6,022 2,936 2000 US$m 6,464 2,964 1999 US$m 7,666 3,571 185 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 18 Concentrations of exposure HSBC has the following concentrations of gross loans and advances to customers: Europe† US$m Hong Kong US$m Rest of Asia- Pacific US$m North America US$m Latin America US$m Total† US$m 27,282 23,125 5,134 21,809 865 78,215 Total gross advances to customers: Residential mortgages .................. Hong Kong SAR Government Home Ownership Scheme......... Other personal .............................. Total personal ............................... Commercial, industrial and international trade ..................... Commercial real estate ................. Other property related................... Government .................................. Other commercial* ....................... Total corporate and commercial ... Non-bank financial institutions .... Settlement accounts ...................... Total financial............................... Residential mortgages .................. Hong Kong SAR Government Home Ownership Scheme......... Other personal .............................. Total personal ............................... Commercial, industrial and international trade ..................... Commercial real estate ................. Other property related................... Government .................................. Other commercial* ....................... Total corporate and commercial ... Non-bank financial institutions .... Settlement accounts ...................... Total financial............................... – 21,065 48,347 38,476 9,475 3,630 2,393 20,510 74,484 11,329 2,361 13,690 – 20,537 44,585 38,012 10,053 3,121 2,572 19,570 73,328 10,374 3,946 14,320 At 31 December 2001.................. 136,521 24,048 23,121 3,723 19,641 1,099 71,632 8,123 6,227 37,475 9,662 8,474 4,710 543 6,349 29,738 1,546 223 1,769 68,982 – 4,280 9,414 11,282 2,412 2,174 900 5,559 22,327 908 189 1,097 32,838 – 6,113 27,922 8,600 5,826 3,990 725 4,203 23,344 12,524 8,984 21,508 72,774 – 1,440 2,305 2,138 128 90 778 644 3,778 166 4 170 6,253 8,123 39,125 125,463 70,158 26,315 14,594 5,339 37,265 153,671 26,473 11,761 38,234 317,368 7,353 4,923 35,397 9,584 8,293 3,850 130 7,459 29,316 1,664 142 1,806 66,519 – 3,860 7,583 11,644 2,773 1,816 574 5,516 22,323 683 361 1,044 30,950 – 6,694 26,335 8,831 6,865 4,053 710 3,710 24,169 8,593 2,464 11,057 61,561 – 1,517 2,616 3,246 127 175 55 980 4,583 188 41 229 7,428 7,353 37,531 116,516 71,317 28,111 13,015 4,041 37,235 153,719 21,502 6,954 28,456 298,691 At 31 December 2000................... 132,233 * † Other commercial includes advances in respect of agriculture, transport, energy and utilities. The figures for 31 December 2000 have been presented on a consistent basis with 31 December 2001 for residential mortgages and other personal lending. The geographical information shown above has been classified by the location of the principal operations of the subsidiary undertaking, or in the case of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, HSBC Bank Middle East and HSBC Bank USA, by location of the branch responsible for advancing the funds. 186 19 Debt securities 2001 2000 Book value US$m Market valuation US$m Book value US$m Market valuation US$m 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 ............................. 39,943 4,908 44,851 27,366 1,091 73,308 6,782 41,633 48,415 10,893 27,963 87,271 160,579 43,803 116,776 160,579 241 Unamortised net discounts on investment securities........................................................ (102) 40,470 5,014 45,484 6,800 42,030 48,830 37,955 3,261 41,216 22,134 545 63,895 13,745 31,993 45,738 852 22,333 68,923 132,818 44,731 88,087 132,818 584 (761) 38,535 3,337 41,872 13,759 32,113 45,872 187 H S B C H O L D I N G S P L C Notes on the Financial Statements (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 .......................................................... 2001 Book value Market valuation 2000 Book value Market valuation 9,564 830 41,392 35,958 87,744 13,769 915 45,750 32,832 93,266 6,525 1,828 35,597 23,363 160,579 13,877 959 46,327 33,151 94,314 9,514 795 40,884 35,761 86,954 5,309 1,788 26,923 11,844 132,818 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 HSBC’s investment securities. If the effect of these transactions was included, the market valuation of investment securities would be US$94,100 million (2000: US$87,665 million). Investment securities: At 1 January 2001 .......................................................................... Additions ....................................................................................... Acquisition of subsidiaries ............................................................ Disposals and amounts repaid........................................................ Provisions made............................................................................. Amortisation of discounts and premiums ...................................... Exchange and other movements .................................................... At 31 December 2001 ................................................................... Cost US$m 87,034 94,214 950 (87,447) – 174 (1,580) 93,345 The book value of investment securities, analysed by type of borrower, is as follows: Available-for-sale US Treasury and Government agencies ................................................................... UK Government....................................................................................................... Hong Kong SAR Government ................................................................................. Other governments................................................................................................... Asset-backed securities............................................................................................ Corporate debt and other securities.......................................................................... Held-to-maturity US Treasury and Government agencies ................................................................... Obligations of US state and political sub-divisions ................................................. Corporate debt and other securities.......................................................................... Provisions US$m Book Value US$m (80) – – – (24) – 25 (79) 2001 US$m 17,452 1,880 490 16,212 4,535 48,021 88,590 3,907 769 – 4,676 86,954 94,214 950 (87,447) (24) 174 (1,555) 93,266 2000 US$m 18,381 3,276 306 12,302 4,497 43,754 82,516 3,690 718 30 4,438 188 The following table provides an analysis of gross unrealised gains and losses for investment securities by instrument type as at 31 December for the past two years: Available-for-sale 31 December 2001 US Treasury and Government agencies ............ UK Government................................................ Hong Kong SAR Government .......................... Other governments............................................ Asset-backed securities ..................................... Corporate debt and other securities................... 31 December 2000 US Treasury and Government agencies ............ UK Government................................................ Hong Kong SAR Government .......................... Other governments............................................ Asset-backed securities ..................................... Corporate debt and other securities................... Held-to-maturity 31 December 2001 US Treasury and Government agencies ............ Obligations of US state and political sub-divisions ................................................. 31 December 2000 US Treasury and Government agencies ............ Obligations of US state and political sub-divisions ................................................. Corporate debt and other securities................... Carrying value US$m Gross unrealised gains US$m Gross unrealised losses US$m Market valuation US$m 17,452 1,880 490 16,212 4,535 48,021 88,590 18,381 3,276 306 12,302 4,497 43,754 82,516 3,907 769 4,676 3,690 718 30 4,438 237 12 30 311 45 604 1,239 347 7 30 187 38 323 932 168 32 200 136 31 – 167 (62) – (2) (158) (6) (153) (381) (79) (1) – (46) (10) (172) (308) (9) (1) (10) – (1) – (1) 17,627 1,892 518 16,365 4,574 48,472 89,448 18,649 3,282 336 12,443 4,525 43,905 83,140 4,066 800 4,866 3,826 748 30 4,604 The maturities of investment securities at 31 December 2001 are analysed as follows: Available-for-sale Book value Market valuation 1 year or less .............................................................................................................. 5 years or less but over 1 year .................................................................................... 10 years or less but over 5 years ................................................................................ Over 10 years ............................................................................................................. No fixed maturity....................................................................................................... 20,948 43,982 8,364 14,344 952 88,590 20,975 44,357 8,631 14,526 959 89,448 189 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Held-to-maturity 1 year or less .............................................................................................................. 5 years or less but over 1 year.................................................................................... 10 years or less but over 5 years ................................................................................ Over 10 years ............................................................................................................. Book value Market valuation 22 182 463 4,009 4,676 22 191 484 4,169 4,866 The following table provides an analysis of contractual maturities and weighted average yields of investment debt securities as at 31 December 2001: Available-for-sale US Treasury and Government agencies.............. UK Government .... Hong Kong SAR Government ....... Other governments Asset-backed securities ............ Corporate debt and other securities ... Held-to-maturity US Treasury and Government agencies.............. Corporate debt and other securities ... Within one year After one but within five years After five but within ten years After ten years No fixed maturity Amount US$m Yield Amount % US$m Yield Amount % US$m Yield Amount % US$m Yield Amount % US$m Yield % 2,156 1,569 6 2,820 6.11 6.48 3,210 311 6.06 3.85 345 11,291 5.44 5.73 4.40 2.83 897 – 4.00 – 11,189 – 139 1,623 9.41 6.39 – 478 5.22 – – 8.46 67 3.57 1,554 3.64 1,517 2.82 1,397 2.91 – – – – – – – – – – 14,330 20,948 3.90 27,271 4.48 43,982 4,188 8,364 5.15 1,280 4.89 14,344 5.63 952 952 17 5 22 7.44 143 7.26 319 7.19 3,428 7.13 7.30 7.47 39 182 144 463 5.79 581 5.59 4,009 – – – – – The maturity distributions of asset-backed securities are presented in the above table based upon contractual maturity dates. The weighted average yield for each range of maturities in the above table is calculated by dividing the annualised interest income for the year ended 31 December 2001 by the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives. Proceeds from the sale and redemption of investment securities were US$87,626 million (2000: US$109,300 million). Gross realised gains of US$359 million (2000: US$123 million) and gross realised losses of US$180 million (2000: US$58 million) were recorded on those sales. Realised gains and losses are computed using the weighted average cost method. There were no gains or losses recorded on securities transferred from the investment book to the trading book. The cost of investment securities purchased during the year ended 31 December 2001 was US$94,214 million (2000: US$107,025 million). 190 20 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 .......................................................... 2001 2000 Book value Market valuation Book value Market valuation 1,005 742 1,382 2,644 5,773 695 245 1,389 2,426 4,755 713 74 2,405 110 8,057 688 564 1,436 2,606 5,294 722 270 1,247 2,399 4,638 1,071 228 1,953 214 8,104 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 within ‘Investment securities – listed on a recognised UK exchange’ are US$555 million (2000: US$564 million) shares in HSBC Holdings as explained in note 26(a). Included in the above are 1,369,901 (2000: 5,871,062) shares in HSBC Holdings held by subsidiary undertakings as equity market-makers. Investment securities: At 1 January 2001 .......................................................................... Additions ....................................................................................... Acquisition of subsidiaries............................................................. Disposals........................................................................................ Provisions made............................................................................. Provisions written off..................................................................... Exchange and other movements..................................................... At 31 December 2001 ................................................................... Cost US$m 4,787 1,670 12 (1,578) – (3) 71 4,959 Provisions US$m Book value US$m (149) – – 47 (58) 3 (47) (204) 4,638 1,670 12 (1,531) (58) – 24 4,755 The following table provides an analysis of gross unrealised gains and losses as at 31 December for the past two years: 31 December 2001 ........................................... Carrying value US$m 4,755 Gross unrealised gains US$m 669 Gross unrealised losses US$m (130) Market Valuation US$m 5,294 31 December 2000 ........................................... 4,638 1,183 (48) 5,773 191 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Proceeds from the sale of investment securities were US$1,796 million (2000: US$1,259 million). Gross realised gains of US$290 million (2000: US$225 million) and gross realised losses of US$25 million (2000: US$20 million) were recorded on those sales. Realised gains and losses are computed using the weighted average cost method. There were no gains recorded on securities transferred from the investment book to the trading book. The cost of investment securities purchased during the year ended 31 December 2001 was US$1,670 million (2000: US$1,822 million). 21 Interests in joint ventures At 1 January 2001 ................................................................................................................................... Additions ................................................................................................................................................ Amortisation of goodwill........................................................................................................................ Retained profits and losses (Note 36) ..................................................................................................... Exchange and other movements ............................................................................................................. At 31 December 2001 ............................................................................................................................ (a) Shares in banks................................................................................................... Other ................................................................................................................... 2001 US$m 51 241 292 2001 US$m 283 120 (8) (78) (25) 292 2000 US$m – 283 283 All shares are unlisted. (b) The principal joint ventures of HSBC are: Country of incorporation Principal activity Merrill Lynch HSBC Limited .................... England Framlington Group Limited ....................... England Commercial banking Asset management Loxxia Slibail............................................. France Leasing HSBC’s interest in equity capital Issued equity capital 50% US$395m 51% 49% £3m €32m All of the above interests in joint ventures are owned by subsidiaries of HSBC Holdings. All of the above make their financial statements up to 31 December. The principal countries of operation are the same as the countries of incorporation, except for Merrill Lynch HSBC Limited which operates in the UK, Australia and Canada. (c) HSBC’s share of total operating income in joint ventures is US$79 million (2000: US$29 million). HSBC’s share of contingent liabilities in joint ventures is US$56 million (2000: US$37 million). HSBC’s share of commitments by joint ventures is US$ nil (2000: US$98 million). 192 (d) Included within HSBC’s share of gross assets of joint ventures is goodwill as follows: Goodwill At 1 January 2001 ........................................................................................................................... Exchange and other movements ..................................................................................................... Cost at 31 December 2001 ............................................................................................................ Accumulated amortisation at 1 January 2001 ................................................................................. Charge to the profit and loss account.............................................................................................. Accumulated amortisation at 31 December 2001....................................................................... Net book value at 31 December 2001........................................................................................... Net book value at 31 December 2000............................................................................................. 22 Interests in associates At 1 January 2001 ...................................................................................................................................... Additions ................................................................................................................................................... Disposals.................................................................................................................................................... Amounts written off................................................................................................................................... Retained profits and losses (Note 36) ........................................................................................................ Exchange and other movements................................................................................................................. At 31 December 2001 ............................................................................................................................... There was no goodwill included in the interests in associates at either 31 December 2001 or 2000. (a) Shares in banks ................................................................................................. Other ................................................................................................................. Listed shares (all listed outside the United Kingdom and Hong Kong).............. Unlisted shares.................................................................................................... 2001 US$m 718 338 1,056 521 535 1,056 Cost US$m 190 9 199 Accumulated amortisation US$m (4) (8) (12) 187 186 2001 US$m 1,085 30 (11) (7) 39 (80) 1,056 2000 US$m 820 265 1,085 517 568 1,085 193 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) (b) The principal associates of HSBC are: Financial Statements made up to Country of incorporation Barrowgate Limited ....... 31.12.01 Hong Kong British Arab 31.12.01 England Principal activity Property Investment Banking HSBC’s interest in equity capital 24.64% 46.51% Commercial Bank Limited ....................... The Cyprus Popular Bank Limited†............ Erisa .............................. The Saudi British Bank Wells Fargo HSBC Trade Bank, N.A. ....... World Finance International Limited 31.12.01 Cyprus Banking 21.74% 31.12.01 31.12.01 31.12.01 France Saudi Arabia United States Insurance Banking Trade finance 30.6.01 Bermuda Shipping 50% 40% 20% 50% Issued equity capital * US$81m £32m fully paid, £5m nil paid C£149m €65m SR2,000m ¶ US$58m * † ¶ issued equity capital is less than HK$1 million trading as Laiki Group issued equity capital is less than US$1 million. All the above interests in associates are owned by subsidiaries of HSBC Holdings. The principal countries of operation are the same as the countries of incorporation except for World Finance International Limited which operates worldwide, and British Arab Commercial Bank Limited which operates in the Middle East. (c) The associates listed above have no loan capital, except for British Arab Commercial Bank Limited which has issued US$43.2 million of subordinated unsecured loan stock in which HSBC has a 35.64% interest; Barrowgate Limited which has HK$845 million of loan capital in which HSBC has a 25% interest; and The Cyprus Popular Bank Limited which has issued C£21.7 million of convertible debentures in which HSBC has a 30.1% interest. HSBC also has a 100% interest in the issued preferred stock (less than US$1 million) of Wells Fargo HSBC Trade Bank, N.A. HSBC has a 40% economic interest in Wells Fargo HSBC Trade Bank, N.A. by virtue of the joint agreement under which HSBC’s equity capital and preferred stock interests are held. 23 Other participating interests Listed other than on a recognised UK exchange or in Hong Kong............................. Unlisted....................................................................................................................... Market value of listed securities ................................................................................. Other participating interests in banks.......................................................................... 2001 US$m – 120 120 1 91 2000 US$m 3 123 126 8 104 194 At 1 January 2001 .......................................................................... Additions ....................................................................................... Disposals........................................................................................ Provisions made............................................................................. Exchange and other movements..................................................... At 31 December 2001 ................................................................... 24 Intangible fixed assets Cost US$m 157 4 (7) – 10 164 Provisions US$m (31) – – (22) 9 Carrying Value US$m 126 4 (7) (22) 19 (44) 120 Goodwill At 1 January 2001 .................................................................................................................................. Additions ............................................................................................................................................... Exchange and other movements............................................................................................................. Cost at 31 December 2001 ................................................................................................................... Accumulated amortisation at 1 January 2001 ........................................................................................ Charge to the profit and loss account..................................................................................................... Exchange and other movements............................................................................................................. Cost US$m 15,645 749 (427) 15,967 Accumulated amortisation US$m (556) (799) (31) Accumulated amortisation at 31 December 2001 .............................................................................. (1,386) Net book value at 31 December 2001.................................................................................................. Net book value at 31 December 2000 .................................................................................................... 14,581 15,089 Additions represent goodwill arising on acquisitions of subsidiaries during 2001, which is being amortised over periods of between 5 and 20 years. 195 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 25 Tangible fixed assets (a) HSBC Freehold land and buildings Long leasehold land and buildings* Short leasehold land and buildings Equipment, fixtures and fittings Equipment on operating leases US$m 3,108 237 82 (169 ) – (65 ) (14 ) 27 (176 ) US$m 3,692 65 – (51) (128) (46) – (258) (29) US$m 3,172 77 1 (57 ) 128 (65 ) – (40 ) (135 ) US$m 4,516 984 79 (299 ) – – – – 308 US$m 3,555 510 – (462) – – – – (115) Total US$m 18,043 1,873 162 (1,038 ) – (176 ) (14 ) (271 ) (147 ) Cost or valuation at 1 January 2001 ........... Additions .................................................... Acquisition of subsidiaries ......................... Disposals .................................................... Reclassification........................................... Transfer of accumulated depreciation arising on revaluation ............................. Impairment of land and buildings............... Surplus/(deficit) on revaluation .................. Exchange and other movements ................. Cost or valuation at 31 December 2001 .. 3,030 3,245 3,081 5,588 3,488 18,432 Accumulated depreciation at 1 January 2001........................................................ 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 2001...................................... (43 ) 3 – 65 (51 ) (42 ) (68 ) – – 15 46 (51) (15) (5) (506 ) 45 (15 ) 65 (121 ) 15 (2,639 ) 236 – – (668 ) (428 ) (834) 217 – – (229) 24 (4,022 ) 501 – 176 (1,120 ) (446 ) (517 ) (3,499 ) (822) (4,911 ) Net book value at 31 December 2001 ...... Net book value at 31 December 2000......... 2,962 3,065 3,240 3,692 2,564 2,666 2,089 1,877 2,666 2,721 13,521 14,021 * 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$773 million (2000: US$742 million). (b) HSBC Holdings Cost or valuation at 1 January 2001........................................ Additions ................................................................................ Disposals................................................................................. Deficit on revaluation ............................................................. Cost or valuation at 31 December 2001 .............................. Accumulated depreciation at 1 January 2001 ......................... Disposals................................................................................. Charge to the profit and loss account...................................... Accumulated depreciation at 31 December 2001 ............... Net book value at 31 December 2001 .................................. Net book value at 31 December 2000..................................... Freehold land and buildings US$m 7 – – (3) Equipment, fixtures and fittings US$m 4 1 (1) – 4 – – – – 4 7 4 (1) 1 (1) (1) 3 3 Total US$m 11 1 (1) (3) 8 (1) 1 (1) (1) 7 10 196  (c) Valuations Cost or valuation of freehold and long and short leasehold land and buildings (excluding investment properties): At 2001 valuation (2000: at 2000 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 ......................... HSBC 2001 US$m HSBC Holdings 2000 US$m 2001 US$m 2000 US$m 7,103 1,697 8,800 6,783 2,630 9,413 7,538 (1,575) 5,963 7,671 (1,356) 6,315 4 – 4 – – – 7 – 7 – – – HSBC values its non-investment properties on an annual basis. In September 2001, except as noted below, HSBC’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 and updated for any material changes at 31 December 2001. As a result of the revaluation, the net book value of land and buildings (excluding investment properties) decreased by US$241 million (2000: increase US$385 million). A deficit of US$227 million (net of minority interest of US$14 million) (2000: surplus of US$357 million), net of minority interest of US$14 million (2000:US$28 million) was debited to reserves at 31 December 2001. The property of HSBC Holdings was also valued by an independent, professionally qualified valuer at open market value. The deficit on revaluation of US$3 million has been debited to reserves at 31 December 2001 (2000: surplus US$1 million). Included within ‘Short leasehold land and buildings’ are the following amounts in respect of assets classed as improvements to buildings, which are carried at depreciated historical cost: At 1 January 2001 ............................................................................................... Additions ............................................................................................................ Disposals............................................................................................................. Charge for the year.............................................................................................. Exchange and other movements ......................................................................... At 31 December 2001 ........................................................................................ Net book value at 31 December 2001 (2000: US$169 million) ....................... Accumulated depreciation US$m (458) – – (26) 211 (273) Cost US$m 627 42 (51) – 158 776 503 197 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) (d) Investment properties The valuation at which investment properties are included in tangible fixed assets, together with the net book value of these properties calculated under the historical cost basis, is as follows: Freehold land and buildings....................... Short and long leasehold land and buildings................................................. 2001 2000 At valuation US$m 80 476 556 At cost US$m 80 145 225 At valuation US$m 53 506 559 At cost US$m 53 154 207 Investment properties are valued on an open market value basis at 31 December annually by professional valuers. Investment properties in Hong Kong, the Macau Special Administrative Region and mainland China, which represent 89% by value of HSBC’s properties subject to revaluation, were valued by Chesterton Petty. 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$30 million (2000: surplus of US$12 million). A deficit of US$18 million, net of minority interests of US$12 million, has been credited to reserves at 31 December 2001. HSBC Holdings had no investment properties at 31 December 2001 or 2000. (e) HSBC properties leased to customers HSBC properties leased to customers, none of which was held by HSBC Holdings, included US$522 million at 31 December 2001 (2000: US$518 million) let under operating leases, net of accumulated depreciation of US$27 million (2000: US$32 million). (f) Land and buildings occupied for own activities Net book value.................................................................................................... 2001 US$m 7,468 2000 US$m 7,961 The property owned by HSBC Holdings was unoccupied at 31 December 2001 (31 December 2000: occupied by another HSBC company). (g) Residual values of equipment on operating leases Included in the net book value of equipment on operating leases are residual values at the end of current lease terms, which will be recovered through re-letting or disposal in the following periods: Within 1 year ..................................................................................................... Between 1-2 years.............................................................................................. Between 2-5 years.............................................................................................. More than 5 years .............................................................................................. Total exposure ................................................................................................... 2001 US$m 248 386 1,017 527 2,178 2000 US$m 155 219 1,308 513 2,195 198 26 Investments (a) HSBC Holdings Shares in HSBC Undertakings US$m Loans to HSBC Undertakings US$m Other investments other than loans US$m Own shares US$m At 1 January 2001 .................... Additions ................................. Repayments and redemptions .. Amortisation ........................... Transfers to other HSBC companies............................. Write-up of subsidiary undertakings to net asset value, including attributable goodwill (Note 36) ............... At 31 December 2001 46,395 3,396 – – (934) 496 49,353 5,406 150 (1,384) – – – 289 389 (237) – – – 564 17 (16) (10) – – 4,172 441 555 Total US$m 52,654 3,952 (1,637) (10) (934) 496 54,521 ‘Loans to HSBC undertakings’ includes qualifying or regulatory capital and similar financing which can only be repaid by the relevant HSBC undertaking with the consent of its local regulatory authority. Included within ‘Own shares’ are: (i) US$16 million, after amortisation, of HSBC Holdings’ own shares (2000: US$10 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 146 and 147. At 31 December 2001, the trust held 3,230,422 ordinary shares (2000: 2,030,652 ordinary shares) of US$0.50 each with a market value at that date of US$37,735,716 (2000: US$29,840,868) in respect of these conditional awards. (ii) US$539 million of HSBC Holdings’ own shares (2000: US$554 million) held in trust which may be used in respect of the exercise of share options. At 31 December 2001, the trust held 38,788,413 ordinary shares (2000: 39,838,800 ordinary shares) of US$0.50 each with a market value of US$453,101,339 (2000: US$ 585,439,731) in respect of these option holders. In addition, HSBC Holdings’ own shares were held in trust by other HSBC group companies for the purposes of conditional awards under the Restricted Share Plan. At 31 December 2001, such trusts held 3,455,821 shares (2000: 1,890,733) of nominal value US$0.50 with a market value at that date of US$40,368,700 (2000: US$27,784,727). HSBC Holdings’ own shares are included within ‘Equity Shares’ (Note 20) in the Consolidated Balance Sheet. On the historical cost basis, shares in HSBC undertakings would have been included as follows: Cost less provisions of US$170 million (2000: US$170 million) ...................... 40,391 37,929 2001 US$m 2000 US$m 199 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) (b) The principal subsidiary undertakings of HSBC Holdings are: Europe Crédit Commercial de France S.A. (99.99% owned) ................................................ HSBC Bank AS .................................................... HSBC Asset Finance (UK) Limited...................... HSBC Bank Malta p.l.c. (70.03% owned)............ HSBC Bank Middle East ...................................... HSBC Bank plc (directly owned) ......................... HSBC Guyerzeller Bank AG (95.81% owned)1 ... HSBC Insurance Brokers Limited ........................ HSBC Investment Bank plc .................................. HSBC Life (UK) Limited ..................................... HSBC Republic Bank (Guernsey) Limited ........... HSBC Republic Bank (Suisse) S.A ...................... HSBC Republic Bank (UK) Limited ................... HSBC Trinkaus & Burkhardt KGaA Country of incorporation or registration Principal activity Issued equity capital France Turkey England Malta England England Switzerland England England England Guernsey Switzerland England Banking Banking Finance Banking Banking Banking Banking Insurance Investment banking Insurance Private banking Private banking Private banking €377m TRL277bn £265m Lm9m US$331m £797m SFr5m £3m £280m £14m US$5m 2 SFr680m £112m (partnership limited by shares, 73.47% owned) Germany Banking €70m Hong Kong Hang Seng Bank Limited (62.14% owned) .......... The Hongkong and Shanghai Banking Corporation Limited.......................................... HSBC Insurance (Asia) Limited ........................... HSBC Investment Bank Asia Limited .................. HSBC Life (International) Limited ....................... Rest of Asia-Pacific HSBC Bank Egypt S.A.E. (formerly Egyptian British Bank S.A.E.) (94.53% owned)................ HSBC Bank Australia Limited ............................. HSBC Bank Malaysia Berhad............................... HSBC Asset Management (Taiwan) Ltd (formerly China Securities Investment Trust Corporation) (97% owned) ............................... Hong Kong Hong Kong Hong Kong Hong Kong Bermuda Banking HK$9,559m Banking Insurance Investment banking Retirement benefits and life assurance HK$16,254m HK$125m HK$850m HK$327m Egypt Australia Malaysia Banking Banking Banking E£168m A$560m RM$114m Taiwan Investment banking TWD788m 1 2 Indirect minority interest through HSBC Trinkaus & Burkhardt KGaA HSBC also owns 100% of the issued redeemable preference share capital of US$17 million 200 North America HSBC Bank Canada (99.99% owned) .................. HSBC Bank USA ................................................. HSBC Securities (USA) Inc.................................. HSBC USA Inc..................................................... Latin America HSBC Bank Argentina S.A (99.92% owned) ....... HSBC Bank Brasil S.A. – Banco Múltiplo........... HSBC Seguros (Brasil) S.A. (99.75% owned) ..... HSBC La Buenos Aires Seguros S.A. (formerly La Buenos Aires Compañia Argentina de Seguros S.A.) (99.32% owned) ......................... Máxima S.A. AFJP (55.74% owned).................... Country of incorporation or registration Principal activity Issued equity capital Canada United States United States United States Banking Banking Investment banking Holding company C$935m US$205m – 3 – 3 Argentina Brazil Brazil Argentina Argentina Banking Banking Insurance ARS237m BRL912m BRL244m Insurance Pension fund management ARS43m ARS87m 4 3 4 issued equity capital is less than US$1 million HSBC has a 60% economic and voting interest in Máxima S.A. AFJP . Details of all HSBC companies will be annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies. Except where indicated otherwise, the issued equity capital of the above undertakings is wholly-owned by HSBC and is held by subsidiaries of HSBC Holdings. All the above make their financial statements up to 31 December except for HSBC Bank Argentina S.A., HSBC La Buenos Aires Seguros S.A. and Maxima S.A. AFJP, whose financial statements are made up to 30 June annually. The principal countries of operation are the same as the countries of incorporation except for HSBC Bank Middle East which operates mainly in the Middle East, and HSBC Life (International) Limited which operates mainly in Hong Kong. All the above subsidiaries are included in the consolidation. (c) Acquisitions HSBC made the following acquisitions of subsidiary undertakings or net assets and operations in 2001, which were accounted for on an acquisition basis: i. On 3 March 2001, CCF, a 99.99 per cent owned subsidiary of HSBC, acquired 89.6 per cent of Banque Hervet and a further 8.3 per cent in July for a total cash consideration of US$481 million. Goodwill of US$269 million arose on this acquisition. ii. On 22 March 2001, HSBC Finance (Brunei) Berhad, a wholly owned subsidiary of HSBC, acquired 100 per cent of IRB Finance Berhad for a cash consideration of US$32 million. Goodwill of US$9 million arose on this acquisition. iii. On 30 March 2001, HSBC Bank plc, a wholly owned subsidiary of HSBC, acquired 100 per cent of the issued share capital of Intermediarios Financieros, Agencia de Valores y Bolsa, S.A. for a cash consideration of US$7 million. Goodwill of US$4 million arose on this acquisition. iv. On 2 April 2001, HSBC Bank plc acquired the whole of Barclays branch network in Greece including the Greek fund management company Barclays AEDAK for a cash consideration of US$11 million. Goodwill of US$11 million arose on this acquisition. v. On 1 June 2001, CCF acquired 100 per cent of the issued share capital of Reyers for a cash consideration of US$11 million. Goodwill of US$7 million arose on this acquisition. 201 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) vi. On 7 August 2001, HSBC Asset Management (Europe) Limited, a wholly owned subsidiary of HSBC, acquired 97 per cent of China Securities Investment Trust Corporation for a cash consideration of US$187 million. Goodwill of US$163 million arose on this acquisition. vii. On 2 October 2001, HSBC Republic Bank (UK) Limited, a wholly owned subsidiary of HSBC, acquired 100 per cent of Property Vision for a cash consideration of US$30 million. Goodwill of US$27 million arose on this acquisition. viii. On 30 October 2001, HSBC Bank plc acquired 100 per cent of the issued share capital of Demirbank TAS for a cash consideration of US$353 million. Goodwill of US$98 million arose on this acquisition. ix. On 6 November 2001, HSBC Bank Australia Limited, a wholly owned subsidiary of HSBC, acquired 100 per cent of NRMA Building Society Limited for a cash consideration of US$80 million. Goodwill of US$44 million arose on this acquisition. x. HSBC undertook certain other minor acquisitions in the year, which involved assets acquired of less than US$3 million in aggregate, on which goodwill of US$3 million arose, which are excluded from the table below. xi. Increases in stake in a number of existing subsidiaries are excluded from the table below. On 31 March 2001, CCF increased its stake in Banque du Louvre from 83.3 per cent to 88.86 per cent for a cash consideration of US$6 million, on which goodwill of US$4 million arose. On 18 May 2001 and 8 June 2001, CCF increased its stake in Primecorp from 50.3 per cent to 100 per cent for cash consideration of US$12 million, on which goodwill of US$5 million arose. On 30 September 2001 and 4 December 2001, CCF increased its stake in Sinopia Asset Management from 60.4 per cent to 99.88 per cent for a cash consideration of US$58 million, on which goodwill of US$44 million arose. On 13 December 2001, HSBC Holdings BV increased its stake in HSBC Bank Egypt from 90.56 per cent to 94.53 per cent for a cash consideration of US$9 million, on which goodwill of US$7 million arose. On 21 December 2001, CCF increased its stake in Financiere Groupe Dewaay S.A. from 74.9 per cent to 100 per cent for cash consideration of US$61 million. Goodwill of US$54 million arose on this acquisition. 202 The assets and liabilities at the dates of acquisition and the total consideration paid are set out in the following table: Book value US$m Revaluations US$m Accounting policy alignments US$m Fair value US$m At date of acquisition: Cash and balances at central banks ............ Items in course of collection from other banks ...................................................... Treasury bills and other eligible bills......... Loans and advances to banks..................... Loans and advances to customers .............. Debt securities ........................................... Equity shares.............................................. Tangible fixed assets.................................. Other asset categories ................................ Deposits by banks ...................................... Customer accounts..................................... Items in the course of transmission to other banks ............................................. Debt securities in issue .............................. Provisions for liabilities and charges ......... Subordinated liabilities .............................. Other liability categories ............................ Less: minority interests – equity ................ Net assets acquired..................................... Goodwill (Note 24).................................... Total consideration including costs of acquisition .............................................. 104 116 92 1,893 2,803 1,931 13 139 293 (2,133) (3,123) (151) (579) (67) (24) (862) 445 (5) 440 – – – – (63) (4) (1) 23 21 – – – – (5) – 49 20 – 20 – – – – (6) – – – 90 – – – – 17 – (1) 100 – 100 The fair value adjustments in the above table represent the following: Revaluations, reflecting the recognition of: – – – the fair value of financial instruments acquired; the market value of acquired properties; and adjustments to provisions and other liabilities. Accounting policy alignments reflecting HSBC’s criteria for recognising deferred tax. 104 116 92 1,893 2,734 1,927 12 162 404 (2,133) (3,123) (151) (579) (55) (24) (814) 565 (5) 560 632 1,192 203 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 27 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 32) ..................................................................................... Long-term assurance assets attributable to policyholders (Note 31)........................ Other accounts ......................................................................................................... 2001 US$m 1,619 15,575 287 730 9,712 10,324 38,247 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 HSBC companies........................................... Debt securities ......................................................................................................... Equity shares............................................................................................................ Other assets.............................................................................................................. Prepayments and accrued income ............................................................................ Other liabilities ........................................................................................................ 2001 US$m 318 3,381 3,863 2,298 46 (194) 9,712 2000 US$m 837 16,106 80 340 8,963 9,236 35,562 2000 US$m 458 3,245 3,569 1,965 55 (329) 8,963 Included in the above are 8,104,024 (2000: 7,913,880) shares in HSBC Holdings held by subsidiary undertakings, as part of their long-term assurance and retirement funds for the benefit of the policyholders. 28 Deposits by banks Repayable on demand .............................................................................................. With agreed maturity dates or periods of notice, by remaining maturity: – 3 months or less but not repayable on demand..................................................... – 1 year or less but over 3 months........................................................................... – 5 years or less but over 1 year .............................................................................. – over 5 years .......................................................................................................... Due to joint ventures................................................................................................ Due to associates...................................................................................................... 2001 US$m 18,132 27,845 5,234 1,808 621 53,640 192 29 2000 US$m 16,154 36,909 4,992 1,433 565 60,053 – 123 204 The composition of deposits by banks on a geographical basis is set out below: Europe................................................... Hong Kong............................................ Rest of Asia-Pacific .............................. North America ...................................... Latin America ....................................... 2001 Non interest- bearing US$m 3,910 395 370 1,117 48 5,840 Interest- bearing US$m 32,998 2,876 3,640 6,485 1,801 47,800 Total US$m 36,908 3,271 4,010 7,602 1,849 53,640 Interest- bearing US$m 36,490 1,880 3,576 6,370 2,300 50,616 2000 Non interest- bearing US$m 7,398 340 504 851 344 9,437 Total US$m 43,888 2,220 4,080 7,221 2,644 60,053 The geographical analysis of deposits is based on the location of the office in which the deposits are recorded and excludes balances with HSBC companies. 29 Customer accounts 2000 US$m 182,582 207,101 27,867 8,229 1,290 427,069 869 31 Total US$m 159,505 146,394 42,516 68,389 10,265 Repayable on demand .............................................................................................. With agreed maturity dates or periods of notice, by remaining maturity: – 3 months or less but not repayable on demand..................................................... – 1 year or less but over 3 months........................................................................... – 5 years or less but over 1 year .............................................................................. – over 5 years .......................................................................................................... Amounts include: Due to joint ventures ............................................................................................... Due to associates ..................................................................................................... The composition of customer accounts on a geographical basis is set out below: 2001 US$m 209,634 205,231 26,591 7,519 1,016 449,991 333 19 Europe................................................... Hong Kong............................................ Rest of Asia-Pacific .............................. North America ...................................... Latin America ....................................... 2001 Non interest- bearing US$m 27,569 6,447 4,594 17,005 1,614 Total US$m 169,371 146,544 45,498 80,022 8,556 57,229 449,991 Interest- bearing US$m 141,802 140,097 40,904 63,017 6,942 392,762 Interest- bearing US$m 133,557 140,754 37,883 60,638 8,523 381,355 2000 Non interest- bearing US$m 25,948 5,640 4,633 7,751 1,742 45,714 427,069 The geographical analysis of deposits is based on the location of the office in which the deposits are recorded and excludes balances with HSBC companies. 205 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 30 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........................................................................................................... 31 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 HSBC Holdings ..................................................................... Long-term assurance liabilities attributable to policyholders (Note 27) .................. Other liabilities ........................................................................................................ Obligations under finance leases fall due as follows: – within 1 year ......................................................................................................... – between 1 and 5 years ........................................................................................... – over 5 years........................................................................................................... 2001 US$m 2,351 2,179 2,511 740 7,781 10,437 3,103 4,810 967 27,098 2001 US$m 1,613 25,250 235 2,352 2,487 31,937 15,399 1,172 354 2,700 9,712 11,349 72,623 58 53 243 354 2000 US$m 3,196 2,259 3,611 1,530 10,596 8,818 3,062 4,443 1,037 27,956 2000 US$m 1,718 17,102 617 2,030 1,573 23,040 17,201 1,448 364 2,627 8,963 9,471 63,114 39 46 279 364 Short positions in debt securities are generally in respect of unlisted securities maturing in over one year. 206 32 Provisions for liabilities and charges (a) Deferred taxation At 1 January 2001 ............................................................................................ Credit to profit and loss account (Note 8) ........................................................ Exchange and other movements....................................................................... At 31 December 2001 ..................................................................................... HSBC US$m 911 (425) (107) 379 HSBC Holdings US$m 173 (75) – 98 Included in ‘Provisions for liabilities and charges’ .................................................. Included in ‘Other assets’ (Note 27) .......... Net deferred taxation provision ................. Comprising: Short-term timing differences .................... Leasing transactions................................... Relief for tax losses.................................... Provision for additional UK tax on profit remittances from overseas ...................... Other items................................................. HSBC HSBC Holdings 2001 US$m 1,109 (730) 379 (7) 1,004 (102) 24 (540) 379 2000 US$m 1,251 (340) 911 155 965 (64) 120 (265) 911 2001 US$m 2000 US$m 98 – 98 – – – – 98 98 173 – 173 – – – 120 53 173 There is no material deferred taxation liability not provided for. (i) The distribution of the reserves of certain subsidiary undertakings, joint ventures and associates may give rise to additional tax liabilities. The US$304 million provision for potential UK tax on profit remittances from overseas established upon the acquisition of HSBC Bank plc was US$ nil at 31 December 2001 (2000: US$120 million). (ii) 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 HSBC’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. (iii) At 31 December 2001, there were potential future tax benefits of US$220 million (2000: US$350 million) in respect of trading losses, allowable expenditure charged to the profit and loss account but not yet allowed for tax and capital losses which have not been recognised because recoverability of the potential benefits is not sufficiently certain. 207 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) (b) Other provisions for liabilities and charges Provisions for pension and other post- retirement obligations US$m 832 Provisions for contingent liabilities and commitments US$m 528 Insurance provisions US$m 1,163 Other provisions US$m 809 130 26 (57) (3) 928 649 26 (146) 107 1,164 367 – (200) (145) 1,185 83 5 (139) (152) 606 Total US$m 3,332 1,229 57 (542) (193) 3,883 At 1 January 2001 ................... Additional provisions/ increase in provisions * ....... Acquisition of subsidiaries...... Provisions utilised................... Exchange and other movements .......................... At 31 December 2001............ * The increase in ‘other provisions’ includes unwinding of discounts of US$5 million(2000: US$7 million) in relation to vacant space provisions and US$1 million (2000: US$27 million) in relation to Brazilian labour claims provisions. Included within ‘Provisions for contingent liabilities and commitments’ are provisions for the costs of possible redress relating to the sales of certain personal pension plans of US$64 million (2000: US$143 million). This is the result of an actuarial calculation extrapolated from a sample of cases and the timing of the expenditure depends on settlement of the individual claims. This caption also includes US$665 million in connection with the Princeton Note Matter (Note 44) (2000: US$79 million). On 10 January 2002, US$569 million was paid out as settlement in connection with this matter. Included within ‘Other provisions’ are: (i) Provisions for onerous property contracts of US$144 million (2000: US$225 million), of which US$127 million (2000: US$127 million) relates to discounted future costs associated with leasehold properties that will become vacant as a consequence of HSBC’s planned move to Canary Wharf in 2002. The provisions cover rent voids whilst finding new tenants, shortfalls in expected rent receivable compared to rent payable and costs of refurbishing the buildings to attract tenants. Uncertainties relate to movements in market rents, the delay in finding new tenants and the timing of rental reviews. (ii) Labour, civil and fiscal litigation provisions in HSBC Bank Brasil S.A.- Banco Múltiplo of US$230 million (2000: US$331 million). This relates to labour and overtime litigation claims brought by employees after leaving the bank. The provision is based on the expected number of departing employees, their individual salaries and historical trends. Timing of settlement of these potential claims is uncertain. 208 33 Subordinated liabilities Undated subordinated loan capital: – HSBC Holdings ...................................................................................................... – Other HSBC............................................................................................................ Dated subordinated loan capital: – HSBC Holdings ...................................................................................................... – Other HSBC............................................................................................................ Total subordinated liabilities: – HSBC Holdings ...................................................................................................... – Other HSBC............................................................................................................ Dated subordinated loan capital is repayable: – within 1 year ........................................................................................................... – between 1 and 2 years ............................................................................................. – between 2 and 5 years ............................................................................................. – over 5 years ............................................................................................................. 2001 US$m – 3,479 3,479 2,820 9,181 12,001 2,820 12,660 15,480 1,393 950 2,165 7,493 2000 US$m – 3,546 3,546 2,860 9,816 12,676 2,860 13,362 16,222 953 1,401 2,263 8,059 12,001 12,676 209 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) The total subordinated borrowings of HSBC Holdings are as follows: Amounts owed to third parties: amounts falling due after more than 1 year: US$1,000m 7.5% subordinated notes 2009............................................................ 11.69% subordinated bonds 2002 ...................................................... £413m 9.875% subordinated bonds 20181 ..................................................... £250m Subordinated step-up coupon floating rate notes 20102 ..................... US$350m 5.5% subordinated notes 2009............................................................ €300m Subordinated collared floating rate notes 2008 .................................. US$250m Amounts owed to third parties: amounts falling due within 1 year £413m 11.69% subordinated bonds 2002 ..................................................... Amounts owed to HSBC undertakings: US$1,350m 9.547% subordinated step-up cumulative notes 2040 – HSBC Capital Funding (Dollar 1) LP ................................................ US$900m 10.176% subordinated step-up cumulative notes 2040 – HSBC Capital Funding (Dollar 1) LP ................................................ 8.208% subordinated step-up cumulative notes 2040 – £500m HSBC Capital Funding (Sterling 1) LP.............................................. 8.03% subordinated step-up cumulative notes 2040 – €600m US$350m HSBC Capital Funding (Euro 1) LP................................................... 7.525% subordinated loan 2003 – HSBC Finance Nederland B.V. ... HSBC Holdings’ dated subordinated loan capital is repayable: – within 1 year ........................................................................................................... – between 1 and 2 years ............................................................................................. – between 2 and 5 years ............................................................................................. – over 5 years............................................................................................................. 2001 US$m 2000 US$m 999 – 357 349 266 250 2,221 599 2,820 999 617 367 348 279 250 2,860 – 2,860 1,350 1,350 900 725 531 350 3,856 6,676 599 350 – 5,727 6,676 900 746 558 349 3,903 6,763 – 617 349 5,797 6,763 The interest rate on the 9.875 per cent subordinated bonds 2018 changes in April 2013 to become the higher of i) 9.875 per cent or ii) the sum of the yield on the relevant benchmark treasury stock plus 2.5 per cent. The bonds may be redeemed in April 2013 at par and redemption has also been allowed from April 1998, subject to the prior consent of the Financial Services Authority, for an amount based on the redemption yields of the relevant benchmark treasury stocks. The interest margin on the Subordinated Step-up coupon floating rate notes 2010 increases by 0.5 per cent from April 2005. The notes are repayable from their step up date at the option of the borrower, subject to the prior consent of the Financial Services Authority. 1 2 210 At 31 December 2001, the other HSBC subordinated borrowings were as follows: US$1,200m Primary capital subordinated undated floating rate notes................... Undated floating rate primary capital notes........................................ US$750m Undated floating rate primary capital notes........................................ US$500m 7.625% subordinated notes 2006........................................................ US$500m 6.5% subordinated notes 2023............................................................ £300m US$400m 8.625% subordinated notes 2004........................................................ HK$3,000m Subordinated collared (7% to 9%) floating rate notes 2003 ............... Subordinated step-up coupon floating rate notes 20091 ..................... US$375m Subordinated unsecured floating rate notes 2001 ............................... £250m 7.4% subordinated guaranteed notes 2003 ......................................... US$350m 6.25% subordinated notes 20412 ........................................................ £225m Undated floating rate primary capital notes (Series 3) ....................... US$300m 6.95% subordinated notes 2011.......................................................... US$300m 7.65% subordinated notes 2025.......................................................... US$300m 7% subordinated notes 2006............................................................... US$300m 9% subordinated notes 2005............................................................... £200m 7.25% subordinated notes 2002.......................................................... US$250m 5.875% subordinated notes 2008........................................................ US$250m 9.25% step-up undated subordinated notes3 ....................................... £150m 8.625% step-up undated subordinated notes4 ..................................... £150m Subordinated step-up coupon floating rate notes 20071 ..................... £150m 7.20% subordinated debentures 2097................................................. US$250m Subordinated debentures 20085 .......................................................... BRL472m 6.625% subordinated notes 2009........................................................ US$200m 7.808% capital securities 2026 ........................................................... US$200m 8.38% capital securities 2027 ............................................................. US$200m Other subordinated liabilities less than US$200m ..................................................... 2001 US$m 1,200 750 500 500 432 400 385 375 – 350 323 300 300 300 299 290 250 226 217 217 217 215 204 200 200 200 3,810 12,660 2000 US$m 1,200 750 500 500 448 400 385 375 373 350 224 300 300 300 298 298 249 223 224 224 224 214 – 200 200 200 4,403 13,362 1 2 3 4 5 The interest margins on the Subordinated Step-up coupon floating rate notes 2007 and 2009 increase by 0.5 per cent five years prior to their maturity dates. These notes are then repayable at the option of the borrower, subject to the prior consent of the Financial Services Authority. A further issue of £75 million was made during the year. The proceeds from the issue of new notes by HSBC Bank plc were used to support development of HSBC Bank plc’s capital base. The interest rate on the 9.25 per cent Step-up Undated Subordinated Notes changes in December 2006 to become, for each successive five year period, the rate per annum which is the sum of the yield on the then five year benchmark UK gilt plus 2.15 per cent. The notes are then repayable at the option of the borrower, subject to the prior consent of the Financial Services Authority. The interest rate on the 8.625 per cent Step-up Undated Subordinated Notes changes in December 2007 to become, for each successive five year period, the rate per annum which is the sum of the yield on the then five year benchmark UK gilt plus 1.87 per cent. The notes are then repayable at the option of the borrower, subject to the prior consent of the Financial Services Authority. The proceeds from the issue of new notes by HSBC S. Paulo Leasing Arrendamento Mercantil (Brasil) S.A. were used to support the development of the capital base of HSBC in Brazil. 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%. 211 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 34 Minority interests – non-equity Preference shares issued by subsidiaries: US$1,350m 9.547% Non-cumulative Step-up Perpetual Preferred Securities, Series 1 ........................................................................................... US$900m 10.176% Non-cumulative Step-up Perpetual Preferred Securities, £500m €600m US$1m US$150m US$150m US$125m US$125m CAD125m DM105m US$75m Series 2 ........................................................................................... 8.208% Non-cumulative Step-up Perpetual Preferred Securities ....... 8.03% Non-cumulative Step-up Perpetual Preferred Securities ......... Non-cumulative preference shares1 .................................................... Depositary shares each representing 25% interest in a share of adjustable rate cumulative preferred stock, Series D2..................... Cumulative preferred stock3 ............................................................... Dutch auction rate transferable securities preferred stock, Series A and B4............................................................................... 7.20% Series A cumulative preference shares5 .................................. Non-cumulative redeemable class 1 preferred shares, Series A ......... 6.35% Series B cumulative preference shares.................................... Cumulative preferred stock ................................................................ Other issues ....................................................................................... 2001 US$m 1,337 891 717 526 50 150 150 125 125 77 68 75 – 2000 US$m 1,335 889 737 552 873 150 150 125 125 81 71 75 8 4,291 5,171 Step-up Perpetual Preferred Securities The four issues of Non-cumulative Step-up Perpetual Preferred Securities were issued by Jersey limited partnerships and are guaranteed, on a subordinated basis, by HSBC Holdings. The proceeds of the issue were on-lent to HSBC Holdings by the limited partnerships by issue of subordinated notes. The Preferred Securities qualify as innovative tier 1 capital for HSBC. The Preferred Securities, together with the guarantee, are intended to provide investors with rights to income and capital distributions and distributions upon liquidation of HSBC Holdings that are equivalent to the rights they would have had if they had purchased non-cumulative perpetual preference shares of HSBC Holdings. The Preferred Securities are perpetual, but redeemable in 2010, 2030, 2015 and 2012, respectively, at the option of the general partners of the limited partnerships. If not redeemed the distributions payable step-up and become floating rate. There are limitations on the payment of distributions if prohibited under UK banking regulations or other requirements, if a payment would cause a breach of HSBC’s capital adequacy requirements, or if HSBC Holdings has insufficient distributable reserves (as defined). HSBC Holdings has covenanted that if it has been prevented under certain circumstances from paying distributions on the Preferred Securities in full, it will not pay dividends or other distributions in respect of its ordinary shares, or effect repurchase or redemption of its ordinary shares, until after a distribution has been paid in full. If i) HSBC’s total capital ratio falls below the regulatory minimum ratio required, or ii) in view of the deteriorating financial condition of HSBC Holdings, the Directors expect i) to occur in the near term, then the Preferred Securities will be substituted by Preference Shares of HSBC Holdings having economic terms which are in all material respects equivalent to those of the Preferred Securities and the guarantee taken together. 1 Non-cumulative preference shares HSBC Bank plc redeemed preference shares with an aggregate amount of US$825 million, plus an additional premium on certain series of the shares of US$19 million, during 2001. The remaining preference shares are redeemable at the option of HSBC Bank plc at an aggregate amount of US$50 million from February 2002. 212 2 Adjustable rate cumulative preferred stock, Series D The preferred stock is redeemable, at the option of HSBC USA Inc, in whole or in part on or after 1 July 1999 at par. 3 Cumulative preferred stock The preferred stock is redeemable at the option of HSBC USA Inc., in whole or in part, at any time on or after 1 October 2007 at par. 4 Dutch auction rate transferable securities preferred stock, Series A and B The preferred stock of each series is redeemable at the option of HSBC USA Inc., in whole or in part, on any dividend payment date at par. 5 7.20% Series A cumulative preference shares The preference shares are redeemable at the option of HSBC Republic Holdings (Luxembourg) S.A., in whole but not in part, on any dividend date falling on or after 30 April 2003 at an aggregate amount of US$125 million. The redemption of all preference shares is subject to the prior consent of the FSA and the relevant local banking regulator. 35 Called up share capital Authorised: The authorised ordinary share capital of HSBC Holdings at 31 December 2001 was US$7,500 million, (2000 and 1999: US$5,250 million) divided into 15,000 million (2000 and 1999: 10,500 million) ordinary shares of US$0.50 each, and £301,500 divided into 301,500 non-voting deferred shares of £1 each. At 31 December 2001 and 2000, the authorised preference share capital of HSBC Holdings was 10 million non- cumulative preference shares of £0.01 each, 10 million non-cumulative preference shares of US$0.01 each, and 10 million non-cumulative preference shares of euro 0.01 each. At 31 December 1999, the authorised preference share capital of HSBC Holdings was £500 million divided into 500 million non-cumulative preference shares of £1 each. Issued: At 1 January 2001 ........................................... Shares issued to QUEST................................. Shares issued under other option schemes ...... Shares issued in lieu of dividends ................... At 31 December 2001 .................................... At 1 January 2000 ........................................... Shares issued to QUEST................................. Shares issued under other option schemes ...... Shares issued in lieu of dividends ................... Shares issued on acquisition of CCF............... At 31 December 2000 ..................................... Number of US$0.50 shares 9,268,200,364 3,343,173 10,161,789 72,922,195 9,354,627,521 8,458,101,569 33,749,569 22,307,960 75,867,497 678,173,769 9,268,200,364 US$m 4,634 2 5 37 4,678 4,230 16 11 38 339 4,634 213 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Number of HK$10 shares Number of 75p shares Number of US$0.50 shares Issued: At 1 January 1999 ........................................... Shares issued to QUEST................................. Shares issued under other option schemes ...... Shares issued in lieu of dividends ................... Shares issued, placing ..................................... Shares cancelled on reorganisation ................. Shares issued on reorganisation ...................... Exchange movements ..................................... 1,816,108,390 – – 10,237,488 59,238,000 (1,885,583,878) – – 882,949,598 – 842,995 4,338,031 28,762,000 (916,892,624) – – – 19,564,285 12,199,762 18,908,016 – – 8,407,429,506 – At 31 December 1999 ..................................... – – 8,458,101,569 The 301,500 non-voting deferred shares are held by a subsidiary undertaking of HSBC Holdings. US$m 3,443 10 7 28 111 (3,515) 4,204 (58) 4,230 Options outstanding to subscribe for HSBC Holdings’ ordinary shares under the HSBC Holdings Group Share Option Plan, HSBC Holdings Executive Share Option Scheme, and HSBC Holdings Savings-Related Share Option Plans are as follows: Number of shares US$0.50 Period of exercise Exercise price 31 December 2001 ................................... 31 December 2000 .................................... 31 December 1999 .................................... 284,267,280 231,746,943 201,926,373 2002 to 2011 2001 to 2010 2000 to 2009 £2.1727 to £9.642 £1.806 to £9.642 £1.806 to £7.871 Following the acquisition of CCF in 2000, outstanding options over CCF shares granted (at nil consideration) to employees between 1993 and 2000 have vested. On exercise of the options, the CCF shares are exchangeable for HSBC Holdings ordinary shares of US$0.50 each in the same ratio as for the acquisition of CCF (13 HSBC Holdings shares for each CCF share). During 2001 76,799 (2000: 12,400) CCF shares were issued in connection with the exercise of employee share options and exchanged for 998,387 ordinary shares of US$0.50 each (2000: 161,200). A further 3,000 (2000: 15,500) CCF shares were issued in connection with the exercise of employee share options during 2001 and will be exchanged for ordinary shares of US$0.50 each on the fifth anniversary of the award of the options. During 2001 4,000 CCF shares previously issued in connection with the exercise of employee share options were exchanged for 52,000 ordinary shares of US$0.50 each. At 31 December 2001 10,500 CCF shares were in issue and will be exchanged for ordinary shares of US$0.50 each on the fifth anniversary of the award of the options. On 28 September 2001 441,000 CCF options were exercised and exchanged for cash. There are 3,077,826 CCF employee share options exchangeable for HSBC Holdings ordinary shares of US$0.50 each outstanding at 31 December 2001 (2000: 3,200,625). At 31 December 2001 HSBC Holdings General Employee Benefit Trust held 38,788,413 (2000: 39,838,800) ordinary shares of US$0.50 each which may be exchanged for CCF shares arising from the exercise of options. CCF options, effectively outstanding on HSBC shares under this arrangement, and the effective exercise period and price are as follows: Number of CCF shares exchangeable for HSBC Holdings ordinary shares Period of exercise Exercise price 31 December 2001 ............................... 31 December 2000 ................................ 3,088,326 3,204,625 2002 to 2010 2001 to 2010 €32.78 – €142.5 €32.78 – €142.5 214 36 Reserves Share premium account: At 1 January 2001 ..................................................................... Shares issued to QUEST ........................................................... Shares issued under other option schemes................................. Shares issued in lieu of dividends ............................................. At 31 December 2001 .............................................................. Other reserves: – Reserve in respect of obligations under CCF share options: At 1 January 2001 ..................................................................... On exercise of CCF share options ............................................ At 31 December 2001 .............................................................. – Merger reserve: At 1 January and 31 December 2001......................................... Total other reserves....................................................................... Revaluation reserves: – Investment property revaluation reserve: At 1 January 2001 ..................................................................... Unrealised deficit on revaluation of land and buildings ............ Transfer from revaluation reserve ............................................. Exchange and other movements ................................................ At 31 December 2001 .............................................................. – Revaluation reserve: At 1 January 2001 ..................................................................... Realisation on disposal of properties......................................... Unrealised deficit on revaluation of 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 (Note 26(a)) ...................................................... Exchange and other movements ................................................ At 31 December 2001 .............................................................. Total revaluation reserves ............................................................. HSBC US$m 3,305 37 68 (37) 3,373 496 (16) 480 8,290 8,770 289 (23) 8 (5) 269 2,322 (7) (227) (54) (8) – (24) 2,002 2,271 HSBC Holdings US$m Associates US$m 3,305 37 68 (37) 3,373 496 (16) 480 – 480 – – – – – 31,652 – (3) – – 496 27 32,172 32,172 – – – – – – – – – – 53 (5) – (2) 46 10 – – – (4) – – 6 52 215 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Profit and loss account: At 1 January 2001 ..................................................................... Retained profit for the year........................................................ Revaluation reserve realised on disposal of properties.............. Arising on shares issued in lieu of dividends ............................ Transfer of depreciation to revaluation reserve ......................... Exchange and other movements ................................................ At 31 December 2001 .............................................................. HSBC US$m 26,234 939 7 866 54 (1,213) 26,887 HSBC Holdings US$m Associates US$m 5,483 (1,073) – 866 – – 5,276 189 39 – – – 27 255 Included within the HSBC profit and loss account reserve at 31 December 2001 are retained losses of US$119 million (2000: US$41 million) attributable to interests in joint ventures. Share premium account: At 1 January 2000 ..................................................................... Shares issued to QUEST ........................................................... Shares issued under other option schemes ................................ Shares issued in lieu of dividends ............................................. At 31 December 2000 ............................................................... Other reserves: – Reserve in respect of obligations under CCF share options: At 1 January 2000 ..................................................................... On acquisition of CCF............................................................... On exercise of CCF share options ............................................ At 31 December 2000 ............................................................... – Merger reserve: At 1 January 2000 ..................................................................... On acquisition of CCF............................................................... At 31 December 2000 ............................................................... Total other reserves....................................................................... HSBC US$m 2,882 372 89 (38) 3,305 – 498 (2) 496 – 8,290 8,290 8,786 HSBC Holdings US$m Associates US$m 2,882 372 89 (38) 3,305 – 498 (2) 496 – – – 496 – – – – – – – – – – – – – 216 HSBC US$m HSBC Holdings US$m Associates US$m Revaluation reserves: – Investment property revaluation reserve: At 1 January 2000 ..................................................................... Unrealised surplus on revaluation of land and buildings........... Transfer from revaluation reserve ............................................. Realisation on disposal of properties......................................... Exchange and other movements ................................................ At 31 December 2000................................................................ – Revaluation reserve: At 1 January 2000 ..................................................................... Realisation on disposal of properties......................................... Unrealised surplus on revaluation of 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 2000................................................................ Total revaluation reserves ............................................................. Profit and loss account: At 1 January 2000 ..................................................................... Retained profit for the year........................................................ Revaluation reserve realised on disposal of properties.............. Arising on shares issued in lieu of dividends ............................ Capitalised on issue of shares to QUEST .................................. Transfer of depreciation to revaluation reserve ......................... Exchange and other movements ................................................ At 31 December 2000................................................................ Share premium account: At 1 January 1999 ..................................................................... Shares issued to QUEST ........................................................... Shares issued under other option schemes................................. Shares issued in lieu of dividends ............................................. Capitalised in share reorganisation............................................ Shares issued in the year............................................................ Costs of shares issued in year.................................................... Exchange and other movements ................................................ At 31 December 1999................................................................ 273 14 8 (4) (2) 289 2,069 (36) 361 (21) (8) – (43) 2,322 2,611 23,954 2,618 40 944 (324) 21 (1,019) 26,234 HSBC US$m 480 247 41 (28) (689) 2,887 (30) (26) 2,882 – – – – – – 21,874 – 1 – – 9,821 (44) 31,652 31,652 4,422 441 – 944 (324) – – 5,483 46 8 – – (1) 53 5 – 4 – – – 1 10 63 225 5 – – – – (41) 189 HSBC Holdings US$m Associates US$m 480 247 41 (28) (689) 2,887 (30) (26) 2,882 – – – – – – – – – 217 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Revaluation reserves: – Investment property revaluation reserve: At 1 January 1999 ..................................................................... Unrealised deficit on revaluation of land and buildings ............ Transfer to revaluation reserve .................................................. Realisation on disposal of properties......................................... Exchange and other movements ................................................ At 31 December 1999 ............................................................... – Revaluation reserve: At 1 January 1999 ..................................................................... Realisation on disposal of properties......................................... Unrealised surplus on revaluation of properties ........................ Transfer arising on redenomination of share capital ................. Transfer to profit and loss account reserve on disposal of subsidiary undertakings ......................................................... Transfer of depreciation from profit and loss account reserve Transfer from investment property revaluation reserve............. Net increase in attributable net assets of subsidiary undertakings........................................................................... Exchange and other movements ................................................ At 31 December 1999 ............................................................... Total revaluation reserves ............................................................. Profit and loss account: At 1 January 1999 ..................................................................... Retained profit/(deficit) for the year.......................................... Transfer arising on redenomination of share capital ................. Transfer from revaluation reserve on disposal of subsidiary undertakings........................................................................... Transfer of depreciation to revaluation reserve ......................... Revaluation reserve realised on disposal of properties.............. Arising on shares issued in lieu of dividends ............................ Capitalised on issue of shares to QUEST.................................. Exchange and other movements ................................................ HSBC US$m 328 (46) (6) (1) (2) 273 1,792 (7) 371 – – (22) 6 – (71) 2,069 2,342 21,359 2,536 – – 22 8 679 (185) (465) HSBC Holdings US$m Associates US$m – – – – – – 19,566 – 2 (271) (51) – – 2,588 40 21,874 21,874 3,913 (307) 271 51 – – 679 (185) – 48 (1) – – (1) 46 8 – – – – – – – (3) 5 51 247 123 – – – – – – (145) 225 At 31 December 1999 ............................................................... 23,954 4,422 The accumulated foreign exchange translation adjustment as at 31 December 2001 reduced HSBC’s reserves by US$3,370 million (2000: US$2,073 million; 1999: US$1,009 million). Cumulative goodwill amounting to US$5,138 million (2000: US$5,138 million) has been charged against reserves in respect of acquisitions of subsidiary undertakings prior to 1 January 1998. Statutory share premium relief under Section 131 of the Companies Act 1985 was taken in respect of the acquisition of CCF in 2000; in HSBC’s consolidated accounts the fair value difference of US$8,290 million was transferred to a merger reserve. Many of HSBC’s banking subsidiary undertakings, joint ventures and associates operate under local regulatory jurisdictions which could potentially restrict the amount of reserves which can be remitted to HSBC Holdings plc in order to maintain local regulatory capital ratios. In addition, as stated in Note 32(a) above, the remittance of reserves may result in further taxation liabilities. 218 In 1999, HSBC established a qualifying employee share ownership trust (QUEST) to operate in conjunction with the Savings-Related Share Option Plan by acquiring shares in HSBC Holdings and using them to satisfy share options. The HSBC QUEST has subscribed at market value for 3,343,173 ordinary shares at a total cost of US$39 million (2000: US$388 million). HSBC provided US$nil (2000: US$324 million) for this purpose. 8,774,315 ordinary shares (2000: 23,412,488 shares) were transferred from the HSBC QUEST to participants in HSBC’s Savings-Related Share Option Plan in the UK on exercise of their options. US$39 million (2000: US$64 million) was received from the share option plan participants. The price paid by option holders, ranged from £1.806 to £6.7536 (2000: £1.806 to £6.0299) per ordinary share of US$0.50. At 31 December 2001, the trust held 4,905,939 ordinary shares (2000: 10,337,081 shares) of US$0.50 with a market value of US$57,308,030 (2000: US$151,905,628) in respect of these options. Dividends on these shares are waived by the QUEST. HSBC has taken advantage of the exemptions applicable to Inland Revenue approved SAYE share option schemes and equivalent overseas schemes under Urgent Issues Task Force Abstract 17 (revised 2000) ‘Employee share schemes’. 37 Analysis of total assets and total liabilities (a) Assets subject to sale and repurchase transactions Total assets subject to sale and repurchase transactions ................................... (b) Assets leased to customers Loans and advances to customers ..................................................................... Tangible fixed assets – equipment on operating leases (Note 25(a)) ................ 2001 US$m 28,973 2001 US$m 7,523 2,666 10,189 2000 US$m 18,352 2000 US$m 6,934 2,721 9,655 The cost of assets acquired during 2001 for letting to customers under finance leases and hire purchase contracts by HSBC amounted to US$4,097 million (2000: US$3,203 million). (c) Assets charged as security for liabilities HSBC has pledged assets as security for liabilities included under the following headings: Deposits by banks ............................................................................................. Customer accounts............................................................................................ Debt securities in issue ..................................................................................... Other liabilities ................................................................................................. Amount of liability secured 2001 US$m 290 5,371 1,692 3,175 10,528 2000 US$m 260 4,903 3,090 3,544 11,797 The amount of assets pledged to secure these amounts is US$32,757 million (2000: US$30,432 million). This is mainly made up of items included in ‘Debt securities’ and ‘Treasury bills and other eligible bills’ of US$30,682 million (2000: US$26,466 million). 219 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) (d) HSBC Holdings HSBC Holdings’ investment in and indebtedness of and to subsidiary undertakings at 31 December is as follows: Investments in subsidiary undertakings*.............................. Amounts owed by HSBC undertakings................................ Subordinated liabilities to HSBC undertakings .................... Other amounts owed to HSBC undertakings .................... 2001 2000 Bank Non-bank US$m US$m Total US$m Bank Non-bank US$m US$m Total US$m 43,002 6,351 49,353 43,489 2,906 46,395 6,971 2,709 9,680 6,495 3,492 9,987 – 21 3,856 3,856 4,386 4,407 – 21 3,903 3,903 1,908 1,929 * Investments in subsidiary undertakings have been analysed on the basis of the business of the principal operating sub-group, i.e. banking sub-groups which include insurance companies have been categorised as banks. 38 Financial instruments (a) Derivatives Off-balance-sheet financial instruments, commonly referred to as derivatives, are contracts the characteristics of which are derived from those of the 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 HSBC acting as a counterparty, or can be dealt through exchanges. Nature and terms of derivatives The following outlines the nature and terms of the most common types of derivatives used by HSBC. Exchange rate contracts Forward foreign exchange contracts are agreements to buy or sell fixed amounts of currency at agreed rates of exchange on a specified future date. Cross currency swaps are agreements to exchange, and on termination of the swap re-exchange, principal amounts denominated in different currencies. Cross currency swaps may involve the exchange of interest payments in one specified currency for interest payments in another specified currency for a specified period. Currency futures are typically exchange-traded agreements to buy or sell standard amounts of a specified currency at an agreed exchange rate on a standard future date. Currency options give the buyer on payment of a premium the right, but not the obligation, to buy or sell specified amounts of currency at agreed rates of exchange on or before a specified future date. Interest rate contracts Interest rate swaps involve the exchange of interest rate obligations with a counterparty for a specified period without exchanging the underlying (or notional) principal. HSBC may enter a swap transaction either as an intermediary or as a direct counterparty. Interest rate futures are typically exchange-traded agreements to buy or sell a standard amount of a specified fixed income security or time deposit at an agreed interest rate on a standard future date. 220 Forward rate agreements give the buyer the ability to determine the underlying rate of interest for a specified period commencing on a specified future date (the ‘settlement date’). There is no exchange of principal and settlement is effected on the settlement date. The settlement amount is calculated by reference to the difference between the contract rate and the market rate prevailing on the settlement date. Interest rate options give the buyer on payment of a premium the right, but not the obligation, to fix the rate of interest on a future deposit or loan, for a specified period and commencing on a specified future date. Interest rate caps and floors give the buyer the ability to fix the maximum or minimum rate of interest. There is no facility to deposit or draw down funds; instead the writer pays to the buyer the amount by which the market rate exceeds or is less than the cap rate or the floor rate respectively. A combination of an interest rate cap and floor is known as an interest rate collar. Equities contracts Equities options give the buyer on payment of a premium the right, but not the obligation, to buy or sell a specified amount of equities or a basket of equities in the form of published indices. Equities futures are typically exchange-traded agreements to buy or sell a standard quantity of a specific equity at a future date, at a price decided at the time the contract is made, and may be settled in cash or through delivery. Credit derivatives In addition to the above, HSBC selectively uses credit derivative contracts. Credit derivatives are off-balance- sheet financial instruments that typically permit one party to transfer the credit risk of a reference asset to another party without actually selling the asset. Credit derivative contracts are included in the following tables within ‘other contracts’. Uses of derivatives 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. HSBC, 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, HSBC 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, HSBC also uses derivatives (principally interest rate swaps) in the management of its own asset and liability portfolios and structural positions. Risks associated with derivatives Derivative instruments are subject to both market risk and credit risk. Market 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 management of market risk arising from derivatives business is monitored by Traded Markets Development and Risk, an independent unit within the Investment Banking and Markets operation, in combination with market risks arising from on-balance-sheet instruments (Note 40). 221 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Credit risk 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 (Note 14), the credit risk relative to a derivative is principally the replacement cost of any contract with a positive mark-to-market gain and an estimate for the potential future change in value, reflecting the volatilities affecting the contract. Credit risk on contracts having a negative mark-to-market value is restricted to the potential future change in value. Credit risk on derivatives is, therefore, small in relation to a comparable balance sheet risk. In addition, credit exposure with individual counterparties can be reduced by the receipt of collateral and 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 HSBC has executed close-out netting agreements with the majority of its counterparties, notwithstanding the fact that HSBC deals only with the most creditworthy counterparties. Derivatives used for trading purposes The following tables summarise the contract amount, replacement cost, mark-to-market values and average mark-to-market values of third party and internal trading derivatives by product type. The replacement cost shown is the positive mark-to-market value and represents the accounting loss HSBC would incur if the counterparty to a derivative contract failed to perform according to the terms of the contract and the collateral, if any, for the amount due proved to be of no value. 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. Because all derivative instruments used for trading purposes are marked to market, carrying values are equal to mark-to-market values. Mark-to-market values are determined by reference to market rates prevailing on the date of valuation or by discounting future cash flows and include netted internal positions, except where otherwise indicated. 2001 2000 Spot and forward foreign exchange ........... Currency swaps, futures and options purchased ............................................... Currency options written ........................... Other contracts........................................... Total exchange rate contracts..................... Interest rate swaps...................................... Interest rate futures, forward rate agreements, collars and options purchased ............................................... Interest rate options written ....................... Contract amount US$m 685,674 127,120 36,087 7,530 856,411 1,013,807 408,758 87,245 Total interest rate contracts ........................ 1,509,810 Equities, futures and options purchased..... Equities options written ............................. Other contracts........................................... Total equities contracts .............................. 18,583 16,235 5,442 40,260 Replacement cost* US$m 7,770 3,045 – 104 10,919 12,703 1,261 – 13,964 1,309 – 197 1,506 Contract amount US$m 644,169 90,278 21,165 3,935 759,547 839,671 363,737 63,037 1,266,445 22,203 20,920 2,361 45,484 Netting ....................................................... (11,156) Total........................................................... 2,406,481 15,233 2,071,476 Replacement cost* US$m 10,149 2,342 – 108 12,599 8,748 863 – 9,611 2,094 – 51 2,145 (8,468) 15,887 * Third party contracts only 222 2001 2000 Mark-to- market values at year end US$m 11,182 (11,113) 14,043 (13,572) 1,506 (1,871) 26,731 (26,556) 11,156 Average mark-to- market values for the year US$m 11,933 (12,298) 12,790 (12,547) 1,737 (1,813) 26,460 (26,658) 9,977 Mark-to- market values at year end US$m 12,824 (13,309) 9,623 (10,013) 2,145 (2,347) 24,592 (25,669) 8,468 Average mark-to- market values for the year US$m 11,214 (13,973) 5,046 (6,551) 2,170 (2,674) 18,430 (23,198) 4,562 Equities Interest rate Exchange rate assets.......................... liabilities .................... assets.......................... liabilities .................... assets.......................... liabilities .................... assets.......................... liabilities .................... Netting ....................................................... Total The above amounts are stated after deducting cash collateral meeting the offset criteria of FRS5 as follows: Offset against assets .................................. Offset against liabilities ............................. 367 108 24 14 Derivatives used for risk management purposes The majority of the transactions undertaken for risk management purposes are between business units within HSBC, one of which is a trading desk, which then lays off the resulting position by trading in the external market. Internal positions are integral to HSBC’s asset and liability management and are included within analyses of non-trading positions in the tables below. The following table summarises the contract amount and replacement cost of derivatives used for risk management purposes by product type. The replacement cost shown represents the accounting loss HSBC would incur if the counterparty to a derivative contract failed to perform according to the terms of the contract and the collateral, if any, for the amount due proved to be of no value. 2001 2000 Contract amount US$m 55,552 10,832 66,384 Replacement cost* US$m 17 52 69 Contract amount US$m 73,668 6,474 80,142 174,194 541 155,389 3 544 – – – 26,654 182,043 571 19 590 Spot and forward foreign exchange ........... Currency swaps, futures and options purchased ............................................... Total exchange rate contracts..................... Interest rate swaps...................................... Interest rate futures, forward rate agreements, collars and options purchased ............................................... 8,091 Total interest rate contracts ........................ 182,285 Equities, futures and options purchased..... Other contracts........................................... Total equities contracts .............................. 333 297 630 * Third party contracts only Replacement cost* US$m 67 43 110 475 13 488 – – – 223 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) The table below summarises the carrying value and mark-to-market value of derivative contracts held for risk management purposes. Mark-to-market values for assets and liabilities arising from derivatives held for non- trading purposes are determined in the same way as those set out for trading derivatives above, including internal positions. 2001 2000 Carrying value US$m 860 (547) 1,332 (781) 13 – Mark-to- market values US$m 717 (289) 3,325 (2,247) 2 – Carrying value US$m 374 (510) 1,398 (608) 32 – Mark-to- market values US$m 566 (631) 2,728 (1,594) 96 – Exchange rate Interest rate Equities assets.......................... liabilities .................... assets.......................... liabilities .................... assets.......................... liabilities .................... Concentrations of credit risk Concentrations of credit risk exist if a number of counterparties are engaged in similar activities or activities in the same region or have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The following table analyses the replacement cost of all third party exchange rate, interest rate and equities contracts with positive mark-to-market gains, after netting where possible, by maturity and by category of counterparty at 31 December 2001 and 31 December 2000. The table shows that the replacement cost of derivatives is predominantly with banks and under five years. Less than 1 year 1-5 years Residual maturity Over 5 years Netting Governments..................................... Banks ................................................ Non-bank financial institutions – exchanges*..................................... – other............................................... Other sectors ..................................... 7 7,878 270 1,426 1,506 72 8,419 64 2,405 1,076 130 2,881 4 548 316 (64) (9,339) (26) (868) (859) 2001 Total 145 9,839 312 3,511 2,039 2000 Total 143 10,735 469 2,871 2,267 Total 2001 ........................................ 11,087 12,036 3,879 (11,156) 15,846 Total 2000......................................... 13,917 7,740 3,296 (8,468) 16,485 * Exchanges with margining requirements. 224 The following maturity profile of the notional principal values of third party derivative contracts outstanding as at 31 December 2001 and 31 December 2000 shows that the majority of contracts are executed over the counter and mature within one year. Less than 1 year US$m Residual Maturity 1-5 years US$m Over 5 years US$m 2001 Total US$m 2000 Total US$m Exchange rate, interest rate and equities contracts – exchanges*............................................. – other contracts........................................ 168,104 1,313,434 42,245 571,871 658 166,549 211,007 2,051,854 270,617 1,670,339 Total 2001 ................................................ 1,481,538 614,116 167,207 2,262,861 Total 2000................................................. 1,253,660 537,061 150,235 1,940,956 * Exchanges with margining requirements. (b) Other financial instruments (i) Financial instruments held for trading purposes Assets: Treasury bills and other eligible bills........................................................... Loans and advances to banks and customers ............................................... Debt securities ............................................................................................. Equity shares................................................................................................ Liabilities: Short positions in securities ......................................................................... Debt securities in issue ................................................................................ Deposits by banks and customer accounts ................................................... 2001 Mark-to- market values US$m 5,069 38,242 67,313 3,302 113,926 31,937 578 32,432 64,947 2000 Mark-to- market values US$m 7,269 28,830 45,864 3,466 85,429 23,040 477 22,561 46,078 The net trading assets above are funded by liabilities whose fair value is not materially different from their carrying value. 225 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) (ii) Financial instruments not held for trading purposes and for which a liquid and active market exists 2001 2000 Assets: Treasury bills and other eligible bills.. Debt securities .................................... Equity shares....................................... Liabilities: Debt securities in issue ....................... Subordinated liabilities ....................... Non-equity minority interests ............. Carrying value US$m 12,890 92,944 4,755 110,589 24,973 14,410 4,160 43,543 Mark-to- market values US$m 12,901 94,145 5,295 112,341 25,115 14,828 4,134 44,077 Carrying value US$m 15,862 86,954 4,638 107,454 27,479 16,222 5,171 48,872 Mark-to- market values US$m 15,831 87,744 5,773 109,348 27,630 16,168 5,535 49,333 Where possible, mark-to-market values have been estimated using market prices for these financial instruments. Where market prices are not available, values have been estimated using quoted prices for financial instruments with similar characteristics, or otherwise using a suitable valuation technique where practicable to do so. The valuation techniques used are: – Treasury bills and other eligible bills Mark-to-market value approximates to carrying value because these are mainly short-term in maturity with a carrying value not materially different from mark-to-market value. – Loans and advances to banks and customers For variable rate loans and advances with no significant change in credit risk, the carrying value is considered to represent mark-to-market value. The mark-to-market values of other loans and advances are estimated by discounting future cash flows using market interest rates. – Debt securities and equity shares Listed securities are valued at middle-market prices and unlisted securities at management’s valuation which takes into consideration future earnings streams, valuations of equivalent quoted securities and other relevant techniques. – Debt securities in issue, short positions in securities, subordinated liabilities and non-equity minority interests Mark-to-market values are estimated using quoted market prices at the balance sheet date. – Deposits by banks and customer accounts Deposits by banks and customer accounts which mature or reprice after six months are grouped by residual maturity. Fair value is estimated using discounted cash flows, applying either market rates, where applicable, or current rates offered for deposits of similar repricing maturities. (c) Gains and losses on hedges Unrecognised gains and losses Gains and losses on instruments used for hedging are recognised in line with the underlying items which are being hedged. The unrecognised gains on instruments used for hedging as at 31 December 2001 were US$3,137 226 million (2000: US$1,797 million) and the unrecognised losses were US$2,506 million (2000: US$1,318 million). Unrecognised gains of US$1,217 million and unrecognised losses of US$983 million are expected to be recognised in 2002. Of the gains and losses included in the profit and loss account in 2001, US$887 million gains and US$603 million losses were unrecognised at 1 January 2001. (d) Liquidity management HSBC’s liquidity management process is discussed in the ‘Financial Review’ section on page 112 from the paragraph under the heading Liquidity management to the bullet point ‘maintenance of liquidity contingency plans’. 39 Memorandum Items (a) HSBC Contingent liabilities: Acceptances and endorsements...... Guarantees and assets pledged as collateral security: – guarantees and irrevocable letters of credit ........................ Other contingent liabilities............. Commitments: Documentary credits and short- 2001 Credit equivalent amount US$m Risk- weighted amount US$m Contract amount US$m 2000 Credit equivalent amount US$m Risk- weighted amount US$m Contract amount US$m 4,219 2,840 2,792 5,160 3,171 3,119 39,817 9 30,428 9 24,700 9 33,968 14 26,110 14 23,298 12 44,045 33,277 27,501 39,142 29,295 26,429 term trade-related transactions ... 5,580 1,917 1,125 6,513 2,183 1,323 Forward asset purchases and forward forward deposits placed 1,669 1,669 Undrawn note issuing and revolving underwriting facilities Undrawn formal standby facilities, credit lines and other commitments to lend: 381 156 106 191 655 302 655 152 294 151 – over 1 year .............................. – 1 year and under...................... 35,156 155,673 17,690 – 16,106 – 36,567 138,679 18,284 – 17,070 – 198,459 21,432 17,528 182,716 21,274 18,838 The table above gives the nominal principal amounts, credit equivalent amounts and risk-weighted amounts of off-balance-sheet transactions. The credit equivalent amounts are calculated for the purposes of deriving the risk-weighted amounts. These are assessed in accordance with the Financial Services Authority’s guidelines which implement the 1988 Basel Capital Accord on capital adequacy and depend on the status of the counterparty and the maturity characteristics. Contingent liabilities and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments to extend credit. The contractual amounts represent the amounts at risk 227 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) should the contract be fully drawn upon and the client default. Since a significant portion of guarantees and commitments are expected to expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements. (b) HSBC Holdings HSBC Holdings had no contingent liabilities (2000: US$ nil). In addition, HSBC Holdings enters into guarantees and letters of support on behalf of other HSBC undertakings in the normal course of business. (c) Concentration of contingent liabilities and commitments HSBC has the following concentrations of exposure to contingent liabilities and commitments and these are determined on the basis set out in Note 47(a): Contract amounts Europe Hong Kong US$m US$m Rest of Asia-Pacific US$m North America US$m Latin America US$m 9,260 6,827 5,576 5,728 7,523 6,410 923 643 Total US$m 44,045 39,142 50,743 47,888 26,191 24,498 45,245 38,300 3,883 3,280 198,459 182,716 Contingent Liabilities 2001 .................................... 2000 .................................... Commitments 2001 .................................... 2000 .................................... 20,763 19,534 72,397 68,750 40 Market risk management HSBC’s market risk management process is discussed in the ‘Financial Review’ section on pages 114 and 115 from the paragraph under the heading ‘Market risk management’ to the paragraph ended ‘impact of extreme events on the market risk exposures of HSBC’. (a) Trading VAR VAR is a technique that 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. Trading VAR for HSBC for 2001was: At 31 December 2001 US$m Minimum during the year US$m Maximum during the year US$m Total trading activities .................................. Foreign exchange trading positions .............. Interest rate trading positions........................ Equities trading positions.............................. 122.0 13.3 111.7 45.5 60.8 1.8 48.1 27.4 173.4 50.6 160.2 79.6 Average for the year US$m 102.2 22.1 86.7 41.9 228 Trading VAR for HSBC for 2000 was: Combined HSBC At 31 December 2000 US$m 75.0 19.1 58.9 39.9 Excluding former Republic operations At 31 December 2000 US$m Minimum during the year US$m Maximum during the year US$m Average for the year US$m 64.8 17.2 45.0 39.9 44.5 8.9 32.2 23.6 83.7 26.8 66.4 53.4 63.1 16.6 46.9 36.1 Total trading activities ............ Foreign exchange trading positions .............................. Interest rate trading positions.. Equities trading positions........ Trading VAR for CCF is included in the above table from the date of acquisition. Trading VAR for the former Republic operations at 31 December 2000 was US$23.2 million on a variance/co- variance basis. On a historical simulation approach, trading VAR for the former Republic operations at 31 December 2000 was US$11.7 million, the maximum during 2000 was US$37.1 million, the minimum US$9.3 million and the average US$18.8 million. The scope of calculation of VAR on a historical simulation approach was refined at 30 June 2000, following a review of its basis, to be more consistent with that of the rest of HSBC. The maximum, minimum and average on a historical simulation approach for each half year are set out below: Maximum for the half-year ......................................... Minimum for the half-year.......................................... Average for the half-year ............................................ Former Republic operations Total trading First half 2000 US$m 37.1 12.5 22.7 Second half 2000 US$m 19.1 9.3 13.6 The VAR noted for foreign exchange positions excludes structural foreign currency exposures, since related gains or losses are taken through reserves. (b) Interest rate sensitivity gap table In accordance with FRS 13, the table below discloses the mismatching of the dates on which interest receivable on assets and interest payable on liabilities are next reset to market rate on a contractual basis or, if earlier, the dates on which the instruments mature. Actual reset dates may differ from contractual dates owing to prepayments and the exercise of options. In addition, contractual terms may not be representative of the behaviour of assets and liabilities. For these reasons, HSBC manages its interest rate risk on a different basis from that presented below, taking into account the behavioural characteristics of the relevant assets and liabilities. 229 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) More than three months but not more than six months US$m Not more than three months US$m More than six months but not more than one year US$m More than one year but not more than five years More than five years US$m US$m Non- interest bearing US$m Banking book total US$m Trading book total US$m Total US$m 10,421 1,469 818 75,585 6,068 4,001 194 648 – – 12,902 5,069 17,971 275 2,768 89,345 15,296 104,641 200,329 17,426 13,429 34,637 17,224 2,658 285,703 22,946 308,649 36,563 1,432 4,672 – 6,651 – 28,385 – 16,244 – 5,506 75,310 98,021 76,742 70,615 19,238 168,636 95,980 31 December 2001 Assets Treasury bills and other eligible bills Loans and advances to banks ............... Loans and advances to customers......... Debt securities and equity shares........ Other assets ............. Total assets............. 324,330 29,635 24,899 63,864 33,743 86,242 562,713 133,164 695,877 Liabilities Deposits by banks.... Customer accounts .. Debt securities in issue...................... Other liabilities........ Loan capital and other subordinated liabilities.............. Minority interests and shareholders’ funds..................... Internal funding of (34,477) (354,944) (2,182 ) (12,976 ) (1,330) (10,422) (1,009) (3,833) (310) (614) (2,888) (46,214) (42,196 ) (429,003 ) (11,444) (20,988) (53,640 ) (449,991 ) (14,248) (32) (2,011 ) – (2,048) (6) (6,922) (285) (1,291) (32) – (48,334) (26,520 ) (48,689 ) (578) (48,510) (27,098 ) (97,199 ) (5,016) (1,286 ) (1,062) (2,517) (5,599) – (15,480 ) – (15,480 ) – – – – – (51,005) (51,005 ) (1,464) (52,469) the trading book... 41,005 2,437 2,755 4,309 76 (402) 50,180 (50,180) – (367,712) (16,018 ) (12,113) (10,257) (7,770) (148,843) (562,713 ) (133,164) (695,877) Total liabilities ....... Off-balance-sheet items.................... Interest rate (9,682) 2,436 (2,656) 10,712 (810) – sensitivity gap..... (53,064) 16,053 10,130 64,319 25,163 (62,601) Cumulative interest rate sensitivity gap..... (53,064) (37,011 ) (26,881) 37,438 62,601 – – – – – – – – – – The presentation of the interest rate sensitivity gap table has been changed to disclose trading balances to facilitate reconciliation with the balance sheet. Balances representing internal funding of trading activities have been moved from ‘Other assets’ and ‘Other liabilities’ to form a single line ‘Internal funding of the trading book’. A positive interest rate sensitivity gap exists where more assets than liabilities reprice during a given period. Although a positive gap position tends to benefit net interest income in a rising interest rate environment, the actual effect will depend on a number of factors, including the extent to which repayments are made earlier or later than the contracted date and variations in interest rates within repricing periods and among currencies. Similarly, a negative interest rate sensitivity gap exists where more liabilities than assets reprice during a given period. In this case, a negative gap position tends to benefit net interest income in a declining interest rate 230 environment, but again the actual effect will depend on the same factors as for positive interest rate gaps, as described above. More than three months but not more than six months US$m More than six months but not more than one year US$m More than one year but not more than five years US$m Not more than three months US$m More than five years US$m Non- interest bearing US$m Banking book total US$m Trading book total US$m Total US$m 11,107 2,603 1,969 97,675 6,652 4,364 175 440 8 – 15,862 7,269 23,131 107 4,203 113,441 12,591 126,032 189,088 16,310 11,975 33,056 15,587 7,582 273,598 16,239 289,837 36,574 1,433 5,114 – 11,145 – 20,502 – 13,479 – 4,778 73,999 91,592 75,432 49,330 18,460 140,922 93,892 31 December 2000 Assets Treasury bills and other eligible bills Loans and advances to banks ............... Loans and advances to customers ........ Debt securities and equity shares........ Other assets ............. Total assets.............. 335,877 30,679 29,453 54,173 29,181 90,562 569,925 103,889 673,814 Liabilities Deposits by banks ... Customer accounts .. Debt securities in issue .................... Other liabilities........ Loan capital and other subordinated liabilities.............. Minority interests and shareholders’ funds.................... Internal funding of (41,447) (342,611) (2,598 ) (13,551 ) (1,189) (11,947) (602) (4,443) (55) (673) (50,307 ) (4,416) (41,029) (414,254 ) (60,053 ) (9,746) (12,815) (427,069 ) (16,955) (45) (2,050 ) (6 ) (2,748) (12) (3,534) (178) (2,192) (121) – (49,057) (27,479 ) (49,419 ) (477) (40,216) (27,956 ) (89,635 ) (5,171) (1,415 ) (261) (3,140) (6,233) (2) (16,222 ) – (16,222 ) – – – – – (50,102) (50,102 ) (2,777) (52,879 ) the trading book... 39,418 (305 ) (100) (1,142) (35) 22 37,858 (37,858) – Total liabilities ........ (366,811) (19,925 ) (16,257) (13,039) (9,309) (144,584) (569,925 ) (103,889) (673,814 ) Off-balance-sheet items.................... (9,352) 4,588 (1,094) 5,364 494 – Interest rate sensitivity gap...... (40,286) 15,342 12,102 46,498 20,366 (54,022) Cumulative interest rate sensitivity gap....................... (40,286) (24,944 ) (12,842) 33,656 54,022 – – – – – – – – – – 231 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) (c) 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 .................................................................................................... 2001 US$m 260,243 435,634 695,877 276,575 419,302 695,877 2000 US$m 232,918 440,896 673,814 260,551 413,263 673,814 (d) Structural currency exposures HSBC’s structural foreign currency exposure is represented by the net asset value of its foreign currency equity and subordinated debt investments in subsidiary undertakings, branches, joint ventures and associates. Gains or losses on structural foreign currency exposures are taken to reserves. HSBC’s management of structural foreign currency exposures is discussed in the ‘Financial Review’ section on pages 116 and 117. HSBC’s structural currency exposures as at the year-end were as follows: 2001 Currency of structural exposure Euros .................................................... Hong Kong dollars ............................... Sterling ................................................. Swiss francs.......................................... Canadian dollars ................................... Brazilian reais....................................... UAE dirham ......................................... Singapore dollars.................................. Malaysian ringgit.................................. Saudi riyals........................................... Turkish lira ........................................... Indian rupees ........................................ Australian dollars ................................. Korean won .......................................... Chilean pesos........................................ Taiwanese dollars ................................. Thai baht............................................... Maltese lira........................................... Cyprus pounds...................................... Philippine pesos.................................... Argentine pesos* .................................. Others, less than US$100 million.. Total ..................................................... Net investments in overseas operations US$m 13,944 9,407 8,303 1,241 959 454 440 410 403 395 395 286 272 231 170 169 162 155 108 103 (140) 559 38,426 Currency hedges other than borrowings US$m – – (120 ) – – (301 ) – (97 ) – – – – – – – – – – – – – (64 ) (582 ) Borrowings taken out in the functional currencies of the overseas operations in order to hedge the net investments in such operations US$m – (3) – (559) – – – – – – – – (52) – – – – – – – – – (614) Remaining structural currency exposures US$m 13,944 9,404 8,183 682 959 153 440 313 403 395 395 286 220 231 170 169 162 155 108 103 (140) 495 37,230 * The negative net investment in Argentine pesos reflects the deficiency in domestic net assets following the pesification of certain balances formerly denominated in US dollars. 232 2000 Currency of structural exposure Euros ...................................................... Hong Kong dollars ................................. Sterling................................................... Swiss francs ........................................... Canadian dollars..................................... Singapore dollars.................................... UAE dirham ........................................... Brazilian reais ........................................ Argentine pesos...................................... Malaysian ringgit ................................... Saudi riyals............................................. Australian dollars ................................... Indian rupees .......................................... Korean won ............................................ Chilean pesos ......................................... Maltese lira............................................. Cyprus pounds........................................ Thai baht ................................................ Others, less than US$100 million.. Total ....................................................... Net investments in overseas operations US$m 14,363 9,808 7,993 1,024 889 544 454 449 448 378 360 280 232 206 203 144 130 109 416 38,430 Currency hedges other than borrowings US$m – – (97) – – – – – – – – – – – – – – – (61) (158) Borrowings taken out in the functional currencies of the overseas operations in order to hedge the net investments in such operations US$m – (3) (40) (136) (10) – – – – – – (46) – – – – – – – (235) Remaining structural currency exposures US$m 14,363 9,805 7,856 888 879 544 454 449 448 378 360 234 232 206 203 144 130 109 355 38,037 233 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 41 Reconciliation of operating profit to net cash flow from operating activities Operating profit .......................................................................... Change in prepayments and accrued income ................................ Change in accruals and deferred income ...................................... Interest on finance leases and similar hire purchase contracts ...... Interest on subordinated loan capital ............................................ Depreciation and amortisation ...................................................... Amortisation of discounts and premiums ..................................... Provisions for bad and doubtful debts........................................... Loans written off net of recoveries ............................................... Provisions for liabilities and charges ........................................... Provisions utilised......................................................................... Amounts written off fixed asset investments ................................ Net cash inflow from trading activities ..................................... Change in items in the course of collection from other banks ...... Change in treasury bills and other eligible bills............................ Change in loans and advances to banks ........................................ Change in loans and advances to customers ................................. Change in other securities............................................................. Change in other assets................................................................... Change in deposits by banks......................................................... Change in customer accounts........................................................ Change in items in the course of transmission to other banks ...... Change in debt securities in issue ................................................. Change in other liabilities* ........................................................... Elimination of exchange differences† .......................................... 2001 US$m 7,153 452 (2,207) 27 1,074 1,933 (640) 2,037 (1,893) 1,229 (542) 125 8,748 1,009 2,200 19,601 (16,072) (20,307) (1,856) (8,546) 19,799 (827) (1,437) 9,179 1,424 2000 US$m 9,447 (772) 1,863 26 1,216 1,591 (727) 932 (1,653) 723 (510) 36 12,172 656 (826) 838 (10,265) (16,006) (1,858) (2,333) 42,153 (1,576) (17,019) 7,004 2,283 1999 US$m 7,409 359 249 26 826 999 (112) 2,073 (1,021) 765 (478) 28 11,123 304 (2,007) (5,832) 1,126 11,293 7,669 (4,700) 10,269 559 (2,324) (4,618) (1,318) Net cash inflow from operating activities 12,915 15,223 21,544 * † The change in other liabilities excludes the creditor of US$9,733 million at 31 December 1999 in respect of the acquisitions of the former Republic and Safra Republic businesses, as this was a non-operating item. The settlement of this creditor was in January 2000 and is recorded under ‘Acquisitions and disposals’ in the Consolidated Cash Flow Statement. Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as it cannot be determined without unreasonable expense. 234 42 Changes in financing during the year Balance at 1 January 2001 ................................ Shares issued in lieu of dividends ..................... Acquisition of subsidiaries ............................... Issued during the year ....................................... Repaid during the year ...................................... Net cash (outflow)/inflow from financing ........ Exchange and other movements........................ Subordinated loan capital US$m 16,222 – 24 456 (965) (509) (257) Balance as at 31 December 2001 .................... 15,480 Balance at 1 January 2000 ................................ Shares issued in lieu of dividends ..................... Acquisition of subsidiaries ............................... Shares issued on the acquisition of CCF.......... Issued during the year ....................................... Costs incurred with share issue......................... Repaid during the year ...................................... Own shares acquired by employee share ownership trust†............................................ Net cash inflow/(outflow) from financing ........ Capitalised on issue of shares to QUEST.......... Own shares acquired by employee share Ownership trust†............................................ Exchange and other movements........................ 15,423 – 860 – 948 – (708) – 240 – – (301) Preference shares* US$m 5,171 – – – (825) (825) (55) 4,291 1,583 – – – 3,626 – – – 3,626 – – (38) Ordinary shares US$m 4,634 37 – 7 – 7 – 4,678 4,230 38 – 339 13 – – (20) (7) 14 20 – Balance as at 31 December 2000 ...................... 16,222 5,171 4,634 * † Preference shares in issue are in subsidiary undertakings (Note 34). See Note 26(a). Share premium US$m 3,305 (37) – 105 – 105 – 3,373 2,882 (38) – – 151 – – (536) (385) 309 536 1 3,305 235 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Balance at 1 January 1999 ................................ Shares issued in lieu of dividends ..................... Acquisition of subsidiaries ............................... Issued during the year ....................................... Costs incurred with share issue......................... Repaid during the year ...................................... Net cash inflow from financing ........................ Capitalised on issue of shares to QUEST ......... Shares cancelled on reorganisation ................... Shares issued on reorganisation ........................ Exchange and other movements ....................... Subordinated loan capital US$m 10,844 – 3,202 2,101 – (599) 1,502 – – – (125) Balance as at 31 December 1999 ...................... 15,423 * Preference shares in issue are in subsidiary undertakings (Note 34). 43 Analysis of cash Preference shares* US$m 870 – 702 – – – – – – – 11 1,583 Ordinary shares US$m 3,443 28 – 128 – – 128 – (3,515) 4,204 (58) Share premium US$m 480 (28) – 2,990 (30) – 2,960 185 – – (715) 4,230 2,882 HSBC 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 2001, these amounted to US$2,030 million (2000: US$1,604 million; 1999: US$1,842 million). (a) Changes in cash during the year Balance at 1 January .............................................................. Net cash (outflow)/inflow before the effect of foreign exchange movements ......................................................... Effect of foreign exchange movements.................................. Balance at 31 December ........................................................ 2001 US$m 24,338 (1,706) (408) 22,224 (b) Analysis of the balances of cash as classified in the consolidated balance sheet Cash and balances at central banks ........................................ Loans and advances to banks................................................. 2001 US$m 6,185 16,039 22,224 2000 US$m 17,705 7,470 (837) 24,338 2000 US$m 5,006 19,332 24,338 1999 US$m 14,203 3,808 (306) 17,705 1999 US$m 6,179 11,526 17,705 44 Litigation HSBC through a number of its subsidiary undertakings, is named in and is defending legal actions in various jurisdictions arising from its normal business. None of these proceedings is regarded as material litigation. On 17 December, 2001, HSBC USA Inc. announced that it had settled civil law suits brought by 51 of the 53 Japanese plaintiffs who have asserted claims arising from the involvement of its subsidiary, Republic New York Securities Corporation (‘RNYSC’), with its customers Princeton Global Management Ltd. and affiliated entities and their Chairman Martin Armstrong (the ‘Princeton Note Matter’). It also announced that it had resolved all of the previously reported regulatory and criminal investigations arising from the Princeton Note Matter. The Princeton Note Matter came to light prior to HSBC’s acquisition of Republic New York Corporation, RNYSC’s parent, in 236 December 1999. As part of the resolution, RNYSC, now a dormant subsidiary, pleaded guilty in federal court in Manhattan to two federal criminal charges arising from the misconduct of certain of its former executives in assisting Martin Armstrong’s scheme to defraud numerous purchasers of Princeton Notes, which Armstrong offered for sale in Japan. Following the acquisition by HSBC, RNYSC ceased active business during the year 2000, and the employment of all the RNYSC executives associated with RNYSC’s misconduct was terminated. The United States Attorney’s Office in its public filing acknowledged HSBC’s ‘exemplary cooperation’ and recommended to the Court that no criminal fine be imposed on RNYSC. Instead, RNYSC agreed to the imposition of a restitution order requiring it to make payments totalling approximately US$569 million to Princeton noteholders, as compensation for their out-of-pocket losses. Since RNYSC’s capital was about US$81 million, HSBC USA Inc. agreed to pay the remaining amount of compensation due to the noteholders in exchange for their termination of the pending civil litigation against HSBC USA Inc. and RNYSC, and in connection with the United States Attorney’s Office commitment not to pursue any claims against RNYSC’s parent company or its banking affiliate. In addition, the settling Princeton noteholders can expect to receive payments totalling approximately US$72 million from assets held by Princeton’s court-appointed receiver. At hearings held on 7 and 9 January 2002 the court entered the restitution order agreed to by RNYSC and the US Attorney’s Office and also approved the related settlement between HSBC and the Princeton Receiver. Promptly thereafter 17 lawsuits filed in the federal court in Manhattan by 51 Princeton noteholders against HSBC USA Inc., RNYSC and others were dismissed pursuant to the previously-announced settlements, terminating the plaintiffs’ claims for damages arising from unpaid Princeton Notes with face amounts totalling approximately US$1 billion. RNYSC has also reached settlements with seven additional Princeton noteholders who did not file suit. The after tax cost to date of the settlement is within the range of the price reduction taken by Republic’s largest stockholders, companies controlled by the late Mr. Edmond Safra, at the time of HSBC’s acquisition of Republic. Two of the noteholders, whose civil suits seek damages arising from unpaid Princeton Notes with face amounts totalling approximately US$125 million, are not included in the settlement and their civil suits will continue. The US Government excluded one of them from the restitution order because that noteholder is being criminally prosecuted in Japan for its conduct relating to its Princeton Notes, and excluded the other because the sum it is likely to recover from the Princeton Receiver exceeds its losses attributable to its funds transfers with RNYSC as calculated by the US Government. Under the regulatory settlements RNYSC agreed with the Securities and Exchange Commission to the revocation of its broker-dealer registration and with the Commodity Futures Trading Commission to the revocation of various commodities-related licenses and the payment of a US$5 million civil monetary penalty. It is also expected that RNYSC will shortly reach an agreement with The New York Mercantile Exchange resolving Princeton-related matters. 45 Capital commitments Expenditure contracted for......................................................................................... Expenditure authorised by Directors but not contracted for ...................................... 2001 US$m 592 265 857 2000 US$m 412 110 522 In addition, HSBC has committed to provide a further US$403 million (2000: US$523 million) of capital to its joint venture Merrill Lynch HSBC Limited. 237 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) 46 Lease commitments At the year-end, annual commitments under non-cancellable operating leases were: Leasehold land and buildings Operating leases which expire: – within 1 year ........................................................................................................... – between 1 and 5 years ............................................................................................. – over 5 years............................................................................................................. Equipment Operating leases which expire: – within 1 year ........................................................................................................... – between 1 and 5 years ............................................................................................. 2001 US$m 2000 US$m 37 159 164 360 33 146 136 315 2001 US$m 2000 US$m – 11 11 1 10 11 47 Segmental analysis As HSBC is not required to disclose turnover, no segmental analysis of turnover is included. Turnover of non- banking businesses is included in other operating income above. The allocation of earnings reflects the benefit of shareholders’ funds to the extent that these are actually allocated to businesses in the segment by way of intra-HSBC capital and funding structures. Common costs are included in segments on the basis of the actual recharges made. In 2000, HSBC disclosed an analysis of its results by two classes of business, distinguishing the results of the commercial banking and investment banking operations. This analysis is not provided for the current year, since it no longer reflects the basis on which HSBC manages its business in practice as investment banking has increasingly been aligned with HSBC’s major corporate business. (a) By geographical region Geographical information has been classified by the location of the principal operations of the subsidiary undertaking, or in the case of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, HSBC Bank Middle East and HSBC Bank USA operations, by the location of the branch responsible for reporting the results or for advancing the funds. Due to the nature of HSBC’s structure, the analysis of profits and net assets shown below includes intra-HSBC items between geographical regions. The ‘Rest of Asia- Pacific’ geographical segment includes the Middle East, India and Australasia. 238 Total assets: Europe*.......................................... Hong Kong..................................... Rest of Asia-Pacific ....................... North America* ............................. Latin America* .............................. At 31 December 2001 % 43.3 25.6 9.0 19.9 2.2 US$m 297,701 175,652 62,151 136,526 15,210 At 31 December 2000 % 44.4 26.5 8.5 17.7 2.9 US$m 295,274 176,545 56,676 118,053 19,073 At 31 December 1999 % 37.7 29.6 9.9 19.7 3.1 US$m 211,222 165,420 55,291 110,120 17,181 687,240 100.0 665,621 100.0 559,234 100.0 Add: Hong Kong SAR Government certificates of indebtedness ............................... 8,637 Total assets..................................... 695,877 8,193 673,814 9,905 569,139 * In 2000 included within total assets in Europe, Latin America and the rest of Asia-Pacific are amounts of US$67,484 million, US$2,967 million and US$1,130 million, respectively in relation to businesses acquired that year. Net assets: Europe............................................ Hong Kong..................................... Rest of Asia-Pacific ....................... North America ............................... Latin America ................................ At 31 December 2001 % 62.2 20.9 6.9 10.0 0.0 US$m 28,609 9,630 3,165 4,591 (16) At 31 December 2000 % 61.6 19.1 6.9 9.5 2.9 US$m 28,073 8,709 3,133 4,313 1,342 At 31 December 1999 % 50.0 26.8 7.7 11.1 4.4 US$m 16,695 8,960 2,561 3,730 1,462 Total net assets............................... 45,979 100.0 45,570 100.0 33,408 100.0 239 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Profit on ordinary activities before tax: Year ended 31 December 2001 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 Hong Kong US$m 8,971 (4,806) 4,165 26 1,358 (186) 218 436 6,017 (2,140) 3,877 Rest of Asia- Pacific US$m 3,612 (2,130) 1,482 3 810 (129) 395 58 2,619 (1,405) 1,214 North America US$m Latin America US$m Total US$m 6,853 (4,451) 2,402 29 1,052 (154) 324 205 3,858 (2,630) 1,228 2,453 (1,340) 36,397 (21,672) 1,113 12 640 (131) 40 358 14,725 186 8,873 (1,403) 1,685 2,079 2,032 (1,566) 26,145 (15,661) 466 10,484 Europe US$m 14,508 (8,945) 5,563 116 5,013 (803) 708 1,022 11,619 (7,920) 3,699 debts .............................................. (441) (197) (172) (287) (940) (2,037) Provisions for contingent liabilities and commitments .......................... (30) Loss from foreign currency redenomination in Argentina......... – Amounts written off fixed asset 6 – investments.................................... (90) (18) Operating profit/(loss)....................... Share of operating loss in joint 3,138 3,668 ventures ........................................ (79) Share of operating profit in associates....................................... Gains on disposal of investments and tangible fixed assets................ Profit/(loss) on ordinary activities 42 441 – 17 198 (43) (582) – (649) – (11) 988 (5) 99 6 – (520) (520) (5) 354 (7) 5 129 481 (1) (995) (125) 7,153 – 1 – (91) 164 774 (994) 8,000 before tax....................................... 3,542 3,883 1,088 240 Profit on ordinary activities before tax: Year ended 31 December 2000 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 Europe* US$m Hong Kong US$m 14,257 (9,269) 11,447 (7,450) 4,988 84 4,909 (809) 787 951 10,910 (6,866) 4,044 3,997 34 1,359 (191) 229 359 5,787 (1,987) 3,800 debts .............................................. (348) (248) Rest of Asia- Pacific US$m 3,930 (2,563) 1,367 3 840 (130) 324 48 2,452 (1,297) 1,155 15 5 (3) North America US$m Latin America US$m Total US$m 7,290 (5,138) 2,152 68 981 (128) 218 178 3,469 (2,506) 963 2,480 (1,261) 39,404 (25,681) 1,219 8 624 (144) 68 397 13,723 197 8,713 (1,402) 1,626 1,933 2,172 (1,648) 24,790 (14,304) 524 10,486 (147) (204) (932) 1 – – (2) 35 850 – (1) 319 – 1 (9) (71) (36) 9,447 (51) 75 304 311 9,775 Provisions for contingent liabilities and commitments .......................... Amounts written off fixed asset investments.................................... Operating profit ................................ Share of operating loss in joint ventures ........................................ Share of operating (loss)/profit in associates....................................... Gains on disposal of investments (67) (23) (10) (9) 3,606 3,533 1,172 817 (51) (45) – 21 – 100 and tangible fixed assets................ 148 137 (7) Profit on ordinary activities before tax.................................................. 3,658 3,691 1,265 * Included within profit on ordinary activities before tax and goodwill amortisation in Europe is US$169 million in relation to businesses acquired during the year. Management estimates the contribution from acquisitions made at the end of 1999 to profits on ordinary activities before tax, restructuring charges, costs of funding and goodwill amortised in the year, to be US$850 million (of which approximately US$500 million is estimated to relate to Europe). 241 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Profit on ordinary activities before tax: Year ended 31 December 1999 Interest receivable ............................. Interest payable ................................. Net interest income ........................... Dividend income............................... Fees and commissions receivable ..... Fees and commissions payable ......... Dealing profits .................................. Other operating income .................... Operating income.............................. Operating expenses ........................... Operating profit before provisions.... Provisions for bad and doubtful Hong Kong US$m 9,814 (6,079) 3,735 39 1,133 (169) 211 338 5,287 (1,896) 3,391 Rest of Asia- Pacific US$m 3,486 (2,246) 1,240 2 761 (116) 300 36 2,223 (1,162) 1,061 Europe US$m 10,298 (6,067) 4,231 93 4,144 (720) 543 876 9,167 (5,454) 3,713 North America US$m Latin America US$m Total US$m 30,358 (18,368) 11,990 157 7,280 (1,263) 1,299 1,737 2,081 (984) 1,097 11 562 (171) 64 324 1,887 (1,450) 21,200 (11,547) 437 9,653 4,679 (2,992) 1,687 12 680 (87) 181 163 2,636 (1,585) 1,051 debts .............................................. (438) (585) (809) (108) (133) (2,073) Provisions for contingent liabilities and commitments .......................... (114) Amounts written off fixed asset investments.................................... Operating profit ................................ Share of operating (loss)/profit in (20) 3,141 associates....................................... (1) Gains on disposal of investments and tangible fixed assets................ 182 Profit on ordinary activities before 2 (5) 2,803 15 236 (30) (1) 221 94 14 (1) – (143) – 942 4 13 (2) 302 11 5 (28) 7,409 123 450 tax.................................................. 3,322 3,054 329 959 318 7,982 Total interest receivable and total interest payable include intra-HSBC interest of US$1,136 million (2000: US$1,658 million; 1999: US$1,154 million). Fees and commissions receivable and fees and commissions payable include intra-HSBC items of US$117 million (2000: US$137 million; 1999: US$131 million). Other operating income and operating expenses include intra-HSBC items of US$257 million (2000: US$217 million; 1999: US$198 million). (b) By country of domicile HSBC Holdings is registered and domiciled in the United Kingdom. (i) Profit on ordinary activities before tax in the United Kingdom Operating income............................................................. Profit on ordinary activities before tax ............................ 2001 US$m 8,394 3,147 2000 US$m 8,596 3,162 1999 US$m 8,111 2,707 Operating income includes intra-HSBC income of US$517 million (2000: US$506 million; 1999: US$221 million). Profit on ordinary activities before tax includes profit arising on intra-HSBC transactions of US$488 million (2000: US$492 million; 1999: US$192 million). 242 (ii) Geographical analysis of tangible fixed assets United Kingdom .............................................................. Other ................................................................................ Total................................................................................. 2001 US$m 5,270 8,251 13,521 2000 US$m 5,504 8,517 14,021 1999 US$m 5,469 7,399 12,868 Other includes assets held in Hong Kong amounting to US$4,589 million (2000: US$4,954 million; 1999: US$4,733 million). 48 Related party transactions (a) Transactions, arrangements and agreements involving Directors and others Particulars of transactions, arrangements and agreements entered into by subsidiary undertakings of HSBC Holdings with Directors and connected persons and companies controlled by them and with officers of HSBC Holdings disclosed pursuant to section 232 of the Companies Act 1985 are as follows: Directors and connected persons and companies controlled by them: Loans and credit card transactions (including US$259,172 in credit card transactions (2000: US$319,000) and US$34,541,955 in guarantees (2000: US$6,706,000))........ Officers: Loans and credit card transactions (including US$149,753 in credit card transactions (2000: US$140,000) and US$nil in guarantees (2000: US$ nil)) ................................ 2001 2000 Number US$m Number US$m 150 716 154 1,127 27 13 24 7 Particulars of Directors’ transactions are recorded in a register held at the Registered Office of HSBC Holdings which is available for inspection by members. The transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features. (b) Transactions with other related parties of HSBC Joint ventures Information relating to joint ventures can be found in the ‘Notes on the Financial Statements’ where the following are disclosed: − Notes 15 and 16: amounts due from joint ventures; − Note 21: interests in joint ventures and principal joint ventures; and − Note 28 and 29: amount due to joint ventures. During the year HSBC charged HSBC Merrill Lynch US$146.0 million (2000: US$6.7 million) for services provided during the year. Associates Information relating to associates can be found in the ‘Notes on the Financial Statements’ where the following are disclosed: 243 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) − Notes 15 and 16: amounts due from associates; − Note 22: interests in associates; principal associates and interests in loan capital; and − Notes 28 and 29: amounts due to associates. Pension funds At 31 December 2001, US$12.5 billion (2000: US$14.0 billion) of HSBC pension fund assets were under management by HSBC companies of which US$1,167 million (2000: US$1,195 million) is included in HSBC’s balance sheet under ‘Other assets’ in ‘Long-term assurance assets attributable to policyholders’. Fees to HSBC companies in connection with such management amounted to US$27 million (2000: US$27 million). HSBC’s pension funds had deposits of US$275 million (2000: US$303 million) with banking subsidiaries within HSBC. 49 UK and Hong Kong accounting requirements The financial statements have been prepared in accordance with UK accounting requirements; there would be no material differences had they been prepared in accordance with Hong Kong Accounting Standards, 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 HSBC properties that do not represent impairments. If HSBC had prepared its financial statements under Hong Kong Statement of Standard Accounting Practice 17 ‘Property, plant and equipment’, there would have been a net charge to the profit and loss account of US$38.9 million (2000: US$17 million) in respect of valuations below depreciated historical cost (of which a credit of US$1.4 million (2000: US$1.4 million) relates to minority interests). If HSBC had prepared its financial statements under Hong Kong Statement of Standard Accounting Practice 24 ‘Accounting for Investments in Securities’, US$419 million (2000: US$968 million) would have been credited to reserves in respect of changes in the fair value of its long-term equity investments. In accordance with Statement of Standard Accounting Practice 17 ‘Post balance sheet events’, HSBC has recorded dividends declared after the period end in the period to which they relate. If HSBC had prepared its financial statements in accordance with Hong Kong Statement of Standard Accounting Practice 9 ‘Events after the balance sheet date’, dividends would be recorded in the period in which they are declared and there would have been an increase in reserves at 31 December 2001 of US$2,700 million (at 31 December 2000: US$2,627 million). HSBC Holdings has recorded its investment in HSBC undertakings at net asset value, including attributable goodwill. If HSBC Holdings had prepared its individual financial statements in accordance with Hong Kong Statement of Standard Accounting Practice 32 ‘Consolidated Financial Statements and Accounting for Investments in Subsidiaries’, and recorded its investment in HSBC undertakings at cost, there would have been a reduction in the reserves of HSBC Holdings at 31 December 2001 of US$8,962 million (at 31 December 2000: US$8,466 million). There would have been no impact on the consolidated financial statements of HSBC. 244 50 Differences between UK GAAP and US GAAP The consolidated financial statements of HSBC are prepared in accordance with UK generally accepted accounting principles (‘GAAP’) which differ in certain significant respects from US GAAP. The following is a summary of the significant differences applicable to HSBC: UK GAAP Leasing US GAAP Finance lease income is recognised so as to give a constant rate of return on the net cash investment in the lease, taking into account tax payments and receipts associated with the lease. Unearned income on finance leases is taken to income at a rate calculated to give a constant rate of return on the investment in the lease, but no account is taken of the tax flows generated by the lease. Leases are categorised as finance leases when the substance of the agreement is that of a financing transaction and the lessee assumes substantially all of the risks and benefits relating to the asset. All other leases are categorised as operating leases. Operating leased assets are depreciated over their useful lives such that, for each asset, rentals less depreciation are recognised at a constant periodic rate of return on the net cash invested in that asset. Rentals receivable under operating leases are accounted for on a straight-line basis over the lease term. Debt swaps Assets acquired in exchange for other advances in order to achieve an orderly realisation are reported as advances. The assets acquired are recorded at the carrying value of the advances disposed of at the date of the exchange, with any provision having been duly updated. Any subsequent deterioration in their value will be recorded as an additional provision. Shareholder’s interest in the long-term assurance fund The shareholders’ interest in the in-force life assurance and fund pensions policies of the long-term assurance fund are valued at the net present value of the profits inherent in such policies. Leases are classified as capital leases when any of the criteria outlined under Statement of Financial Accounting Standards (‘SFAS’) 13 ‘Accounting for Leases’ are met. Operating leased assets are depreciated such that in each period the depreciation charge is at least equal to that which would have arisen on a straight-line basis. Under SFAS No. 15 ‘Accounting by Debtors and Creditors for Troubled Debt Restructurings’, debt securities and equity shares acquired in exchange for advances in order to achieve an orderly realisation are required to be accounted for at their fair value, usually their secondary market value, at the date of exchange. Under SFAS 115 ‘Accounting for Certain Investments in Debt and Equity Securities’, certain of these debt swaps qualify as securities and accordingly are classified as available-for-sale. The net present value of these profits is not recognised. An adjustment is made to amortise acquisition costs and fees in accordance with SFAS 97 ‘Accounting and Reporting by Insurance Enterprises for Certain Long- Duration Contracts and for Realized Gains and Losses from the Sale of Investments’. 245 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) UK GAAP US GAAP SFAS 87 ‘Employers’ Accounting for Pensions’ prescribes a similar method of actuarial valuation but requires assets to be assessed at fair value and the assessment of liabilities to be based on current settlement rates. Certain variations from regular cost are allocated in equal amounts over the average remaining service lives of current employees. SFAS 123 ‘Accounting for Stock Based Compensation’ encourages a fair value based method of accounting for stock-based compensation plans. Under the fair value method, compensation cost is measured at date of grant based on the value of the award and its recognised over the service period, which is usually the vesting period. This value includes a prudent valuation of the discounted future earnings expected to emerge from business currently in force, taking into account factors such as recent experience and general economic conditions, together with the surplus retained in the long-term assurance funds. These are determined annually in consultation with independent actuaries and are included in ‘Other assets’. Pension costs Pension costs, based on actuarial assumptions and methods, are charged so as to allocate the cost of providing benefits over the average remaining service lives of employees. Share compensation schemes For executive share option schemes, such options are granted at fair value and no compensation costs are recognised under the ‘intrinsic value method’. For Save-As-You-Earn schemes, employees are granted shares at a 20 per cent (15 per cent until 31 December 2000) discount to fair value at the date of grant. No compensation cost is recognised for such awards. For longer term and other restricted share award schemes, the fair value of the shares awarded is charged to compensation cost over the period in respect of which performance conditions apply. To the extent the award is adjusted by virtue of performance conditions being met or not, the compensation cost is adjusted in line with this. 246 UK GAAP US GAAP The American Institute of Certified Public Accountants’ (‘AICPA’) Statement of Position (‘SOP’) 98-1 ‘Accounting for the costs of computer software developed or obtained for internal use’ was issued in March 1998, to be effective for fiscal years beginning after 15 December 1998. It requires that all costs incurred in the preliminary project and post implementation stages of internal software development be expensed. Costs incurred in the application development stage must be capitalised and amortised over the estimated useful life. Goodwill acquired up to 30 June 2001 is capitalised and amortised over its estimated useful life but not more than 25 years. Under the transition requirements of SFAS 142 ‘Goodwill and Other Intangible Assets’ goodwill acquired after 30 June 2001 is capitalised but not amortised, and is subject to annual impairment testing as required under APB 17 ‘Intangible Assets’. All goodwill will cease to be amortised from 31 December 2001. US GAAP requires the recoverability of goodwill to be assessed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment of goodwill relating to an entity is recognised if the sum of the estimated future cashflows (undiscounted and without interest charges) expected to be generated by that entity is less than its carrying amount. If impairment is assessed to exist, the amount recognised is the amount by which the carrying amount of the entity exceeds its fair value. Costs of software for internal use HSBC generally expenses costs of software developed for internal use. However, if it can be demonstrated that conditions for capitalisation are met under FRS 10 ‘Goodwill and intangible assets’ or FRS 15 ‘Tangible fixed assets’, the software should be capitalised as part of the cost of related hardware and amortised over its useful life. Website design and content development costs should be capitalised only to the extent that they lead to the creation of an enduring asset delivering benefits at least as great as the amount capitalised. Goodwill For acquisitions prior to 1998, goodwill arising on the acquisition of subsidiary undertakings, associates or joint ventures was charged against reserves in the year of acquisition. In 1998, HSBC adopted FRS 10. For acquisitions made on or after 1 January 1998, goodwill is included in the balance sheet and amortised over its estimated useful life on a straight-line basis. FRS 10 allows goodwill previously eliminated against reserves to be reinstated, but does not require it. In common with many other UK companies, HSBC elected not to reinstate such goodwill. HSBC considered whether reinstatement would materially assist the understanding of readers of its accounts who were already familiar with UK GAAP and decided that it would not. Goodwill included in the balance sheet is tested for impairment when necessary by comparing the recoverable amount of an entity with the carrying value of its net assets, including attributable goodwill. The recoverable amount of an entity is the higher of its value in use, generally the present value of the expected future cash flows from the entity, and its net realisable value. 247 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) UK GAAP US GAAP At the date of disposal of subsidiary undertakings, associates or joint ventures, any unamortised goodwill or goodwill charged directly against reserves is included in HSBC’s share of total net assets of the undertaking in the calculation of the profit on disposal of the undertaking. Property HSBC values its properties on an annual basis and adjustments arising from such revaluations are taken to reserves. HSBC depreciates non-investment properties based on cost or the revalued amounts. No depreciation is charged on investment properties other than leaseholds with 20 years or less to expiry. Investment securities 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. Other participating interests are accounted for on the same basis. Where dated investment securities are purchased at a premium or discount, these premiums and discounts are amortised through the profit and loss account over the period from date of purchase to date of maturity and included in ‘interest income’. 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 investment securities’. Other debt securities and equity shares held for trading purposes 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’. US GAAP does not permit revaluations of property although it requires recognition of asset impairment. Any realised surplus or deficit is therefore reflected in income on disposal of the property. Depreciation is charged on all properties based on cost. Under SFAS 115 ‘Accounting for Certain Investments in Debt and Equity Securities’ all debt securities and equity shares are classified and disclosed within one of the following three categories: held-to-maturity; available-for-sale; or trading. Held-to-maturity debt securities are measured at amortised cost. Available- for-sale securities are measured at fair value with unrealised holding gains and losses excluded from earnings and reported net of applicable taxes and minority interests in a separate component of shareholders’ funds. Trading securities are measured at fair value with unrealised holding gains and losses included in earnings. Foreign exchange gains or losses on foreign currency denominated available-for-sale securities are also excluded from earnings and recorded as part of the same separate component of shareholders’ funds. 248 UK GAAP US GAAP Sale and repurchase transactions (‘repos’) and reverse repos Repos and reverse repos are accounted for as if the collateral involved remains with the transferor. On the balance sheet, repos are included within ‘Deposits by banks’ and ‘Customer accounts’ and reverse repos are included within ‘Loans and advances to banks’ or ‘Loans and advances to customers’. Accruals accounted derivatives Non-trading derivatives are those which are held for hedging purposes as part of HSBC’s risk management strategy against assets, liabilities, positions or cash flows measured on an accruals basis. Non-trading transactions include qualifying hedges and positions that synthetically alter the characteristics of specified financial instruments. Non-trading derivatives 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. To qualify as a hedge, a derivative must effectively reduce the price or interest rate risk of the asset, liability or anticipated transaction to which it is linked and be designated as a hedge at inception of the derivative contract. Accordingly, changes in the market value of the derivative must be highly correlated with changes in the market value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. If these criteria are met, the derivative is accounted for on the same basis as the underlying hedged item. Derivatives used for hedging purposes include swaps, forwards and futures. Under SFAS 140 ‘Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities’, repos and reverse repos transacted under agreements that give the transferee the right by contract or custom to sell or repledge the collateral give rise to the following adjustments and disclosures. For repos, where the transferee has the right to sell or repledge the collateral, the transferor would report the securities separately in the Financial Statements from other securities not so encumbered. For reverse repos, where the transferee has the right to sell or repledge the collateral, the transferee should not recognise the pledged asset but should disclose the fair value of the collateral and if the transferee sells collateral pledged to it, the proceeds from the sale and the transferee’s obligation to return the collateral should be recognised. SFAS 133 ‘Accounting for Derivative Instruments and for Hedging Activities’ requires that all derivatives be recognised as either assets or liabilities in the balance sheet and that those instruments be measured at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation as described below: − − For a derivative designated as hedging the exposures to changes in the fair value of a recognised asset or liability or a firm commitment, the gain or loss is recognised in earnings in the period of change together with the associated loss or gain on the hedged item attributable to the risk being hedged. For a derivative designated as hedging the exposure to variable cash flows of a recognised asset or liability, or of a forecasted transaction, the derivative’s gain or loss associated with the effective portion of the hedge is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion is reported in earnings immediately. 249 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) UK GAAP US GAAP Interest rate swaps are also used to alter synthetically the interest rate characteristics of financial instruments. In order to qualify for synthetic alteration, a derivative instrument must be linked to specific individual, or pools of similar, assets or liabilities by the notional principal and interest rate risks of the associated instruments, and must achieve a result that is consistent with defined risk management objectives. If these criteria are met, accrual based accounting is applied, i.e. income or expense is recognised and accrued to the next settlement date in accordance with the contractual terms of the agreement. Any gain or loss arising on the termination of a qualifying derivative is deferred and amortised to earnings over the original life of the terminated contract. Where the underlying asset, liability or position is sold or terminated, the qualifying derivative is immediately marked-to-market through the profit and loss account. Derivatives that do not qualify as hedges or synthetic alterations at inception are marked-to-market through the profit and loss account, with gains and losses included within ‘Dealing profits’. Own shares held UK GAAP allows for the inclusion of own shares held within equity shares. – For net investment hedges, in which derivatives hedge the foreign currency exposure of a net investment in a foreign operation, the change in fair value of the derivative associated with the effective portion of the hedge is included as a component of other comprehensive income, together with the associated loss or gain on the hedged item. The ineffective portion is reported in earnings immediately. For a derivative not designated as a hedging instrument, the gain or loss is recognised in earnings in the period of change in fair value. The effect of adoption of SFAS 133 is treated as a change in accounting principles. AICPA Accounting Research Bulletin 51 ‘Consolidated Financial Statements’ requires a reduction in shareholders’ equity for own shares held. Dividends payable Dividends declared after the period end are recorded in the period to which they relate. Dividends are recorded in the period in which they are declared. 250 UK GAAP Deferred taxation Deferred taxation is provided on timing differences using the liability method only to the extent that it is probable that an actual liability or asset will crystallise. Acceptances Acceptances outstanding are not included in the consolidated balance sheet. Profit and loss presentation The following items are separately disclosed in the profit and loss account: US GAAP As provided by SFAS 109 ‘Accounting for Income Taxes’, deferred tax liabilities and assets are recognised in respect of all temporary differences. A valuation allowance is raised against any deferred tax asset where it is more likely than not that the asset, or a part thereof, will not be realised. Acceptances outstanding and the matching customer liabilities are included in the consolidated balance sheet. Provisions for contingent liabilities and commitments. Classified as ‘Operating expenses’. Amounts written off fixed asset investments. Classified as ‘Other operating income’. Gains on disposal of investments and tangible fixed assets. Classified as ‘Other operating income’. 251 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) The following tables summarise the significant adjustments to consolidated net income and shareholders’ equity which would result from the application of US GAAP. Note 2001 2000 1999 US$m US$m US$m US$m US$m US$m NET INCOME Attributable profit of HSBC (UK GAAP) .......... Lease financing ....................................................... Debt swaps .............................................................. Shareholders’ interest in long-term assurance fund Pension costs ........................................................... Stock-based compensation ...................................... Goodwill ................................................................. Internal software costs............................................. Revaluation of property........................................... Purchase accounting adjustments ............................ Accruals accounted derivatives ............................... Foreign exchange gains on investment securities.... Taxation : US GAAP ............................................. : on reconciling items.............................. a b c d e f g h Minority interest in reconciling items...................... Estimated net income (US GAAP).......................... Per share amounts (US GAAP) Basic earnings per ordinary share............................ Diluted earnings per ordinary share......................... l l (186) (162) 5,406 (40 ) 4 (152 ) (26 ) (316 ) (509 ) 264 49 (49 ) 280 312 (348 ) 36 4,911 US$ 0.53 0.53 6,628 (53) 97 (140) (113) (234) (363) 185 69 68 116 – (40) 16 6,236 US$ 0.71 0.70 5,408 (53) (44) (101) (199) (133) (296) 137 34 130 – – 17 (11) 4,889 US$ 0.59 0.58 (20 ) 37 (8) (32) Note 2001 2000 US$m US$m US$m US$m SHAREHOLDERS’ EQUITY Shareholders’ funds (UK GAAP)............................................................ Lease financing ....................................................................................... Debt swaps .............................................................................................. Shareholders’ interest in long-term assurance fund................................. Pension costs ........................................................................................... Goodwill ................................................................................................. Internal software costs............................................................................. Revaluation of property........................................................................... Purchase accounting adjustments ............................................................ Accruals accounted derivatives ............................................................... Fair value adjustment for securities available-for-sale ............................ Own shares held ...................................................................................... Dividend payable .................................................................................... Taxation : US GAAP ............................................................................. : on reconciling items.............................................................. a b d e f g j h Minority interest in reconciling items...................................................... Estimated shareholders’ equity (US GAAP) ........................................... 45,979 (300 ) – (798 ) (1,157 ) 1,944 570 (2,681 ) 104 419 1,342 (608 ) 2,700 573 357 48,444 516 57 45,570 (267) (4) (662) (1,151) 2,562 313 (3,044) 198 116 1,316 (650) 2,627 856 292 48,072 737 119 252 The following table provides an estimated summarised balance sheet for HSBC, which incorporates the estimated adjustments arising from the application of US GAAP: Assets Cash and balances at central banks ............................................................................ Items in the course of collection from other banks .................................................... Treasury bills and other eligible bills......................................................................... Hong Kong SAR Government certificates of indebtedness ....................................... Loans and advances to banks ..................................................................................... Loans and advances to customers .............................................................................. Debt securities and equity shares ............................................................................... Interests in associated undertakings and other participating interests ........................ Intangible and tangible fixed assets ........................................................................... Due from customers on acceptances .......................................................................... Other assets (including prepayments and accrued income)........................................ Total assets................................................................................................................. Liabilities Hong Kong SAR currency notes in circulation.......................................................... Deposits by banks ...................................................................................................... Customer accounts..................................................................................................... Items in the course of transmission to other banks .................................................... Debt securities in issue............................................................................................... Acceptances outstanding............................................................................................ Other liabilities (including accruals and deferred income) ........................................ Provisions for liabilities and charges deferred taxation – deferred taxation ..................................................................................................... – other provisions for liabilities and charges ............................................................. Subordinated liabilities .............................................................................................. Minority interests ....................................................................................................... Shareholders’ funds ................................................................................................... 2001 US$m 6,185 5,775 17,941 8,637 104,641 308,705 169,284 1,448 27,899 4,219 43,578 698,312 8,637 53,640 449,991 3,798 27,098 4,219 74,478 1,315 5,079 15,480 6,133 48,444 2000 US$m 5,006 6,668 23,100 8,193 126,032 289,870 141,550 1,432 29,019 5,160 44,046 680,076 8,193 60,053 427,069 4,475 27,956 5,160 70,602 705 4,552 16,222 7,017 48,072 Total liabilities ........................................................................................................... 698,312 680,076 Net assets arising due to reverse repo transactions of US$10,926 million (2000: US$12,341 million) and US$14,823 million (2000: US$12,158 million) are included under ‘Loans and advances to banks’ and ‘Loans and advances to customers’ respectively. Net liabilities arising due to repo transactions of US$7,113 million (2000: US$5,827 million) and US$9,769 million (2000: US$10,485 million) are included in ‘Deposits by banks’ and ‘Customer accounts’ respectively. Average repo liabilities during the year were US$23,850 million (2000: US$15,374 million). The maximum quarter-end repo liability outstanding during the year was US$24,901 million (2000: US$16,313 million). HSBC enters into repo and reverse repo transactions which are accounted for as secured borrowings. Under SFAS 140, securities pledged as collateral whereby the counterparty has the right to sell or repledge the collateral would be reclassified within ‘Debt securities and equity shares’ and ‘Treasury bills and other eligible bills’ as encumbered. As at 31 December 2001, the impact on ‘Debt securities and equity shares’ and ‘Treasury bills and other eligible bills’ would be to reclassify securities amounting to US$28,973 million as encumbered (2000: US$18,352 million). As at 31 December 2001, collateral received under reverse repo transactions where HSBC has the right to sell or repledge the security obtained amounted to US$35,820 million gross (2000: US$30,832 million). 253 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) As at 31 December 2001, approximately US$34 billion of the collateral obtained from reverse repo transactions had been sold or pledged by HSBC in connection with repo transactions and securities sold not yet purchased (2000: approximately US$26 billion). HSBC also enters into stock lending and borrowing transactions for which either cash or other securities may be received in exchange. At 31 December 2001, stock lending transactions where the securities lent are subject to sale or repledge amounted to US$3,966 million (2000: US$3,958 million). At 31 December 2001, stock borrowing transactions where the securities borrowed are subject to sale or repledge amounted to US$2,972 million (2000: US$6,718 million). (a) Debt swaps Under UK GAAP, assets acquired in exchange for advances in order to achieve an orderly realisation are included at the net book value of the advance disposed of at the date of exchange, with any provision having been duly updated. Under SFAS 15, such assets are included at the fair value at the date of acquisition. Under US GAAP, as the Group disposed of its remaining debt swaps accounted for under SFAS 15 during 2001 there would be no adjustment to shareholders’ funds at 31 December 2001 (2000: decrease US$4 million). Profit before tax would increase by US$4 million (2000: increase US$97 million; 1999: decrease US$44 million) to show such assets at their fair value at the date of acquisition. (b) Pension costs For the purpose of the above reconciliations, the provisions of SFAS 87 ‘Employers’ Accounting for Pensions’ have been applied to HSBC’s main pension plans, which make up approximately 95% of all HSBC’s schemes in terms of plan assets. For non-US schemes, HSBC has applied SFAS 87 ‘Employers’ Accounting for Pensions’ with effect from 30 June 1992 as it was not feasible to apply it as of January 1989, the date specified in the standard. The projected benefit obligation in excess of plan assets at 30 June 1992 for the HSBC Bank (UK) Pension Scheme has been recognised as a liability under the purchase accounting requirements of APB 16 ‘Business Combinations’. For other pension plans, the excess of the projected benefit obligation over plan assets at 30 June 1992 is recognised as a charge to pension expense over 15 years. On 25 March 1998, HSBC Bank Brasil S.A. – Banco Múltiplo assumed liability for pension schemes which were previously the responsibility of Banco Bamerindus do Brasil. This transfer arose on completion of the intervention period. The projected benefit obligation in excess of plan assets at that date has been recognised as a liability under the purchase accounting adjustments of APB 16 ‘Business Combinations’. Plan assets in excess of the projected benefit obligation at 31 December 1999 for Republic New York Corporation pension schemes have been recognised as assets under the purchase accounting requirements of APB 16 ‘Business Combinations’. The projected benefit obligation in excess of plan assets at 28 July 2000 for Crédit Commercial de France has been recognised as a liability under the purchase accounting adjustments of APB 16 ‘Business Combinations.’ Estimated pension costs for these plans computed under SFAS 87 are as follows: Components of net periodic benefit cost Service cost............................................................................. Interest cost............................................................................. Expected return on plan assets................................................ Amortisation of prior service cost........................................... Amortisation of unrecognised net liability at 30 June 1992.... Amortisation of recognised net actuarial (gain)...................... Net periodic pension cost........................................................ Employee contributions .......................................................... Net periodic pension cost........................................................ 2001 US$m 2000 US$m 1999 US$m 447 801 (862) 4 6 (1) 395 – 395 445 736 (764) 4 4 (47) 378 (2) 376 413 716 (633) 4 4 (13) 491 (2) 489 254 The US GAAP pension cost of US$395 million (2000: US$376 million; 1999 US$489 million) compares with US$369 million for these plans under UK GAAP (2000: US$263 million; 1999: US$290 million) for the schemes included in the SFAS 87 calculation. Change in projected benefit obligation Projected benefit obligation as at 1 January........................................................ Service cost ......................................................................................................... Interest cost......................................................................................................... Employee contributions ...................................................................................... Net actuarial (gain)/loss ...................................................................................... Acquisition.......................................................................................................... Transfers in1........................................................................................................ Plan amendment.................................................................................................. Benefits paid ....................................................................................................... Exchange movements ......................................................................................... Projected benefit obligation as at 31 December.................................................. Change in plan assets Plan assets at fair value as at 1 January............................................................... Restatement of plan assets fair value as at 1 January.......................................... Actual return on plan assets ................................................................................ Transfers in1........................................................................................................ Employer contributions....................................................................................... Employee contributions ...................................................................................... Benefits paid ....................................................................................................... Exchange movements ......................................................................................... Plan assets at fair value as at 31 December......................................................... Funded status Unrecognised net obligation existing at 30 June 1992........................................ Unrecognised net actuarial loss/(gain) ................................................................ Unrecognised prior service cost.......................................................................... Accrued pension cost .......................................................................................... Amounts recognised under US GAAP: Prepaid benefit cost............................................................................................. Accrued benefit liability ..................................................................................... Accrued pension cost .......................................................................................... US GAAP adjustment: Accrued net pension cost under US GAAP ........................................................ Pension liability recognised for these schemes under UK GAAP....................... 2001 US$m 14,481 447 801 1 (869) 21 – 2 (443) (387) 14,054 13,828 30 (1,315) – 339 1 (443) (343) 12,097 (1,957) 13 492 23 (1,429) 268 (1,697) (1,429) (1,429) 272 (1,157) 2000 US$m 13,238 445 736 2 278 227 1,009 – (488) (966) 14,481 12,971 – 904 1,009 299 2 (488) (869) 13,828 (653) 19 (809) 26 (1,417) 261 (1,678) (1,417) (1,417) 266 (1,151) 1 During 2000 the schemes of certain other HSBC entities were collectively merged into the HSBC Bank (UK) Pension Scheme. None of these schemes were individually significant. 255 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Plan asset valuations are as at 31 December with the exception of the 2000 HSBC Bank (UK) Pension Scheme plan assets which are valued as at 30 September. In 2001, plans with an aggregate accumulated benefit obligation of US$11,406 million (2000: US$411 million) and assets with an aggregate fair value of US$10,508 million (2000: US$ nil) had an accumulated benefit obligation in excess of plan assets. Plans with an aggregate projected benefit obligation of US$13,255 million (2000: US$12,949 million) and assets with an aggregate fair value of US$11,282 million (2000: US$12,210 million) had a projected benefit obligation in excess of plan assets. Plan assets are invested primarily in equities, fixed interest securities and property. The projected benefit obligation at 31 December 2001 and 30 September 2000 for the HSBC Bank (UK) Pension Scheme and at 31 December 2001 and 2000 for the remainder of HSBC’s main pension plans has been calculated using the following financial assumptions: 2001 % per annum 2000 % per annum Discount rate Return on assets Rate of pay increase United Kingdom............................................ Hong Kong.................................................... Jersey............................................................. Brazil............................................................. United States ................................................. France............................................................ United Kingdom............................................ Hong Kong.................................................... Jersey............................................................. United States ................................................. United Kingdom............................................ Hong Kong.................................................... Jersey............................................................. Brazil............................................................. United States ................................................. France............................................................ (c) Stock-based compensation 5.9 6.5 5.9 10.25 7.25 5.5 6.8 8.0 6.3 9.5 3.75 6.0 4.25 6.05 4.0 3.5 5.5 7.5 5.0 10.3 7.8 5.0 6.0 9.0 5.0 9.5 4.0 7.0 2.5 6.1 5.2 2.5 HSBC has adopted SFAS 123 and accounts for share compensation schemes based on their estimated fair values at date of grant. The disclosure requirements are only applicable to options and other awards granted from 1 January 1995 onwards and, in the initial phase-in period, the amounts reported will not be representative of the effect on reported net income for future years. The SFAS 123 charge for the fair value of options granted since 1 January 1997 is US$316 million (2000: US$234 million; 1999: US$133 million). The Executive Share Option Scheme, Group Share Option Plan, Savings-Related Share Option Scheme and Restricted Share Plan fall within the scope of SFAS 123. The disclosures of options outstanding only relate to those granted from 1995 onwards. Analysis of the movement in the number and weighted average exercise price of options is set out below. Executive Share Option Scheme The Executive Share Option Scheme is a long-term incentive scheme available to certain HSBC employees with grants usually made each year. Options are granted at market value and are normally exercisable between the 256 third and tenth anniversaries of the date of grant, subject to vesting conditions. No further grants will be made under the Scheme following the adoption of the Group Share Option Plan in 2000. 2001 2000 1999 Weighted average exercise price £ 6.56 – 5.34 6.53 Number (000’s) 109,424 – (3,236) (3,478) Weighted average exercise price £ 6.10 7.46 4.11 6.65 Number (000’s) 84,765 32,789 (4,059) (4,071) Weighted average exercise price £ 4.45 6.38 2.65 5.86 Number (000’s) 15,093 72,539 (1,207) (1,660) Outstanding at beginning of year Granted in the year.......................... Exercised in the year....................... Less: Forfeited in the year............... Outstanding at end of year .............. 102,710 6.60 109,424 6.56 84,765 6.10 The weighted average fair value of options as at the date of grant during 2000 was £3.29 (1999: £2.57). The weighted average exercise price of options granted in 1998 was £6.28 (1997: £5.04). The number of options, weighted average exercise price and the weighted average remaining contractual life for options outstanding at the balance sheet date, analysed by exercise price range, are as follows: 2001 2000 1999 Exercise price range (£)..................... £2.17 - £6.00 £6.01 - £7.87 £2.17 - £6.00 £6.01 - £7.87 £2.17 - £6.00 £6.01 - £7.87 Number (‘000)................................... Weighted average exercise price (£).. Weighted average remaining contractual life (years)..................... Of which exercisable: Number (‘000)................................... Weighted average exercise price (£).. Group Share Option Plan 4,116 3.94 98,594 6.71 4.55 7.52 4,116 3.94 3,170 6.28 5,600 3.86 5.49 5,600 3.86 103,824 6.71 9,099 3.81 75,666 6.37 8.51 35 7.80 6.46 9.18 5,415 2.99 – – The Group Share Option Plan is a long-term incentive plan available to certain HSBC employees that was adopted by HSBC during 2000. Options are granted at market value and are normally exercisable between the third and tenth anniversaries of the date of grant, subject to vesting conditions. Outstanding at beginning of year ......... Granted in the year................. Less: Forfeited in the year...... Outstanding at end of year ..... Number (000’s) 455 51,357 (987) 50,825 2001 Weighted average exercise price £ 9.64 8.71 8.72 2000 Number (000’s) – 460 (5) Weighted average exercise price £ – 9.64 9.64 8.72 455 9.64 The weighted average fair value of options granted in the year as at the date of grant was £2.35 (2000: £3.10). The number of options, weighted average exercise price, and the weighted average remaining contractual life for options outstanding at the balance sheet date, analysed by exercise price range, are below. None of these options were exercisable at 31 December 2001 or 2000. 257 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Exercise price range (£).................................................................................... £8.00 - £10.00 £8.00 - £10.00 Number (‘000).................................................................................................. Weighted average exercise price (£) ................................................................ Weighted average remaining contractual life (years).................................................................................... 50,825 8.72 9.30 455 9.64 9.76 2001 2000 Savings-Related Share Option Schemes The Savings-Related Share Option Schemes invite eligible employees to enter into savings contracts to save up to £250 per month, with the option to use the savings to acquire shares. The options are exercisable within six months following either the third or the fifth anniversary of the commencement of the savings contract depending on conditions set at grant. The exercise price is at a 20 per cent (2000 and 1999: 15 per cent) discount to the market value at the date of grant. 2001 2000 1999 Weighted average exercise price £ 5.25 6.75 3.14 5.82 Number (000’s) 121,312 28,832 (12,601) (7,093) Weighted average exercise price £ 3.81 6.03 1.84 5.08 Number (000’s) 115,664 48,195 (37,595) (4,952) Weighted average exercise price £ 3.28 5.44 2.23 4.28 Number (000’s) 89,754 31,261 (1,308) (4,043) Outstanding at beginning of year . Granted in the year....................... Exercised in the year.................... Less: Forfeited in the year............ Outstanding at end of year ........... 130,450 5.76 121,312 5.25 115,664 3.81 The maximum term of options granted in the year is 51/2 years from the date of grant (2000: 51/2 years; 1999: 51/2 years). The weighted average fair value of options granted in the year as at the date of grant was £2.57 (2000: £2.72; 1999: £2.75). The weighted average exercise price of options granted in 1998 was £5.22 (1997: £2.80). The number of options, weighted average exercise price, and the weighted average remaining contractual life for options outstanding at the balance sheet date, analysed by exercise price range, are as follows: Exercise price range (£) ..................... £1.81 - £4.00 £4.01 - £6.52 £1.81 - £4.00 £4.01 - £6.52 £1.81 - £4.00 £4.01 - £6.52 2001 2000 1999 Number (‘000) ................................... Weighted average exercise price (£) .. Weighted average remaining contractual life (years)...................... Of which exercisable: Number (‘000) ................................... Weighted average exercise price (£) .. 3,411 3.62 127,039 5.81 15,470 3.16 105,842 5.56 53,292 2.21 62,372 5.18 1.16 2.47 0.68 3.28 0.68 3.49 999 3.23 – – 543 1.81 – – – – – – Fair values of share options, measured at the date of grant of the option, are calculated at the date of grant using a binomial model which produces similar results to the Black-Scholes model. The fair values calculated are inherently subjective and uncertain due to the assumptions made and the limitations of the model used. The 258 significant weighted average assumptions used to estimate the fair value of the options granted in 2001 are as follows: Group Share Option Plan 5.65 10 30 3 year Savings- Related Share Option Schemes 5.40 3.5 30 5 year Savings- Related Share Option Schemes 5.50 5.5 30 Risk-free interest rate (%) ............... Expected life (years) ....................... Expected volatility (%) ................... Crédit Commercial de France CCF granted share purchase and subscription offers to certain executives of CCF, directors and officers, as well as to certain senior executives of subsidiaries. Options granted between 1994 and 1999 vested upon announcement of HSBC’s intent to acquire CCF and were therefore included in the valuation of CCF. CCF granted 909,000 options in 2000 after the public announcement of the acquisition and these options did not vest as a result of the change in control. The options were subject to continued employment and vested on 1 January 2002. The CCF shares obtained on exercise of the options are exchangeable for HSBC’s ordinary shares of US$0.50 each in the same ratio as the Exchange Offer for Crédit Commercial de France shares (13 ordinary shares of US$0.50 for each CCF share). Options are granted at market value and are exercisable within 10 years of the vesting date. 2001 2000 Outstanding at beginning of year .................. Granted in the year........................................ Less: Forfeited in the year............................. Weighted average exercise price £ 6.68 – 6.68 Number (000’s) 907,500 – (47,000) Outstanding at end of year ............................ 860,500 6.68 Weighted average exercise price £ – 6.68 6.68 6.68 Number (000’s) – 909,000 (1,500) 907,500 The weighted average exercise price of options granted during 2000 was £6.68, the fair value as at the date of grant was £41.88 and the weighted average remaining contractual life for options outstanding at the balance sheet date was 10 years. Restricted Share Plan Conditional awards under the Restricted Share Plan Conditional awards under the Restricted Share Plan have been in operation since 1996. It is intended to align the interests of executives to the creation of shareholder value. This is achieved by setting certain Total Shareholder Return targets which must normally be attained in order for the awards to vest. Outstanding at beginning of year ............................................ Additions during the year........................................................ Less: Released in the year....................................................... Less: Forfeited in the year....................................................... 2001 Number (000’s) 4,092 2,564 (210) (249) Outstanding at end of year ...................................................... 6,197 2000 Number (000’s) 2,085 2,085 – (78) 4,092 1999 Number (000’s) 412 1,673 – – 2,085 The weighted average purchase price for shares purchased by HSBC for conditional awards under the Restricted 259 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Share Plan is £9.29 (2000: £7.06; 1999: £6.35). The weighted average remaining vesting period as at 31 December 2001 was 3.29 years (2000: 3.25 years; 1999: 3.5 years). The 2002 conditional awards from the Restricted Share Plan in respect of 2001 will have an aggregate value at the date of award of £10.49 million (2001 awards in respect of 2000: £8.86 million). Other awards made under the Restricted Share Plan Other awards are made to key employees under the Restricted Share Plan as part of their annual bonus. The awards vest from one to three years from the date of award. Outstanding at beginning of year ............................................ Additions during the year........................................................ Less: Released in the year....................................................... Less: Forfeited in the year....................................................... 2001 Number (000’s) 19,363 17,109 (5,389) (2,034) Outstanding at end of year ...................................................... 29,049 2000 Number (000’s) 10,747 13,580 (4,964) – 19,363 1999 Number (000’s) 8,601 4,983 (2,837) – 10,747 The weighted average purchase price for shares purchased by HSBC for other awards under the Restricted Share Plan is £9.23 (2000: £7.26; 1999: £6.29). The weighted average remaining vesting period as at 31 December 2001 was 1.25 years (2000: 2.35 years; 1999: 1.57 years). (d) Goodwill Goodwill arises on the acquisition of subsidiary or associated undertakings when the cost of acquisition exceeds the fair value of HSBC’s share of separable net assets acquired. Under UK GAAP, 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, in ‘Interests in associates’ in respect of associates and in ‘Interests in joint ventures’ in respect of joint ventures. 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. Under US GAAP, goodwill on acquisition both pre and post 1 January 1998 would have been capitalised and amortised over its estimated useful life. At 31 December 2001, the cost of goodwill acquired both pre and post 1 January 1998 on a US GAAP basis was US$20,172 million (2000: US$20,559 million; 1999: US$11,587 million) and accumulated amortised goodwill was US$3,319 million (2000: US$2,441 million; 1999: US$1,762 million). Amortisation periods which have been applied to purchased goodwill range from 5 to 20 years. Goodwill acquired post 30 June 2001 is not amortised as a result of the transitional provisions of SFAS 142. HSBC evaluated the recoverability of the carrying amount of goodwill relating to HSBC Bank Argentina. As a result of this review US$258 million of goodwill relating to HSBC Bank Argentina was written off to the profit and loss account under US GAAP since the carrying amount of this goodwill was not supported by the present value of future cashflows. The write-down reflects the deterioration in the economic situation, and in future economic prospects for the Argentine economy. (e) Internal software costs Under UK GAAP, costs of software developed for internal use are generally expensed as they are incurred. Under US GAAP, costs incurred in the application development stage of internal software must be capitalised and amortised over its estimated useful life. HSBC recognises an adjustment in calculating its US GAAP net income, reflecting the impact of current year software development costs capitalised under US GAAP, offset by the US GAAP amortisation of these and previous years’ costs and by any provisions for impairment of these costs. 260 hsbc.com, Inc., has been engaged, in development activities to provide a global website and web hosting services to HSBC companies. A provision of US$50 million was made in 2001 for impairment against the US GAAP capitalised amount of development costs. (f) Purchase accounting adjustments Under UK GAAP, certain costs which relate to either post-acquisition management decisions or decisions made prior to the acquisition are required to be expensed to the profit and loss account and cannot be capitalised as goodwill. (g) Accruals accounted derivatives Under UK GAAP, internal derivatives used to hedge banking book transactions may be accruals accounted but, under US GAAP, all derivatives are held at fair value. With the exception of certain subsidiaries in North America, HSBC has not elected to satisfy the more prescriptive hedge documentation requirements of SFAS 133 in respect of derivative contracts. At 1 January 2001 contracts which had previously qualified as fair value hedges under US GAAP were marked to market with a corresponding revaluation of the hedged item. There was no material ineffectiveness of these hedges and therefore no adjustment was required to US GAAP reported income. There were no significant contracts at 1 January 2001 which had previously qualified as cash flow hedges under US GAAP. Since 1 January 2001 further contracts which qualify as fair value hedges under SFAS 133 have been entered into by HSBC’s North American subsidiaries. These are used to hedge the risk associated with the risk free component of the value of certain fixed rate investment securities. As above, since there was no material ineffectiveness of these hedges no adjustment is required to US GAAP reported net income. In addition, since 1 January 2001 certain contracts which qualify as cash flow hedges under SFAS 133 have been entered into by HSBC Bank USA. These contracts are used to hedge the forecast repricing of certain deposit liabilities. The reduction in US GAAP reported equity due to such hedges at 31 December 2001 was US$38 million. All other UK GAAP hedging derivatives have been marked to market for US GAAP purposes, giving rise to the increase to US reported net income of US$280 million (2000: US$116 million). 261 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) (h) Taxation The components of the net deferred tax position calculated under SFAS 109 ‘Accounting for Income Taxes’, are as follows: Deferred tax liabilities: Leasing transactions............................................................................................ Capital allowances .............................................................................................. Provision for additional UK tax on overseas dividends ...................................... Reconciling items ............................................................................................... Other ................................................................................................................... Total deferred tax liabilities ................................................................................ Deferred tax assets: Provisions for bad and doubtful debts................................................................. Tax losses ........................................................................................................... Reconciling items ............................................................................................... Other ................................................................................................................... Total deferred tax assets before valuation allowance.......................................... Less: valuation allowance ................................................................................... Deferred tax assets less valuation allowance ...................................................... Net deferred tax (asset)/liability under SFAS No. 109 ....................................... Included within ‘other assets’ under US GAAP ................................................. Included within ‘deferred tax liabilities’ under US GAAP ................................. 2001 US$m 1,041 79 24 844 448 2,436 743 1,014 901 892 3,550 (920) 2,630 (194) (1,509) 1,315 2000 US$m 995 38 120 430 471 2,054 902 578 577 652 2,709 (682) 2,027 27 (678) 705 The valuation allowance against deferred tax assets principally relates to trading and capital losses carried forward which have not been recognised due to uncertainty as to when and if they will be utilised. (i) Loans and advances SFAS 114 ‘Accounting by Creditors for Impairment of a Loan’ as amended by SFAS 118 ‘Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosures’ is effective for accounting periods beginning after 15 December 1994. SFAS 114 addresses accounting by creditors for impairment of a loan by specifying how allowances for credit losses for certain loans should be determined. A loan is impaired when it is probable that the creditor will be unable to collect all amounts in accordance with the contractual terms of the loan agreement. Impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective rate or, as an expedient, at the fair value of the loan’s collateral. Leases, smaller-balance homogeneous loans and debt securities are excluded from the scope of SFAS 114. At 31 December 2001, HSBC estimated that the difference between the carrying value of its loan portfolio on the basis of SFAS 114 and its value in HSBC’s UK GAAP financial statements was such that no adjustment to net income or shareholders’ equity was required. Impaired loans are those reported by HSBC as non-performing; the value of such loans at 31 December 2001 amounted to US$9,658 million (2000: US$10,395 million). Of this total, loans which were included within the scope of SFAS 114 and for which a provision has been established amounted to US$8,085 million (2000: US$9,180 million). The impairment reserve in respect of these loans estimated in accordance with the provisions of SFAS 114 was US$4,441 million (2000: US$5,108 million). During the year ended 31 December 2001, impaired loans, including those excluded from SFAS 114, averaged US$9,617 million (2000: US$9,099 million) and interest income recognised on these loans was US$261 million (2000: US$324 million; 1999: US$328 million). 262 (j) Investment securities Under UK GAAP, debt securities and equity shares intended to be held on a continuing basis are classified as investment securities and are included in the balance sheet at cost less provision for any permanent diminution in value. Other participating interests are accounted for on the same basis. 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 and included in ‘interest income’. These securities are included in the balance sheet at cost adjusted for the amortisation of premium and discounts arising on acquisition. 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’. 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. Debt securities and listed equity shares which were acquired in exchange for advances in order to achieve an orderly realisation continue to be reported as advances under UK GAAP. Under SFAS 115 ‘Accounting for Certain Investments in Debt and Equity Securities’, all the above debt securities and equity shares, with the exception of equity investments without a readily determinable market value, are classified and disclosed within one of the following three categories: held-to-maturity; available-for- sale; or trading. Held-to-maturity securities are measured at amortised cost less provision for any permanent diminution in value. Available-for-sale securities are measured at fair value with unrealised holding gains and losses excluded from earnings and reported net of applicable taxes and minority interests in a separate component of shareholders’ funds. Provisions for permanent diminution in value of available-for-sale securities are recognised in earnings. Trading securities are measured at fair value with unrealised holding gains and losses included in earnings. Under US GAAP, HSBC’s investment securities, other participating interests and debt securities and equity shares with a readily determinable market value acquired in exchange for advances are classified as available- for-sale securities except for certain securities held by RNYC at acquisition which were classified as held-to- maturity. All other debt and equity shares are categorised as trading securities. The book and market values of these debt securities and equity shares with a readily determinable market value are analysed as follows: Trading............................................................ Available-for-sale ........................................... Held-to-maturity ............................................. 2001 2000 Book value US$m 75,684 103,557 4,703 Market valuation US$m 75,684 104,873 4,866 Book value US$m 56,599 100,560 4,438 Market valuation US$m 56,599 101,876 4,604 During the year, US$442 million (2000: US$850 million, 1999: US$425 million) of net unrealised gains on available for sale securities were included in Other Comprehensive Income (‘OCI’). US$442 million (2000: US$270 million, 1999: US$431 million) of net gains were reclassified out of OCI and recognised as part of income for the year. Upon adoption of SFAS 133, HSBC transferred US$190 million of securities previously classified as held to maturity to securities available for sale. The reclassification resulted in a net of tax cumulative effect adjustment loss of US$11 million. Under the provisions of SFAS 133, such a reclassification does not call into question HSBC’s interest to hold current or future debt securities to their maturity. At the same date, HSBC transferred US$1,042 million of securities from available for sale to held to maturity. 263 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Trading Assets The following table provides an analysis of trading assets, which are valued at market value and the net gains/(losses) resulting from trading activities: US Treasury and Government agencies .......... UK Government.............................................. Hong Kong SAR Government ........................ Other government ........................................... Asset-backed securities ................................... Corporate debt and other securities................. Equities ........................................................... 2001 2000 Market valuation US$m 17,915 1,645 4,884 8,172 2,619 37,147 3,302 75,684 Gains/ (losses) US$m 161 (8) – 112 4 42 37 Market valuation US$m 11,565 3,473 3,780 9,355 1,611 23,349 3,466 348 56,599 Gains US$m 84 32 7 55 24 79 200 481 Trading assets are marked to market and all profits and losses are deemed realised. Available-for-sale The following table provides an analysis of available-for-sale securities: Market valuation US$m Gross SFAS 115 adjustment US$m Tax and minority interests US$m Net SFAS 115 adjustment US$m Book value US$m As at 31 December 2001 Investment securities (excluding investments with no readily determinable market value) Other participating interests.... Brady bonds* .......................... Other debt securities and equity shares acquired in exchange for advances*....... Securities available-for-sale at 31 December 2001 ......... Securities available-for-sale at 31 December 2000 .............. Movement in the year ended 31 December 2001 ............. 103,266 91 166 104,496 151 136 34 90 103,557 104,873 100,560 101,876 1,230 60 (30) 56 1,316 1,316 – (426) (18) 13 (16) (447) (511) 64 804 42 (17) 40 869 805 64 * Debt securities and equity shares with a readily determinable market value that have been acquired through debt swaps (which under UK GAAP are included as loans and advances) would qualify as available-for-sale securities. The book value of these securities incorporated a SFAS 15 adjustment of US$4 million at 31 December 2000 as discussed in (a) above. 264 (k) Fair value of financial instruments SFAS 107 ‘Disclosures about Fair Value of Financial Instruments’ requires disclosure of the estimated fair values of certain financial instruments, both on-balance-sheet and off-balance-sheet, where it is practicable to do so. Where possible, fair values have been estimated using market prices for the financial instruments. Where market prices are not available, fair values have been estimated using quoted prices for financial instruments with similar characteristics, or otherwise using a suitable valuation technique where practicable to do so. The fair value information presented represents HSBC’s best estimate of those values and may be subject to certain assumptions and limitations. The fair values presented in the table on page 266 are at a specific date and may be significantly different from the amounts which will actually be paid or received on the maturity or settlement date. In many cases, the estimated fair values could not be realised immediately and accordingly do not represent the value of these financial instruments to HSBC as a going concern. HSBC has excluded the fair value of intangible assets, such as values placed on its portfolio of core deposits, credit card relationships and customer goodwill, as these are not considered to constitute financial instruments for the purposes of SFAS 107. HSBC believes such items to be significant and essential to the overall evaluation of HSBC’s worth. In view of the above, comparisons of fair values between financial institutions may not be meaningful and users are advised to exercise caution when using this data. Financial instruments for which fair value is equal to carrying value The following table lists those financial instruments, within the scope of SFAS 107, where carrying value is an approximation of fair value because they are either (i) carried at market value or (ii) short term in nature or reprice frequently. By definition, the fair value of trading account assets and liabilities, including derivative instruments, equals carrying value. Carrying values of these instruments are presented on the balance sheets and related notes on pages 161 to 268. Assets Liabilities Cash and balances at central banks Items in the course of collection Hong Kong SAR Government certificates of indebtedness Trading debt securities and equity shares Deposits by banks repayable on demand or that mature / reprice within six months Customer accounts repayable on demand or that mature / reprice within six months Hong Kong SAR currency notes in circulation Short positions in treasury bills, debt securities and equity shares Treasury bills and other eligible bills Items in the course of transmission Other assets Other liabilities Prepayments and accrued income Accruals and deferred income Off-balance-sheet trading instruments Provisions for liabilities and charges Off-balance-sheet trading instruments Other financial instruments The fair value of other financial instruments within the scope of SFAS 107 is set out in the table below. The valuation technique adopted for each major category is discussed below: 265 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) Loans and advances to banks and customers For personal and commercial loans and advances which mature or reprice after six months, fair value is principally estimated by discounting anticipated cash flows (including interests at contractual rates). Performing loans are grouped, to the extent possible, into homogenous pools segregated by maturity and the coupon rates of the loans within each pool. In general, cash flows are discounted using current market rates for instruments with similar maturity, repricing and credit risk characteristics. The fair value for residential mortgages may be treated differently where there is an established market value for asset-backed securities, such as in the United States. In such situations, the fair value is estimated by reference to quoted market prices for loans with similar characteristics and maturities. For non-performing uncollateralised commercial loans, an estimate is made of the time period to realise these cash flows and the fair value is estimated by discounting these cash flows at a risk-free rate of interest. For non- performing commercial loans where collateral exists, the fair value is the lesser of the carrying value of the loans, net of specific provisions, or the fair value of the collateral, discounted where appropriate. General provisions are deducted from the fair values of these non-performing loans. Debt securities and equity shares held for investment purposes, and other participating interests Listed investment securities are valued at middle market prices and unlisted investment securities at management’s valuation which takes into consideration future earnings streams, valuations of equivalent quoted securities and other relevant techniques. Deposits by banks and customer accounts Deposits by banks and customer accounts which mature or reprice after six months are grouped by residual maturity. Fair value is estimated using discounted cash flows, applying either market rates, where applicable, or current rates offered for deposits of similar remaining maturities. Debt securities in issue and subordinated liabilities Fair value is estimated using quoted market prices at the balance sheet date. The following table presents the carrying value and fair value for those financial instruments whose fair value is derived using these various estimation techniques: Assets Loans and advances to banks and customers .. Debt securities – non-trading .......................... Equity shares – non-trading ............................ Other participating interests............................ Liabilities Deposits by banks and customer accounts ...... Debt securities in issue ................................... Subordinated liabilities ................................... Non-equity minority interests ......................... 2001 2000 Carrying value US$m 413,290 93,293 4,755 120 503,631 27,098 15,480 4,291 Fair value US$m 415,664 94,314 5,294 172 503,725 26,635 15,799 4,221 Carrying value US$m 415,869 86,954 4,638 126 487,122 27,956 16,222 5,171 Fair value US$m 417,721 87,744 5,773 212 487,174 28,107 16,168 5,535 The carrying and fair values of non-trading derivative financial instruments are disclosed on page 224. 266 (l) Earnings per share Basic earnings per share under US GAAP, SFAS 128 ‘Earnings per share’, is calculated by dividing net income of US$4,911 million (2000: US$6,236 million; 1999: US$4,889 million) by the weighted average number of ordinary shares in issue in 2001 of 9,237 million (2000: 8,777 million; 1999: 8,296 million). Diluted earnings per share under US GAAP is calculated by dividing net income, which requires 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 2001 of 9,336 million (2000: 8,865 million; 1999: 8,374 million), as shown in Note 11. (m) Consolidated cash flow statement HSBC prepares its cash flow statement in accordance with the UK Financial Reporting Standard 1 (Revised 1996) ‘Cash flow statements’. Its objectives and principles are similar to those set out in SFAS 95 ‘Statement of cash flows’, as amended by SFAS 104 ‘Statement of cash flows – Net reporting of certain cash receipts and cash payments and classification of cash flows from hedging transactions’. FRS 1 (Revised) defines cash as cash and balances at central banks and advances to banks payable on demand. Under US GAAP, Cash equivalents are defined as short-term highly liquid investments that are both: − − convertible to known amounts of cash; and so near their maturity that they present insignificant risk of changes in value because of fluctuations in interest rates. The other principal differences between US and UK GAAP are in respect of classification. Under UK GAAP, HSBC presents its cash flows by: (a) Operating activities; (b) Dividends received from associates; (c) Returns on investments and servicing of finance; (d) Taxation; (e) Capital expenditure and financial investments; (f) Acquisitions and disposals; (g) Equity dividends paid; and (h) Financing. Under US GAAP, only three categories are required. These are: (a) Operating; (b) Investing; and (c) Financing. Cash Flow Taxation Dividends received from associates Equity dividends paid Non-equity dividends paid and dividends to minority interests Capital expenditure and financial investments Transfers of subsidiary undertakings, joint ventures and associates Net changes in loans and advances including finance lease payables Net changes in deposits Classification Under FRS 1 (Revised) Taxation Dividends received from associates Equity dividends paid Returns on investments and servicing of finance Capital expenditure and financial investments Acquisitions and disposals Classification Under SFAS 95/104 Operating activities Operating activities Financing activities Financing activities Investing activities Investing activities Operating activities Investing activities Operating activities Financing activities Under FRS 1 (Revised), hedges are reported under the same heading as the related assets or liabilities. 267 H S B C H O L D I N G S P L C Notes on the Financial Statements (continued) For the purposes of the following table, HSBC has defined cash and cash equivalents as the sum of the following balance sheet categories: Cash and balances at central banks ......................................... Items in the course of collection from other banks ................. Loans and advances to banks repayable on demand ............... Less: Items in the course of transmission to other banks ................. 2001 US$m 6,185 5,775 16,039 (3,798) 24,201 2000 US$m 5,006 6,668 19,332 (4,475) 26,531 Set out below is a summary combined statement of cash flows under US GAAP. Cash flows from operating activities .......................................... Cash flows from investing activities ........................................... Cash flows from financing activities .......................................... Effect of exchange rate changes on cash and cash equivalents... Net movement in cash and cash equivalents under US GAAP ... Cash and cash equivalents at beginning of year.......................... Cash and cash equivalents at the end of the year ........................ Year ended 31 December 2001 US$m 14,324 (20,241) 3,995 (408) (2,330) 26,531 24,201 2000 US$m 16,464 (31,300) 23,545 (837) 7,872 18,659 26,531 1999 US$m 6,179 5,826 11,526 (4,872) 18,659 1999 US$m 10,559 (12,655) 5,153 (306) 2,751 15,908 18,659 The total interest paid by HSBC during the year was US$22,301 million (2000: US$21,844 million; 1999: US$17,550 million). 51 Approval of accounts These accounts were approved by the Board of Directors on 4 March 2002. 268 Taxation of Shares and Dividends Taxation Taxation of dividends No tax is currently withheld from dividends paid by HSBC Holdings. However, dividends are paid with an associated tax credit which is available for set-off against any liability a shareholder may have to UK income tax. Currently, the associated tax credit is equivalent to 10 per cent of the combined cash dividend and tax credit, i.e. one-ninth of the cash dividend. For individual shareholders who are resident in the United Kingdom for taxation purposes and liable to UK income tax at the basic rate, no further UK income tax liability arises on the receipt of a dividend from HSBC Holdings. Individual shareholders who are liable to UK income tax at the higher rate on UK dividend income (currently 32.5 per cent) are taxed on the combined amount of the dividend and the tax credit. The tax credit is available for set-off against the higher rate liability, leaving net higher rate tax to pay equal to 25 per cent of the cash dividend. From 6 April 1999, individual UK resident shareholders have not been 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 their country of residence and the United Kingdom. However, in most cases no amount of the tax credit is in practice repayable. Dividends paid by HSBC Holdings are generally not subject to tax in Hong Kong. Information on the taxation consequences of the HSBC Holdings scrip dividends offered in lieu of the 2000 second interim dividend and the 2001 first interim dividend was set out in the Secretary’s letters to shareholders of 26 March 2001 and 5 September 2001 respectively. In both cases, the market value of the scrip dividend was not substantially different from the dividend forgone and, accordingly, the price of HSBC Holdings US$0.50 ordinary shares (the ‘Shares’) for UK tax purposes for both dividends was the cash dividend forgone. Taxation of capital gains The computation of the capital gains tax liability arising on disposals of shares in HSBC Holdings by shareholders subject to UK capital gains tax can be complex, partly dependent on whether, for example, the shares were purchased since April 1991, acquired in 1991 in exchange for shares in The Hongkong and Shanghai Banking Corporation Limited, or acquired in 1992 in exchange for shares in Midland Bank plc, now HSBC Bank plc. For capital gains tax purposes, the acquisition cost for ordinary shares is adjusted to take account of subsequent rights and capitalisation issues. Further adjustments apply where an individual shareholder has chosen to receive shares instead of cash dividends, subject to scrip issues made since 6 April 1998 being treated for tax as separate holdings. Any capital gain arising on a disposal will also be adjusted to take account of indexation allowance and, in the case of individuals, tapering relief. If in doubt, shareholders are recommended to consult their professional advisers. Stamp duty and stamp duty reserve tax Transfers of Shares generally will be subject to UK stamp duty at the rate of 0.5 per cent of the consideration paid for the transfer, and such stamp duty is generally payable by the transferee. An agreement to transfer Shares, or any interest therein, normally will give rise to a charge to stamp duty reserve tax at the rate of 0.5 per cent of the consideration. However, provided an instrument of transfer of the Shares is executed pursuant to the agreement and duly stamped before the date on which the stamp duty reserve tax becomes payable, under current UK Inland Revenue practice it will not be necessary to pay the stamp duty reserve tax, nor to apply for such tax to be cancelled. Stamp duty reserve tax generally is payable by the transferee. Paperless transfers of Shares within CREST, the United Kingdom’s paperless share transfer system, are liable to stamp duty reserve tax at the rate of 0.5 per cent of the consideration. In CREST transactions, the tax is calculated and payment made automatically. Deposits of Shares into CREST generally will not be subject to stamp duty reserve tax, unless the transfer into CREST is itself for consideration. 269 H S B C H O L D I N G S P L C Taxation of Shares and Dividends (continued) Taxation – US residents The following is a summary of the US Federal tax considerations that are likely to be material to the ownership and disposition of Shares or ADSs by a holder that is a resident of the United States for the purposes of the income tax convention between the United States and the United Kingdom (the ‘Treaty’), and is fully eligible for benefits under the Treaty (an ‘eligible US holder’). The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a holder of Shares or ADSs. In particular, the summary deals only with eligible US holders that hold Shares or ADSs as capital assets, and does not address the tax treatment of holders that are subject to special tax rules, such as banks, tax-exempt entities, insurance companies, dealers in securities or currencies, persons that hold Shares or ADSs as part of an integrated investment (including a ‘straddle’) comprised of a Share or ADS and one or more other positions, and persons that own, directly or indirectly, 10 per cent or more of the voting stock of HSBC Holdings. This discussion is based on laws, treaties, judicial decisions and regulatory interpretations in effect on the date hereof, all of which are subject to change. On 24 July 2001 representatives of the United Kingdom and the United States signed a new income tax convention (the ‘New Treaty’). As of the date hereof, the New Treaty has not been ratified by either country and there can be no assurance that it will enter into force. The New Treaty does not currently have the force and effect of law. If the New Treaty is ratified and enters into force, eligible US holders will no longer be entitled to claim a special foreign tax credit in respect of dividends that is available under the terms of the Treaty, except for a limited period of time during which such holders may elect to apply the Treaty in its entirety in preference to the New Treaty. Holders and prospective purchasers should consult their own advisers regarding the tax consequences of an investment in Shares or ADSs in light of their particular circumstances, including the effect of any national, state or local laws. In general, the beneficial owner of a Share or ADS will be entitled to benefits under the Treaty (and, therefore, will be an eligible US holder) if it is (i) an individual resident of the United States, a US corporation, or a partnership, estate or trust to the extent its income is subject to taxation in the United States as the income of a resident, either in its hands or in the hands of its partners or beneficiaries; and (ii) 270 not also resident in the United Kingdom for UK tax purposes. Special rules, including a limitation of benefits provision, may apply in limited circumstances to certain investment or holding companies and tax- exempt entities. The Treaty benefits discussed below generally are not available to US holders that hold Shares or ADSs in connection with the conduct of a business through a permanent establishment, or the performance of personal services through a fixed base, in the United Kingdom. Taxation of dividends The Treaty contains provisions that are intended to extend the benefits of the UK integrated tax system to eligible US holders. The UK tax credit available to persons who are resident for tax purposes in the United Kingdom in respect of dividends is currently equal to one-ninth of the cash dividend, or the equivalent of 10 per cent of the sum of the dividend and the UK tax credit. The Treaty provides that an eligible US holder is entitled to receive a payment from the UK Inland Revenue equal to the amount of the tax credit, reduced by any deduction withheld from the payment. The UK withholding tax (which, under UK law, may not exceed the UK tax credit) fully offsets the UK tax credit, and eligible US holders are no longer entitled to receive a cash payment from the UK Inland Revenue. To claim foreign tax credit benefits under the Treaty, eligible US holders must report an election on IRS Form 8833 to include in their income, as an additional dividend, an amount equal to the tax credit that is available to UK resident investors, currently one-ninth of the amount of the dividend that is received by such a holder in cash. If an eligible US holder makes this election, the holder will be treated for US tax purposes as if a UK tax equal to the amount of the credit had been withheld from the dividend. The holder will not be entitled to receive an additional cash payment from HSBC or from the UK Inland Revenue. For example, if HSBC pays such a holder a dividend of 90, the holder may elect to include 100 in its income. By making this election, the holder will be treated as having income of 100 that is subject to a UK withholding tax of 10. Subject to generally applicable limitations, this tax may be claimed as a credit against the holder's US tax liability. Foreign tax credits are not allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities or in certain other situations. If the New Treaty enters into force, eligible US holders will no longer be entitled to elect to receive the benefits discussed above and will not be able to claim a foreign tax credit in respect of any dividends paid by HSBC. For this purpose, the New Treaty will generally be effective for amounts credited on or after the first day of the second month next following the date on which instruments of ratifications are exchanged by the United Kingdom and the United States, except that such holders may elect to continue to receive the special foreign tax credit benefits described above for a 12-month period from the date on which the New Treaty will otherwise enter into effect if they elect to apply the Treaty in its entirety for that period. Taxation of capital gains Gains realised by an eligible US holder on the sale or other disposition of Shares or ADSs normally will not be subject to UK taxation. Such gains will be included in income for US tax purposes, and will be long-term capital gains if the Shares or ADSs were held for more than one year. A long-term capital gain realised by an individual holder generally is subject to US tax at a maximum rate of 20 per cent. Stamp duty and stamp duty reserve tax – ADSs If Shares are transferred into a clearance service or depositary receipt arrangement (which will include a transfer of Shares to the Depositary) UK stamp duty and/or stamp duty reserve tax will be payable. The stamp duty or stamp duty reserve tax is generally payable on the consideration for the transfer and is payable at the aggregate rate of 1.5 per cent. No stamp duty will be payable on the transfer of, or agreement to transfer, an ADS, provided that the ADR and any separate instrument of transfer or written agreement to transfer remain at all times outside the United Kingdom, and provided further that any such transfer or written agreement to transfer is not executed in the United Kingdom. No stamp duty reserve tax will be payable on a transfer of, or agreement to transfer, an ADS effected by the transfer of an ADR. On a transfer of Shares from the Depositary to a registered holder of an ADS upon cancellation of the ADS, a fixed stamp duty of £5 per instrument of transfer will be payable by the registered holder of the ADR cancelled. US backup withholding tax and information reporting Distributions made on Shares and proceeds from the sale of Shares or ADSs that are paid within the United States, or through certain US-related financial intermediaries to US holders, are subject to information reporting and may be subject to a US ‘backup’ withholding tax unless, in general, the US holder complies with certain certification procedures or is a corporation or other person exempt from such withholding. Holders that are not US persons generally are not subject to information reporting or backup withholding tax, but may be required to comply with applicable certification procedures to establish that they are not US persons in order to avoid the application of such information reporting requirements or backup withholding tax to payments received within the United States or through certain US-related financial intermediaries. 271 H S B C H O L D I N G S P L C Shareholder Information Financial Calendar 2002 Publication of Annual Report and Accounts online 4 March Mailing of Annual Report and Accounts and /or Annual Review, Notice of Annual General Meeting and dividend information 2001 second interim dividend payable Annual General Meeting Announcement of interim results 3 April 7 May 31 May 5 August Proposed dates for first interim dividend for 2002: Shares quoted ex-dividend in London and Hong Kong and ADSs quoted ex-dividend in New York 21 August Record date 23 August Shares quoted ex-dividend in Paris 26 August Payment date 9 October Annual General Meeting The 2002 Annual General Meeting will be held at the Barbican Hall, Barbican Centre, London EC2 on 31 May 2002 at 11 am. Second Interim Dividend for 2001 The Directors have declared a second interim dividend of US$0.29 per ordinary share (in lieu of a final dividend) which, together with the first interim dividend of US$0.19 already paid, will make a total distribution for the year of US$0.48 per share, an increase of 10 per cent on 2000. Information on the scrip dividend scheme and currencies in which the cash dividend may be paid will be sent to shareholders on or about 3 April 2002. Postal Share-Dealing Service For shareholders on the UK register, a low-cost postal share-dealing service for buying and selling HSBC Holdings shares is available from HSBC Bank plc Stockbrokers. Details are available from: HSBC Bank plc Stockbrokers Mariner House, Pepys Street London EC3N 4DA Telephone: 020 7260 0906 Facsimile: 020 7260 7556 lost share certificates and dividend cheques, should be sent in writing to the registrars: UK or Computershare Investor Services PLC PO Box 435, Owen House 8 Bankhead Crossway North Edinburgh EH11 4BR Hong Kong Central Registration Hong Kong Limited Rooms 1901-1905, Hopewell Centre 183 Queen’s Road East, Hong Kong Investor Relations Enquiries may be directed to: Senior Manager Investor Relations HSBC Holdings plc 10 Lower Thames Street London EC3R 6AE UK Telephone: +44 (0)20 7260 7252 +44 (0)20 7260 9041 Facsimile: Annual Report and Accounts 2001 Further copies may be obtained by writing to the following departments. For those in Europe, the 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 For those in the Americas: Group Public Affairs HSBC Bank USA 452 Fifth Avenue New York, NY 10018 USA Chinese translation Shareholder Enquiries Any matters relating to your shareholding, for example transfer of shares, change of name or address, A Chinese translation of this Annual Report and Accounts is available on request after 3 April 2002 from: 272 Central Registration Hong Kong Limited Rooms 1901-1905, Hopewell Centre 183 Queen’s Road East Hong Kong Where more information about HSBC is available This Annual Report and Accounts, and other information on HSBC, may be viewed on our web site: www.hsbc.com. US Investors may read and copy this Annual Report, and other reports, statements or information that HSBC Holdings files at the Securities Exchange Commission’s public reference room in Washington D.C., which is located at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. These documents will also be available at the Commission’s regional offices located at The Woolworth Building, 233 Broadway, New York, New York 10279 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Investors should call the Commission at 1-800-SEC- 0330 for further information on the operation of the public reference rooms. Investors can request copies of these documents upon payment of a duplicating fee, by writing to the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the deposit agreement requires HSBC Holdings to deliver to ADS holders, or to the depositary for forwarding to ADS holders, copies of all reports that HSBC Holdings files with the Commission without charge to these holders. Investors may also obtain the reports and other information HSBC Holdings files at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. Nature of trading market HSBC Holdings has listings on the London Stock Exchange, the Hong Kong Stock Exchange, Euronext Paris and the New York Stock Exchange. HSBC Holdings maintains its principal share register in London and an overseas branch share register in Hong Kong (collectively, the ‘share register’). As at 31 December 2001, there were a total of 184,701 holders of record of US$0.50 ordinary shares. As at 31 December 2001, a total of 5,603,177 of the US$0.50 ordinary shares were registered in the HSBC Holdings share register in the name of 670 holders of record with addresses in the United States. These shares represented 0.06 per cent of the total US$0.50 ordinary shares in issue. As at 31 December 2001, there were 1,574 holders of record of ADSs holding approximately 29.71 million ADSs, representing approximately 148.6 million US$0.50 ordinary shares. All of these holders had addresses in the United States. As at 31 December 2001, approximately 1.59 per cent of the US$0.50 ordinary shares were represented by ADSs held by holders of record with addresses in the United States. The following table shows, for the years, calendar quarters and months indicated, the highest and lowest prices for the US$0.50 ordinary shares and ADSs. These are based on mid-market prices at close of business on the London Stock Exchange, the Hong Kong Stock Exchange, Euronext Paris and the New York Stock Exchange. Share prices have not been given for the 75p ordinary shares listed on the Hong Kong Stock Exchange until 2 July 1999 since on many days, the 75p shares had little or no turnover in Hong Kong. Past share price performance should not be regarded as a guide to future performance. 273 H S B C H O L D I N G S P L C Shareholder Information (continued) High and low mid-market closing prices US$0.50 shares Low (pence) 608 682 632 High (pence) 1092 1046 866 2001 ...... 2000 ...... 1999 ...... 1998 ...... 1997 ...... London 75p shares High (pence) Low (pence) HK$10 shares High (pence) Low (pence) 815 675 782 519 327 424 816 638 751 486 322 414 Hong Kong US$0.50 shares Low (HK$) 68.5 82.8 83.3 High (HK$) 121.5 117.5 109.0 HK$10 shares High (HK$) Low (HK$) 100.0 82.3 93.0 61.8 44.0 51.7 New York ADSs High (US$) 79.7 76.6 71.4 Low (US$) 44.8 54.3 53.8 Paris US$0.50 shares Low (euro) 9.5 14.2 High (euro) 17.3 17.6 London US$0.50 shares Hong Kong US$0.50 shares New York ADSs Paris US$0.50 shares 2001 4th Quarter.................................. 3rd Quarter ................................. 2nd Quarter ................................. 1st Quarter................................... 2000 4th Quarter .................................... 3rd Quarter.................................... 2nd Quarter ................................... 1st Quarter..................................... High (pence) 891 852 921 1092 1046 1033 792 823 Low (pence) 697 608 815 777 910 749 694 682 High (HK$) 98.5 94.0 101.0 121.5 117.5 116.0 93.5 108.0 Low (HK$) 79.8 68.5 90.0 89.5 102.5 88.8 82.8 85.0 High (US$) 63.7 61.9 66.0 79.7 76.6 74.7 60.1 70.7 London US$0.50 shares Hong Kong US$0.50 shares New York ADSs High (pence) 891 862 795 823 850 852 Low (pence) 803 760 697 608 802 777 High (HK$) 98.5 94.8 89.5 92.5 94.0 93.0 Low (HK$) 89.5 85.5 79.8 68.5 90.0 86.5 High (US$) 63.7 61.9 57.4 59.8 61.9 60.8 2001 December ................................... November................................... October ...................................... September .................................. August ........................................ July............................................. Notes (i) US$0.50 ordinary shares were issued on implementation of a share capital reorganisation in 1999. (ii) Share prices prior to 2 July 1999 have been restated to reflect the share capital reorganisation. (iii) Shares were not listed on the New York Stock Exchange prior to 16 July 1999. (iv) Shares were not listed on the Paris Bourse (now Euronext Paris) prior to 28 July 2000. Low (US$) 52.5 44.8 57.8 56.4 66.5 58.3 54.3 55.4 Low (US$) 58.8 56.9 52.5 44.8 59.2 56.3 High (euro) 14.2 14.2 15.0 17.3 Low (euro) 11.2 9.5 12.9 12.5 17.6 17.0 15.1 14.2 Paris US$0.50 shares High (euro) 14.2 13.9 12.7 13.3 13.5 14.2 Low (euro) 13.0 12.2 11.2 9.5 12.9 12.6 274 Dividends on the ordinary shares of HSBC Holdings Memorandum and Articles of Association HSBC Holdings has paid dividends on its ordinary shares every year without interruption since it became the HSBC Group holding company by a scheme of arrangement in 1991. The 75p ordinary shares and HK$10 ordinary shares were entitled to equal rights, including the right to a dividend, and all dividends were declared and paid with respect to both classes of shares. The dividends declared, per ordinary share*, for each of the last five years were: 2001 2000 1999 1998 1997 First Interim Second Interim US$.......... £............... HK$......... US$.......... £............... HK$ ......... US$.......... £............... HK$ ......... US$.......... £............... HK$ ......... US$.......... £............... HK$ ......... 0.190 0.129 1.482 0.150 0.103 1.170 0.133 0.081 1.033 0.123 0.073 0.956 0.108 0.067 0.832 0.290 0.200 2.261 0.285 0.191 2.223 0.207 0.131 1.612 0.185 0.115 1.434 0.169 0.100 1.308 Total 0.480 0.329 3.743 0.435 0.294 3.393 0.340 0.212 2.645 0.308 0.188 2.390 0.277 0.167 2.140 * The second interim dividend for 2001 of US$0.29 per share has been translated into pounds sterling and Hong Kong dollars at the closing rate on 31 December 2001. The dividend will be paid on 7 May 2002. For the year ended 31 December 1997, dividends on the 75p ordinary shares and the HK$10 ordinary shares were declared in sterling and, at the shareholder’s election, paid in either sterling or Hong Kong dollars, or satisfied by the issue of new shares in lieu of a cash dividend. In the table above dividends have been translated into US dollars at the noon buying rates in New York City for cable transfers in sterling as certified for customs purposes by the Federal Reserve Bank of New York for the dates on which dividends were paid. For the year ended 31 December 1998 and onwards, dividends on the 75p ordinary shares, the HK$10 ordinary shares and, following the share reorganisation in 1999, the US$0.50 ordinary shares have been declared in US dollars and, at the election of the shareholder, paid in cash in one of, or in a combination of, US dollars, sterling and Hong Kong dollars, or satisfied in whole or in part by the issue of new shares in lieu of a cash dividend. The 2001 Annual General Meeting of HSBC Holdings approved alterations to the Articles of Association to: • enable shareholders to elect to receive certain shareholder communications electronically, rather than in paper form through the mail, and to appoint proxies electronically; • • require all Directors to stand for re-election at least every three years. This reflects current policy on the retirement of Directors by rotation and the best practice recommendations contained in the Combined Code on corporate governance in the United Kingdom; and reflect the increase in authorised ordinary share capital approved by shareholders at that Meeting. The increase was from US$5,250,000,000 to US$7,500,000,000 (comprising 15,000,000,000 ordinary shares of US$0.50 each) by the creation of an additional 4,500,000,000 ordinary shares. The discussion under the caption ‘Memorandum and Articles of Association’ contained in HSBC Holdings Annual Report on Form 20-F for the year ended 31 December 2000 is incorporated by reference herein. 275 H S B C H O L D I N G S P L C Organisational Structure C B S H e c n a r u s n I s g n i d l o H d e t i m L i C B S H e c n a r u s n I s r e k o r B d e t i m L i t e s s A C B S H t n e m e g a n a M ) n a w i a T ( d e t i m L i ) % 0 1 . 7 9 ( c l p C B S H t n e m t s e v n I k n a B s g n i d l o H C B S H t n e m t s e v n I c l p k n a B e h T s u r p y C k n a B r a l u p o P d e t i m L i ) K U ( k n a B d e t i m L i C B S H c i l b u p e R ) % 4 7 . 1 2 ( C B S H V B s g n i d l o H d e t i i m L ) K U e f i L C B S H ( ) s d n a l r e h t e N e c n a n i F ( C B S H c l p C B S H s g n i d l o H p u o r G C B S H e h T s e i n a p m o C g n i t a r e p O l a p i c n i r P f o e r u t c u r t S 2 0 0 2 y r a u n a J t a k n a B C B S H c l p t e s s A C B S H e c n a n i F ) K U ( d e t i m L i ) % 1 5 7 9 ( . a s i r E ) % 9 9 9 4 ( . a i x x o L ) l i a b i l S % 5 9 . 8 4 ( t i d é r C l a i c r e m m o C A S e c n a r F e d ) % 9 9 . 9 9 ( n o t g n i l m a r F 276 s g n i d l o H d e t i m L i ) % 1 5 ( l a i c r e m m o C d e t i i m L k n a B ) % 1 5 . 6 4 ( h c n y L l l i r r e C B S H d e t i m L i ) % 0 5 ( b a r A h s i t i r B M k n a B C B S H t s a E e l d d i M n i t a L C B S H V B a c i r e m A k n a B C B S H E A S t p y g E ) % 3 5 . 4 9 ( C B S H o c u b a c a h C s e n o i s r e v n I . A S . ) % 0 6 ( a L C B S H s e r i A s o n e u B A S s o r u g e S ) % 2 3 . 9 9 ( k n a B C B S H . . A S a n i t n e g r A ) % 2 9 . 9 9 ( C B S H a n i t n e g r A . . A S s g n i d l o H ) % 1 6 . 3 2 ( ) % 1 3 . 6 7 ( k n a B C B S H – . . A S l i s a r B o c n a B o l p i t l u M C B S H s o r u g e S . . A S ) l i s a r B ) % 5 7 . 9 9 ( e f i L C B S H ) l a n o i t a n r e t n I ( d e t i m L i s g n i d l o H d e t i m L i C B S H e c n a r u s n I ) % 0 5 ( ) a i s A ( d e t i m L i i d u a S e h T h s i t i r B k n a B ) % 0 4 ( C B S H e c n a r u s n I ) c i f i c a P - a i s A ( e h T g n o k g n o H i a h g n a h S d n a g n i k n a B n o i t a r o p r o C d e t i m L i e c n a n i F d l r o W l a n o i t a n r e t n I d e t i m L i g n e S g n a H d e t i i m L k n a B ) % 4 1 . 2 6 ( d a h r e B k n a B C B S H a i l a r t s u A d e t i m L i k n a B C B S H a i s y a l a M ) % 4 6 . 4 2 ( e t a g w o r r a B d e t i m L i ) % 1 3 . 5 1 ( C B S H , s e i t i r u c e S . c n I ) A S U ( o g r a F s l l e W e d a r T C B S H . A N . , k n a B ) % 0 2 ( C B S H & s u a k n i r T t d r a h k r u B A a G K ) % 7 4 . 3 7 ( ) % 1 2 ( C B S H r e l l e z r e y u G V B s g n i d l o H ) % 1 4 . 4 9 ( ) % 2 0 . 5 4 ( ) % 3 9 . 9 ( ) % 8 9 . 6 1 ( A S a m i x a M ) P J F A % 4 7 . 5 5 ( ) % 5 . 5 ( ) % 2 6 . 1 3 ( ( ) % 9 7 ( C B S H t n e m t s e v n I k n a B s g n i d l o H V B A S U C B S H . c n I C B S H c i l b u p e R s g n i d l o H . A S . ) % 9 9 . 9 9 ( ) g r u o b m e x u L ( ) % 9 4 2 ( . k n a B C B S H A S U k n a B C B S H ) a d a n a C % 9 9 . 9 9 ( C B S H V B e p o r u E ) % 0 3 4 1 ( . k n a B C B S H . c . l . p a t l a M ) % 3 0 0 7 ( . ) % 7 5 7 ( . C B S H c i l b u p e R ) e s s i u S ( k n a B . A S . ) % 0 7 5 8 ( . C B S H e t a v i r P g n i k n a B s g n i d l o H A S ) e s s i u S ( C B S H t n e m t s e v n I a i s A k n a B d e t i m L i C B S H c i l b u p e R ) y e s n r e u G k n a B ( d e t i m L i ) % 8 8 1 ( . ) % 8 3 8 5 ( . C B S H r e l l e z r e y u G ) % 0 1 ( G A k n a B ) % 3 2 8 9 ( . . d e n w o y l l o h w s i y n a p m o c e h t s r a e p p a e r u g i f o n e r e h W . p u o r G C B S H e h t n i h t i w y n a p m o c t a h t e n o h p e l e t e h t d n a E A 6 R 3 C E n o d n o L , t e e r t S s e m a h T r e w o L 0 1 s i s s e r d d a d e r e t s i g e r s t I . s e l a W d n a d n a l g n E f o 5 8 9 1 t c A s e i n a p m o C e h t r e d n u d e s i n a g r o y n a p m o c f o d e n w o e g a t n e c r e p e t a m i t l u e h t . ' s t n e m e t a t S l a i c n a n i F e h t n o s e t o N s e t a c i d n i e h t ' f o 6 2 d n a 2 2 , 1 2 s e t o N n i n w o h s e r a n o i t a r o p r o c n i x o b e m a n y n a p m o c a e d i s n i s t e k c a r b n i e r u g i f e g a t n e c r e p A f o s e c a l P . n w o h s e r a s e i n a p m o c g n i d l o h e t a i d e m r e t n i l l a t o n ; y l n o m a r g a i d p i h s r e n w o d e i f i l p m i s a s i t r a h c s i h T d e t i m i l c i l b u p a s i c l p s g n i d l o H C B S H . 0 0 0 8 0 6 2 7 0 2 ) 0 ( 4 4 + s i r e b m u n S E T O N ) 1 ) 2 ) 3 ) 4 2. 3. 4. 5. 6. 7. H S B C H O L D I N G S P L C SEC 20-F Cross-Reference Sheet and Glossary Cross-Reference Sheet Form 20-F Item Number and Caption Location Page PART I 1. Identity of Directors, Senior Management and Advisers Not required for Annual Report Offer and Statistics and Expected Timetable Not required for Annual Report Key Information A. Selected Financial Data B. Capitalization and Indebtedness C. Reasons for the Offer and use of Proceeds D. Risk Factors Information on the Company A. History and Development of the Company B. Business Overview C. Organizational Structure D. Property, Plants and Machinery Five-Year Comparison US GAAP Selected Financial Data Not required for Annual Report Not required for Annual Report Not Applicable Description of Business Description of Business Description of Business Organisational Structure Description of Property _ _ 3 4 – – – 9-32 9-32 7 276 33 Operating and Financial Review and Prospects A. Operating Results B. Liquidity and Capital Resources C. Research and Development, Patents and Financial Review Financial Review Not Applicable 35-78 112-113, 118-120 – Licences, etc. D. Trend Information Financial Review 35-78 Directors, Senior Management and Employees A. Directors and Senior Management B. Compensation C. Board Practices D. Employees E. Share Ownership Major Shareholders and Related Party Transactions A. Major Shareholders B. Related Party Transactions C. Interests of Experts and Counsel 8. Financial Information A. Consolidated Statements and Other Financial Information B. Significant Changes Board of Directors and Senior Management Report of the Directors Report of the Directors Description of Business Report of the Directors 127-130 142-150 138-141, 148-150 26 150-155 Report of the Directors Report of the Directors Note 48 – Notes on the Financial Statements Not Applicable Financial Statements Legal Proceedings Note 44 – Notes on the Financial Statements Not applicable 156 156 243-244 – 160-268 34 236-237 – 277 H S B C H O L D I N G S P L C SEC 20-F Cross-Reference Sheet and Glossary (continued) 9. 10 11. 12. The Offer and Listing A. Offer Listing and Details B. Plan of Distribution C. Markets D. Selling Shareholders E. Dilution F. Expenses of the Issue Additional Information A. Share Capital B. Memorandum and Articles of Association C. Material Contracts D. Exchange Controls E. Taxation F. Dividends and Paying Agents G. Statements by Experts H. Documents on Display I. Subsidiary Information Quantitative and Qualitative Disclosures About Market Risk Shareholder Information Not required for Annual Report Shareholder Information Not required for Annual Report Not required for Annual Report Not required for Annual Report Not required for Annual Report Shareholder Information Not Applicable Exchange controls and other limitations affecting security holders Shareholder Information Not required for Annual Report Not required for Annual Report Shareholder Information Not Applicable Financial Review Notes 38 and 40 – Notes on the Financial Statements Description of Securities Other than Equity Securities A. Debt Securities B. Warrants and Rights C. Other Securities D. American Depositary Shares Not required for Annual Report Not required for Annual Report Not required for Annual Report Not required for Annual Report PART II 13. Defaults, Dividends Arrearages and Delinquencies 14. Material Modifications to the Rights of Securities Holders and Use of Proceeds Not Applicable Not Applicable 15. [Reserved] 16. [Reserved] PART III 17. Financial Statements Not Applicable 18. Financial Statements Financial Statements 19. Exhibits * Filed with the Securities and Exchange Commission. 273-274 – 273-274 – – – – 275 – 6 269-271 – – 273 – 114-118 220-233 – – – – – – – 160-268 * 278 Glossary of Terms Terms Used US Equivalent or Brief Description Accounts Allotted Articles of Association Associates Attributable profit Balance sheet Bills Called-up share capital Capital allowances Creditors Dealing Debtors Deferred tax De-mutualising Depreciation Fees and commissions payable Fees and commissions receivable Finance lease Freehold Interest payable Interest receivable Interests in associated undertakings Loans and advances Loan capital Memorandum items Nominal value One-off Ordinary shares Other participating interests Overdraft Preference shares Premises Profit & loss account Profit & loss account reserve Provisions Revaluation reserve Share capital Shareholders’ funds Share premium account Shares in issue Tangible fixed assets Undistributable reserves Write-offs Financial Statements Issued Bylaws Long-term equity investments accounted for by the equity method Net income Statement of financial position Notes Ordinary shares, issued and fully paid Tax depreciation allowances Payables Trading Receivables Deferred income tax Process by which a mutual society is converted into a public limited company Amortisation Fees and commissions expense Fees and commissions income Capital lease Ownership with absolute rights in perpetuity Interest expense Interest income Long-term equity investments accounted for by the equity method Lendings Long-term debt Contingencies and commitments; off-balance-sheet items Par value Non-recurring Common stock Long-term equity investments accounted for by the cost method A line of credit, contractually repayable on demand unless a fixed-term has been agreed, established through a customer’s current account Preferred stock Real estate Income statement Retained earnings Allowances Increase or temporary decrease in the valuation of certain assets as compared with historical cost Ordinary shares or common stock issued and fully paid Stockholders’ equity Additional paid-in capital Shares outstanding Property and equipment Restricted surplus Charge-offs 279 H S B C H O L D I N G S P L C Index Page Page 118. Capital management and allocation 121. Other information 121. 123. Loan maturity and interest sensitivity analysis Deposits 127. Board of Directors and Senior Management 131. Report of the Directors 158. Statements of Directors’ Responsibilities in Relation to Financial Statements 159. Report of the Auditors 160. Financial Statements 165. Notes on the Financial Statements 269. Taxation of Shares and Dividends 269. 270. Taxation Taxation – US Residents 272. Shareholder Information 272. 272. 272. 272. 272. 272. 272. 273. 273. 275. Financial Calendar 2002 Annual General Meeting Dividends Postal Share-Dealing Service Shareholder Enquiries Investor Relations Annual Report and Accounts 2001 Where more information about HSBC is available Nature of trading market Dividends on the ordinary shares of HSBC Holdings 275. Memorandum and Articles of Association 276. Organisational structure 277. SEC 20-F Cross-Reference Sheet and Glossary 1. 3. 4. 5. 6. 6. 6. 7. 7. 7. 8. 9. 12. 20. 24. 26. 26. Financial Highlights Five-Year Comparison US GAAP Selected Financial Data Cautionary Statement Regarding Forward- Looking Statements Certain Defined Terms Information about the Enforceability of Judgements made in the United States Exchange controls and other limitations affecting security holders Description of Business Introduction Management and resources Strategy History and development Geographical regions Lines of Business Competitive environment Employees Regulation and supervision 33. Description of Property 34. Legal Proceedings Financial Review Introduction Summary Analysis by geographical segment Analysis by line of business UK GAAP compared with US GAAP Future accounting developments Average balance sheet and net interest income Analysis of changes in net interest income Risk management Credit risk management Liquidity management Market risk management Operational risk management 35. 35. 36. 48. 72. 78. 78. 81. 90. 94. 94. 112. 114. 118. 280 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: 44 020 7260 0500 Facsimilie: 44 020 7260 0501 Web: www.hsbc.com REGISTRARS Principal Register Computershare Investor Services PLC PO Box 435, Owen House 8 Bankhead Crossway North Edinburgh EH11 4BR United Kingdom Telephone: 44 0870 02 0010 Hong Kong Overseas Branch Register Central Registration Hong Kong Limited Rooms 1901-1905, Hopewell Centre 183 Queen’s Road East Hong Kong Telephone: 852 2862 8628 ADR Depositary The Bank of New York Floor 6 620 Avenue of the Americas New York, NY 10011 USA Telephone: 1 888 269 2377 Paying Agent (France) Crédit Commercial de France 103 avenue des Champs Elysées 75008 Paris France Telephone: 33 1 40 70 22 56 STOCKBROKERS Cazenove & Co. Ltd 12 Tokenhouse Yard London EC2R 7AN United Kingdom HSBC Investment Bank plc Thames Exchange 10 Queen Street Place London EC4R 1BL United Kingdom © Copyright HSBC Holdings plc 2002 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Holdings plc. Published by HSBC Holdings plc, London Designed by Group Public Affairs, The Hongkong and Shanghai Banking Corporation Limited, Hong Kong Printed by St Ives Westerham Press, Edenbridge, United Kingdom, on environmentally friendly, totally chlorine-free paper HSBC Holdings plc 10 Lower Thames Street London EC3R 6AE United Kingdom Telephone: 44 020 7260 0500 Facsimile: 44 020 7260 0501 Web: www.hsbc.com 

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