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
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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
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Published by HSBC Holdings plc, London
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Printed by St Ives Westerham Press, Edenbridge,
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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