HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: 44 020 7991 8888
Facsimile: 44 020 7992 4880
Web: www.hsbc.com
HSBC Holdings plc
Annual Report
and Accounts
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H S B C H O L D I N G S P L C
Table of Contents
Page
Page
Financial Highlights............................................... 1
Report of the Directors ...................................... 153
Five-Year Comparison........................................... 3
Directors’ Remuneration Report ...................... 170
Cautionary Statement Regarding
Forward-Looking Statements ............................... 5
Statements of Directors’ Responsibilities in
Relation to Financial Statements...................... 187
Certain Defined Terms .......................................... 6
Independent Auditors’ Report ......................... 188
Information about the Enforceability of
Judgements Made in the United States ................ 6
Financial Statements ......................................... 190
Exchange Controls and Other Limitations
Affecting Security Holders .................................... 7
Description of Business .......................................... 8
Description of Property ....................................... 34
Legal Proceedings ................................................ 35
Financial Review .................................................. 36
Other Information.............................................. 143
Board of Directors and Senior Management ... 149
Notes on the Financial Statements ................... 195
Taxation of Shares and Dividends ................... 314
Shareholder Information .................................. 317
Organisational Structure .................................. 321
SEC 20-F Cross-Reference Sheet and
Glossary.............................................................. 322
Index ................................................................... 325
This document comprises the Annual Report and Accounts 2002 and the Annual Report on Form 20-F 2002 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
2002 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 286. Cash basis items are non-GAAP measures
which are derived by adjusting reported earnings to eliminate the impact of the amortisation of goodwill arising on
acquisitions. HSBC judges its overall performance by comparing cash returns with cash invested. HSBC therefore
considers that cash basis measures provide useful additional indicators of performance for investors.
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
Basic earnings ..................................................................................
Cash earnings...................................................................................
Diluted earnings...............................................................................
Dividends.........................................................................................
Net asset value at year-end...............................................................
Share information
US$0.50 ordinary shares in issue (million)......................................
Market capitalisation at year-end .....................................................
Closing market price per share at year-end ......................................
2002
US$m
11,641
10,513
7,102
10,787
9,650
6,239
(5,001)
52,406
57,430
548,371
759,246
430,551
US$
0.67
0.76
0.66
0.53
5.53
2001¶
US$m
11,283
8,807
5,799
10,484
8,000
4,992
(4,467)
46,388
50,854
503,631
696,245
391,478
US$
0.54
0.63
0.53
0.48
4.96
9,481
US$105bn
£6.87
9,355
US$109bn
£8.06
HSBC
Benchmark
Total shareholder return to 31 December 2002*
– over 1 year....................................................................................
– since 1 January 1999†...................................................................
89
155
*
†
¶
Total shareholder return (‘TSR’) is defined on page 174.
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.
Figures for 2001, excluding average risk-weighted assets, have been restated to reflect the adoption of UK Financial Reporting
Standard 19 ‘Deferred Tax’, details of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
76
95
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 ..............................
On a reported basis
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 .....................................................................................
2002
%
12.8
19.8
1.11
1.95
12.3
0.97
1.74
56.2
58.1
41.9
29.4
4.9
9.0
13.3
2001¶
%
11.2
17.4
1.00
1.76
10.4
0.86
1.55
56.4
56.9
43.1
28.9
6.5
9.0
13.0
¶
Figures for 2001, excluding average risk-weighted assets, have been restated to reflect the adoption of UK Financial Reporting
Standard 19 ‘Deferred Tax’, details of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
The following explains the non-GAAP cash basis measures and how they are derived from the equivalent reported
measures.
The cash basis operating profit before provisions can be reconciled to the equivalent reported measure by
deducting goodwill amortisation of US$854 million and US$799 million for 2002 and 2001 respectively.
The cash basis profit on ordinary activities before tax and cash basis profit attributable to shareholders can be
reconciled to the equivalent reported measures by deducting goodwill amortisation, including that attributable to
joint ventures, of US$863 million and US$807 million for 2002 and 2001, respectively.
Cash basis earnings per ordinary share are calculated by dividing cash basis profit attributable to shareholders
(as explained above) by the weighted average number of ordinary shares in issue during the year which is the same
number used in the calculation of basic earnings per share on a reported basis.
The definition of return on invested capital and a reconciliation to the equivalent GAAP measures is set out on
page 53.
Average net tangible equity and average tangible assets are calculated by deducting average purchased goodwill
net of cumulative amortisation of US$15.0 billion. The calculation of both the cash basis and reported basis average
risk-weighted assets are derived from the same regulatory measure.
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 customers1 ....
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 share2
Basic earnings ...................................
Cash earnings....................................
Diluted earnings................................
Dividends..........................................
Net asset value .................................
Share information2
US$0.50 ordinary shares in issue ......
Financial ratios
Dividend payout ratio3 ......................
Post-tax return on average total
assets .............................................
Return on average shareholders’
funds..............................................
Average shareholders’ funds to
average total assets ........................
Capital ratios
Tier 1 capital .....................................
Total capital ......................................
1998
1999
2000 4
2001 4
2002
US$m
US$m
US$m
US$m
US$m
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
34,402 4
44,270
359,972
3,235
12,188
253,567
569,908 4
11,990
9,012
9,653
(2,073)
7,982
5,408
(2,872)
US$
US$
0.54
0.54
0.53
0.308
3.38
0.65
0.66
0.65
0.34
3.95
4,634
46,393
50,964
427,069
3,546
12,676
289,837
674,265
13,723
10,850
10,486
(932)
9,775
6,457
(4,010)
US$
0.74
0.80
0.73
0.435
5.01
4,678
46,388
50,854
449,991
3,479
12,001
308,649
696,245
14,725
11,163
10,484
(2,037)
8,000
4,992
(4,467)
US$
0.54
0.63
0.53
0.48
4.96
4,741
52,406
57,430
495,438
3,540
14,831
352,344
759,246
15,460
11,135
10,787
(1,321)
9,650
6,239
(5,001)
US$
0.67
0.76
0.66
0.53
5.53
8,067m
8,458m
9,268m
9,355m
9,481m
%
57.0
0.98
15.5
5.71
9.7
13.6
%
51.5
1.20
17.5
6.24
8.5
13.2
%
54.4
1.31
15.8
6.64
9.0
13.3
%
76.2
0.86
10.4
6.87
9.0
13.0
%
69.7
0.97
12.3
6.91
9.0
13.3
1
2
3
4
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.
Dividends per share expressed as a percentage of cash earnings per share.
The figures for 2001 and 2000 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’.
Apart from shareholders’ funds and total assets at 1999 year-end, the 1999 and 1998 comparatives have not been restated as any
adjustment made would not significantly alter the figures. Therefore, any benefit to be obtained from restatement would be
outweighed by the cost of the exercise.
3
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
Income statement data
for the year
Net income available for ordinary
shareholders...................................
Other comprehensive income............
Dividends..........................................
Balance sheet data
at 31 December
Total assets........................................
Shareholders’ equity .........................
Per ordinary share
Basic earnings ...................................
Diluted earnings................................
Dividends..........................................
Net asset value at year-end ...............
1998
1999
2000
2001
2002
US$m
US$m
US$m
US$m
US$m
3,934
(127)
(2,328)
4,889
(776)
(2,617)
6,236
(511)
(3,137)
4,911
(1,439)
(4,394)
4,900
5,502
(4,632)
488,856
30,351
574,588
35,930
680,076
48,072
698,312
48,444
763,565
55,831
US$
0.49
0.48
0.29
3.75
US$
0.59
0.58
0.31
4.25
US$
0.71
0.70
0.34
5.19
US$
0.53
0.53
0.48
5.18
US$
0.52
0.52
0.495
5.89
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 it should not be assumed
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 South America;
volatility in equity markets, including in the
smaller and less liquid trading markets in
Asia and South America;
lack of liquidity in wholesale funding
markets in periods of economic or political
crisis;
−
−
−
volatility in national real estate markets,
particularly consumer-owned real estate
markets;
continuing or deepening recessions and
employment fluctuations; and
consumer perception of the availability of
credit, including price competition in the
market segments served by HSBC and the
ramifications of ease of filing for personal
bankruptcy.
•
changes in governmental policy and regulation,
including:
−
−
−
−
−
−
the monetary, interest rate and other policies
of central banks and bank and other
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;
expropriation, nationalisation, confiscation
of assets and changes in legislation relating
to foreign ownership;
initiatives by local, state and national
regulatory agencies or legislative bodies to
revise the practices, pricing or
responsibilities of financial institutions
serving the consumer markets;
general changes in government policy that
may significantly influence investor
decisions in particular markets in which
HSBC operates;
other unfavourable political or diplomatic
developments producing social instability or
legal uncertainty which in turn may affect
demand for HSBC’s products and services;
and
the costs, effects and outcomes of
regulatory reviews, actions or litigation,
including any additional compliance
requirements.
•
the ability of the Government of Argentina
through reform of monetary, fiscal and exchange
rate policy to restore economic stability within
5
H S B C H O L D I N G S P L C
Cautionary Statement Regarding Forward-Looking Statements (continued)
the country and thereby attract 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 including increased competition
resulting from legislation permitting new types
of affiliations between banks and financial
services companies, including securities firms,
particularly in the United States.
the success of HSBC in adequately identifying
and managing the risks it faces, such as loan
losses or delinquency (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.
•
the success of HSBC in integrating the recently
acquired Grupo Financiero Bital S.A. de C.V.,
and in completing the acquisition of, and
integrating, Household International, Inc.
Trends and factors that are expected to affect
the results of HSBC’s operations in particular are
described in the ‘Financial Review’.
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.
6
H S B C H O L D I N G S P L C
Exchange Controls and Other Limitations Affecting Equity 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’ equity 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’ equity securities or, when entitled to vote,
to do so.
7
H S B C H O L D I N G S P L C
Description of Business
Introduction
• Hang Seng Bank
Hong Kong SAR
HSBC is one of the largest banking and financial
services organisations in the world, with a market
capitalisation of US$105 billion at 31 December
2002. At the end of 2002, HSBC had total assets of
US$759 billion and shareholders’ equity of US$52
billion. For the year ended 31 December 2002,
HSBC’s operating profit was US$9 billion on
revenues of US$27 billion. HSBC is a strongly
capitalised banking group with a total capital ratio of
13.3 per cent and a tier 1 capital ratio of 9.0 per cent
as at 31 December 2002.
Headquartered in London, HSBC operates
through long-established businesses in five regions:
Europe; Hong Kong; the rest of Asia-Pacific,
including the Middle East and Africa; North
America; and South 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 extensive
technological links, businesses are able to access its
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/or private banking operations which,
together with its commercial banks, enable HSBC to
service the requirements of its high net worth
personal, corporate and institutional customers.
Through its international network of over 8,000
offices in 80 countries and territories, HSBC
provides a comprehensive range of financial services
to personal, commercial, corporate, institutional and
investment, and private banking clients. The
establishment of HSBC as a uniform, international
brand has ensured that the Group’s corporate symbol
has become an increasingly familiar sight across the
world. HSBC’s largest and best-known subsidiaries
and their primary areas of operation are:
• The Hongkong and
Shanghai Banking
Corporation Limited
(‘The Hongkong and
Shanghai Banking
Corporation’)
Hong Kong SAR, with
an extensive network
throughout Asia-
Pacific.
8
Limited (‘Hang Seng
Bank’)
• HSBC Bank plc
United Kingdom
• CCF S.A. (‘CCF’)
France
• HSBC Bank USA
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 Private
Banking Holdings’)
• Grupo Financiero
Bital S.A. de C.V.
(‘GFBital’)
Switzerland, Hong
Kong SAR, Monaco,
Luxembourg, United
Kingdom, Singapore
and the Channel
Islands.
Mexico
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 on 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.
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
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
teamwork 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 personal financial
services to key markets around the world.
Personal Financial Services encompasses the
entire relationship with personal customers
including, but going well beyond, the provision
of a simple cheque account and lending
products. HSBC offers these customers the full
range of financial services and products,
including personal loans and mortgages,
consumer finance, 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 enhance corporate and investment banking
services for HSBC’s largest customers.
Following on the progress of recent years in
aligning more closely HSBC’s corporate
banking and credit services with the skill base
and professional expertise available from its
investment bank, HSBC decided in 2002 to
merge the two into a new division called
Corporate, Investment Banking and Markets
(‘CIBM’). This division offers a wide range of
high quality tailored services to corporate and
institutional clients, including treasury and
capital markets products, and structured finance
solutions. The fusion of these businesses will
help HSBC meet the requirements of its clients –
some of the world’s largest and most successful
companies.
• To develop HSBC and the hexagon symbol as an
international 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 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 that have provided access to
new markets, an increased presence in key
economies 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. In November 2002, HSBC made a
strategic move into Mexico with the purchase of
GFBital. This represents a strategic stake in a
country with a growing and under-banked population
in an economy with strong long-term growth
potential through membership of NAFTA. HSBC
now has a major presence in all the NAFTA
countries. Completion of the acquisition of
Household International, Inc., which was announced
on 14 November 2002, will further increase HSBC’s
presence in the US (see Developments in 2002 on
page 10).
9
H S B C H O L D I N G S P L C
Description of Business (continued)
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.
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.
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
within HSBC, are key to this integration process. The
most significant developments are described below.
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 is the second-largest listed bank in
Hong Kong by market capitalisation.
In the late 1970s and the 1980s, The Hongkong
and Shanghai Banking Corporation began to focus its
acquisition strategy on the UK. In 1987, The
Hongkong and Shanghai Banking Corporation
purchased a 14.9 per cent interest in Midland Bank
plc (now HSBC Bank plc), one of the UK’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.
The Hongkong and Shanghai Banking
Corporation entered the US market in 1980 by
10
acquiring a 51 per cent interest in Marine Midland
(now HSBC USA Inc.). The remaining interest was
acquired in 1987.
In 1981, The Hongkong and Shanghai Banking
Corporation incorporated its existing Canadian
operations. HSBC Bank Canada has since made
numerous acquisitions, expanding rapidly to become
the largest foreign-owned bank in Canada and the
seventh-largest overall at 31 December 2002.
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. HSBC also completed the acquisition
of Grupo Roberts in Argentina in 1997.
In December 1999, HSBC acquired Republic
New York Corporation, subsequently merged with
HSBC USA Inc., and Safra Republic Holdings S.A.
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.
Developments in 2002
In 2002, HSBC made further steps in expanding its
presence in North America. On 25 November 2002
HSBC completed the acquisition of 99.59 per cent of
GFBital, the fifth-largest banking group in Mexico
(measured by deposits and assets), for a
consideration of US$1.14 billion. During December
2002 HSBC recapitalised GFBital, injecting US$800
million of fresh capital. GFBital’s principal
subsidiaries include the banking operation – Banco
Internacional, S.A., a brokerage house – Casa de
Bolsa Bital, a bonding company – Fianzas Mexico
Bital, and a joint venture insurance and pension fund
operation with ING (GFBital 51 per cent, ING 49 per
cent).
On 14 November 2002, HSBC announced that it
had reached agreement to acquire the common stock
of Household International, Inc. (‘Household’) for a
consideration of approximately US$14.2 billion.
Pursuant to the agreement, Household will be
merged into H2 Acquisition Corporation, a wholly-
owned subsidiary of HSBC. Also pursuant to the
agreement, upon completion of the merger, each
issued and outstanding share of Household common
stock will be cancelled and converted into the right
to receive, at the election of the holder, 2.675 HSBC
ordinary shares or 0.535 ADSs (each HSBC ADS
representing an ownership interest in five HSBC
ordinary shares), with any right to fractional interests
being satisfied by a cash payment. Upon completion
of the merger, each issued and outstanding share of
Household non-voting preferred stock will be
cancelled and converted into the right to receive cash
in the amount of $1,000 per share ($25 per
depositary share representing 1/40th of a share), plus
all accrued and unpaid dividends up to but excluding
the closing date, without interest. The agreement
remains subject to a number of conditions including
shareholders’ approval of both HSBC and Household
and regulatory approvals. A Discloseable Transaction
Circular was sent to HSBC’s shareholders on 28
February setting out, inter alia, reasons for and
benefits of the acquisition. A registration statement
on Form F-4 describing the transaction has also been
filed with the US Securities and Exchange
Commission. These may be found on HSBC’s
website www.hsbc.com.
The acquisition, which is expected to be
completed around the end of the first quarter of
2003, will significantly increase the contribution
from HSBC’s North American operation. In
particular, Household offers HSBC national coverage
in the US for consumer lending, credit cards and
credit insurance through varied distribution channels
including approximately 1,400 offices in 46 states.
Further information on Household, including its
filings with the SEC, may be found on the
company’s website, www.household.com.
In further support of HSBC’s investment
banking business, particularly in the United States, in
May 2002 HSBC Holdings plc and AEA Investors
Inc. (‘AEA’) agreed in principle that HSBC will
invest up to US$750 million over the next five years
in a new US$1 billion plus private equity fund. In
February, 2003, the fund completed its first closing
for US$912 million, of which HSBC’s share is
US$638 million. The fund will enhance HSBC’s
existing involvement in the private equity sector
through entry to the US private equity market. HSBC
will be a limited partner in the fund.
Mainland China remains a critical growth area
for the Group. In November 2002, HSBC completed
the acquisition of a 10 per cent equity stake in Ping
An Insurance Company of China Limited at a cost of
US$600 million. Ping An Insurance is the second-
largest life insurer and the third-largest insurer in the
People’s Republic of China with over 25 million
policyholders, some 21,500 employees and over
200,000 licensed agents.
Expansion of wealth management services
remains another priority. In late December 2002,
HSBC agreed to acquire Keppel Insurance Pte
Limited. The acquisition was completed on 18
February 2003 at a price of S$154 million
(approximately US$88 million) in cash. Keppel
Insurance was established in Singapore in 1954 and
provides a full range of life and non-life insurance
products and services. It is also the market leader in
Takaful (Islamic) insurance in Singapore.
On 28 June 2002, Merrill Lynch HSBC
(‘MLHSBC’) became a wholly owned subsidiary of
HSBC. MLHSBC was formed as a 50:50 joint
venture between HSBC and Merrill Lynch in April
2000 to provide direct investment and banking
services, primarily over the internet, to mass affluent
investors outside the US. It currently operates in
Australia, Canada and the UK.
Working with HSBC’s private banking business,
HSBC USA Inc. employed in July 2002 certain
partners and staff of Arthur Andersen LLP’s US
Private Client Practice, who have joined a new
HSBC Private Client Services Group (‘WTAS’) in
the US, serving the wealth and tax advisory needs of
high net worth individuals.
HSBC continued to build in areas where it has
significant strengths and, in 2002, made
opportunistic investments in France, Turkey and
Malaysia.
11
H S B C H O L D I N G S P L C
Description of Business (continued)
Lines of Business
fulfil customer needs when they arise.
Profit on ordinary activities before tax (cash
basis) by Line of Business
Year ended 31 December 2002
3,543
3,034
3,717
4,000
3,000
2,000
1,000
0
-1,000
420
-201
Personal Fin Services
Corp, Inv Bkg & Mkts
Other
Commercial Banking
Private Banking
Total assets* by Line of Business
Year ended 31 December 2002
%
Corp, Invest. Bkg and Mkts 52.6
Personal Fin Services
Commercial Banking
Private Banking
Other
22.9
15.1
6.5
2.9
*
excludes Hong Kong SAR Government certificates of
indebtedness
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 36
million customers worldwide. Within this figure,
more than 630,000 are classified as HSBC Premier
customers and these represent the most valuable
personal customer segment.
Through its extensive branch network, HSBC
provides a wide range of banking and related
financial services to meet the needs of its personal
customers. HSBC employees use Customer
Relationship Management (CRM) systems and
processes to sell appropriate products and services to
12
Principal products and services for personal
customers include current, cheque and savings
accounts, loans and home finance, cards, payments,
insurance and investment services, including
securities trading. Services are increasingly delivered
via self service terminals, the telephone and the
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 29 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 200 HSBC Premier centres worldwide,
24-hour priority telephone access, and
24-hour global travel assistance.
As at 31 December 2002, HSBC had total
personal customer deposits of US$258 billion and
total personal customer loans and advances, net of
suspended interest and provisions for bad and
doubtful debts, of US$144 billion.
HSBC sells and distributes a range of insurance
products, including life, loan protection and health
protection, 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 sees continuing
opportunities to deliver personal insurance products
to its personal customer base utilising its branch
network, local sales forces, direct telephone
capabilities and internet delivery channels.
Commercial Banking
The Commercial Banking sector covers a wide and
diverse range of enterprises from sole proprietors,
partnerships, clubs and associations to incorporated
businesses and publicly quoted companies.
HSBC is one of the world’s leading banks in the
provision of financial services and products with
over 1.8 million small to medium-sized businesses.
As at 31 December 2002, HSBC had total
commercial customer deposits of US$92.9 billion
and total commercial customer loans and advances,
net of suspended interest and provisions for bad and
doubtful debts, of US$90.6 billion.
HSBC continues to broaden and enhance its
range of products and services, placing a particular
emphasis on multi-disciplinary and cross-geographic
collaboration in meeting its commercial customers’
needs:
Personal Financial Services. In addition to a range
of current and savings accounts, corporate and
purchasing cards, treasury services and lending
products, HSBC also provides a wide range of
insurance and investment products to commercial
banking customers and their employees through an
extensive, worldwide network of branches and
business banking centres throughout the Asia-Pacific
region, Europe, the Americas and the Middle East.
Insurance. HSBC provides business customers with
a range of insurance protection, employee benefits
and pension schemes to meet the needs of both the
business itself and its employees and to fulfil the
statutory obligations of the company. These products
are provided by HSBC either as manufacturer or as
supplier of third party products. HSBC also 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; employer’s
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.
Trade services. HSBC has more than 130 years of
trade services experience and expertise in this core
business. A complete range of traditional
documentary credit, collections and financing
products is offered, 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 UK, Hong Kong, the
US 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 worldwide,
enabling financial institutions and corporate
customers to manage their cash efficiently on a
global basis. HSBC’s extensive network of offices
and strong domestic capabilities in many countries,
including direct access to local clearing systems,
enhance its ability to provide high-quality cash
management services.
e-banking. A key component of HSBC’s market
leadership in providing financial services to
commercial customers is continuing innovation and
flexibility in electronic delivery solutions, to best suit
the clients’ needs.
Corporate, Investment Banking and Markets
HSBC’s Corporate, Investment Banking and Markets
business provides tailored financial solutions to
major government, corporate and institutional clients
worldwide. Managed as a global business, it
operates a long-term relationship management
approach to build a full understanding of client
financial requirements. Clients are served by sector-
based client service teams that combine relationship
managers and product specialists to develop financial
solutions to meet individual client needs. With
dedicated offices in over 40 countries and with
access to HSBC’s worldwide presence and
capabilities, this business serves subsidiaries and
offices of these clients in 80 countries and territories.
Products and services offered include:
Banking Services. These comprise general banking
products including lending and deposit taking and
related services; payments and cash management
services at an international and regional level as well
as ‘in country’ domestic services; trade services with
an emphasis on the specialised ‘Trade Solutions’
product; and securities services, where HSBC is one
of the world’s leading custodians providing custody
and clearing services to both domestic and cross-
border investors. Leasing, with an emphasis on ‘large
ticket’ transactions, finance and factoring and
banknotes services are also provided by specialist
units.
13
H S B C H O L D I N G S P L C
Description of Business (continued)
Financing and Advisory Services. These comprise
capital raising, including debt and equity capital,
structured finance, and syndicated finance,
leveraging links with other areas of the business to
provide full distribution for these instruments;
corporate finance and advisory services including
those in connection with mergers and acquisitions,
asset disposals, stock exchange listings,
privatisations and capital restructurings; project and
export finance services providing non-recourse
finance to exporters, importers and financial
institutions, working closely with all major export
credit agencies; aviation and structured finance for
complex and tax efficient investment facilities; and
Amanah finance which provides structured products
that are consistent with Islamic laws.
Investor services. These comprise treasury and
capital markets services for supranationals, central
banks, corporations, institutional and private
investors, financial institutions and other market
participants. Products include foreign exchange;
currency, interest rate, bond and other specialised
derivatives; government and non-government fixed
income and money market instruments; precious
metals and exchange traded futures. Equity services,
including research, sales and trading for institutional,
corporate and private clients and asset management
services, including global investment advisory and
fund management services, are also offered.
Insurance services. These comprise a narrow range
of specialist insurance services for major corporate
and institutional customers.
onshore and offshore businesses have now been
unified in the UK and the process of alignment is
under way in the US. Private Banking works closely
with HSBC’s retail, commercial and corporate and
investment banking networks to generate and
maintain ‘two-way’ client referrals.
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, Private Banking is able to
provide its clients with not just private banking, trust,
and wealth management services, but a
comprehensive range of financial services, including
corporate banking, investment banking and
insurance.
In 2002, Private Banking launched WTAS and
several successful product offerings, particularly in
the area of alternative investments and tax-efficient
insurance wrapper products. The trust business has
been expanded in the US, Asia and the Channel
Islands and, building on its success in Asia, internet
banking services were rolled out to the US, UK and
Switzerland.
Private Banking
Geographical Regions
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.
As part of HSBC’s strategic objectives, the
14
Profit before tax split by geographical region
Year ended 31 December 2002
3,500
3,710
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
-500
1,238
1,260
1
2
3
4
Europe
North America
South America
Hong Kong
Rest of Asia-Pacific
-58
5
Total assets* split by geographical region
As at 31 December 2002
Europe
Hong Kong
North America
Rest of Asia Pacific
South America†
%
45.7
24.1
18.9
10.2
1.1
*
†
excludes Hong Kong SAR Government certificates of
indebtedness
Formerly described as Latin America, which included
Group entities in Panama and Mexico, which are now
included in North America
Europe
Europe contributed US$3,500 million, or 36.3 per
cent, to HSBC’s profit on ordinary activities before
tax in 2002 compared with US$3,542 million in
2001. The UK contributed US$3,176 million in 2002
compared with US$3,147 million in 2001.
HSBC’s main subsidiaries in Europe are HSBC
Bank plc, CCF S.A., HSBC Private Banking
Holdings (Suisse) S.A., HSBC Trinkaus & Burkhardt
KGaA and HSBC Bank A.S..
HSBC Bank plc
Headquartered in London, HSBC Bank services
over 6 million personal current accounts, inter alia,
through a network of 1,633 branches in the UK,
including 42 outlets in supermarkets. Customers also
have access to approximately 3,000 HSBC Bank
ATM machines, over 42,000 cash machines through
the UK LINK network and over 835,000 ATM
machines worldwide. HSBC Bank serves
approximately 14 per cent of the personal current
account market in England and Wales. At 31
December 2002, on a consolidated basis, HSBC
Bank’s total assets were US$352 billion, total
customer balances were US$211 billion and total net
customer loans were US$169 billion.
HSBC Bank’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 during 2002, the bank
continued to invest in improving customer
relationship management systems, in creating more
convenient service channels ranging from
conventional branches to the internet and mobile
phones, in developing innovative and flexible
products and in building a reputation for fair pricing.
Evidencing customers’ continuing response to
easier access to banking services, 5 million calls per
month are now answered across HSBC call centres
(excluding First Direct). Matching customer
preference, over 50 per cent of all telephone calls are
handled through automated systems, providing a
more efficient and cost effective service. This has
allowed call centres to be used for more outward
bound calls leading to more customers purchasing
financial products and services over the telephone.
Over 780,000 sales, including personal loans
totalling over US$1.2 billion, were made through
Direct Financial Services in 2002, an increase of
over 280,000 sales on 2001.
Demand for remote services continues to grow
and HSBC Bank is responding with continued
investment in internet banking, TV banking and
ATMs. Some 1.2 million customers are now
registered for personal internet banking with a
further 177,000 customers registered for TV
Banking. These customers access their bank account
details around one million times weekly via personal
internet banking, and over half of all payments on
demand are made online.
Global processing, through the establishment of
Group Service Centres (GSCs), continued to play an
important role in HSBC’s strategic aim of pursuing
economies of scale in order to increase productivity
and achieve a competitive and economic advantage.
Since their introduction in 1996, the GSCs have
progressively fulfilled more of the back office
functions previously undertaken by HSBC’s
principal members, including HSBC Bank. The
centres provide a wide range of activities for a
growing number of business areas, including cards,
mortgage processing, investment products and retail
banking.
The HSBC Premier customer account base in
the UK has grown by 44 per cent during 2002. The
Premier telephone service has been enhanced to
include the opening of personal loans, credit cards
and savings accounts. 22 per cent of Premier
customers have registered for personal internet
banking.
15
H S B C H O L D I N G S P L C
Description of Business (continued)
In 2002, HSBC Bank increased its market share
of net new mortgage lending, in the United
Kingdom, to 5.8 per cent compared with 4.4 per cent
in 2001. Over the last 5 years mortgage balances
have almost doubled. This has been achieved via
competitive pricing and attractive product design.
For example, the development of ‘HomeStart’ in
2001, an innovative mortgage appealing to first time
buyers and allowing the customer to pay only the
interest costs during the first three years, has been a
major contributor to growth. In July 2001, First
Direct launched ‘smartmortgage’ which links
customer savings, cheque and home loan accounts.
Mortgage balances at First Direct grew from US$2.2
billion in June 2001 to US$5.8 billion by the end of
2002. ‘Buying a Home in France’ was launched in
April in conjunction with CCF.
HSBC Bank also issues a comprehensive range
of credit cards to develop high value customer
relationships by providing more tailored, personal
credit card solutions to customers as an integral part
of the bank’s customer relationship strategy. Nearly
30 per cent of new customers are now offered
premium card products.
Again with the objective of building customer
loyalty, in 2002, HSBC Bank was the first major
bank in the UK to reduce overdraft interest rates
significantly for unauthorised borrowing.
Success in building stronger customer
relationships is evidenced in the broadening product
range delivered to customers, in particular wealth
management products. The bank’s combined market
share for its principal investment products, Open
Ended Investment Companies (OEICs) and ISAs,
was maintained at over 5 per cent during 2002,
despite the difficult investment market conditions.
Private client services offer discretionary portfolio
management services and independent financial
advice to high net worth individuals. Despite the
impact of adverse stock markets, new funds
increased by 8 per cent over 2001. Within general
insurance, HSBC Bank launched home emergency
and legal assistance products in 2002.
First Direct, which was launched by HSBC
Bank in 1989 as the UK’s first full banking service
by telephone, 24 hours a day, 365 days a year,
continued to grow in 2002, attracting 88,900 new
customers and maintaining its position as the UK’s
most recommended bank. Its e-channel services
attracted around 54 per cent of First Direct’s
16
customers online by the end of 2002. Increasingly
customer contacts with First Direct are now made
electronically. Sales from internet banking and
mobile phone banking sources have increased, with
12 per cent of First Direct’s product sales now
attributable to e-channels. The first part of HSBC in
the UK to adopt ‘open architecture’ for product
selection, First Direct continued to develop its
independent life, pensions and investments business,
offering products from leading providers supported
by a telephone based advice service.
HSBC Bank offers a full range of commercial
banking services, remaining committed to serving its
commercial customers through the branch network,
complemented by internet and telephone banking.
This commitment was strengthened in January 2002,
when a number of specialist sales forces were
integrated into the branch network. Working
alongside relationship managers, they provide a
‘one-stop-shop’ for business financial services.
By increasingly employing product specialists,
investing in new sales channels and through effective
marketing, HSBC Bank demonstrated its customer
focus and thereby increased its share of the business
start-up market in 2002. During the year, over 87,000
new start-up business accounts were opened, an
increase of more than one third over the same period
last year. The number of customers moving accounts
from competitors to the bank also grew, helping to
achieve more than 6 per cent overall growth in
customer base in a stable market.
HSBC Bank’s commercial banking operations
have access to the full range of personal and other
financial services products allowing business owners
and directors to manage their business and personal
wealth efficiently through to retirement. HSBC Bank
also offers business protection products such as ‘key
man’ insurance and partnership protection. Sales of
such products during 2002 grew significantly, up by
11 per cent on 2001. For example, HSBC Bank is
now one of the top providers of regular premium
stakeholder pensions in the UK market, with a 6.3
per cent market share.
During 2002, the bank continued to invest in the
development of alternative sales channels to increase
customer choice. Dedicated Business Telephone
Banking centres now operate from Swansea,
Edinburgh and Hyderabad handling inbound calls
from a total of 134,000 registered users. A business
outbound telephone centre was established in
Leicester during the year. Business Internet Banking,
launched in January 2002, offers customers easier
access to banking services and products.
Through access to HSBC’s international
network, HSBC Bank is a market leader in providing
trade and international banking services and is
recognised as one of the world’s largest trade finance
and service organisations. HSBC offers customers
access to its extensive local knowledge and
international expertise to simplify the processes and
reduce the risks associated with trading overseas.
The largest corporate and institutional clients are
managed through a number of specialist industry
groups to facilitate a better understanding of, and
response to, the needs of customers. Core banking
services have been aligned with investment banking
products and activities, making maximum use of
HSBC’s international network to win important
cross-border business and providing support to
clients seeking to develop internationally.
In November 2002, HSBC Bank integrated the
investment banking business of HSBC Investment
Bank following a Private Act of Parliament to enable
the required legal changes. This restructuring
supported HSBC’s key strategic aim of integrating
investment banking and commercial and corporate
banking activities.
Within institutional banking, HSBC Bank’s
global custody division offers comprehensive global,
regional European and UK custodian services in 70
markets worldwide. Assets under custody were over
US$1,100 billion at 31 December 2002.
HSBC Bank’s provision of comprehensive cash
management services to corporate and institutional
clients has been significantly enhanced by continued
investment in European infrastructure and through
acquisitions. These have significantly enhanced
international money transmission and payment
services provided by the bank to customers.
Electronic banking channels continue to be
developed and will be further enhanced, with the
launch of an enhanced internet-based service to
corporate customers planned for 2003. HSBC Bank
was one of the initial participants when Continuous
Linked Settlement services were launched in
September 2002 and actively uses the system to
reduce foreign exchange risk and develop new
services for institutional and corporate customers.
HSBC Bank’s major dealing room in London
serves as the hub for HSBC’s European network of
treasury and capital markets operations, delivering 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
derivatives trading activities in exchange traded
futures and in precious metals and banknotes.
CCF
CCF 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 major corporate and
institutional business clients. CCF has a network of
782 branches in France. At 31 December 2002,
CCF’s total assets were US$73 billion, total
customer deposits were US$26 billion and total net
customer loans were US$31 billion under UK
GAAP.
CCF’s strategy continues 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 for both large and high quality mid-sized
corporates. 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 226
branches, and a network of ten regional banks with a
total of 556 branches. Each regional bank operates in
a specific geographical area, under its own brand
name, with strong local recognition.
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
17
H S B C H O L D I N G S P L C
Description of Business (continued)
the Paris Bourse and financial information including
stock quotes, French and international newswires and
research. CCF’s online credit company, Netvalor,
offers credit directly to 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.
Through its Corporate Banking Division, CCF
offers account management, credit, cash
management and stock custody services to the 100
largest French institutional and corporate groups, and
to international clients. The Corporate Banking
Division is also 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 among others retailing,
chemicals, pharmaceuticals, utilities, automobiles,
banking, finance and insurance, and entertainment.
CCF also 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.
CCF provides asset management services
primarily through three full-service fund
management subsidiaries which serve institutional
clients, as well as retail networks, with proprietary or
non-proprietary products. HSBC Asset Management
(Europe) SA is the major global mainstream
discretionary manager; Sinopia specialises in active
quantitative management together with guaranteed
and structured products; HSBC Multimanager
(Europe) is an independent service provider for fund
selection and multi-management. CCF is also strong
18
in corporate savings plans provided through its
subsidiary Elysées Fonds.
CCF, through its associates Erisa and Erisa
IARD, offers a wide range of insurance products,
including comprehensive health insurance, personal
property and casualty insurance, and 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, Banque Eurofin in Paris, HSBC Bank
France S.A. an existing HSBC subsidiary transferred
to CCF in July 2002, and Banque Dewaay in
Brussels.
HSBC Private Banking Holdings
HSBC’s principal private banking activities in
Europe are grouped under a Swiss holding company,
HSBC Private Banking Holdings. At 31 December
2002, the principal subsidiaries of HSBC Private
Banking Holdings comprised the international
private banking operations of HSBC Republic with
branches in Guernsey, Hong Kong, Jersey, London,
Luxembourg, Monaco, Nassau, Singapore and
Switzerland, and HSBC Guyerzeller Bank AG
located in Zurich.
Considerable progress was made during the year
in grouping HSBC’s various private banking
activities under the HSBC Private Banking Holdings
umbrella. This coherent ownership structure brings
together onshore and offshore private banking
services in Europe.
In Asia, the reorganisation of HSBC’s private
banking operations under HSBC Republic Bank
(Suisse) S.A. was completed. The operations
infrastructure was also rationalised into a regional
hub to take advantage of scale efficiencies, and
clients were segmented according to both their needs
and the size of their portfolios. HSBC Republic is
now one of the region’s three largest private banks.
As part of HSBC’s strategic objective to align
onshore and offshore private banking operations,
domestic and international private banking
operations were successfully integrated in the United
Kingdom, and the business of HSBC Republic Bank
(UK) Limited was transferred under ownership of
HSBC Private Banking Holdings on 1 July 2002.
In June 2002 HSBC Guyerzeller, HSBC’s Swiss
private bank, which focuses on discretionary
management and trustee services, completed its
merger with Handelsfinanz-CCF Bank S.A. and
Crédit Commercial de France (Suisse) S.A. This
initiative strengthened HSBC Guyerzeller’s presence
in Geneva and provided synergies and long-term cost
savings.
During the year HSBC Republic Holdings (CI)
Limited, HSBC International Trustee Limited and
HSBC Financial Services (Cayman) Limited were
transferred under the ownership of HSBC Private
Banking Holdings, increasing the Swiss holding
company’s client funds under management to US$45
billion at 31 December 2002.
With investment activities subdued,
opportunities to increase credit facilities to clients
have been sought actively, and HSBC Private
Banking Holding’s lending book grew by 22 per cent
during 2002. By leveraging HSBC’s extensive
branch network, HSBC expanded the Trust business
in Asia and the Channel Islands, and worked closely
with HSBC insurance experts to launch new tax-
efficient insurance wrapper products. The range of
investment funds offered continued to grow,
especially in the alternative and hedge fund sector
where HSBC has US$10 billion of hedge fund assets
under management. The Hermitage Fund, the largest
public equity fund dedicated to Russia, continues to
be rated as one of the best performing equity funds in
emerging markets.
Following successful trials in Asia during 2001,
the roll out of internet banking services to the UK
and Switzerland was completed in 2002 and there are
now over 5,400 registered private banking internet
clients. HSBC plans to extend this facility to other
HSBC Republic locations during 2003 and to
enhance the services available.
Investment in training and communications has
developed excellent teamwork with HSBC’s retail
banking operations and led to a significant increase
in client referrals from Hong Kong, Singapore and
London, and on a reciprocal basis to the introduction
of significant business to other areas of the Group,
notably HSBC Premier.
The strong core capitalisation of HSBC Private
Banking Holdings and the financial strength of the
HSBC Group continued to represent a significant
competitive advantage as financial strength became
an increasingly important factor for private
individuals and their advisers when reviewing their
choice of which banks to entrust with their assets.
Germany
In Germany, HSBC operates mainly through HSBC
Trinkaus & Burkhardt KGaA (HSBC Trinkaus &
Burkhardt).
Based in Düsseldorf HSBC Trinkaus &
Burkhardt has branches in seven major German cities
and offers a comprehensive range of services to
wealthy private clients, large and medium-sized
enterprises, institutional investors, public
corporations and financial institutions. Its strengths
lie in portfolio management, international business,
interest rate and currency management, new issues
on the debt and capital markets, corporate finance,
and mergers and acquisitions advice, tailored to
clients’ requirements. Client business is underpinned
by trading activities in foreign exchange and interest
rate products, market-making in equities, and trading
in equities derivatives. Investment advisory services
are provided through HSBC Trinkaus Capital
Management GmbH, and HSBC Trinkaus &
Burkhardt Immobilien GmbH manages investments
in closed-end property funds.
HSBC Trinkaus & Burkhardt’s stake in the
funds management company INKA Internationale
Kapitalanlagegesellschaft mbH was increased from
60 per cent to 100 per cent during 2002, in
recognition of the strategic importance of the
securities markets in Germany.
Turkey
Demirbank was acquired from the Turkish Banking
Regulator in October 2001. The purchase included
the acquisition of Demir Yatirim, Demirbank’s fund
management and stockbroking subsidiary. During
2002, the operations and business activities of
Demirbank were successfully integrated into those of
HSBC Bank A.S. Customers are served through a
variety of channels: 163 branches, call centres and
internet banking providing personal, corporate,
treasury, capital markets, stockbroking, fund
management and investment banking services across
the Turkish market.
On 19 September 2002, HSBC Bank A.S.
completed the purchase of Benkar, Turkey’s largest
independent consumer finance and card services
company, and its high-profile ‘Advantage’ brand. At
the time of acquisition, Benkar had over 280
participating merchant firms and over 1 million
Advantage cardholders. The Advantage card is a
combined instalment and loyalty card that can be
19
H S B C H O L D I N G S P L C
Description of Business (continued)
used at over 5,000 points of sale in Turkey.
Hong Kong
Hong Kong contributed US$3,710 million, or 38.4
per cent, of HSBC’s profit on ordinary activities
before tax in 2002 compared with US$3,883 million
in 2001.
HSBC’s principal banking subsidiaries in Hong
Kong are The Hongkong and Shanghai Banking
Corporation 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 one of the Hong
Kong SAR’s three note-issuing banks, accounting for
more than 62 per cent by value of the Hong Kong
banknotes in circulation in 2002 and it is also the
agent bank for the issuing and handling of the Hong
Kong SAR Government’s newly launched HK$10
note. HSBC has a substantial market share and
operational network in the Hong Kong SAR,
including 199 outlets of the Hongkong and Shanghai
Banking Corporation in 159 locations, and 138 Hang
Seng Bank branches.
Both banks offer personal customers an
extensive range of financial services with the aim of
satisfying customers’ needs to grow, manage and
protect their wealth. To meet the demands of a
growing client base and to offer tailored wealth
management solutions to HSBC Premier customers,
HSBC now has 34 HSBC Premier Centres and 400
personal bankers in Hong Kong.
HSBC’s customer relationship management
processes and systems were further developed in
2002 to provide a comprehensive view of all aspects
of every customer’s relationship with HSBC. This
has led to new business opportunities and enhanced
HSBC’s ability to offer tailored solutions to meet
individual customer needs.
Hang Seng Bank opened a further 26 Prestige
Banking Centres for affluent customers in 2002,
bringing the total to 59. Stamina Banking, offering
customers comprehensive banking, investment and
financial services and a wide variety of lifestyle
privileges, and ezLink Financial Services, catering
for the financial needs of customers commuting
between Hong Kong and the mainland of the
People’s Republic of China (‘mainland China’), were
also launched in 2002.
20
HSBC has grown to be one of the leading
distributors of retail fund products in Hong Kong. In
2002’s uncertain investment market, HSBC achieved
significant growth in the sale of unit trusts through
the promotion of 14 guaranteed/capital-secured funds
designed to meet customers’ demands to protect their
investment capital. In the low interest rate
environment, HSBC also introduced a range of
alternative deposit products to provide customers
with more investment choices. There was strong
growth in funds under management.
Hang Seng Bank also continued to widen its
investment and insurance product range to enhance
its wealth management services. The launch in 2002
of 30 retail capital-guaranteed funds was well
received and increased the total number of retail
funds in the Hang Seng Investment Series to 60. The
series of capital-guaranteed funds offered by Hang
Seng Bank is the largest in Hong Kong in terms of
number of funds.
The insurance business remains a key focus in
HSBC’s wealth management strategy in Hong Kong.
Significant growth in personal insurance was
achieved, outpacing market growth and giving
HSBC a larger market share of new business. There
was increasing use of telesales and the internet for
insurance business. Corporate insurance profitability
improved and the retirement business continued to
develop, both through new sales and the transfer to
HSBC of Pacific Century Insurance Company
Limited’s Mandatory Provident Fund (‘MPF’)
business.
In another year of fierce competition for quality
assets and increasing consumer loan write-offs in
Hong Kong, HSBC maintained a strong
performance. Including cards issued by Hang Seng
Bank, HSBC remained the largest credit card issuer
in Hong Kong with 2.8 million cards in circulation
and led the market in cardholder spending and
outstandings. The implementation in 2001 of an
enhanced card processing system and continued
migration of work to HSBC’s Group Service Centre
in Guangzhou has enabled operational efficiency to
be further improved.
HSBC provides a comprehensive range of
banking products and services to meet the needs of
large and small businesses in Hong Kong. To meet
the needs of small and medium-sized businesses,
HSBC introduced enhanced services and products,
launching its Business Internet Banking service in
August and further enhancing the service later in the
year with the addition of online trade functionalities.
The initial response from customers has been
encouraging, with e-channel transaction volumes
continuing to rise. Going forward, HSBC will
continue to devote resources to the further
improvement of service levels and enhancement of
its product range to meet the investment and
insurance needs of commercial customers,
demonstrating its ongoing commitment to business
customers regardless of their size.
HSBC’s Corporate, Investment Banking and
Markets business in Hong Kong reported strong
results in 2002. A diversified portfolio of
businesses has helped it ride the economic
downturn well, with strong profits in its treasury
and capital markets business more than
compensating for the slow-down in equity
markets. The same low interest rate environment
that has squeezed margins in HSBC’s commercial
and retail lending business helped the treasury
area’s well-positioned balance sheet to post record
accrual income in 2002.
Dealing profits fell, primarily in the area of
interest rate trading, against a backdrop of
widening credit spreads and concerns over
economic growth. This was, however, offset by
foreign exchange revenues which remained
robust. In addition, HSBC focused on its ability to
leverage off its strong and growing customer
franchise, by offsetting thinner trade flows with a
stronger emphasis on higher margin derivative
products. The low interest rate environment has
led to increasing customer demand for yield
enhancement products, and HSBC’s wealth
management group was well positioned to take
advantage of this trend. HSBC added resources to
this area to build momentum and increase market
penetration in 2003.
HSBC’s debt finance group continued to build
on its superior distribution capability, successfully
completing several high-profile transactions in
2002 and reinforcing its strong position in the
Hong Kong market.
An increasing proportion of HSBC’s client
business in the foreign exchange, fixed income
and money markets continues to be migrated to
electronic dealing channels, improving transaction
ease and speed and reducing cost.
Surveys indicate that HSBC has the largest
online banking market share in Hong Kong with over
470,000 registered users (up by 60 per cent over
2001). The e-channel proposition was enhanced
during 2002 with the introduction of new solutions
and applications, and a new investment page, all of
which led to a 33 per cent year-on-year increase in
monthly website visits. Online@hsbc has won many
awards and has achieved differentiation in the market
through its wide range of more than 50 online
services, including online share trading, IPO
registration and primary bonds subscription services,
instant approval for a range of insurance products,
and personal loans, electronic bill presentation and
payment services.
Hang Seng Bank’s comprehensive range of
internet banking services has similarly become an
important part of its multi-channel delivery network.
At the end of 2002, more than 250,000 customers
were registered for its Personal e-Banking Services,
internet transactions had grown to more than 14 per
cent of total transactions, and online share trading
accounted for 55 per cent of total securities
transactions. Hang Seng Bank continues to enhance
its e-banking services to meet customer expectations.
Business e-banking services, including online fund
transfers, cash management and trade services, were
introduced in 2002 to help commercial customers
manage their company finances more efficiently.
Rest of Asia-Pacific (including the Middle
East)
The rest of Asia-Pacific region contributed US$1,260
million, or 13.1 per cent, to HSBC’s profit on
ordinary activities before tax in 2002 compared with
US$1,088 million in 2001.
Asia-Pacific
Outside Hong Kong, HSBC conducts business in the
Asia-Pacific region primarily through branches and
subsidiaries of The Hongkong and Shanghai Banking
Corporation, with particularly strong coverage in
mainland China, India, Indonesia, Korea, Singapore,
Taiwan and Thailand; through HSBC Bank Australia
Limited in Australia; and through HSBC Bank
Malaysia Berhad, which has the second 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 and
commercial services. The Hongkong and Shanghai
21
H S B C H O L D I N G S P L C
Description of Business (continued)
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. The Hongkong and
Shanghai Banking Corporation was one of the first
foreign banks to be allowed to provide renminbi
services to customers who are not citizens of the
People’s Republic of China, through its branches in
Shanghai and Shenzhen. In addition The Hongkong
and Shanghai Banking Corporation is a member of
the Shanghai ATM network, which comprises 17
domestic and foreign banks and offers services
through more than 2,000 ATMs throughout the city.
In November 2002, HSBC acquired a 10 per
cent equity stake in Ping An Insurance Company of
China Limited. Established in Shenzhen in 1988,
Ping An Insurance is the second-largest life insurer
and has the third-largest insurer in mainland China,
with over 25 million policyholders, some 21,500
employees and over 200,000 licensed agents. Ping
An Insurance also engages in investment trust and
securities business.
HSBC’s strong presence in mainland China is
supported by a wide range of business capabilities in
commercial and corporate banking as well as
personal financial services. With further
liberalisation of China’s financial market, banking
regulations have been relaxed to permit foreign
banks to provide foreign currency services to
mainland Chinese companies and individual Chinese
citizens. HSBC became the first foreign bank to offer
foreign currency services to local citizens and
companies, at 10 locations across the country, and
launched online personal banking services to local
citizens and international customers in mainland
China in December 2002.
Hang Seng Bank operates branches in
Guangzhou, Shanghai, Shenzhen and Fuzhou and
representative offices in Beijing and Xiamen. Its
Shanghai branch, which moved to new premises in
August 2002, launched renminbi services for
expatriates and foreign-invested enterprises, and the
Guangzhou, Shanghai and Shenzhen branches began
offering foreign currency services to mainland
Chinese residents and enterprises and opened
Prestige Banking Centres during the year. Personal
internet banking services were launched in
December. Hang Seng Bank obtained in principle
22
approval during the year to open a branch in Nanjing
and approval to open a sub-branch in Puxi. Hang
Seng Securities Limited opened a representative
office in Shanghai in August 2002, and Hang Seng
Investment Management Limited obtained approval
in September 2002 to open a representative office in
Shenzhen. As part of HSBC’s development of Group
Service Centres to improve operational and cost
efficiency, HSBC’s Guangzhou Service Centre has
been operating since 1995. In mid-2002, as further
opportunities to migrate data processing activities
were identified, a second centre became fully
operational in Shanghai.
HSBC’s strategy elsewhere in Asia-Pacific has
historically emphasised service to corporate and
commercial banking customers with a strong trade
services element augmented by an increasingly
important treasury and capital markets business. In
recent years, HSBC’s strategy has evolved to
promote an increased focus on providing products
and services that meet the wealth management
requirements of the mid and upper personal 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. This strategy continues to be pursued
aggressively across the region, with ongoing
investment in upgrading and expanding HSBC’s
personal banking and cards operations.
The year 2002 saw the continued expansion of
internet banking services across the region with
substantial increases in both online customer activity
and the range of services offered. The number of
personal internet banking customers rose to over
300,000, a seven-fold increase over 2001, and 15 per
cent of the personal banking customer bases in 12
countries across the region can now bank online.
Further countries will be brought online in 2003.
Online services were expanded to include an
enhanced credit card offering, bill payment
capabilities and a SMS alert service which will be
built upon during 2003. 2002 also saw the
introduction of an online service for commercial
customers in India, Malaysia and Brunei which is
utilised at present by some 3,000 customers. Online
trade services and business banking services are
currently being piloted in Singapore and will be
extended to other markets during 2003. The HSBC
Group’s strong alliance with Yahoo! was
demonstrated in Asia by the joint sponsorship of the
FIFA World Cup site in mainland China. The HSBC
brand was exposed via 560 million page impressions
during the period of the campaign.
Eight new branches were opened in the region
during 2002, including HSBC’s first branch in the
Maldive Islands early in the year. The HSBC
Premier banking service is now available in 11
countries across the region. Further expansion of
other service channels, such as ATM and telephone
banking services, also occurred, as well as the use of
sales agents to reach customers. Retail customer
numbers, including cards customers, reached 3.8
million by year-end. Due in part to the expanded
accessibility of HSBC’s services, sales of insurance
and investment products increased significantly
during the year, and these particular products are
expected to show rapid growth in 2003. There will be
a greater focus on insurance and asset management
activities across the region in 2003 and HSBC
expects the acquisition of Keppel Insurance in
Singapore will facilitate further regional expansion
of these businesses in 2003.
HSBC’s credit card business in the rest of Asia-
Pacific recorded a 25 per cent increase in
outstandings in 2002. Against a depressed economic
climate, the focus was switched from acquisition to
usage and retention of customers. Further expansion
of the credit card business is expected in 2003, with
significant investment in staff, training and systems
to support this growth.
The focus on increasing the efficiency of the
Group’s operations in the region and reducing costs
has intensified during the year. Process reviews of
several of HSBC’s larger operations in the region
have been carried out with a particular emphasis on
streamlining operational procedures, concentrating
processing activities in single sites where economies
of scale can be achieved, and, where financially
appropriate, moving certain processing activities
offshore to the major Group Service Centres in India
and mainland China. Japan, Singapore and the
Philippines have migrated operations offshore during
the year, and further migrations are planned for 2003.
In aggregate the Group Service Centres in India and
mainland China now employ 4,720 people, an
increase of over 2,700 since December 2001. To
facilitate further growth and diversity in locations, a
new processing site in Malaysia will be opened in the
first half of the year.
In the Asia-Pacific region outside Hong Kong,
HSBC’s Corporate Investment Banking and Markets
business posted robust results.
As a result of investment in human resources,
marketing and systems development in 2001, HSBC
firmly established itself as a premier provider of
higher margin derivative products in 2002. This was
reflected in strong customer-franchise-related
revenues, augmenting accrual income and dealing
profits.
HSBC’s electronic dealing platform now
allows its various branches in the region to access
liquidity in its major global market-making
centres, thus enhancing speed of delivery, breadth
of product offering, and overall service quality. In
addition, many regional centres now allow
customers to deal directly via electronic media.
Middle East
HSBC’s operations in the region are conducted
primarily through HSBC Bank Middle East, HSBC
Financial Services (Middle East) Limited, 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 Middle East Finance Company
Limited (80 per cent owned) and HSBC Insurance
Brokers Limited also have operations in the region.
HSBC’s network consists of 139 branches and
offices, primarily in the United Arab Emirates and
Saudi Arabia, and also in Algeria, Egypt, Bahrain,
Jordan, Lebanon, Libya, Morocco, Oman, Qatar, Iran
and the Palestinian Autonomous Area. In addition to
their core commercial and 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. During 2002, data processing was
integrated in the UK, and certain processing
activities were streamlined by moving them to the
Group Service Centre in Hyderabad. IT systems
development for the Middle East is now also sourced
from India.
North America
North America contributed US$1,238 million, or
12.8 per cent, of HSBC’s profit on ordinary activities
before tax in 2002 compared with US$503 million in
2001. HSBC’s principal banking subsidiaries in
North America are HSBC Bank USA, HSBC Bank
Canada and GFBital.
23
H S B C H O L D I N G S P L C
Description of Business (continued)
United States
At 31 December 2002, HSBC Bank USA had assets
of US$89 billion and deposits of US$59 billion and
was the eleventh-largest US commercial bank,
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. Through HSBC Bank
USA, HSBC has the largest branch network in New
York State, where it has over 400 branches, as well
as two branches in Pennsylvania, eight in Florida and
three 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. At 31 December 2002, HSBC
Bank USA’s customer base included more than 2.3
million personal and 190,000 commercial and
institutional customers.
As a result of the acquisition of RNYC in
December 1999, HSBC provides the fifth-largest
factoring service in the US. The acquisition also
helped to double assets under administration and
greatly enhanced HSBC’s global treasury and foreign
exchange businesses. HSBC is now also a world
leader in banknotes and precious metals trading.
Through its participation in the joint venture
Wells Fargo HSBC Trade Bank with Wells Fargo
Bank, HSBC offers trade-related financing
throughout the western US. Through HSBC’s
international network, HSBC Bank USA offers its
customers access to the global markets and services
of HSBC.
HSBC Bank USA also has a considerable
presence and is the largest lender to corporations in
Panama with 15 branches.
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 2002,
more than 405,000 customers had registered for the
service, up from approximately 275,000 at 31
December 2001. The HSBC Bank USA web site,
us.hsbc.com, where customers can apply for
accounts, conduct financial planning and link to
online services, receives approximately 50,000 visits
daily.
In 2002, hsbc.com, HSBC’s internet
24
development facility based in New York, launched
business applications in Asia, North America and
Europe; implemented an improved internet service
for Global Treasury and Capital Markets customers;
launched new web sites for Group businesses in
North America and Europe; and provided a global
service for processing internet credit card
transactions. hsbc.com made significant progress in
fulfilling its mission of providing a common
presentation layer / browser capability for all
HSBC’s global products and services. This e-channel
delivery program, when completed, will provide
HSBC’s customers with access to all Group products
in all the countries and territories in which HSBC has
a presence, as well as reducing costs through the
economies of a single technical platform.
Considerable infrastructural work was also
successfully completed in 2002, providing the
foundation for migrating all existing systems and
applications to this platform over the next 5 years.
Canada
HSBC Bank Canada had assets of US$22 billion as
at 31 December 2002 and was the seventh-largest
bank in Canada. With over 160 branches and
subsidiary offices and a staff of over 4,900, HSBC
Bank Canada’s operations are customer-driven and
integrated both across service and product lines and
through HSBC's international network. HSBC Bank
Canada offers a wide range of products and services
to targeted customer segments. As at 31 December
2002, HSBC Bank Canada had approximately
890,000 customers across all business segments.
Through HSBC’s international network, HSBC Bank
Canada has a strong market share of Asian banking.
HSBC has the largest market share in Canada for
Import Documentary Credits and ranks second based
on industry statistics as compiled by the Canadian
Bankers’ Association for the 12 months ended 31
October 2002 in terms of combined Import/Export
Documentary Credits.
In 2002, HSBC Bank Canada was rated highest
for overall quality of customer service among the
banks included in the ‘2002 Customer Service
Index’, an independent study conducted annually by
Market Facts of Canada. HSBC Bank Canada
introduced ‘clientConnect’, a sales and service
initiative designed to improve client relationships.
The bank also completed the rollout of a Call
Management strategy, designed to remove routine
tasks from branches, enabling staff to concentrate on
deepening relationships with customers.
Electronic Documentary Credit Advising, an
internet based trade services product, was launched
in 2002. In addition, there was a major overhaul of
the hsbc.ca website and Business Internet Banking
was launched.
Mexico
GFBital, which is headquartered in Mexico City, has
nation-wide coverage from a network of 1,350
branches and nearly 4,000 automatic teller machines
servicing the bank's customers, which, numbering
nearly five and a half million, represent the largest
personal customer base of any banking institution in
Mexico. HSBC plans to use this network and
customer base to expand personal banking services
and cross-sell other products and services,
particularly leveraging the important position now
held in all of the North American Free Trade
Agreement countries (Canada, the US and Mexico).
Through its subsidiary Banco Internacional S.A.,
GFBital provides comprehensive retail and consumer
banking products and services using its branches and
state of the art internet and tele-banking facilities. In
addition, Casa de Bolsa Bital, a brokerage house,
offers investment banking and fund management
products and services, through the branch network.
GFBital has a joint venture insurance and
pension investment with ING, offering life, auto,
property, health insurance and pension products
through branches.
South America
South America contributed a loss of US$58 million
to HSBC’s profit on ordinary activities before tax in
2002 compared with a loss of US$1,016 million in
2001. HSBC’s operations in South America
principally comprise HSBC Bank Brasil and HSBC
Bank Argentina S.A., with small operations in Chile,
Uruguay and Venezuela.
Brazil
HSBC Bank Brasil, which is headquartered in
Curitiba, has an extensive domestic network, with
over 1,500 branches and offices, 3.5 million personal
customers and over 250,000 business and
institutional customers. HSBC’s goal is to use this
network, the third-largest of the privately-owned
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 seventh-largest insurance
business in Brazil, offering a broad range of
insurance products. As part of HSBC’s overall cross-
selling strategy, most of the staff of HSBC Bank
Brasil’s insurance and banking offices are being
located together in order to maximise cross-sale
opportunities.
HSBC Bank Brasil also manages HSBC
Investment Bank Brasil S.A.-Banco Múltiplo
(formerly known as Banco CCF Brasil S.A), which
is owned by CCF. The business complements
HSBC’s capital markets and insurance operations
and has brought significant additions to HSBC’s
private banking and asset management operations in
Brazil. Total assets under management were US$5.9
billion at 31 December 2002, making HSBC the
fifth-largest fund manager in Brazil.
Argentina
Argentina has undergone significant financial turmoil
in 2002, with a consequent adverse impact on the
economy. It remains unclear when this position will
improve. HSBC in Argentina has a total staff of over
4,100 employees and a total of 115 sales points, of
which 58 are bank branches and 57 are insurance,
pension, annuities and health care outlets. HSBC
Bank Argentina S.A. is the seventh-largest privately-
owned bank in Argentina in terms of deposits and
sixth-largest in terms of assets and loans. HSBC also
has 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.
Competitive environment
HSBC Holdings and its subsidiaries face keen
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
25
H S B C H O L D I N G S P L C
Description of Business (continued)
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
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 largest current markets, the UK, France,
the US 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 as well as the branch system.
Regional factors
UK
Although market growth in the UK has remained
limited, competition continues to increase. The
market has seen an array of new entrants, new
channels and new products. Such new entrants have
included insurance companies, supermarkets,
clothing and grocery retailers, car manufacturers and
utilities, each providing a variety of products and
26
services to challenge traditional banks.
In March 2002, the Competition Commission
Report on the supply of banking services to small
and medium sized businesses was published. The
Report prescribed several remedies including a
‘Transitional Remedy’ which allowed the banks the
choice of paying interest on current accounts at a
minimum of 2 ½ per cent below base rate or
providing free money transmission services to
businesses with up to £25 million turnover. During
the year, discussions took place with The Office of
Fair Trading (OFT) following the completion of the
Competition Commission’s report on the provision
of banking services to small and medium-sized
businesses. HSBC Bank plc has developed an
enhanced package of initiatives for customers,
estimated to be worth US$125 million per annum.
Interest on current accounts has been paid
automatically to all qualifying customers with effect
from 1 January 2003. Further initiatives include the
introduction of a new instant access savings account
and improved terms for start-up businesses.
In November 2002, OFT announced that in early
2003 it is to launch a new market investigation
looking into payment systems developments. It has
stated that this will pave the way for its prospective
powers to promote effective competition in payment
systems. On 11 February 2003, OFT announced its
preliminary conclusion that an agreement between
MasterCard’s UK members (which includes HSBC
Bank plc) on a common interchange fee charged on
transactions made in the UK by credit and charge
cards infringes the Competition Act 1998. OFT has
given MasterCard a further opportunity to justify the
existing agreement or suggest changes to it so that it
will meet the conditions for an exemption under the
Competition Act. A final decision on this issue is
expected in the spring of 2003.
France
Like the other western economies, the French
banking sector was affected in 2002 by the poor
economic environment and the equity market
turmoil, but benefited from high volumes of sight
deposits and slightly improved lending margins. A
debate has been opened on the legal prohibition of
remuneration for sight deposits. The trend towards
consolidation in the sector is expected to continue.
Hong Kong
Competition from locally incorporated and foreign
banks remains strong, particularly for quality
customers and quality assets. Competition for credit
cards and consumer assets has remained intense, but
banks in general have tightened their credit
acceptance procedures and limits due to the growing
numbers of bankruptcies. This trend is likely to
continue through 2003. To generate income to cover
credit loss and mitigate the reduction in mortgage
revenue, banks have diversified into growing their
insurance and investment businesses. HSBC has
grown its securities trading market share by 40 per
cent, although weak demand for individual equity
products continues to put securities trading revenues
under pressure. As market leaders, The Hongkong
and Shanghai Banking Corporation and Hang Seng
Bank are well placed to meet these competitive
challenges.
Rest of Asia-Pacific (including Middle East)
Growth picked up in general across the rest of Asia-
Pacific in 2002, spurred by a rebound in trade and
economic activity. An improvement in consumer
spending, supported by more flexible monetary
policy and the willingness of banks to extend credit
to the household sector, was also seen in certain
economies, notably in Malaysia.
The competitive environment varies greatly
across the region, depending on the level of
regulation, number of entrants and the maturity of
the markets. Following the economic slowdown in
2001, a greater accommodation towards foreign
banks has emerged in some countries as local banks
suffer from the burden of extensive non-performing
loans. HSBC’s strong reputation for prudent risk
management is invaluable as new opportunities arise.
Additionally, in most countries in the region, the
relatively young population and maturing
sophistication in financial services are expected to
provide further growth opportunities for HSBC.
In the Middle East, competition remains intense,
with a large number of banks serving relatively small
populations in each country.
North America
In the US, 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 (‘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.
In Canada, the financial services industry is
more centrally regulated relative to the US and other
parts of the world. The financial services industry
continues to be dominated by the five largest banks
in the country but the market remains highly
competitive. In anticipation of potential de-
regulation, there has been consolidation in the
insurance and wealth management sectors over the
past two years. The large banks, however, have been
unsuccessful to date in gaining approval from the
federal government to merge.
In Mexico, the banking environment has seen
significant concentration in recent years with over
70% of banking assets and 75% of deposits owned
by subsidiaries of four major foreign banks (HSBC,
BBVA, Citibank and Santander). Given that Mexico
has a population of 100 million of which an
estimated 80% do not use the banking system, the
growth opportunities in the retail sector are
favourable in the medium to long term. GFBital,
with its extensive branch network, solid
technological infrastructure and growing young
customer base is well positioned to take full
advantage of the economic and competitive
environment.
HSBC's expertise and global customer base will
help position GFBital to compete more effectively in
trade finance, Corporate, Investment Banking and
Markets and Personal Financial Services. Mexico's
economy is very closely linked to that of the US and
Canada; over 90% of Mexico's exports stay within
the North American market. HSBC's growing
presence in the region provides a competitive
advantage.
South 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
underway, increasingly involving foreign banks (at
27
H S B C H O L D I N G S P L C
Description of Business (continued)
the end of 2002 there were 53 banks in Brazil with
foreign ownership interests). With a population of
175 million and an estimated 63 per cent of the
population ‘unbanked’, growth opportunities in the
retail sector, in particular, appear favourable in the
medium to long term. In comparison with more
developed markets, insurance penetration in Brazil is
fairly low, especially in the life business 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 financial groups are
the main competitors as most major banking and
insurance players in the market are foreign
controlled.
The crisis in Argentina over the past year has
had a profound impact on the financial services
market and HSBC is now one of a few participants
still able to provide the full range of financial
services to its customers. The financial services
industry however remains unprofitable pending the
necessary economic, fiscal and political reforms
required to recover confidence in the country’s
prospects. HSBC will carefully monitor
developments, particularly following the presidential
election due in April 2003, to evaluate the
opportunities and risks within the financial services
industry in Argentina.
Employees
As at 31 December 2002, HSBC had approximately
192,000 employees (including part-time employees)
worldwide (of whom approximately 54,000 work in
the UK, 14,000 in France, 24,000 in Hong Kong,
14,000 in the US, 21,000 in Brazil and 15,000 in
Mexico), compared with approximately 180,000 at
31 December 2001 and 172,000 at 31 December
2000. HSBC estimates that approximately half of its
labour force worldwide is unionised. Most
significant concentrations of union membership
occur in Brazil, France, Indonesia, Malaysia, Malta,
Mexico, Philippines, Spain, and the UK.
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.
28
HSBC is proud of its diverse workforce that is
able to communicate with HSBC’s customers in the
local languages and dialects across 80 countries and
territories. A continued focus on policies that
encourage an inclusive working environment and the
development of career opportunities for all,
regardless of ethnicity, gender or grade, is a key part
of HSBC’s employer of choice philosophy. Emphasis
is also placed on identifying, developing and
retaining the very best talent that exists around the
globe.
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
rules that affect, or place limitations on, 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 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 are supervised by the Hong Kong
Monetary Authority (the ‘Monetary Authority’),
HSBC Bank plc by the FSA, CCF 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 and financial institutions are subject to
multiple regulations. The primary UK statute is 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 to it responsibility for, among other
things, banking supervision from the Bank of
England. The FSA regulates all investment business
in the UK from retail life and pensions business to
custody, branch share dealing and treasury and
capital markets activity.
FSA rules establish the minimum criteria for
authorisation for banks and investment businesses in
the UK. They also 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.
In its capacity as supervisor of HSBC on a
consolidated basis, the FSA 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 140 to 142.
HSBC Bank plc is HSBC’s principal authorised
institution in the UK. HSBC Investment Bank plc’s
business was subsumed into HSBC Bank plc in
November 2002 (see page 9).
Depositors and investors are covered by the
Financial Services Compensation Scheme which
deals with 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 are entitled to
receive 100% of the first £2,000 (US$3,224) of a
claim plus 90% of any further amount up to £33,000
(US$53,189) (the maximum amount payable being
£31,700 (US$51,094)). Payments under the scheme
in respect of investment business compensation are
limited to 100% of the first £30,000 (US$48,354) of
a claim plus 90% of any further amount up to
£20,000 (US$32,236) (the maximum amount payable
being £48,000 (US$77,366)).
The European Union is currently in the process
of finalizing a new directive regarding the taxation of
savings income. Under the current proposal, each
Member State other than Austria, Belgium, and
Luxembourg would be required, beginning in 2004,
to provide the tax authorities of each other Member
State with details of payments of interest or other
similar income paid by a person within its
jurisdiction to individuals resident in such other
Member State. Beginning on the same date, Austria,
Belgium, and Luxembourg would impose a
withholding tax on such income. The withholding tax
rate would initially be 15 per cent, increasing to 20
per cent after 2006 and 35 per cent after 2009. If and
when (i) the European Union enters into exchange of
information agreements with Switzerland,
Liechtenstein, Monaco, Andorra, and San Marino
and (ii) the Council of the European Union confirms
that the United States is sufficiently committed to
exchange of information pursuant to bilateral
agreements, Austria, Belgium, and Luxembourg
would cease to apply the withholding tax and would
instead comply with the automatic exchange of
information rules applicable to the other Member
States. Although some issues regarding the proposal
remain to be resolved (notably, a precondition that
Switzerland agree to a withholding tax regime
29
H S B C H O L D I N G S P L C
Description of Business (continued)
similar to that applicable to Austria, Belgium, and
Luxembourg), the Council of the European Union
intends to finalize and approve the directive on
March 21, 2003.
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. The
Chief Executive of Hong Kong (‘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 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 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, 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.
30
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 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.
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 (to 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.
US regulation and supervision
HSBC is subject to extensive federal and state
supervision and regulation in the US. 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. HSBC has elected to be treated as
a financial holding company under the GLBA,
enabling it to offer a more complete line of financial
products and services. HSBC’s ability to engage in
expanded financial activities as an FHC depends
upon HSBC meeting certain criteria set forth in the
BHCA, including requirements that its principal US
depository institution subsidiary, HSBC Bank USA,
and its forty per cent owned subsidiary, Wells Fargo
HSBC Trade Bank, N.A., be well capitalized and
well managed, and that they have achieved at least a
satisfactory record of meeting community credit
needs during their most recent examination pursuant
to the Community Reinvestment Act. In general
under the BHCA, an FHC would be required, upon
notice by the Federal Reserve Board, to enter into an
agreement to correct any deficiency in the
requirements necessary to maintain its FHC election.
Until such deficiencies are corrected, the Federal
Reserve Board may impose limitations on the
conduct or activities of an FHC or any of its affiliates
as it deems appropriate. If such deficiencies are not
timely corrected, the Federal Reserve Board may
require an FHC to divest its control of any subsidiary
bank or to cease to engage in certain financial
activities. HSBC is also generally prohibited from
acquiring, directly or indirectly, ownership or control
of more than 5 per cent of any class of 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 US 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).
The Federal Reserve Board has 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 on the Federal Reserve Board’s
flexibility with respect to the capital adequacy
requirements applicable to such US bank holding
companies.
HSBC Bank USA, like other FDIC-insured
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). 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), 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,
31
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Description of Business (continued)
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 2002, HSBC Bank USA was
well capitalised under Federal Reserve Board
regulations.
On 26 October 2001 the USA Patriot Act
(‘Patriot Act’) became effective. The Patriot Act
imposed significant record keeping and customer
identity requirements, expanded the government’s
powers to freeze or confiscate assets and increased
the available penalties that may be assessed against
financial institutions for violation of the
requirements of the Patriot Act intended to detect and
deter money laundering. The Patriot Act required the
U.S. Treasury Secretary to develop and adopt final
regulations with regard to the anti-money laundering
32
compliance obligations on financial institutions (a
term which includes insured U.S. depository
institutions, U.S. branches and agencies of foreign
banks, U.S. broker-dealers and numerous other
entities). The U.S. Treasury Secretary delegated this
authority to a bureau of the U.S. Treasury
Department known as the Financial Crimes
Enforcement Network (‘FinCEN’).
Many of the new anti-money laundering
compliance requirements of the Patriot Act, as
implemented by FinCEN, are generally consistent
with the anti-money laundering compliance
obligations that already apply to HSBC Bank USA
under the Bank Secrecy Act and applicable Federal
Reserve Board regulations. These include
requirements to adopt and implement an anti-money
laundering program, report suspicious transactions and
implement due diligence procedures for certain
correspondent and private banking accounts. Certain
other specific requirements under the Patriot Act
involve new compliance obligations. The passage of
the Patriot Act and other recent events have resulted in
heightened scrutiny of the Bank Secrecy Act and anti-
money laundering compliance by federal and state
bank examiners. HSBC Bank USA is in the process of
implementing a program to ensure that it is in full
compliance with all such requirements.
Certain U.S. source payments to foreign persons
may be subject to U.S. withholding tax unless the
foreign person is a qualified intermediary. A qualified
intermediary is a financial intermediary who is
qualified under the Internal Revenue Code and has
completed the Qualified Intermediary Withholding
Agreement with the Internal Revenue Service. This
regulatory regime requires us to incur additional
compliance expenses and creates another risk of
noncompliance which may have significant adverse
consequences.
The U.S. Treasury has proposed amendments to
the regulations under section 163(j) of the Internal
Revenue Code that would limit deductions for
interest expense paid to certain related parties.
Treasury’s proposal is subject to the uncertainties
inherent in the legislative process and it is impossible
to predict whether and in what form the proposal will
be enacted. If the amendment is enacted as proposed,
it may reduce the amount of U.S. tax deductions we
are able to take for interest paid in respect of certain
related-party debt.
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 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.
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.
33
H S B C H O L D I N G S P L C
Description of Property
At 31 December 2002, HSBC had some 7,600
operational properties worldwide, of which
approximately 3,100 were located in Europe, 600 in
Hong Kong and the Asia Pacific region, 2,000 in
North America (including 1,370 in Mexico) and
1,600 in Brazil. Additionally, properties with a net
book value of US$525 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 acquire a long leasehold interest in a
building at Canary Wharf, London, to be developed
by Canary Wharf Limited. The building was
substantially completed, and occupation commenced
in the third quarter 2002. The final transfer of
operations was completed in February 2003. The
new building accommodates under one roof
approximately 8,000 staff, who previously occupied
various HSBC offices in the City of London. The
disposal of surplus property interests released by this
consolidation move has been managed in 2002, and
will continue to be managed in 2003, through
assignment, leasing or sale into the market, as
appropriate.
34
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.
35
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 long-established businesses
in five regions: Europe; Hong Kong; Rest of Asia-
Pacific, including the Middle East and Africa; North
America; and South 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.
In addition, HSBC has private banking operations in
Hong Kong, London, New York, Miami, Düsseldorf,
Monaco, Singapore, Luxembourg, and the Channel
Islands as well as in Switzerland.
Against a background of difficult conditions in
most of the world’s economies, HSBC achieved a
solid set of results in 2002. Its performance reflected
the resilience of its local businesses and their ability
to generate a reasonable return.
HSBC’s attributable profit of US$6,239 million
in 2002 was 25 per cent higher than 2001. The
results in 2001 bore an exceptional charge of
US$1,120 million relating to the situation in
Argentina, and the provision for the Princeton Note
settlement (US$323 million after tax). Operating
profit before provisions and goodwill amortisation
increased by 3 per cent year on year for the second
year running, rising to US$11,641 million in 2002. In
constant currency, operating profit before provisions
rose also by 3 per cent with a 43 per cent decline in
South America being offset against an underlying
growth of 6 per cent in Europe and 11 per cent in
North America. In an environment of economic
uncertainty, weak equity markets and reduced
demand for capital investment, HSBC concentrated
on controlling costs and extending the range of
products offered to its core customer base. Organic
growth, particularly in North America and Europe,
36
together with the benefit of acquisitions, more than
offset the lower levels of operating profits earned in
South America, which were heavily impacted by
foreign exchange translation. Credit costs in 2002 at
US$1,321 million absorbed 11 per cent of cash
operating profit before provisions against 13 per cent
in 2001, excluding the additional general provision
for Argentina.
HSBC has grown its asset base and operating
profits over the past several years, fuelled by an
expansion of services and a strategy of value-added
acquisitions. HSBC’s strong capital position and
depth of management resources have enabled
opportunistic acquisitions to be made in all market
conditions.
The strategic acquisitions impacting the last
three years are as follows:
In December 1999, HSBC acquired Republic
New York Corporation, subsequently merged with
HSBC USA Inc, and Safra Republic Holdings S.A.
subsequently renamed HSBC Republic Holdings
(Luxembourg) S.A.. The acquisition doubled
HSBC’s private banking business and extended
HSBC’s US domestic, personal and commercial
banking business. Goodwill of US$6.3 billion arose
on the acquisition and is being amortised over 20
years commencing January 2000.
In July 2000, HSBC acquired CCF, a major
French banking group, with businesses in personal,
corporate and investment banking, asset management
and private banking. Goodwill of US$9 billion arose
on the acquisition of CCF and is being amortised
over 20 years commencing July 2000. At 31
December 2002 CCF’s total assets were US$73
billion, total customer deposits were US$26 billion
and loans to customers (net) were US$31 billion.
On 25 November 2002, HSBC completed the
acquisition of GFBital, a major retail banking group
in Mexico. Goodwill of US$2 billion arose on the
acquisition of GFBital and is being amortised over
20 years commencing November 2002. With this
acquisition, HSBC has extended its presence in the
North American Free Trade Agreement countries. At
31 December 2002, GFBital’s total assets were
US$21 billion, total customer deposits were US$13
billion and loans to customers (net) were US$8
billion.
On 14 November 2002, HSBC announced that it
had reached agreement to acquire the common stock
of Household for a consideration of approximately
US$14.2 billion. The agreement remains subject to a
number of conditions including shareholders’
approval and regulatory approvals.
HSBC’s financial performance has also been and
may continue to 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, such as
the managed exchange rate between the Hong Kong
dollar and the US dollar. In 2002, the decline in the
value of the US dollar against sterling and the euro
had a significant effect on the results reported in
Europe, while the strengthening of the US dollar
against the Argentine peso and Brazilian real
significantly affected the results reported in South
America.
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 2003 will be
the impact on the world economy of possible conflict
in the Middle East, and low expected growth rates in
the US and in European economies.
So far during the economic and stock market
downturn consumers and small business customers
have proved surprisingly resilient. Policy initiatives
to maintain economic activity through low interest
rates have been effective. Although equity markets
have fallen, property markets have supported
consumer confidence and have attracted savings and
investment flows. However, this cannot be a long
term solution for repairing world economic growth
prospects. Overcapacity still burdens many of the
world’s industries, leading to corporate activity
focussed on rationalisation rather than expansion. It
is a period of cost reduction rather than revenue
growth. Demand for investment funding remains
very modest. Pension provision and, in the US
retirement health benefits obligations, entered into by
companies during a more benign economic climate,
are likely to place a severe strain on future corporate
profits. Employment levels remain a key factor in
economic recovery. During the current uncertainties,
HSBC believes completion of the Household
acquisition announced last year will improve its
geographical balance. This will also change the
character of risks within HSBC’s financial
framework by increasing the proportion of earnings
from the personal sector which, long term, has more
predictable revenue and cost characteristics.
Summary
Figures in US$m
Net interest income ..............
Other operating income........
Year ended 31 December
2002
15,460
11,135
14,725
11,163
2001 †
2000 †
13,723
10,850
Total operating income ......
26,595
25,888
24,573
Operating expenses excluding
goodwill amortisation......
Goodwill amortisation..........
Operating profit before
(14,954 )
(854 )
(14,605 )
(799 )
(13,577 )
(510 )
provisions .......................
10,787
10,484
10,486
Provisions for bad and
doubtful debts..................
(1,321 )
(2,037 )
(932 )
Provisions for contingent
liabilities and
commitments...................
Loss from foreign currency
redenomination in
Argentina.........................
Amounts written off fixed
asset investments .............
(39 )
(649 )
(71 )
(68 )
(324 )
(520 )
(125 )
–
(36 )
Operating profit .................
9,035
7,153
9,447
Share of operating loss in joint
ventures...........................
Share of operating profit in
associates ........................
Gains/(losses) on disposal of:
- investments ......................
- tangible fixed assets .........
Profit on ordinary activities
before tax .......................
Tax on profit on ordinary
(28 )
135
532
(24 )
(91 )
(51 )
164
754
20
75
302
2
9,650
8,000
9,775
activities ..........................
(2,534 )
(1,988 )
(2,409 )
Profit on ordinary activities
after tax..........................
7,116
6,012
7,366
Minority interests .................
(877 )
(1,020 )
(909 )
Profit attributable to
shareholders...................
6,239
4,992
6,457
Cash basis profit before tax*
10,513
8,807
10,300
Cash basis profit attributable to
shareholders*...................
7,102
5,799
6,982
* Cash based measurements are after excluding the impact of
goodwill amortisation.
†
The figures for 2001 and 2000 have been restated to reflect the
adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’,
details of which are set out in Note 1 on pages 195 to 197.
37
H S B C H O L D I N G S P L C
Financial Review (continued)
Year ended 31 December 2002 compared with
year ended 31 December 2001
In the sections which follow, analysis of these results
highlights the impact of a weaker US dollar against
other major currencies and significantly weaker
South American currencies against all currencies, on
translating revenues and costs arising in the year.
Both are important to an understanding of HSBC’s
performance in 2002.
HSBC made a profit on ordinary activities
before tax of US$9,650 million in 2002, an increase
of US$1,650 million, or 21 per cent, compared with
2001. On a cash basis, profit before tax increased by
US$1,706 million, or 19 per cent.
Net interest income of US$15,460 million in
2002 was US$735 million, or 5 per cent, higher than
2001. Net interest income in Europe and North
America was higher than in 2001 by US$1.1 billion,
of which US$0.2 billion reflected the impact of
foreign exchange translation and US$85 million
reflected the first time contribution from GFBital.
Underlying growth reflected higher levels of average
interest-earning assets and the benefits from lower
funding costs. Net interest income in South America
was lower than in 2001 by US$0.4 billion, of which
US$0.3 billion was due to foreign exchange
translation. Excluding this, the underlying reduction
reflected a lower level of local debt securities in
Brazil. In Argentina narrower spreads and the costs
associated with the funding of the non-performing
loan portfolio resulted in net interest expense in
2002.
Other operating income of US$11,135 million,
was in line with 2001 as growth in wealth
management income was offset by falls in securities
market related fee and commission income. Dealing
profits was also lower against a backdrop of difficult
trading conditions in the credit and equity markets.
Operating expenses, excluding goodwill
amortisation, were US$349 million, or 2 per cent,
higher than 2001 reflecting the cost structures of new
acquisitions, investment in the expanding wealth
management business, and costs associated with the
enhancement of business processes. In constant
currency, operating expenses were 4 per cent higher.
HSBC’s cost: income ratio, excluding goodwill
amortisation, decreased to 56.2 per cent compared
with 56.4 per cent in 2001.
38
The charge for bad and doubtful debts was
US$1,321 million in 2002, which was US$716
million lower than in 2001. The main component of
the charge related to the personal sector which
amounted to US$857 million, a rise of US$113
million, largely as a result of growth in lending and
higher credit card provisioning in Hong Kong. New
corporate provisions also increased in Europe but
this was more than offset by the clients in Asia as the
economic conditions in some Asian countries
improved. The substantial decrease in the total
charge from 2001 reflected the US$600 million
general provision against Argentine exposure
charged in 2001.
Other charges of US$107 million in 2002 were
US$1,062 million, or 91 per cent, lower than in
2001. The 2001 charges included the loss of US$520
million arising from the foreign currency
redenomination in Argentina and a charge of US$575
million in respect of the Princeton Note matter. The
2002 charge includes US$68 million in respect of
losses in Argentina arising from judicial orders or
‘amparos’ (allowing certain depositors relief from the
mandatory pesification rules and recovery of their
historic US dollar deposits at current exchange
rates), government decrees and renegotiation of
banking contracts
Amounts written off fixed asset investments
were dominated by a US$143 million charge writing
down the carrying value of a major European life
assurer in which CCF has for some time held a
strategic minority stake.
The US$28 million share of operating losses in
joint ventures principally reflected HSBC’s share of
the ongoing costs of Merrill Lynch HSBC for the
first half of 2002. Following the acquisition by
HSBC of its joint venture partner’s share on 28 June
2002 these results are now consolidated fully on a
line by line basis.
Gains on disposal of investments of US$532
million included profit on the sales of CCF’s stake in
Lixxbail to its joint venture partner and HSBC’s 6.99
per cent stake in Banco Santiago S.A. In addition,
disposal gains of US$170 million were realised from
sales of investment debt securities to adjust to
changes in interest rate conditions. In aggregate
disposal gains on investments were US$222 million
lower than in 2001.
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$265 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$170 million were
realised from sales of investment debt securities to
adjust to changes in interest rate conditions.
Net interest income
Year ended 31
December 2002
Year ended 31
December 2001
US$m
6,343
4,133
1,607
% US$m
5,563
4,165
1,482
41.0
26.7
10.4
Year ended 31
December 2000
%
36.4
29.1
10.0
% US$m
4,988
3,997
1,367
37.8
28.3
10.1
2,732
645
17.7
4.2
2,450
1,065
16.6
7.2
2,185
1,186
15.9
8.6
Europe................
Hong Kong.........
Rest of Asia-
Pacific ...........
North America ...
South America ...
Net interest
income........... 15,460
100.0
14,725
100.0
13,723
100.0
Net interest income (US$m)
15,460
14,725
13,723
18,000
15,000
12,000
9,000
6,000
3,000
0
2002
2001
2000
Figures in US$m
Net interest income ...............
Average interest-earning
Year ended 31 December
2002
15,460
2001
14,725
2000
13,723
assets................................
608,749
579,665
516,185
Gross interest yield
(per cent)1 ........................
Net interest spread
(per cent) 2 ........................
Net interest margin
(per cent)3 ........................
4.70
2.27
2.54
6.08
2.09
2.54
7.31
2.10
2.66
1 Gross interest yield is the average interest rate earned on average
interest-earning assets (AIEA).
2 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.
3 Net interest margin is net interest income expressed as a percentage
of average interest-earning assets.
39
H S B C H O L D I N G S P L C
Financial Review (continued)
Year ended 31 December 2002 compared with
year ended 31 December 2001
Net interest income in 2002 was US$735 million, or
5 per cent, higher than 2001, at US$15,460 million.
At constant exchange rates, net interest income was 6
per cent higher than 2001 reflecting growth in
HSBC’s operations in Europe, North America and
the rest of Asia Pacific regions, as well as the
acquisition of GFBital at the end of November 2002.
In Europe, net interest income was US$780
million, or 14 per cent, higher than in 2001, mainly
reflecting the growth in average interest-earning
assets and the benefits of lower funding costs. In
constant currency, growth was 10 per cent. In North
America net interest income increased by US$282
million, or 12 per cent, due to a combination of the
increased level of average interest-earning assets,
primarily residential mortgages, and wider margins
on treasury activities as a steeper yield curve led to
reduced funding costs. In addition, GFBital
contributed US$85 million of net interest income to
the North American region. In Hong Kong,
notwithstanding modest loan growth and a reduced
contribution from net free funds, net interest income
was largely maintained as a strong treasury
performance, together with growth in credit card
lending and in low cost deposits, offset continuing
margin compression in the mortgage business.
In the rest of Asia-Pacific net interest income
growth of 8 per cent was driven by higher credit card
and personal lending together with the full year
impact of the acquisition of NRMA Building Society
in Australia in 2001.
In South America the impact of the unsettled
economic environment caused net interest income to
fall by US$420 million to US$645 million. In Brazil,
underlying net interest income was in line with 2001
as the benefit from higher levels of customer lending
was offset by the impact of HSBC’s decision to
reduce the level of local debt securities and to move
to a more conservative positioning of the balance
sheet. In Argentina, the combination of narrower
spreads and the high cost of local funding of the
non-performing loan portfolio resulted in net interest
expense in 2002.
Average interest-earning assets at US$609
billion increased by US$29 billion, or 5 per cent.
Adjusting for the impact of foreign exchange
translation and acquisitions, underlying growth was 3
40
per cent, driven principally by the placement of
customer deposits in the United Kingdom, Taiwan,
India, Korea, mainland China and the Middle East,
together with personal lending growth in the United
Kingdom, France, United States, Canada, Singapore,
Malaysia, Korea, Taiwan and India. The increase in
average interest-earning assets from acquisitions was
US$4 billion.
HSBC was able to maintain its net interest
margin at 2.54 per cent, unchanged from that for
2001, as an 18 basis point widening in interest spread
was offset by a similar reduction in the contribution
from net free funds. Interest spreads benefited from a
change in asset mix with a higher proportion of
personal lending and with surplus liquidity
increasingly invested in higher yielding investment
grade corporate debt securities as opposed to
interbank placements. In addition, the fall in short-
term interest rates benefited margins in our treasury
activities as the historical deployment of liquidity
into longer dated assets benefited from the effects of
the steeper yield curve. A reduced benefit from a
higher level of net free funds mitigated this impact
on the net interest margin.
In the United Kingdom, net interest margin fell
as a reduced benefit from net free funds more than
offset an improved contribution from treasury
activities and the benefit of a higher level of
personal customer lending. In Hong Kong, the
Hongkong and Shanghai Banking Corporation was
able to maintain its margin through improved
treasury performance, higher net recoveries of
suspended interest and an increased proportion of
higher yielding credit card advances. These factors
offset the impact of reduced spreads on deposits, a
lower contribution from net free funds and narrower
spreads in the competitive mortgage market. Hang
Seng Bank suffered a fall in net interest margin
resulting primarily from a combination of a lower
benefit from net free funds as interest rates fell and
the narrower spreads on mortgages. For Hang Seng
Bank these drivers are much more significant than
for the Hongkong and Shanghai Banking
Corporation. In the United States, a strong
performance in treasury activities as a steeper yield
curve reduced funding costs, and a growth in average
mortgage balances, drove an improvement in net
interest margin.
HSBC is moving increasingly to differentiated
product pricing. This competitive approach reflects
the value to HSBC of its most loyal customers and
has resulted in narrower spreads on a number of
products, particularly mortgages and savings
products. The benefit of this strategy is being 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 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
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$265 million to US$2,450
million.
Average interest-earning assets at US$579.7
billion (of which US$55.4 billion relates to CCF)
increased by US$63.5 billion, or 12 per cent.
Excluding the effect of acquisitions, there was
organic growth in Hong Kong driven principally by
the placement of customer deposits, together with
personal lending growth in the United Kingdom, the
United States, Canada, Singapore, Taiwan, India and
the Philippines.
At 2.54 per cent, HSBC’s net interest margin
was 12 basis points lower than for 2000 mainly
reflecting the impact of CCF’s lower margin
business. In addition, for HSBC as a whole an
increasingly liquid balance sheet, and a reduced
benefit from net free funds as interest rates fell, also
impacted the net interest margin. The fall in interest
rates, however, improved the net interest margin in
two of HSBC’s largest domestic operations in the
United Kingdom and the United States as margins in
our treasury activities widened as funding costs
reduced. In Hong Kong, net interest margin in The
Hongkong and Shanghai Banking Corporation was
largely unchanged as a reduction in suspended
interest, net of releases and recoveries, and improved
margins on treasury activities offset the effects of a
more liquid balance sheet the reduced benefit of net
free funds and reduced interest spreads on Hong
Kong dollar deposits. In Hang Seng Bank, the fall in
net interest margin resulted primarily from a lower
benefit from net free funds as interest rates fell.
HSBC is moving increasingly to differentiated
product pricing. This competitive approach reflects
the value to HSBC of our most loyal customers and
has resulted in narrower spreads on a numbers of
products, particularly mortgages and savings
products. The benefit of this strategy is seen in the
mix and volume of HSBC’s core current account and
savings products, particularly in the United
Kingdom, Hong Kong and the United States.
Other operating income
Year ended 31
December 2002
US$m
By geographical segment
Europe................... 6,272
Hong Kong............ 1,917
Rest of Asia-
54.8
16.7
Year ended 31
December 2001
Year ended 31
December 2000
%
% US$m
% US$m
6,056
1,852
53.0
16.2
5,922
1,790
Pacific .............. 1,174
North America ...... 1,502
596
South America ......
11,461
10.2
13.1
5.2
1,137
1,495
880
100.0 11,420
10.0
13.1
7.7
1,085
1,338
932
100.0 11,067
Intra-HSBC
elimination .......
(326 )
(257 )
(217 )
Other operating
income.............. 11,135
11,163
10,850
Figures in US$m
By income category:
Dividend income ...................
Fees and commissions (net) ..
Dealing profits
- foreign exchange.................
- interest rate derivatives
- debt securities .....................
- equities and other trading....
- operating leased assets
rental income.......................
- general insurance
underwriting (net) ...............
- increase in value of
long-term insurance
business...............................
- other....................................
Year ended 31 December
2002
2001
278
7,824
1,167
47
75
24
1,313
490
313
182
735
186
7,470
1,120
159
311
95
1,685
465
373
251
733
53.5
16.2
9.8
12.1
8.4
100.0
2000
197
7,311
965
57
281
323
1,626
481
360
195
680
Total other operating income.
11,135
11,163
10,850
1,720
1,822
1,716
41
H S B C H O L D I N G S P L C
Financial Review (continued)
Analysis of fees and commissions receivable
and payable
constant exchange rates, net fees and commissions
were 4 per cent higher than in 2001.
Figures in US$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 ...............
Funds under management
Corporate finance
Other ...................................
Total fees and commissions
receivable .......................
Less: fees payable ................
Net fees and
commissions.....................
Year ended 31 December
2002
1,715
752
268
1,242
556
173
775
77
125
773
296
160
1,026
122
1,185
2001
1,620
628
246
1,116
524
135
668
78
114
928
308
165
965
115
1,146
2000
1,536
613
225
1,070
540
119
570
69
185
1,208
291
176
822
271
882
9,245
(1,421 )
8,756
(1,286 )
8,577
(1,266 )
7,824
7,470
7,311
Other operating income (US$m)
12,000
10,000
8,000
6,000
4,000
2,000
0
278
1,720
1,313
7,824
186
1,822
1,685
197
1,716
1,626
7,470
7,311
2002
2001
2000
Fee and commissions (net)
Other
Dealing profits
Dividend income
Year ended 31 December 2002 compared with
year ended 31 December 2001
Other operating income of US$11,135 million, was
in line with that for 2001 both in nominal terms and
in constant currency. In both Europe and South
America the nominal movements in other operating
income were primarily due to currency translation
effects. Virtually all lines of other operating income
demonstrated growth with the exception of equity
market-related activities, namely broking income and
custody fees.
Net fees and commissions at US$7,824 million
represented 29 per cent of total operating income
against 29 per cent in 2001 and were US$354
million, or 5 per cent, higher than in 2001. At
42
In Europe, fee income increased by US$318
million, or 7.5 per cent (3.1 per cent in constant
currency), as growth in wealth management income,
particularly in general and life insurance, private
client, pensions and investment advisory business
more than offset the lower levels of equity market-
related fees. Within UK Banking, growth was
achieved of 17 per cent in HSBC branded life,
pensions and investment products sold through the
tied salesforce, of 4 per cent in sales of life
protection products and of 29 per cent in creditor
protection insurance.
In North America, excluding the US$47 million
increase relating to the acquisition of GFBital in
Mexico, fee income was US$24 million higher than
in 2001. Growth in fee income from the sale of
annuities, mutual funds and across a range of
banking services more than offset a lower level of
broking income.
In Hong Kong, given the muted demand for
credit products, significant emphasis was given to
generating fee income. A combination of initiatives
drove fee income US$92 million higher than in 2001.
This was primarily due to strong growth in fees from
the sale of unit trusts, including the sale of US$2.8
billion of HSBCs capital guaranteed funds, fees from
credit cards, insurance and underwriting business. In
addition, higher levels of fee income were earned
from structured finance transactions.
HSBC’s operations in the rest of Asia Pacific
grew fee income by US$43 million with strong
growth in fee income from credit cards in Taiwan,
Malaysia, Indonesia, the Middle East, Thailand and
India.
In South America, fee income fell nominally by
US$170 million, but by only US$27 million at
constant exchange rates. The weakening economic
environment reduced activity levels in areas where
fees are generated, and in addition, the Brazilian
Government moved to prohibit the charging of fees
against certain accounts.
Dealing profits at US$1,313 million were
US$372 million, or 22 per cent, lower than in 2001.
Within this category foreign exchange earnings grew
4 per cent to US$1,167 million and continued to
demonstrate resilience across all market conditions.
The deterioration was primarily in the area of interest
rate trading, with debt securities earnings US$236
million less as credit spreads on corporate bonds
widened sharply as market confidence was
undermined by low earnings growth and news of
corporate scandals in the United States. Dealing
profits were also impacted by weaknesses in the
equity markets.
Fees in debt capital markets grew strongly by 30
per cent, or US$40 million, as HSBC improved its
position in European markets.
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 arising 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, its customers also
benefited from a number of fee reductions during
2001, particularly in HSBC Bank plc’s UK Banking
business.
In the United Kingdom, eliminating mortgage
loan to valuation fees reduced revenues by US$7
million, dispensing with 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.
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 South America, fee income benefited from the
initiatives taken to increase wealth management
revenue. Fee income in Brazil, at constant exchange
rates, was US$79 million, or 28 per cent, higher with
good growth in revenue from asset management
activities and success in cross-sales to existing
customers through the retails branch.
Revenues from investment banking, broking
income, corporate finance activities and other
securities-related activities were substantially lower
than those earned in the buoyant equity markets
during the first half of 2000.
Dealing profits held up well, despite less
favourable conditions in the equity markets, as
performance in debt securities and interest rate
trading improved. Foreign exchange trading was
bolstered by CCF.
43
H S B C H O L D I N G S P L C
Financial Review (continued)
Operating expenses
Staff numbers (full-time equivalent)
Year ended 31
December 2002
US$m
By geographical segment
Year ended 31
December 2001
Year ended 31
December 2000
%
% US$m
% US$m
Europe .................. 7,878
Hong Kong ........... 2,139
Rest of Asia-
Pacific .............. 1,528
North America ...... 2,675
South America ...... 1,060
15,280
Goodwill amortisation
Europe ..................
Hong Kong ...........
Rest of Asia-
651
–
Pacific ..............
North America ......
South America ......
Intra-HSBC
33
146
24
854
51.6
14.0
7,288
2,140
49.0
14.4
6,518
1,986
10.0
17.5
6.9
1,397
2,540
1,497
100.0 14,862
9.4
17.1
10.1
1,292
2,396
1,602
100.0 13,794
47.3
14.4
9.4
17.3
11.6
100.0
632
–
8
145
14
799
348
1
5
143
13
510
elimination .......
(326 )
(257 )
(217 )
Total operating
expenses ........... 15,808
15,404
14,087
Year ended 31 December
Figures in US$m
By expense category:
Staff costs ............................
Premises and equipment
(excluding depreciation)..
Other administrative
expenses ..........................
2002
8,609
1,824
3,331
2001
8,553
1,639
3,279
2000
8,057
1,480
2,959
Administrative expenses ....
13,764
13,471
12,496
Depreciation and
amortisation
- tangible fixed assets...........
- goodwill.............................
1,190
854
1,134
799
1,081
510
Total operating expenses ..
15,808
15,404
14,087
Cost:income ratio (excluding
goodwill amortisation) ....
56.2
56.4
55.3
Operating expenses (US$m)
18,000
15,000
12,000
9,000
6,000
3,000
0
2,044
3,331
1,824
8,609
1,933
3,279
1,639
8,553
1,591
2,959
1,480
8,057
2002
2001
2000
Staff costs
Other
Premises and equipment
Depreciation and amortisation
44
Europe ................................
Hong Kong .........................
Rest of Asia-Pacific ............
North America....................
South America....................
Total staff numbers............
As at 31 December
2002
72,260
23,786
28,630
34,207
25,522
184,405
2001
73,326
24,654
26,259
19,291
27,519
171,049
2000
69,629
24,204
22,919
19,201
25,671
161,624
Year ended 31 December 2002 compared with
year ended 31 December 2001
Operating expenses in 2002 were US$404 million, or
3 per cent, higher than in 2001. In addition to
organic growth, the increase reflected the impact of
the acquisitions made during 2002 and the full year
impact of acquisitions and expansion of business
activities in 2001, particularly in Asia Pacific and
North America. In constant currency, excluding
acquisitions made in 2002 and goodwill
amortisation, cost growth was 2 per cent. Goodwill
amortisation increased by US$55 million of which
US$10 million reflected the amortisation of goodwill
arising on GFBital for the one month of its
ownership, and US$20 million was a one time charge
to write-off the balance of the purchased goodwill on
the Group’s insurance activities in Argentina.
In Europe, costs in 2002, excluding goodwill
amortisation, increased by US$590 million compared
with 2001. At constant exchange rates, costs in 2002,
excluding goodwill amortisation, were US$265
million, or 3 per cent higher than in 2001. Of this
increase in costs, acquisitions and changes in group
structure accounted for US$165 million of the
movement following the full consolidation of the
Merrill Lynch HSBC business from July 2002
(US$45 million), and the acquisition of Demirbank
and the Benkar card business in Turkey(US$120
million) The move to the Group’s new headquarters
in Canary Wharf together with increases in vacant
space provisioning consequential to that move, added
US$76 million. Costs in the UK based investment
banking operations were lower as headcount was
adjusted to reflect market conditions.
In Hong Kong, costs in 2002, excluding
goodwill amortisation, were in line with 2001. A fall
in staff costs, following the transfer of back office
processing functions to Group Service Centres in
India and mainland China, and the non-recurrence of
a pension top-up in Hang Seng Bank offset increases
in costs associated with business expansion.
In the rest of Asia-Pacific, costs in 2002,
excluding goodwill amortisation, increased by
US$131 million, or 9 per cent compared with 2001.
This growth in costs primarily reflected a higher staff
complement in Group Service Centres in India and
mainland China and the expansion of business in
several countries in the region, in particular mainland
China, Taiwan, the Middle East and in Australia
through the acquisition of NRMA. During the year
The Hongkong and Shanghai Banking Corporation
opened eight new branches in the Asia Pacific
region.
Operating expenses in North America, excluding
goodwill amortisation, increased by US$135 million,
or 5 per cent, in 2002. This increase was largely
driven by the impact of the acquisition of GFBital
and the costs associated with the establishment of the
WTAS business in the United States. A reduction in
the costs associated with ongoing development of
hsbc.com offset additional costs relating to the
closure of the institutional equity business in Canada
and the restructuring of the merchant banking
business in the United States.
In South America, operating expenses, excluding
goodwill amortisation, fell by US$437 million, or 29
per cent, during 2002. At constant exchange rates
operating expenses, excluding goodwill amortisation,
were 4 per cent higher than in 2001. The increase
related to industry-wide union agreed salary
adjustments in Brazil and costs of severance as
headcount reductions were made in the recessionary
environment.
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 the development of e-banking
initiatives.
In the rest of Asia-Pacific, operating expenses,
excluding goodwill amortisation, increased by
US$105 million, or 8 per cent, compared to 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$144
million, or 6 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 South America, operating expenses at
constant exchange rates were US$133 million, or 10
per cent, higher than in 2001. This mainly reflected
the acquisition of CCF Brazil and restructuring costs.
As economic conditions become less certain in the
region, further cost controls were put in place to
restrain cost growth.
The Group’s global processing initiatives
continue to develop with some 2000 staff employed
at HSBC’s global processing centres in mainland
China and India at 31 December 2001.
HSBC’s cost: income ratio, excluding goodwill
amortisation, was 56.4 per cent in 2001, reflecting
the cost structure of new acquisitions and investment
in the expanding wealth management businesses and
IT.
45
H S B C H O L D I N G S P L C
Financial Review (continued)
Provisions for bad and doubtful debts
Year ended 31
December 2002
Year ended 31
December 2001
% US$m
Year ended 31
December 2000
%
% US$m
43.1
18.6
441
197
21.6
9.7
348
248
37.3
26.6
US$m
By geographical segment:
569
Europe ..................
Hong Kong ...........
246
Rest of
89
6.7
172
8.4
159
17.1
–
300
–
22.7
–
300
–
14.7
(174 )
157
(18.7 )
16.9
313
23.7
327
16.1
194
20.8
Asia-Pacific
- normal ................
- release of special
general
provision ..........
North America ......
South America ......
- normal............
- additional
general
provision
against
Argentine
exposures.......
Hong
Kong
Rest of
Asia-
Pacific
Europe
Total
US$m US$m US$m US$m US$m US$m
North
America
South
America
2001
New specific
provisions ........
802
449
577
392
346
2,566
Release of
provisions no
longer required.
Recoveries of
amounts
previously
written-off........
General provisions
- Argentine
additional
provision..........
- other ...................
(260 )
(212 )
(268 )
(42 )
(35 )
(817 )
(65 )
477
(31 )
206
(138 )
171
(43 )
307
(8 )
303
(285 )
1,464
–
(36 )
(36 )
–
(9 )
(9 )
–
1
1
–
(7 )
(7 )
600
24
624
600
(27 )
573
(196 )
1,321
(14.8 )
100.0
600
2,037
29.5
100.0
–
932
–
100.0
Total for 2001.......
441
197
172
300
927
2,037
Of the charge for 2000, US$2 million related to bank advances.
The charge for customer bad and doubtful debts and
non-performing customer loans and related
provisions can be analysed as follows:
Hong
Kong
Rest of
Asia-
Pacific
Total
Europe
US$m US$m US$m US$m US$m US$m
North
America
South
America
2002
New specific
provisions.........
963
528
400
399
388
2,678
Release of
provisions no
longer required .
Recoveries of
amounts
previously
written-off ........
General provisions
- Argentine
additional
provision ..........
- other ...................
(271 )
(160 )
(268 )
(79 )
(48 )
(826 )
(58 )
634
(25 )
343
(52 )
80
(35 )
285
(10 )
330
(180 )
1,672
–
(65 )
(65 )
–
(97 )
(97 )
–
9
9
–
15
15
(196 )
(17 )
(213 )
(196 )
(155 )
(351 )
31 December
2001
Non-performing
loans ................
Provisions .............
2000
New specific
3,682
3,045
2,028
1,408
2,723
1,952
672
723
544
1,033
9,649
8,161
Hong
Kong
Rest of
Asia-
Pacific
Europe
Total
US$m US$m US$m US$m US$m US$m
North
America
South
America
provisions ........
607
454
543
395
232
2,231
Release of
provisions no
longer required.
Recoveries of
amounts
previously
written-off........
General provisions
-special provision
reflecting
Asian risk
raised in 1997...
- other ...................
(248 )
(192 )
(321 )
(72 )
(28 )
(861 )
(56 )
303
(15 )
247
(49 )
173
(31 )
292
(9 )
195
(160 )
1,210
–
43
43
–
1
1
(174 )
(14 )
(188 )
–
(135 )
(135 )
–
(1 )
(1 )
(174 )
(106 )
(280 )
Total for 2002 .......
569
246
89
300
117
1,321
Total for 2000.......
346
248
(15 )
157
194
930
31 December
2002
Non-performing
loans.................
Provisions .............
4,495
3,645
1,724
1,143
2,055
1,496
1,773
2,356
476 10,523
9,117
477
31 December
2000
Non-performing
loans ................
Provisions .............
3,376
2,995
2,521
1,802
3,081
2,091
684
739
710 10,372
8,167
540
46
Year ended 31 December 2002 compared with
year ended 31 December 2001
HSBC’s customer loan portfolio continued to be
well-spread both geographically and across personal
and industrial sectors during 2002. The loan portfolio
at constant exchange rates and excluding loans to the
financial sector, grew by US$31.5 billion, or 11 per
cent, during 2002 of which US$9.4 billion, or 3 per
cent, arose from the acquisition of GFBital in
Mexico. The personal loan sector of the Group’s loan
portfolio increased to 42 per cent of the aggregate at
the end of 2002 compared to 40 per cent at the end of
2001. At constant exchange rates, there was growth
of US$19.5 billion mainly in Europe, North America
and Asia. Of this increase, US$14.2 billion arose
from residential mortgage lending.
The other main change in HSBC’s loan portfolio
in terms of concentration risk and asset quality
related to incorporating the domestic Mexican loan
book of GFBital. 13 per cent of GFBital’s loan book
of US$9.7 billion is non-performing including a
significant proportion of residential mortgage loans
and unsecured personal loans. These assets became
impaired during the Mexican economic crisis in the
late 1990s. In addition, approximately 40 per cent of
GFBital’s loan exposures are peso-denominated
Mexican Government risk. GFBital also has
impaired assets in the agriculture and other
government-supported sectors. As part of the fair
value exercise carried out as at the date of acquisition
of GFBital, these loan assets were critically reviewed
and restated where necessary to conform with the
requirements of both UK GAAP and US GAAP.
Excluding GFBital, there was a decrease in the
level of non-performing loans during 2002 of
US$350 million due to a combination of write-offs,
recoveries and upgradings in Hong Kong and a
number of other Asian countries. This was partly
offset by a rise of US$813 million in non-performing
loans in Europe. This related primarily to a small
number of individual corporate loans in the
telecommunications, private healthcare, leisure and
manufacturing sectors and was not indicative of a
general trend. Importantly, credit quality on
consumer lending remained stable. In South
America, in local currency terms there was a sharp
increase in the level of non-performing loans in
Argentina as individual accounts migrated to non-
performing status as the economic crisis deepened.
Almost three-quarters of the non-government loan
book is now classified as non-performing. The
impact of this migration was recognised in the
general provision established at the end of 2001
within which the deterioration noted was covered.
Aggregate customer bad and doubtful debt
provisions at 31 December 2002 of US$9.1 billion
represented 2.52 per cent of gross customer advances
compared with 2.57 per cent at 31 December 2001.
As in 2001, HSBC’s cross-border exposures did
not necessitate significant provisions.
There were no significant changes to the
Group’s procedures for determining the various
components of the provision for bad and doubtful
debts.
The main components of the decrease in the
customer loans bad debt charge were:
• New specific provisions increased by US$112
million, or 4 per cent, principally driven by:
i. new provisions in Europe which were US$161
million higher than in 2001, reflecting an
increase in non-performing loans in the UK. In
UK Banking, there was an increase in specific
provisions relating to a small number of
corporate exposures in the telecommunications,
private healthcare, leisure and manufacturing
sectors. These provisions are assessed on a case-
by-case basis. By contrast, provisions for UK
personal customers were lower than in 2001 as
credit quality remained stable and increased debt
counselling services proved effective.
Provisioning against such unsecured loans is
determined on a formula based, inter alia, on the
number of days delinquent. There were no major
changes made during the year to the
assumptions used. The level of new specific
provisions against residential mortgages in
Europe remained very low.
ii. new specific provisions in the rest of Asia-
Pacific decreased by US$177 million compared
with 2001 reflecting the fall in non-performing
loans. In Indonesia and Malaysia, significantly
lower new provisions were raised, particularly
against commercial and corporate borrowers, as
the economic conditions in these countries
improved. In the Middle East, new provisions
required on the corporate loan book were lower
following economic growth in the UAE and
strengthened credit control systems. These
factors helped reduce delinquencies and as a
result the level of new provisions on consumer
lending.
47
H S B C H O L D I N G S P L C
Financial Review (continued)
iii. new corporate provisions in Hong Kong
declined by US$48 million reflecting a
reduction in non-performing loans. As the
economy remained in deflation, high levels of
unemployment and the impact of new
bankruptcy laws significantly increased the
incidence of personal bankruptcy filings leading
to an increase of US$127 million in new
provisions against personal lending, principally
on credit cards.
•
In aggregate, releases and recoveries decreased
by US$96 million compared with 2001. 2001
benefited from exceptional recoveries against an
historical Olympia and York exposure and from
successful restructuring and recoveries achieved
in Malaysia on corporate and commercial loans
impaired during the Asian economic crisis in the
late 1990s.
• Excluding Argentina, there was a net release of
general provisions of US$155 million compared
with a release of US$27 million in 2001. There
was a release of US$97 million in Hong Kong
reflecting a reduction in estimated latent loan
losses at 31 December 2002. The estimate of
these latent losses reflects the group’s historical
experience of the rate at which such losses
occur and are identified, on the structure of the
credit portfolio and the economic and credit
conditions prevailing at the balance sheet date.
In the UK there was a release of some US$50
million of general provisions as a number of
corporate borrowers which had been causing
concern at the 2001 year end were specifically
provisioned against in 2002. In Argentina, an
additional general provision of US$600 million
(at constant exchange rates, US$292 million)
was raised at the end of 2001. In 2002, US$196
million of specific impairments were raised and
the general provision requirement was reduced
accordingly. As individual loans have become
impaired, this has caused an underlying increase
in the level of non-performing loans in South
America. The loss experience on corporate
credit in Argentina during 2002 has confirmed
that the level of general provisions established
in 2001 was appropriate. At the end of 2002,
specific and general provisions together
continued to cover about 60 per cent of non-
government loans in Argentina.
48
Year ended 31 December 2001 compared with
year ended 31 December 2000
HSBC’s loans and advances to customers were
spread across the various industrial sectors, as well
as geographically. At constant exchange rates, the
loan portfolio (excluding the financial sector and
settlement accounts) grew by US$16.4 billion, or 6
per cent, during 2001. Within this growth, personal
lending grew by US$11.5 billion, or 10 per cent, and
loans to the commercial and corporate customer base
grew by US$4.9 billion, or 3 per cent. The personal
loan sector of the Group’s loan portfolio increased to
40 per cent at the end of 2001 compared to 39 per
cent at the end of 2001. Residential mortgage lending
and other personal lending contributed US$6.5
billion and US$3.4 billion respectively to this
growth.
The main change in HSBC’s loan portfolio in
terms of concentration risk related to the expansion
of the personal lending portfolio. In terms of asset
quality, the main change was the substantially
increased risk within the portfolio subsequent to the
collapse in economic conditions in Argentina
following its default on sovereign debt.
There was a decrease in non-performing loans of
US$723 million during 2001 due to a combination of
write-offs and recoveries in Hong Kong and in the
rest of Asia-Pacific, including the recoveries against
a historical Olympia and York exposure. In South
America, there was an increase in the level of non-
performing loans in local currency terms in Brazil
reflecting both targeted growth in consumer lending
and a weaker economy. In Argentina, there was an
increase in non-performing loans 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.
In terms of non-performing loans, overall credit
quality in North America remained stable in 2001.
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.
During 2001, HSBC’s cross-border exposures
did not necessitate significant provisions.
There were no significant changes to HSBC’s
procedures for determining the various components
of the provision for bad and doubtful debts.
The main components of the increase in the bad debt
charge were:
• New specific provisions increased by 15 per
cent, or US$335 million, which was principally
driven by:
i. new provisions in Europe which were US$195
million higher than in 2000. This reflected a full
year charge for bad and doubtful debts of
US$178 million for CCF for the first time. This
charge mainly arose on corporate borrowers in
the airline and leisure industries. In UK
Banking, lower levels of new specific provision
were raised for consumer loans in First Direct
and on credit card advances but new provisions
for commercial loans were slightly higher and
mainly reflected problems seen in the
manufacturing sector. Although underlying
credit quality remained stable both in the UK
and in France, there was some weakening of
business confidence and a rise in non-
performing loans of US$290 million.
additional general provision increased the
provision coverage to this level. There was also a
modest release of general provisions in the
private bank in Switzerland in view of the
improved loss experience in the book.
During 2000, there had been a release of US$174
million of the special general provision reflecting
Asian risk raised in 1997.
•
In aggregate, releases and recoveries were
US$81 million higher than in 2000. Both years
benefited from the releases and recoveries on
problem loans which had been impaired during
the Asian economic crisis in 1998 and 1999
although there was also a significant recovery
and release on Olympia and York in 2001.
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
%
South
America
%
Total
%
0.62
0.75
1.13
0.51
9.97
0.78
Year ended 31
December 2002
New provisions .....
Releases and
recoveries .........
(0.21 )
(0.26 )
(0.90 )
(0.15 )
(1.48 )
(0.29 )
ii. new specific provisions rose by US$114 million
Net charge for
specific
in South America. This reflected the growth in
the consumer lending portfolio in Brazil, for
which provisions are determined on a formula
based on the number of days delinquency. New
specific provisions rose by US$64 million in
Argentina as the impact of the economic turmoil
caused some increase in the level of non-
performing loans.
• The other major factor contributing to the rise in
the bad debt charge was the US$600 million
additional general provision raised for Argentina.
This reflected the severe economic deterioration
and unprecedented political and economic
uncertainty, with government default on foreign
currency debt and on a more generalised
breakdown of the economic and political
structures of the country, manifested most
immediately in a sharp rise in unemployment.
Management judged that the severity of losses
incurred in Argentina was somewhat higher than
had been experienced in the Asian crisis of 1998
and that, taking into account all these factors the
probable inherent loss in its Argentine non-
government loan portfolio approximated 60 per
cent of outstanding customer loans and the
provisions.........
0.41
0.49
0.23
0.36
8.49
0.49
Total provisions
charged.................
Amounts written
off net of
recoveries...........
Year ended 31
December 2001
New provisions .....
releases and
0.37
0.35
0.25
0.38
3.01
0.38
0.25
0.72
1.55
0.41
3.91
0.56
0.60
0.66
1.85
0.55
5.72
0.82
recoveries .........
(0.24 )
(0.36 )
(1.31 )
(0.12 )
(0.71 )
(0.35 )
Net charge for
Specific
provisions.........
0.36
0.30
0.54
0.43
5.01
0.47
Total provisions
charged................
Amounts written
off net of
Recoveries..........
Year ended 31
December 2000
New provisions .....
Releases and
0.33
0.29
0.55
0.42
15.36
0.65
0.28
0.88
0.93
0.39
5.78
0.61
0.53
0.68
1.70
0.66
4.07
0.81
recoveries .........
(0.28 )
(0.31 )
(1.16 )
(0.17 )
(0.65 )
(0.39 )
Net charge for
Specific
provisions.........
0.25
0.37
0.54
0.49
3.42
0.42
Total provisions
charged................
Amounts written
off net of
Recoveries..........
0.28
0.37
(0.05 )
0.26
3.39
0.32
0.35
0.64
1.39
0.45
1.43
0.58
49
H S B C H O L D I N G S P L C
Financial Review (continued)
Gains on disposals of investments
Figures in US$m
Gains/(losses) on disposal
of:
- equity investments ..............
- debt securities .....................
- part of a business ................
- other participating interests.
- associates............................
- subsidiaries .........................
- other ...................................
Year ended 31 December
2002
2001
2000
226
170
–
69
47
16
4
532
305
170
–
4
257
21
(3 )
754
228
66
(11 )
(11 )
–
–
30
302
Year ended 31 December 2002 compared with
year ended 31 December 2001
During 2002, HSBC made 23 business acquisitions
and completed 20 business disposals.
HSBC’s European results included US$213
million of profits on the sales of securities from
investment portfolios, principally as HSBC adjusted
its exposure to interest rates. CCF also disposed of
its 50 per cent stake in Lixxbail to its joint venture
partner generating a profit of US$39 million.
In the United States, gains were taken in the first
half of the year, on the sales of a number of
mortgage-backed and other debt securities as long-
term portfolios were adjusted to respond to
exposures to interest rates and sovereign credit.
HSBC’s South American results include a gain
of US$38 million on the sale of HSBC’s 6.99 per
cent stake in Banco Santiago S.A.
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$200 million on the
sale of HSBC’s stake in British Interactive
Broadcasting (‘BiB’) to BSkyB.
HSBC’s European results were bolstered by
gains on the disposal of the stake in Quilter and by
profits in Germany on the sale of the majority stake
in our fledgling internet broker Pulsiv and ERGO.
In Hong Kong HSBC made gains on the sale of
HSBC’s investment in Modern Terminals Limited
and the disposal of our 50 per cent stake in Central
Registration Hong Kong Limited to the other 50 per
cent shareholder, Computershare.
50
In the United States, HSBC realised significant
gains, substantially in the first half of the year, on
the sale of a number of mortgage-backed and other
debt securities as long-term portfolios were adjusted
to respond to changed economic circumstances,
particularly the potential loss of value from mortgage
refinancing. Similar, but smaller gains were achieved
in other locations.
Taxation
Figures in US$m
UK corporation tax charge
Overseas taxation.................
Joint ventures.......................
Associates............................
Current taxation
Origination and reversal of
timing differences
Effect of decreased tax rate on
opening asset
Adjustment in respect of prior
periods
Deferred taxation
Year ended 31 December
2002
684
1,217
(6)
17
1,912
615
–
7
622
2001 *
2000 *
416
1,570
(13 )
26
1,999
(176 )
3
162
(11 )
856
1,468
(7 )
(1 )
2,316
89
4
–
93
Total charge for taxation......
2,534
1,988
2,409
Effective taxation (per cent)
Standard UK corporation tax
rate (per cent).....................
26.3
30.0
24.9
30.0
24.6
30.0
Analysis of overall tax charge
Figures in US$m
2002
2001 *
2000 *
Year ended 31 December
Taxation at UK corporate
tax rate of 30.0% (2001:30.0%
2000: 30.0%) .......................
Impact of differently taxed
overseas profits in principal
locations ..................................
Tax free gains ...........................
Argentine losses .......................
Goodwill amortisation ..............
Prior period adjustments
Other items
2,895
2,400
2,932
(472 )
(19 )
87
261
(90 )
(128 )
(616 )
(102 )
336
263
(167 )
(126 )
(498 )
(15 )
–
172
(48 )
(134 )
Overall tax charge
2,534
1,988
2,409
*
The figures for 2001 and 2000 have been restated to reflect the
adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’,
details of which are set out in Note 1 on pages 195 to 197.
Year ended 31 December 2002 compared with
year ended 31 December 2001
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 2002
(2001: 30 per cent).
Overseas tax included Hong Kong profits tax of
US$408 million (2001: US$450 million) provided at
a rate of 16 per cent (2001: 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 26.3 per cent in
2002 was higher than that for 2001 (24.9 per cent)
mainly as a result of the geographic mix of profits
and certain non-recurring items which occurred in
2001 and resulted in a reduction in the 2001 rate.
In particular, profits arising in North America
represented a higher percentage of HSBC’s profits in
2002 compared to 2001 because profits in the US
were abnormally suppressed in 2001 by the provision
relating to the Princeton Note settlement. US profits
are taxed at a higher rate than the average for the rest
of the group and thus this change in mix raised the
overall tax rate of the group.
One-off tax-free gains arising in 2002 were less
than those arising in 2001.
Partly offsetting these factors, no tax relief was
assumed in respect of the bad debt provision and
other losses relating to Argentina. These losses and
provisions were lower in 2002 than in 2001. This had
the effect of increasing the aggregate tax rate in both
2002 and 2001 but by a lesser degree in 2002.
In 2002, prior year adjustments mainly relating
to audit settlements, which resulted in a reduction in
the tax rate, were less than similar adjustments in
2001.
At 31 December 2002 there were potential
future tax benefits of US$885 million (2001: US$906
million) in respect of trading losses, allowable
expenditure charged to the profit and loss account
but not yet allowable for tax, and capital losses
which had not yet been recognised because
realisation of the benefits was not considered certain.
Year ended 31 December 2001 compared to
year ended 31 December 2000
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 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 24.9 per cent in
2001 was in line with that for 2000 (24.6 per cent)
although there were several factors either increasing
or reducing the rate.
Profits arising in North America represented a
lower percentage of HSBC’s profits in 2001
compared to 2000 because the profits in the US were
suppressed in 2001 by the provision relating to the
Princeton Note settlement. Because these profits are
taxed at a higher rate than the average for the rest of
the group this reduces the overall group tax rate in
2001.
One-off tax-free gains arose in 2001 and these
were greater than those arising in 2000.
No tax relief has been assumed for the 2001 bad
debt provision relating to Argentina. This increases
the 2001 tax rate.
In 2001 certain prior year adjustments mainly
relating to audit settlements resulted in a reduction in
the tax rate. There were similar adjustments in 2001
which resulted in a lower reduction in the tax rate.
At 31 December 2001 there were potential
future tax benefits of US$906m (2000: US$350m) in
respect of trading losses, allowable expenditure
charged to the profit and loss account but not yet
allowable for tax and capital losses which have not
yet been recognised because realisation of the
benefits is not considered certain.
51
H S B C H O L D I N G S P L C
Financial Review (continued)
Asset deployment
At 31 December 2002
At 31 December 2001
US$m
%
US$m
352,344
47.1
308,649
Loans and
advances to
customers ........
Loans and
advances to
banks ...............
Debt securities .....
Treasury bills and
other eligible
bills .................
Equity shares........
Intangible fixed
assets.................
Other ...................
Hong Kong SAR
Government
certificates of
indebtedness....
95,496
175,730
18,141
8,213
17,163
82,714
749,801
9,445
Total assets ..........
759,246
Loans and advances to
customers include:
- reverse repos.....
- settlement
accounts ..........
12,545
8,385
Loans and advances to banks
include:
- reverse repos......
- settlement
accounts ..........
18,736
4,717
12.7
23.4
104,641
160,579
2.4
1.1
2.3
11.0
100.0
17,971
8,057
14,564
73,147
687,608
8,637
696,245
14,823
11,761
10,926
4,433
%
44.9
15.2
23.4
2.6
1.2
2.1
10.6
100.0
Asset 2002 (excluding Hong Kong Government
certificates of indebtedness)
% US$b
Loans and advances
to Customers
47.1
352.3
Debt Securities
23.4
175.7
Loans and Advances
to Banks
12.7
95.5
Other
14.4
108.2
Treasury and other
eligible bills
Total
2.4
18.1
100
749.8
Assets 2001 (excluding Hong Kong Government
certificates of indebtedness)*
%
US$b
Loans and advances
to Customers
44.9
308.6
Debt Securities
23.4
160.6
Loans and Advances
to Banks
15.2
104.6
Other
13.9
95.8
2.6
18.0
100
687.6
Treasury and other
eligible bills
Total
52
*
The figures for 2001 have been restated to reflect the
adoption of UK Financial Reporting Standard 19
‘Deferred Tax’, details of which are set out in Note 1 on
pages 195 to 197.
31 December 2002 compared with 31
December 2001
HSBC’s total assets at 31 December 2002 were
US$759 billion, an increase of US$63 billion, or 9
per cent, since 31 December 2001; at constant
exchange rates, the increase was US$29 billion, or 4
per cent. US$23 billion or 74 per cent of this growth
was attributable to acquisitions, of which US$22
billion resulted from the acquisition of GFBital.
HSBC’s balance sheet remained highly liquid,
reflecting further strong growth in customer deposits
and limited credit demand in some countries.
Approximately 47 per cent of the balance sheet was
deployed in customer loans and advances which was
2 per cent higher than as at 31 December 2001.
At constant exchange rates, gross loans and
advances to customers (excluding loans to the
financial sector) at 31 December 2002 were US$32
billion, or 11 per cent, higher than at 31 December
2001. Of this growth US$9.7 billion reflected the
acquisition of GFBital. Excluding the impact of
GFBital, personal lending grew by 15 per cent and
constituted 88 per cent of the organic growth in
lending outside the financial sector, with strong
organic growth in the UK, United States, Malaysia,
Taiwan, Korea, Singapore and India. Personal
lending now constitutes 42 per cent of gross
customer lending at 31 December 2002, compared
with 39 per cent at 31 December 2001. Loans and
advances to the commercial and corporate customer
base (excluding Governments) grew by 3 per cent
and reflected muted loan demand from this sector.
At 31 December 2002, assets held by the Group
as custodian amounted to US$1,350 billion. Custody
is the safe-keeping and administration of securities
and financial instruments on behalf of others. Funds
under management amounted to US$306 billion at
31 December 2002.
Debt securities and equity shares
Continuing reductions in interest rates, particularly in
the United States have contributed to debt securities
held in the accruals book at 31 December 2002 being
recognised in the accounts at an amount net of off-
balance-sheet hedges, of US$1,278 million less than
market value, compared with an unrecognised gain
of US$885 million at 31 December 2001. Equity
shares included US$4,833 million held on
investment account, compared with US$4,755
million at 31 December 2001, on which there was a
further unrecognised gain of US$406 million
compared with US$539 million at 31 December
2001.
Funds under management
Funds under management of US$306 billion were
US$22 billion, or 8 per cent, higher than at 31
December 2001.
During the year, both HSBC’s asset management
and private banking businesses attracted net funds
inflows. The weakening of the US dollar on our
sterling and Euro denominated funds also led to
increases in the value of funds under management.
Together these more than offset the impact of the fall
in global equity markets.
Funds under management
At 1 January 2002................................................................
Additions.............................................................................
Withdrawals ........................................................................
Value change.......................................................................
Exchange and other .............................................................
US$bn
284
116
(86 )
(26 )
18
At 31 December 2002..........................................................
306
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 the cost of capital internally and the 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. 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 10.0 per cent. HSBC
plans to continue to use the figure of 12.5 per cent
until at least the end of the current year which marks
the conclusion of its current five year strategic plan
period to ensure consistency and to help
comparability.
Economic profit improved by US$845 million,
compared with 2001 which bore the cost of the
settlement of the Princeton Note matter and the
exceptional provisions in respect of Argentina.
Measurement of economic profit involves a number
of assumptions and, therefore, management believes
that the trend over time is more relevant than the
absolute economic profit reported for a single period
and this approach concentrates focus on external
factors rather than measurement bases.
Economic profit
2002
2001
US$m
%
US$m
%
Average shareholders
funds ....................... 50,937
Add: cumulative
goodwill written off
and amortised ..........
Dividends declared but
not yet paid..............
6,554
953
Less: property
revaluation reserves.
(2,180 )
Average invested
capital...................... 56,264
Profit after tax
Add: Goodwill
7,116
amortisation.............
863
Depreciation charged
on property
revaluations .............
Less: equity minority
interest.....................
Preference dividends ....
Return on invested
80
(505 )
(372 )
48,154
6,111
893
(2,573 )
52,585
6,012
807
78
(579 )
(441 )
12.7
1.5
0.1
(0.9 )
(0.6 )
11.4
1.5
0.2
(1.1 )
(0.8 )
capital*....................
7,182
12.8
5,877
11.2
After charging:
Princeton settlement .....
Additional Argentine
general provisions
and losses ................
Benchmark cost of
–
–
–
–
(323 )
(0.6 )
(1,120 )
(2.1 )
capital......................
(7,033 )
(12.5 )
(6,573 )
(12.5 )
Economic profit ...........
149
0.3
(696 )
(1.3 )
* Return on invested capital is based on cash-based attributable profit
adjusted for depreciation attributable to revaluation surpluses.
Average invested capital is measured as shareholders’ funds after
adding back goodwill amortised and goodwill previously written-off
directly to reserves and deducting property revaluation reserves.
This measure broadly reflects cash invested capital.
53
H S B C H O L D I N G S P L C
Financial Review (continued)
Analysis by geographical segment
North America, from South America (formerly
described as Latin America).
Profit on ordinary activities before tax by
segment
Europe
Year ended 31 December
2001
2000
2002
Cash basis profit before tax
US$m
Europe .................. 3,500
Hong Kong ........... 3,710
Rest of Asia-
Pacific .............. 1,260
North America ...... 1,238
of which
% US$m
3,542
3,883
36.3
38.4
% US$m
3,658
3,691
44.3
48.5
13.1
12.8
1,088
503
13.6
6.3
1,265
860
–
(58 )
–
(575 )
(0.6 ) (1,016 )
(7.2 )
(12.7 )
–
301
%
37.4
37.8
12.9
8.8
–
3.1
Princeton..........
South America ......
of which
Argentina
provisions.........
Total
–
9,650
–
100.0
(1,120 )
8,000
(14.0 )
100.0
–
9,775
–
100.0
Total assets by segment
31 December
2002
31 December
2001†
US$m
Total assets*
Europe .................................. 342,118
Hong Kong ........................... 180,525
Rest of Asia-
Pacific ...............................
76,635
North America ...................... 142,032
8,491
South America ......................
749,801
Total
% US$m
45.7 297,674
24.1 175,744
10.2
62,355
18.9 138,738
13,097
1.1
100.0 687,608
%
43.2
25.6
9.1
20.2
1.9
100.0
*
†
Excluding Hong Kong SAR Government certificates of
indebtedness.
The figures for 2001 have been restated to reflect the adoption of
UK Financial Reporting Standard 19 ‘Deferred Tax’, details of
which are set out in Note 1 on pages 195 to 197.
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 81 to 96. The cash
basis measures set out in this section are derived by
deducting goodwill amortisation from the equivalent
reported measure.
In the analysis of profit by geographical segment
which follows, the total of operating income and
operating expenses includes intra-HSBC items of
US$326 million in 2002, US$257 million in 2001
and US$217 million in 2000.
Following the acquisition of GFBital, HSBC is better
able to facilitate business among member countries
of the North American Free Trade Agreement
(“NAFTA”) and internationally. Hence, the
geographical analysis has been realigned to reflect
this fact by reclassifying Mexico and Panama to
54
Year ended 31 December
Figures in US$m
UK banking ..........................
France...................................
International banking ............
Treasury and capital markets
HSBC Private Banking
Holdings (Suisse) SA.......
HSBC Trinkaus &
Burkhardt.........................
Other*...................................
2002
2,242
548
312
701
233
57
67
2001
2,394
587
278
487
211
133
92
2000
2,205
176
426
305
290
133
486
4,160
4,182
4,021
* Other primarily relates to other operating subsidiaries and the
holding company sub-group.
Year ended 31 December
Figures in US$m
Net interest income...............
Dividend income ..................
Net fees and commissions.....
Dealing profits......................
Other income ........................
Other operating income ........
2002
6,343
211
4,528
508
1,025
6,272
2001
5,563
116
4,210
708
1,022
6,056
2000
4,988
84
4,100
787
951
5,922
Total operating income
12,615
11,619
10,910
Staff costs .............................
Premises and equipment .......
Other ....................................
Depreciation .........................
Goodwill amortisation ..........
Operating expenses...............
(4,425 )
(966 )
(1,763 )
(724 )
(7,878 )
(651 )
(8,529 )
(4,227 )
(786 )
(1,619 )
(656 )
(7,288 )
(632 )
(7,920 )
(3,862 )
(651 )
(1,374 )
(631 )
(6,518 )
(348 )
(6,866 )
Operating profit before
provisions........................
4,086
3,699
4,044
Provisions for bad and
doubtful debts ..................
(569 )
(441 )
(348 )
Provisions for contingent
liabilities and
commitments ...................
Amounts written off fixed
(15 )
asset investments .............
(267 )
(30 )
(90 )
(67 )
(23 )
Operating profit..................
3,235
3,138
3,606
Share of operating (loss)
in joint ventures
Share of operating profits/
(losses) in associated
undertakings.....................
Gains on disposal of
investments and tangible
fixed assets ......................
Profit on ordinary
3
288
activities before tax* ......
3,500
* of which United Kingdom....
3,239
(26 )
(79 )
(51 )
(45 )
148
3,658
3,127
42
441
3,542
3,147
Year ended 31 December
2002
2001
2000
Share of HSBC’s pre-tax
profits (cash basis)
(per cent) .........................
39.5
Share of HSBC’s pre-tax
profits (per cent) ..............
36.3
47.5
44.3
39.0
37.4
Cost:income ratio
(excluding goodwill
amortisation) (per cent)....
Period-end staff numbers
62.4
62.7
59.7
(full-time equivalent ) ......
72,260
73,326
69,629
Bad and doubtful debts
Figures in US$m
Loans and advances to
customers
- specific charge
new provisions .....................
release of provisions no
963
longer required.................
(271 )
recoveries of amounts
previously written off.......
- general (release)/charge......
Customer bad and doubtful
(58 )
634
(65 )
Year ended 31 December
2002
2001
2000
802
(260 )
(65 )
477
(36 )
607
(248 )
(56 )
303
43
debt charge ......................
569
441
346
Loans and advances to
banks
- net specific
(release)/charge................
–
–
Total bad and doubtful
debt charge ..........................
569
441
2
348
Customer bad debt charge as
a percentage of closing
gross loans and advances
0.34%
0.32%
0.26%
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
2002
At 31
December
2001
164,701
39,373
71,446
342,118
34,559
197,362
133,380
40,641
66,255
297,674
36,908
169,371
Year ended 31 December 2002 compared with
year ended 31 December 2001
Economic activity slowed further in 2002, as early
indicators pointing to a standard cyclical recovery in
economic activity diminished and the momentum
from rate cuts in 2001 was lost. Industrial production
and investment contracted in all major economies,
although this was offset to varying degrees by
consumer and government expenditure. Initial
optimism that the fourth quarter of 2001 marked the
low point in the Eurozone’s economic cycle was
largely misplaced as constraints imposed by the
EMU’s growth and stability pact limited the degree
of fiscal loosening available to members.
The United Kingdom registered strong consumer
led GDP growth, expected to be 1.6 per cent, in
2002. Structural disparities within the United
Kingdom economy widened further as consumer and
government spending masked an industrial recession.
A combination of low interest rates and a rising
incidence of equity withdrawal, as house prices rose,
boosted consumer expenditure, particularly in the
latter half of the year. Unemployment remained low
as the jobs shake-out in manufacturing was absorbed
by growth in the public sector. However, a slowing
of house price rises since the start of 2003, combined
with fiscal tightening and higher consumer
indebtedness is likely to dampen consumer spending
in the first half of 2003.
France is expected to register a fall in GDP
growth from 1.8 per cent in 2001 to 1.0 per cent in
2002. Growth in consumer spending was stronger
than in other parts of the Eurozone while fixed
investment fell by less. However, there was a
substantial fall in inventory which reduced GDP
growth by 0.9%. French consumer spending
remained buoyant in spite of a gradual increase in the
unemployment rate and a high savings rate,
reflecting household concerns about future pension
provisions. Underlying fiscal policy is likely to be
largely neutral with tax cuts balanced by public
sector spending limits. The budget deficit is likely to
hit a target of 2.8 per cent, double the 2001 level but
within the stability pact limit of 3 per cent of GDP.
In Germany, GDP growth for 2002 is forecast to
be 0.2 per cent, reflecting constraints within the
EMU’s growth and stability pact and weakness in the
banking system. Germany’s budget deficit, projected
at 3.75 per cent of GDP, was well ahead of the pact’s
upper limit of 3 per cent and limited the
government’s ability to loosen fiscal policy to bolster
the economy. Lending to small and medium sized
businesses collapsed as weakness in the banking
system reflected a combination of low banking
profits and rising non-performing loans. The
government has announced a significant tightening
of fiscal policy in an attempt to bring the deficit back
below 3 per cent in 2003. This is already hitting
confidence and is likely to dampen growth further
55
H S B C H O L D I N G S P L C
Financial Review (continued)
during the first half of 2003.
European operations contributed US$3,500
million to HSBC’s profits before tax in 2002 and
represented 36.3 per cent of pre-tax profits. On a
cash basis, Europe’s pre-tax profits were US$4,160
million, and represented 39.5 per cent of HSBC’s
profits on this basis. Operating performance was
strong with pre-provision profit rising 9 per cent to
US$4,737 million on a cash basis. In constant
currency terms, the growth was 6 per cent. This
growth was driven essentially by the core personal
and commercial banking businesses in the UK and
France and by Treasury and Capital Markets
performance. There was no material benefit in 2002
from disposal gains as after making provisions for
amounts to be written off fixed asset investments the
net gain was only US$21 million. The comparable
figure in 2001 was US$351 million, a result
dominated by the sale of the Group’s stake in British
Interactive Broadcasting.
The impact of acquisitions on 2002 profit before
tax was modest at US$51 million. The acquisitions
of Demirbank in October 2001 and Benkar in
September 2002, however, represented a major
expansion of HSBC’s business in Turkey. These
businesses have been successfully integrated during
2002, and now over 500,000 customers in Turkey are
served through a combination of call centres, internet
banking and a network of 163 branches.
A number of other internal restructurings took
place to enhance operational efficiency. In June
2002, HSBC acquired Merrill Lynch’s 50 per cent
share of the Merrill Lynch HSBC joint venture. The
business was integrated into HSBC Bank in
December.
HSBC continued to restructure and strengthen
its private banking operations with the integration of
HSBC Guyerzeller and CCF’s private banking
operations outside France with HSBC Republic
Holdings (Suisse). The comments below on HSBC
Republic (Suisse) assume that this structure was in
place during 2001.
The following commentary on the Europe
results is based on constant exchange rates.
Net interest income at US$6,343 million was
US$558 million, or 10 per cent, higher than in 2001,
56
principally attributable to growth in mortgage
lending in the UK and increased spreads as funding
costs reflected the low interest rate environment
across Europe.
In UK Banking, net interest income at US$3,469
million was US$312 million, or 10 per cent, higher
than in 2001, driven by strong growth in mortgages
and personal lending, and the benefits of lower cost
of funds. Mortgage balances increased by US$5.4
billion, or 24 per cent, and gross new lending by 57
per cent as HSBC Bank increased its market share
from 4 per cent to 6 per cent in a buoyant housing
market. Personal current account balances were up
11 per cent on 2001 as customers preferred to hold
cash in the uncertain investment climate. The launch
of a new Bonus Savings Account and improved
utilisation of customer relationship management
systems contributed to growth of 19 per cent in
personal savings balances and 16 per cent in personal
lending balances in 2002. Business current account
balances grew by 14 per cent, helped by HSBC
Bank’s increased profile in the market place and its
‘Start up Stars’ advertising campaign. The bank
increased its share of business start-ups and opened
more than 87,000 new business accounts in 2002.
Corporate current account balances improved by 9
per cent compared with 2001 although this was
partly offset by a narrowing of spreads on deposit
accounts.
In Treasury and Capital Markets net interest
income increased by US$141 million, or 32 per cent,
compared with 2001. The increase was primarily due
to earnings on money market business, which
benefited from reduced funding costs and the
deployment of surplus liquidity in higher yielding
investment grade corporate and institutional bonds.
In France, CCF’s net interest income of
US$1,022 million was US$95 million, or 10 per cent,
higher than for 2001. Net interest income in the
branch network grew strongly, driven by growth both
in personal lending and in sight deposits as
customers preferred liquidity and security in the face
of falling equity markets. CCF’s treasury operation
benefited from a lower cost of funds and spreads
widened offsetting a reduction in benefit from net
free funds.
HSBC Republic (Suisse)’s net interest income
fell by 7 per cent compared with 2001 as lower
interest rates reduced the benefit from its investment
portfolio and from free funds. Part of the portfolio
was repositioned at the beginning of the year into
lower yielding but higher grade securities in
anticipation of difficult credit markets.
Other operating income at US$6,272 million in
2002 was US$25 million lower than in 2001,
reflecting lower income from equity-market-related
activity and sales of investment products largely
offset by strong growth in credit facility, life and
income protection fees. Lower dealing profits
reflected difficult conditions in the equity markets,
and costs associated with the hedging of the
corporate bond portfolio.
In UK Banking, other operating income at
US$3,040 million was 2 per cent lower than in 2001
but within this performance there was encouraging
evidence of success in reaching customers with
products to match their current preferences. The
number of customers who benefited from HSBC
Bank’s individual service reviews more than doubled
to 485,000 and over 750,000 personal banking
products were sold through call centres in 2002.
HSBC’s Premier service for its higher value
customers was further enhanced and the number of
customers using this service increased by 44 per cent
to 182,000. Overall sales of HSBC branded life,
critical illness and income protection products
through its tied sales-force were 7 per cent higher
than in 2001. Life protection sales grew by 42 per
cent on the back of strong mortgage growth and there
was a 26 per cent increase in sales of creditor
protection insurance, driven by the growth in
personal lending. Fees and commissions in
commercial banking increased on the back of a rise
in current accounts and overdrafts. Cards income
grew by 6 per cent and Invoice Finance saw a 13 per
cent rise in the number of clients opting for credit
protection. Corporate banking fees were 7 per cent
lower than in 2001 reflecting the impact of subdued
stock market activity on the custody services
business and lower fee income from reduced
corporate activity. In addition, sales of investment
products fell by 14 per cent reflecting continued
uncertainty in the investment markets and the impact
of a sustained fall in equity markets reduced the
value of long-term assurance business.
In CCF, a similar pattern was evidenced. Good
growth was achieved in fee income on credit
facilities, payments and cash management and cards.
Stockbroking, market making and asset management
fees were all lower in the face of subdued equity
markets although sales of investment protection
products in CCF’s regional banking subsidiaries rose.
In the European bond markets, CCF benefited from
synergies as a core member of HSBC Group,
growing origination and distribution fees on euro-
denominated products. Dealing profits, however, fell
in difficult market conditions. Equity fees were
boosted by CCF’s role as lead manager in the
privatisation of Autoroutes du Sud de la France, the
largest IPO in the European market in 2002. In
aggregate other operating income was US$84
million, or 7 per cent, lower than 2001.
Treasury and Capital Markets’ other operating
income at US$400 million was US$70 million, or 21
per cent, higher than in 2001. Although dealing
profits were down in aggregate, foreign exchange
revenues grew by 6 per cent following expansion in
emerging markets business and currency options. Fee
income from fixed income products also benefited
strongly from the continued alignment with HSBC
corporate clients and HSBC achieved number one
ranking in bond issuance with UK and French
corporates in all currencies.
This was offset by the costs of interest rate
swaps used as part of the management of the
corporate bond portfolio. In addition, equity swap
activity generated dealing losses, although these
were offset by a rise in dividend income.
In HSBC Republic (Suisse), transaction and safe
custody fees increased in line with the growth in
funds under management of US$4.1 billion to
US$45.6 billion reflecting net inflows as world stock
markets fell. US$2 billion of net new funds were
attracted. Investment fees benefited strongly from the
success of the Hermitage Fund, which offered clients
access to Russian investment opportunities.
Operating expenses, excluding amortisation of
goodwill, at US$7,878 million were US$265 million,
or 3 per cent, higher than in 2001, reflecting
acquisition related growth, one-off property related
expenses and continued investment in customer
contact and relationship management systems.
Staff costs at US$4,425 million were broadly in
line with 2001. In UK Banking, staff costs reduced
by US$24 million, or 1 per cent, compared with
2001. This was due in part to a switch into ‘other
operating expenses’ of the cost of outsourcing HSBC
Bank’s cash and cheque processing services and to
57
H S B C H O L D I N G S P L C
Financial Review (continued)
the impact of offshore processing. Utilisation of
HSBC’s service centres in China and India increased
with some 700 staff positions and 20 new processes
being transferred to India during the year. In
Treasury and Capital Markets, staff costs were
US$21 million or 12 per cent higher than in 2001,
reflecting higher bonus accruals in line with
increased profitability. CCF’s staff costs were
unchanged on 2001, despite the full year impact of
Banque Hervet, achieved in part through a small
reduction in headcount.
Non-staff costs of US$3,452 million were
US$256 million, or 8 per cent, higher than in 2001.
In UK Banking, non-staff costs increased by US$140
million, or 4 per cent, due to the cost of the
outsourced cash and cheque processing centres, the
full consolidation of Merrill Lynch HSBC from July
2002 and one-off property and vacant space costs
relating to the relocation of the bank’s headquarters
to Canary Wharf. Provisions for vacant space and
diminution in value of surplus properties given the
fall in value of central London property cost US$76
million. The contribution of customer contact
systems to delivering strong growth in both personal
savings and lending balances and fee based products
during the year justified further investment in these
systems.
In CCF, the full year impact of Banque Hervet
and the acquisition of 11 branches from Banque
Worms added US$7 million to non-staff costs, while
the integration of Demirbank and acquisition of
Benkar in Turkey added a further US$76 million to
the cost base.
The charge for bad and doubtful debts at
US$569 million was US$81 million, or 17 per cent,
higher than in 2001. In UK Banking, there was an
increase in specific provisions of which the largest
element related to a small number of corporate
exposures in the telecommunications sector together
with a number of individual provisions for
commercial loans in the private healthcare, leisure
and manufacturing sectors. In contrast, provisions in
the branch network for personal customers were
lower than in 2001 as credit quality remained stable
and increased debt counselling services proved
effective. The charge for bad debts in CCF was
considerably lower than in 2001 as lower provisions
58
combined with higher releases and recoveries.
Amounts written off fixed asset investments
largely reflected a write-down of a strategic equity
investment held by CCF in a European life company.
The share of operating losses in joint ventures
fell by 37 per cent in 2002, largely reflecting the full
consolidation of MLHSBC from July 2002 which
offset lower profitability in CCF’s insurance and
asset management joint ventures. On 28 June 2002,
HSBC acquired Merrill Lynch’s 50 per cent share of
the joint venture.
Gains on disposal of fixed assets and
investments were US$266 million lower than in
2001. Higher venture capital gains were realised
from the sale of private equity investments in CCF
and a US$39 million profit was achieved on the
disposal of its stake in Lixxbail to its joint venture
partner. However, these could not compensate for
non-recurrence of the gain on disposal of HSBC
Bank plc’s 20 per cent shareholding in British
Interactive Broadcasting in the first half of 2001.
In Turkey, operating profit of US$82 million
was US$12 million lower than in 2001, mainly
reflecting depreciation of the Turkish lira. At
constant exchange rates, operating profit was US$17
million, or 27 per cent, higher. Net interest income
increased by US$98 million, reflecting the full year
contribution from Demirbank and acquisition of
Benkar. Operating expenses increased by US$120
million as a result of the integration of the two
companies.
In Germany, HSBC Trinkaus & Burkhardt
reported pre-tax profits of US$57 million, US$85
million, or 61 per cent, lower than in 2001.
Fees and commissions benefited from strong
corporate finance income, which offset a significant
reduction in equity commissions as a result of lower
transaction volumes. However, a significant inflow
of new funds failed to compensate for reductions in
advisory fees and securities transaction commissions,
and uncertainty on amendments to German tax laws
following the general elections in autumn 2002 also
slowed the placement of closed end property funds.
Trading activities generally suffered from the
weakness in equity markets and profits from equity
derivatives fell sharply as volatilities increased.
Strict cost control led to a fall in operating
expenses despite one-off costs relating to the
successful implementation of a new securities
system. Staff numbers fell slightly reflecting the
reduction in market activity and lower transaction
numbers.
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
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.
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
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
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$569 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.
59
H S B C H O L D I N G S P L C
Financial Review (continued)
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
60
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
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.
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$1,441 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$1,441 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$302 million related to CCF) to US$3,061
million, including an increase in information
technology-related expenditure and 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 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
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 Merill
Lynch HSBC’s European operations. The 2000
comparatives for the share of operating losses in
associated undertakings included losses of US$76
61
H S B C H O L D I N G S P L C
Financial Review (continued)
million in respect of HSBC Bank plc’s 20 per cent
shareholding in British Interactive Broadcasting.
Gains on disposal of fixed assets of US$441
million included the US$200 million profit in the
first half of 2001, on the sale of HSBC Bank plc’s 20
per cent shareholding in British Interactive
Broadcasting. HSBC’s European results were also
bolstered by gains on disposal of the stake in Quilter
and by profits in Germany on the sale of our
fledgling internet broker Pulsiv and ERGO.
Hong Kong
Year ended 31 December
Figures in US$m
Net interest income ...............
Dividend income...................
Net fees and commissions .....
Dealing profits ......................
Other income ........................
Other operating income.........
2002
4,133
25
1,264
133
495
1,917
Total operating income .......
6,050
Staff costs .............................
Premises and equipment........
Other ....................................
Depreciation..........................
Goodwill amortisation...........
Operating expenses ...............
(1,249 )
(233 )
(459 )
(198 )
(2,139 )
–
(2,139 )
2001
4,165
26
1,172
218
436
1,852
6,017
(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 )
Operating profit before
provisions ........................
3,911
3,877
3,800
Provisions for bad and
doubtful debts...................
(246 )
(197 )
(248 )
Provisions for
contingent liabilities and
commitments....................
Amounts written off fixed
asset investments..............
(14 )
(10 )
6
(18 )
(10)
(9 )
Operating profit ..................
3,641
3,668
3,533
Share of operating profit in
associated undertakings ....
Gains on disposal of
investments and tangible
fixed assets.......................
Profit on ordinary
11
58
17
198
21
137
activities before tax.........
3,710
3,883
3,691
Share of HSBC’s pre-tax
profits (cash basis)
(per cent) ..........................
35.3
Share of HSBC’s pre-tax
profits (per cent)...............
38.4
44.1
48.5
35.9
37.8
Cost:income ratio
(excluding goodwill
amortisation)
(per cent) ..........................
Period-end staff numbers
(full-time equivalent)........
23,786
24,654
24,204
62
Bad and doubtful debts
Figures in US$m
Loans and advances to
customers
- specific charge
new provisions......................
release of provisions no
longer required.................
recoveries of amounts
previously written off.......
- general (release)/charge......
528
(160 )
(25 )
343
(97 )
Customer bad and doubtful
debt charge.......................
246
Total bad and doubtful debt
charge ..............................
246
Year ended 31 December
2002
2001
2000
449
(212 )
(31 )
206
(9 )
197
197
454
(192 )
(15 )
247
1
248
248
Customer bad debt charge as
a percentage of closing
gross loans and advances .
0.35%
0.29%
0.37%
Figures in US$m
Assets
Loans and advances to customers (net)...
Loans and advances to banks (net)..........
Debt securities, treasury bills and other
At 31
December
2002
69,948
33,359
eligible bills ......................................
60,083
At 31
December
2001
67,359
42,516
49,625
Total assets (excluding Hong Kong
SAR Government certificates of
indebtedness) .....................................
180,525
175,744
Liabilities
Deposits by banks...................................
Customer accounts..................................
2,379
148,904
3,271
146,544
Year ended 31 December 2002 compared with
year ended 31 December 2001
Hong Kong continued to suffer from deflation in
2002 and domestic demand remains subdued. An
improvement in trade failed to stimulate demand, as
unemployment increased and salaries fell. Deflation
is forecast to continue throughout 2003.
Against this backdrop HSBC’s operations in
Hong Kong reported a cash basis operating profit
before provisions of US$3,911 million, an increase
of US$34 million, or 1 per cent, compared with
2001, as targeted income growth from wealth
management products was achieved. Cash basis
profit before tax of US$3,710 million was US$173
million, or 4 per cent, lower than in 2001 due to a
higher bad debt charge and lower investment
disposal gains.
35.4
35.6
34.3
Net interest income of US$4,133 million was
US$32 million, or 1 per cent, lower than in 2001.
Further growth in personal lending, particularly
mortgages and credit cards, and an improved spread
arising from lower funding deposit costs were offset
by intense competition reducing spreads on mortgage
and commercial lending. In addition net interest
income benefitted from a strong treasury
performance. The reduced spreads on mortgages
reduced net interest income by US$142 million.
There was also a considerable reduction in the
benefit of net free funds as average interest rates
remained low.
Average customer advances increased by
US$2.0 billion compared with 2001, with growth in
mortgages and credit cards. Average credit card
advances increased by a further 15 per cent
compared to 2001. Term lending to corporate and
commercial customers also increased, despite
subdued demand for lending.
For the Hongkong and Shanghai Banking
Corporation in Hong Kong actions taken to improve
lending mix and target lower cost deposits held net
interest margin essentially flat, the actual margin
falling by 1 basis point to 2.47 per cent. Spread
widened by 13 basis points, driven by a strong
treasury performance, suspended interest recoveries,
increased levels of high-yielding credit card
balances, and a greater level of low cost deposits.
These factors more than offset lower spreads on
mortgages and deposits. Continued price competition
in the residential mortgage portfolio, excluding the
Government Home Ownership Scheme loans,
resulted in a further reduction in the average yield on
the residential mortgage portfolio to 151 basis points
below the bank’s best lending rate (‘BLR’) in 2002.
The overall improvement in spread was offset by a
reduction in 14 basis points from the benefit of net
free funds, as average interest rates remained low.
Hang Seng Bank’s net interest margin fell by 10
basis points to 2.46 per cent. Net interest spread
improved, driven by improved spreads on debt
securities and higher levels of low-cost deposits.
These were offset by lower spreads on mortgages –
Hang Seng Bank’s average yield on residential
mortgages was 149 basis points below BLR in 2002
– and a lower benefit from net free funds as average
interest rates remained low.
Other operating income increased by US$65
million, or 4 per cent, to US$1,917 million. Fee
income grew by US$92 million, or 8 per cent, to
US$1,264 million, driven by growth in revenues
from wealth management initiatives. Sales of unit
trusts were strong, including the sale of over US$4
billion of funds launched by HSBC in 2002, up 33
per cent compared with 2001. Revenues from
insurance and underwriting also increased strongly.
Revenue from cards also increased by US$9 million,
or 4 per cent. There was also growth in the
Hongkong and Shanghai Banking Corporation in
Hong Kong in Corporate Banking revenues, due to
higher income from structured and corporate finance
transactions. Other income increased by US$59
million, driven by improved underwriting results.
Dealing profits fell by US$85 million, or 39 per cent,
due to lower profits on debt securities as credit
spreads widened following the series of corporate
scandals in the USA. Part of the decline was also
attributable to treasury positions which generated
improved net interest income at the expense of lower
dealing profits as hedge costs were reflected on that
line. Foreign exchange trading remained strong with
profits increasing 11 per cent over 2001.
Operating expenses were in line with 2001.
Staff costs fell by US$30 million, driven by a
reduction in full time equivalent headcount of 868 as
back office processing functions transferred to
HSBC’s Group Service Centres in India and
mainland China, and the non-recurrence of a pension
top-up in Hang Seng Bank in 2001. These reductions
were partially offset by higher revenue-related
remuneration. Other administrative expenses
increased by US$31 million, or 7 per cent, due to
continuing marketing initiatives, higher IT costs to
support business growth, and higher professional
fees in relation to higher levels of structured finance
transactions.
The charge for bad and doubtful debts increased
by US$49 million, or 25 per cent, to US$246 million.
The increase was driven by new provisions against
credit card lending, rising to US$250 million in
2002, compared with US$122 million in 2001;
provisions against other retail lending also increased,
as bankruptcy filings grew. Provisions against the
mortgage portfolio fell as delinquency rates fell.
Recoveries and releases against commercial and
corporate customers were lower than in 2001,
although economic conditions remained difficult.
The above increases were partially offset by a release
in general provisions reflecting a reduction in latent
losses.
Gains on the disposal of fixed asset investments
63
H S B C H O L D I N G S P L C
Financial Review (continued)
of US$58 million were US$140 million lower than in
2001, which included gains on the disposal of
interests in Modern Terminals and Central
Registration.
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 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 44.1 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
64
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 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.
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 738,000 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,
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$61 million compared with 2000.
During the first half of 2001, HSBC’s operations in
Hong Kong disposed of their interest in Modern
Terminals and a 50 per cent shareholding in Central
Registration. These were augmented by gains on
disposals of other investment securities throughout
2001.
65
H S B C H O L D I N G S P L C
Financial Review (continued)
Rest of Asia-Pacific (including the Middle
East)
Year ended 31 December
Figures in US$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
2002
1,607
3
724
364
83
1,174
2,781
(826 )
(156 )
(454 )
(92 )
(1,528 )
(33 )
(1,561 )
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 )
provisions ........................
1,220
1,214
1,155
Provisions for bad and
doubtful debts...................
(89 )
(172 )
15
Provisions for
contingent liabilities and
commitments....................
Amounts written off fixed
asset investments..............
18
(2 )
(43 )
(11 )
5
(3 )
Operating profit ..................
1,147
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
–
113
–
(5 )
99
6
–
100
(7 )
activities before tax.........
1,260
1,088
1,265
Share of HSBC’s pre-tax
profits (cash basis) (per
cent) .................................
Share of HSBC’s pre-tax
12.3
12.4
12.3
profits (per cent)...............
13.1
13.6
12.9
Cost:income ratio
(excluding goodwill
amortisation) (per cent) ....
Period-end staff numbers
54.9
53.3
52.7
(full-time equivalent)........
28,630
26,259
22,919
66
Bad and doubtful debts
Figures in US$m
Loans and advances to
customers
- specific charge
new provisions.....................
release of provisions no longer
required...........................
recoveries of amounts
previously written off......
- general charge/(release).....
Customer bad and doubtful
debt charge/(release) .......
Loans and advances to banks
- net specific (releases)
Total bad and doubtful debt
charge/(release)...............
Customer bad debt charge as a
percentage of closing gross
loans and advances..........
Year ended 31 December
2002
2001
2000
400
(268 )
(52 )
80
9
89
–
89
577
(268 )
(138 )
171
1
543
(321 )
(49 )
173
(188 )
172
(15 )
–
–
172
(15 )
0.23%
0.52%
–
Figures in US$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
2002
At 31
December
2001
37,078
10,708
21,622
76,635
5,362
54,172
30,666
11,253
13,623
62,355
4,010
45,498
Year ended 31 December 2002 compared with
year ended 31 December 2001
Following the slowdown across the region in
2001, the growth in mainland China, Malaysia and
South Korea was export-led, whilst consumer
spending has driven growth in Australia and New
Zealand. Interest rates and inflationary pressures
remained low across the region. Improving economic
fundamentals in Thailand, Malaysia and Singapore
are positioning these economies to benefit from
future direct investment recovery. The Japanese
economy has remained fragile, with consumer
growth rates slowing during the year despite an
improvement in GDP during the second half of 2002
driven by increased exports and domestic
consumption.
HSBC’s operations in the rest of the Asia-Pacific
region contributed US$1,253 million cash basis
operating profit before provisions, an increase of
3 per cent compared with 2001. In constant currency
terms the growth was 2 per cent. Cash basis profit
before tax of US$1,293 million was 18 per cent
higher than 2001. The increase in profit before tax
resulted largely from lower bad debt charges,
particularly in the Middle East and Indonesia.
Net interest income of US$1,607 million was
US$125 million, or 8 per cent, higher than in 2001.
The increase was driven by strong growth in credit
card and personal lending across the region,
particularly in Taiwan, Singapore, India, the
Philippines and Australia, the latter supported by
HSBC’s acquisition of NRMA Building Society in
2001. Overall, average loans and advances to
customers in the rest of Asia-Pacific increased by 14
per cent compared with 2001.
Other operating income increased by US$37
million, or 3 per cent, compared with 2001. Net fee
income increased by US$43 million, or 6 per cent,
compared with 2001. There was a 30 per cent
increase in credit card income, mainly focused in
Taiwan, Malaysia, Indonesia and the Middle East.
There was also good growth in account service and
credit-related fee income. Dealing profits fell by
US$31 million, or 8 per cent, to US$364 million.
The reduction resulted principally from lower
interest rate derivatives and debt securities trading
income in Singapore and the Philippines.
Total operating expenses excluding goodwill
increased by US$131 million, or 9 per cent, to
US$1,528 million. This included an increase of
US$26 million resulting from the further expansion
of HSBC’s processing facilities in mainland China
and India, along with significant business expansion,
particularly in the Middle East and Taiwan. In
addition, an increase in costs in Australia resulted
from the acquisition of NRMA Building Society at
the end of 2001. Staff costs increased by US$55
million, or 7 per cent, to US$826 million. Of the
increase, US$13 million relates to the processing
centres in India and mainland China. There was also
a significant increase in staff costs in the Middle East
as a result of increased headcount to support the
expansion of personal and commercial banking.
This was offset by savings in Singapore due to lower
headcount and lower levels of voluntary severance
costs. Other administrative expenses increased by
US$76 million, particularly due to the expansion of
personal financial services in Taiwan, Singapore and
mainland China, one-off IT costs in the Middle East,
and higher costs in Australia arising from the
acquisition of NRMA Building Society in 2001.
The charge for bad and doubtful debts of US$89
million was US$83 million lower than in 2001.
There was a significant reduction in the bad debt
charges in Indonesia, the Middle East and mainland
China. In Indonesia, there were significantly lower
new provisions raised, particularly against
commercial and corporate sectors, along with higher
levels of releases against commercial and corporate
customers. Strengthened credit control procedures in
the Middle East led to lower requirements for new
specific provisions against both personal and
corporate customers, along with releases in the UAE
and Lebanon. In mainland China, there were various
recoveries of provisions against corporate customers.
HSBC’s operations in Singapore reported an
increase in operating profit before provisions of
US$22 million, or 12 per cent to US$213 million.
Profit before tax fell by 17 per cent to US$223
million, as 2001 benefited from the release of
provisions held against the historic Olympia and
York exposure. Net interest income increased by
US$20 million, or 8 per cent, to US$272 million
driven mainly by increased volumes of car loans and
a strong treasury performance, partly offset by
narrower spreads and subdued demand in the
commercial and corporate sector. Dealing profits fell
by US$17 million, or 29 per cent, due to lower
profits from interest rate derivatives and debt
securities trading resulting from interest rate
movements and wider credit spreads. Fee income
remained flat with growth in income from the sale of
HSBC’s capital guaranteed funds offset by
reductions in broking income. Operating expenses
fell by US$16 million, or 7 per cent to US$204
million. Staff costs fell by US$24 million, or 17 per
cent as a result of lower headcount and lower
voluntary separation costs. Other administrative
expenses increased by US$8 million including higher
marketing costs relating to personal financial
services. There was a net release of US$6 million of
bad debts, compared with a net release of US$94
million in 2001 which benefited from the recovery
made against the historic Olympia and York
exposure. New provisions were US$22 million lower
than in 2001, particularly relating to exposures in the
corporate sector, and there were further recoveries
from commercial and corporate customers.
HSBC’s operations in India reported operating
profit before provisions of US$111 million, an
67
H S B C H O L D I N G S P L C
Financial Review (continued)
increase of US$7 million, or 7 per cent, compared
with 2001. Profit before tax of US$85 million was
broadly in line with 2001. Net interest income
increased by US$3 million, or 3 per cent to US$100
million. Growth in personal lending was partly offset
by lower treasury income as spreads narrowed. Fee
income increased by 6 per cent to US$57 million,
driven by higher credit card fees due to higher
merchant acquiring volume. Dealing profits
increased by 17 per cent to US$68 million, as profits
on interest rate derivatives trading grew, reflecting
increased business volumes as a result of the closer
co-operation between investment banking and
corporate banking to offer customised structured
solutions to major corporate customers. Operating
expenses increased by US$20 million, or 18 per cent,
to US$132 million. Of this increase, US$12 million
related to the further expansion of operations in
HSBC’s Group Service Centres in Hyderabad, which
now employs in excess of 2,300 employees. Staff
costs increased by US$10 million, of which US$6
million related to the processing centre, and the
remainder due to higher headcount due to business
expansion. Other operating expenses increased by
US$10 million, of which US$6 million related to the
processing centre. The remaining increase resulted
from an expansion in business, including investment
in IT, new branches and marketing of credit cards
and other personal financial products. The charge for
bad and doubtful debts increased by US$6 million to
US$27 million, reflecting increasing levels of
provisions against personal and credit card lending.
HSBC’s operations in mainland China reported
operating profit before provisions of US$17 million,
a decrease of US$9 million compared with 2001, as
operating expenses related to HSBC’s Group Service
Centre in Guangzhou and Shanghai increased. Profit
before tax increased by US$17 million to US$50
million due to increased bad debt recoveries. Net
interest income increased by US$4 million, or 11 per
cent to US$40 million, driven by increases in
renminbi advances and an increase in customer
deposits, resulting from a successful cash
management marketing campaign. Fee income
increased by 6 per cent to US$33 million, with
increased levels of income from trade services and
credit card merchant acquiring. Operating expenses
increased by US$26 million to US$79 million. Of
68
this increase, US$14 million relates to the further
expansion of operations in HSBC’s Group Service
Centres in Guangzhou and Shanghai, which now
employ in excess of 2,300 employees. Staff costs
increased by US$11 million, of which US$7 million
related to the processing centres, and the remainder
due to higher headcount due to an increased PFS
sales-force and new staff in investment banking and
card issuing. Other operating expenses increased by
US$15 million, of which US$7 million related to the
HSBC’s Group Service Centres. The remaining
increase resulted from an expansion in business,
including investment in IT to support the credit card
business and in Customer Relationship Management
systems, and increased marketing and advertising
costs for PFS services. There was a net release of
bad and doubtful debts of US$32 million, reflecting a
number of recoveries of provisions held against
various corporate customers.
In Malaysia, HSBC Bank Malaysia reported
operating profit before provisions of US$131
million, an increase of US$3 million, or 3 per cent,
compared with 2001 as fees from personal financial
services increased. Profit before tax of US$119
million was US$12 million, or 9 per cent, lower than
in 2001, which included significant levels of bad
debt recoveries as a result of repayments and credit
upgrades following a programme of loan
restructurings. Net interest income of US$169
million was broadly in line with 2001. Residential
mortgages grew by 63 per cent, including the
acquisition of ABN Amro’s residential mortgage
portfolio in the first half of 2002, and average credit
card advances increased by 34 per cent. However,
this growth was offset by a reduction in margin
resulting from subdued corporate loan demand, price
competition and lower recoveries of suspended
interest. Fee income increased by 19 per cent, as the
continuing focus on personal banking initiatives led
to increased fees from credit cards and account
services. Operating expenses were 1 per cent lower
than in 2001, mainly as a result of a reduction in
mortgage promotion expenditure. The bad and
doubtful debt charge of US$18 million was US$11
million higher than in 2001, which benefited from
significant bad debt recoveries following a series of
loan restructurings. The credit environment
remained favourable and non-performing loans were
26 per cent lower than at 31 December 2001.
HSBC Bank Middle East reported a decrease in
operating profit before provisions of 9 per cent
compared with 2001 due to higher costs to support
growth in personal and commercial banking. Profit
before tax on a cash basis was 12 per cent higher
than in 2001, mainly as a result of a lower bad debt
charge and releases of provisions. Net interest
income increased by 3 per cent, with a 5 per cent
increase in average interest-earning assets due to
higher term lending to corporate customers in the
UAE. However, the net interest margin fell by 6
basis points to 3.78 per cent due to a lower benefit of
net free funds in a declining interest rate
environment. Net fee income rose by 12 per cent,
largely from personal banking products. The
financial planning services team, which provides
savings, retirement education and protection
planning services throughout the region sold
investments totalling US$304 million, 12 per cent
higher than in 2001. There was further growth in the
credit card business, where fee income rose by 14 per
cent. As a result of the increased staffing to support
the expansion of personal and commercial banking,
staff costs increased by 26 per cent. Increased costs
of US$2 million were incurred for the debt recovery
teams whilst net charge for personal lending bad and
doubtful debts declined by 51 per cent. Additional
one-off costs were also incurred in transferring data
processing work to other parts of HSBC. In total,
operating expenses rose by 26 per cent. The charge
for bad and doubtful debts fell by US$50 million to
US$6 million. Strengthened credit risk management
procedures and a new debt recovery unit resulted in
lower new provisioning requirements in both the
personal and corporate lending portfolio.
Elsewhere, HSBC’s operations in Taiwan,
Indonesia and Korea each contributed in excess of
US$50 million to pre-tax profits. Growth in Taiwan
was driven by increased sales of personal financial
services, particularly credit cards. HSBC’s
operations in Japan, Thailand, the Philippines,
Brunei and Australia each contributed in excess of
US$25 million to pre-tax profits, the latter benefiting
from HSBC’s acquisition of NRMA Building Society
in 2001. HSBC Bank Egypt contributed a pre-tax
profit of US$19 million, in line with 2001. HSBC’s
associates The Saudi British Bank and British Arab
Commercial Bank contributed US$113 million to
cash basis pre-tax profits.
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 mainland 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
69
H S B C H O L D I N G S P L C
Financial Review (continued)
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
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
70
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
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
71
H S B C H O L D I N G S P L C
Financial Review (continued)
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
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$31 million were
suffered on an operation which has subsequently
been closed. In addition, increased levels of credit
provisions raised against a small number of
customers reduced the contribution from operations
in Australia and resulted in losses being reported in
Indonesia.
72
2000
871
35
5
911
236
9
2
1,158
–
–
(154 )
1,004
2000
2,185
68
862
229
179
1,338
3,523
(1,406 )
(312 )
(561 )
(117 )
(2,396 )
(144 )
(2,540 )
Year ended 31 December
2002
2001
North America
Cash basis profit before tax
Figures in US$m
HSBC Bank USA (excl
Princeton) .......................
HSBC Markets USA............
Other USA operations..........
USA operations ...................
Canadian operations ............
Mexico ................................
Panama ................................
Princeton Note settlement ...
Group internet
1,406
(100 )
4
1,310
267
35
(15 )
1,597
–
development – hsbc.com .
(83 )
Intermediate holding
companies .......................
(130 )
1,384
1,273
(6 )
13
1,280
230
14
11
1,535
(575 )
(161 )
(151 )
648
Year ended 31 December
Figures in US$m
Net interest income...............
Dividend income ..................
Net fees and commissions.....
Dealing profits......................
Other income ........................
Other operating income ........
Total operating income
Staff costs .............................
Premises and equipment .......
Other ....................................
Depreciation .........................
Goodwill amortisation ..........
Operating expenses...............
Operating profit before
2002
2,732
24
984
161
333
1,502
4,234
(1,537 )
(356 )
(651 )
(131 )
(2,675 )
(146 )
(2,821 )
2001
2,450
29
913
346
207
1,495
3,945
(1,440 )
(323 )
(653 )
(124 )
(2,540 )
(145 )
(2,685 )
provisions........................
1,413
1,260
983
Provisions for bad and
doubtful debts ..................
(300 )
(300 )
(157 )
Provisions for contingent
liabilities and
commitments ...................
- other ...................................
- Princeton Note settlement ..
Amounts written off fixed
asset investments .............
3
–
(9 )
Operating profit..................
1,107
Share of operating losses in
joint venture.....................
Share of operating
profit/(losses) in
associates .........................
Gains on disposal of
investments and tangible
fixed assets ......................
(2 )
8
125
Profit on ordinary
activities before tax ........
1,238
(7 )
(575 )
(5 )
373
(7 )
5
132
503
1
–
–
827
–
(2 )
35
860
Share of HSBC’s pre-tax
profits (cash basis)
(per cent) .........................
Share of HSBC’s pre-tax
profits (cash basis excl.
Princeton) (per cent) .......
13.2
7.4
13.2
13.8
Share of HSBC’s pre-tax
profits (per cent) ..............
12.8
6.3
9.7
9.7
8.8
Cost:income ratio
(excluding goodwill
amortisation)
(per cent) .........................
Period-end staff numbers
(full-time equivalent
basis) ...............................
63.2
64.4
68.0
34,207
19,291
19,201
Bad and doubtful debts
Figures in US$m
Loans and advances to
customers
- specific charge
new provisions .....................
Release of provisons no
longer required.................
Recoveries of amounts
prevously written off
- general charge/(release)......
399
(79 )
(35 )
285
15
Customer bad and doubtful
debt charge ......................
300
Total bad and doubtful debt
charge ..............................
300
Year ended 31 December
2002
2001
2000
392
(42 )
(43 )
307
(7 )
300
300
395
(72 )
(31 )
292
(135 )
157
157
Customer bad debt charge as
a percentage of closing
gross loans and advances
0.38%
0.41%
0.25%
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
2002
At 31
December
2001
77,589
10,391
39,270
142,032
73,088
7,979
45,661
138,738
9,972
90,137
8,113
81,055
Year ended 31 December 2002 compared with
year ended 31 December 2001
The United States economy showed signs of
improvement in 2002 following a deterioration in
2001, as low interest rates and low inflation helped
to boost the housing, manufacturing and consumer
sectors. GDP growth was 2.4 per cent compared with
1.1 per cent in 2001. However, growth prospects
remained unclear, as equity markets remained
subdued, and levels of corporate and consumer debt
remained high. The dollar weakened throughout the
year, reflecting investor concerns about investment
returns from the US.
The Canadian economy continued to outperform
its fellow G7 members, with GDP growth of 3.3 per
cent in 2002. This has been driven by strong growth
in employment, and increased levels of retail sales.
However, in response to fears about strong consumer
spending and increasing inflation, interest rates have
shown upward pressure. It is expected that the
Canadian economy will be slowed down by the
performance of the US economy during 2003.
Economic growth in Mexico also remained
subdued, relying as it does on the US economy for
25 per cent of its GDP. However, growth in
industrial output is an encouraging sign for Mexico’s
future prospects. Although the recent devaluation in
the value of the peso has increased inflationary
pressures, the present economic indicators do not
appear to present cause for concern with regard to
Mexico’s creditworthiness.
HSBC’s operations in North America which
include Mexico and Panama, contributed US$1,559
million to cash operating profit before provisions, up
US$154 million, or 11 per cent, compared with 2001.
Cash basis profit before tax increased by US$736
million to US$1,384 million. Operating performance
was driven by strong growth in net interest income in
2002 which benefited from low funding costs as
interest rates remained at historically low levels. The
2001 results bore the exceptional costs of the
Princeton Note Settlement.
HSBC Bank USA’s operations in the United
States reported an increase in cash basis operating
profit before provisions of US$58 million, or 4 per
cent, to US$1,438 million, primarily driven by
improved spreads in treasury in the low interest rate
environment. At the pre-tax level profits on a cash
basis of US$1,406 million were US$133 million, or
10 per cent, higher than in 2001, excluding the
Princeton Note settlement. A number of successful
restructurings and debt reduction programs allowed
HSBC Bank USA to release provisions raised.
HSBC’s Canadian operations reported an increase in
cash operating profit before provisions of US$53
million, or 18 per cent. This performance was
achieved through higher net interest income arising
from lower funding costs and mortgage growth.
Cash basis profit before tax increased by US$37
73
H S B C H O L D I N G S P L C
Financial Review (continued)
million, or 16 per cent to US$267 million. HSBC
Markets USA reported a pre-tax loss of US$100
million largely as a result of losses on bond positions
held when credit spreads widened significantly in the
first half of the year. Following the acquisition of
GFBital on 25 November 2002, HSBC’s operations
in Mexico reported a cash basis pre-tax profit of
US$35 million.
Net interest income increased by US$282
million, or 12 per cent, to US$2,732 million in 2002.
In the United States, HSBC Bank USA’s domestic
operations grew net interest income by US$176
million, or 9 per cent. The principal driver of growth
was significantly reduced funding costs as the
steeper yield curve led to spread increasing by 54
basis points. Treasury operations in particular
benefited from the lower funding costs. There was
also strong growth in residential mortgage lending.
Average mortgage balances grew by US$1.8 billion,
or 12 per cent, as consumers took advantage of the
low interest rate environment to remortgage. These
factors were partly offset by a lower benefit of net
free funds, and a lower yield on investment securities
as HSBC Bank USA sacrificed yield for security. In
Canada, HSBC Bank Canada reported an increase in
net interest income of US$58 million, or 12 per cent,
to US$538 million. Lower cost funding increased
spread by 25 basis points. Deposits grew by US$1.0
billion, or 10 per cent, as consumers sought to
minimise risks whilst equity markets remained
volatile, and the cost of funds fell by 170 basis points
to 2.33 per cent. In addition, the bank achieved
strong growth in mortgage lending, up US$1.0
billion as consumers took advantage of the
introduction of a new variable interest rate mortgage,
based on a similar product available through HSBC
Bank plc in the United Kingdom, to remortgage.
Other operating income increased by US$7
million to US$1,502 million. Solid growth in fee
income of 8 per cent was offset by lower dealing
income. Fee income, excluding mortgage servicing
rights, in HSBC Bank USA’s domestic operations,
grew strongly by 18 per cent, driven by increases in
wealth management fees, fees on deposit and cash
management products and card fees. In addition,
brokerage revenues increased, due in part to sales of
annuity products and increased transaction volumes,
and insurance revenues also grew strongly. Over
74
1,500 professionals are now licensed to sell
insurance and certain annuity products through the
retail network. Difficult conditions in the capital
markets prevented a recurrence of 2001’s strong
dealing profits, and profits on domestic US dollar
trading fell. Income relating to mortgage servicing
rights was in line with 2001. In Canada, HSBC’s
Canadian operations reported an increase in other
operating income of US$8 million, or 3 per cent, as
growth in fees from account services and credit
facilities was partially offset by the reduction in
equity market-related fees. HSBC Canada withdrew
from the institutional equity trading and research
business in the first half of 2002. Other operating
income in HSBC Markets USA fell by US$45
million, largely resulting from losses on corporate
bond trading. HSBC’s operations in Mexico
reported other operating income of US$75 million,
up US$51 million compared with 2001 following the
acquisition of GFBital.
Total operating expenses on a cash basis rose by
US$135 million, or 5 per cent, to US$2,675 million
in 2002. Of this increase, US$129 million arose as a
result of the acquisition of GFBital, the launch of
WTAS and increased revenue-related staff costs,
offset by a reduction in development costs relating to
HSBC’s world-wide internet development platform
hsbc.com. HSBC Bank USA’s domestic operations
reported an increase in costs of US$127 million, or 8
per cent. Staff costs increased by US$47 million,
including US$22 million related to the establishment
of WTAS, the remainder largely resulting from
increased revenue-related compensation. Other
administrative expenses increased by US$80 million,
or 12 per cent, to US$764 million, resulting from
higher IT costs, a number of one-off indirect taxation
expenses, and costs arising from WTAS. HSBC Bank
Canada reported an increase in costs of US$13
million, or 3 per cent. Staff costs remained flat, as
costs incurred on restructuring the securities business
were saved due to lower headcount and lower
revenue-related remuneration. Other administrative
costs increased by US$13 million, principally arising
from the one-off expense relating to the
consolidation of premises in Toronto and expenses
relating to a brand marketing campaign. Operating
expenses in HSBC Markets USA decreased by
US$21 million, as revenue-related pay decreased.
The charge for bad and doubtful debts of US$300
million was the same as for 2001. HSBC Bank
USA’s charge for bad and doubtful debts fell by
US$68 million, or 30 per cent, to US$160 million.
New specific provisions fell by US$38 million, as
credit quality improved in 2002 and the non-
recurrence of a specific provision against exposure to
a corporate customer in the energy sector that arose
in 2001. Releases and recoveries were US$26
million higher than in 2001, as restructuring and debt
reduction programs enabled a number of provisions
raised in previous years against corporate customers
to be released or recovered. The charge for bad and
doubtful debts in Canada of US$81 million was
US$22 million, or 37 per cent, higher than in 2001,
mainly reflecting a provision for an exposure in the
telecommunications sector.
Provisions for contingent liabilities and
commitments were US$585 million lower than in
2001, due to the non-recurrence of the Princeton
Note settlement in 2001.
Gains on the disposal of fixed assets of US$125
million were in line with 2001, and reflected gains
on the disposal of mortgage-backed and South
American securities.
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$1,535 million to cash basis profit
before tax; US$377 million, or 33 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$357 million, or 42 per
cent, to US$503 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$265
million, or 12 per cent to US$2,450 million when
compared to 2000. In the United States net interest
income was US$222 million higher than in 2000.
75
H S B C H O L D I N G S P L C
Financial Review (continued)
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. Net interest income in Panama was US$29
million higher in 2001, following the acquisition of
Chase Manhattan’s branch network in Panama in the
second half of 2000.
Other operating income was US$157 million
higher than in 2000 with a solid increase in dealing
profits. Dealing profits at US$346 million were
US$117 million, or 51 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$913 million was US$51
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
76
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
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 offered 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,
received 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$2,540 million in 2001 were
US$144 million, or 6 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
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
2001 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$143 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$671 million
compared with US$684 million at 31 December
2000. It was 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$132 million, an increase of US$97 million
compared with 2000. During the year, but
substantially in the first half, HSBC’s operations in
the United States sold mortgage-backed securities to
reduce exposure to refinancing mortgages in a
declining interest rate environment.
South America
Cash basis profit before tax
Figures in US$m
Brazil ....................................
Argentina ..............................
Chile ....................................
Other ....................................
Year ended 31 December
2002
127
(210 )
72
(23 )
(34 )
2001
136
(1,152 )
17
(3 )
(1,002 )
Year ended 31 December
Figures in US$m
Net interest income ...............
Dividend income ...................
Net fees and commissions .....
Dealing profits ......................
Other income.........................
Other operating income.........
2002
645
15
324
147
110
596
2001
1,065
12
494
18
356
880
2000
208
112
8
(15 )
313
2000
1,186
8
471
57
396
932
Total operating income
1,241
1,945
2,118
Staff costs .............................
Premises and equipment........
Other ....................................
Depreciation..........................
Goodwill amortisation...........
Operating expenses ...............
(572 )
(113 )
(330 )
(45 )
(1,060 )
(24 )
(1,084 )
(836 )
(153 )
(435 )
(73 )
(1,497 )
(14 )
(1,511 )
(890 )
(162 )
(486 )
(64 )
(1,602 )
(12 )
(1,614 )
Operating profit before
provisions ........................
157
434
504
Provisions for bad and
doubtful debts...................
(117 )
(927 )
(194 )
Loss from foreign currency
redenomination in
Argentina..........................
Provisions for contingent
liabilities and
commitments....................
Amounts written off fixed
asset investments ..............
Operating (loss)/profit.........
Share of operating profit in
associated undertakings ....
Gains/(losses) on disposal of
investments and tangible
fixed assets .......................
(Loss)/profit on ordinary
(68 )
(520 )
(31 )
(36 )
(95 )
–
37
–
(1 )
(1,014 )
1
(3 )
–
–
(1 )
309
1
(9 )
activities before tax.........
(58 )
(1,016 )
301
Share of HSBC’s pre-tax
profits (cash basis) (per
cent) .................................
Share of HSBC’s pre-tax
(0.3 )
(11.4 )
profits (per cent)...............
(0.6 )
(12.7 )
3.1
3.1
Cost:income ratio
(excluding goodwill
amortisation) (per cent)
Period-end staff numbers
85.4
77.0
75.6
(full-time equivalent)........
25,522
27,519
25,671
77
H S B C H O L D I N G S P L C
Financial Review (continued)
Bad and doubtful debts
Figures in US$m
Loans and advances to
customers
- specific charge
new provisions ......................
release of provisions no
longer required .................
recoveries of amounts
previously written off .......
- additional general charge
against Argentine
exposure ...........................
- general charge/(release) ......
Customer bad and doubtful
debt charge .......................
388
(48 )
(10 )
330
(196 )
(17 )
117
Total bad and doubtful debt
charge...............................
117
Year ended 31 December
2002
2001
2000
346
(35 )
(8 )
303
600
24
927
927
232
(28 )
(9 )
195
–
(1 )
194
194
Customer bad debt charge as
a percentage of closing
gross loans and advances..
3.27%
17.80%
3.04%
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
2002
At 31
December
2001
3,028
1,665
1,450
8,491
661
4,863
4,156
2,252
3,386
13,097
1,338
7,523
Year ended 31 December 2002 compared with
year ended 31 December 2001
2002 has been a year of uncertainty in both Brazil
and Argentina. The Argentine government has been
in talks with the International Monetary Fund and
World Bank for over a year, however an agreement
on the resumption of lending has yet to be reached.
The Argentine economy has experienced its fourth
successive year of recession with a large contraction
in GDP, falling 12 per cent, and unemployment
continuing to rise. However, some stability was
introduced towards the end of 2002, as the peso
began to appreciate from its lows as fears of
hyperinflation began to recede and a significant trade
surplus emerged. Elections are expected to take place
in the second quarter of 2003.
Brazil skillfully avoided major fall-out from the
collapse of the Argentine economy and steadily
improved its current account position through
growing its trade surplus with the rest of the world.
78
Uncertainty over the outcome of presidential
elections held in the second half of 2002 led to a
sharp depreciation in the value of the real and
upward pressure on interest rates in the first half of
the year. The newly elected government quickly
stated its commitment to fiscal discipline, leading to
improved stability towards the end of 2002 reflected
in lower interest rates and a stronger currency.
HSBC’s operations in South America reported a
cash basis operating profit before provisions of
US$181 million, compared with US$448 million in
2001. At constant exchange rates, cash basis
operating profit before provisions was US$137
million, or 43 per cent, lower than in 2001. Cash
basis losses before tax improved substantially to
US$34 million, compared with a loss of US$1,002
million in 2001.
In Brazil, cash basis operating profit before
provisions of US$268 million was US$51 million, or
16 per cent, lower than in 2001. At constant
exchange rates, cash basis operating profit before
provisions was broadly in line with 2001. A strong
performance in dealing income was offset by a loss
of revenue from account services, as new legislation
prohibited the levying of fees on certain types of
account. Higher contributions to employee pension
schemes arising from higher levels of inflation also
depressed results. In Argentina there was a cash basis
operating loss before provisions of US$111 million,
compared with a profit of US$117 million in 2001.
These losses were driven primarily by the high cost
of funding non performing assets. In addition,
revenues from the insurance businesses were
adversely affected by the prevailing market
conditions. Cash basis losses before tax of US$210
million included further losses relating to the
mandatory pesification of assets and liabilities of
US$68 million. These arose mainly from court
decisions (‘amparos’) relating to formerly frozen US
dollar denominated customer deposits that were
required to be settled at the prevailing market
exchange rate.
The following commentary is based on constant
exchange rates.
Net interest income of US$645 million was
US$119 million, or 16 per cent lower than in 2001.
In Brazil, net interest income was US$14 million, or
2 per cent, lower than in 2001. Customer lending,
particularly overdrafts, term lending and credit cards
grew strongly in 2002 in response to targeted
marketing campaigns. Yield on customer lending
was slightly higher than in 2001 as a result of higher
pricing of term lending and instalment finance. The
increases in customer lending were more than offset
by a significant reduction in investment securities, as
HSBC sought to minimise its exposure in the
uncertain economic climate. In Argentina, net
interest expense was US$16 million, compared with
net interest income of US$85 million in 2001. HSBC
Bank Argentina’s margin worsened from 5.65 per
cent in 2001 to negative 2.71 per cent in 2002,
mainly as a result of the high cost of funding the
non-performing loan portfolio. In addition, the
reduction in net interest income reflected the fact that
pesified mortgages and personal loans are
specifically excluded from CER, an inflation
adjustment applied to all pesified sovereign debt,
deposit balances and certain (primarily commercial
and corporate) customer loans.
Other operating income of US$596 million was
US$24 million, or 4 per cent higher than in 2001.
Fee income fell by US$27 million, or 8 per cent, but
dealing profits increased by US$133 million to
US$147 million as a result of the volatile economic
conditions. In Brazil, other operating income
increased by US$47 million, or 11 per cent, to
US$489 million. Dealing profits increased by US$74
million on strong interest rate derivatives trading and
foreign exchange trading. Fee income fell by US$22
million to US$281 million, reflecting a loss of
revenue from account fees, as the Brazilian
government outlawed the levying of fees on certain
accounts. Fees were also lower from investment
banking services. However, the above factors were
partly offset by strong growth in credit-related fee
income. Income from insurance business fell 4 per
cent compared with 2001. In Argentina, other
operating income of US$70 million was US$39
million, or 36 per cent lower, than in 2001. The
reduction was principally as a result of considerably
lower net revenues from the insurance businesses.
HSBC was obliged to renegotiate a number of
contracts as a result of the mismatch between
premiums and claims arising from the pesification of
assets and liabilities. In addition, HSBC’s pension
fund administrator suffered reduced revenues due to
increased levels of unemployment. Foreign exchange
dealing profits improved as some resumption in
activity was permitted.
Cash operating expenses rose by US$39 million,
or 4 per cent, to US$1,060 million. In response to the
difficult economic conditions in South America, the
full time equivalent number of staff has been reduced
by 2,000. However, staff costs in 2002 rose by
US$16 million to US$572 million. In Brazil,
operating expenses of US$873 million were US$32
million, or 4 per cent higher than in 2001. Staff costs
increased by US$17 million driven mainly by higher
pension contributions required as a result of higher
levels of inflation, and an industry-wide union-
agreed salary increase. Other administrative expenses
increased by US$15 million as a result of an increase
in the levels of transactional taxation imposed by the
government. In Argentina, operating expenses on a
cash basis rose by US$13 million to US$165 million.
The reduction of 1,000 in headcount reduced costs
by US$2 million, however this saving was offset by
severance payments made. There was further
additional expense resulting from transactional
taxation, including an additional tax imposed on
foreign companies. HSBC wrote off during 2002 the
remaining goodwill of US$20 million that arose on
the purchase of its insurance subsidiaries.
The provision for bad and doubtful debts of
US$117 million was US$361 million lower than in
2001. In 2001, a special general provision of US$292
million (at constant exchange rates) was raised to
provide a coverage ratio of 63 per cent against
Argentina’s non-government loan book. In 2002,
US$196 million of bad debts arising have been
specifically provided and the general provision
requirement was reduced accordingly. The remaining
US$96 million of general provisions has been
critically reviewed and is believed to be sufficient to
cover remaining credit risk in the loan portfolio. In
Brazil, the bad debt charge of US$139 million was
US$10 million, or 7 per cent lower than in 2001.
New provisions against customers increased by
US$29 million, as a result of a specific corporate
exposure and as a result of the increasing level of
personal lending, including credit cards, term lending
and overdrafts. However, pro-active management of
the personal loan portfolio has enabled a number of
provisions, particularly in the cards portfolio, to be
released. In addition, further releases have been
made of provisions raised against the commercial
sector.
In the first half of 2002, HSBC realised a gain of
US$38 million on the sale of its 6.99 per cent
79
H S B C H O L D I N G S P L C
Financial Review (continued)
shareholding in Banco Santiago S.A.
Year ended 31 December 2001 compared with
year ended 31 December 2000
The main focus in South 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 South America reported a
cash basis pre-tax loss of US$1,002 million in 2001
compared with a cash basis pre-tax profit of US$313
80
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$723 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 South America’s
results is based on constant exchange rates.
Net interest income in South America at
US$1,065 million was US$71 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
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.
Other operating income of US$880 million was
US$71 million, or 9 per cent, higher than in 2000
with an increase of US$103 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
and a reduction in annuities business.
Operating expenses, excluding goodwill
amortisation, of US$1,497 million were US$133
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$927
million increased by US$765 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$56 million in 2000.
Analysis by line of business
Profit on ordinary activities before tax (cash
basis) by line of business
Personal Financial
Services ........................
Commercial Banking..........
Corporate, Investment
Banking and Markets....
Private Banking..................
Other ................................
31 December
2002
Year ended
31 December
2001*
31 December
2000*
US$m
%
US$m
%
US$m
%
3,543
3,034
3,717
420
(201 )
33.7
28.8
35.4
4.0
(1.9)
3,457
2,385
39.3
27.1
4,033
456
(1,524 )
45.8
5.2
(17.4 )
3,010
2,780
3,559
578
373
29.2
27.0
34.6
5.6
3.6
10,513
100.0
8,807
100.0
10,300
100.0
* Restated for changes in management responsibility. The principal change
relates to aligning domestic private banking with international private banking
in the United States.
The cash basis measures included in this section are derived by deducting goodwill
amortisation from the equivalent reported measure.
Total assets by line of business
Year ended
31 December
2002
31 December
2001
Total assets#
Personal Financial Services .
Commercial Banking...........
Corporate, Investment
Banking and Markets.....
Private Banking...................
Other .................................
US$m
171,496
113,525
394,542
48,346
21,892
%
22.9
15.1
52.6
6.5
2.9
US$m
138,908
101,002
374,282
52,135
21,281
%
20.2
14.7
54.4
7.6
3.1
749,801
100.0
687,608
100.0
#
Excluding Hong Kong SAR Government certificates of indebtedness.
81
generally allocated to lines of business on the basis
of economic capital measures including the relative
risk-weighted assets of each operation.
In the analysis of profit by line of business,
total operating income and operating expenses
include intra-HSBC items of US$1,148 million,
US$1,057 million in 2001 and US$931 million in
2000.
All commentary is made on a cash basis, that
is excluding the impact of goodwill amortisation.
H S B C H O L D I N G S P L C
Financial Review (continued)
Net assets by line of business
Year ended
31 December
2002
31 December
2001
Personal Financial Services .
Commercial Banking...........
Corporate, Investment
Banking and Markets.....
Private Banking...................
Other .................................
US$m
12,101
10,290
16,852
7,366
5,797
%
23.0
19.6
32.2
14.1
11.1
US$m
9,309
9,108
15,046
6,195
6,730
%
20.1
19.6
32.4
13.4
14.5
52,406
100.0
46,388
100.0
The data presented on pages 83 to 96 reflects an
analysis of HSBC’s results and of certain key
balance sheet amounts, according to the lines of
business described on pages 12 to 14. This
provides additional and complementary analysis to
HSBC’s segmental reporting by geographic region.
The figures for 2001 and 2000 have been
restated where changes in management
responsibility for the business this year impact on
comparatives. The principal change relates to
aligning domestic private banking with
international private banking in the United States
and therefore moving the results from Personal
Financial Services into Private Banking. Total
assets and net assets split by line of business are
disclosed for the first time with 2001 comparatives.
Year 2000 comparatives are not available.
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
expense. 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 and
consistent 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 undertaken on arm’s-length terms. Intra-
segment 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 shareholders’ funds
allocated to that business. Shareholders’ funds are
82
Personal Financial Services
Cash basis profit before tax
Europe ................................
Hong Kong .........................
Rest of Asia-Pacific.............
North America ....................
South America ....................
31 December
2002
US$m
987
1,705
127
757
(33 )
3,543
%
27.8
48.1
3.6
21.4
(0.9)
100.0
Year ended
31 December
2001*
US$m
1,091
1,631
80
593
62
3,457
%
31.6
47.2
2.3
17.1
1.8
100.0
31 December
2000*
US$m
624
1,680
189
482
35
3,010
%
20.7
55.8
6.3
16.0
1.2
100.0
31 December
2002
7,581
6
2,979
50
788
3,823
Figures in US$m
Net interest income.......
Dividend income ..........
Net fees and
commissions ............
Dealing profits..............
Other income................
Other operating
income .....................
Total operating
Year ended
31 December
2001*
31 December
2000*
6,828
6,508
5
2,877
53
806
3,741
1
2,644
97
711
3,453
income.....................
11,404
10,569
9,961
Operating expenses
(excluding goodwill
amortisation)............
Operating profit
(6,973 )
(6,477 )
(6,237 )
before provisions....
4,431
4,092
3,724
Provisions for bad and
doubtful debts ..........
Provisions for
contingent liabilities
and commitments
Amounts written off
fixed asset
investments..............
(857 )
(767 )
(602 )
(42 )
(2 )
(17 )
(31 )
(5 )
–
Operating profit..........
3,530
3,303
3,091
Share of operating
(losses) in joint
ventures ...................
Share of operating
profit/(losses) in
associates
Gains on disposal of
investments and
tangible fixed assets.
Profit on ordinary
activities before
tax (cash basis) .......
Share of HSBC’s pre-
tax profits (cash
basis) (per cent)
Cost: income ratio
(excluding goodwill
amotisation) (per
cent).........................
(23 )
(99 )
17
19
43
210
(52 )
(44 )
15
3,543
3,457
3,010
33.7
39.3
29.2
61.1
61.3
62.6
Selected balance sheet data (third party items
only)
Figures in US$m
Loans and advances to
customers (net) ........
At
31 December
2002
31 December
2001*
31 December
2000*
143,696
113,844
103,901
Customer deposits ........
257,880
228,931
216,058
*
Restatement consistent with page 81.
Year ended 31 December 2002 compared with
year ended 31 December 2001
On a cash basis Personal Financial Services
contributed US$3,543 million to pre-tax profits in
2002 and represented 33.7 per cent of such profits.
Growth in pre-tax profits over 2001 amounted to
US$86 million, an increase of 2 per cent.
Revenues grew by 8 per cent driven by strong
growth in net interest income as mortage banking
and personal savings grew strongly. Cost growth of
8 per cent tracked revenue growth, with benefits
from moving activity to the HSBC’s Group’s
Shared Service Centres offset by increased
marketing costs and property costs arising on
surplus space following relocation of the PFS
central London based staff to the new head office
at Canary Wharf.
Provisions for bad and doubtful debts rose by
US$90 million, an increase of 12 per cent, but less
than the rise in customer lending. Disposal gains
were significantly lower than 2001, which
benefited from the sale of the HSBC’s interest in
British Interactive Broadcasting in May 2001.
Net interest income increased by US$753
million or 11 per cent. Within this, net interest
income in Europe rose by US$405 million as the
investment made in improving customer
relationship management systems improved the
ability of front office staff in the branches to sell
more effectively. In the low interest rate
environment, there has been significant growth in
personal lending and with the property market
continuing to rise there has been strong demand for
mortgages and equity release loans. Personal
current accounts and savings accounts continued to
grow as customers preferred liquidity and security
in the uncertain investment climate. The impact of
product re-pricing initiatives in the UK in late 2001
and the benefit of lower cost of funds has increased
spreads.
83
H S B C H O L D I N G S P L C
Financial Review (continued)
In Hong Kong, net interest income was
broadly in line with 2001. The benefits of increased
credit card and mortgage lending and improved
spreads arising from lower funding deposit costs
were largely offset by the impact of competitive
pricing initiatives on residential mortgage spreads.
In addition, there was also a reduction in the
benefit of free funds as average interest rates
remained low.
Net interest income grew by US$107 million
within the rest of Asia-Pacific driven by significant
growth in credit card advances and personal
lending across the region, particularly in Taiwan,
Singapore and India. In Malaysia growth also
reflected the acquisition of the ABN AMRO
mortgage portfolio in the first half of 2002 together
with significant growth in credit card advances. In
Australia the inclusion of a full year’s income from
the acquisition of the former NRMA Building
Society in November 2001 contributed to increased
net interest income.
In North America, net interest income rose by
US$258 million of which US$60 million reflected
the inclusion of GFBital since acquisition in late
November 2002. Excluding the impact of GFBital,
the rise in net interest income reflected growth in
deposits and record mortgage banking activity as
customers sought to minimise risks whilst equity
markets remain volatile and invested in property.
Homeowners also took advantage of the low
interest rate environment to re-mortgage at lower
rates. The increase in spreads arising from lower
funding costs was partly offset by a lower benefit
of net free funds.
Net interest income in South America was
US$27 million lower than 2001, reflecting the
effect of the severe economic conditions in
Argentina and the impact of non-performing loans,
together with currency translation impacts.
In Brazil, net interest income rose by US$21
million or 29 per cent in local currency terms as
competitive pricing initiatives and targeted
marketing campaigns led to strong growth in
personal lending products, particularly credit cards
and overdrafts.
Net fees and commissions increased by
US$102 million or 4 per cent. Hong Kong was the
major contributor, where net fees increased by
US$64 million driven by growth in revenues from
wealth management products, increased
84
commissions from sales of unit trusts, higher
revenues from insurance and increased card fee
income.
In Europe, fee income was broadly in line with
2001 in constant currency terms. The inclusion of a
full year’s income for Demirbank, and Benkar
from September 2002, resulted in increased card
fee income on the acquired credit card portfolios.
Elsewhere, increased sales of HSBC branded life,
critical illness and income protection products,
were offset by the impact of the sustained fall in
equity markets which reduced the value of long-
term assurance business and depressed sales of
investment products.
Net fees grew by US$41 million in the rest of
Asia-Pacific largely due to a significant increase in
credit card income principally in Taiwan, Malaysia,
Indonesia and the Middle East, in addition to
growth in account service fee income.
In North America, excluding the impact of
GFBital, which contributed US$35 million, net
fees increased by US$34 million, reflecting strong
growth in brokerage and wealth management
products and successful re-pricing of account
service charges.
Net fees in South America declined by
US$110 million mainly due to the effect of the
severe economic conditions in Argentina and
turbulent financial markets during the year. In
Brazil, the decline in fee income reflected
competitive pricing initiatives and the loss of
revenue from account fees as the Brazilian
government have outlawed the levying of fees on
certain accounts.
Other income decreased by US$18 million.
Increases in Hong Kong, rest of Asia-Pacific and
North America were more than offset by reductions
in South America and Europe.
Operating expenses increased US$496 million
or 8 per cent. Costs in Europe increased by
US$356 million, including a full year’s costs for
Demirbank, the acquisition of Benkar and the full
consolidation of Merrill Lynch HSBC from July
2002. Excluding the impact of these acquisitions,
costs rose by US$227 million in part reflecting
increased premises and equipment costs relating to
the relocation to a new headquarters in the second
half of 2002, and increased marketing and IT costs,
as further investment was made in both front office
and customer contact systems.
In constant currency terms, the UK bank’s
staff costs fell by 2 per cent due to the impact of
outsourcing and offshore processing.
Costs in Hong Kong were in line with 2001.
The increased cost of continuing marketing
initiatives and higher IT costs to support business
growth were funded by reduction in staff costs
driven by a reduction in headcount as back office
processing functions transferred to HSBC’s service
centres in India and China, and the non-recurrence
of pension top-up fees in Hang Seng Bank in 2001.
In the rest of Asia-Pacific costs increased by
US$114 million reflecting an increase in costs in
Australia resulting from the acquisition of NRMA
Building society in November 2001 and increased
costs in the Middle East, Taiwan, Singapore and
India funding the expansion of personal banking.
In addition, there were increased staff costs relating
to the expansion of service centres in India and
China.
Costs in North America increased by US$182
million, of which US$72 million reflected the
impact of GFBital. The underlying increase of
US$110 million reflected higher IT and marketing
costs, partially offset by a 6 per cent fall in staff
costs reflecting lower revenue related
remuneration.
Costs in South America declined by US$163
million entirely due to translation effects. In
constant currency terms, operating costs were 15
per cent higher than 2001 as savings from a
reduction in headcount were offset by severance
payments made.
Operating costs in Brazil declined by US$14
million. In constant currency terms, costs increased
by 21 per cent due to increased staff costs caused
by an increase in inflation linked pension costs and
an industry-wide union-agreed salary increase. IT
costs were higher to support key business
initiatives.
Provisions for bad and doubtful debts rose
from US$767 million to US$857 million.
Provisions in Hong Kong rose by US$110 million,
where increased card lending and significantly
higher personal bankruptcy filings resulted in
additional provisions for credit card accounts.
Provisions against the mortgage portfolio fell
slightly.
In Europe, increased provisions in CCF were
offset by lower provisions for personal customers
in the UK as credit quality remained stable and
improved debt counselling services proved
effective.
Provisions for bad debts increased by US$12
million in the rest of Asia-Pacific, following
increased credit card lending in India, Indonesia
and Taiwan. Improved credit control procedures in
the Middle East reduced the cost of new specific
provisions against personal customers.
Provisions in South America fell by US$53
million. In Brazil, new provisions raised to reflect
the increased level of personal lending were more
than offset by the release of a number of
provisions, particularly in the credit card portfolio,
reflecting Brazil’s pro-active management of the
personal loan portfolio.
Provisions for contingent liabilities and
commitments saw a US$42 million charge in the
year compared with US$17 million in 2001.
Losses from joint ventures reduced by US$76
million reflecting the full consolidation of Merrill
Lynch HSBC from the second half of 2002.
Share of associates operating profit reduced
from US$43 million to US$17 million largely due
to lower profits in the personal banking business in
Cyprus Popular Bank and Saudi British Bank.
Year ended 31 December 2001 compared with
year ended 31 December 2000
Personal Financial Services contributed US$3,457
million to pre-tax profits in 2001 and represented
39.3 per cent of such profits. Growth in pre-tax
profits over 2000 amounted to US$447million, 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 4
per cent. Reflecting significant growth in personal
lending, provisions for bad and doubtful debts rose
US$165 million an increase of 27 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$320
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
85
H S B C H O L D I N G S P L C
Financial Review (continued)
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$73
million 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$233
million or 9 per cent on the year. US$127 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$95 million,
primarily in Hong Kong due to strong growth in
life insurance income fees and the growth in
embedded value in this business.
86
Operating expenses increased by US$240
million or 4 per cent, mainly reflecting a US$137
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$66 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
South America were lower by US$165 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$767 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. South American loan losses rose by
US$23 million, including US$11 million in
Argentina due to the economic situation in the
country. South 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 joint ventures and associates
reduced by US$40 million, mainly reflecting the
sale of British Interactive Broadcasting which also
contributed US$202 million to profit on disposal of
fixed asset investments. In other associates and
joint ventures, an improved performance in Cyprus
partly offset higher losses in Merrill Lynch HSBC
and lower profits in the personal banking business
of Saudi British Bank.
Commercial
Cash basis profit before tax
31 December
2002
US$m
1,344
733
423
455
79
%
44.3
24.2
13.9
15.0
2.6
Year ended
31 December
2001
US$m
986
726
277
410
(14 )
%
41.4
30.4
11.6
17.2
(0.6 )
31 December
2000
US$m
1,139
781
376
387
97
%
41.0
28.1
13.5
13.9
3.5
3,034
100.0
2,385
100.0
2,780
100.0
Year ended
31 December
2002
3,855
31 December
2001*
3,821
31 December
2000*
3,541
6
1,934
107
463
2,510
7
1,751
103
422
2,283
3
1,681
82
368
2,134
6,365
6,104
5,675
(3,153 )
(3,116 )
(2,738 )
3,212
2,988
2,937
(269 )
(662 )
(202 )
19
3
16
(1 )
5
2
Europe................................
Hong Kong.........................
Rest of Asia-Pacific ............
North America....................
South America....................
Figures in US$m
Net interest income
Dividend income ....
Net fees and
commissions......
Dealing profits .......
Other income..........
Other operating
income...............
Total operating
income ..............
Operating expenses
(excluding goodwill
amortisation) .....
Operating profit
before provisions
Provisions for bad and
doubtful debts....
Provisions for
contingent liabilities
and commitments
Amounts written off
fixed asset
investments .......
Operating profit ...
2,965
2,341
2,742
Share of operating
profit in joint
ventures.............
Share of operating
profit in associates
Gains on disposal of
investments and
tangible fixed assets
Profit on ordinary
activities before
tax (cash basis).
Share of HSBC’s pre-
tax profits (cash
basis) (per cent) .
Cost: income ratio
(excluding goodwill
amotisation) (per
cent) ..................
2
16
51
6
28
10
–
26
12
3,034
2,385
2,780
28.8
27.1
27.0
49.5
51.0
48.2
*
Restatement consistent with page 81
87
H S B C H O L D I N G S P L C
Financial Review (continued)
Selected balance sheet data (third party items
only)
Figures in US$m
31 December
2002
31 December
2001
31 December
2000
At
Loans and advances to
customers (net)........
90,562
Customer deposits........
92,884
81,999
81,038
79,103
82,113
Year ended 31 December 2002 compared with
year ended 31 December 2001
On a cash basis, Commercial Banking contributed
US$3,034 million to pre-tax profits in 2002 and
represented 28.8 per cent of such profits. These
profits were US$649 million, or 27 per cent, higher
than 2001 mainly reflecting increased fees and
commissions and lower provisions for bad and
doubtful debts.
Net interest income remained broadly in line
with 2001. Net interest income in Europe rose by
US$248 million (in constant currency US$180
million) mainly due to growth in UK current
accounts and lending partly offset by lower
margins. Increased net interest income in CCF was
due to strong growth in lending and sight deposits.
In addition, the inclusion of a full year’s income
for Banque Hervet and Demirbank increased net
interest income.
In Hong Kong, net interest income fell as low
interest rates reduced the value of interest free
balances. The rest of Asia-Pacific saw a 10 per cent
decline in net interest income reflecting subdued
commercial loan demand and lower lending
margins.
In North America, net interest income was
broadly in line with 2001. The inclusion of GFBital
was offset by reduced net interest income in the
United States reflecting lower lending levels.
In South America, net interest income was
broadly flat in constant currency terms.
Net fees and commissions increased by
US$183 million or 10 per cent against 2001. In
constant currency the growth was US$171 million.
Most of the increase was in Europe reflecting
success in generating lending fee income and
money transmission income together with
transaction fees on current accounts and overdrafts.
In addition, corporate cards income grew by 6 per
88
cent. In Hong Kong, cross-selling initiatives with
HSBC Asset Management and Treasury led to
higher levels of fee income on investment funds.
Insurance and trade services income also increased.
Operating expenses were broadly in line with
2001. In constant currency terms the increase was
US$27 million. There was modest growth in
Europe reflecting increased premises costs in the
UK and one-off IT costs related to the introduction
of the Euro. Offsetting these were savings in Hong
Kong due to rationalisation of sales teams within
the area.
Contributing to the good cost performance in
2002, HSBC continued to expand its utilisation of
Group Service Centres with new centres opening in
Shanghai and Bangalore in addition to existing
centres in Hyderabad and Guangzhou. There are
now 12,400 calls from UK business telephone
banking customers being answered each week in
the Bangalore call centre. In addition, Business
Internet Banking which was launched during 2002
in Canada, the Hong Kong SAR, India, Argentina
and the UK already has over 200,000 registered
customers.
Provisions for bad and doubtful debts fell by
US$393 million. Following corporate debt
restructurings and repayments there were net
releases of specific provisions in the Middle East,
Indonesia, Singapore, Taiwan and Thailand
together with a release of general provisions in the
UK and Hong Kong as the risk profile of the
commercial portfolio improved. These were partly
offset by additional specific provisions elsewhere
following difficulties by customers in the timber,
hotel, construction, knitwear, cement and yarn
industries inter alia. Provisions in North America
were broadly in line with last year.
Gains on disposal of investments increased by
US$41 million, mainly due to the sale of CCF’s
holding in Lixxbail.
2002 included the full year contribution from
the acquisition of Banque Hervet in France and
Demirbank in Turkey. Both performed in line with
expectations and have integrated well into HSBC.
The Bank has responded to the UK’s
Competition Commission Review of banking
services to small and medium size businesses with
changes to its business banking propositions. The
Review covered the Money Transmission and
Liability businesses, with a particular emphasis on
the Current Account market. The Commercial
market is highly competitive and the Government
proposals are aimed at increasing customer
switching between players. Approximately fifty per
cent of HSBC’s Commercial income is now subject
to Government price controls and the cost of
implementing these pricing adjustments is
estimated to be US$130 million per annum.
Year ended 31 December 2001 compared with
year ended 31 December 2000
The Commercial Banking 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 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$97 million
reflecting organic growth, increased commercial
deposit levels and improved margins in
commercial real estate lending.
Net fees and commissions rose by US$70
million or 4 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$378
million or 14 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$86
million, reflecting losses in receivables lending and
equipment lending. Canada also experienced
increased loan losses, particularly to one name in
the telecommunications sector. South American
loan losses rose by US$79 million, including
US$58 million in Argentina, with increased losses
in Brazil.
89
H S B C H O L D I N G S P L C
Financial Review (continued)
Corporate, Investment Banking and
Markets
Cash basis profit before tax
31 December
2002
US$m
1,438
1,226
706
315
32
%
38.6
33.0
19.0
8.5
0.9
Year ended
31 December
2001*
US$m
1,438
1,244
725
441
185
%
35.6
30.9
18.0
10.9
4.6
31 December
2000*
US$m
1,501
1,012
666
211
169
%
42.2
28.4
18.7
5.9
4.8
3,717
100.0
4,033
100.0
3,559
100.0
Year ended
31 December
2002
3,521
31 December
2001*
3,419
31 December
2000*
2,849
230
2,164
1,008
610
4,012
138
2,140
1,411
568
4,257
148
2,305
1,370
610
4,433
7,533
7,676
7,282
(3,901 )
(3,920 )
(3,836 )
3,632
3,756
3,446
(184 )
(34 )
(146 )
12
(109 )
3,351
3
46
317
(14 )
(72 )
(10 )
(33 )
3,636
3,257
10
33
–
59
354
243
3,717
4,033
3,559
35.4
45.8
34.6
51.8
51.1
52.7
Europe ................................
Hong Kong..........................
Rest of Asia-Pacific.............
North America.....................
South America.....................
Figures in US$m
Net interest income
Dividend income....
Net fees and
commissions......
Dealing profits .......
Other income .........
Other operating
income...............
Total operating
income ..............
Operating expenses
(excluding goodwill
amortisation) .....
Operating profit
before provisions
Provisions for bad and
doubtful debts....
Provisions for
contingent liabilities
and commitments
Amounts written off
fixed asset
investments .......
Operating profit ...
Share of operating
profit in joint
ventures.............
Share of operating
profit in associates
Gains on disposal of
investments and
tangible fixed assets
Profit on ordinary
activities before
tax (cash basis).
Share of HSBC’s pre-
tax profits (cash
basis) (per cent).
Cost: income ratio
(excluding goodwill
amotisation) (per
cent) ..................
90
Selected balance sheet data (third party items
only)
Figures in US$m
Loans and advances to
banks (net) ..............
Loans and advances to
customers (net)........
Debt securities,
treasury bills &
other eligible bills ...
At
31 December
2002
31 December
2001*
31 December
2000*
80,870
83,312
100,073
101,770
99,260
92,851
162,583
155,330
134,823
Deposits by banks........
48,895
Customer deposits........
95,351
49,785
88,618
55,700
80,421
*
Restatement consistent with page 81.
Year ended 31 December 2002 compared with
year ended 31 December 2001
This segment covers HSBC’s Corporate and
Institutional Banking and Investment Banking and
Markets businesses. These businesses cover
HSBC’s provision of integrated solutions to the
major international clients of the Corporate and
Institutional Banking business.
Corporate, Investment Banking and Markets
(CIBM) contributed US$3,717 million of pre-tax
profits (cash basis) in 2002 representing 35.4 per
cent of HSBC’s pre-tax profits. These profits were
US$316 million or 8 per cent lower than 2001
reflecting higher credit costs and muted corporate
activity in global market conditions that continue
to suffer from both economic and political
uncertainty. In constant currency pre-tax profits
were US$294 million lower. Weakness in the
equity market, high profile US corporate scandals
and Middle East tensions combined to create an
extremely challenging business environment for
HSBC and its customers. In addition, economic
conditions in South America continued to be
difficult during 2002.
Net interest income increased by US$102
million or 3 per cent. Money market income was
strong as Treasury continued to benefit from the
steeper yield curve following the significant
interest rate cuts during 2001. The impact of this
reduced during the second half of the year as
maturing liquidity was redeployed in lower
yielding assets. Net interest income also benefited
as Treasury continued to grow the proportion of its
liquid assets held in high quality corporate bonds
as opposed to interbank placement. Increased
equity swap activity also generated additional cash
deposits. The effect of the above was offset by
significant reductions in net interest income in
South America, due to the large non-performing
loan book in Argentina. Corporate loan demand
continued to be subdued.
Net fees and commissions increased by US$24
million or 1 per cent. There was higher income
from merchant banking activities, particularly in
Asia-Pacific, where transactions were structured
for a number of key CIBM relationships. Debt
capital markets activity also grew in Europe and
Asia-Pacific, by 30 per cent to US$175 million, as
origination and syndication revenues benefited
from the continuing alignment between client
service teams. The global new equity issues and
financial advisory markets continued to be
depressed, and trading volumes on the world’s
stock markets remained at subdued levels
negatively impacting commission revenues. In
asset management revenues were reduced,
consistent with the fall in the level of world stock
market indices seen during the year.
Dealing profits decreased by US$403 million
or 29 per cent. In Europe there was strong growth
in trading revenues in emerging markets and in
currency options, and improved results in
government bond trading. These were offset by
weaker revenues in debt securities trading across
all major regions. These declined against a
backdrop of widening credit spreads on corporate
debt securities following the widely publicised
accounting scandals across the US, and concerns
about a slowdown in global economic growth.
Interest rate derivatives undertaken to hedge
the interest rate risk arising on holding of corporate
bonds generated dealing losses, although this was
offset by increased net interest income on the
bonds.
In the UK, increased activity in equity swap
transactions generated dealing losses which were
offset by significantly increased dividend income.
Other income increased by US$42 million or 7
per cent due to improvements in North America
together with higher income from Rail Finance.
Outside the major centres, there were strong
results from Singapore, India, China and Japan.
Operating expenses were in line with 2001.
Whilst there were significant reductions in staff
costs in Investment Banking as staff numbers were
reduced in the light of market conditions, these
were offset by increased revenue related costs in
Treasury and Capital Markets.
Provisions for bad and doubtful debts
increased by US$150 million due to lower levels of
provision release compared to 2001, which had
included a significant recovery relating to an
historic Olympia and York exposure. Provisioning
in 2002 was dominated by a small number of
telecommunications related exposures in the UK
and Canada.
Amounts written off fixed asset investments
increased by US$37 million or 51 per cent
reflecting the writedown of a limited number of
venture capital investments across the Group.
Gains on disposal of investments and tangible
fixed assets decreased by US$37 million or 10 per
cent.
Year ended 31 December 2001 compared with
year ended 31 December 2000
Corporate, Investment Banking and Markets
contributed US$4,033 million of pre-tax profits in
2001 representing 45.8 per cent of such profits.
Compared with 2000, pre-tax profits were US$474
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$570
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$165
million or 7 per cent on the year. A year of severely
adverse conditions in global new equity
91
H S B C H O L D I N G S P L C
Financial Review (continued)
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$171 million,
reflecting investment to strengthen the Group’s
capabilities in a number of areas, including foreign
exchange, interest rate derivatives and structured
products. South America’s dealing profits were
down by US$53 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$84
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
92
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$133 million in 2001.
Private Banking
Cash basis profit before tax
31 December
2002
US$m
236
107
25
64
%
56.2
25.5
6.0
15.2
Europe ..............................
Hong Kong .......................
Rest of Asia-Pacific...........
North America ..................
South America ..................
(12 )
(2.9)
Year ended
31 December
2001*
31 December
2000*
US$m
310
% US$m
406
68.0
%
70.3
14.7
85
(1 )
(0.2 )
80
8
13.8
1.4
84
(16 )
81
(3 )
18.4
(3.5 )
17.8
(0.7 )
420
100.0
456
100.0
578 100.0
*
Restatement consistent with page 81.
Figures in US$m
Net interest income
Dividend income....
Net fees and
commissions .....
Dealing profits .......
Other income .........
Other operating
income ..............
Total operating
income..............
Operating expenses
(excluding goodwill
amortisation).....
Operating profit
before provisions
Provisions for bad and
doubtful debts ...
Provisions for
contingent liabilities
and commitments
Amounts written off
fixed asset
investments .......
Operating profit...
Share of operating
profit/(losses) in
associates ..........
Gains/(losses) on
disposal of
investments and
tangible fixed assets
Profit on ordinary
activities before
tax (cash basis)
31 December
2002
Year ended
31 December
2001*
31 December
2000*
556
2
623
137
102
864
577
4
602
124
87
817
569
2
555
110
90
757
1,420
1,394
1,326
(987 )
(919 )
(759 )
433
(5 )
(21 )
(22 )
385
(11 )
46
420
475
24
(46 )
(2 )
451
–
5
567
(6 )
–
(4 )
557
2
19
456
578
Share of HSBC’s pre-
tax profits (cash
basis) (per cent)
Cost: income ratio
(excluding goodwill
amotisation)(per
cent)..................
4.0
5.2
5.6
69.5
65.9
57.2
Selected balance sheet data (third party items
only)
At
31 December
2002
31 December
31 December
2001 *
2000 *
Figures in US$m
Loans and advances to
customers (net) ........
14,115
Customer deposits ........
49,012
12,137
51,199
11,930
48,003
* Restatement consistent with page 81.
Year ended 31 December 2002 compared with
year ended 31 December 2001
The Private Banking division of HSBC includes all
of the activities of HSBC Private Banking
Holdings (Suisse) S.A., which contains HSBC
Republic Bank (Suisse) S.A. and Guyerzeller Bank
AG, the private banking operations of HSBC Bank
USA, CCF and HSBC Trinkaus & Burkhardt.
HSBC continued with the integration of
various businesses into Group Private Banking.
This is now complete in Asia. Additionally, the
process of alignment of domestic and international
operations was completed in the UK during 2002
and is ongoing in America. Comparative figures for
2001 and 2000 have been restated to reflect the
changes made in organisation structure.
Private Banking contributed US$420 million
to HSBC’s pre-tax profits (cash basis) and
represented 4.0 per cent of such profits. These
profits were 8 per cent lower than in 2001.
Despite the decline in the world stock markets
the Private Banking division grew client funds
under management, including trust assets, from
US$129.7 billion to US$144.0 billion or 11 per
cent.
Excellent teamwork with HSBC’s personal
banking operations led to a significant increase in
client referrals during 2002.
Net interest income declined by US$21 million
to US$556 million as lower interest rates reduced
the benefit of free funds. In addition, asset
portfolios were moved to lower yielding but higher
grade securities at the beginning of the year in
expectation of difficult credit markets.
Other operating income, including fees and
commissions, increased by US$47 million, or 6 per
cent, reflecting an increase in fees from greater
client assets under management and fee income
from the newly formed WTAS which provides
private tax services to wealthy clients.
Trust business was expanded in the United
States, Asia and the Channel Islands. Working with
Group Insurance, the Private Bank launched new
tax efficient insurance wrapper products. In fund
management the range of funds expanded
especially in the alternative or hedge fund sector.
There was strong growth in investment fees, which
benefited from the success of the Hermitage Fund,
which provided clients access to investment
opportunities in Russia.
Operating expenses increased by US$68
million. In constant currency, operating expenses
increased by US$28 million mainly due to the
launch of WTAS.
The provision for bad and doubtful debts was
US$5 million in 2002 compared with a credit of
US$24 million in 2001. The prior year credit
reflected the reduction in the allowance based upon
a study of actual loss history on the loan book.
Amounts written off fixed asset investments of
US$22 million related to the write-down of one
specific debt instrument of a company in the
telecommunications sector.
The share of profit in associated undertakings
was a loss of US$11 million in 2002. This reflected
a drop in the value of a partially owned private
equity company.
Gain on disposal of investments and tangible
assets were US$46 million compared with US$5
million in 2001. The increase related to debt
instruments sold during the year and the liquidation
of a Russian Recovery fund established in 2000 to
manage previously written down Russian debt
instruments.
Year ended 31 December 2001 compared with
year ended 31 December 2000
Private Banking contributed US$456 million to
pre-tax profits in 2001 which represented 5.2 per
cent of such profits. These profits were US$122
million or 21 per cent lower than in 2000,
93
Other
Cash basis profit before tax
31 December
2002
Year ended
31 December
2001
31 December
2000
US$m
%
US$m
% US$m
Europe ..............................
155
(77.1)
Hong Kong .......................
Rest of Asia-Pacific...........
(61 )
12
30.3
(6.0)
North America ..................
(207 ) 103.0
South America ..................
(100 )
49.8
357
198
30
(877 )
(1,232 )
(23.4 )
(13.0 )
(2.0 )
57.6
80.8
%
94.1
35.9
10.7
351
134
40
(156 ) (41.8 )
4
1.1
(201 ) 100.0
(1,524 )
100.0
373 100.0
H S B C H O L D I N G S P L C
Financial Review (continued)
reflecting a decline in customer activity, lower
disposal gains and costs associated with
restructuring the business.
Net interest income was broadly in line.
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$47
million or 8 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$17
million on fees generated from increased assets
under management.
Operating expenses increased by US$160
million or 21 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$122 million, mainly due to
the inclusion of a full year’s costs for CCF.
Excluding CCF, costs in Europe were up by US$34
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$24
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$31m 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$19 million in 2000.
94
31 December
2002
(53 )
34
124
11
905
1,074
1,021
Year ended
31 December
31 December
2001 *
80
32
100
(6 )
996
2000 *
256
43
126
(33 )
868
1,122
1,004
1,202
1,260
(1,088 )
(1,230 )
(938 )
(67 )
(28 )
322
(6 )
–
(7 )
–
2
(600 ) #
(13 )
(575 )
(68 )
(520 )
(194 )
(342 )
(45 )
(1,779 )
(1 )
67
75
–
60
195
24
–
(35 )
–
–
(1 )
310
1
47
15
(201 )
(1,524 )
373
Selected balance sheet data (third party items
only)
Figures in US$m
Loans and advances to
customers (net) ........
Customer deposits ........
At
31 December
2002
31 December
31 December
2001 *
2000 *
2,201
311
1,409
205
2,052
474
Year ended 31 December 2002 compared with
year ended 31 December 2001
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 in 2001 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
the Group’s wholesale insurance operations
amounted to US$324 million in 2002, US$297
million in 2001 and US$256 million in 2000.
The provision for the diminution in value of a
minority holding in a European life company
acquired in the CCF acquisition has also been
reported in this section.
(1.9 )
(17.4 )
3.6
Year ended 31 December 2001 compared with
year ended 31 December 2000
Figures in US$m
Net interest income
Dividend income ...
Net fees and
commissions .....
Dealing profits.......
Other income.........
Other operating
income ..............
Total operating
income..............
Operating expenses
(excluding goodwill
amortisation).....
Operating profit
before provisions
Provisions for bad and
doubtful debts ...
Argentine general
provision...........
Provisions for
contingent liabilities
and commitments
Princeton Note
Settlement
Loss from currency
redenomination in
Argentina..........
Amounts written off
fixed asset
investments.......
Operating profit...
Share of operating
profit/(losses) in
joint ventures ....
Share of operating
profit/(losses) in
associates..........
Gains/(losses) on
disposal of
investments and
tangible fixed assets.
Profit on ordinary
activities before
tax (cash basis) .......
Share of HSBC’s pre-
tax profits (cash
basis) (per cent) .......
Cost: income ratio
(excluding goodwill
amotisation) (per
cent).........................
106.6
102.3
74.4
* Restatement consistent with page 81.
#
In 2002, this provision was partially utilised to absorb specific
bad debt provisions raised against Personal Financial Services
(US$19 million), Commercial Banking (US$103 million) and
Corporate, Investment Banking and Markets (US$74 million).
The main items reported under Other are the
income and expenses of wholesale insurance
operations, certain property activities, unallocated
investment activities including hsbc.com, central
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
95
H S B C H O L D I N G S P L C
Financial Review (continued)
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
the Group’s wholesale insurance operations
amounted to US$297 million in 2001 and US$256
million in 2000.
Critical Accounting Policies
Introduction
The results of HSBC Holdings plc are sensitive to
the accounting policies, assumptions and estimates
that underlie the preparation of its consolidated
financial statements. The accounting policies used in
the preparation of the consolidated financial
statements are set out in Note 2 in the ‘Notes to the
financial statements’ on pages 197 to 202.
When preparing the financial statements, it is the
directors’ responsibility under UK company law to
select suitable accounting policies and to make
judgements and estimates that are reasonable and
prudent. Under UK GAAP, Financial Reporting
Standard 18 ‘Accounting Policies’ requires the
Group to adopt the most appropriate accounting
policies in order to give a true and fair view.
HSBC also provides details of its net income
and shareholders’ equity calculated in accordance
with US GAAP. US GAAP differs in certain
respects from UK GAAP. Details of these
differences are set out in Note 50 to the financial
statements on pages 286 to 313.
The accounting policies that are deemed critical
to the Group’s results and financial position, based
upon materiality and significant judgement and
estimates, are discussed below.
Provisions for bad and doubtful debts
HSBC’s accounting policy for provisions for bad and
doubtful debts on customer loans is described in
Note 2 (b) to the financial statements on pages 197 to
199. The process for applying this policy is described
on pages 122 to 124.
Specific provisions
Specific provisions are established either on a case-
by-case basis or on a portfolio basis, depending on
96
the nature of the asset. In addition, provisions for the
sovereign risk inherent in cross-border credit
exposures are established for certain countries; this
element is not currently significant.
Where specific provisions are established on a
case-by-case basis, the most important factors are:
•
•
the amount and timing of cashflows forecast to
be received from the borrower; and
the enforceability and amount which may be
recovered through the sale of any security held.
In many cases, the determination of these factors
will be judgmental, either because the security may
not be readily marketable or the cashflows will
require an assessment of the customer’s future
performance. HSBC’s practice is to make a
conservative estimate of these factors and to review
and update them on a regular basis.
This basis of determining provisions is applied
to residential mortgages more than 90 days
delinquent and to most corporate loans. Corporate
loans and residential mortgages together comprise
about 85 per cent of loans and advances to non-
financial customers.
HSBC has no individual loans for which specific
bad and doubtful debt provisions have been
established on a case-by-case basis where changes in
the underlying factors could cause a material change
to the Group’s reported results.
Where specific provisions are raised on a
portfolio basis, the most important factors are:
•
•
•
loss rate set for each delinquency category;
roll rates where determined for specific
portfolios; and
the period embedded in the loss rate and roll rate
calculations which is designed to reflect only
losses inherent at the reporting date and not
future losses.
The factor most susceptible to variability in
management judgement is the period used in the loss
rate and roll rate calculations. This factor is kept
under continuous review based on the incidence of
losses experienced.
The portfolio basis is applied to small corporate
accounts (typically less than US$15,000) in certain
countries, residential mortgages overdue but less
than 90 days overdue, credit card and other
unsecured consumer lending products. Credit card
and other unsecured consumer lending products
comprise about 15 per cent of loans and advances to
customers.
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.
The most important factors in determining
general loan loss provisions are:
•
•
historical loss rates for each separately
identified portfolio;
determination of the period between losses
occurring and establishment of a specific
provision for this loss; and
• management’s judgement of the extent to which
current economic and credit conditions are such
that the actual level of inherent losses is greater
or less than that suggested by historical
experience .
The main areas of judgement are in determining
the period and assessing current economic
conditions. These are kept under continuous review
based on an analysis of economic forecasts, industry
sector performance, insolvency and bankruptcy
statistics together with details of the rate and nature
of losses experienced.
Goodwill impairment
HSBC’s accounting policy for goodwill is described
in Note 2 (d) (v) to the financial statements on pages
199 to 200.
In accordance with the requirements of FRS 10
‘Goodwill and Intangible Assets’, HSBC reviews
goodwill arising on the acquisition of subsidiary
undertakings, joint ventures and interests in
associates when there is an indication that
impairment may have taken place and at the end of
the first full year after an acquisition. Where
identified, impairments of goodwill are accounted for
in accordance with FRS 11 ‘Impairment of Fixed
Assets and Goodwill’. Indications of impairment
include any events or changes in circumstance that
indicate that the carrying amount of goodwill may
not be recoverable.
If management believes there is an indication
that an impairment may have taken place, then the
valuation of each of the entity’s relevant ‘Income
Generating Units’ (IGUs) is compared to its
respective carrying value (including related
goodwill). The valuation of each IGU is generated
from a discounted cashflow model. Management
judgement is involved in three elements of the
process of identifying and evaluating impairments of
goodwill.
Firstly, other than at the end of the first full year
after acquisition, the identification that a possible
impairment of goodwill has occurred and that an
impairment test needs to be carried out in respect of
the goodwill of the relevant IGU will be a matter of
management judgement. While this judgement will
be exercised in the light of the indications of possible
impairment contained in FRS 10, the interpretation
of these guidelines will involve judgement of
whether the indications of impairment are significant
enough to require a full test to be undertaken. It
should be noted, however, that the identification of a
requirement to undertake an impairment test in
respect of a particular IGU will not, in itself, give
rise to any impairment charge for the goodwill
associated with that unit.
Secondly, management judgement will be
required in deriving the forecast cashflows to be used
in the discounted cashflow valuation of the IGU.
The valuation of an IGU, and hence the possible
identification of an impairment of its goodwill, will
be sensitive to the cashflows used, and in particular
to the assumed long-term sustainable growth rate of
cashflows after the initial period for which more
detailed forecasts are available. While the cashflow
forecasts will reflect management’s view of future
business growth and developments, the range of
reasonably-acceptable cash forecasts will be
constrained by the requirement for such forecasts to
be compared against actual performance in future
years and verifiable economic data.
Finally, the assignment of a cost of capital to an
individual IGU will also have a significant impact on
its valuation. The appropriate cost of capital will
generally be determined by applying the capital asset
pricing model but the application of this model itself
requires a number of inputs which need to be
97
H S B C H O L D I N G S P L C
Financial Review (continued)
established on the basis of management’s judgement.
being compared.
Where management’s judgement is that the
expected cashflows of an IGU have declined and/or
that its cost of capital has increased, the effect will be
to reduce the estimated fair value of the IGU. If this
results in a fair value that is lower than the carrying
value of the IGU, an impairment of goodwill will be
recorded.
Valuation of unquoted and illiquid debt and
equity securities
HSBC’s accounting policy for these instruments is
described in Note 2 (c) on page 199 of the financial
statements.
HSBC carries its debt and equity securities held
for trading purposes at fair value. For those debt and
equity securities which are not carried at fair value,
the fair value of the security is taken into
consideration in determining whether the asset
should be written down to reflect a permanent
impairment.
The fair value determined for unquoted and
illiquid debt and equity securities reflects
management’s assessment of the value of these
securities. This assessment may be based upon the
use of a discounted cashflow model (particularly for
debt securities) or determined by looking directly at
the valuation of comparable securities for which an
independent price can be established.
The main factors which management consider
when applying a cashflow model are:
•
•
the likelihood and expected timing of future
cashflows on the instrument. These cashflows
are usually determined by the terms of the
instrument, although management judgement
may be required in situations where the ability
of the counterparty to service the instrument in
accordance with its contractual terms is in
doubt; and
an appropriate discount rate for the instrument.
Again management determines this rate, based
on its assessment of the appropriate spread of
the rate for the instrument over the risk free rate.
Where management values the instrument by
reference to comparable securities, the basis of
valuation takes account of the maturity, structure and
rating of the security to which the position held is
98
In assessing the valuation of securities,
management also takes account of the size of the
position held relative to market liquidity and
conditions. Where considered appropriate, the
assessed fair value of the securities will be reduced
to reflect the amount which management estimate
could be realised on their sale.
Changes in any of the assumptions used by
management to determine the valuation will give rise
to changes in the recorded fair value of unquoted
securities. Such changes will result in changes in the
carrying value of the securities where they are
carried at fair value. Where the securities are carried
at amortised cost, changes in their estimated fair
value, arising from changes in management’s
assumptions on the above variables, may result in the
recording of a permanent diminution in their value.
In this case, it will also be necessary for HSBC’s
management to exercise judgement as to whether or
not changes in the underlying valuation assumptions
are only temporary.
UK GAAP compared with US GAAP
Figures in US$m
Net income:
US GAAP...................
UK GAAP ..................
Shareholder’s equity:
US GAAP...................
UK GAAP ..................
2002
4,900
6,239
55,831
52,406
2001
4,911
4,992
2000
6,236
6,457
48,444
46,388
48,072
46,393
Differences result from the different treatment of
lease financing, shareholders’ interest in the long-
term assurance fund, pension costs, stock-based
compensation, goodwill, internal software costs,
revaluation of property, purchase accounting
adjustments, accruals accounted derivatives,
permanent diminution in value of available-for-sale
securities, foreign exchange gains on investment
securities, foreign exchange losses on Argentine
funding, fair value adjustment for securities
available-for-sale, dividends payable, own shares
held and deferred taxation. See Note 50 of the ‘Notes
on the Financial Statements’.
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. FRS 17 when applied in full will
replace SSAP 24 ‘Accounting for pension costs’.
There are also amendments to other accounting
standards and UITF Abstracts.
FRS 17 requires that financial statements report
at fair value the assets and liabilities arising from an
employer’s retirement benefit obligations and any
related funding. The operating costs of providing
retirement benefits to employees are recognised in
the accounting periods in which the benefits are
earned by the employees, and the related finance
costs and any changes in value of the assets and
liabilities are recognised in the accounting periods in
which they arise.
Under FRS 17 as originally issued, the primary
statement impact was to have been recognised
initially from 1 January 2003. In November 2002,
the ASB issued an amendment to FRS 17 which
defers the full accounting impact of FRS 17 until 1
January 2005. In the period until full
implementation the transitional disclosures required
by FRS 17 will be included in the Notes on the
Financial Statements. Note 5 (b) (ii) and (iii) contain
information on the effect of FRS 17. The effect on
reserves at 31 December 2002, if the FRS 17 pension
liability were to be recognised, would be a reduction
of US$2,333 million.
US GAAP
SFAS 146 ‘Accounting for Costs Associated with
Exit or Disposal Activities’ was issued on 30 July
2002. The statement requires that a liability for costs
associated with exit or disposal activities be
recognised when the liability is incurred. Existing
generally accepted accounting principles provide for
the recognition of such costs at the date of
management’s commitment to an exit plan. In
addition, SFAS 146 requires that the liability be
measured at fair value and adjusted for changes in
estimated cash flows. SFAS 146 is effective for exit
and disposal activities initiated after 31 December
2002. Management are currently assessing the
impact of the statement on HSBC’s reconciliation to
US GAAP.
FASB Interpretation No. 45 ‘Guarantor’s
Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others’ was issued in November
2002. The Interpretation requires that a guarantor
shall recognise, at the inception of a guarantee, a
liability in respect of the non-contingent element of
that guarantee, that is the obligation to stand ready to
perform in the event that specified triggering events
or conditions occur. The disclosure requirements of
the statement are applicable for the year ended 31
December 2002 but the recognition and
measurement provision requirements only relate to
those guarantees issued or modified after 31
December 2002. HSBC has adopted the disclosure
requirements of the Interpretation and will apply the
recognition and measurement provisions for all
guarantees entered into or modified after 31
December 2002. Adoption is not expected to have a
material impact on HSBC’s reconciliation to US
GAAP.
SFAS 148 ‘Accounting for Stock-Based
Compensation – Transition and Disclosure – an
amendment of FASB Statement No. 123’was issued
in December 2002. The Standard provides
alternative methods of transition for a voluntary
change to the fair value based method of accounting
for stock-based compensation. Since HSBC already
uses the fair value based method of accounting for
stock-based compensation adoption of SFAS 148
will have no impact on HSBC’s reconciliation to US
GAAP.
FASB Interpretation No. 46 ‘Consolidation of
Variable Interest Entities’ was issued in January
2003. The Interpretation identifies an entity as a VIE
if:
•
•
the total equity investment at risk is not
sufficient for the entity to finance its activities
without support from other parties; or
the equity investors do not have the
characteristics of a controlling financial interest.
HSBC will be required to consolidate a VIE if it
has a variable interest which will absorb a majority
of the VIE’s losses or receive a majority of its
residual returns, or both. HSBC should consolidate
the assets and liabilities of a VIE initially at their fair
value at the date HSBC is first required to
99
H S B C H O L D I N G S P L C
Financial Review (continued)
consolidate the VIE. Management have performed an
initial review of HSBC’s VIEs in order to provide the
disclosures required in respect of VIEs both where
HSBC is and is not likely to be the primary
beneficiary.
HSBC has adopted the disclosure requirements of
the Interpretation. The accounting requirements apply
immediately to VIEs, in which HSBC has a variable
interest created after 31 January 2003, and to existing
VIEs from 1 July 2003. The impact of the accounting
provisions of the Interpretation on HSBC’s financial
statements is still being assessed.
100
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 109.
Assets
Short-term funds and loans to banks
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ...............
HSBC Private Banking
Holdings ......................
CCF .................................
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...........
South America HSBC Bank Brasil...........
HSBC Bank
Argentina S.A. .............
Other operations ..........................................
Year ended
31 December 2002
Year ended
31 December 2001
Year ended
31 December 2000
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
16,691
5,500
12,650
15,205
595
144
647
409
3.56
13,841
2.62
5.11
2.69
10,529
12,600
19,285
803
488
787
905
5.80
18,667
1,084
4.63
6.25
4.69
8,927
7,368
520
471
20,862
1,317
Yield
%
5.81
5.83
6.39
6.31
17,776
496
2.79
23,455
1,129
4.81
27,352
1,906
6.97
6,686
547
1,857
2,248
1,291
3,756
1,065
187
2.80
5,710
15
39
63
26
48
2.74
2.10
2.80
2.01
1.28
177
16.62
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
164
8,998
94,434
14
360
3,220
8.54
746
10,977
4.00
3.41 110,196
39
710
5,784
5.23
824
6.47
11,295
5.25 114,692
51
881
7,365
Loans and advances to customers
Europe
HSBC Bank plc ............... 105,456
HSBC Private Banking
5,865
5.56
89,987
6,056
6.73
87,684
6,721
2,881
29,111
28,820
81
1,657
1,083
2.81
5.69
3.76
2,695
25,559
28,673
112
1,705
1,688
4.16
6.67
5.89
2,728
11,679
27,515
139
776
2,279
Hong Kong
Rest of Asia-
Pacific
Holdings ......................
CCF .................................
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...........
South America HSBC Bank Brasil...........
HSBC Bank
Argentina S.A. .............
Other operations ..........................................
17,031
39,040
1,713
4.39
37,142
2,324
6.26
34,863
3,095
8.88
22,898
1,284
5.61
20,343
1,351
6.64
19,149
1,483
4,237
5,243
44,130
15,631
8,975
2,542
889
251
366
2,419
835
115
821
261
773
326,884
17,524
5.92
6.98
5.48
5.34
1.28
32.30
3,829
4,668
41,457
14,731
7,197
2,879
29.36
2,122
15,222
4.54
5.36 296,504
242
410
2,815
988
183
896
371
745
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
4.89
15,233
237
464
2,983
1,056
277
908
350
761
19,886
6.71 269,993
21,529
5.53
3.09
6.35
5.96
5.95
4.60
15.30
6.19
7.80
6.42
7.67
5.10
6.64
8.28
7.74
6.41
9.56
7.93
7.45
4.76
33.56
15.47
4.99
7.97
101
H S B C H O L D I N G S P L C
Financial Review (continued)
Assets (continued)
Trading securities
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ...............
HSBC Private Banking
Holdings......................
CCF.................................
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 ..........
South America HSBC Bank Brasil ..........
HSBC Bank
Argentina S.A...............
Year ended
31 December 2002
Year ended
31 December 2001
Year ended
31 December 2000
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
25,104
1,084
4.32
18,352
–
10,435
569
–
235
18
–
2.25
3.16
–
13,275
761
963
–
508
40
5.25
7,380
–
3.83
5.26
179
3,135
210
467
11
218
13
Yield
%
6.33
6.15
6.95
6.41
11,915
432
3.63
10,667
545
5.11
6,742
450
6.67
2,452
309
4,294
755
16,768
34
2
112
9
140
18
752
–
–
4.57
2,042
5.53
1,433
113
7
181
19
877
8
16
135
195
1,826
188
10,879
95
192
3.14
4.64
4.00
5.03
7.69
13.79
6.84
4.92
99
7
105
11
660
23
21
69,326
3,412
2,009
153
34,463
2,238
223
3,898
475
17,439
104
116
1,974
2.91
3.26
2.38
4.48
–
–
5.13
3.89
13,071
14,454
2,052
10,629
623
503
141
375
4.77
14,939
3.48
6.87
3.53
11,376
2,425
8,529
851
611
130
453
5.70
20,573
1,231
5.37
5.36
5.31
8,424
3,285
6,003
593
180
395
29,945
955
3.19
24,937
1,173
4.70
18,026
974
5.40
10,534
981
760
17,795
2,440
17
448
34
30
927
78
1
314
34
337
4.25
8,587
475
5.53
6,203
418
3.47
3.95
5.21
3.20
5.88
733
755
19,244
2,105
17
21.36
2,745
18.38
4.62
949
5,481
28
48
1,232
99
1
462
113
365
3.82
6.36
6.40
4.70
5.88
676
692
19,952
2,209
16
16.83
2,781
11.91
808
6.66
6,678
29
55
1,403
127
1
467
86
492
6.91
3.64
5.75
5.85
6.07
24.21
10.94
7.61
6.49
5.98
7.04
5.48
6.59
6.74
4.26
7.95
7.03
5.75
6.25
16.79
10.64
7.37
6.70
Other operations..........................................
2,164
111
74,801
2,911
Investment securities
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ...............
HSBC Private Banking
Holdings......................
CCF.................................
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 ..........
South America HSBC Bank Brasil ..........
1,470
HSBC Bank
Argentina S.A...............
Other operations..........................................
185
7,292
111,625
4,800
4.30 102,822
6,041
5.88
96,326
6,451
102
Assets (continued)
Other interest-earning assets
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ...............
HSBC Private Banking
Holdings ......................
CCF .................................
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...........
South America HSBC Bank Brasil...........
HSBC Bank
Argentina S.A..............
Year ended
31 December 2002
Year ended
31 December 2001
Year ended
31 December 2000
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
10,384
3,964
2,701
1,158
198
119
56
33
1.91
2,981
218
7.31
2,522
3.00
2.07
2.85
287
1,586
1,081
85
82
56
29.62
5.17
5.18
1,915
45
1,335
183
124
3
92
Yield
%
7.26
6.48
6.67
6.89
9,128
238
2.61
7,958
353
4.44
9,890
487
4.92
2.00
4,799
181
3.77
5,599
201
3.59
4,349
25
744
320
1
64
196
53
87
1
17
24
1
2
24
6
4.00
2.28
7.50
100.00
3.13
12.24
11.32
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
Other operations ..........................................
(32,082 )
(666)
2.08
(20,001 )
(963)
4.81
(23,148 )
(1,129)
1,005
140
13.93
817
138
16.89
711
163
Total interest-earning assets
Europe
HSBC Bank plc ............... 170,706
HSBC Private Banking
8,365
4.90 140,100
8,891
6.35 136,826
9,686
Holdings ......................
CCF .................................
Hang Seng Bank ..............
The Hongkong and
26,799
56,949
56,381
847
2,736
1,918
3.16
4.80
3.40
24,887
55,445
58,329
1,296
3,212
3,142
5.21
5.79
5.39
22,173
25,512
55,925
1,387
1,648
4,096
Shanghai Banking
Corporation Limited .... 107,804
3,834
3.56 104,159
5,524
5.30
96,873
6,912
7.13
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...........
South America HSBC Bank Brasil...........
HSBC Bank
Argentina S.A. ..............
Other operations ..........................................
Summary
46,919
2,118
4.51
41,481
2,388
5.76
38,734
2,552
6,099
8,604
68,787
20,118
29,580
5,307
1,293
3,403
310
452
3,573
958
918
1,336
315
915
5.08
5.25
5.19
4.76
3.10
25.17
24.36
26.89
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
5.22
7.11
6.44
6.21
4.12
6,444
7,883
64,704
17,962
20,067
21.50
6,923
333
670
4,834
1,280
1,093
1,588
13.66
4,091
509
12.44
7.27
12,068
1,158
608,749
28,595
4.70 579,665
35,261
6.08 516,185
37,746
11.52
6.63
8.28
–
5.23
10.26
25.00
4.88
22.93
7.08
6.26
6.46
7.32
6.59
5.17
8.50
7.47
7.13
5.45
22.94
9.60
7.31
Total interest-earning assets ........................ 608,749
Provisions for bad and doubtful debts .........
(7,809 )
Non interest-earning assets*........................ 132,898
28,595
35,261
4.70 579,665
(7,816 )
125,290
6.08 516,185
(7,980 )
107,480
37,746
7.31
Total assets & interest income*................... 733,838
28,595
3.90 697,139
35,261
5.06 615,685
37,746
6.13
*
Figures for 2001 have been restated to reflect the adoption of UK Reporting Standard 19 ‘Deferred Tax’, details of which are set out
in Note 1 on the Summary Financial Statements on pages 195 to 197.
103
Year ended 31 December
2001
%
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
2002
%
28.7
3.8
9.7
7.9
18.6
7.1
0.8
1.2
11.5
2.8
5.3
1.1
0.2
1.3
2000
%
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
100.0
100.0
100.0
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 ...............
HSBC Private Banking
Holdings......................
CCF.................................
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 ..........
South America HSBC Bank Brasil ..........
HSBC Bank
Argentina S.A...............
Other operations (including consolidation
adjustments)............................................
104
Year ended
31 December 2002
Year ended
31 December 2001
Year ended
31 December 2000
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
18,259
1,976
13,456
83
212
60
596
1
1.16
13,890
451
3.25
12,725
3.04
4.43
1.20
1,708
17,393
256
66
1,136
9
3.86
6.53
3.52
2,158
11,534
632
668
103
644
37
2,066
35
1.69
1,933
70
3.62
1,911
113
5.93
Deposits by banks #
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ...............
HSBC Private Banking
Holdings ......................
CCF .................................
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...........
South America HSBC Bank Brasil...........
HSBC Bank
Argentina S.A. ..............
Hong Kong
Rest of Asia-
Pacific
Holdings ......................
CCF .................................
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...........
South America HSBC Bank Brasil...........
HSBC Bank
Argentina S.A. ..............
2,683
103
3.84
2,757
113
531
4,216
679
3,190
693
164
3
15
46
26
44
79
69
32
315
3,702
439
3,654
1,177
432
5,506
2.65
2.82
1.09
3.83
1.38
11.40
42.07
2.67
2.68
146
1
14
100
18
114
106
29
199
5.30
1,956
3.13
4.44
2.70
4.10
3.12
9.01
6.71
3.61
51
326
2,776
374
2,791
920
425
5,664
109
1
21
102
21
131
101
35
270
Other operations ..........................................
4,985
133
53,094
1,422
53,194
2,459
4.62
44,243
2,356
Customer accounts #
Europe
HSBC Bank plc ............... 106,301
HSBC Private Banking
2,387
2.25
90,055
3,300
3.66
88,360
4,037
20,476
11,841
48,074
549
593
448
2.68
5.01
0.93
20,839
12,174
937
665
49,842
1,502
4.50
5.46
3.01
16,421
7,181
965
421
47,432
2,397
82,535
616
0.75
81,484
2,219
2.72
75,534
3,651
4.83
29,965
4,347
6,176
45,438
13,708
6,972
3,066
757
705
131
106
860
257
112
491
217
704
2.35
25,581
3.01
1.72
1.89
1.87
1.61
4,456
6,311
45,817
12,876
7,820
16.01
4,086
28.67
2,689
969
145
250
1,609
474
295
598
226
2.61
23,919
1,062
3.79
22,994
1,117
3.25
3.96
3.51
3.68
3.77
4,360
5,937
41,966
12,314
4,427
14.64
4,275
146
331
1,951
593
234
553
191
2,854
8.40
4.44
22,972
1,168
Other operations ..........................................
26,949
#
Further analysis is given on pages 145 and 146.
406,605
8,176
2.01 387,949
14,251
3.67 357,027
17,755
Cost
%
5.25
4.77
5.58
5.79
5.57
2.26
6.44
3.67
5.61
4.69
10.98
8.24
4.76
5.33
4.57
5.88
5.86
5.05
4.86
3.35
5.58
4.65
4.82
5.29
12.94
6.69
5.08
4.97
105
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 .................
HSBC Private Banking
Holdings........................
CCF...................................
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 .........
South America HSBC Bank Brasil ............
HSBC Bank
Argentina S.A. ...............
Other operations............................................
1,081
Year ended
31 December 2002
Year ended
31 December 2001
Year ended
31 December 2000
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$m
2,088
–
4,856
2,150
83
–
201
65
3.98
1,257
–
4.14
3.02
–
5,547
2,040
65
–
262
94
5.17
1,284
–
4.72
4.61
–
2,489
2,195
79
–
136
147
Cost
%
6.15
–
5.46
6.71
5,331
258
4.84
3,851
242
6.28
3,933
291
7.39
1,659
148
–
2,286
2,168
53
105
69
7
–
62
56
14
7
38
4.16
1,298
121
–
2,030
2,193
29
284
475
4.73
–
2.71
2.58
26.42
6.67
3.52
3.92
67
6
–
92
104
4
21
3
5.16
1,397
4.96
–
4.53
4.74
13.79
7.39
0.63
175
–
2,192
1,589
53
113
539
82
8
–
72
91
5
10
22
21,925
860
19,125
960
5.02
15,959
943
Loan capital
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ...............
HSBC Private Banking
Holdings..........................
CCF.................................
The Hongkong and
Shanghai Banking
Corporation Limited........
The Hongkong and
Shanghai Banking
Corporation Limited........
North America HSBC USA Inc ...............
HSBC Bank Canada ........
South America HSBC Bank Brasil ..........
HSBC Bank
Argentina S.A...............
7,053
–
3,941
463
–
164
6.56
10,136
–
4.16
–
2,939
625
–
163
6.17
9,445
668
–
5.55
91
1,093
8
58
1,786
83
4.65
1,805
99
5.48
1,820
121
6.64
151
3,396
1,014
271
319
12
214
65
44
62
7.95
6.30
6.41
16.24
19.44
2.36
5.08
47
3,969
1,272
208
245
6
12.77
280
80
11
24
7.05
6.29
5.29
9.80
4.44
107
5,271
1,628
72
281
4,771
5,952
264
26,573
1,552
5.84
24,579
1,794
13
462
107
12.15
8.76
6.57
8
11.11
27
322
9.61
6.75
7.30
5.87
4.29
–
3.28
5.73
9.43
8.85
4.17
5.91
7.07
8.79
5.31
Other operations..........................................
7,167
169
25,098
1,276
#
Further analysis is given on page 147.
106
Year ended
31 December 2002
Year ended
31 December 2001
Year ended
31 December 2000
Average
balance
Interest
expense
Average
balance
Interest
Expense
Cost
Average
balance
Interest
expense
Cost
US$m US$m
% US$m
US$m
%
US$m
US$m
Liabilities and shareholders’ funds
(continued)
Other interest-bearing liabilities
HSBC Bank plc ...............
HSBC Private Banking
21,006
Holdings ......................
1,645
CCF .................................
10,725
684
581
37
154
19
2.77
10,273
525
5.11
10,849
582
2.25
1.44
2.78
1,152
6,496
869
69
92
42
5.99
1.42
4.83
840
118
251
30
6
14
Europe
Hong Kong
Rest of Asia-
Pacific
Hang Seng Bank ..............
The Hongkong and
Shanghai Banking
Corporation Limited ....
The Hongkong and
Shanghai Banking
Corporation Limited ....
HSBC Bank Malaysia
Berhad .........................
HSBC Bank Middle East .
North America HSBC USA Inc................
HSBC Bank Canada .......
HSBC Markets Inc...........
South America HSBC Bank Brasil...........
HSBC Bank
Argentina S.A. ..............
7,753
179
2.31
7,367
309
4.19
6,009
342
5.78
8,744
195
2.23
7,433
273
3.67
8,153
385
51
179
9,545
415
19,141
467
299
1
6
280
15
832
79
1.96
3.35
2.93
3.61
4.35
16.92
(5)
(1.67)
40
46
7,425
374
16,568
633
80
1
4
462
16
740
133
2.50
8.70
6.22
4.28
4.47
21.01
19
23.75
80
96
9,767
406
12,634
261
102
4
6
603
20
681
49
19
Other operations ..........................................
(47,127 )
(972)
33,527
1,401
2.06
4.18
(30,800 )
(1,371)
4.45
(30,359 )
(1,566)
27,956
1,314
4.70
19,207
1,175
Cost
%
5.36
3.57
5.08
5.67
4.72
4.86
6.25
6.17
4.93
5.39
18.77
18.63
5.16
6.12
107
H S B C H O L D I N G S P L C
Financial Review (continued)
Liabilities and shareholders’ funds
(continued)
Total interest-bearing liabilities
Year ended
31 December 2002
Year ended
31 December 2001
Year ended
31 December 2000
Average
balance
Interest
expense
Average
balance
Interest
Expense
Cost
Average
Balance
Interest
expense
Cost
US$m US$m
% US$m
US$m
%
US$m
US$m
Europe
HSBC Bank plc ............... 154,707
HSBC Private Banking
3,726
2.41 125,611
4,966
3.95 122,663
6,034
24,097
44,819
50,991
646
1,708
533
2.68
3.81
1.05
23,699
44,549
53,007
1,072
2,318
1,647
4.52
5.20
3.11
19,510
22,415
50,510
1,106
1,265
2,595
Hong Kong
Rest of Asia-
Pacific
Holdings......................
CCF.................................
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. .........
South America HSBC Bank Brasil ..........
HSBC Bank
Argentina S.A...............
Other operations..........................................
(6,945 )
99,471
1,171
1.18
96,440
2,939
3.05
89,207
4,518
5.08
43,202
1,084
2.51
37,116
1,461
3.94
34,607
1,706
4,659
6,886
64,881
17,984
29,303
4,550
1,644
142
127
1,462
419
988
707
350
72
3.05
1.84
2.25
2.33
3.37
4,649
6,672
62,943
17,154
28,042
15.54
6,133
21.29
(1.04)
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
540,249
13,135
2.43 514,797
20,536
3.99 461,015
24,023
Cost
%
4.92
5.67
5.64
5.14
4.93
3.40
5.63
5.15
5.10
5.27
12.83
7.47
6.03
5.21
Total interest-bearing liabilities................... 540,249
13,135
2.43 514,797
20,536
3.99 461,015
24,023
5.21
Non interest-bearing current accounts.........
40,220
Shareholders’ funds & other non interest-
bearing liabilities*................................... 153,369
36,090
146,252
27,199
127,471
Total liabilities & interest expense* ............ 733,838
13,135
1.79 697,139
20,536
2.95 615,685
24,023
3.90
*
Figures for 2001 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of which
are set out in Note 1 on the Summary Financial Statements on pages 195 to 197.
108
Net interest margin
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ...............
HSBC Private Banking
Holdings ......................
CCF .................................
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...........
South America HSBC Bank Brasil...........
HSBC Bank
Argentina S.A. ..............
Other operations ..........................................
HSBC margin ..............................................
Notes
Year ended 31 December
2001
%
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
2002
%
2.72
0.75
1.81
2.46
2.47
2.20
2.76
3.78
3.07
2.68
-0.24
11.85
-2.71
24.77
2.54
2000
%
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
(i) Average balances are based on daily averages for the principal areas of HSBC’s banking activities with monthly or less frequent
averages used elsewhere.
(ii)
‘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.
(iii) 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.
(iv) Other than as noted in (iii) above, ‘Other operations’ comprise the operations of the principal commercial banking entities outside
their domestic markets and all other banking operations.
(v) 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.
109
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 2002 compared
with 2001, and for 2001 compared with 2000.
Changes due to a combination of volume and rate are
allocated to rate.
Interest income
Short-term funds and loans to banks
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc .......................
HSBC Private Banking
Holdings..............................
CCF.........................................
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 ..................
South 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 .......................
HSBC Private Banking
Holdings ...............................
CCF.........................................
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 ..................
South America HSBC Bank Brasil ..................
HSBC Bank Argentina S.A. ....
Other operations..................................................
2002 compared with 2001
Increase/(decrease)
2001 compared with 2000
Increase/(decrease)
2002
US$m
Volume
US$m
Rate
US$m
2001
US$m
Volume
US$m
Rate
US$m
2000
US$m
595
144
647
409
165
(233 )
3
(191 )
(373)
(111)
(143)
(305)
803
488
787
905
(280)
93
334
(100)
(1)
1,084
(125)
(18)
(312)
520
471
1,317
496
(273 )
(360)
1,129
(272)
(505)
1,906
187
15
39
63
26
48
177
14
360
3,220
46
(26 )
–
(74 )
(12 )
17
(38 )
(30 )
(127)
(2)
(39)
(42)
(26)
(54)
9
5
(128 )
(827 )
(222)
(1,737)
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
5,784
(289)
(1,292)
7,365
5,865
1,041
(1,232)
81
1,657
1,083
8
237
9
(39)
(285)
(614)
6,056
112
1,705
1,688
177
(2)
922
(842)
6,721
(25)
7
139
776
96
(687)
2,279
1,713
119
(730)
2,324
202
(973)
3,095
1,284
251
366
2,419
835
115
821
261
773
170
26
51
182
60
45
(105 )
(216 )
89
(237)
(17)
(95)
(578)
(213)
(113)
30
106
(61)
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
17,524
2,038
(4,400)
19,886
2,114
(3,757)
21,529
110
–
235
18
432
112
9
140
18
752
–
–
111
2,911
623
503
141
375
Interest income (continued)
Trading securities
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc .......................
HSBC Private Banking
Holdings ..............................
CCF .........................................
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...................
South America HSBC Bank Brasil...................
HSBC Bank Argentina S.A. ....
Other operations ..................................................
Investment securities
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc .......................
HSBC Private Banking
Holdings ..............................
CCF .........................................
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...................
South America HSBC Bank Brasil...................
HSBC Bank Argentina S.A. ....
Other operations ..................................................
2002 compared with 2001
Increase/(decrease)
2001 compared with 2000
Increase/(decrease)
2002
US$m
Volume
US$m
Rate
US$m
2001
US$m
Volume
US$m
Rate
US$m
2000
US$m
1,084
354
(233)
–
(164)
–
(109 )
(10 )
(12)
963
–
508
40
694
(11)
705
34
(198)
–
(415)
(7)
64
(177)
545
262
(167)
23
3
18
11
(34 )
(5 )
(16 )
13
269
(24)
(1)
(59)
(12)
(91)
(3)
–
(37)
(770)
113
7
181
19
877
8
16
135
42
1
119
17
398
2
(8)
(3)
(28)
(1)
(43)
(9)
(181)
(17)
3
(15)
3,412
2,264
(1,090)
2,238
(337)
(43)
1,231
(106 )
(122)
165
(20 )
112
(273)
31
(190)
851
611
130
453
208
(47)
166
(190)
(3)
(108)
955
236
(454)
1,173
373
(174)
448
34
30
927
78
1
314
34
337
4,800
108
9
0
(93 )
16
–
(215 )
(91)
121
517
(135)
(3)
(18)
(212)
(37)
–
67
12
(149)
475
28
48
1,232
99
1
462
113
365
(1,758)
6,041
161
2
5
(50)
(6)
–
(6)
15
(88)
435
(104)
(3)
(12)
(121)
(22)
–
1
12
(39)
(845)
467
11
218
13
450
99
7
105
11
660
23
21
153
593
180
395
974
418
29
55
1,403
127
1
467
86
492
6,451
111
H S B C H O L D I N G S P L C
Financial Review (continued)
Interest expense
Deposits by banks
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc .......................
HSBC Private Banking
Holdings ..............................
CCF.........................................
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 ..................
South America HSBC Bank Brasil ..................
HSBC Bank Argentina S.A. ....
Other operations..................................................
Customer accounts
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc .......................
HSBC Private Banking
Holdings ..............................
CCF.........................................
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 ..................
South America HSBC Bank Brasil ..................
HSBC Bank Argentina S.A. ....
Other operations..................................................
112
2002 compared with 2001
Increase/(decrease)
2001 compared with 2000
Increase/(decrease)
2002
US$m
Volume
US$m
Rate
US$m
2001
US$m
Volume
US$m
Rate
US$m
2000
US$m
212
60
596
1
35
103
3
15
46
26
44
79
69
133
1,422
142
10
(257 )
(381)
(16)
(283)
(6 )
(2)
5
(40)
(4)
3
10
14
10
(14 )
(44 )
(18 )
(19 )
(39)
(1)
(9)
(68)
(2)
(56)
17
58
(47)
451
66
1,136
9
70
146
1
14
100
18
114
106
29
199
(5 )
(1,032)
2,459
2,387
595
(1,508)
3,300
(16 )
(18 )
(372)
(54)
937
665
(53 )
(1,001)
1,502
668
103
644
37
113
109
1
21
102
21
131
101
35
270
61
(278)
(21)
327
(22)
(16)
165
(6)
1
(44)
(8)
–
(6)
(36)
(7)
(58)
(23)
(7)
(63)
45
–
(1)
34
4
41
28
1
(8)
477
77
260
293
122
(374)
2,356
(814)
(288)
(49)
4,037
965
421
(1,017)
2,397
29
(1,632)
2,219
288
(1,720)
3,651
166
(4 )
(5 )
(13 )
31
(32 )
(149 )
(162 )
135
685
(430)
(10)
(139)
(736)
(248)
(151)
42
153
969
145
250
1,609
474
295
598
226
(493)
1,062
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
(6,760)
14,251
1,538
(5,042)
17,755
549
593
448
616
705
131
106
860
257
112
491
217
704
8,176
Interest expense
CDs and other money market instruments
Europe
HSBC Bank plc .......................
CCF .........................................
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 ................
South America HSBC Bank Brasil...................
HSBC Bank Argentina S.A. ....
Other operations
Loan capital
Europe
HSBC Bank plc .......................
HSBC Private Banking
Holdings ..............................
CCF .........................................
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 ................
South America HSBC Bank Brasil...................
HSBC Bank Argentina S.A. ....
Other operations ..................................................
2002 compared with 2001
Increase/(decrease)
Volume
US$m
2002
US$m
Rate
US$m
2001 compared with 2000
Increase/(decrease)
Volume
US$m
2001
US$m
Rate
US$m
83
201
65
258
69
7
–
62
56
14
7
38
860
463
–
164
(25)
(28)
(34)
(77)
(17)
–
–
(42)
(47)
7
(1)
31
65
262
94
242
67
6
–
92
104
4
21
3
43
(33 )
5
93
19
1
–
12
(1 )
3
(13 )
4
141
(241)
960
187
(190 )
–
56
28
–
(55)
625
–
163
49
(8)
98
(2)
167
(10)
(12)
(41)
(43)
(6)
(43)
(6)
(2)
–
(5)
35
(2)
15
(3)
(9)
–
–
25
(22)
1
(4)
(16)
(170)
(92)
–
7
2000
US$m
79
136
147
291
82
8
–
72
91
5
10
22
943
668
8
58
83
(1 )
(15)
99
(1)
(21)
121
12
214
65
44
62
169
13
(40 )
(16 )
3
7
54
1,276
(86 )
(7)
(26)
1
30
31
(149)
(190)
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
113
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
114
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
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.
115
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 US$31.5 billion, or
10.7 per cent during 2002 of which US$9.7 billion,
or 3.2 per cent, related to the acquisition of GFBital
in Mexico. Excluding the impact of GFBital,
personal lending grew by 14.9 per cent and loans and
advances to the commercial and corporate customer
base grew by 1.6 per cent.
Figures in US$m
Exchange
variance
2001
Under-
lying
change
GF
Bital
2002
78,215
Personal:
Residential mortgages
Hong Kong SAR
Government
Home Ownership
8,123
Scheme .................
Other personal............
39,125
Total personal............. 125,463
3,339
14,227
1,203
96,984
(1 )
2,101
5,439
(867 )
6,142
19,502
7,255
–
1,194
48,562
2,397 152,801
Corporate and
commercial:
Commercial,
industrial and
international trade .
Commercial real
estate ....................
Other property-related
Government ...............
Other commercial.......
Total Corporate and
70,158
5,219
1,953
1,685
79,015
26,315
14,594
5,339
37,265
1,471
519
(37 )
2,812
1,394
(17 )
(476 )
(292 )
87
251
4,127
889
29,267
15,347
8,953
40,674
commercial ........... 153,671
9,984
2,562
7,039 173,256
Financial:
Non-bank financial
institutions ............
Settlement accounts....
Total financial ............
26,473
11,761
38,234
1,473
260
1,733
(733 )
(3,636 )
(4,369 )
274
–
274
27,487
8,385
35,872
Total gross loans and
advances to
customers.............. 317,368
17,156
17,695
9,710 361,929
116
The commentary below excludes the impact of
foreign exchange transaction movements and the
acquisition of GFBital except where stated.
Residential mortgages increased by US$14.2
billion, or 18 per cent and including GFBital
comprised 26.8 per cent of total gross loans to
customers at 31 December 2002. Residential
mortgages in Europe increased by US$8.2 billion of
which US$8.0 billion arose in UK Banking as market
initiatives, including First Direct’s smart mortgage,
and competitive pricing resulted in improved
mortgage retention rates and increased share of the
remortgage market. Residential mortgage lending in
Hong Kong was slightly higher than 2001 against a
background of intense mortgage price competition as
HSBC increased its share of the remortgaging
market. This growth was more than offset by a
reduction in loans made under the Hong Kong SAR
Government Home Ownership Scheme (‘GHOS’).
At US$7.3 billion residential mortgage loans under
GHOS were US$0.9 billion lower than at 31
December 2001 and resulted from the suspension of
the sale of new homes under this scheme by the
Hong Hong SAR Government in the second half of
2001. In the rest of Asia-Pacific, residential
mortgages grew by US$2.1 billion with strong
growth in Singapore, Malaysia, South Korea, India
and Taiwan. In North America, residential mortgage
lending grew strongly by US$3.3 billion due to
strong mortgage origination as interest rates
remained low.
Including GFBital other personal lending
increased to approximately 13.4 per cent of total
gross loans to customers. Personal lending grew by
US$3.2 billion in Europe. Strong organic growth
was achieved in consumer lending in the UK with an
increase of 10 per cent in credit card advances at 31
December 2002.
Corporate commercial lending grew modestly,
less than 2 per cent, reflecting muted corporate loan
demand and cautious risk appetite.
Areas of special interest
Telecoms industry exposure
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.
Group exposure to the telecom sector reduced
during the year to US$4.8 billion, which as a
percentage of total loans and advances, was 1.34 per
cent as at 31 December 2002 as compared with
US$6.6 billion or 2.1 per cent as at 31 December
2001. This exposure had the following
characteristics:
Percentage of telecoms industry
exposure
At 31 December
At 31 December
2002
2001
57
33
79
21
6
59
85
47
70
30
2
55
Satisfactory grades
under HSBC gradings..
Under one year
remaining maturity ......
Telecom operators...........
Telecom manufacturers...
Non-performing
accounts.......................
of which provided .......
The rise in non-performing assets relates
primarily to three accounts, with the quantum of
balances in this category actually decreasing in the
second half of 2002.
Argentina
HSBC’s banking operations’ exposure to Argentina
as at 31 December 2002 amounted to US$1.7 billion.
Of this amount, US$1.3 billion was in-country
exposure, including US$0.6 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 2002 amounted to total
assets of US$0.6 billion, of which US$0.3 billion
related to long-term assurance assets attributable to
policyholders, mainly comprising loans to the
Argentine Government received in exchange for debt
securities. Overall, provisions of US$317 million
were held against gross customer non-government
loans of US$522 million.
HSBC continues to monitor closely
developments in Argentina and has restructured its
Argentine operations to reflect the current economic
environment. HSBC still hopes to be able to continue
to operate in Argentina and contribute to a revitalised
financial sector following forthcoming elections.
However, HSBC is also prepared to take the
necessary actions if required to protect the value of
its shareholders’ interests in the event of unforeseen
political and economic events.
Brazil
HSBC’s banking operations’ exposure to Brazil as at
31 December 2002 amounted to US$5.7 billion. Of
this amount, US$5.6 billion was in-country exposure.
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 Brazil as at 31 December
2002 amounted to total assets of US$0.5 billion, of
which US$0.1 billion related to long-term assurance
assets attributable to policyholders. Non-performing
loans net of suspended interest were US$146 million,
against which specific provisions outstanding were
US$121 million.
Analysis of loans and advances to customers by
geographical region and by type of customer
The following tables analyse loans by industry sector
and by the location of the principal operations of the
lending subsidiary or, in the case of The Hongkong
and Shanghai Banking Corporation, HSBC Bank plc,
HSBC Bank Middle East and HSBC Bank USA
operations, by the location of the lending branch.
117
H S B C H O L D I N G S P L C
Financial Review (continued)
Europe
US$m
Hong Kong
US$m
Rest of
Asia-Pacific #
US$m
North
America
US$m
South
America #
US$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
38,719
23,839
7,507
26,666
253
96,984
–
26,748
65,467
44,424
11,887
3,970
2,164
22,712
85,157
15,221
2,622
17,843
7,255
7,066
38,160
10,173
8,336
4,805
719
6,612
30,645
2,055
347
2,402
–
5,900
13,407
12,582
2,701
2,031
933
5,950
24,197
931
192
1,123
–
7,836
34,502
10,773
6,297
4,515
4,575
4,835
30,995
9,231
5,224
14,455
–
1,012
1,265
1,063
46
26
562
565
2,262
49
–
49
7,255
48,562
152,801
79,015
29,267
15,347
8,953
40,674
173,256
27,487
8,385
35,872
26.9
2.0
13.4
42.3
21.8
8.1
4.2
2.5
11.2
47.8
7.6
2.3
9.9
(548 )
–
(1,527 )
(2,075 )
(2,603 )
(221 )
(397 )
(4 )
(1,077 )
(4,302 )
(229 )
–
(229 )
31 December 2002
Personal:
Residential mortgages ..........................
Hong Kong SAR Government Home
Ownership Scheme..........................
Other personal......................................
Total personal ......................................
Corporate and commerical:
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 ........................................
168,467
71,207
38,727
79,952
3,576
361,929
100.0
(6,606 )
General provisions ...............................
Suspended interest ...............................
Total.....................................................
(467 )
361,462
(2,511 )
(9,117 )
* Other commercial includes advances in respect of agriculture, transport, energy and utilities.
# Further analysis is given on page 121.
118
Europe †
US$m
Hong Kong
US$m
Rest of
Asia-
Pacific ¶
US$m
North
America
US$m
South
America #
US$m
Gross
Loans and
Advances to
Customers †
US$m
Gross loans
by customer
type as a
% of total
gross
loans
%
Provisions
for bad
and
doubtful
debts
US$m
27,282
–
21,065
48,347
38,476
9,475
3,630
2,393
20,510
74,484
11,329
2,361
13,690
23,125
5,134
22,126
548
78,215
8,123
6,227
37,475
–
4,616
9,750
–
6,273
28,399
9,662
8,474
4,710
543
6,349
29,738
1,546
223
1,769
11,226
2,395
2,169
900
5,457
22,147
752
189
941
9,018
5,877
4,011
728
4,230
23,864
12,572
8,984
21,556
–
1,280
1,828
1,720
77
69
775
617
3,258
118
4
122
8,123
39,461
125,799
70,102
26,298
14,589
5,339
37,163
153,491
26,317
11,761
38,078
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 commerical:
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
73,819
5,208
317,368
100.0
(5,500 )
General provisions................................
Suspended interest................................
Total.....................................................
31 December 2000
Personal:
Residential mortgages ..........................
Hong Kong SAR Government Home
Ownership Scheme ..........................
Other personal ......................................
Total personal.......................................
Corporate and commerical:
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
(558 )
316,810
24,048
–
20,537
44,585
38,012
10,053
3,121
2,572
19,570
73,328
10,374
3,946
14,320
23,121
3,723
19,931
809
71,632
7,353
4,923
35,397
–
4,110
7,833
–
6,847
26,778
9,584
8,293
3,850
130
7,459
29,316
1,664
142
1,806
11,583
2,749
1,815
574
5,406
22,127
629
361
990
9,274
6,915
4,072
715
3,753
24,729
8,629
2,464
11,093
–
1,364
2,173
2,803
77
156
50
937
4,023
152
41
193
7,353
37,781
116,766
71,256
28,087
13,014
4,041
37,125
153,523
21,448
6,954
28,402
(2,661 )
(8,161 )
(324 )
–
(1149 )
(1,473 )
(2,663 )
(307 )
(376 )
(44 )
(924 )
(4,314 )
(278 )
–
(278 )
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
customers.........................................
132,233
66,519
30,950
62,600
6,389
298,691
100.0
(6,065 )
General provisions................................
Suspended interest................................
Total.....................................................
(687 )
298,004
(2,102 )
(8,167 )
* 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 years 1998 to 2001 have been restated to reflect a reclassification of loans to personal investment vehicles to ‘Other personal’ category, from
‘corporate and commercial’ and ‘non-bank financial institutions’ as this provides a more accurate desription of the borrower.
# Formerly described as Latin America, which included Group Entities in Panama and Mexico, which are now included in North America, figures for 1998
to 2001 have been restated to reflect this change.
119
H S B C H O L D I N G S P L C
Financial Review (continued)
Europe
US$m
Hong Kong
US$m
Rest of
Asia-
Pacific ¶
US$m
North
America
US$m
South
America
US$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
22,047
23,614
3,028
16,962
746
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
–
3,979
7,007
–
5,864
22,826
9,762
8,987
2,093
140
6,874
27,856
2,262
114
2,376
12,250
3,353
2,033
749
5,249
23,634
984
200
1,184
9,129
5,709
4,114
730
4,481
24,163
6,402
619
7,021
–
1,017
1,763
2,255
255
151
149
852
3,662
187
9
196
6,565
31,937
104,899
60,776
24,823
10,411
5,173
35,438
136,621
17,062
3,769
20,831
25.2
2.5
12.2
39.9
23.2
9.5
4.0
2.0
13.5
52.2
6.5
1.4
7.9
(228 )
–
(921 )
(1,149 )
(2,468 )
(248 )
(319 )
(90 )
(1,143 )
(4,268 )
(275 )
–
(275 )
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
customers .........................................
106,075
64,820
31,825
54,010
5,621
262,351
100.0
(5,692 )
General provisions ................................
Suspended interest ................................
Total......................................................
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
20,716
–
12,000
32,716
28,224
6,418
2,110
3,381
15,200
55,333
4,638
877
5,515
25,051
2,746
13,073
6,291
4,257
35,599
10,952
9,420
2,248
551
7,377
30,548
2,259
78
2,337
–
3,548
6,294
–
5,270
18,343
13,131
3,598
2,125
567
4,986
24,407
1,448
231
1,679
6,623
4,615
1,602
653
3,958
17,451
3,265
3,734
6,999
626
–
883
1,509
2,423
62
163
133
861
3,642
74
43
117
(788 )
261,563
62,212
6,291
25,958
94,461
61,353
24,113
8,248
5,285
32,382
131,381
11,684
4,963
16,647
(2,304 )
(7,996 )
(156 )
–
(789 )
(945 )
(1,973 )
(232 )
(194 )
(141 )
(967 )
(3,507 )
(156 )
–
(156 )
25.7
2.6
10.7
39.0
25.3
9.9
3.4
2.2
13.4
54.2
4.8
2.0
6.8
customers .........................................
93,564
68,484
32,380
42,793
5,268
242,489
100.0
(4,608 )
General provisions ................................
Suspended interest ................................
Total......................................................
(567 )
241,922
(2,019 )
(6,627 )
¶ The years 1998 to 2001 have been restated to reflect a reclassification of loans to personal investment vehicles to ‘Other personal’ category, from
‘corporate and commercial’ and ‘non-bank financial institutions’ as this provides a more accurate description of the borrower.
120
Customer loans and advances by principal area within rest of Asia-Pacific and South America
Residential
mortgages
US$m
Other
Personal
US$m
Property-
related
US$m
Commercial,
industrial and
international
trade and other
US$m
31 December 2002
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...............................................................
Other .....................................................................
Total of South America .........................................
960
2,742
1,558
36
9
800
26
12
29
216
918
201
7,507
158
94
1
253
2,023
290
453
1,544
91
67
80
67
4
288
420
573
5,900
979
31
2
1,012
925
1,187
333
1,086
27
–
26
592
298
18
1
239
4,732
48
15
9
72
2,296
2,821
2,521
3,518
581
855
705
2,010
1,410
1,236
909
1,726
20,588
1,162
940 *
137
2,239
*
includes US$558 million of loan exposures to the Argentine Government received in exchange for debt securities
31 December 2001
Loans and advances to customers (gross)
Singapore† ............................................................
Australia and New Zealand ...................................
Malaysia................................................................
Middle East ...........................................................
Indonesia ...............................................................
South Korea...........................................................
Thailand ................................................................
Japan .....................................................................
Mainland China .....................................................
India ......................................................................
Taiwan ..................................................................
Other .....................................................................
Total of rest of Asia-Pacific...................................
Brazil.....................................................................
Argentina...............................................................
Other .....................................................................
Total of South America .........................................
Residential
Mortgages
US$m
Other
Personal
US$m
Property-
related
US$m
Commercial,
industrial and
international
trade and other
US$m
536
1,539
1,196
31
5
597
32
1
22
125
843
207
5,134
276
263
9
548
1,110
281
435
1,415
48
56
56
53
–
254
364
439
4,511
1,140
140
–
1,280
915
1,225
455
920
31
14
35
288
384
18
3
297
4,585
57
59
30
146
2,795
2,109
2,400
2,934
757
516
659
1,119
1,456
1,161
931
1,771
18,608
1,484
1,584 *
166
3,234
Total
US$m
6,204
7,040
4,865
6,184
708
1,722
837
2,681
1,741
1,758
2,248
2,739
38,727
2,347
1,080
149
3,576
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
205
5,208
*
includes US$774 million of loan exposures to the Argentine Government received in exchange for debt securities
† The figures for 2001 have been restated to reflect a reclassification of loans to personal investment vehicles to ‘Other personal’ category, from ‘corporate
and commercial’ and ‘non-bank financial institutions’ as this provides a more accurate description of the borrower.
121
H S B C H O L D I N G S P L C
Financial Review (continued)
Analysis of loans and advances to banks by geographical region
31 December 2002 ..........................................
Suspended interest ..........................................
Total................................................................
31 December 2001 ..........................................
Suspended interest ..........................................
Total................................................................
31 December2000 ...........................................
Suspended interest ..........................................
Total................................................................
31 December 1999 ..........................................
Suspended interest ..........................................
Total................................................................
31 December 1998 ..........................................
Suspended interest ..........................................
Total................................................................
Europe
US$m
39,398
Hong Kong
US$m
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America *
US$m
33,359
10,708
10,391
1,665
40,665
42,516
11,253
7,979
2,252
45,072
57,154
11,197
9,441
3,200
29,395
53,778
10,024
4,568
2,337
22,713
44,938
11,433
4,615
1,648
Gross
loans and
advances to
banks
US$m
Provisions
for bad and
doubtful
debts
US$m
95,521
(2 )
95,519
104,665
(2 )
104,663
126,064
(2 )
126,062
100,102
(1 )
100,101
85,347
(1 )
85,346
(23 )
(22 )
(30 )
(24 )
(31 )
* Formerly described as Latin America, which included group entities in Panama and Mexico, which are now included in North America, figures for 1998
to 2001 have been restated to reflect this change.
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
in accordance with established group guidelines.
HSBC maintains a universal grading process for
credit facilities that members of its group extend.
This grading system currently has three satisfactory
and four less than satisfactory grades, and is being
expanded to refine the measure of credit quality used
by management. Management regularly reviews the
appropriateness of grades assigned to a facility, and
amendments, where necessary, are required to be
undertaken promptly. Management also regularly
performs an assessment of the adequacy of the
provision for bad and doubtful debts by conducting a
detailed review of the loan portfolio. Particular
attention is paid to those borrowers classified in one
of the four less than satisfactory grades.
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 is suspended (see below) and a
specific provision raised if required.
122
The suspension of interest may, however 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 types of provision, specific and
general as discussed below.
Specific provisions
Specific provisions represent the quantification of
actual and inherent losses from identified accounts
that are deducted from loans and advances in the
balance sheet.
The majority of specific provisions are determined
by an evaluation of individual exposures on a case by
case basis. This procedure is applied to all corporate
accounts with the exception of small exposures
(typically less than US$15,000) in certain countries,
and to all residential mortgages where delinquencies
exceed 90 days. In determining such provisions
account is taken of the following factors:
•
•
•
•
•
•
•
the bank’s exposure to the customer (including
contingent liabilities);
the likely dividend available on
liquidation/bankruptcy;
the extent of other creditors’ commitments
ranking ahead of or pari passu with the Group;
the amount and timing of expected receipts and
recoveries;
the realisable value of security and likelihood of
successful repossession;
the deduction of any costs involved in recovery
of amounts outstanding; and
if loans are not in local currency, the ability of
the borrower to obtain the relevant foreign
currency.
Group policy requires a review of the level of
specific provisions on individual facilities at least
half yearly or more regularly where individual
circumstances require. This should include the
revaluation of collateral held (including
reconfirmation of its enforceability) and a review of
actual and anticipated receipts. For significant
commercial debts, specialised loan ‘work-out’ teams
are used who have experience in insolvency and
specific markets. This expertise is leveraged to assess
more accurately likely losses on the individual
exposures. Releases on individually calculated
specific provisions are determined whenever the
Group has a reasonable indication that the estimate
of loss has been reduced.
For portfolios of low value, high volume
homogenous facilities, specific provisions are raised
to reflect the quantum of balances at each stage of
delinquency. The principal portfolios assessed for
specific provision on a portfolio basis are overdue
credit cards and other unsecured consumer lending
products and residential mortgages overdue, but less
than 90 days overdue. The Group has used loss rate
data to develop guidelines for the loss rates that
should be applied to overdue accounts, based on the
severity of delinquency. The major operating units
maintain their own loss data which is used to validate
the Group’s guidelines. This has generally confirmed
the appropriateness of the guidelines although it has
led in some isolated cases to higher provision rates
being applied. For portfolios of non-mortgage
personal lending the provision policy guidelines
require 100 per cent provision after 180 days of
delinquency. The Group also uses flow rate
methodology. At present this has been adopted in
limited circumstances, but the Group is broadening
its use as appropriate data becomes available.
These portfolio provisions are generally
reassessed monthly and charges for new provisions,
or releases of existing provisions, are calculated
separately for each portfolio type.
Specific provisions are established in respect of
cross border exposures to countries assessed by the
management to be vulnerable to foreign currency
payment restrictions. This assessment includes an
analysis of both economic and political factors.
Economic factors include the level of external
indebtedness, the debt service burden and access to
external sources of funds to meet the country’s
financing requirements. Political factors include the
stability of the country and its government, potential
threats to security and the quality of the legal system.
Provisions are applied to all exposures within
such countries unless the facilities:
•
•
•
are fully performing and of less than one year’s
duration;
are mitigated by acceptable security cover held
outside the country concerned; and
related to securities held for short term trading
purposes where there is a liquid security market
and they are marked to marked daily.
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
each operating company to maintain a general
provision which is determined taking into account:
•
•
the historical loss experienced in portfolios of
similar risk characteristics (generally divided by
industry sector and for HSBC Bank USA also
by loan grade);
the estimated period between losses occurring
and establishment of a specific provision for this
loss; and
• management’s judgement of whether the current
economic and credit conditions are such that the
123
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.
H S B C H O L D I N G S P L C
Financial Review (continued)
actual level of inherent losses is greater or less
than that suggested by historical experience.
Loss experience is defined as the annual new
provisions (net of recoveries for personal lending)
over a five-year period. These loss rates are applied
to all loans, other than those for which a specific
provision has been established in order to develop an
estimate of the level of losses inherent in the
portfolio at the reporting date. Management reviews
the need to hold a different level of general
allowance than that suggested by historical loss rates
by reference to current economic conditions and loan
gradings. Any adjustment made as a result of this
management judgement, and the basis for this
adjustment for each reporting entity, is documented
and reviewed by senior Group credit management.
The estimated period between losses occurring
and establishment of a specific provision for this loss
is determined by management for each identified
portfolio, having regard to the robustness of the
specific provisioning process and the availability of
information on which to assess specific provisions.
In general, the periods used vary between four
and nine months. In certain circumstances, such as
Argentina in 2001, economic conditions are such that
it is clear that historical loss experience provides
little evidence as to the inherent loss. In such
circumstances management will use their judgement
and any relevant experience from similar situations
to determine an appropriate provision.
Charge offs
Loans (and the related provisions) are charged off
either partially or in full when there is no prospect of
recovery of these amounts. HSBC therefore
generally writes off loans less quickly than US banks
leading to a higher reported level of credit risk
elements and associated provisions. New provisions
rather than amounts written off should be taken as
indications of current loss trends.
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
124
The following tables show details of the movements
in HSBC’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 operating segments on pages
54 to 81.
Europe
US$m
3,067
Hong
Kong
US$m
1,408
Rest of
Asia-
Pacific
US$m
1,952
North
America
US$m
South
America
US$m
723
1,033
2002
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.............................................................
Net 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 .................................................................................
–
(161 )
(31 )
(4 )
(1 )
(54 )
(2 )
(199 )
(452 )
15
6
–
–
7
1
29
58
(2 )
345
(4 )
3
(1 )
50
–
243
(65 )
569
426
3,668
23
2,774
871
3,668
1.65
0.52
2.17
–
(59 )
(18 )
(11 )
–
(11 )
(109 )
(328 )
(536 )
1
–
–
–
3
7
14
25
–
(22 )
9
(14 )
–
(22 )
70
322
(97 )
246
–
1,143
–
688
455
1,143
0.97
0.64
1.61
–
(255 )
(88 )
(2 )
–
(116 )
(7 )
(132 )
(600 )
4
2
1
–
14
–
31
52
–
38
(11 )
(29 )
–
(22 )
11
93
9
89
3
1,496
–
1,321
175
1,496
3.42
0.45
3.87
–
(92 )
(9 )
(12 )
–
(149 )
(2 )
(96 )
(360 )
6
6
–
–
9
–
14
35
–
89
5
18
(5 )
116
(4 )
66
15
300
1,658
2,356
–
1,482
874
2,356
1.85
1.09
2.94
Total
US$m
8,183
(1 )
(595 )
(150 )
(31 )
(1 )
(352 )
(130 )
(851 )
(1 )
(28 )
(4 )
(2 )
–
(22 )
(10 )
(96 )
(163 )
(2,111 )
2
–
–
–
–
–
8
10
–
30
2
11
4
177
10
96
(213 )
117
(520 )
477
–
341
136
477
9.73
3.88
13.61
28
14
1
–
33
8
96
180
(2 )
480
1
(11 )
(2 )
299
87
820
(351 )
1,321
1,567
9,140
23
6,606
2,511
9,140
1.83
0.69
2.52
* 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 GFBital of US$1,704 million.
125
H S B C H O L D I N G S P L C
Financial Review (continued)
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 ............................................................
Net 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 ...............................................
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
Europe
US$m
3,025
Hong
Kong
US$m
1,802
Rest of
Asia-
Pacific
US$m
2,091
North
America
US$m
South
America ¶
US$m
739
540
(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 )
–
(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
–
(107 )
(10 )
(3 )
–
(107 )
(2 )
(93 )
(322 )
18
–
–
–
11
–
14
43
–
93
2
2
(3 )
151
1
70
(16 )
300
(37 )
723
–
289
434
723
0.39
0.59
0.98
–
(29 )
(4 )
(1 )
–
(215 )
(13 )
(95 )
(357 )
3
–
–
–
1
–
4
8
–
55
7
–
–
90
17
125
633
927
(85 )
1,033
–
365
668
1,033
7.03
12.87 #
19.90
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
* 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.
¶ Formerly described as Latin America, which included group entities in Panama and Mexico, which are now included in North America. Figures for 1998
to 2001 have been restated to reflect this change.
126
2000
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..........................................................
Residential mortgages ...................................................
Other personal...............................................................
Total recoveries.............................................................
Net 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$m
1,887
–
(202 )
(9 )
(8 )
–
(68 )
(82 )
(73 )
(442 )
–
3
–
–
–
4
1
8
16
–
81
40
–
–
(30 )
101
55
1
248
93
1,802
–
1,241
561
1,802
1.87
0.84
2.71
Rest of
Asia-
Pacific
US$m
2,686
–
(191 )
(58 )
(3 )
–
(149 )
(5 )
(88 )
(494 )
–
3
2
2
–
23
–
19
49
–
107
19
(3 )
–
(18 )
5
63
(188 )
(15 )
(135 )
2,091
–
1,929
162
2,091
6.23
0.53
6.76
North
America
US$m
South
America ¶
US$m
864
–
(97 )
(13 )
–
–
(97 )
(4 )
(90 )
(301 )
–
1
3
1
–
11
–
15
31
–
89
10
(2 )
–
80
9
109
(138 )
157
(12 )
739
–
278
461
739
0.44
0.74
1.18
430
–
(36 )
(3 )
–
–
(15 )
(7 )
(30 )
(91 )
–
2
–
–
–
1
1
6
10
–
43
5
2
–
21
12
109
2
194
(3 )
540
–
482
58
540
7.54
0.91
8.45
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.
¶ Formerly described as Latin America, which included group entities in Panama and Mexico, which are now included in North America. Figures for 1998
to 2001 have been restated to reflect this change.
127
H S B C H O L D I N G S P L C
Financial Review (continued)
1999
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:
Banks............................................................................
Commercial, industrial and international trade..............
Real estate ....................................................................
Non-bank financial institutions .....................................
Governments ................................................................
Other commercial .........................................................
Other personal ..............................................................
Total recoveries ............................................................
Net 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$m
South
America ¶
US$m
599
392
(89 )
(25 )
(1 )
–
(43 )
(2 )
(222 )
(382 )
–
15
2
20
11
10
32
90
(2 )
155
(14 )
11
(62 )
19
–
312
19
438
75
2,153
24
1,411
718
2,153
1.33
0.68
2.01
(146 )
(14 )
–
–
(15 )
(3 )
(78 )
(256 )
–
1
–
–
–
1
8
10
–
273
96
45
–
42
86
77
(34 )
585
(6 )
(130 )
(32 )
(35 )
–
(49 )
(5 )
(62 )
(313 )
1
1
2
–
–
1
13
18
(2 )
414
86
75
–
169
7
74
(14 )
809
(9 )
1,887
2,686
–
1,428
459
1,887
2.20
0.71
2.91
–
2,221
465
2,686
6.98
1.46
8.44
(33 )
(2 )
(2 )
–
(12 )
(10 )
(106 )
(165 )
–
3
13
–
–
9
19
44
–
60
(18 )
1
(2 )
11
1
79
(23 )
109
277
864
–
261
603
864
0.48
1.12
1.60
(36 )
(1 )
–
–
(14 )
(4 )
(15 )
(70 )
–
2
–
–
–
–
1
3
–
44
4
–
–
33
8
38
5
132
(27 )
430
–
371
59
430
6.60
1.05
7.65
Total
US$m
6,658
(434 )
(74 )
(38 )
–
(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
* 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.
¶ Formerly described as Latin America, which included group entities in Panama and Mexico, which are now included in North America. Figures for 1998
to 2001 have been restated to reflect this change.
128
1998
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.............................................................
Net 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$m
South
America ¶
US$m
635
233
(24 )
(147 )
(54 )
(2 )
(10 )
(203 )
(3 )
(190 )
(633 )
–
28
25
1
1
4
27
86
4
67
(54 )
(1 )
–
60
–
245
48
369
34
1,932
28
1,286
618
1,932
1.37
0.66
2.03
–
(34 )
(10 )
–
–
(50 )
–
(47 )
(141 )
–
1
–
–
–
3
5
9
–
361
105
45
–
107
59
88
(18 )
747
5
1,554
–
1,059
495
1,554
1.55
0.72
2.27
(4 )
(19 )
(18 )
–
–
(300 )
(1 )
(55 )
(397 )
–
6
1
–
–
–
9
16
5
679
113
43
–
272
27
88
(8 )
1,219
43
2,181
3
1,701
477
2,181
5.26
1.47
6.73
–
(32 )
(13 )
–
–
(19 )
(10 )
(122 )
(196 )
–
3
21
1
–
14
22
61
–
48
(45 )
–
1
3
8
129
(36 )
108
(9 )
599
–
228
371
599
0.53
0.87
1.40
–
(3 )
–
–
–
(4 )
–
(24 )
(31 )
–
–
–
–
–
–
–
–
–
70
2
–
–
27
9
62
24
194
(4 )
392
–
334
58
392
6.34
1.10
7.44
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.
¶ Formerly described as Latin America, which included group entities in Panama and Mexico, which are now included in North America. Figures for 1998
to 2001 have been restated to reflect this change.
129
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
- held against Argentine risk ..............
- other ................................................
Total provisions .................................
31 December
2002
%
31 December
2001
%
1.94
0.04
0.70
2.68
1.90
0.21
0.71
2.82
* 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, ‘Owned Real Estate’. 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
130
with the new terms.
In addition, US banks typically charge off
problem lending more quickly than is the practice in
the United Kingdom. This practice means that
HSBC’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’
ability to comply with the loan repayment terms. At
31 December 2002, 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.
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.
31 December
2002
US$m
31 December
2001
US$m
17
10,523
10,540
9
9,649
9,658
86.7%
84.7%
Total non-performing loans to customers
increased by US$874 million, however excluding the
increase of US$1,224 million arising on the
acquisition of GFBital, non-performing loans
reduced by US$350 million during 2002. At 31
December 2002, non-performing loans represented
2.9 per cent of total lending compared with 3.0 per
cent at 31 December 2001.
In Europe, total non-performing loans to
customers increased by US$813 million during 2002.
In the UK, and to a lesser extent France, there was
some weakening in business confidence due to the
continued uncertainty and weaknesses in global
economies. In addition, intense competition and
over-capacity in the energy and telecommunications
sectors resulted in the downgrading to non-
performing loan status of a small number of
corporate accounts in these sectors.
In Hong Kong, non-performing loans decreased
by US$304 million during 2002 due mainly to write-
offs, recoveries and a return to performing status of
some customer accounts.
In the rest of Asia-Pacific, non-performing loans
decreased by US$668 million during 2002 due
mainly to the combination of write-offs, recoveries
and a return to performing status of exposures in
Indonesia, Malaysia, Singapore and mainland China.
The level of non-performing loans in North
America increased by US$1,101 million. The
underlying level of non-performing loans, excluding
the increase of the US$1,224 million on the
acquisition of GFBital, fell by US$123 million
during 2002 due mainly to the write-offs of a few
customer accounts.
In South America, there was an increase in non-
performing loans in local terms in Argentina where
74 per cent of the non-government loan book is now
classified as non-performing. In Brazil, the level of
non-performing loans reduced slightly.
The following table provides an analysis of risk elements in the loan portfolios as at 31 December for the past five
years:
Loans accounted for on a non-accrual basis:
Europe........................................................................
Hong Kong.................................................................
Rest of Asia-Pacific....................................................
North America............................................................
South America*..........................................................
Total non-accrual loans ..............................................
Loans on which interest has been accrued but
suspended:
Europe........................................................................
Hong Kong.................................................................
Rest of Asia-Pacific....................................................
North America............................................................
South America*..........................................................
Total suspended interest loans ....................................
Assets acquired in exchange for advances:
Europe........................................................................
Hong Kong.................................................................
Rest of Asia-Pacific....................................................
North America............................................................
Total assets acquired in exchange for advances ..........
31 December
2002
US$m
2,393
247
294
1,624
293
4,851
31 December
2001
US$m
2,052
213
195
593
429
3,482
31 December
2000
US$m
1,985
236
429
627
550
3,827
31 December
1999
US$m
1,176
163
435
550
447
2,771
31 December
1998
US$m
1,092
77
344
546
355
2,414
2,086
1,460
1,714
48
183
5,491
26
17
54
101
198
1,553
1,795
2,497
67
115
6,027
84
19
32
14
149
1,389
2,259
2,627
39
160
6,474
25
26
24
19
94
1,514
2,898
3,097
34
133
7,676
27
72
2
17
118
1,243
2,443
2,691
31
41
6,449
28
–
–
22
50
Total non-performing loans ........................................
10,540
9,658
10,395
10,565
8,913
Troubled debt restructurings:
Europe........................................................................
Hong Kong.................................................................
Rest of Asia-Pacific ...................................................
North America............................................................
South 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 ...........................................................
South America*..........................................................
Total accruing loans contractually past due
90 days or more ....................................................
Total risk elements:
Europe........................................................................
Hong Kong.................................................................
Rest of Asia-Pacific....................................................
North America............................................................
South America*..........................................................
Total risk elements .....................................................
Provisions for bad and
doubtful debts as a %
of total risk elements ..............................................
41
396
89
4
669
1,199
16
193
33
42
7
291
4,562
2,313
2,184
1,819
1,152
12,030
–
381
131
3
144
659
15
98
38
52
47
250
3,704
2,506
2,893
729
735
10,567
–
395
231
7
142
775
11
76
66
64
82
299
3,410
2,992
3,377
756
934
11,469
–
266
138
9
146
559
21
84
54
59
58
276
2,738
3,483
3,726
669
784
11,400
22
187
68
2
17
296
1
121
69
30
67
288
2,386
2,828
3,172
631
480
9,497
76.0
77.4
71.5
70.3
70.1
* Formerly described as Latin America, which included group entities in Panama and Mexico, which are now included in North America. Figures for 1998
to 2001 have been restated to reflect this change.
At 31 December 2002, there were potential problem loans of US$599 million in respect of exposure to Argentine
loans (31 December 2001: US$2,604 million).
131
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$617 million in 2002 compared
with US$640 million in 2001, US$955 million in
2000, US$946 million in 1999 and US$811 million
in 1998. Interest income of approximately US$258
million in 2002 from such loans was recorded in
2002, compared with US$261 million in 2001,
US$324 million in 2000, US$328 million in 1999
and US$192 million in 1998.
Non-performing customer loans* and related
specific provisions outstanding by geographical
segment
Non-
performing
loans
2002
Specific
Provisions
2002
Non-
performing
loans
2001
Specific
provisions
2001
US$m
4,495
1,724
2,055
1,773
476
10,523
US$m
2,774
688
1,321
1,482
341
6,606
US$m
3,682
2,028
2,723
672
544
9,649
US$m
2,204
856
1,786
289
365
5,500
Europe..................
Hong Kong...........
Rest of Asia-
Pacific .............
North America .....
South America# ...
* net of suspended interest
# Formerly described as Latin America, which included Group
Entities in Panama and Mexico, which are now included in North
America, figures for 2001 have been restated to reflect this change.
31 December 2002
United States................................................
Germany ......................................................
France ..........................................................
The Netherlands...........................................
Hong Kong ..................................................
Canada .........................................................
Japan ............................................................
Italy..............................................................
Australia ......................................................
Banks
US$bn
5.6
16.9
5.8
7.5
0.9
4.8
4.0
4.7
5.8
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’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’ 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$bn
9.6
2.4
1.7
0.4
0.7
2.9
4.1
2.2
0.5
9.7
2.7
5.0
4.0
9.1
2.4
1.0
1.1
1.6
24.9
22.0
12.5
11.9
10.7
10.1
9.1
8.0
7.9
132
31 December 2001
Germany .....................................................
United States...............................................
France .........................................................
The Netherlands..........................................
Hong Kong .................................................
Italy.............................................................
Canada ........................................................
Japan...........................................................
31 December 2000
United States...............................................
Germany .....................................................
France .........................................................
Italy.............................................................
Hong Kong .................................................
Canada ........................................................
The Netherlands..........................................
Japan...........................................................
Banks
US$bn
22.0
5.1
8.1
6.9
0.8
8.3
5.6
3.4
Banks
US$bn
6.3
18.4
10.0
7.3
1.0
7.7
7.1
4.5
As at 31 December 2002, HSBC had in-country
foreign currency and cross-border outstandings to
counterparties in Belgium of between 0.75% and 1%
of total assets. The aggregate in-country foreign
currency and cross-border outstandings were US$5.9
billion.
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$6.0 billion.
Liquidity management
Liquidity relates to the ability of a company to meet
its obligations as they fall due. Management of
liquidity in HSBC therefore is carried out at local
Government and
official institutions
US$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
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
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;
133
H S B C H O L D I N G S P L C
Financial Review (continued)
• 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’s overall funding. HSBC places
considerable importance on the stability of these
deposits, which is achieved through HSBC’s diverse
geographical retail banking activities and by
maintaining depositor confidence in HSBC’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$759 billion, funding
from customers amounted to US$495 billion, of
which US$485 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 of business 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$53 billion deposits by banks (US$50 billion
repayable within one year), US$22 billion of short
positions in securities and US$35 billion of securities
134
in issue. Assets available to meet these liabilities,
and to cover outstanding commitments to lend
(US$51 billion), include cash, central bank balances,
items in course of collection and treasury and other
bills (US$31 billion); loans to banks (US$95 billion
– including US$92 billion repayable within one year)
and loans to customers (US$352 billion – including
US$164 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$176
billion of debt securities marketable at a value
US$2.0 billion in excess of that carrying value. Of
these assets, some US$41 billion of debt securities
and treasury and other bills have been pledged to
secure liabilities. HSBC’s ability to sell securities
together with its access to alternative funding sources
such as inter-bank markets or securitisation, would
be the routes through which HSBC would meet
unexpected outflows in excess of available liquid
assets.
Asset, deposits and advances (US$bn)
759.3
696.2
674.3
495.4
352.3
271.2
450.0
427.1
308.6
265.2
289.8
258.8
800
700
600
500
400
300
200
100
0
2002
2001
2000
Debt securities and loans
Customer accounts
Loans and advances to customer
Total assets
HSBC’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.
Customer accounts and deposits by banks 2002
%
US$bn
Deposits by banks
9.7
52.9
Current
38.8
213.0
Savings and
other deposits
51.5
282.4
Total
100.0 548.3
Customer accounts and deposits by banks 2001
%
US$bn
Deposits by banks
10.7
53.6
Current
34.1
171.8
Savings and
other deposits
55.2
278.2
Total
100.0 . 503.6
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’s activities means that HSBC Holdings is not
dependent on a single source of profits to generate
dividends. HSBC Bank and The Hongkong and
Shanghai Banking Corporation, which currently
provide most of the cash paid up to HSBC Holdings,
are themselves diversified banking businesses.
HSBC Holdings also periodically issues capital
securities and subordinated debt which provides both
regulatory capital for HSBC and funding for HSBC
Holdings. During 2002, HSBC Holdings issued
US$3.4 billion of subordinated debt.
At 31 December 2002, the short term liabilities
of HSBC Holdings plc totalled US$5.0 billion,
including US$3.1 billion in respect of the proposed
second interim dividend for 2002. 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$9.3 billion, consisting
mainly of cash at bank and money market deposits of
US$6.6 billion, and other amounts due from HSBC
undertakings (including dividends) of US$1.6
billion, exceeded short term liabilities.
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.
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 mark-to-
market basis.
In liquid portfolios, 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 are 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’s
derivative transactions are in plain vanilla
135
H S B C H O L D I N G S P L C
Financial Review (continued)
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
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 Corporate 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 (‘VAR’) 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’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.
136
HSBC’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’s VAR should be viewed in the context of
the limitations of the methodology used. These
include:
•
•
•
•
•
the model assumes that changes in risk factors
follow a normal distribution. This may not be
the case in reality and may lead to an
underestimation of the probability of extreme
market movements;
the use of a 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’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 2002 was:
Minimum Maximum Average
for the
At 31 during the during the
year end
2002
US$m
year end
2002
US$m
December
2002
US$m
At 31
year end December
2001
US$m
2002
US$m
Total trading
activities ...............
Foreign exchange
trading positions ...
Interest rate trading
positions ...............
Equities trading
positions ...............
71.6
12.9
63.2
27.1
66.7
130.0
2.4
60.2
20.4
47.0
120.9
40.6
93.9
21.0
82.4
29.0
122.0
13.3
111.7
45.5
Trading VAR for HSBC for 2001 was:
At 31 Minimum Maximum
during
during
the year
the year
US$m
US$m
December
2001
US$m
Average
for the
year
US$m
Total trading
activities ...............
122.0
Foreign exchange
trading positions ...
13.3
Interest rate trading
positions ...............
111.7
Equities trading
positions ...............
45.5
60.8
1.8
48.1
27.4
173.4
102.2
50.6
160.2
79.6
22.1
86.7
41.9
The average daily revenue earned from market
risk-related treasury activities in 2002, including
accrual book net interest income and funding related
to dealing positions, was US$14.6 million, compared
with US$13.9 million for 2001. The standard
deviation of these daily revenues was US$8.9 million
compared with US$7.7 million in 2001. An analysis
of the frequency distribution of daily revenues shows
that there were 10 days with negative revenues
during 2002. The most frequent result was a daily
revenue of between US$12 million and US$13
million with 18 occurrences. The highest daily
revenue was US$41.5 million.
Daily distribution of market risk revenues in 2001
Number of days
60
50
40
30
20
10
0
59
52
46
28
16
11
22
16
7
0
1
1
-4
0
4
8
12
16
20
24
28
32
36
40
44
Revenues (US$m)
Profit and loss frequency
Foreign exchange exposure
HSBC’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
above.
The average one-day foreign exchange revenue
in 2002 was US$3.2 million compared with US$3.0
million in 2001.
Daily distribution of market risk revenues in 2002
Structural currency exposure
Number of days
80
70
60
50
40
30
20
10
0
77
50
33
35
23
7
1
0
0
0
2
19
8
2
2
-30 -25 -20 -15 -10 -5
0
5
10 15 20 25 30 35 40 45
Profit and loss frequency
Revenues (US$m)
HSBC’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’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’s consolidated balance sheet is
137
H S B C H O L D I N G S P L C
Financial Review (continued)
affected by movements in the exchange rates
between these functional currencies and the US
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’s structural foreign currency exposures
are managed with the primary objective of ensuring,
where practical, that HSBC’s and individual banking
subsidiaries’ 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’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
2002.
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. The Government of Argentina is still
deliberating on compensation for structural losses
arising from the pesification of formerly US dollar
denominated assets and liabilities that occurred.
Details of HSBC’s structural foreign currency
exposures are given in Note 40(d) in the ‘Notes on
the Financial Statements’.
Interest rate exposures
HSBC’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 136. Interest rate risk
138
arises on both trading positions and accrual books.
The average daily revenues earned from treasury-
related interest rate activities for 2002 were US$10.7
million compared with US$10.3 million for 2001.
The interest rate risk on interest rate trading positions
is set out in the trading VAR table on page 137.
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’ 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 (‘ALCO’). The primary objective of such
interest rate risk management is to limit potential
adverse effects of interest rate movements on net
interest income.
Local ALCOs regularly monitor all such interest
rate risk positions, subject to interest rate risk limits
which are agreed with HSBC Holdings on an annual
basis.
Limits are approved at an operating entity level,
covering both the quantum of risk that may be
established, and the maximum maturity of risk
exposures. The limit setting process takes account of
the liquidity of the respective currencies with risk
exposures concentrated in the period up to five years,
and not generally permitted beyond ten years.
In assessing the interest risk position ALCOs
take account both of the behavioural characteristics,
as well as the contractual terms of any underlying
balances. In the cases of assumptions in respect of
behavioural characteristics, these must be based on
detailed analysis of historical trends and are subject
to ratification by a central function within 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 the interest rate position in different interest rate
scenarios.
Where considered appropriate, treasury units
and ALCO may use a variety of instruments to
manage interest rate risk, for example to lengthen or
to shorten the duration of the interest risk position.
The range of permitted instruments varies by
location, but is generally restricted to on-balance
sheet financial instruments and plain vanilla interest
rate swaps.
In addition, in the second half of 2002, in
response to the low level of interest rates in the Asian
bloc, ALCO approved the purchase of an interest rate
floor to reduce the effect of further interest rate cuts
to interest margins. The effect of the floor is included
in the sensitivity tables shown below.
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 2003 would decrease
planned net interest income for the 12 months to 31
December 2003 by US$690 million while a
hypothetical 100 basis points parallel rise in all yield
curves would decrease planned net interest income
by US$252 million.
Rather than assuming that all interest rates move
together, HSBC’s interest rate exposures can be
grouped into currency blocs whose interest rates are
considered more likely to move together. The
sensitivity of net interest income for 2003 can then
be described as follows:
Figures in US$ m
Change in 2003 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
–
(243 )
(47 )
6
(225 )
(437 )
69
(66 )
Euro
bloc
(49 )
50
Total
2003
(252 )
(690 )
Total
2002
(200 )
(196 )
The change in HSBC’s sensitivity to a fall of
100 basis points is mainly because further interest
rate cuts in the US dollar and Asian blocs at 1
January 2003 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’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
monitored by the subsidiaries’ ALCOs. VAR on
equities trading positions is set out in the trading
VAR table on page 137.
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 internal
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’s
subsidiaries local management is responsible for
establishing an effective and efficient operational
control environment in accordance with HSBC
standards so that HSBC’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
139
H S B C H O L D I N G S P L C
Financial Review (continued)
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 (‘FSA’) 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-
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’s
major banking subsidiaries have exercised capital
adequacy supervision in a broadly similar
framework.
Under the European Union’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’s Amending Directive (Directive
98/31/EC) to the Capital Adequacy Directive
(‘CAD2’). 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’s capital to risk-weighted assets, taking into
account both balance sheet assets and off-balance-
sheet transactions.
HSBC’s capital is divided into two tiers: tier 1,
comprising shareholders’ 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
140
capital and minority and other 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’s policy to maintain a strong capital base
to support the development of HSBC’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 and profit retentions. 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 .......................................
Redemption of preference shares.........
Other (including exchange
movements) ....................................
Closing tier 1 capital............................
Movement in risk-weighted assets
Opening risk-weighted assets ..............
Movements..........................................
Closing risk-weighted assets................
2002
US$m
35,073
6,239
863
(5,001 )
1,023
(3,729 )
338
(50 )
4,193
38,949
2001
US$m
34,620
5,406
807
(4,467 )
866
(199 )
112
(825 )
(1,247 )
35,073
391,478
39,073
430,551
383,687
7,791
391,478
Capital structure
The table below sets out the analysis of regulatory
capital at the end of 2002 and 2001.
Composition of capital
Tier 1:
Shareholders’ funds ..............................
Minority interests..................................
Innovative tier 1 securities ....................
Less : property revaluation reserves ......
goodwill capitalised and intangible
assets..........................................
own shares held*..............................
2002
US$m
2001
US$m
52,406
3,306
3,647
(1,954 )
45,979
3,515
3,467
(2,271 )
(17,855 )
(601 )
(14,989 )
(628 )
Total qualifying tier 1 capital ................
38,949
35,073
Tier 2:
Property revaluation reserves ................
General provisions ................................
Perpetual subordinated debt .................
Term subordinated debt.........................
Minority and other interests in tier 2
capital...............................................
1,954
2,348
3,542
12,875
775
2,271
2,091
3,338
9,912
693
Total qualifying tier 2 capital ................
21,494
18,305
Unconsolidated investments..................
Investments in other banks ...................
Other deductions ...................................
(2,231 )
(638 )
(144 )
(1,781 )
(627 )
(116 )
Total capital ..........................................
57,430
50,854
Total risk-weighted assets .....................
430,551
391,478
Capital ratios (per cent):
Total capital ..........................................
Tier 1 capital.........................................
13.3
9.0
13.0
9.0
*
This principally reflects shares held in trust available to fulfil
HSBC’s obligations under employee share option plans.
141
H S B C H O L D I N G S P L C
Financial Review (continued)
The above figures were computed in accordance
with the EU Banking Consolidation Directive. The
comparative figures for 31 December 2001 have not
been restated for the impact of FRS19, details of
which are set out in Note 1 on pages 195 to 197.
Tier 1 capital increased by US$3.9 billion.
Retained profits on a cash basis (excluding goodwill
amortisation) contributed US$2.1 billion and shares
issued through options and scrip dividends
contributed US$1.4 billion. Exchange movements on
reserves also contributed US$3.7 billion to this
increase. The acquisition of Grupo Financiero Bital
and currency translation differences contributed
US$1.9 billion and US$1.7 billion to the increase in
goodwill and intangible assets deducted from tier 1
capital.
The increase of US$3.2 billion in tier 2 capital
mainly reflects the proceeds of capital issues, net of
redemption and regulatory amortisation.
Total risk-weighted assets increased by US$39
billion. The acquisition of GFBital contributed US$8
billion to this increase. The remaining increase was
largely due to currency translation differences
together with the effect of growth in the loan book.
Risk-weighted assets by principal subsidiary
In order to give an indication as to how HSBC’s
capital is deployed, the table below analyses the
disposition of risk-weighted assets by principal
subsidiary. The risk-weighted assets are calculated
using FSA rules and exclude intra-HSBC items.
Hang Seng Bank Limited..............
32,350
31,992
2002
US$m
2001
US$m
The Hongkong and Shanghai
Banking Corporation Limited
and other subsidiaries...............
The Hongkong and Shanghai
Banking Corporation Limited
and subsidiaries........................
HSBC Bank plc (excluding CCF
and HSBC Private Banking
Holdings (Suisse) S.A.)............
HSBC Private Banking Holdings
(Suisse) S.A.* ..........................
CCF
87,932
80,492
120,282
112,484
138,206
113,643
20,374
40,399
14,611
35,706
HSBC Bank plc ............................
198,979
163,960
HSBC USA Inc ............................
54,576
53,945
HSBC Bank Middle East ..............
HSBC Bank Malaysia Berhad ......
6,573
4,713
5,699
4,215
HSBC Bank Canada .....................
15,499
14,400
GFBital.........................................
HSBC South American operations
HSBC Holdings sub-group ...........
7,853
4,865
554
–
8,044
966
Other
16,657
27,765
HSBC risk-weighted assets...........
430,551
391,478
142
H S B C H O L D I N G S P L C
Other information
Loan maturity and interest sensitivity analysis
There follows a geographic analysis of loan maturity and interest sensitivity by loan type on a contractual repayment
basis as at 31 December 2002. All amounts are net of suspended interest.
Maturity of 1 year or less
Loans and advances to banks* .........................
Commercial loans to customers
– Commercial, industrial and
international trade.........................................
– Real estate and other property related ..........
– Non-bank financial institutions ....................
– Governments ................................................
– Other commercial .........................................
Hong Kong SAR Government Home
Ownership Scheme.......................................
Residential mortgages and other
Europe
Hong
Kong
Rest of
Asia-
Pacific
North
America
South
America
Total
US$m
US$m
US$m
US$m
US$m
US$m
38,089
33,352
10,301
8,866
1,665
92,273
25,845
6,691
13,512
322
15,013
7,365
4,030
1,372
280
1,918
10,422
2,333
828
489
4,028
7,142
4,209
8,653
848
8,525
911
58
41
11
384
51,685
17,321
24,406
1,950
29,868
61,383
14,965
18,100
29,377
1,405
125,230
–
742
–
–
–
742
personal loans...............................................
15,918
8,695
5,042
Loans and advances to customers ....................
77,301
24,402
23,142
Total loans maturing in one year or less ..........
115,390
57,754
33,443
7,509
36,886
45,752
965
2,370
4,035
38,129
164,101
256,374
Maturity after 1 year but within 5 years
Loans and advances to banks ...........................
Commercial loans to customers
– Commercial, industrial and international .....
– Real estates and other property related.........
– Non-bank financial institutions ....................
– Governments ................................................
– Other commercial .........................................
883
7
251
70
–
1,211
12,464
5,621
1,085
816
5,812
2,575
7,617
656
436
3,400
1,826
1,961
86
289
1,635
2,992
3,840
393
1,987
1,152
25,798
14,684
5,797
10,364
113
8
6
135
111
373
–
212
585
19,970
19,047
2,226
3,663
12,110
57,016
2,331
37,721
97,068
Hong Kong SAR Government Home
Ownership Scheme.......................................
–
2,331
–
–
Residential mortgages and other
personal loans...............................................
16,470
7,594
Loans and advances to customers ....................
42,268
24,609
3,280
9,077
10,165
20,529
Total loans maturing after 1 year but
within 5 years ...............................................
43,151
24,616
9,328
20,599
585
98,279
*
Excludes sight balances with central banks
143
H S B C H O L D I N G S P L C
Other information (continued)
Europe
Hong
Kong
Rest of
Asia-
Pacific
North
America
South
America
Total
US$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 ....................................
6,016
20,663
80
14,611
3,292
2,756
2,971
7,462
Total.................................................................
26,679
14,691
6,048
10,433
68
305
373
12,427
45,797
58,224
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 .........................................
425
–
157
1,453
–
2,035
6,061
3,533
612
1,024
4,486
15,716
184
1,472
25
3
1,622
3,306
235
413
16
155
458
1,277
635
2,764
185
1,740
381
5,705
28
3
1
416
25
473
7,143
8,185
839
3,338
6,972
26,477
Hong Kong SAR Government Home
Ownership Scheme.......................................
–
4,181
–
–
–
4,181
Residential mortgages and other
personal loans...............................................
Loans and advances to customers ....................
33,061
48,777
14,601
22,088
5,071
6,348
16,826
22,531
Total loans maturing after 5 years....................
49,202
22,088
6,505
23,984
75
548
548
69,634
100,292
102,327
Interest rate sensitivity of loans and
advances to banks and commercial loans
to customers:
– Fixed interest rate .........................................
– Variable interest rate ....................................
Total.................................................................
4,209
11,932
16,141
31
3,274
3,305
663
769
1,432
1,609
5,548
7,157
23
450
473
6,535
21,973
28,508
144
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.
2002
Year ended 31 December
2001
2000
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 .........................................................................
7,626
5,282
19,053
12,113
44,074
1,011
1,910
321
39
3,281
898
663
2,804
786
5,151
1,271
3,566
2,205
3,488
Total..........................................................................
10,530
South 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..........................................................................
19
385
296
180
880
10,825
11,806
24,679
16,606
63,916
–
3.0
2.0
3.0
–
1.6
2.0
7.0
–
2.4
4.4
4.6
–
1.0
2.4
1.7
–
29.4
5.2
15.0
–
3.0
2.3
2.9
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
1,447
2,962
1,876
4,015
10,300
149
916
712
221
1,998
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
3.9
3.4
–
10.8
4.1
13.3
–
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
725
2,323
1,319
2,984
7,351
197
810
418
181
1,606
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
6.3
4.8
–
12.1
5.0
13.6
–
4.9
6.0
4.6
145
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 .........................................................................
2002
Average
Balance
US$m
29,109
77,835
23,587
44,745
6,621
Total ..........................................................................
181,897
Hong Kong
Demand and other – non-interest bearing..................
Demand – interest bearing.........................................
Savings......................................................................
Time ..........................................................................
Other .........................................................................
6,743
62,922
65,914
8,630
413
Total ..........................................................................
144,622
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 ..........................................................................
South 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...........................................................
South America...........................................................
4,913
13,903
23,711
5,508
1,338
49,373
14,412
7,088
44,913
6,266
10,219
82,898
1,038
606
3,438
11
255
5,348
56,215
162,354
161,563
65,160
18,846
464,138
6,958
7,546
2,418
4,838
165
Total ..........................................................................
21,925
146
Average
Rate
%
–
2.0
2.9
2.7
6.4
–
0.3
1.2
1.9
1.2
–
1.3
3.1
2.0
2.3
–
1.7
1.4
4.9
2.3
–
21.7
17.1
4.2
4.8
–
1.4
2.1
2.8
3.8
4.1
4.0
4.3
3.0
13.8
3.9
Year ended 31 December
2001
Average
Balance
US$m
26,084
62,475
24,305
43,637
5,177
161,678
5,804
53,470
76,277
8,361
434
144,346
4,328
10,930
22,023
6,006
1,008
44,295
14,209
5,380
43,181
7,396
11,752
81,918
1,212
1,577
5,315
316
345
8,765
51,637
133,832
171,101
65,716
18,716
441,002
6,828
5,902
1,653
4,393
350
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
3.8
–
14.4
11.4
3.5
3.7
–
2.7
3.9
4.7
5.1
4.8
5.1
5.4
5.5
12.9
5.0
2000
Average
balance
US$m
19,521
55,269
21,204
45,587
1,440
143,021
5,465
46,208
76,503
6,477
353
135,006
4,301
8,749
20,128
7,141
775
41,094
8,000
3,802
39,059
7,989
8,818
67,668
1,018
895
6,039
212
379
8,543
38,305
114,923
162,933
67,406
11,765
395,332
3,821
6,163
1,890
3,885
200
15,959
Average
rate
%
–
3.6
5.7
5.9
5.6
–
4.2
5.2
5.8
7.0
–
3.0
5.3
5.6
4.8
–
5.4
3.9
7.5
5.6
–
16.2
9.7
9.8
6.7
–
4.0
5.2
6.1
5.7
6.5
6.4
5.8
4.4
10.4
5.9
Certificates of deposit and other time deposits
At 31 December 2002 the maturity analysis of certificates of deposit and other wholesale time deposits, by
remaining maturity, was as follows:
3 months or
less
After 3 months
but within 6
months
After 6 months
but within 12
months
Europe
Certificates of deposit ...........
Time deposits:
– banks .................................
– customers...........................
Total......................................
Hong Kong
Certificates of deposit ...........
Time deposits:
– banks .................................
– customers...........................
Total......................................
Rest of Asia-Pacific
Certificates of deposit ...........
Time deposits:
– banks .................................
– customers...........................
Total......................................
North America
Certificates of deposit ...........
Time deposits:
– banks .................................
– customers...........................
Total......................................
South America
Certificates of deposit ...........
Time deposits:
– banks .................................
– customers...........................
Total......................................
Total
Certificates of deposit ...........
Time deposits:
– banks .................................
– customers...........................
Total......................................
US$m
3,792
13,116
35,159
52,067
547
172
8,505
9,224
1,806
2,412
5,180
9,398
3,474
2,654
2,965
9,093
–
175
193
368
9,619
18,529
52,002
80,150
US$m
US$m
96
765
1,941
2,802
770
–
229
999
174
227
67
468
35
405
2,095
2,535
–
78
14
92
1,075
1,475
4,346
6,896
12
1,634
1,027
2,673
1,155
–
78
1,233
61
262
158
481
23
192
919
1,134
–
21
–
21
1,251
2,109
2,182
5,542
After 12
months
US$m
4
1,665
4,279
5,948
5,738
5
170
5,913
133
474
221
828
–
370
257
627
–
8
–
8
Total
US$m
3,904
17,180
42,406
63,490
8,210
177
8,982
17,369
2,174
3,375
5,626
11,175
3,532
3,621
6,236
13,389
–
282
207
489
5,875
2,522
4,927
13,324
17,820
24,635
63,457
105,912
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$100,000 and over or the equivalent in other currencies.
147
H S B C H O L D I N G S P L C
Other information (continued)
Short-term borrowings
HSBC includes short-term borrowings within customer accounts, deposits by banks and debt securities in issue and
does not show short-term borrowings separately on the balance sheet. Short-term borrowings are defined by the SEC
as Federal funds purchased and securities sold under agreements to repurchase, commercial paper and other short-
term borrowings. Securities sold under agreements to repurchase are the only significant short-term borrowings of
HSBC. The following table provides additional information with respect to HSBC’s securities sold under
agreements to repurchase for each of the past three years.
Outstanding at 31 December..........................................................
Average amount outstanding during the year ................................
Maximum quarter-end balance outstanding during the year ..........
Weighted average interest rate during the year ..............................
Weighted average interest rate at the year-end ..............................
Disclosure Controls
Year ended 31 December
2002
US$m
21,397
21,089
21,468
4.0%
3.9%
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%
Within the 90 day period prior to the filing of this report, an evaluation has been carried out under the supervision
and with the participation of the Company’s management, including the Company’s Group Chairman and Group
Finance Director, of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures. Based upon and as of that evaluation, the Group Chairman and Group Finance Director concluded that
the disclosure controls and procedures are effective in all material respects to ensure that information required to be
disclosed in the report the Company files and submits under the Exchange Act is recorded, processed, summarised
and reported as and when required.
In addition, there have been no significant changes in the Company’s internal controls or in other factors that
could significantly affect these controls subsequent to the date of their evaluation.
148
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 61. 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 and HSBC Bank
Canada. Chairman of The Institute of International
Finance, Inc. 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 63. Executive Director of John Swire & Sons
Limited and a Director of Swire Pacific Limited. 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 64. Chairman of Corus Group plc. A non-
executive Director since 1998. A member of the
Court of the Bank of England.
Sir Keith Whitson
Age 59. 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 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., HSBC Bank Canada and
Grupo Financiero Bital, S.A. de C.V. A non-
executive Director of the Financial Services
Authority.
† The Lord Butler, GCB, CVO
Age 65. Master, University College, Oxford and a
non-executive Director of Imperial Chemical
Industries plc. A non-executive Director since 1998.
Responsible for the policy overview of HSBC in the
Community and Chairman of HSBC Education
Trust. 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 51. Executive Chairman of chinadotcom
corporation and Chairman of 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, Inmarsat
Ventures Plc, Convenience Retail Asia Limited,
VTech Holdings Ltd. and The Wharf (Holdings)
Limited. 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 59. An executive Director since 2000. Chairman
and Chief Executive Officer of CCF S.A. Joined
CCF 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 59. 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. A
Director of CCF S.A., HSBC Investment Bank
Holdings plc and HSBC Private Banking Holdings
(Suisse) S.A. 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.
D G Eldon
Age 57. 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.
149
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
* The Lord Marshall
Age 69. 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 62. Chairman of Anglo American plc. Director
and former Chairman of The ‘Shell’ Transport and
Trading Company, plc and former Chairman of the
Committee of Managing Directors of the Royal
Dutch/Shell Group of Companies. A Director of
Accenture Limited, 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 2001.
† S W Newton
of Newton
61. Founder
Age
Investment
Management, from which he retired in April 2002. A
non-executive Director since 27 September 2002. A
Member of the Advisory Board of the East Asia
Institute at Cambridge University.
* H Sohmen, OBE
Age 63. 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.
† C S Taylor
Age 57. Chair of Canadian Broadcasting
Corporation. A non-executive Director since 27
September 2002. Chair of Vancouver Board of Trade
from 2001 to 2002. A Director of Canfor
Corporation, Fairmont Hotels and Resorts, HSBC
USA Inc., HSBC North America Inc. and HSBC
Bank USA.
Age 47. Group Finance Director. An executive
Director since 1995. A Director of 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 54. 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, the
Hong Kong Exporters' Association and the Hong
Kong Committee for the Pacific Economic Co-
operation Council. A non-executive Director of The
Hongkong and Shanghai Banking Corporation
Limited since 1995.
S K Green
Age 54. Executive Director, Corporate, 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, CCF
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 58. Former Chief Operating Officer of Barilla
S.P.A. and former Senior Vice President of Nestlé
S.A. With Mars Incorporated from 1972 to 1993,
latterly as Executive Vice President of M&M/Mars
in New Jersey. A non-executive Director since
2001. A non-executive Director of Safeway plc.
A W Jebson
Age 53. Group IT Director. An executive Director
since 2000. Joined HSBC in 1978. A non-executive
Deputy Chairman of CLS Group Holdings AG.
† Sir John Kemp-Welch
Age 66. Former Joint Senior Partner of Cazenove &
Co and former Chairman of the London Stock
Exchange. A non-executive Director since 2000.
150
† Sir Brian Williamson, CBE
Z J Cama
Age 58. Chairman of London International Financial
Futures and Options Exchange. Chairman of Electra
Investment Trust plc. A Director of Templeton
Emerging Markets Investment Trust plc. A non-
executive Director since 27 September 2002. A
former Chairman of Gerrard Group plc and a former
Director of the Financial Services Authority and of
the Court of The Bank of Ireland.
*
†
Non-executive Director
Independent non-executive Director
Age 55. Deputy Chairman and Chief Executive
Officer, HSBC Bank Malaysia Berhad. Joined HSBC
in 1968. Appointed a Group General Manager in
2001.
V H C Cheng, OBE
Age 54. 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.
Adviser to the Board
A Dixon, OBE
D J Shaw
Age 56. 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.
Age 58. Deputy Chairman, HSBC Bank Middle East.
Joined HSBC in 1965. Appointed a Group General
Manager in 1995.
C-H Filippi
Age 50. Group General Manager and Global Head of
Corporate and Institutional Banking. Joined HSBC in
1987. Appointed a Group General Manager in 2001.
Senior Management
A A Flockhart
R J Arena
Age 54. Group General Manager, Global e-business.
Joined HSBC in 1999. Appointed a Group General
Manager in 2000.
C C R Bannister
Age 44 . Chief Executive Officer, Group Private
Banking. Joined HSBC in 1994. Appointed a Group
General Manager in 2001.
R G Barber
Age 52. 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.
R E T Bennett
Age 51. Group General Manager, Legal and
Compliance. Joined HSBC in 1979. Appointed a
Group General Manager in 1998.
Age 51. Group General Manager and Chief
Executive Officer, Mexico. Joined HSBC in 1974.
Appointed a Group General Manager in October
2002.
M F Geoghegan
Age 49. President and Chief Executive Officer,
HSBC Bank Brasil S.A.-Banco Múltiplo. Joined
HSBC in 1973. Appointed a Group General Manager
in 1997.
M J G Glynn
Age 51. President and Chief Executive Officer,
HSBC Bank Canada. Joined HSBC in 1982.
Appointed a Group General Manager in 2001.
S T Gulliver
Age 43. Group General Manager and Head of Global
Markets. Joined HSBC in 1980. Appointed a Group
General Manager in 2000.
151
H S B C H O L D I N G S P L C
Board of Directors and Senior Management (continued)
A P Hope
R C Picot
Age 56. Group General Manager, Insurance. Joined
HSBC in 1971. Appointed a Group General Manager
in 1996.
D D J John
Age 52. Chief Operating Officer and Director, HSBC
Bank plc. Joined HSBC in 1972. Appointed a Group
General Manager in 2000.
Age 45. Joined HSBC in 1993. Group Chief
Accounting Officer since 1995.
A F Rademeyer
Age 44. Group General Manager and Head of
Corporate Investment Banking and Markets, Asia-
Pacific. Joined HSBC in 1982. Appointed a Group
General Manager in March 2003.
M J W King
J C S Rankin
Age 46. Group General Manager, Internal Audit.
Joined HSBC in 1986. Appointed a Group General
Manager in June 2002.
Age 61. Group General Manager, Human Resources.
Joined HSBC in 1960. Appointed a Group General
Manager in 1990.
M B McPhee
B Robertson
Age 61. Group General Manager, Credit and Risk.
Joined HSBC in 1984. Appointed a Group General
Manager in 1997.
Age 48. Group General Manager and Head of
Corporate Investment Banking and Markets - North
America, HSBC Bank USA. Joined HSBC in 1975.
Appointed a Group General Manager in March 2003.
A Mehta
Age 56. Chief Executive Officer, The Hongkong and
Shanghai Banking Corporation Limited. Joined
HSBC in 1968. Appointed a Group General Manager
in 1991.
Dr S Rometsch
Age 64. Chairman of the Managing Partners, HSBC
Trinkaus & Burkhardt KGaA. Joined HSBC in 1983.
Appointed a Group General Manager in 2001.
Y A Nasr
M R P Smith, OBE
Age 46. Group General Manager. Joined HSBC in
1978. Appointed a Group General Manager in 2000.
I A Stewart
Age 44. Group General Manager and Head of
Investment Banking and Markets, Americas. Joined
HSBC in 1980. Appointed a Group General Manager
in 2000.
P E Stringham
Age 53. Group General Manager, Marketing. Joined
HSBC in 2001. Appointed a Group General Manager
in 2001.
Age 48. President and Chief Executive Officer,
HSBC USA Inc. and HSBC Bank USA. Joined
HSBC in 1976. Appointed a Group General Manager
in 1998.
T W O’Brien, OBE
Age 55. Group General Manager, Strategic
Development. Joined HSBC in 1969. Appointed a
Group General Manager in 1992.
R C F Or
Age 53. General Manager, The Hongkong and
Shanghai Banking Corporation Limited. Joined
HSBC in 1972. Appointed a Group General Manager
in 2000.
K Patel
Age 54. Chairman, Global Investment Banking
Division, HSBC Bank plc. Joined HSBC in 1984.
Appointed a Group General Manager in 2000.
152
H S B C H O L D I N G S P L C
Report of the Directors
Results for 2002
HSBC reported operating profit before provisions of
US$10,787 million. Profit attributable to
shareholders of HSBC Holdings was US$6,239
million, a 12.3 per cent return on shareholders’
funds. The retained profit to be transferred to
reserves was US$1,238 million.
A first interim dividend of US$0.205 per
ordinary share was paid on 9 October 2002. The
Directors have declared a second interim dividend of
US$0.325 per ordinary share in lieu of a final
dividend, making a total distribution for the year of
US$5,001 million. The second interim dividend will
be payable on 6 May 2003 in cash in United States
dollars, or in sterling or Hong Kong dollars at
exchange rates to be determined on 28 April 2003,
with a scrip dividend alternative. The reserves
available for distribution before accounting for the
second interim dividend of US$3,069 million are
US$10,943 million.
Further information about the results is given in
the consolidated profit and loss account on page 190.
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 over 8,000 offices in 80
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’s
income.
On 29 May 2002, HSBC Holdings and AEA
Investors Inc. agreed in principle that HSBC will
invest up to US$750 million over the next five years
in a new US$1 billion plus private equity fund being
organised by AEA.
On 28 June 2002, Merrill Lynch HSBC
('MLHSBC') became a 100 per cent owned
subsidiary of HSBC. MLHSBC was formed as a
50:50 joint venture between HSBC and Merrill
Lynch in April 2000 to provide direct investment and
banking services primarily over the internet to mass
affluent investors outside the United States.
On 14 November 2002, HSBC and Household
International, Inc. ("Household") entered into an
agreement for HSBC to acquire Household. The
agreeement is subject to a number of conditions
including the approval of shareholders of Household,
and regulatory and other consents and approvals in
the USA, Canada, UK and other relevant
jurisdictions. Under the terms of the agreement,
Household common shareholders will be entitled to
receive 2.675 HSBC ordinary shares or 0.535 HSBC
American Depositary Shares for each share of
Household common stock.
On 25 November 2002, HSBC Insurance
Holdings Limited subscribed for new common
shares of Ping An Insurance Company of China, Ltd.
equivalent to 10 per cent of Ping An's enlarged
issued share capital, for a consideration of US$600
million.
On 25 November 2002, HSBC completed the
acquisition of 99.59 per cent of GF Bital for a
consideration of US$1,135 million.
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 ‘Description of Business’ on pages 8 to 33.
HSBC’s five-year strategy, launched in
December 1998, is designed to focus on shareholder
value. HSBC Holdings’ 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 four years was 155 per cent,
compared to 95 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 174.
Capital and reserves
The following events occurred during the year:
Scrip dividends
1.
75,150,755 ordinary shares of US$0.50 each
were issued at par on 7 May 2002 to
shareholders who elected to receive new shares
in lieu of the 2001 second interim dividend. The
market value per share used to calculate
shareholders’ entitlements to new shares was
US$11.3968, being the United States dollar
equivalent of £8.009.
2. 14,434,840 ordinary shares of US$0.50 each
were issued at par on 9 October 2002 to
153
H S B C H O L D I N G S P L C
Report of the Directors (continued)
shareholders who elected to receive new shares
in lieu of the 2002 first interim dividend. The
market value per share used to calculate
shareholders’ entitlements to new shares was
US$11.5172 being the United States dollar
equivalent of £7.505.
All-Employee share plans
3. 6,040,317 ordinary shares of US$0.50 each were
issued at prices ranging from £3.059 to £6.7536
per share in connection with the exercise of
options under the HSBC Holdings Savings-
Related Share Option Plan. Options over
10,915,990 ordinary shares of US$0.50 each
lapsed.
4. 850,582 ordinary shares of US$0.50 each were
issued at prices ranging from £3.7768 to
£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 2002, the QUEST held 4,905,939
ordinary shares of US$0.50 each. During 2002,
HSBC QUEST Trustee (UK) Limited, the
corporate trustee of the QUEST, subscribed for
6,147,311 ordinary shares of US$0.50 each at
market values ranging from £6.61 to £8.43,
using funds from those employees who
exercised options under the HSBC Holdings
Savings-Related Share Option Plan. In addition,
9,564,355 ordinary shares were transferred from
the QUEST to employees who exercised options
under the HSBC Holdings Savings-Related
Share Option Plan. At 31 December 2002, the
QUEST held 1,488,895 ordinary shares of
US$0.50 each.
resident in 51 countries and territories under the
HSBC Holdings savings-related share option
plans. The options are exercisable within six
months following the third or fifth anniversary
of the commencement of the relevant savings
contracts on 1 August 2002 at a price of £6.3224
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. 21,069,640 ordinary shares of US$0.50 each
were issued at prices ranging from £2.1727 to
£7.421 per share in connection with the exercise
of options under the HSBC Holdings Executive
Share Option Scheme. Options over 2,083,441
ordinary shares of US$0.50 each lapsed.
9. Options over 56,763,464 ordinary shares of
US$0.50 each were awarded at nil consideration
on 7 May 2002 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 £8.4050
per share, the market value of the ordinary
shares on the date of award.
10. Options over 472,050 ordinary shares of
US$0.50 each were awarded at nil consideration
on 30 August 2002 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 £7.455
per share, the average market value over the five
business days immediately preceding the date of
the award. Options over 1,896,660 ordinary shares
of US$0.50 each lapsed.
Redemption of HSBC Holdings plc 11.69 per cent
Subordinated Bonds 2002 of £1.
11. On 31 July 2002, HSBC Holdings redeemed
£413,000,000 11.69 per cent Subordinated
Bonds 2002 of £1 each.
6. Under the authority granted by shareholders at
Authority to repurchase shares
the Annual General Meeting in 2000, 2,542,180
ordinary shares of US$0.50 each were issued at
€10.5638 in connection with a Plan d’Epargne
Entreprise for the benefit of non-UK resident
employees of CCF and its subsidiaries.
7. Options over 19,828,037 ordinary shares of
US$0.50 each were awarded at nil consideration
on 2 May 2002 to 41,401 HSBC employees
154
12. At the Annual General Meeting in 2002
shareholders gave authority for the Company to
make market repurchases of up to 935,560,000
ordinary shares of US$0.50 each. Your
Directors have not exercised this authority.
Authority to allot shares
13. At the Annual General Meeting in 2002
shareholders gave authority for the Directors to
allot up to 1,871,120,000 ordinary shares of
US$0.50 each. Within this amount the Directors
were granted authority to allot up to 467,780,000
ordinary shares of US$0.50 each wholly for cash
to persons other than existing shareholders.
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. The options are
granted at nil consideration unless otherwise
indicated. No options have been granted to
substantial shareholders, suppliers of goods or
services, or in excess of the individual limit for each
share plan. No options were cancelled during the
year. 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 3 March 2003). 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 474,072,000 ordinary shares of
US$0.50 each on 3 March 2003). Particulars of
options held by Directors of HSBC Holdings are set
out on pages 182 to 185 of the Directors’
Remuneration Report.
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 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 the commencement
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.
155
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
HSBC Holdings ordinary shares of US$0.50 each
Date of award
3 Apr 1996
9 Apr 1997
6 Apr 1998
1 Apr 1999
10 Apr 2000
11 Apr 2001
11 Apr 2001
2 May 2002
2 May 2002
Exercise
price (£)
3.0590
Exercisable
from 1
1 Aug 2001
Exercisable
until 2
31 Jan 2002
4.5206
5.2212
5.3980
6.0299
6.7536
6.7536
6.3224
6.3224
1 Aug 2002
1 Aug 2003
1 Aug 2004
1 Aug 2005
1 Aug 2004
1 Aug 2006
1 Aug 2005
1 Aug 2007
31 Jan 2003
31 Jan 2004
31 Jan 2005
31 Jan 2006
31 Jan 2005
31 Jan 2007
31 Jan 2006
31 Jan 2008
Options at
1 January
2002
72,519
8,721,489
9,609,696
12,681,199
15,875,709
4,251,916
9,221,110
–
–
Options
awarded
during year 3
–
Options
exercised
during year 4
58,115
Options
lapsed
during year
14,404
Options at
31 December
2002
–
–
–
–
–
–
–
3,366,992
7,572,479
8,377,754
408,223
339,272
264,453
67,617
52,699
617
387
116,326
464,903
806,740
1,466,152
712,433
858,267
182,789
191,825
227,409
8,736,570
11,535,187
14,145,104
3,471,866
8,310,144
3,183,586
7,380,267
1 May be advanced to an earlier date in certain circumstances, e.g. retirement.
2 May be extended to a later date in certain circumstances, e.g. on death of a participant, the executors may exercise the option up to
six months beyond the normal exercise period.
The closing price per share on 1 May 2002 was £8.08.
The weighted average closing price of the securities immediately before the dates on which options were exercised was £7.43.
3
4
HSBC Holdings Savings-Related Share Option Plan: Overseas Section
HSBC Holdings ordinary shares of US$0.50 each
Date of award
3 Apr 1996
9 Apr 1997
6 Apr 1998
1 Apr 1999
10 Apr 2000
11 Apr 2001
11 Apr 2001
2 May 2002
2 May 2002
Exercise
price (£)
3.0590
4.5206
5.2212
5.3980
6.0299
6.7536
6.7536
6.3224
6.3224
Exercisable
from 1
1 Aug 2001
1 Aug 2002
1 Aug 2003
1 Aug 2004
1 Aug 2005
1 Aug 2004
1 Aug 2006
1 Aug 2005
1 Aug 2007
Exercisable
until 2
31 Jan 2002
31 Jan 2003
31 Jan 2004
31 Jan 2005
31 Jan 2006
31 Jan 2005
31 Jan 2007
31 Jan 2006
31 Jan 2008
Options at
1 January
2002
45,483
5,696,106
3,393,848
12,870,183
27,773,999
10,805,468
3,317,457
–
–
Options
Options
exercised
awarded
during year 4
during year 3
39,750
–
–
5,469,602
– 70,385
–
– 216,594
44,924
–
10,081
–
3,139
6,427,955
809
2,460,611
Options
lapsed
during year
5,733
142,087
136,068
180,251 853,351
2,974,540
1,333,738
372,842
228,877
54,915
Options at
31 December
2002
–
84,417
3,187,395
11,836,581
24,582,865
9,426,806
2,934,534
6,195,939
2,404,887
1 May be advanced to an earlier date in certain circumstances, e.g. retirement.
2 May be extended to a later date in certain circumstances, e.g. on death of a participant, the executors may exercise the option up to
six months beyond the normal exercise period.
The closing price per share on 1 May 2002 was £8.08.
The weighted average closing price of the securities immediately before the dates on which options were exercised was £7.39.
3
4
156
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
1 Jul 2001
Exercisable
until 2
31 Dec 2001
1 Jul 2002
1 Jul 2003
1 Jul 2004
31 Dec 2002
31 Dec 2003
31 Dec 2004
Options at
1 January
2002
881,199
1,320,588
2,411,881
1,499,721
Options
exercised
during year 3
–
814,854
29,413
6,315
Options
lapsed
during year
881,199
505,734
–
–
Options at
31 December
2002
–
–
2,382,468
1,493,406
No options were awarded during the year.
1 May be advanced to an earlier date in certain circumstances, e.g. retirement.
2 May be extended to a later date in certain circumstances, e.g. on death of a participant, the executors may exercise the option up to
six months beyond the normal exercise period.
The weighted average closing price of the securities immediately before the dates on which options were exercised was £7.08.
3
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 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 are being 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 the third and tenth
anniversary of 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.
157
H S B C H O L D I N G S P L C
Report of the Directors (continued)
HSBC Holdings Executive Share Option Scheme
HSBC Holdings ordinary shares of US$0.50 each
Date of award
Exercise
price (£)
Exercisable
from 1
Exercisable
until 2
12 Oct 1993
8 Mar 1994
7 Mar 1995
1 Apr 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
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
24 Mar 2000
12 Aug 2000
16 Mar 2001
3 Apr 2002
10 Aug 2002
31 Aug 2002
3 Apr 2003
12 Oct 2003
8 Mar 2004
7 Mar 2005
1 Apr 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
2002
31,785
250,860
603,000
1,644,210
1,899,484
14,625
3,182,024
64,647,156
264,750
4,000
30,507,764
Options
exercised
during year 3
9,081
79,086
185,250
457,759
361,129
–
524,536
19,193,029
16,200
–
243,570
Options
lapsed
during year
–
–
6,000
25,500
16,618
–
–
1,030,711
4,200
–
1,057,655
Options at
31 December
2002
22,704
171,774
411,750
1,160,951
1,521,737
14,625
2,657,488
44,423,416
244,350
4,000
29,206,539
1 May be advanced to an earlier date in certain circumstances, e.g. retirement.
2 May be extended to a later date in certain circumstances, e.g. on death of a participant, the executors may exercise the option up to
twelve months beyond the normal exercise period.
The weighted average closing price of the securities immediately before the dates on which options were exercised was £8.08.
3
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
7 May 2002
30 Aug 2002
Exercisable
from
4 Oct 2003
Exercisable
Exercise
until 1
price (£)
9.6420
4 Oct 2010
8.7120 23 Apr 2004 23 Apr 2011
8.2280 30 Aug 2004 30 Aug 2011
7 May 2012
8.4050
7.4550 30 Aug 2005 30 Aug 2012
7 May 2005
Options at
1 January
2002
443,522
50,006,367
375,405
–
–
Options
awarded
during year
–
–
–
56,763,464 2
472,050 3
Options
exercised
during year
–
–
–
–
–
Options
lapsed during
year
26,996
1,215,869
11,975
638,320
3,500
Options at
31 December
2002
416,526
48,790,498
363,430
56,125,144
468,550
1 May be extended to a later date in certain circumstances, e.g. on death of a participant, the executors may exercise the option up to
twelve months beyond the normal exercise period.
The closing price per share on 6 May 2002 was £8.37.
The closing price on 29 August 2002 was £7.30.
2
3
CCF S.A. and subsidiary company plans
When it was acquired in July 2000 CCF and certain
of its subsidiary companies operated employee share
option plans under which options could be granted
over their respective shares. With the exception of the
Banque Eurofin plan, under which further options can
be granted, no further options will be granted under
any of these subsidiary company plans.
The following are outstanding options to acquire
shares in CCF S.A. and its subsidiaries.
158
CCF S.A.
shares of €5 each
Date of award
Exercise
price(€)
Exercisable
from
Exercisable
until
Options at 1
January
2002
Options
exercised
during year1
Options
lapsed
during year
Options at
31 December
2002
4 May 1993
23 Jun 1994
22 Jun 1995
9 May 1996
7 May 1997
29 Apr 1998
7 Apr 1999
12 Apr 2000
33.69
32.78
34.00
35.52
37.05
73.50
81.71
4 May 1995
4 May 2003
23 Jun 1996
23 Jun 2004
22 Jun 1997
22 Jun 2005
9 May 1998
9 May 2006
7 Jun 2000
7 May 2007
7 Jun 2000
29 Apr 2008
7 Jun 2000
7 Apr 2009
142.50
1 Jan 2002
12 Apr 2010
100
15,000
58,300
121,826
554,000
673,400
794,700
860,500
–
4,200
2,170
25,326
193,370
–
–
4,000
–
–
–
–
–
–
–
–
100
10,800
56,130
96,500
360,630
673,400
794,700
856,500
1 On exercise of the options, the CCF shares will be exchanged 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). At 31 December 2002 HSBC Holdings General Employee Benefit Trust held 35,745,555 HSBC
Holdings ordinary shares of US$0.50 each which may be exchanged for CCF shares arising from the exercise of options.
Banque Chaix
shares of €16 each
Date of award
28 Oct 1997
10 Jul 1998
21 Jun 1999
7 Jun 2000
Exercise
price(€)
88.73
94.52
100.31
105.94
Exercisable
from
Exercisable
until
28 Oct 2001
28 Jan 2003
10 Jul 2002
10 Oct 2003
21 Jun 2004
21 Dec 2004
7 Jun 2005
7 Dec 2005
Banque de Baecque Beau
shares of no par value
Exercise
price(€)
32.88
61.66
Exercisable
from
Exercisable
until
17 Oct 2002
17 Oct 2003
22 Dec 2003
22 Dec 2005
Options at
1 January
2002
10,000
10,000
10,000
10,000
Options at
1 January
2002
28,500
11,500
Options
exercised
during year
10,000
–
–
–
Options
lapsed
during year
Options at
31 December
2002
–
–
–
–
–
10,000
10,000
10,000
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2002
–
–
–
–
28,500
11,500
Date of award
17 Oct 1997
22 Dec 2000
Banque de Savoie
shares of €16 each
Date of award
24 Dec 1998
9 Sep 1999
14 Jun 2000
Exercise
price(€)
Exercisable
from
Exercisable
until
61.85
64.79
69.52
24 Dec 2003
24 Jun 2004
9 Sep 2004
9 Mar 2005
14 Jun 2005
14 Dec 2005
Options at
1 January
2002
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2002
5,000
5,000
5,100
–
–
–
–
–
–
5,000
5,000
5,100
159
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
price(€)
68.65
154.75
Exercisable
from
Exercisable
until
1 Jul 2000
31 Mar 2009
7 Sep 2005
7 Oct 2007
Options at
1 January
2002
17,600
78,600
Options
exercised
during year
17,600
–
Options
lapsed
during year
Options at
31 December
2002
–
4,400
–
74,200
Banque Dupuy de Parseval
shares of €20 each
Date of award
3 Mar 1997
1 Jul 1998
1 Jul 1999
3 Apr 2000
8 Jun 2000
Banque Eurofin
shares of €16 each
Date of award
30 Nov 19981
21 Dec 1999
15 May 2001
1 Oct 2002
Exercise
price(€)
32.01
33.31
34.76
36.36
39.48
Exercisable
from
3 Mar 2002
1 Jul 2003
1 Jul 2004
3 Apr 2005
Exercisable
until
3 Jun 2002
1 Oct 2003
1 Oct 2004
3 Jul 2005
8 Jun 2005
8 Sep 2005
Options at
1 January
2002
5,000
5,000
5,000
5,000
5,000
Options
exercised
during year
5,000
–
–
–
–
Options
lapsed
during year
Options at
31 December
2002
–
–
–
–
–
–
5,000
5,000
5,000
5,000
Exercise
price(€)
Exercisable
from
Exercisable
until
25.92
30 Nov 2001
29 Nov 2003
48.78
21 Dec 2000
21 Dec 2009
93.60 15 May 2002
15 May 2011
100.00
2 Oct 2005
1 Oct 2012
Options at 1
January
2002
Options
awarded
during year
7,200
66,000
60,000
–
–
–
–
51,100
Options
exercised
during year
4,200
–
–
–
Options
lapsed
during year
Options at
31 December
2002
–
5,500
2,300
–
3,000
60,500
57,700
51,100
1 Consideration of €1.52 per share paid on grant of options .
CCF Banque Privée Internationale
shares of no par value
Date of award
9 Mar 2000
Exercise
price(€)
Exercisable
from
Exercisable
until
116.93
9 Mar 2005
31 Dec 2010
Options at
1 January
2002
18,000
Options
exercised
during year
–
Options
lapsed
during year
Options at
31 December
2002
500
17,500
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
Exercise
price(€)
Exercisable
from
Exercisable
until
80.49
85.68
90.25
95.89
1 Oct 2001
1 Apr 2002
7 Nov 2002
7 Nov 2003
8 Jul 2003
8 Jan 2004
9 Sep 2004
9 Mar 2005
102.29
7 Jun 2005
7 Dec 2005
Options at
1 January
2002
6,375
5,625
7,500
7,500
7,500
Options
exercised
during year
6,375
–
–
–
–
Options
lapsed
during year
Options at
31 December
2002
–
–
–
–
–
–
5,625
7,500
7,500
7,500
160
Netvalor
shares of €415 each
Date of award
22 Dec 1999
19 Dec 2000
Exercise
price(€)
Exercisable
from
Exercisable
until
415
415
22 Dec 2004
22 Dec 2006
19 Dec 2005
19 Dec 2007
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(€)
Exercisable
from
Exercisable
until
24 Jun 2002
24 Dec 2002
18 Mar 2003
18 Sep 2003
22 Mar 2004
22 Sep 2004
15 Oct 2004
15 Apr 2005
6.13
8.61
21.85
18.80
18.66
18 Feb 2005
18 Aug 2005
120,500
Options at
1 January
2002
2,410
3,480
Options at
1 January
2002
91,200
94,400
81,000
45,000
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2002
–
–
–
140
2,410
3,340
Options
exercised
during year
91,200
–
–
–
–
Options
lapsed
during year
Options at
31 December
20021
–
–
2,000
–
23,000
–
94,400
79,000
45,000
97,500
1 On exercise of the options, the Sinopia shares will be exchanged for HSBC Holdings ordinary shares of US$0.50 each in the ratio of 2.143 HSBC
Holdings shares for each Sinopia share. At 31 December 2002 HSBC General Trust Employee Benefit Trust held 685,549 HSBC Holdings ordinary
shares of US$0.50 each which may be exchanged for Sinopia Asset Management shares arising from the exercise of options.
Union de Banques à Paris
shares of €16 each
Date of award
3 Jul 1997
25 Nov 1998
22 Nov 1999
12 Jul 2000
Exercise
price(€)
Exercisable
from
Exercisable
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
Options at
1 January
2002
47,850
27,900
27,900
28,400
Options
exercised
during year
46,150
–
–
–
Options
lapsed
during year
Options at
31 December
2002
1,700
–
1,700
2,000
–
27,900
26,200
26,400
Valuation of freehold and leasehold
land and buildings
HSBC’s freehold and long leasehold properties,
together with all leasehold properties in the Hong
Kong SAR, were revalued in September 2002 in
accordance with HSBC’s policy of annual
valuation. As a result of this revaluation, the net
book value of land and buildings has decreased by
US$359 million.
Further details are included in Note 25 of the
‘Notes on the Financial Statements’.
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’s business. All Directors have full and
timely access to all relevant information and may
take independent professional advice if necessary.
161
H S B C H O L D I N G S P L C
Report of the Directors (continued)
The Directors who served during the year were
Sir John Bond, Baroness Dunn, Sir Brian Moffat,
Sir Keith Whitson, Lord Butler, R K F Ch’ien, C F
W de Croisset, W R P 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, Sir
Mark Moody-Stuart, M Murofushi, S W Newton,
C E Reichardt, H Sohmen, Sir Adrian Swire, C S
Taylor and Sir Brian Williamson.
M Murofushi, C E Reichardt and Sir Adrian
Swire retired on 31 May 2002.
S W Newton, C S Taylor and Sir Brian
Williamson were appointed Directors on 27
September 2002. Having been appointed since the
last Annual General Meeting, they will retire at the
forthcoming Annual General Meeting and offer
themselves for election.
On 14 November 2002 it was announced that
W F Aldinger will be invited to join the Board
subject to the completion of the acquisition of
Household.
R K F Ch’ien, S K Green, A W Jebson, Sir
Brian Moffat, H Sohmen and Sir Keith Whitson
will retire by rotation at the forthcoming Annual
General Meeting. With the exception of Sir Keith
Whitson, who is to retire, they will offer
themselves for re-election.
S K Green will succeed Sir Keith Whitson as
Group Chief Executive and A W Jebson will take
up the new position of Group Chief Operating
Officer following the Annual General Meeting.
Brief biographical particulars for each Director
are set out on pages 149 to 151.
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
The Group Executive Committee meets regularly
and operates as a general management committee
162
under the direct authority of the Board. The
members of the Group Executive Committee are
Sir Keith 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’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 and Sir John Kemp-Welch, all of whom are
independent non-executive Directors.
Remuneration Committee
The role of the Remuneration Committee and its
membership are set out in the Directors’
Remuneration Report on page 170.
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), Lord Butler, H Sohmen and Sir Brian
Moffat.
Corporate Governance
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’s lead regulator.
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 3 March 2003, the date of approval
of the Annual Report and Accounts. In the case of
companies acquired during the year, including GF
Bital, the internal controls in place are being
reviewed against HSBC’s benchmarks and they are
being integrated into HSBC’s systems. HSBC’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
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 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
163
H S B C H O L D I N G S P L C
Report of the Directors (continued)
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 social, ethical 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’s system of internal
control covering all controls, including financial,
operational and compliance controls and risk
management.
Reputational, Strategic and
Operational Risk
HSBC regularly updates its policies and procedures
for safeguarding against reputational, strategic and
164
operational risks. This is an evolutionary process
which now takes account of The Association of
British Insurers’ guidance on best practice when
responding to social, ethical and environmental
(SEE) risks.
The safeguarding of HSBC’s reputation is of
paramount importance to its continued prosperity
and is the responsibility of every member of staff.
HSBC has always operated to 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 includes
reputational matters.
Reputational risks, including SEE matters, are
considered and assessed by the Board, the Group
Executive Committee, subsidiary company boards,
board committees and/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 Group
and for individual subsidiary companies,
businesses and functions. These policies, which
form an integral part of the internal control
systems, and which were strengthened
considerably during 2002, are communicated
through manuals and statements of policy and are
promulgated through internal communications. The
policies include social, ethical and environmental
issues and set out operational procedures in all
areas of reputational risk, including money
laundering deterrence, environment impact, anti-
corruption measures and employee relations. The
policy manuals address risk issues in detail and co-
operation between head office departments and
businesses is required to ensure a strong adherence
to HSBC’s risk management system and its
corporate social responsibility practices.
Internal controls are an integral part of how
HSBC conducts its business. HSBC’s manuals and
statements of policy are the foundation of these
internal controls. There is a strong process in place
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 to the Group Audit Committee, which keeps
under review the effectiveness of the system of
internal controls and reports regularly to HSBC
Holdings’ Board. In addition, all Group businesses
and major functions are required to review their
control procedures and to make regular reports
about any losses arising from operational risks.
KPMG continues to assist HSBC in developing
systems to quantify the key direct environmental
impact of its principal operations around the world.
This third party scrutiny of the environmental
reporting system supports HSBC's internal risk
management procedures. HSBC is a participant in
the Dow Jones Sustainability, FTSE4Good and
Business in Environment indices. Further details
are contained in the HSBC in the Community
brochure which is published to coincide with each
Annual General Meeting.
Health and Safety
The maintenance of appropriate health and safety
standards throughout HSBC remains 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.
Communication with shareholders
Communication with shareholders is given high
priority. Extensive information about HSBC’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.
Directors’ interests
According to the registers of Directors’ 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:
165
H S B C H O L D I N G S P L C
Report of the Directors (continued)
At 1 January
2002
HSBC Holdings ordinary shares of US$0.50
Sir John Bond1 ………….……
R K F Ch’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 ……………….
Sir Brian Moffat …………….
Sir Mark Moody-Stuart ………
H Sohmen ……………….……
C S Taylor4 …………………...
Sir Keith Whitson1 ……………
Sir Brian Williamson4 ………...
273,841
23,671
34,170
21,484
131,477
13,419
30,173
328,000
127,804
20,859
331,800
7,261
5,289
5,840
2,815,144
500
121,484
14,500
Personal
At 31 December 2002
Corporate
Family
Other
Total
271,060
24,273
35,664
22,624
112,172
12,816
35,590
328,000
159,271
45,254
25,000
7,578
5,640
5,000
–
500
101,687
14,500
3,309
–
–
–
–
863
1,789
–
14,337
–
–
–
–
840
382,138
–
20,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,504,636 3
–
–
–
–
–
–
–
24,000 2
–
–
–
–
–
381,800 2
–
–
–
–
–
–
–
274,369
24,273
35,664
22,624
136,172
13,679
37,379
328,000
173,608
45,254
406,800
7,578
5,640
5,840
2,886,774
500
121,687
14,500
–
–
–
–
–
–
–
–
–
HSBC Holdings 11.69 per cent subordinated bonds 2002 of £15
Sir John Bond …………….…..
A W Jebson …………………..
Lord Marshall …………….…..
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
on pages 183 to 185 of the Directors' Remuneration Report.
Non-beneficial.
Interests held by private investment companies.
Interests at 27 September 2002 - date of appointment.
Redeemed on 31 July 2002.
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 €75,000 of
HSBC Holdings plc 5½ 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 CCF S.A., C F W de Croisset,
W R P Dalton and S K Green, each have a personal
interest in one share of €5 each in that company,
which they held throughout the year. The Directors
have waived their rights to receive dividends on
these shares and undertaken on cessation of this
directorship to transfer these shares to HSBC.
Following the acquisition of CCF in 2000,
HSBC Holdings ordinary shares of US$0.50 each
were purchased by the HSBC Holdings General
166
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 2002, the Trust
held 35,745,555 HSBC Holdings ordinary shares of
US$0.50 each.
Save as stated above and in the Directors'
Remuneration Report, 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.
Since the end of the year, the beneficial interests
of Sir John Bond, W R P Dalton, D J Flint, S K
Green and Sir Keith Whitson each increased by 19
HSBC Holdings ordinary shares of US$0.50 each,
which were acquired by Computershare Trustees
Limited using monthly contributions to the HSBC
UK Share Ownership Plan. The automatic
reinvestment of a tax credit carried forward by an
Individual Savings Account manager has resulted in
the family interests of D J Flint being increased by
one HSBC Holdings ordinary share of US$0.50.
There have been no other changes in Directors’
interests from 31 December 2002 to the date of this
Report. Any subsequent changes up to the last
practicable date before the publication of the ‘Notice
of Annual General Meeting’ will be set out in the
notes to that Notice.
At 31 December 2002, Directors and Senior
Management held, in aggregate, beneficial interests
in 12,202,827 HSBC Holdings ordinary shares of
US$0.50 each (0.13 per cent of the issued ordinary
shares).
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’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’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 is made to continue their
employment and, if necessary, appropriate training is
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
invoice is contested and settle disputes quickly.
Copies of, and information about, the Code are
available from: The Department of Trade and
Industry, 1 Victoria Street, London SW1H 0ET.
It is HSBC Holdings’ 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 2002, represented 15 days’ average
daily purchases of goods and services received from
such creditors, calculated in accordance with the
Companies Act 1985, as amended by Statutory
Instrument 1997/571.
Substantial interests in share capital
According to the register maintained under section
211 of the Companies Act 1985, Legal and General
Investment Management Limited notified HSBC
Holdings on 11 June 2002 that it had an interest in
284,604,788 HSBC Holdings ordinary shares,
representing 3.01 per cent of the ordinary shares in
issue at that date. On 21 January 2003 the Hong
167
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Kong Monetary Authority gave notice that the Hong
Kong Special Administrative Region Government
had ceased to have a notifiable interest in 3 per cent
or more of HSBC Holdings ordinary shares.
No substantial interest, being 10 per cent or
more, in any of the equity share capital is recorded
in the register maintained under section 16(1) of the
Securities (Disclosure of Interests) Ordinance.
Dealings in HSBC Holdings plc
shares
Save for dealings by HSBC Investment Bank plc
(until 29 November 2002) and HSBC Bank plc
(since 30 November 2002) trading as intermediaries
in HSBC Holdings’ shares in London, and the
redemption on 31 July 2002 by HSBC Holdings of
£413,000,000 11.69 per cent Subordinated Bonds
2002 of £1 each, neither HSBC Holdings nor any
subsidiary undertaking has bought, sold or redeemed
any securities of HSBC Holdings during the 12
months ended 31 December 2002.
Connected Transaction
The following constituted a connected transaction
under the rules of The Stock Exchange of Hong
Kong Limited.
In January 2003 CCF, a subsidiary of HSBC
Holdings, agreed to acquire, subject to regulatory
approval, 11.31% of the capital of Banque Eurofin
S.A. ('Eurofin') jointly held by Jean and Odon Vallet.
Odon Vallet is a Director of Eurofin. The
consideration of €15.05 million in cash is payable
on completion. The transaction will increase CCF 's
interest in Eurofin from 59.9% to 71.21%.
HSBC in the Community
Since 1999 Lord Butler has, at the Board’s request,
taken a policy overview of HSBC in the Community,
the principal objectives of which are to support
access to primary and secondary education for those
who are disadvantaged and the Environment. In
addition, Lord Butler is Chairman of the HSBC
Education Trust, which began operation in 2001.
Considerable progress continues to be made in
these important areas.
On 21 February 2002, HSBC’s five-year
partnerships, called ‘Investing in Nature’, with
Botanic Gardens Conservation International
("BGCI"), Earthwatch and WWF, were announced.
168
To date more than 190 of our employees from 39
countries have participated in Earthwatch projects in 25
countries. BGCI have also listed and conserved 8,000
threatened plant species out of a five year target of
20,000. WWF have selected project administration
sites in Brazil, China and the UK with the USA to
follow. HSBC has committed to providing US$50
million in funding over five years in supporting these
partnerships. Further information is available in the
HSBC in the Community brochure.
Donations
During the year, HSBC made charitable donations
totalling US$34,500,000. Of this amount,
US$16,700,000 was given for charitable purposes in
the United Kingdom.
No political donations were made during the
year.
At the Annual General Meeting in 2002
shareholders gave authority for 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
as a precautionary measure in light of the wide
definitions in The Political Parties, Elections and
Referendums Act 2000. These authorities have not
been used and it is not proposed that HSBC's
longstanding policy of not making contributions to
any political party be changed. However, as a
precautionary measure a resolution will again be
proposed at the Annual General Meeting. On this
occasion it is intended that these precautionary
authorities should cover a period of four years. At
the Annual General Meeting in 2002 shareholders
gave authority in these amounts for one year.
Annual General Meeting
The Annual General Meeting of HSBC Holdings will
be held at the Barbican Hall, Barbican Centre,
London EC2 on Friday 30 May 2003 at 11.00 am.
An informal meeting of shareholders will be
held at Level 28, 1 Queen’s Road Central, Hong
Kong on Tuesday 27 May 2003 at 4.30 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
2003 a recording of the proceedings will be available
on www.hsbc.com.
Auditor
KPMG Audit Plc has expressed its willingness to
continue in office. The Group Audit Committee and
the Board recommend 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
3 March 2003
169
H S B C H O L D I N G S P L C
Directors' Remuneration Report
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. During
2002, the members of the Remuneration
Committee were W K L Fung, Sir John Kemp-
Welch, Lord Marshall and Sir Mark Moody-Stuart,
all of whom were independent non-executive
Directors. Sir Mark Moody-Stuart succeeded Lord
Marshall, who retired as a member of the
Committee, as Chairman of the Committee on 1
January 2003.
The Remuneration Committee retains the
services of Towers Perrin, a specialist
remuneration consulting firm, who provide advice
on executive pay issues. The Remuneration
Committee also receives advice from the Group
General Manager, Group Human Resources and
the Senior Executive, Group Reward Management.
Towers Perrin also provide other remuneration,
actuarial and retirement consulting services to
various parts of the HSBC Group. Other
consultants are used from time to time to validate
their findings.
Policy
In common with most businesses, HSBC’s
performance depends on the quality and
commitment of its people. Accordingly, the
Board’s stated strategy is to attract, retain and
motivate the very best people.
In a business that is based on trust and
relationships, HSBC’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’s decisions on which company to join, but it
is not the only one; it is HSBC’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
170
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
• since 1996, to follow a policy of moving
progressively from defined benefit to defined
contribution Group pension schemes for new
employees only.
Basic salary and benefits
Salaries are reviewed annually in the context of
individual and business performance, market
practice, internal relativities and competitive
market 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’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’s
approach to risk management serves the interests
of all. Closer alignment with the interests of
shareholders continues to be achieved through the
promotion and extension of 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 ‘Notes on
the Financial Statements’. The dilutive effect of
exercising all outstanding share options would be
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 (‘TSR’) targets (full details
are set out on pages 174 to 177). Separate
transitional arrangements are currently in place for
those employed by 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,
including executive Directors and Senior
Management, 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’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 enables employees to purchase
HSBC Holdings shares from pre-tax salary. 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’ Board is currently composed of
13 non-executive Directors and eight executive
Directors. With businesses in 80 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 27 Group General
Managers have in total more than 800 years of
service with HSBC.
The aggregate remuneration of Directors and
Senior Management for the year ended 31
December 2002 was US$70,886,000.
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 2002 was US$3,864,000.
At 31 December 2002, executive Directors
and Senior Management held, in aggregate, options
to subscribe for 2,036,492 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 2003 and 2012 at
prices ranging from £2.1727 to £8.712.
Directors' fees
Directors’ fees are regularly reviewed and
compared with other large international companies.
The current basic fee is £35,000 per annum.
171
H S B C H O L D I N G S P L C
Directors' Remuneration Report (continued)
In addition, non-executive Directors receive
with effect from 1 January 2003 the following
fees:
Chairman, Audit Committee
£15,000 p.a.
Member, Audit Committee
£10,000 p.a.
During 2002 six Audit Committee meetings were
held. A Director’s commitment to each meeting can
be as much as 15 hours.
Chairman, Remuneration Committee
£15,000 p.a.
Member, Remuneration Committee
£10,000 p.a.
During 2002, seven meetings of the Remuneration
Committee were held.
Non-executive Director responsible for policy
overview of HSBC in the Community
£10,000 p.a.
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.
Executive Directors’ remuneration
HSBC’s operations are large, diverse and
international; for example, more than 60 per cent of
net income is derived from outside the United
Kingdom.
The executive Directors are experienced
executives with detailed knowledge of the financial
services business in various countries. In most
cases there has been a need to attract them from
abroad to work in the United Kingdom.
It became clear to the Board over three years
ago that executive Directors’ total remuneration
had fallen steadily behind the competition. This
became apparent from ‘league tables’ 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.
172
The market 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 2003.
There are four key components of executive
Directors’ remuneration:
i
Salary
Base salaries with effect from April 2003 will
be:
Sir John Bond ...........................
C F W de Croisset.....................
W R P Dalton............................
D G Eldon …………………...
D J Flint ....................................
S K Green .................................
A W Jebson ..............................
Sir Keith Whitson……………
£970,000
€541,660
£496,500
US$286,752
£440,500
£470,500
£440,000
£790,000
D G Eldon’s current base salary, as an
International Manager, shown above, is
calculated on a net basis and will be subject to
a separate review in April 2003.
This represents an average increase from
2002 of 4.3 per cent.
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.
From 2002, combining these two key
performance factors may 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). Actual
awards have ranged from 40 per cent to 195
per cent with only three awards being greater
than 100 per cent.
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 2003 conditional awards
to executive Directors, together with vesting
arrangements, are set out on pages 174 to 175.
It is the Remuneration Committee’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).
may receive awards under the HSBC Holdings
Restricted Share Plan 2000 and the HSBC
Holdings Group Share Option Plan. 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 174.
iv Pension Arrangements
The pension entitlements earned by the
executive Directors during the year are set out
on pages 181 to 182.
Only basic salary is pensionable. No other
Director participated in any Group pension
schemes and none of the Directors
participating in Group ‘approved’ pension
schemes is subject to the earnings cap
introduced by the 1989 Finance Act.
In appropriate circumstances, executive
Directors and members of Senior Management
The increase in accrued pension benefits
during 2002 were:
Sir John Bond..............................................
C F W de Croisset .......................................
W R P Dalton ..............................................
D G Eldon ...................................................
S K Green....................................................
A W Jebson .................................................
Sir Keith Whitson........................................
Increase in accrued pension during
2002, excluding any increase for
inflation
£000
15
7
(5)2
17
16
15
26
Transfer value (less personal contributions)
at 31 December 2002 relating to increase
in accrued pensions during 2002
£000 1
272
74
(74 )
325
196
171
462
1
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.
2 While the accrued pension has increased marginally, after excluding the impact of inflation in Canada and movements in exchange
rates, the transfer value has decreased.
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 2003 as set out
below. The Trustee to the Plan will be provided with
funds to acquire ordinary shares of US$0.50 each at
an appropriate time after the announcement of the
annual results. The 2003 awards proposed for
executive Directors and members of Senior
Management in respect of 2002 will have an
aggregate value at the date of award of £11.4 million
including awards to the following values to
executive Directors:
173
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Sir John Bond ..........................................
W R P Dalton...........................................
D G Eldon ................................................
D J Flint ...................................................
S K Green ................................................
A W Jebson..............................................
Total.........................................................
£000
1,100
750
500
750
750
750
4,600
No share options will be granted under the HSBC
Holdings Group Share Option Plan in respect of
2002 to the executive Directors listed above; they
have not received share option awards since the
HSBC Holdings Restricted Share Plan was
introduced in 1997.
No award under the HSBC Holdings Restricted
Share Plan 2000 will be made to C F W de Croisset
in respect of 2002. Mr de Croisset will instead
receive an award of options to acquire 206,000
ordinary shares of US$0.50 each under the HSBC
Group Share Option Plan. Taking account of market
practice in France, transitional arrangements will
gradually align share options awards in CCF more
closely with those elsewhere in HSBC. In this
respect only 50 per cent of the above-mentioned
award will be subject to the same TSR performance
conditions set out below for the HSBC Holdings
Restricted Share Plan 2000. Any future share option
awards he may receive will be wholly subject to
these performance conditions. In accordance with
the arrangements agreed at the acquisition of CCF in
2000, the HSBC Group Share Option Plan awards
made to Mr de Croisset in 2001 and 2002 were not
subject to performance conditions.
The 1998 Restricted Share Plan awards were
subject to performance conditions of earnings per
share, to be achieved in whole or in part, as follows:
earnings per share in the year 2001 (the fourth
year of the performance period) to be greater
than earnings per share in 1997 (the base year
for the calculation) by a factor equivalent to the
composite rate of inflation ( a weighted average
of inflation in the UK, USA and Hong Kong)
plus 2 per cent, compounded over each year of
the performance period;
earnings per share to increase relative to the
previous year in not less than three of the four
years of the performance period; and
cumulative earnings per share over the four
years of the performance period, 1998 to 2001
•
•
•
174
inclusive, must exceed an aggregate figure
calculated by compounding 1997 earnings per
share by a factor equivalent to the annual
composite rate of inflation plus 2 per cent for
each year of the performance period.
On meeting all of these three primary tests, 50
per cent of the conditional awards would be
released to each eligible participant. A secondary
test would apply such that, if the cumulative
earnings per share over the performance period
exceeded an aggregate figure calculated by
compounding 1997 earnings per share by a factor
equivalent to the same annual composite rate of
inflation as described above, plus 5 per cent or
more, or 8 per cent or more, for each year of the
performance period, 75 per cent or 100 per cent
respectively of the conditional awards would be
released.
In accordance with the rules of the plan, as these
tests were not satisfied over the years 1998 to 2001,
the same tests are to be applied over the years 1999
to 2002. If the tests are not satisfied, the conditional
share awards will be forfeited.
From 1999, the vesting of awards has been
linked to the attainment of predetermined TSR
targets as set out below.
Particulars of executive Directors' interests in
shares held in the Restricted Share Plan are set out
on page 185.
The HSBC Holdings Restricted Share Plan
2000
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 2003 awards to the attainment of
predetermined TSR targets.
Total Shareholder Return (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.
Vesting schedule
Having regard to HSBC Holdings’ 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.
3.
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
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’ TSR
measured against the benchmark TSR. The
calculation of the share price component within
HSBC Holdings’ TSR will be the average market
price over the 20 trading days commencing on the
day when the annual results are announced, which in
2003 is 3 March. The starting point will be,
therefore, the average over the period 3 to 28
March inclusive. TSR for the benchmark
constituents will be based on their published share
prices for 28 March 2003.
If HSBC Holdings’ TSR over the performance
period exceeds the mean of the benchmark TSR,
awards with a value, at the date of grant, of up to
100 per cent of earnings, will vest. For higher value
awards, the greater of 50 per cent of the award or the
number of shares, equating at the date of grant to
100 per cent of earnings, will vest at this level of
performance. If HSBC Holdings’ TSR over the
performance period places it within the upper
quartile in the ranked list against the benchmark,
these higher value awards will vest in full. For
performance between the median and the upper
quartile, vesting will be on a straight line basis.
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’ financial performance
has shown a sustained improvement in the period
since the date of grant.
Awards will vest immediately in cases of death.
The Remuneration Committee retains discretion to
recommend early release of the shares to the Trustee
in certain instances, e.g. in the event of redundancy,
retirement on grounds of injury or ill health, early
retirement, retirement on or after contractual
retirement or if the business is no longer part of
HSBC Holdings. 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.
175
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Total Shareholder Return
The following graph shows HSBC Holdings' TSR performance against the benchmark TSR.
Total Shareholder Re turn (£)
220%
210%
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
80%
Dec 1997
Dec 1998
Dec 1999
Dec 2000
Dec 2001
Dec 2002
HSBC TSR
TSR Benchmark
Pursuant to the Directors' Remuneration Report Regulations 2002, the following graphs show HSBC Holdings' TSR
performance against the Financial Times Stock Exchange (FTSE) 100 Index, the Morgan Stanley Capital
International (MSCI) World Index and Morgan Stanley Capital International (MSCI) Financials Index.
Total Shareholder Return (£)
220%
210%
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
80%
Dec 1997
Dec 1998
Dec 1999
Dec 2000
Dec 2001
Dec 2002
HSBC TSR
FTSE 100 Index
176
Total Shareholder Re turn (£)
220%
210%
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
80%
Dec 1997
Dec 1998
Dec 1999
Dec 2000
Dec 2001
Dec 2002
HSBC TSR
MSCI World Index
Total Shareholder Return (£)
220%
210%
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
80%
Dec 1997
Dec 1998
Dec 1999
Dec 2000
Dec 2001
Dec 2002
HSBC TSR
MSCI Financials Index
Source: Datastream
177
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Employees’ Emoluments
The basic salaries of Group General Managers are
within the following bands:
£150,001 – £250,000
£250,001 – £350,000
£350,001 – £450,000
£450,001 – £550,000
Number of Group
General Managers
15
10
1
1
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 2002.
Basic salaries, allowances and
benefits in kind ................................
Pension contributions..........................
Bonuses paid or receivable .................
Compensation for loss of office
– contractual .......................................
– other ...............................................
Total (£) .............................................
Total (US$) ........................................
£000
1,286
98
26,237
–
–
27,621
41,446
Their emoluments are within the following bands:
£4,100,001 – £4,200,000
£4,500,001 – £4,600,000
£5,300,001 – £5,400,000
£6,000,001 – £6,100,000
£7,400,001 – £7,500,000
Number of
Employees
1
1
1
1
1
Service contracts and terms of appointment
HSBC’s policy is to employ executive Directors on
one-year rolling contracts, although on recruitment
longer initial terms may be approved by the
Remuneration Committee. The Remuneration
Committee will, consistent with the best interests of
the Company, seek to minimise termination
payments.
178
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’s salary and
benefits in kind save as referred to below. There are
no provisions for compensation upon early
termination of executive Directors' service contracts
save for C F W de Croisset, details of which are set
out below.
Sir John Bond is employed on a rolling contract
dated 1 January 1993 which requires 12 months’
notice to be given by either party.
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’ 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.
W R P Dalton is employed on a rolling contract
dated 5 January 1998 which requires 12 months’
notice to be given by either party.
D G Eldon is employed on a rolling contract
dated 1 January 1968 which requires three months’
notice to be given by either party.
D J Flint is employed on a rolling contract dated
29 September 1995 which requires 12 months’
notice to be given by the Company and nine months’
notice to be given by Mr Flint.
S K Green, who is to stand for re-election at the
forthcoming Annual General Meeting, is employed
on a rolling contract dated 9 March 1998 which
requires 12 months’ notice to be given by either
party.
A W Jebson, who is to stand for re-election at
the forthcoming Annual General Meeting, is
employed on a rolling contract dated 14 January
2000 which requires 12 months’ notice to be given
by either party.
Sir Keith Whitson is employed on a rolling
contract dated 1 August 1992 which requires 12
months’ notice to be given by either party.
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’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 subsequent Annual
General Meeting. Non-executive Directors have no
service contract and are not eligible to participate in
HSBC's share plans. Non-executive Directors’ terms
of appointment will expire in 2004 – Lord Butler, R
K F Ch’ien, W K L Fung, S Hintze, Sir John Kemp-
Welch, Lord Marshall, Sir Brian Moffat and Sir
Mark Moody-Stuart; and 2006 – Baroness Dunn, S
W Newton, H Sohmen, C S Taylor and Sir Brian
Williamson.
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 one such appointment. Any
remuneration receivable in respect of this
appointment is normally paid to the HSBC company
by which the executive Director is employed, unless
otherwise approved by the Remuneration
Committee.
In October 2000, the Remuneration Committee
granted an exemption for Sir John Bond to retain his
non-executive directors’ fees from the Ford Motor
Company, which are provided partly in the form of
deferred shares, to vest after five years.
179
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Audited Information
Directors’ emoluments
The emoluments of the Directors of HSBC Holdings for 2002 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.......................
Sir Keith Whitson ............
Non-executive Directors
Lord Butler.......................
R K F Ch’ien....................
Baroness Dunn.................
W K L Fung .....................
S Hintze ...........................
Sir John Kemp-Welch......
Lord Marshall ..................
Sir Brian Moffat...............
Sir Mark Moody-Stuart....
M Murofushi7...................
S W Newton8 ...................
C E Reichardt7 .................
H Sohmen9 .......................
Sir Adrian Swire7 .............
C S Taylor8……………...
Sir Brian Williamson8…
Total (£) ...........................
35
35
35
21
35
35
35
35
40
167 5
35
61 6
35
48
45
45
40
15
9
18
27
15
17 10
9
892
Total (US$) ......................
1,338
926
339
566
417
567
463
437
722
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
26
576
8
6
1
13
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
923
235
– 2
212
350
461
175 4
1,400
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
2002
£000
1,885
609
627
1,226
960
965
648
2,170
40
167
35
61
35
48
45
45
40
15
9
18
27
15
17
9
Total
2001
£000
1,820
609
612
1,204
848
797
715
1,515
40
164
35
62
29
44
43
45
31
35
–
43
28
35
–
–
4,437
6,658
631
947
3,756
5,636
9,716
14,579
8,834
12,718
1
2
3
4
5
6
7
8
9
10
These discretionary bonuses are in respect of 2002 and will be paid in 2003.
In return for the prior waiver of bonus, the employer contribution into the pension scheme has been increased by the amount of
£400,000 (2001: £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.
In return for a partial prior waiver of bonus, the employer contribution into the pension scheme has been increased by the amount of
£175,000 (2001: £nil) which would otherwise have been paid.
Includes fees as non-executive Chairman of HSBC Private Equity (Asia) Limited and as a non-executive Director of The Hongkong
and Shanghai Banking Corporation Limited.
Includes fee as a non-executive Director of The Hongkong and Shanghai Banking Corporation Limited.
Retired on 31 May 2002.
Appointed on 27 September 2002.
H Sohmen has elected to waive any fees payable to him by HSBC Holdings - 2002: £35,000 (2001: £35,000).
Includes fee as a non-executive Director of HSBC Bank USA.
180
H Sohmen has elected to waive any fees
payable to him by HSBC Holdings.
£400,000 (2001: £300,000), of £529,000 (2001:
£429,000).
A fee of £25,000 (2001: £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 and
occupation of the new HSBC headquarters.
Following the dissolution of this committee,
payment of the fee ceased, with effect from 31
December 2002.
Pensions
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. With three exceptions (see
paragraphs below 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.
The pension arrangements for Sir John Bond,
S K Green, A W Jebson and Sir Keith 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 UK. In addition, until 2001, supplementary
provision was made for S K Green, via an employer
contribution to a personal pension plan, with £1,123
having been made during 2001.
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 supplementary
pension, payable from age 60, currently accrues at
the rate of €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 in 1998. 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 in
respect of 2002, including a bonus waiver of
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 2002 of £80,092
(2001: £78,150). The intention of these arrangements
is to provide benefits broadly comparable to an
accrual rate of one-thirtieth of pensionable salary for
each 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.
181
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Audited Information
Sir John Bond2...........................
C F W de Croisset .....................
W R P Dalton ............................
D G Eldon3 ...............................
S K Green..................................
A W Jebson5 ..............................
Sir Keith Whitson......................
Accrued annual
pension at 31
December 2002
£000
308
56
257
234
159
123
251 6
Increase in
accrued pension
during 2002
£000
20
7
6
21
19
17
29
Transfer value of
accrued pension
at 1 January 2002
£000 1
5,046
516
3,028
4,218
1,833
1,334
5,181 6
Transfer value of
accrued pension at
31 December 2002
£000 1
5,504
626
3,680
4,703
1,901
1,384
4,514
Increase of transfer
value of accrued
pension (less
personal
contributions)
1 January-
31 December 2002
£000 1
458
110
652
471 4
68
50
676
1
2
3
4
5
6
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 which, at 31 December 2002, is shown above.
On attaining age 53, D G Eldon has been able, under the terms of the scheme, to retire at any time with an immediate pension equal
to his accrued pension which, at 31 December 2002, is shown above.
D G Eldon made personal contributions towards his pension of £14,000 in respect of 2002.
A W Jebson's entitlement will be supplemented by an employer contribution of £175,000 in return for the prior waiver of part of his
bonus in respect of 2002.
In addition, Sir Keith Whitson had a deferred pension entitlement under the HSBC International Staff Retirement Benefits Scheme in
respect of his Group service up to 1992 prior to his transfer to the UK. This deferred pension entitlement was increased in
accordance with the Rules of the Scheme during the deferred period. This gave a pension entitlement at 1 January 2002 of £78,859
per annum and a pension entitlement of £84,678 per annum as at 31 October 2002. With the agreement of the Trustee, Sir Keith
Whitson exercised his option under the Rules of the Scheme to fully commute this accrued pension for a lump sum payment
amounting to £1,100,390, which was paid in November 2002. Sir John Bond, S K Green and A W Jebson were also members of the
HSBC International Staff Retirement Benefits Scheme but fully commuted their entitlement in 1993,1992 and 1994 respectively.
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 since
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. No
options held by the Directors lapsed during the year.
The market value of the ordinary shares at 31
December 2002 was £6.865. The highest and lowest
market values during the period were £8.66 and
£6.43. Market value is the mid-market price derived
from the London Stock Exchange Daily Official List
on the relevant date.
The following unfunded pension payments, in
respect of which provision has been made, were
made during 2002 to four former Directors of HSBC
Holdings:
2002
B H Asher ..........................
£81,564
R Delbridge ........................ £117,313
£48,918
Sir Brian Pearse ..................
£86,343
Sir William Purves..............
£334,138
2001
£80,277
£115,595
£48,147
£84,981
£329,000
The payments in respect of R Delbridge and Sir
Brian Pearse were made by HSBC Bank plc as
former Directors of the bank.
Share options
At 31 December 2002, the undernamed Directors
held options to acquire the number of HSBC
Holdings ordinary shares of US$0.50 each set
182
Options
held at
1 January
2002
75,000
2,798
206,000
–
Options
awarded
during
year
–
–
–
206,000
22,704
30,273
36,000
36,000
2,798
36,000
40,500
27,000
3,813 3
–
45,000 2
2,498
22,500 2
1,434
60,000
2,798
–
–
–
–
–
–
–
–
–
2,617 3
–
–
–
–
–
–
Options
exercised
during
year
–
–
–
–
–
–
–
–
–
–
–
–
3,813 5
–
45,000 6
–
22,500 7
–
–
–
Options
held at 31
December
2002
75,000 2
2,798 3
206,000
206,000
22,704
30,273
36,000
36,000 2
2,798 3
36,000
40,500 2
27,000 2
–
2,617
–
2,498 3
–
1,434 3
60,000 2
2,798 3
Sir John Bond..........
C F W de Croisset4 ..
W R P Dalton ..........
D G Eldon ...............
D J Flint...................
S K Green………
A W Jebson …….
Sir Keith Whitson....
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
8.7120 23 Apr 2001 23 Apr 2004 23 Apr 2011
7 May 2012
8.4050
7 May 2005
7 May 2002
12 Oct 1993
2.4062
8 Mar 1994
2.8376
7 Mar 1995
2.1727
3.3334
1 Apr 1996
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
6.3224
1 Apr 1996
9 Apr 1997
2 May 2002
1 Apr 1999
1 Aug 2002
1 Aug 2007
1 Apr 2006
31 Jan 2003
31 Jan 2008
3.3334
1 Apr 1996
6.7536 11 Apr 2001
1 Apr 1999
1 Aug 2006
1 Apr 2006
31 Jan 2007
3.3334
1 Apr 1996
6.7536 11 Apr 2001
1 Apr 1999
1 Aug 2004
1 Apr 2006
31 Jan 2005
3.3334
1 Apr 1996
6.0299 10 Apr 2000
1 Apr 1999
1 Aug 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. In accordance with agreements made at the time of the
acquisition of CCF there are no performance criteria conditional upon which the outstanding options are exercisable.
At the date of exercise, 8 August 2002, the market value per share was £7.45.
At the date of exercise, 13 March 2002, the market value per share was £8.34.
At the date of exercise, 22 March 2002, the market value per share was £8.045.
3
4
5
6
7
At 31 December 2002, C F W de Croisset
held the following options to acquire CCF shares
of €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 remaining performance criteria
conditional upon which the outstanding options are
exercisable.
183
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
CCF S.A. shares of €5 each
Options held at
1 January 2002
10,000
30,000
30,000
30,000
30,000
28,000
28,000
Exercise price
per share(€)
32.78
34.00
35.52
37.05
73.50
81.71
142.50
Options held at 31
December 2002
10,000
30,000
30,000
30,000
30,000
28,000
28,000
Equivalent HSBC Holdings
ordinary shares of US$0.50 each
at 31 December 2002
130,000
390,000
390,000
390,000
390,000
364,000
364,000
Date of award
23 Jun 1994
22 Jun 1995
9 May 1996
7 May 1997
29 Apr 1998
7 Apr 1999
12 Apr 2000
Exercisable from
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
No options over CCF shares of €5 each were
awarded to or exercised by C F W de Croisset
during the year.
Save as stated above, 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.
184
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 ..................................................
Sir Keith Whitson.........................................
Awards
held at
1 January
2002
Awards Monetary value
of awards made
during year
(£000)
made
during
year
28,501
55,353
81,791
76,651
–
19,003
32,290
37,178
43,801
–
22,799
32,290
37,178
7,079
43,801
6,454
–
–
19,003
32,290
33,460
54,751
–
22,799
32,290
37,178
76,651
–
9,502
27,677
29,742
65,701
–
22,799
46,128
52,049
60,226
–
–
10,045 2
–
–
114,779 3
–
5,859 2
–
–
72,492 3
–
5,859 2
–
–
–
–
48,328 3
9,176 4
–
5,859 2
–
–
72,492 3
–
5,859 2
–
–
90,615 3
–
5,022 2
–
–
84,574 3
–
8,371 2
–
–
90,615 3
–
84
–
–
950
–
49
–
–
600
–
49
–
–
–
–
400
75
–
49
–
–
600
–
49
–
–
750
–
42
–
–
700
–
70
–
–
750
Awards
held at 31
December
2002 1
29,746
67,996
85,365
80,001
119,795
19,833
39,665
38,803
45,715
75,660
23,796
39,665
38,803
7,388 4
45,715
6,736 4
50,440
9,340
19,833
39,665
34,922
57,144
75,660
23,796
39,665
38,803
80,001
94,575
9,917
33,998
31,041
68,572
88,270
23,796
56,663
54,323
62,858
94,575
Year in
which
awards
may vest
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
2003
2004
2005
2003
2006
2004
2007
2005
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
Date of
award
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
2 Mar 1998
4 Mar 1999
10 Mar 2000
3 Apr 2000
12 Mar 2001
30 Apr 2001
8 Mar 2002
15 May 2002
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
Unless otherwise indicated, vesting of these shares is subject to the performance tests described in the ‘Report of the Directors’ in the
1998, 1999, 2000 and 2001 Annual Report and Accounts respectively being satisfied.
1
2
3
4
Includes additional shares arising from scrip dividends.
In accordance with the performance conditions over the three-year period to 31 December 2001 set out in the Annual Report and
Accounts 1998, an additional award of 20 per cent of the initial performance share award was made on 7 May 2002. The market
value per share on 7 May 2002 was £8.405. The shares acquired by the Trustee of the Plan were purchased at an average price of
£8.13.
The market value per share on 8 March 2002 was £8.34. The shares acquired by the Trustee of the Plan were purchased at an
average price of £8.28.
50 per cent of D G Eldon’s discretionary bonus for 1999, 2000 and 2001 respectively was awarded in Restricted Shares with a
three-year restricted period.
185
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
On behalf of the Board
Sir Mark Moody-Stuart, Chairman of Remuneration Committee
3 March 2003
186
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 188, 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 190 to 313, 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
3 March 2003
187
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 190 to 313. We have also audited certain of the information in
the directors’ remuneration report that is required to be audited by the Companies Act 1985; this information is set
out on pages 180 to 186.
Respective responsibilities of Directors and Auditors
The directors are responsible for preparing the Annual Report, the Annual Report on Form 20-F and the directors’
remuneration report. As described on page 187, 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 in the
United Kingdom by statute, the Auditing Practices Board in the United Kingdom and the auditing standards
generally accepted in 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 in our United Kingdom opinion as to whether the financial statements give a true and fair view
and whether the financial statements and the part of the directors’ remuneration report required to be audited have
been 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 has not kept proper accounting
records, if we have not received all the information and explanations we require for our audit, or if information
specified by law regarding directors’ remuneration and transactions with HSBC Holdings together with its
subsidiary undertakings (‘HSBC’) is not disclosed.
We review whether the statement on pages 162 to 164 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, including the corporate governance statement
and the unaudited part of the directors’ remuneration report, 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 of the financial statements in accordance with auditing standards issued by the Auditing
Practices Board in the United Kingdom and those generally accepted in 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 conducted our audit of the part of the directors’ remuneration report required
to be audited by the Companies Act 1985 in accordance with auditing standards issued by the Auditing Practices
Board in the United Kingdom.
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
and the part of the directors’ remuneration report required to be audited by the Companies Act 1985 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 and the part of the
directors’ remuneration report required to be audited by the Companies Act 1985.
188
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 2002 and of the profit of HSBC for the year then ended; and
the financial statements and the part of the directors’ remuneration report required to be audited have been
properly prepared in accordance with the Companies Act 1985.
United States opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of HSBC and HSBC Holdings as at 31 December 2002 and 2001, and the results of HSBC’s operations and
cash flows for each of the years in the three-year period ended 31 December 2002, 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 2002 and the shareholders’ equity as of 31 December 2002 and 2001 to the extent
summarised in Note 50 of ‘Notes on the Financial Statements’.
KPMG Audit Plc
Registered Auditor
Chartered Accountants, London
3 March 2003
189
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 2002
Note
2002
US$m
2001*
US$m
2000*
US$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/(losses) 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 year ........................................
Basic earnings per ordinary share ..................................
Diluted earnings per ordinary share ...............................
Dividends per ordinary share .........................................
Movements in reserves are set out in Note 36.
10
11
11
10
7,253
21,342
(13,135)
15,460
278
9,245
(1,421)
1,313
1,720
26,595
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
(13,764)
(13,471)
(12,496)
(1,190)
(854)
10,787
(1,134)
(799)
10,484
(1,081)
(510)
10,486
(1,321)
(2,037)
(932)
(39)
(68)
(324)
9,035
(28)
135
532
(24)
9,650
(2,534)
7,116
(505)
(372)
6,239
(5,001)
1,238
US$
0.67
0.66
0.530
(649)
(520)
(125)
7,153
(91)
164
754
20
8,000
(1,988)
6,012
(579)
(441)
4,992
(4,467)
525
US$
0.54
0.53
0.480
(71)
–
(36)
9,447
(51)
75
302
2
9,775
(2,409)
7,366
(558)
(351)
6,457
(4,010)
2,447
US$
0.74
0.73
0.435
The accompanying notes are an integral part of the Consolidated Financial Statements.
* Figures for 2001 and 2000 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details
of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
190
Consolidated balance sheet at 31 December 2002
Notes
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 ....................................................................................................
: gross assets..........................................................
Interests in joint ventures
: 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.............................................................................
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
Commitments ...................................................................................................
39
Sir John Bond, Group Chairman.
2002
US$m
7,659
5,651
18,141
9,445
95,496
352,344
175,730
8,213
486
(296)
190
1,116
651
17,163
14,181
45,884
7,382
759,246
9,445
52,933
495,438
4,634
34,965
72,090
7,574
1,154
3,683
3,540
14,831
2,122
4,431
4,741
3,647
8,729
1,954
33,335
52,406
759,246
4,711
46,527
17
51,255
225,629
2001*
US$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
14,564
13,521
38,632
7,566
696,245
8,637
53,640
449,991
3,798
27,098
72,623
7,149
1,057
3,883
3,479
12,001
2,210
4,291
4,678
3,373
8,770
2,271
27,296
46,388
696,245
4,219
39,817
9
44,045
198,459
The accompanying notes are an integral part of the Consolidated Financial Statements.
*
Figures for 2001 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of which
are set out in Note 1 on the Financial Statements on pages 195 to 197.
191
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 2002
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 .......................................................
Subordinated liabilities
– owed to third parties................................................................................
– owed to HSBC undertakings ...................................................................
Other creditors ............................................................................................
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.
Notes
25
26
33
10
33
32
35
36
36
36
36
2002
US$m
2
57,637
4,163
484
514
62,800
5,708
1,634
1,012
28
8,382
870
9,252
(1,370)
–
(350)
(196)
(3,069)
(4,985)
4,267
67,067
(5,790)
(3,686)
(5,092)
(93)
52,406
4,741
3,647
37,010
439
6,569
52,406
2001*
US$m
7
49,762
4,172
441
555
54,937
2,685
1,794
301
8
4,788
728
5,516
(973)
(599)
–
(184)
(2,700)
(4,456)
1,060
55,997
(2,221)
(3,856)
(3,434)
(98)
46,388
4,678
3,373
32,581
480
5,276
46,388
*
Figures for 2001 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of which
are set out in Note 1 on the Financial Statements on pages 195 to 197.
192
Statement of total consolidated recognised gains and losses for the year ended 31 December 2002
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...................................................
Total recognised gains and losses for the year .............................
2002
US$m
6,239
(22)
(1)
(297)
–
3,781
9,700
2001*
US$m
2000*
US$m
4,992
6,457
(18)
(5)
(227)
–
(1,242)
6
8
357
4
(1,064)
3,500
5,768
Prior period adjustment (as explained in Note 1) ........................
409
Total gains and losses since last annual report.............................
10,109
Reconciliation of movements in consolidated shareholders’ funds for the year ended 31 December
2002
Profit for the financial year attributable to shareholders ..............
Dividends.....................................................................................
Other recognised gains and losses relating to the year ................
New share capital subscribed, net of costs...................................
New share capital issued in connection with the acquisition of
CCF ..........................................................................................
Reserve in respect of obligations under CCF share options.........
Amounts arising on shares issued in lieu of dividends ................
Capitalised reserves arising on issue of shares to a qualifying
employee share ownership trust (‘QUEST’) ............................
Net addition to shareholders’ funds .............................................
Shareholders’ funds at 1 January as reported...............................
Prior period adjustment (as explained in Note 1).........................
Shareholders’ funds at 1 January .................................................
2002
US$m
6,239
(5,001)
1,238
3,461
337
–
(41)
1,023
–
6,018
45,979
409
46,388
Shareholders’ funds at 31 December ...........................................
52,406
2001*
US$m
4,992
(4,467)
525
(1,492)
112
–
(16)
866
–
(5)
45,570
823
46,393
46,388
2000*
US$m
6,457
(4,010)
2,447
(689)
488
8,629
496
944
(324)
11,991
33,408
994
34,402
46,393
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.
* Figures for 2001 and 2000 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details
of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
193
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 2002
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 inflow/(outflow) 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) from acquisitions and disposals ...........
Equity dividends paid ...........................................................
Net cash inflow/(outflow) 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
2002
US$m
16,426
114
(29)
(870)
(480)
(357)
(1,736)
(1,371)
(130,171)
122,559
(1,723)
328
2001
US$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)
(148,826)
145,361
(1,873)
557
(175,176)
180,044
(1,663)
383
(9,007)
(4,781)
3,588
264
–
–
(649)
341
(44)
(3,609)
773
337
–
–
(50)
4,105
(1,923)
2,469
3,242
(834)
26
–
(154)
79
(883)
(3,528)
(484)
112
–
–
(825)
456
(965)
(1,222)
(1,706)
687
333
(9,733)
(54)
138
(8,629)
(2,193)
3,996
164
3,626
(556)
–
948
(708)
3,474
7,470
Net cash inflow/(outflow) from financing ........................... 42
Increase/(decrease) in cash................................................... 43
The accompanying notes are an integral part of the Consolidated Financial Statements
194
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 19 ‘Deferred Tax’ with
effect from 1 January 2002, and the transitional arrangements of FRS 17 ‘Retirement benefits’, which require
additional disclosures only. For a discussion of the impact of the adoption of FRS 19 see Note 1(e) below.
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’ contains
recommendations on accounting for insurance business for insurance companies and insurance groups. HSBC is
primarily a banking group, rather than an insurance group, and, consistent with previously established practice
for such 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.
In this connection, management believes that the critical accounting policies are those in relation to provisions
for bad and doubtful debts, goodwill impairment, and the valuation of unquoted and illiquid debt and equity
securities. Application of these policies and the key estimates and assumptions used are described in the
Financial Review section on pages 96 to 98 under the heading ‘Critical Accounting Policies’.
(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.
(e) The adoption of FRS 19 has required a change in the method of accounting for deferred tax. Deferred tax is now
recognised in full, subject to recoverability of deferred tax assets. Previously, deferred tax assets and liabilities
were recognised only to the extent they were expected to crystallise. As deferred tax liabilities have generally
been fully provided, the main impact of the change in method for HSBC has been the recognition of deferred tax
assets previously not recognised. The change in accounting policy has been reflected by way of a prior period
adjustment. The comparative figures have been restated as follows:
195
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 – tax on profit on ordinary activities
Figures in US$m
Under previous policy...............................
Adoption of FRS 19..................................
Under new policy......................................
HSBC
2001
(1,574)
(414)
(1,988)
2000
(2,238)
(171)
(2,409)
HSBC Holdings
2001
183
(112)
71
2000
227
(191)
36
The effect on the results for the current period of the adoption of FRS 19 is immaterial.
Consolidated balance sheet
Figures in US$m
At 31 December 2001
Under previous policy....
Adoption of FRS 19.......
Under new policy...........
At 31 December 2000
Under previous policy....
Adoption of FRS 19.......
Under new policy...........
At 31 December 1999
Under previous policy....
Adoption of FRS 19.......
Under new policy...........
Intangible
fixed assets
Other assets
Provisions for
liabilities and
charges –
deferred tax
Minority
interests –
equity
14,581
(17)
14,564
15,089
(17)
15,072
6,541
34
6,575
38,247
385
38,632
35,562
468
36,030
29,363
735
30,098
1,109
(52)
1,057
1,251
(383)
868
1,388
(236)
1,152
2,199
11
2,210
2,138
11
2,149
2,072
11
2,083
Reserves
41,301
409
41,710
40,936
823
41,759
29,178
994
30,172
HSBC Holdings balance sheet
Figures in US$m
At 31 December 2001
Under previous policy...........................
Adoption of FRS 19..............................
Under new policy..................................
At 31 December 2000
Under previous policy...........................
Adoption of FRS 19..............................
Under new policy..................................
At 31 December 1999
Under previous policy...........................
Adoption of FRS 19..............................
Under new policy..................................
Investments in
subsidiary
undertakings
Provisions for
liabilities and
charges –
deferred tax
Revaluation
reserve
Profit and loss
account reserve
49,353
409
49,762
46,395
711
47,106
32,079
691
32,770
98
–
98
173
(112)
61
289
(303)
(14)
32,172
409
32,581
31,652
711
32,363
21,874
691
22,565
5,276
–
5,276
5,483
112
5,595
4,422
303
4,725
196
The increase in HSBC’s tax charge for 2001 as restated can be explained as follows:
•
•
•
reversal of benefit taken in 2001 under SSAP 15 in respect of deferred tax assets attributable under FRS 19
to prior periods;
reversal of a benefit taken in 2001 under SSAP 15 in respect of the utilisation and release of a provision for
additional UK tax on remittances from overseas, such provisions not being permissible under FRS 19; and
establishment of a provision required under FRS 19 in respect of a possible claw-back of capital
allowances.
The increase in HSBC’s tax charge for 2000 as restated can be explained as follows:
•
•
reversal of a benefit taken in 2000 under SSAP 15 in respect of the utilisation of a provision for additional
UK tax on remittances from overseas, such provisions not being allowable under FRS19; and
reduction in the deferred tax asset under FRS19 relating to general bad debt provisions in line with the
reduction in the underlying general provisions.
The increase in HSBC Holdings’ tax charge for 2001 as restated can be explained as follows:
•
reversal of a benefit taken in 2001 under SSAP15 in respect of the utilisation and release of a provision for
additional UK tax on remittances from overseas, such provisions not being permissible under FRS19.
The increase in HSBC Holdings’ tax charge for 2000 as restated can be explained as follows:
•
•
reversal of a benefit taken in 2000 under SSAP15 in respect of the utilisation and release of a provision for
additional UK tax on remittances from overseas, such provisions not being permissible under FRS19; and
reduction in the deferred tax asset under FRS19 relating to various provisions.
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
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.
197
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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.
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.
Loan write-offs
Loans and suspended interest are written off, either partially or in full, when there is no prospect of recovery of
these amounts.
Assets acquired in exchange for advances
Assets acquired in exchange for advances in order to achieve an orderly realisation continue to be reported as
198
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’.
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’.
(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. Negative goodwill
arises on the acquisition of subsidiary undertakings, joint ventures and associates when the fair value of
HSBC’s share of separable net assets acquired exceeds the cost of acquisition. 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
199
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
attributable goodwill. Negative goodwill is credited in the profit and loss account in the periods expected to
be benefited.
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
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 tax is recognised in full on timing differences between the accounting and taxation treatment of
income and expenditure, subject to assessment of the recoverability of deferred tax assets. Deferred tax balances
are not discounted.
(h) Pension and other post-retirement benefits
HSBC operates a number of pension and other post-retirement benefit schemes throughout the world.
200
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 comprise futures, forward, swap and option transactions undertaken by
HSBC in the foreign exchange, interest rate, equity and credit derivative markets. Netting is applied where a
legal right of set-off 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 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, equities and credit
derivative contracts which are marked-to-market are included in ‘Other assets’. Liabilities, including losses,
resulting from such contracts, are included in ‘Other liabilities’.
201
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 and any profit or loss arising is taken to the profit
and loss account.
(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
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 ...........................................................................
2002
US$m
274
4
278
2001
US$m
184
2
186
2000
US$m
195
2
197
202
4 Analysis of income from dealing in financial instruments
2002
Dividend
and net
Dealing
interest
Total
profits
income
US$m US$m US$m
1,210
1,167
43
47
75
24
1,313
(7 )
259
186
481
40
334
210
2001
Dividend
and net
interest
income
US$m
1
20
174
75
270
2000
Dividend
and net
interest
income
US$m
18
16
161
52
247
Total
US$m
1,121
179
485
170
Dealing
profits
US$m
965
57
281
323
1,955
1,626
Dealing
profits
US$m
1,120
159
311
95
1,794
1,685
Foreign exchange .....
Interest rate
derivatives ............
Debt securities..........
Equities and other
trading ..................
5 Administrative expenses
(a)
Staff costs
– wages and salaries ..............................................................
– social security costs ............................................................
– retirement benefits (Note 5(b) below) ................................
Premises and equipment (excluding depreciation).................
Other administrative expenses ...............................................
2002
US$m
7,367
630
612
8,609
1,824
3,331
13,764
2001
US$m
7,329
613
611
8,553
1,639
3,279
13,471
The average number of persons employed by HSBC during the year was made up as follows:
Europe....................................................................................
Hong Kong.............................................................................
Rest of Asia-Pacific ...............................................................
North America .......................................................................
South America* .....................................................................
2002
Number
76,924
24,452
27,584
22,262
26,253
177,475
2001
Number
77,435
25,081
25,142
21,136
27,888
176,682
Total
US$m
983
73
442
375
1,873
2000
US$m
7,139
454
464
8,057
1,480
2,959
12,496
2000
Number
68,208
24,446
22,020
21,489
26,465
162,628
*
Formerly described as Latin America, which included Group entities in Panama and Mexico, which are now included in North
America. Figures for 2001 and 2000 have been restated to reflect this change
(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. Prior to full implementation,
which has been deferred until accounting periods beginning on or after 1 January 2005, phased transitional
203
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 169 pension schemes throughout the world, covering 91% of HSBC’s employees,
with a total pension cost of US$558 million (2001: US$572 million; 2000: US$422 million;), of which
US$316 million (2001: US$349 million; 2000: US$210 million) relates to overseas schemes. Of the
overseas schemes, US$43 million (2001: US$31 million; 2000:US$30 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 53% 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$406 million (2001: US$428 million; 2000: US$341
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
actuarial valuation as at 31 December 2002 is currently in the course of preparation based on the
circumstances as at that date. 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.
Following an interim review, HSBC decided to increase contributions from 16.9% to 20.0% of pensionable
salaries with effect from 1 August 2002, until completion of the actuarial valuation as at 31 December
2002.
HSBC has given preliminary consideration to its funding strategy in advance of knowing the results of the
2002 triennial valuation. The funding policy itself 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. Full valuation
calculations are currently in hand but HSBC anticipates there will be a shortfall of at least US$800 million
on the funding basis which will be adopted for the Scheme. HSBC has therefore decided to pay this
amount into the Scheme (this amount has been paid since the year end). Further contributions to the
Scheme will be assessed after considering the advice of the independent Scheme Actuary and taking into
account long-term rates of returns on the underlying investments assessed with an appropriate degree of
prudence.
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
scheme comprises a funded defined benefit scheme (which is a lump sum 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 2002 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
204
US$794 million. On an ongoing basis, the actuarial value of the scheme’s assets represented 111% of the
benefits accrued to members, after allowing for expected future increases in salaries, and the resulting
surplus amounted to US$81 million. On a wind-up basis, the actuarial value of the scheme’s assets
represents 114% of the members’ vested benefits, based on current salaries, and the resulting surplus
amounted to US$100 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 5.5% per annum and salary
increases of 4.5% 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 2002 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$772 million. The
actuarial value of the assets represented 92% of the benefits accrued to members, after allowing for
expected future increases in earnings, and the resulting deficit amounted to US$67 million. This deficit was
eliminated by means of contributions made to the scheme in 2002. The method employed for this valuation
was the projected unit credit method and the main assumptions used were a discount rate of 7.25% per
annum and average salary increases of 4.0% 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 37% (2001: 42%, 2000: 45%) of HSBC’s
employees.
The pension cost for defined contribution schemes, which cover 38% (2001: 41%; 2000: 24%) of HSBC’s
employees, was US$152 million (2001: US$144 million; 2000: US$81 million).
(ii) FRS 17 Retirement Benefits
At 31 December 2002 the assumptions used to calculate scheme liabilities for HSBC’s main defined benefit
pension schemes under FRS 17 are:
Rate of increase
for pensions in
payment and
deferred
pension
%
2.25
N/A
N/A
2.25
5.0
5.0
2.0
0-1.5
Inflation
Assumption
%
2.25
N/A
2.5
2.25
5.0
5.0
2.0
1.5-2.0
Discount
rate
%
5.6
5.5
6.75
5.6
10.78
10.25
5.5
3.75-6.75
Rate of pay
increase
%
2.75
4.5
3.75
4.0
7.62
6.05
3.5
2.5-3.0
United Kingdom ...............
Hong Kong .......................
United States.....................
Jersey ................................
Mexico ..............................
Brazil ................................
France ...............................
Other .................................
205
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
At 31 December 2001 the assumptions used to calculate scheme liabilities for HSBC’s main defined benefit
pension schemes under FRS 17 were:
Discount
rate
%
5.9
6.5
7.25
5.9
10.25
5.5
4.5-6.25
Inflation
Assumption
%
2.5
N/A
2.75
2.5
5.0
2.0
1.5-2.0
Rate of increase
for pensions in
payment and
deferred
pension
%
2.5
N/A
N/A
2.5
5.0
2.0
1.5-2.0
Rate of pay
increase
%
3.75
6.0
4.0
4.25
6.05
3.5
2.5-3.5
United Kingdom.....................
Hong Kong.............................
United States ..........................
Jersey......................................
Brazil......................................
France.....................................
Other ......................................
The assets in the defined benefit schemes and the expected rates of return are:
HSBC Bank (UK) Pension
Scheme
Other Schemes
Expected rate of
return at 31
December
2002
%
Value at 31
December
2002
US$m
Expected rate of
return at 31
December
2002
%
Value at 31
December
2002
US$m
Equities ..........................................
Bonds .............................................
Property..........................................
Other ..............................................
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....
10.75
6.3
–
3.1
8.5
5.0
7.0
3.75
5,682
2,032
1,139
415
9,268
(12,094)
(2,826)
848
(1,978)
1,491
1,418
–
402
3,311
(4,030)
(719) *
150
(569)
402
(167)
* Of the deficit in other schemes, US$832 million relates to schemes in deficit and US$113 million relates to schemes in surplus.
Of the schemes in deficit, US$442 million relates to unfunded pension schemes in respect of which a provision, net of deferred
tax, of US$402 million has been made. In relation to main schemes, there is a surplus of US$86 million in HSBC Group Hong
Kong Local Staff Retirement Benefit Scheme and a deficit of US$79 million in HSBC Bank USA Pension Plan.
The net pension liability will have a consequent effect on reserves when FRS17 is fully implemented.
206
The defined benefit section of the HSBC Bank (UK) Pension Scheme and the HSBC Group Hong Kong Local
Staff Retirement Benefit Scheme are closed to new entrants. For these schemes the current service cost will
increase as the members of the scheme approach retirement under the projected unit credit method.
HSBC Bank (UK) Pension
Scheme
Other Schemes
Expected rate of
return at 31
December
2001
%
Value at 31
December
2001
US$m
Expected rate of
return at 31
December
2001
%
Value at 31
December
2001
US$m
9.7
6.0
–
3.4
7.5
5.1
7.5
4.0
6,385
1,329
1,066
865
9,645
(10,736)
(1,091)
327
(764)
Equities ......................................
Bonds .........................................
Property......................................
Other ..........................................
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 ...................................
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$48 million in HSBC Bank USA Pension Plan.
The following amounts would be reflected in the profit and loss account and statement of total
consolidated recognised gains and losses on implementation of FRS 17:
Year ended 31 December 2002
Amount that would be charged to operating profit
Current service cost...................................................................................
Past service cost ........................................................................................
Total operating charge...............................................................................
Amount that would be credited to other finance income
Expected return on pension scheme assets ................................................
Interest on pension scheme liabilities........................................................
Net return ..................................................................................................
HSBC Bank
(UK)
Pension
Scheme
US$m
280
–
280
673
(645)
28
Other
Schemes
US$m
184
–
184
236
(234)
2
207
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Year ended 31 December 2002
HSBC Bank
(UK)
Pension
Scheme
US$m
Other
Schemes
US$m
Amount that would be recognised in the statement of total consolidated
recognised gains and losses
Actual return less expected return on pension scheme assets ......................
Experience gains and losses arising on the scheme liabilities......................
Changes in assumptions underlying the present value of the scheme
liabilities
Actuarial loss ...............................................................................................
Movement in pension scheme deficit during the year
Deficit in the pension schemes at 1 January 2002 .......................................
Movement in year:
Current service cost ...................................................................................
Contributions .............................................................................................
Other finance income.................................................................................
Actuarial loss .............................................................................................
Exchange and other movements ................................................................
Deficit in the pension schemes at 31 December 2002
History of experience gains and losses
Difference between expected and actual return on scheme assets:
amount .......................................................................................................
percentage of scheme assets.......................................................................
Experience gains and losses arising on scheme liabilities:
amount .......................................................................................................
percentage of the present value of scheme liabilities .................................
(1,825)
(18)
402
(1,441)
(1,091)
(280)
191
28
(1,441)
(233)
(2,826)
(1,825)
(20% )
(18)
(0.1% )
Total amount recognised in the statement of total consolidated gains and
losses:
amounts......................................................................................................
percentage of the present value of scheme liabilities .................................
(1,441)
(12% )
(510)
95
59
(356)
(654)
(184)
445
2
(356)
28
(719)
(510)
(15% )
95
2%
(356)
(9% )
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.
(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, Mexico and Brazil. The charge relating to these schemes is US$54 million for the
year (2001: US$39 million; 2000:US$42 million). The schemes are unfunded, except for the scheme in Mexico
which had assets of US$13 million at 31 December 2002 comprising US$2 million in equities, US$6 million in
bonds and US$5 million in cash. The latest full actuarial valuations of the liability were carried out at dates
between 31 December 1999 and 31 December 2002 by independent qualified actuaries and have been updated
to 31 December 2002 as necessary. This latest actuarial review (in accordance with FRS 17) estimated the
present value of the accumulated post-retirement benefit obligation at US$491 million (2001: US$404 million;
2000: US$411 million), of which US$366 million (2001: US$269 million; 2000: US$253 million) has been
provided and US$13million is held in assets in the funded scheme in Mexico. 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
208
2002 were price inflation of 2.5% per annum (2001: 2.5%), health-care claims cost escalation of 7.5% per
annum (2001: 7.5%) and a discount rate of 5.6% per annum (2001: 5.9%). Under FRS 17, the deferred tax asset
related to the unprovided liability of US$112 million (2001: US$135 million) would be US$38 million (2001:
US$47 million).
The movement in the FRS 17 liability is as follows:
Deficit at 1 January 2002 ...........................................................................................................
Current service cost....................................................................................................................
Contributions..............................................................................................................................
Interest cost on liabilities............................................................................................................
Experience gains and losses arising on liabilities.......................................................................
Change in assumptions underlying the present value of scheme liabilities ................................
Acquisition of subsidiary undertaking........................................................................................
Exchange and other movements.................................................................................................
Deficit at 31 December 2002 ....................................................................................................
US$m
(404)
(5)
15
(28)
(21)
40
(67)
(8)
(478)
(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 ..............................
2002
US$000
1,338
7,605
5,636
14,579
514
–
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
In addition, there were payments under retirement benefit agreements with former Directors of US$501,000
(2001: US$472,000; 2000: US$483,000). The provision as at 31 December 2002 in respect of unfunded pension
obligations to former Directors amounted to US$6,942,000 (2001: US$6,281,000; 2000: US$6,535,000).
During the year, aggregate contributions to pension schemes in respect of Directors were US$1,592,024 (2001:
US$1,462,000; 2000: US$798,000).
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 165 to 167 and ‘Directors’ Remuneration Report’ on pages
170 to 186.
209
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(d) Auditors’ remuneration
Auditors’ remuneration amounted to US$24.8 million (2001:US$24.3 million; 2000: US$25.8 million). In
addition, US$13.8 million (2001: US$13.3 million; 2000: US$15.0 million) was paid by HSBC companies to
the HSBC Holdings’ auditor and its associates for non-audit work analysed as follows:
2002
US$m
2001
US$m
2000
US$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)
Total independent attestation
Acquisition due diligence
Total audit–related services
Taxation services
Other Services
– group reorganisation
– financial systems
– consultancy services
– other
Total other services
0.3
0.1
5.2
5.6
0.8
6.4
3.3
0.5
0.1
2.0
1.5
4.1
0.2
0.4
5.0
5.6
0.6
6.2
2.1
0.6
0.8
1.9
1.7
5.0
0.1
0.5
3.7
4.3
5.2
9.5
2.1
0.5
0.3
0.8
1.8
3.4
Total non-audit fees paid to KPMG
13.8
13.3
15.0
Of fees paid to auditors for non-audit work, US$0.4 million were capitalised (2001: US$0.4 million; 2000:
US$4.8 million).
6 Loss from foreign currency redenomination in Argentina
The losses in 2002 reflect the further impact of the pesification at the start of the year including revisions to
government decrees, renegotiation of banking contracts and payments to certain customers who had obtained court
orders requiring HSBC to repay their deposits historically denominated in US dollars at current market rates rather
than the pesification rate specified by the Argentine Government. The loss of US$520 million in 2001 arose on the
redenomination by the Argentine Government of certain in-country US dollar assets and liabilities into pesos at
various mandatory but different rates of exchange.
210
7
Profit on ordinary activities before tax
Profit on ordinary activities before tax is stated after:
(a)
Income
Aggregate rentals receivable, including capital repayments,
under
– finance leases and hire purchase contracts............................
– operating leases.....................................................................
Income from listed investments ...............................................
Profits less losses on debt securities and equities dealing
Gains on disposal of investment securities ..............................
(b) Charges
Charges incurred with respect to subordinated liabilities ........
Finance charges in respect of finance leases and similar hire
purchase contracts ................................................................
Hire of plant and machinery.....................................................
Rentals payable on premises held under operating leases........
2002
US$m
2001
US$m
2000
US$m
2,502
490
4,361
19
405
862
36
81
548
3,458
465
4,761
348
475
2,956
481
4,534
456
324
1,074
1,216
27
90
516
26
92
467
Gains on the disposal of investments and tangible fixed assets attracted a tax charge of US$86million (2001:
US$114million; 2000: US$82 million). Of the after-tax amount, US$23 million (2001: US$18 million; 2000: US$11
million) is attributable to minority interests.
8 Tax on profit on ordinary activities
The charge for taxation comprises:
United Kingdom corporation tax charge – current year..................
United Kingdom corporation tax charge – adjustment in respect of
prior years....................................................................................
Relief for overseas taxation.............................................................
Overseas taxation – current year ....................................................
Overseas taxation – adjustment in respect of prior years ................
Joint ventures ..................................................................................
Associates .......................................................................................
Current taxation ..............................................................................
Origination and reversal of timing differences...........................
Effect of decreased tax rate on opening asset.............................
Adjustment in respect of previous periods.................................
Deferred taxation ............................................................................
Total charge for taxation
2002
US$m
899
(68)
(147)
684
1,246
(29)
(6)
17
1,912
615
–
7
622
2,534
2001*
US$m
1,217
(261)
(540)
416
1,638
(68)
(13)
26
1,999
(176)
3
162
(11)
1,988
2000*
US$m
1,865
(39)
(970)
856
1,477
(9)
(7)
(1)
2,316
89
4
–
93
2,409
* The figures for 2001 and 2000 have been restated to reflect the adoption of UK Financial Reporting Standard 19 “Deferred Tax”
details of which are set out in Note 1 on the Financial Statements on pages 195 to 197 .
211
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Group tax charge...........................................................................
Joint ventures tax charge...............................................................
Associates tax charge....................................................................
Total charge for taxation...............................................................
2002
US$m
2,523
(6)
17
2,534
2001*
US$m
1,975
(13)
26
1,988
2000*
US$m
2,417
(7)
(1)
2,409
* The figures for 2001 and 2000 have been restated to reflect the adoption of UK Financial Reporting Standard 19 “Deferred Tax”
details of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
HSBC Holdings and its subsidiary undertakings in the United Kingdom provide for UK corporation tax at 30%
(2001: 30%; 2000: 30%). Overseas tax includes Hong Kong profits tax of US$408 million (2001: US$450 million;
2000: US$478 million). Subsidiary undertakings in Hong Kong provide for Hong Kong profits tax at the rate of 16%
(2001: 16%; 2000: 16%) on the profits for the year assessable in Hong Kong. Other overseas subsidiary
undertakings and overseas branches provide for taxation at the appropriate rates in the countries in which they
operate.
Analysis of overall tax charge:
Taxation at UK corporate tax rate of 30% (2001: 30%;
2000: 30%) ...............................................................................
Impact of differently taxed overseas profits in principal locations
Tax free gains................................................................................
Argentine losses unrelieved ..........................................................
Goodwill amortisation ..................................................................
Prior period adjustments ...............................................................
Other items....................................................................................
Overall tax charge ........................................................................
Timing differences subject to deferred tax:
Accelerated capital allowances .....................................................
Timing differences on lease income .............................................
Provision for bad and doubtful debts ............................................
Relief for losses brought forward..................................................
Provision for Princeton Note settlement .......................................
Other short term timing differences ..............................................
Deferred tax (charge)/credit ..........................................................
2002
US$m
2,895
(472)
(19)
87
261
(90)
(128)
2,534
23
(90)
(29)
(125)
(221)
(180)
(622)
2001*
US$m
2,400
(616)
(102)
336
263
(167)
(126)
1,988
(84)
(97)
46
85
221
(160)
11
2000*
US$m
2,932
(498)
(15)
–
172
(48)
(134)
2,409
22
(48)
(60)
18
–
(25)
(93)
Current tax charge.........................................................................
1,912
1,999
2,316
* The figures for 2001 and 2000 have been restated to reflect the adoption of UK Financial Reporting Standard 19 “Deferred Tax”
details of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
212
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 .......
2002
US$m
5,185
82
5,267
2001*
US$m
3,211
71
3,282
2000*
US$m
4,224
36
4,260
Profit on ordinary activities before tax includes dividend income from subsidiary undertakings for the years ended
31 December as follows:
Bank..............................................................................................
Non-bank ......................................................................................
2002
US$m
1,715
3,745
2001
US$m
2,156
1,251
2000
US$m
1,727
2,598
* The figures for 2001 and 2000 have been restated to reflect the adoption of UK Financial Reporting Standard 19 “Deferred Tax”
details of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
10 Dividends
First interim...................................
Second interim ..............................
2002
2001
2000
US$ per
share
0.205
0.325
0.530
US$m
1,932
3,069
5,001
US$ 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
Of the first interim dividend for 2002, US$166 million (2001: US$129 million; 2000: US$476 million) was settled
by the issue of shares. Of the second interim dividend for 2001, US$857 million (2000: US$737 million; 1999:
US$468 million) was settled by the issue of shares in 2002.
11 Earnings per ordinary share
Basic earnings per ordinary share was calculated by dividing the earnings of US$6,239 million (2001: US$4,992
million; 2000: US$6,457 million) by the weighted average number of ordinary shares, excluding own shares held,
outstanding in 2002 of 9,339 million (2001: 9,237 million; 2000: 8,777 million).
Diluted earnings per share was calculated by dividing the basic earnings, which require no adjustment for the effects
of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own
shares held, plus the weighted average number of ordinary shares that would be issued on ordinary conversion of
dilutive potential ordinary shares (being share options outstanding not yet exercised) in 2002 of 9,436 million (2001:
9,336 million; 2000: 8,865 million).
The effect of dilutive share options on the weighted average number of ordinary shares in issue is as follows:
Average number of shares in issue ...............................................
Savings-related Share Option Plan ...............................................
Executive Share Option Scheme...................................................
Restricted Share Plan ....................................................................
CCF share options.........................................................................
Average number of shares in issue assuming dilution ..................
Number of shares (millions)
2002
9,339
30
11
38
18
9,436
2001
9,237
46
4
27
22
9,336
Of the total number of employee share options existing at 31 December 2002, none were antidilutive (2001 and
2000: nil).
2000
8,777
57
5
17
9
8,865
213
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
12 Treasury bills and other eligible bills
Treasury bills and similar securities .............................................
Other eligible bills ........................................................................
2002
US$m
16,759
1,382
18,141
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 (2001: US$12,902 million; 2000:
US$15,862million) are non-trading book items; these are mainly short-term in maturity and are analysed below.
Investment securities:
At 1 January 2002 ................................................................................................................................
Additions .............................................................................................................................................
Acquisition of subsidiaries...................................................................................................................
Disposals and amounts repaid..............................................................................................................
Amortisation of discounts and premiums ............................................................................................
Exchange and other movements ..........................................................................................................
Cost and
book value
US$m
12,902
42,581
50
(43,434)
315
488
At 31 December 2002 .........................................................................................................................
12,902
The book value of non-trading 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.................................................
2002
US$m
2,888
740
2,898
5,344
1,032
12,902
2001
US$m
2,303
3,013
2,181
4,907
498
12,902
2000
US$m
2,165
2,716
2,007
7,416
1,558
15,862
The following tables provide an analysis of gross unrealised gains and losses for available-for-sale treasury bills and
other eligible bills:
31 December 2002
US Treasury and Government agencies .............
UK Government.................................................
Hong Kong SAR Government ...........................
Other governments.............................................
Corporate debt and other securities....................
Carrying
value
US$m
2,888
740
2,898
5,344
1,032
12,902
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
3
–
2
8
–
13
–
–
–
(1)
–
(1)
Market
valuation
US$m
2,891
740
2,900
5,351
1,032
12,914
214
31 December 2001
US Treasury and Government agencies ............
UK Government................................................
Hong Kong SAR Government ..........................
Other governments............................................
Corporate debt and other securities...................
31 December 2000
US Treasury and Government agencies ............
UK Government................................................
Hong Kong SAR Government ..........................
Other governments............................................
Corporate debt and other securities...................
Carrying
value
US$m
2,303
3,013
2,181
4,907
498
12,902
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$m
1
6
2
7
–
16
–
–
–
(3)
–
(3)
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
1
–
–
13
–
14
–
(15)
–
(6)
(24)
(45)
Market
valuation
US$m
2,304
3,019
2,183
4,911
498
12,915
Market
valuation
US$m
2,166
2,701
2,007
7,423
1,534
15,831
The amounts shown under “other governments” in the above table include securities with a book value of US$1,122
million (2001: US$1,793 million) and a market value of US$1,122 million (2001: US$1,792 million) issued by the
government of Japan.
The maturities of available-for-sale treasury bills and other eligible bills at 31 December 2002 are analysed as
follows:
1 year or less ..............................................................................................................
5 years or less but over 1 year....................................................................................
10 years or less but over 5 years ................................................................................
Carrying
value
US$m
12,344
510
48
12,902
Market
valuation
US$m
12,294
569
51
12,914
The following table provides an analysis of contractual maturities and weighted average yields of available-for-sale
treasury bills and other eligible bills as at 31 December 2002.
US Treasury and Government agencies ...............
UK Government...................................................
Hong Kong SAR Government .............................
Other governments...............................................
Corporate debt and other securities......................
Within one year
Amount
US$m
2,866
529
2,898
5,023
1,028
Yield
%
1.3
4.0
1.6
2.9
3.5
12,344
After one but within
five years
After five but within
ten years
Yield
%
6.1
5.2
–
7.4
–
Amount
US$m
11
211
–
284
4
510
Amount
US$m
11
–
–
37
–
48
Yield
%
6.2
–
–
5.4
–
215
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 114 to 116.
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 .......................................................................................................
2002
US$m
19,211
63,526
9,536
1,211
2,035
(23)
95,496
–
53
2002
US$m
48,463
74,193
41,444
97,068
100,293
(9,117)
352,344
187
655
61
29
460
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
216
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 ‘Reporting the substance of transactions’.
The non-recourse finance has been netted against customer loans as follows:
Customer loans ..........................................................................................................
Non-recourse finance.................................................................................................
Funding provided by HSBC
2002
US$m
2,294
(2,049)
245
2001
US$m
1,865
(1,659)
206
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, Clover
Funding No. 4 plc (collectively ‘Clover Funding’) and HSBC.
To fund the acquisition of this beneficial interest, Clover Funding has issued US$2,294 million (2001: 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. Non-returnable proceeds of
US$2,049 million (2001: US$ 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$66 million (2001: US$51 million) of subordinated FRNs that are repayable after payments
in respect of senior FRNs. HSBC has made subordinated loans of US$42 million (2001: US$33 million) 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$4 million (2001: US$3 million) which comprised US$96 million (2001: US$45
million) interest receivable by Clover Funding less US$92 million (2001: US$42 million) of interest on FRN’s and
other third party expenses payable by Clover Funding.
217
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
17 Provisions for bad and doubtful debts
At 1 January 2002 .............................................
Amounts written off..........................................
Recoveries of advances written off in previous
years.................................................................
Charge/(credit) to profit and loss account.........
Interest suspended during the year....................
Suspended interest recovered............................
Acquisition of subsidiaries................................
Exchange and other movements .......................
At 31 December 2002 ......................................
Included in:
Loans and advances to banks (Note 15)............
Loans and advances to customers (Note 16).....
At 1 January 2001 ..............................................
Amounts written off...........................................
Recoveries of advances written off in previous
years.................................................................
Charge to profit and loss account.......................
Interest suspended during the year.....................
Suspended interest recovered.............................
Acquisition of subsidiaries.................................
Exchange and other movements ........................
At 31 December 2001 ........................................
Included in:
Loans and advances to banks (Note 15).............
Loans and advances to customers (Note 16)......
Provisions against advances
Specific
US$m
5,522
(2,111)
180
1,672
–
–
1,278
88
6,629
General
US$m
2,661
–
–
(351)
–
–
426
(225)
2,511
Provisions against advances
Specific
US$m
6,095
(2,178)
285
1,464
–
–
–
(144)
5,522
General
US$m
2,102
–
–
573*
–
–
7
(21)
2,661
Suspended
interest
US$m
861
(327)
–
–
426
(214)
–
(180)
566
Suspended
interest
US$m
1,016
(437)
–
–
542
(228)
–
(32)
861
Total
US$m
8,183
(2,111)
180
1,321
–
–
1,704
(137)
9,140
23
9,117
9,140
Total
US$m
8,197
(2,178)
285
2,037
–
–
7
(165)
8,183
22
8,161
8,183
*
includes an additional general provision of US$600 million for Argentinian exposures.
218
At 1 January 2000.............................................
Amounts written off .........................................
Recoveries of advances written off in previous
years ...............................................................
Charge/(credit) to profit and loss account.........
Interest suspended during the year....................
Suspended interest recovered ...........................
Acquisition of subsidiaries ...............................
Exchange and other movements .......................
At 31 December 2000.......................................
Included in:
Loans and advances to banks............................
Loans and advances to customers.....................
Provisions against advances
Specific
US$m
5,716
(1,811)
160
1,212
–
–
941
(123)
6,095
General
US$m
2,304
–
–
(280)
–
–
146
(68)
2,102
Suspended
interest
US$m
1,073
(370)
–
–
689
(291)
2
(87)
1,016
Total
US$m
8,020
(1,811)
160
932
–
–
1,087
(191)
8,197
30
8,167
8,197
The total of customer advances, net of suspended interest, on which interest is being placed in suspense, is as
follows:
Gross.............................................................................................
Net of specific provisions .............................................................
2002
US$m
5,485
2,780
2001
US$m
6,022
2,936
2000
US$m
6,464
2,964
219
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:
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...............................
–
26,748
65,467
44,424
11,887
3,970
2,164
22,712
85,157
15,221
2,622
17,843
–
21,065
48,347
38,476
9,475
3,630
2,393
20,510
74,484
11,329
2,361
13,690
At 31 December 2002..................
168,467
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific †
US$m
North
America
US$m
South
America ¶
US$m
Total
US$m
38,719
23,839
7,507
26,666
253
96,984
27,282
23,125
5,134
22,126
548
78,215
7,255
7,066
38,160
10,173
8,336
4,805
719
6,612
30,645
2,055
347
2,402
71,207
–
5,900
13,407
12,582
2,701
2,031
933
5,950
24,197
931
192
1,123
38,727
–
7,836
34,502
10,773
6,297
4,515
4,575
4,835
30,995
9,231
5,224
14,455
79,952
–
1,012
1,265
1,063
46
26
562
565
2,262
49
–
49
3,576
7,255
48,562
152,801
79,015
29,267
15,347
8,953
40,674
173,256
27,487
8,385
35,872
361,929
8,123
6,227
37,475
9,662
8,474
4,710
543
6,349
29,738
1,546
223
1,769
68,982
–
4,616
9,750
11,226
2,395
2,169
900
5,457
22,147
752
189
941
32,838
–
6,273
28,399
9,018
5,877
4,011
728
4,230
23,864
12,572
8,984
21,556
73,819
–
1,280
1,828
1,720
77
69
775
617
3,258
118
4
122
5,208
8,123
39,461
125,799
70,102
26,298
14,589
5,339
37,163
153,491
26,317
11,761
38,078
317,368
At 31 December 2001...................
136,521
* Other commercial includes advances in respect of agriculture, transport, energy and utilities.
†
¶
The figures for 2001 have been restated to reflect a reclassification of loans to personal investment vehicles to ‘Other personal’
category, from ‘Corporate and commercial’ and ‘Non-bank financial institutions’ as this provides a more accurate description of the
borrower.
Formerly described as Latin America, which included Group entities in Panama and Mexico, which are now included in North
America. Figures for 2001 have been restated to reflect this change.
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.
220
19 Debt securities
Issued by public bodies
Investment securities:
– government securities and US
government agencies....................
– other public sector securities
Other securities:
– government securities and US
government agencies....................
– other public sector securities........
Issued by other bodies
Investment securities:
– bank and building society
certificates of deposit ...................
– other debt securities .....................
Other securities:
– bank and building society
certificates of deposit ...................
– other debt securities .....................
Due within 1 year ............................
Due 1 year and over.........................
Amounts include:
Subordinated debt securities............
Unamortised net premium/(discount)
on investment securities ...............
2002
2001
2000
Book value
US$m
Market
valuation
US$m
Book value
US$m
Market
valuation
US$m
Book value
US$m
Market
valuation
US$m
42,706
5,369
48,075
43,591
5,670
49,261
39,943
4,908
44,851
40,470
5,014
45,484
37,955
3,261
41,216
38,535
3,337
41,872
27,664
1,095
76,834
27,366
1,091
73,308
22,134
545
63,895
6,097
53,753
59,850
6,142
54,494
60,636
6,782
41,633
48,415
6,800
42,030
48,830
13,745
31,993
45,738
13,759
32,113
45,872
11,309
27,737
98,896
175,730
56,052
119,678
175,730
311
594
10,893
27,963
87,271
160,579
43,803
116,776
160,579
241
(102)
852
22,333
68,923
132,818
44,731
88,087
132,818
584
(761)
221
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
2002
2001
2000
Book value
US$m
Market
valuation
US$m
Book value
US$m
Market
valuation
US$m
Book value
US$m
Market
valuation
US$m
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...........................................
17,651
1,530
50,221
38,523
107,925
9,158
2,397
29,434
26,816
175,730
9,564
830
41,392
35,958
87,744
18,082
1,640
51,354
38,821
109,897
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$109,204 million (2001: US$94,100 million; 2000: US$87,665 million).
Investment securities:
At 1 January 2002 ...........................................................................
Additions ........................................................................................
Acquisition of subsidiaries..............................................................
Disposals and amounts repaid.........................................................
Provisions made..............................................................................
Amortisation of discounts and premiums .......................................
Exchange and other movements .....................................................
Cost
US$m
93,345
85,837
2,004
(76,935)
–
(289)
4,078
Provisions
US$m
(79)
–
–
–
(14)
–
(22)
Book Value
US$m
93,266
85,837
2,004
(76,935)
(14)
(289)
4,056
At 31 December 2002 ....................................................................
108,040
(115)
107,925
222
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 governments .......................................................
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.................................................
2002
US$m
18,574
1,064
1,042
18,067
3,697
60,852
103,296
3,918
711
–
4,629
2001
US$m
17,452
1,880
490
16,212
4,535
48,021
88,590
3,907
769
–
4,676
2000
US$m
18,381
3,276
306
12,302
4,497
43,754
82,516
3,690
718
30
4,438
The following table provides an analysis of gross unrealised gains and losses for investment securities by instrument
type as at 31 December for the past three years:
Available-for-sale
31 December 2002
US Treasury and Government agencies .............
UK Government.................................................
Hong Kong SAR governments ..........................
Other governments.............................................
Asset-backed securities ......................................
Corporate debt and other securities....................
31 December 2001
US Treasury and Government agencies .............
UK Government.................................................
Hong Kong SAR governments ..........................
Other governments.............................................
Asset-backed securities ......................................
Corporate debt and other securities....................
31 December 2000
US Treasury and Government agencies .............
UK Government.................................................
Hong Kong SAR governments ..........................
Other government ..............................................
Asset-backed securities ......................................
Corporate debt and other securities....................
Carrying
value
US$m
18,574
1,064
1,042
18,067
3,697
60,852
103,296
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
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
445
4
70
370
25
1,146
2,060
237
12
30
311
45
604
1,239
347
7
30
187
38
323
932
(7)
–
(2)
(228)
(7)
(121)
(365)
(62)
–
(2)
(158)
(6)
(153)
(381)
(79)
(1)
–
(46)
(10)
(172)
(308)
Market
valuation
US$m
19,012
1,068
1,110
18,209
3,715
61,877
104,991
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
223
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
The amounts shown under other governments in the above table include securities with a book value of US$5,616
million (2001: US$4,283 million) and a market value of US$5,630 million (2001: US$4,289 million) issued by the
Government of Japan.
Carrying
value
US$m
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
Market
valuation
US$m
Held-to-maturity
31 December 2002
US Treasury and Government agencies ............
Obligations of US state and political
sub-divisions .................................................
Corporate debt and other securities
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 ..................
3,918
711
–
4,629
3,907
769
4,676
3,690
718
30
4,438
234
45
–
279
168
32
200
136
31
–
167
The maturities of investment securities at 31 December 2002 are analysed as follows:
Available-for-sale
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........................................................................................................
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 ..............................................................................................................
224
(1)
(1)
–
(2)
(9)
(1)
(10)
–
(1)
–
(1)
4,151
755
–
4,906
4,066
800
4,866
3,826
748
30
4,604
Book value
US$m
30,013
46,545
8,712
16,923
1,103
Market
valuation
US$m
30,208
47,230
9,111
17,342
1,100
103,296
104,991
Book value
US$m
103
232
323
3,971
Market
valuation
US$m
105
240
348
4,213
4,629
4,906
The following table provides an analysis of contractual maturities and weighted average yields of investment debt
securities as at 31 December 2002:
Available-for-sale
US Treasury and
Government
agencies..............
UK Government ....
Hong Kong SAR
governments.......
Other governments
Asset-backed
securities ............
Corporate debt and
other securities ...
Held-to-maturity
US Treasury and
Government
agencies..............
Corporate debt and
other securities ...
Within one year
Amount
Yield
After one but within
five years
After five but within
ten years
Amount
Yield
Amount
Yield
After ten years
Amount
Yield
No fixed maturity
Amount
Yield
US$m
% US$m
% US$m
% US$m
% US$m
%
1,993
1,059
212
5,245
1.97
4.92
2,989
5
4.17
4.10
745
10,547
3.53
–
4.26
5.17
904
–
5.06
–
12,688
–
85
1,802
8.70
5.86
–
473
4.23
–
–
6.78
116
14.41
996
2.64
1,265
2.28
1,320
2.23
–
–
–
–
–
–
–
–
–
–
21,388
30,013
4.27
31,263
3.86
46,545
4,656
8,712
5.31
2,442
4.12
16,923
0.28
1,103
1,103
–
103
103
–
187
7.27
193
7.19
3,538
6.68
7.14
6.07
45
232
130
323
5.55
433
6.70
3,971
–
–
–
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 2002 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$77,105 million (2001: US$87,626 million;
2000: US$109,300 million). Gross realised gains of US$247 million (2001: US$359 million; 2000: US$123 million)
and gross realised losses of US$77 million (2001: 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 2002 was US$85,837 million (2001:
US$94,214 million; 2000: US$107,025 million).
225
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
20 Equity shares
Investment securities:
– listed on a recognised UK
exchange .............................
– listed in Hong Kong ............
– listed elsewhere...................
– unlisted................................
Other securities:
– listed on a recognised UK
exchange .............................
– listed in Hong Kong ............
– listed elsewhere...................
– unlisted................................
2002
2001
2000
Book value
US$m
Market
valuation
US$m
Book value
US$m
Market
valuation
US$m
Book value
US$m
Market
valuation
US$m
563
241
1,163
2,866
4,833
670
9
2,576
125
8,213
505
400
1,207
3,127
5,239
688
564
1,436
2,606
5,294
695
245
1,389
2,426
4,755
713
74
2,405
110
8,057
1,005
742
1,382
2,644
5,773
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$549 million (2001: US$608
million; 2000:US$582 million) of shares in HSBC Holdings with a market value of US$519 million (2001: US$541
million; 2000: US$596 million), comprising:
(a) US$514 million (2001: US$555 million; 2000: US$564 million) of shares as explained in note 26 (a).
(b) US$14 million, after amortisation, (2001: US$43 million; 2000: US$18 million) of shares held in trusts
established by subsidiary companies for the purposes of conditional awards under the Restricted Share Plan,
details of which are provided in the Directors’ Remuneration Report on pages 173 and 177. At 31 December
2002, such trusts held 5,029,157 ordinary shares (2001: 3,455,821; 2000: 2,143,646) with a market value at that
date of US$56 million (2001: US$40 million; 2000: US$ 32 million)
(c) US$21 million, after amortisation, (2001: US$10 million; 2000: US$ nil) of shares held in trusts established by
subsidiary companies which may be used in respect of the exercise of share options or for the purposes of share
awards as detailed in note 35. At 31 December 2002, such trusts held 1,482,249 (2001: 796,700; 2000: nil)
shares with a market value at that date of US$16 million (2001: US$10 million; 2000: US$ nil).
Included within ‘Other securities – listed on a recognised UK exchange’ are 3,090,776 (2001: 1,369,901; 2000:
5,871,062) shares in HSBC Holdings valued at US$34 million (2001: US$16 million; 2000: US$86 million) held by
subsidiary undertakings as equity market-makers.
226
Investment securities:
At 1 January 2002 ...........................................................................
Additions.........................................................................................
Acquisition of subsidiaries..............................................................
Disposals.........................................................................................
Provisions made..............................................................................
Provisions written off......................................................................
Exchange and other movements......................................................
At 31 December 2002 ....................................................................
Cost
US$m
4,959
1,753
7
(1,791)
–
(24)
304
5,208
Provisions
US$m
Book value
US$m
(204)
–
–
17
(155)
24
(57)
(375)
4,755
1,753
7
(1,774)
(155)
–
247
4,833
The following table provides an analysis of gross unrealised gains and losses as at 31 December for the past three
years:
31 December 2002 ............................................
Carrying
value
US$m
4,833
Gross
Unrealised
gains
US$m
603
31 December 2001 ............................................
4,755
669
31 December 2000 .............................................
4,638
1,183
Gross
unrealised
losses
US$m
(197)
(130)
(48)
Market
valuation
US$m
5,239
5,294
5,773
Proceeds from the sale of investment securities were US$1,980 million (2001: US$1,796 million; 2000: US$1,259
million). Gross realised gains of US$215 million (2001: US$290 million; 2000: US$225 million) and gross realised
losses of US$9 million (2001: 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 2002 was US$1,753 million (2001:
US$1,670 million; 2000: US$1,822 million).
21 Interests in joint ventures
At 1 January 2002 ................................................................................................................................
Additions and acquisitions of subsidiaries ...........................................................................................
Amortisation of goodwill.....................................................................................................................
Disposals..............................................................................................................................................
Transfer to subsidiaries ........................................................................................................................
Retained profits and losses...................................................................................................................
Exchange and other movements...........................................................................................................
At 31 December 2002 .........................................................................................................................
2002
US$m
292
67
(9)
(111)
(67)
(17)
35
190
227
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(a) Shares in banks ....................................................................................................
Other ....................................................................................................................
All shares are unlisted.
(b) The principal joint ventures of HSBC are:
Framlington Group Limited ........................
Pensiones Bital S.A. ...................................
Seguros Bital, S.A. de C.V., Grupo
Financiero Bital .......................................
Country of
incorporation
England
Mexico
Principal
activity
Asset
management
Pensions
2002
US$m
–
190
190
HSBC’s
interest in
equity
capital
51%
2001
US$m
51
241
292
Issued
equity
capital
£3m
51%
MXP 237m
Mexico
Insurance
51%
MXP 413m
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.
(c) HSBC’s share of total operating income in joint ventures is US$19 million (2001: US$79 million).
HSBC’s share of contingent liabilities in joint ventures is US$nil (2001: US$56 million). HSBC’s share of
commitments by joint ventures is US$nil (2001: US$nil).
(d) Included within HSBC’s share of gross assets of joint ventures is goodwill as follows:
Goodwill
At 1 January 2002 ............................................................................................................................
Additions and acquisition of subsidiaries ........................................................................................
Disposals..........................................................................................................................................
Exchange and other movements ......................................................................................................
Cost at 31 December 2002 .............................................................................................................
Accumulated amortisation at 1 January 2002 ..................................................................................
Disposals..........................................................................................................................................
Charge to the profit and loss account...............................................................................................
Exchange and other movements ......................................................................................................
Accumulated amortisation at 31 December 2002........................................................................
Net book value at 31 December 2002 ...........................................................................................
Net book value at 31 December 2001..............................................................................................
Cost
US$m
199
15
(63)
17
168
Accumulated
amortisation
US$m
(12)
6
(9)
(4)
(19)
149
187
228
22 Interests in associates
At 1 January 2002 ...................................................................................................................................
Additions.................................................................................................................................................
Disposals.................................................................................................................................................
Amounts written off................................................................................................................................
Retained profits and losses (Note 36) .....................................................................................................
Exchange and other movements..............................................................................................................
At 31 December 2002 ............................................................................................................................
There was no goodwill included in the interests in associates at either 31 December 2002 or 2001.
(a) Shares in banks ....................................................................................................
Other ....................................................................................................................
Listed shares (all listed outside the United Kingdom and Hong Kong)...............
Unlisted shares.....................................................................................................
2002
US$m
712
404
1,116
294
822
1,116
(b) The principal associates of HSBC are:
Financial
Statements
made up to
Country of
incorporation
Barrowgate Limited ........
31.12.02
Hong Kong
British Arab
31.12.02
England
Principal
activity
Property
Investment
Banking
HSBC’s
interest in
equity capital
24.64%
46.51%
2002
US$m
1,056
6
(19)
(1)
(11)
85
1,116
2001
US$m
718
338
1,056
521
535
1,056
Issued equity
capital
*
US$81m
£32m fully
paid,
£5m nil paid
C£152m
Commercial Bank
Limited ........................
The Cyprus Popular
Bank Limited# .............
Erisa ...............................
The Saudi British Bank...
Wells Fargo HSBC
Trade Bank, N.A. ........
World Finance
International Limited
31.12.02
Cyprus
Banking
21.39%
31.12.02
31.12.02
31.12.02
France
Saudi Arabia
United States
Insurance
Banking
Trade finance
49.99%
40%
20%
€65m
SR2,000m
¶
30.6.02
Bermuda
Shipping
50%
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.
229
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(c) The associates listed above have no loan capital, except for British Arab Commercial Bank Limited which has
issued US$44.5 million of subordinated unsecured loan stock in which HSBC has a 34.66 per cent interest;
Barrowgate Limited which has HK$845 million of loan capital in which HSBC has a 25 per cent interest; and
The Cyprus Popular Bank Limited which has issued C£21.7 million of convertible debentures in which HSBC
has a 30.1 per cent interest. HSBC also has a 100 per cent interest in the issued preferred stock (less than US$1
million) of Wells Fargo HSBC Trade Bank, N.A. HSBC has a 40 per cent economic interest in Wells Fargo
HSBC Trade Bank, N.A. by virtue of the joint agreement under which HSBC’s equity capital and preferred
stock interests are held.
23 Other participating interests
Listed other than on a recognised UK exchange or in Hong Kong.............................
Unlisted.......................................................................................................................
Market value of listed securities .................................................................................
Other participating interests in banks..........................................................................
At 1 January 2002 ...........................................................................
Additions ........................................................................................
Disposals.........................................................................................
Provisions made..............................................................................
Exchange and other movements .....................................................
At 31 December 2002 ....................................................................
Cost
US$m
164
628
(95)
–
7
704
2002
US$m
3
648
651
22
1
Provisions
US$m
(44)
–
–
(9)
–
2001
US$m
–
120
120
1
91
Carrying
value
US$m
120
628
(95)
(9)
7
(53)
651
230
24 Intangible fixed assets
Goodwill
At 1 January 2002 ...................................................................................................................................
Additions (positive goodwill of US$2,074 million, negative goodwill of US$82 million)
(note 26 (c)).........................................................................................................................................
Exchange and other movements..............................................................................................................
Cost at 31 December 2002 ....................................................................................................................
Accumulated amortisation at 1 January 2002 .........................................................................................
Charge to the profit and loss account (net of negative goodwill of US$24 million) ...............................
Exchange and other movements..............................................................................................................
Accumulated amortisation at 31 December 2002...............................................................................
Net book value at 31 December 2002 (net of negative goodwill of US$58 million)..........................
Cost*
US$m
15,950
1,992
1,637
19,579
Accumulated
amortisation
US$m
(1,386)
(854)
(176)
(2,416)
17,163
Net book value at 31 December 2001 .....................................................................................................
14,564
*
Figures for 2001 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of which
are set out in Note 1 of the Financial Statements on pages 195 to 197.
Additions represent goodwill arising on acquisitions and increases of holdings in subsidiaries and businesses during
2002. Positive goodwill is being amortised over periods of up to 20 years. Negative goodwill is being credited to the
profit and loss account over 5 years, the period to be benefited.
231
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
25 Tangible fixed assets
(a) HSBC
Cost or valuation at 1 January 2002 ..............
Additions ......................................................
Acquisition of subsidiaries............................
Disposals ......................................................
Reclassification.............................................
Transfer of accumulated depreciation
arising on revaluation ...............................
Impairment of land and buildings .................
Deficit on revaluation ...................................
Exchange and other movements....................
Freehold
land and
buildings
Long
leasehold
land and
buildings
Short
leasehold
land and
buildings
Equipment,
fixtures and
fittings
Equipment
on
operating
leases
US$m
3,030
58
44
(116 )
53
(67 )
(41 )
(7 )
161
US$m
3,245
131
–
(15 )
(11 )
(57 )
–
(218 )
124
US$m
3,081
48
6
(56)
(111)
(98)
–
(134)
35
US$m
5,588
851
127
(523 )
69
–
–
–
368
US$m
3,488
635
–
(337 )
–
–
–
–
397
Total
US$m
18,432
1,723
177
(1,047)
–
(222)
(41)
(359)
1,085
Cost or valuation at 31 December 2002.....
3,115
3,199
2,771
6,480
4,183
19,748
Accumulated depreciation at 1 January
2002..........................................................
Disposals ......................................................
Reclassification.............................................
Transfer of accumulated depreciation
arising on revaluation ...............................
Charge to the profit and loss account ............
Exchange and other movements....................
Accumulated depreciation at 31
December 2002........................................
(68 )
8
–
67
(54 )
(29 )
(76 )
(5 )
–
(1 )
57
(49 )
(5 )
(3 )
Net book value at 31 December 2002.........
Net book value at 31 December 2001 ...........
3,039
2,962
3,196
3,240
(517)
36
34
98
(98)
(28)
(3,499 )
424
(33 )
–
(709 )
(277 )
(475)
(4,094 )
2,296
2,564
2,386
2,089
(822 )
227
–
–
(239 )
(85 )
(919 )
3,264
2,666
(b) HSBC Holdings
Cost or valuation at 1 January 2002.........................................
Additions .................................................................................
Disposals..................................................................................
Cost or valuation at 31 December 2002 ...............................
Accumulated depreciation at 1 January 2002 ..........................
Charge to the profit and loss account.......................................
Accumulated depreciation at 31 December 2002 ................
Net book value at 31 December 2002 ...................................
Net book value at 31 December 2001......................................
Freehold land
and
buildings
US$m
4
–
(4)
Equipment,
fixtures and
fittings
US$m
4
1
(1)
–
–
–
–
–
4
4
(1)
(1)
(2)
2
3
(4,911)
695
–
222
(1,149)
(424)
(5,567)
14,181
13,521
Total
US$m
8
1
(5)
4
(1)
(1)
(2)
2
7
232
(c) Valuations
Cost or valuation of freehold and long and
short leasehold land and buildings
(excluding investment properties):
At 2002 valuation (2001: at 2001
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
2002
US$m
2001
US$m
HSBC Holdings
2002
US$m
2001
US$m
7,733
827
8,560
7,103
1,697
8,800
7,839
(1,752)
6,087
7,538
(1,575)
5,963
–
–
–
–
–
–
4
–
4
–
–
–
HSBC values its non-investment properties on an annual basis. In September 2002, 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 2002.
As a result of the revaluation, the net book value of land and buildings (excluding investment properties)
decreased by US$322 million (2001: decrease US$241 million). A deficit of US$297 million (2001: deficit of
US$227 million), net of minority interest of US$25 million (2001:US$14 million) was debited to reserves at 31
December 2002.
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 2002 ................................................................................................
Additions .............................................................................................................
Disposals..............................................................................................................
Charge for the year...............................................................................................
Exchange and other movements ..........................................................................
At 31 December 2002 .........................................................................................
Net book value at 31 December 2002 (2001: US$503 million) ........................
Accumulated
depreciation
US$m
(273)
–
–
(22)
(13)
(308)
Cost
US$m
776
45
(39)
–
(14)
768
460
233
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(d) Investment properties
The valuation at which investment properties are included in tangible fixed assets, together with the net book
value of these properties calculated under the historical cost basis, is as follows:
Freehold land and buildings........................
Short and long leasehold land and
buildings..................................................
2002
At valuation
US$m
80
445
525
At cost
US$m
80
146
226
2001
At valuation
US$m
80
476
556
At cost
US$m
80
145
225
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$36 million
(2001: deficit of US$30 million). A deficit of US$22 million, net of minority interests of US$14 million, has
been debited to reserves at 31 December 2002.
HSBC Holdings had no investment properties at 31 December 2002 or 2001.
(e) HSBC properties leased to customers
HSBC properties leased to customers, none of which was held by HSBC Holdings, included US$502 million at
31 December 2002 (2001: US$522 million) let under operating leases, net of accumulated depreciation of
US$39 million (2001: US$27million).
(f) Land and buildings occupied for own activities
Net book value.....................................................................................................
2002
US$m
7,608
2001
US$m
7,468
(g) Residual values of equipment on operating leases
Included in the net book value of equipment on operating leases are residual values at the end of current lease
terms, which will be recovered through re-letting or disposal in the following periods:
Within 1 year .......................................................................................................
Between 1-2 years................................................................................................
Between 2-5 years................................................................................................
More than 5 years ................................................................................................
Total exposure .....................................................................................................
2002
US$m
559
1,108
290
715
2,672
2001
US$m
248
386
1,017
527
2,178
Residual value risk arises in relation to an operation lease transaction to the extent that the actual value of the
leased asset at the end of the lease term (the residual value) recovered through disposing of or re-letting the
asset at the end of the lease term, could be different to that projected at the inception of the lease. Residual value
exposure is regularly monitored by the business through reviewing the recoverability of the residual value
projected at lease inception. This entails considering the re-lettability and projected disposal proceeds of
operating lease assets at the end of their lease terms. Provision is made to the extent that the carrying values of
leased assets are impaired through residual values not being fully recoverable.
234
26 Investments
(a) HSBC Holdings
Shares in
HSBC
undertakings
US$m
Loans to
HSBC
undertakings
US$m
Other
investments
other than
loans
US$m
Own shares
US$m
At 1 January 2002 ....................
Additions .................................
Repayments and redemptions ..
Amortisation ...........................
Provisions for diminution in
value .....................................
Write-up of subsidiary
undertakings to net asset
value, including attributable
goodwill (Note 36) ...............
At 31 December 2002
49,762
3,361
–
–
(21)
4,535
57,637
4,172
248
(257)
–
–
–
441
44
–
(1)
–
–
555
18
(41)
(18)
–
–
4,163
484
514
Total
US$m
54,930
3,671
(298)
(19)
(21)
4,535
62,798
‘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$17 million, after amortisation, of HSBC Holdings’ own shares (2001: US$16 million) held in trust for
the purposes of conditional awards under the Restricted Share Plan, details of which are provided in the
Directors’ Remuneration Report on pages 173 to 177. At 31 December 2002, the trust held 4,664,315
ordinary shares (2001: 3,230,422 ordinary shares) with a market value at that date of US$51,610,678 (2001:
US$37,735,716) in respect of these conditional awards.
(ii) US$497 million of HSBC Holdings’ own shares (2001: US$539 million) held in trust which may be used in
respect of the exercise of share options as detailed in note 35. At 31 December 2002, the trust held
35,745,555 ordinary shares (2001: 38,788,413 ordinary shares) with a market value of US$395,524,816
(2001: US$453,101,339) in respect of these option holders.
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$191 million (2001: US$170 million)........................
43,731
40,391
2002
US$m
2001
US$m
235
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
CCF (formerly Crédit Commercial de France
S.A.) (99.99% owned)........................................
HSBC Bank AS .....................................................
HSBC Asset Management (Europe) Limited.........
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 (96.64% owned)1 ....
HSBC Insurance Brokers Limited .........................
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
England
Malta
England
England
Switzerland
England
England
Guernsey
Switzerland
England
Banking
Banking
Investment banking
Finance
Banking
Banking
Banking
Banking
Insurance
Insurance
Private banking
Private banking
Private banking
€371m
TRL277bn
£142m
£265m
Lm9m
US$331m
£797m
SFr95m
£3m
£34m
US$5m2
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 Life (International) Limited........................
Rest of Asia-Pacific
HSBC Bank Egypt S.A.E. (94.53% owned) ..........
HSBC Bank Australia Limited ..............................
HSBC Bank Malaysia Berhad ...............................
HSBC Asset Management (Taiwan) Ltd
Hong Kong
Hong Kong
Hong Kong
Bermuda
Egypt
Australia
Malaysia
Banking
HK$9,559m
Banking
Insurance
Retirement benefits
and life assurance
HK$16,254m
HK$125m
HK$327m
Banking
Banking
Banking
E£352m
A$600m
RM$114m
(99.46% owned) ................................................
Taiwan
Investment banking
TWD788m
1 Minority interest of 3.36% is through HSBC Trinkaus & Burkhardt KGaA
2 HSBC also owns 100% of the issued redeemable preference share capital of US$17 million
236
North America
HSBC Bank Canada (99.99% owned) ...................
HSBC Bank USA ..................................................
HSBC Securities (USA) Inc...................................
HSBC USA Inc......................................................
Banco Internacional S.A (99.14% owned).............
South America
HSBC Bank Argentina S.A (99.92% owned) ........
HSBC Bank Brasil S.A. – Banco Múltiplo ............
HSBC Seguros (Brasil) S.A. (97.96% owned).......
HSBC La Buenos Aires Seguros S.A. (99.24%
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
Mexico
Banking
Banking
Investment banking
Holding company
Banking
C$950m
US$205m
– 3
– 3
MXP2,921m
Argentina
Brazil
Brazil
Argentina
Argentina
Banking
Banking
Insurance
ARS237m
BRL1,082m
BRL194m
Insurance
Pension fund
management
ARS44m
ARS84m 4
issued equity capital is less than US$1 million
3
4 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 business operations in 2002, which were
accounted for on an acquisition basis:
i. On 28 June 2002, HSBC increased its stake in Merrill Lynch HSBC from 50% to 100% for nil
consideration. Negative goodwill of US$82 million arose on this acquisition. Prior to becoming a
subsidiary undertaking, HSBC’s 50% interest in MLHSBC was accounted for as a joint venture.
In accordance with FRS 2 ‘Accounting for subsidiary undertakings’, and in order to give a true and fair
view, negative goodwill on the acquisition in June has been calculated as that arising on the later acquisition
of shares, being the difference between the fair value of consideration paid and the fair values of the
identifiable assets and liabilities attributable to the further 50% interest purchased. This represents a
departure from the method required by Schedule 4A to the Act, under which goodwill is calculated as the
difference between total consideration paid and the fair values of the identifiable assets and liabilities on the
date that MLHSBC became a subsidiary undertaking.
The method required by the Act would not give a true and fair view because it would result in the Group’s
share of MLHSBC’s retained losses, during the period that it was a joint venture, being reclassified as
goodwill. The effect of this departure is to reduce positive goodwill by US$89 million, recognise negative
goodwill of US$82 million, and reduce retained profits by US$171 million.
ii. On 1 July 2002, CCF, a 99.9 per cent owned subsidiary of HSBC, acquired the business in respect of 11
branches of Banques Worms for a cash consideration of US$10 million. Goodwill of US$10 million arose
on this acquisition.
237
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
iii. On 29 July 2002, HSBC Bank Australia Limited, a wholly owned subsidiary of HSBC, acquired the
corporate banking and trade finance business of State Street Bank and Trust Company’s Global Trade
Banking Australia business for a cash consideration of US$75 million. Goodwill of US$1 million arose on
this acquisition.
iv. On 19 September 2002, HSBC Bank A.S., a wholly owned subsidiary of HSBC, acquired 100 per cent of
the issued share capital of Benkar Tuketici Finansmani ve Kart Hizmetleri A.S. for a cash consideration of
US$72 million. Of this, US$31 million is deferred consideration, payable over five years and conditional on
achievement of specific business objectives. Goodwill of US$53 million arose on this acquisition. The fair
values of the assets and liabilities acquired have been determined only on a provisional basis pending
completion of the fair value appraisal process.
v. On 25 November 2002, HSBC Holdings plc acquired 99.21 per cent of the total capital stock of Grupo
Financiero Bital S.A. for a cash consideration of US$1,140 million. Goodwill of US$2,003 million arose on
this acquisition. The fair values of the assets and liabilities acquired have been determined only on a
provisional basis pending completion of the fair value appraisal process.
vi. On 31 December 2002, The Hongkong and Shanghai Banking Corporation Limited, a 100 per cent owned
subsidiary of HSBC, acquired certain business operations from the trade finance business of State Street
Corporation’s Global Trade Banking Division for a cash consideration of US$nil. Goodwill of US$7
million arose on this acquisition.
vii. Increases in stakes in a number of existing subsidiaries are excluded from the table below. On 8 April 2002,
HSBC Insurance Brokers Limited increased its stake in GHC Treaty from 71.48 per cent to 81.20 per cent
for a cash consideration of US$5 million, on which goodwill of US$4 million arose. On 31 October 2002,
CCF increased its stake in Banque du Louvre from 88.6 per cent to 100 per cent for a cash consideration of
US$26 million, on which goodwill of US$11 million arose.
238
The assets and liabilities at the dates of acquisition and the total consideration paid are set out in the following
table:
Book value
US$m
Revaluations
US$m
Accounting
policy
alignments
US$m
Fair value
US$m
At date of acquisition:
Cash and balances at central banks .............
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.............................
Add: minority interests – equity..................
Less: carrying value of HSBC’s existing
interest in MLHSBC (note i above)
Net assets acquired......................................
Goodwill attributable: .................................
– subsidiaries (Note 24) .............................
– joint ventures (Note 21) ..........................
Total consideration including costs of
acquisition ...............................................
498
935
5,293
9,805
5,491
7
242
930
(2,798)
(14,286)
(120)
(4,932)
(50)
(214)
(530)
271
4
(62)
213
–
–
–
(176)
(374)
–
(8)
183
–
–
–
–
(129)
–
(54)
(558)
–
–
(558)
–
–
–
(310)
–
–
(57)
29
–
–
–
–
(12)
–
–
(350)
–
–
(350)
The fair value adjustments in the above table represent the following:
Revaluations, reflecting the recognition of:
–
–
–
the fair value of financial instruments acquired;
liabilities under pension and other post-retirement benefit schemes; and
recognition of deferred tax benefits.
Accounting policy alignments reflecting:
–
–
introduction of HSBC’s criteria for raising provisions against doubtful loans;
introduction of HSBC’s policy in relation to the depreciation of fixed assets; and
– HSBC’s criteria for recognising deferred tax.
498
935
5,293
9,319
5,117
7
177
1,142
(2,798)
(14,286)
(120)
(4,932)
(191)
(214)
(584)
(637)
4
(62)
(695)
1,977
15
1,992
1,297
239
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 .........................................................................................................
2002
US$m
2,962
21,163
134
1,135
10,356
10,134
45,884
2001*
US$m
1,619
15,575
287
1,115
9,712
10,324
38,632
*
Figures for 2001 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of which
are set out in Note 1 on the Financial Statements on pages 195 to 197.
The composition of the net tangible assets relating to long-term assurance and retirement funds is analysed
as follows:
Loans and advances to banks – with HSBC companies...........................................
Debt securities .........................................................................................................
Equity shares............................................................................................................
Other assets..............................................................................................................
Prepayments and accrued income ............................................................................
Other liabilities ........................................................................................................
2002
US$m
234
4,436
3,690
2,131
78
(213)
10,356
2001
US$m
318
3,381
3,863
2,298
46
(194)
9,712
Included in the above are 8,302,220 (2001: 8,104,024) shares in HSBC Holdings valued at US$92 million
(2001:US$95 million) held by subsidiary undertakings, as part of their long-term assurance and retirement funds for
the benefit of the policyholders.
28 Deposits by banks
Repayable on demand ..............................................................................................
With agreed maturity dates or periods of notice, by remaining maturity:
– 3 months or less but not repayable on demand.....................................................
– 1 year or less but over 3 months...........................................................................
– 5 years or less but over 1 year ..............................................................................
– over 5 years ..........................................................................................................
Amounts include:
Due to joint ventures................................................................................................
Due to associates......................................................................................................
2002
US$m
18,093
27,416
4,804
1,671
949
52,933
–
214
2001
US$m
18,132
27,845
5,234
1,808
621
53,640
192
29
240
The composition of deposits by banks on a geographical basis is set out below:
Europe.....................................................
Hong Kong..............................................
Rest of Asia-Pacific ................................
North America ........................................
South America* ......................................
2002
Non
interest-
bearing
US$m
4,818
638
688
798
6
6,948
Interest-
bearing
US$m
29,741
1,741
4,674
9,174
655
45,985
Total
US$m
34,559
2,379
5,362
9,972
661
52,933
Interest-
bearing
US$m
32,998
2,876
3,640
6,975
1,311
47,800
2001
Non
interest-
bearing
US$m
3,910
395
370
1,139
26
5,840
Total
US$m
36,908
3,271
4,010
8,114
1,337
53,640
*
Formerly described as Latin America, which included Group entities in Panama and Mexico, which are now included in North
America. Figures for 2001 have been restated to reflect this change.
The geographical analysis of deposits is based on the location of the office in which the deposits are recorded and
excludes balances with HSBC companies.
29 Customer accounts
Repayable on demand ..............................................................................................
With agreed maturity dates or periods of notice, by remaining maturity:
– 3 months or less but not repayable on demand.....................................................
– 1 year or less but over 3 months...........................................................................
– 5 years or less but over 1 year ..............................................................................
– over 5 years ..........................................................................................................
Amounts include:
Due to joint ventures ...............................................................................................
Due to associates .....................................................................................................
The composition of customer accounts on a geographical basis is set out below:
Europe...................................................
Hong Kong............................................
Rest of Asia-Pacific ..............................
North America ......................................
South America* ....................................
2002
Non
interest-
bearing
US$m
27,417
7,637
5,782
14,186
1,118
Total
US$m
197,362
148,904
54,172
90,137
4,863
56,140
495,438
Interest-
bearing
US$m
169,945
141,267
48,390
75,951
3,745
439,298
Interest-
bearing
US$m
141,802
140,097
40,904
63,911
6,048
392,762
2002
US$m
256,723
202,578
25,793
9,216
1,128
495,438
421
25
2001
Non
interest-
bearing
US$m
27,569
6,447
4,594
17,144
1,475
2001
US$m
209,634
205,231
26,591
7,519
1,016
449,991
333
19
Total
US$m
169,371
146,544
45,498
81,055
7,523
57,229
449,991
*
Formerly described as Latin America, which included Group entities in Panama and Mexico, which are now included in North
America. Figures for 2001 have been restated to reflect this change.
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.
241
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...........................................................................................................
Short positions in debt securities are in respect of securities:
– due within 1 year...................................................................................................
– due 1 year and over ...............................................................................................
– listed......................................................................................................................
– unlisted..................................................................................................................
242
2002
US$m
2,775
379
4,857
846
8,857
14,966
3,833
6,466
843
34,965
2002
US$m
1,270
17,141
89
2,336
1,470
22,306
22,306
1,463
346
3,069
10,356
12,244
72,090
42
22
282
346
2002
US$m
1,890
17,676
19,566
12,121
7,445
19,566
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
2001
US$m
997
26,840
27,837
22,728
5,109
27,837
32 Provisions for liabilities and charges
(a) Deferred taxation
At 1 January 2002 .............................................................................................
Charge/(release) to profit and loss account (Note 8).........................................
Movements arising from acquisitions and disposals.........................................
Exchange and other movements .......................................................................
At 31 December 2002 ......................................................................................
HSBC
US$m
(58)
622
(575)
30
19
HSBC
Holdings
US$m
98
(5)
–
–
93
Included in ‘Provisions for liabilities and
charges’ ...................................................
Included in ‘Other assets’ (Note 27) ...........
Net deferred taxation provision ..................
Comprising:
Accelerated capital allowances ...................
Timing differences on lease income ...........
Provision for bad and doubtful debts ..........
Relief for losses brought forward................
Provision for Princeton Note settlement .....
Other short term timing differences ............
HSBC
HSBC Holdings
2002
US$m
1,154
(1,135)
19
115
1,243
(1,192)
(179)
–
32
19
2001*
US$m
1,057
(1,115)
(58)
138
1,010
(724)
(164)
(221)
(97)
(58)
2002
US$m
2001*
US$m
93
–
93
–
–
–
–
–
93
93
98
–
98
–
–
–
–
–
98
98
*
Figures for 2001 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of
which are set out in Note 1 on the Financial Statements on pages 195 to 197.
There is no material deferred taxation liability not provided for.
(i) At 31 December 2002, there were potential future tax benefits of approximately US$885 million (2001:
US$906 million) in respect of trading losses, allowable expenditure charged to the profit and loss account
but not yet allowed for tax and capital losses which have not been recognised because recoverability of the
potential benefits is not considered likely.
243
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(b) Other provisions for liabilities and charges
Provisions for
pension and
other post-
retirement
obligations
US$m
928
Provisions for
contingent
liabilities and
commitments
US$m
1,164
Insurance
provisions
US$m
1,185
Other
provisions
US$m
606
127
79
(91)
(5)
39
22
(850)
199
574
563
–
(239)
(97)
1,412
150
89
(151)
(35)
659
At 1 January 2002 ....................
Additional provisions/increase
in provisions * ....................
Acquisition of subsidiaries.......
Provisions utilised....................
Exchange and other
movements ...........................
At 31 December 2002.............
1,038
Total
US$m
3,883
879
190
(1,331)
62
3,683
*
The increase in ‘other provisions’ includes unwinding of discounts of US$7 million (2001: US$5 million) in relation to vacant
space provisions and US$5 million(2001: US$1 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$35 million (2001: US$64 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$17 million in connection with the
Princeton Notes matter (2001: US$665 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$189 million (2001: US$144 million), of which US$110
million (2001: US$127 million) relates to discounted future costs associated with leasehold properties that
became vacant as a consequence of HSBC’s 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 building 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$135 million
(2001: US$230 million). This relates to labour and overtime litigation claims brought by employees after
leaving the bank. The provision is based on the expected number of departing employees, their individual
salaries and historical trends. Timing of settlement of these potential claims is uncertain.
244
33 Subordinated liabilities
Undated subordinated loan capital:
– HSBC Holdings .......................................................................................................
– Other HSBC.............................................................................................................
Dated subordinated loan capital:
– HSBC Holdings .......................................................................................................
– Other HSBC.............................................................................................................
Total subordinated liabilities:
– HSBC Holdings .......................................................................................................
– Other HSBC.............................................................................................................
Dated subordinated loan capital is repayable:
– within 1 year ............................................................................................................
– between 1 and 2 years ..............................................................................................
– between 2 and 5 years ..............................................................................................
– over 5 years ..............................................................................................................
2002
US$m
–
3,540
3,540
5,790
9,041
14,831
5,790
12,581
18,371
956
862
1,957
11,056
14,831
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
12,001
245
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$1,400m 5.25% subordinated notes 2012..........................................................
5.375% subordinated notes 2012........................................................
€1,000m
£650m
5.75% subordinated notes 2027..........................................................
US$1,000m 7.5% subordinated notes 2009............................................................
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 20083 .................................
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 ................................................
10.176% subordinated step-up cumulative notes 2040 –
US$900m
HSBC Capital Funding (Dollar 1) LP ................................................
8.208% subordinated step-up cumulative notes 2040 –
£500m
HSBC Capital Funding (Sterling 1) LP..............................................
€600m
8.03% subordinated step-up cumulative notes 2040 –
US$350m
HSBC Capital Funding (Euro 1) LP...................................................
7.525% subordinated loan 2003 – HSBC Finance Nederland B.V. ...
HSBC Holdings’ dated subordinated loan capital is repayable:
– within 1 year ...........................................................................................................
– between 1 and 2 years .............................................................................................
– between 2 and 5 years .............................................................................................
– over 5 years.............................................................................................................
2002
US$m
2001
US$m
1,394
1,045
1,041
999
397
349
315
250
5,790
–
5,790
–
–
–
999
357
349
266
250
2,221
599
2,820
1,350
1,350
900
806
630
350
4,036
9,826
350
–
–
9,476
9,826
900
725
531
350
3,856
6,676
599
350
–
5,727
6,676
1
2
3
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.
The interest payable ceases to be collared from November 2003 and becomes payable at a floating rate plus margin. The notes are
repayable in November 2003 at the option of the borrower, subject to the prior consent of the Financial Services Authority.
246
At 31 December 2002, 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
Callable subordinated variable coupon notes 20171 ...........................
£350m
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 20092 .....................
US$375m
7.4% subordinated guaranteed notes 2003 .........................................
US$350m
6.25% subordinated notes 2041..........................................................
£225m
Undated floating rate primary capital notes (Series 3) .......................
US$300m
6.95% subordinated notes 2011..........................................................
US$300m
7.65% subordinated notes 20253 ........................................................
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 notes4 .......................................
£150m
8.625% step-up undated subordinated notes5 .....................................
£150m
Subordinated step-up coupon floating rate notes 2007.......................
£150m
7.20% subordinated debentures 2097.................................................
US$250m
Subordinated debentures 2008 ...........................................................
BRL472m
6.625% subordinated notes 2009........................................................
US$200m
US$200m
7.808% capital securities 2026 ...........................................................
8.38% capital securities 2027 .............................................................
US$200m
JP¥24,800m Fixed rate (5.0% to 5.5%) Subordinated Loans 2004.........................
Other subordinated liabilities less than US$200m .....................................................
2002
US$m
1,200
750
564
500
500
480
399
385
374
350
360
300
300
299
299
322
–
230
242
242
–
215
134
200
200
200
209
3,327
12,581
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
189
3,621
12,660
1 The interest on the Callable subordinated variable coupon notes is fixed at 5.75 per cent until June 2012. Thereafter, the rate per
annum is the sum of the gross redemption yield of the then prevailing five-year UK gilt plus 1.70 per cent. The notes are repayable at
the option of the borrower in June 2012, subject to the prior consent of the Financial Services Authority.
2 The interest margin on the Subordinated Step-up coupon floating rate notes 2009 increases by 0.5 per cent five years prior to its
maturity date. The notes are then repayable at the option of the borrower, subject to the prior consent of the Financial Services
Authority.
3 The 7.65 per cent Subordinated notes are repayable at the option of each of the holders in May 2007.
4 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.
5 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.
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 9.875%.
247
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
€77m
US$75m
Series 2 ...........................................................................................
8.208% Non-cumulative Step-up Perpetual Preferred Securities .......
8.03% Non-cumulative Step-up Perpetual Preferred Securities .........
Non-cumulative preference shares1 ....................................................
Depositary shares each representing 25% interest in a share of
adjustable rate cumulative preferred stock, Series D2.....................
Cumulative preferred stock3 ...............................................................
Dutch auction rate transferable securities preferred stock,
Series A and B4...............................................................................
7.20% Series A cumulative preference shares5 ..................................
Non-cumulative redeemable class 1 preferred shares, Series A .........
6.35% Series B cumulative preference shares....................................
Cumulative preferred stock ................................................................
2002
US$m
1,335
889
801
622
–
150
150
125
125
78
81
75
2001
US$m
1,337
891
717
526
50
150
150
125
125
77
68
75
4,431
4,291
1 HSBC Bank plc redeemed in full its preference shares at an aggregate amount of US$50 million during 2002.
2
3
4
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.
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.
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.
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.
5
The redemption of all preference shares is subject to the prior consent of the FSA and the relevant local banking
regulator.
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 issues 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
248
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.
35 Called up share capital
Authorised:
The authorised ordinary share capital of HSBC Holdings at 31 December 2002 was US$7,500 million, (2001:
US$7,500 million; 2000: US$5,250 million) divided into 15,000 million (2001: 15,000 million; 2000: 10,500
million) ordinary shares of US$0.50 each, and £301,500 (2001: £301,500; 2000: £301,500) divided into 301,500
non-voting deferred shares of £1 each.
At 31 December 2002, 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.
Issued:
At 1 January 2002 ..................................................................................................
Shares issued to QUEST........................................................................................
Shares issued under other option schemes .............................................................
Shares issued in lieu of dividends ..........................................................................
Number
of US$0.50
Shares
9,354,627,521
6,147,311
30,460,369
89,585,595
At 31 December 2002 ...........................................................................................
9,480,820,796
At 1 January 2001 ..................................................................................................
Shares issued to QUEST........................................................................................
Shares issued under other option schemes .............................................................
Shares issued in lieu of dividends ..........................................................................
9,268,200,364
3,343,173
10,161,789
72,922,195
At 31 December 2001 ............................................................................................
9,354,627,521
US$m
4,678
3
15
45
4,741
4,634
2
5
37
4,678
249
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Issued:
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......................................................................
Number
of US$0.50
Shares
8,458,101,569
33,749,569
22,307,960
75,867,497
678,173,769
At 31 December 2000 ............................................................................................
9,268,200,364
US$m
4,230
16
11
38
339
4,634
The 301,500 non-voting deferred shares were in issue throughout 2000, 2001 and 2002 and are held by a subsidiary
undertaking of HSBC Holdings.
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:
31 December 2002 ....................................
31 December 2001 .....................................
31 December 2000 .....................................
Number of shares
US$0.50
307,522,913
284,267,280
231,746,943
Period of exercise
2003 to 2012
2002 to 2011
2001 to 2010
Exercise price
£2.1727 to £9.642
£2.1727 to £9.642
£1.806 to £9.642
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 2002, 229,066 (2001:76,799; 2000: 12,400) CCF shares were issued in
connection with the exercise of employee share options and exchanged for 2,977,858 ordinary shares of US$0.50
each (2001: 998,387; 2000: 161,200). During 2002, 5,000 CCF shares previously issued in connection with the
exercise of employee share options were exchanged for 65,000 ordinary shares of US$0.50 each. At 31 December
2002 5,500 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. There are 2,848,760 CCF employee share options exchangeable for HSBC
Holdings ordinary shares of US$0.50 each outstanding at 31 December 2002 (2001: 3,077,826; 2000: 3,200,625). At
31 December 2002 HSBC Holdings General Employee Benefit Trust held 35,745,555 (2001: 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 (see note 26(a)).
CCF options, effectively outstanding on HSBC shares under this arrangement, and the exercise period and price are
as follows:
31 December 2002 ...............................
31 December 2001 ................................
31 December 2000 ................................
Number of CCF shares
exchangeable for
HSBC Holdings
ordinary shares
2,854,260
3,088,326
3,204,625
Period of exercise
2003 to 2010
2002 to 2010
2001 to 2010
Exercise price
€32.78 – €142.5
€32.78 – €142.5
€32.78 – €142.5
250
There also exist outstanding options over the shares of various CCF subsidiaries, the details of which are set out in
the Directors' Report on pages 158 to 161. On exercise of those options held by employees of Sinopia Asset
Management (‘Sinopia’) shares are exchangeable for HSBC Holdings ordinary shares of US$0.50 each. The shares
are exchangeable in the ratio of 2.143 HSBC Holdings shares for each Sinopia share. During 2002, 91,200 (2001 and
2000: nil) Sinopia shares were issued in connection with the exercise of employee shares options and exchanged for
195,439 ordinary shares of US$0.50 each. At 31 December 2002, HSBC Employee Holdings General Employee
Benefit Trust held 685,549 (2001 and 2000: nil) ordinary shares of US$0.50 each which may be exchanged for
Sinopia shares arising from the exercise of options.
31 December 2002 ............................
31 December 2001 .............................
31 December 2000 .............................
Number of Sinopia shares
exchangeable for HSBC
Holdings ordinary
shares
315,900
432,100
444,100
Period of exercise
2003 to 2005
2002 to 2005
2002 to 2005
Exercise price
€8.61 - €21.85
€6.13 - €21.85
€6.13 - €21.85
Shares in another CCF subsidiary, Banque Hervet, are held in a Plan d’Epargne Enterprise on behalf of Banque
Hervet employees and will vest in the employees over a period of 5 years. On the acquisition of Banque Hervet in
2001, CCF agreed to exchange these shares, on vesting, for HSBC Holdings ordinary shares of US$0.50 each. The
shares are exchangeable in the ratio of 3.46 HSBC Holdings shares for each Banque Hervet share. No Banque
Hervet shares were exchanged for ordinary shares of US$0.50 each during 2002 (2001: nil). At 31 December 2002,
HSBC Employee Holdings General Employee Benefit Trust held 796,700 (2001:796,700) ordinary shares of
US$0.50 each which may be exchanged for Banque Hervet shares upon shares vesting in employees.
31 December 2002 ..................................
31 December 2001 ...................................
Number of Banque Hervet shares
exchangeable for HSBC Holdings
ordinary shares
230,259
230,259
Period of vesting
2003 to 2006
2003 to 2006
251
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
36 Reserves
Share premium account:
At 1 January 2002 .....................................................................
Shares issued to QUEST ...........................................................
Shares issued under other option schemes ................................
Shares issued in lieu of dividends .............................................
At 31 December 2002 ..............................................................
Other reserves:
– Reserve in respect of obligations under CCF share options:
At 1 January 2002 .....................................................................
On exercise of CCF share options ............................................
At 31 December 2002 ..............................................................
– Merger reserve:
At 1 January and 31 December 2002 .....................................
Total other reserves.......................................................................
Revaluation reserves:
– Investment property revaluation reserve:
At 1 January 2002 .....................................................................
Unrealised deficit on revaluation of land and buildings ............
Transfer of depreciation from profit and loss account...............
Realisation on disposal of properties.........................................
Exchange and other movements ................................................
At 31 December 2002 ..............................................................
– Revaluation reserve:
At 1 January 2002 .....................................................................
Realisation on disposal of properties.........................................
Unrealised deficit on revaluation of properties .........................
Transfer of depreciation from profit and loss account reserve
Net increase in attributable net assets of subsidiary
undertakings (Note 26 (a)).....................................................
Exchange and other movements ................................................
At 31 December 2002 ..............................................................
Total revaluation reserves .............................................................
HSBC
US$m
3,373
65
254
(45)
3,647
480
(41)
439
8,290
8,729
269
(23)
7
(4)
(2)
247
2,002
(29)
(297)
(37)
–
68
1,707
1,954
HSBC
Holdings
US$m
Associates
US$m
3,373
65
254
(45)
3,647
480
(41)
439
–
439
–
–
–
–
–
–
32,581
(4)
–
–
4,535
(102)
37,010
37,010
–
–
–
–
–
–
–
–
–
–
46
(1)
–
–
(1)
44
6
–
–
–
–
–
6
50
252
Profit and loss account:
At 1 January 2002 .....................................................................
Retained profit for the year........................................................
Revaluation reserve realised on disposal of properties..............
Depreciation 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 2002 ..............................................................
HSBC
US$m
27,296
1,238
33
37
1,023
(7)
3,715
33,335
HSBC
Holdings
US$m
Associates
US$m
5,276
266
4
–
1,023
–
–
6,569
255
(11)
–
–
–
–
(1)
243
Included within the HSBC profit and loss account reserve at 31 December 2002 are retained losses of US$136
million (2001: US$119 million) attributable to interests in joint ventures.
Share premium account:
At 1 January 2001 .....................................................................
Shares issued to QUEST ...........................................................
Shares issued under other option schemes.................................
Shares issued in lieu of dividends .............................................
At 31 December 2001................................................................
Other reserves:
– Reserve in respect of obligations under CCF share options:
At 1 January 2001 .....................................................................
On exercise of CCF share options ............................................
At 31 December 2001................................................................
– Merger reserve:
At 1 January and 31 December 2001.........................................
Total other reserves.......................................................................
Revaluation reserves:
– Investment property revaluation reserve:
At 1 January 2001 .....................................................................
Unrealised surplus on revaluation of land and buildings...........
Transfer from revaluation reserve .............................................
Exchange and other movements ................................................
At 31 December 2001................................................................
HSBC
US$m
3,305
37
68
(37)
3,373
496
(16)
480
8,290
8,770
289
(23)
8
(5)
269
HSBC
Holdings
US$m
Associates
US$m
3,305
37
68
(37)
3,373
496
(16)
480
–
480
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
53
(5)
–
(2)
46
253
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
– Revaluation reserve:
At 1 January 2001 .....................................................................
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 2001 ...............................................................
Total revaluation reserves .............................................................
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 ...............................................................
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$m
2,322
(7)
(227)
(54)
(8)
–
(24)
2,002
2,271
27,057
525
7
866
54
(1,213)
27,296
2,882
372
89
(38)
3,305
–
498
(2)
496
–
8,290
8,290
8,786
HSBC
Holdings
US$m
Associates
US$m
32,363
–
(3)
–
–
194
27
32,581
32,581
5,595
(1,185)
–
866
–
–
5,276
2,882
372
89
(38)
3,305
–
498
(2)
496
–
–
–
496
10
–
–
–
(4)
–
–
6
52
189
39
–
–
–
27
255
–
–
–
–
–
–
–
–
–
–
–
–
–
254
HSBC*
US$m
HSBC
Holdings*
US$m
Associates
US$m
Revaluation reserves:
– Investment property revaluation reserve:
At 1 January 2000 .....................................................................
Unrealised deficit on revaluation of land and buildings ............
Transfer to 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 from 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 reserves........................
Exchange and other movements ................................................
At 31 December 2000................................................................
273
14
8
(4)
(2)
289
2,069
(36)
361
(21)
(8)
–
(43)
2,322
2,611
24,948
2,447
40
944
(324)
21
(1,019)
27,057
–
–
–
–
–
–
22,565
–
1
–
–
9,841
(44)
32,363
32,363
4,725
250
–
944
(324)
–
–
5,595
46
8
–
–
(1)
53
5
–
4
–
–
–
1
10
63
225
5
–
–
–
–
(41)
189
*
Figures for 2001 and 2000 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details
of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
The accumulated foreign exchange translation adjustment as at 31 December 2002 increased HSBC’s reserves by
US$411 million (2001: reduced by US$3,370 million; 2000: reduced by US$2,073 million).
Cumulative goodwill amounting to US$5,138 million (2001: 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 and the shares issued were recorded at their nominal value only; 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, the remittance of reserves may result in further taxation
liabilities.
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.
255
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
During 2002, the HSBC QUEST has subscribed at market value for 6,147,311 ordinary shares at a total cost of
US$68 million (2001: US$39 million). HSBC provided US$nil (2001: US$nil) for this purpose.
9,564,355 ordinary shares (2001: 8,774,315 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$68 million (2001: US$39
million) was received from the share option plan participants. The price paid by option holders, ranged from £3.059
to £6.7536 (2001: £1.806 to £6.7536) per ordinary share of US$0.50.
At 31 December 2002, the trust held 1,488,895 ordinary shares (2001: 4,905,939 shares) of US$0.50 with a market
value of US$16,474,634 (2001: US$57,308,030) in respect of these options. Dividends on these shares are waived
by the QUEST.
HSBC has taken advantage of the exemptions applicable to Inland Revenue approved SAYE share option schemes
and equivalent overseas schemes under Urgent Issues Task Force Abstract 17 (revised 2000) ‘Employee share
schemes’.
37 Analyses of assets and liabilities
(a) Assets subject to sale and repurchase transactions
Total assets subject to sale and repurchase transactions ...................................
(b) Assets leased to customers
Loans and advances to customers .....................................................................
Tangible fixed assets – equipment on operating leases (Note 25(a)) ................
2002
US$m
20,061
2002
US$m
9,003
3,264
12,267
2001
US$m
28,973
2001
US$m
7,523
2,666
10,189
The cost of assets acquired during 2002 for letting to customers under finance leases and hire purchase contracts
by HSBC amounted to US$3,866 million (2001: US$4,097 million).
(c) Assets charged as security for liabilities
HSBC has pledged assets as security for liabilities included under the following headings:
Deposits by banks .............................................................................................
Customer accounts............................................................................................
Debt securities in issue .....................................................................................
Other liabilities .................................................................................................
Amount of liability secured
2002
US$m
1,661
4,204
1,437
2,884
10,186
2001
US$m
290
5,371
1,692
3,175
10,528
256
The amount of assets pledged to secure these liabilities are included under the following headings:
Treasury bills & other eligible securities ..........................................................
Loans and advances to customers .....................................................................
Debt securities ..................................................................................................
Other .................................................................................................................
Amounts of assets pledged
2002
US$m
1,673
2,514
39,126
1,144
44,457
2001
US$m
1,025
1,620
29,657
455
32,757
(d) HSBC Holdings
HSBC Holdings’ investment in and indebtedness of and to subsidiary undertakings at 31 December is as
follows:
Investments in subsidiary
undertakings*..............................
Amounts owed by HSBC
undertakings................................
Subordinated liabilities to
HSBC undertakings ....................
Other amounts owed to
HSBC undertakings ....................
2002
2001†
Bank Non-bank
US$m
US$m
Total
US$m
Bank Non-bank
US$m
US$m
Total
US$m
50,787
6,850
57,637
43,002
6,760
49,762
9,965
3,422
13,387
6,971
2,709
9,680
–
3,686
3,686
1,311
5,501
6,812
–
21
3,856
3,856
4,386
4,407
*
†
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.
Figures for 2001 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of
which are set out in Note 1 of the Financial Statements on pages 195 to 197.
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.
257
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Cross currency swaps are agreements that involve the exchange of interest payments in one specified currency
for interest payments in another specified currency for a specified period, based on an underlying amount. The
agreement may additionally involve the exchange and, on maturity of the swap, re-exchange of the principal
amount.
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.
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 exchange rate 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
258
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 Corporate Investment Banking and
Markets operation, in combination with market risks arising from on-balance-sheet instruments (Note 40).
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.
259
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
2002
2001
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
668,784
183,070
57,300
24,901
934,055
1,381,970
431,777
151,420
Total interest rate contracts ........................
1,965,167
Equities, futures and options purchased.....
Equities options written .............................
Other contracts...........................................
Total equities contracts ..............................
24,582
18,762
5,250
48,594
Replacement
cost*
US$m
11,096
3,927
–
404
15,427
23,442
2,316
–
25,758
1,593
–
329
1,922
Contract
amount
US$m
685,674
127,120
36,087
7,530
856,411
1,013,807
408,758
87,245
1,509,810
18,583
16,235
5,442
40,260
Netting .......................................................
(23,822)
Total...........................................................
2,947,816
19,285
2,406,481
*
Third party contracts only
Replacement
cost*
US$m
7,770
3,045
–
104
10,919
12,703
1,261
–
13,964
1,309
–
197
1,506
(11,156)
15,233
Included in the above table are third party credit derivatives with a contract amount of US$17,405 million
(2001: US$2,171 million) and a replacement cost of US$272 million (2001: US$18 million). These amounts
represent mainly credit default protection products bought or sold.
2002
2001
Mark-to-
market values
at year end
US$m
16,866
(17,263)
26,197
(26,873)
1,923
(1,993)
44,986
(46,129)
23,822
Average
mark-to-
market values
for the year
US$m
13,348
(13,656)
18,560
(18,173)
1,836
(2,354)
33,744
(34,183)
15,073
Mark-to-
market values
at year end
US$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$m
11,933
(12,298)
12,790
(12,547)
1,737
(1,813)
26,460
(26,658)
9,977
Equities
Interest rate
Exchange rate
assets..........................
liabilities ....................
assets..........................
liabilities ....................
assets..........................
liabilities ....................
assets..........................
liabilities ....................
Netting .......................................................
Total
The above amounts are stated after deducting cash collateral meeting the offset criteria of FRS5 as follows:
Offset against assets ..................................
Offset against liabilities .............................
1,992
327
367
108
260
Derivatives used for risk management purposes
The majority of the transactions undertaken for risk management purposes are between business units within
HSBC, one of which is a trading desk, which then lays off the resulting position by trading in the external
market. Internal positions are integral to HSBC’s asset and liability management and are included within
analyses of non-trading positions in the tables below.
The following table summarises the contract amount and replacement cost of derivatives used for risk
management purposes by product type. The replacement cost shown represents the accounting loss HSBC
would incur if the counterparty to a derivative contract failed to perform according to the terms of the contract
and the collateral, if any, for the amount due proved to be of no value.
2002
2001
Spot and forward foreign exchange ...........
Currency swaps, futures and options
purchased ...............................................
Total exchange rate contracts.....................
Interest rate swaps......................................
Interest rate futures, forward rate
agreements, collars and options
purchased ...............................................
Contract
amount
US$m
59,422
17,900
77,322
248,553
19,420
Total interest rate contracts ........................
267,973
Equities, futures and options purchased.....
Other contracts...........................................
Total equities contracts ..............................
90
228
318
*
Third party contracts only
Replacement
cost*
US$m
24
77
101
902
16
918
–
–
–
Contract
amount
US$m
55,552
10,832
66,384
174,194
8,091
182,285
333
297
630
Replacement
cost*
US$m
17
52
69
541
3
544
–
–
–
The table below summarises the carrying value and mark-to-market value of derivative contracts held for risk
management purposes. Mark-to-market values for assets and liabilities arising from derivatives held for non-
trading purposes are determined in the same way as those set out for trading derivatives above, including
internal positions.
Exchange rate
Interest rate
Equities
assets..........................
liabilities ....................
assets..........................
liabilities ....................
assets..........................
liabilities ....................
2002
2001
Carrying
value
US$m
325
(1,224)
1,532
(617)
7
–
Mark-to-
market
values
US$m
456
(1,533)
5,975
(3,834)
–
–
Carrying
value
US$m
860
(547)
1,332
(781)
13
–
Mark-to-
market
values
US$m
717
(289)
3,325
(2,247)
2
–
261
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Concentrations of credit risk
Concentrations of credit risk exist if a number of counterparties are engaged in similar activities or activities in
the same region or have similar economic characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other conditions.
The following table analyses the replacement cost of all third party exchange rate, interest rate and equities
contracts with positive mark-to-market gains by maturity, and by category of counterparty including netting
where available at 31 December 2002 and 31 December 2001. The table shows that the replacement cost of
derivatives is predominantly with banks and under five years.
Governments..................................
Banks .............................................
Non-bank financial institutions
– exchanges*..................................
– other............................................
Other sectors ..................................
Residual maturity
Less than
1 year
23
10,425
344
2,047
1,892
1-5 years
71
14,445
57
3,368
1,681
Over
5 years
158
7,599
–
1,569
447
Netting
(178)
(19,718)
(68)
(2,658)
(1,200)
2002
Total
74
12,751
333
4,326
2,820
2001
Total
145
9,839
312
3,511
2,039
Total 2002
Total 2001
14,731
19,622
9,773
(23,822)
20,304
11,087
12,036
3,879
(11,156)
15,846
*
Exchanges with margining requirements.
The following maturity profile of the notional principal values of third party derivative contracts outstanding as
at 31 December 2002 and 31 December 2001 shows that the majority of contracts are executed over the counter
and mature within one year.
Less than
1 year
US$m
Residual Maturity
1-5
years
US$m
Over
5 years
US$m
2002
Total
US$m
2001
Total
US$m
Exchange rate, interest rate and
equities contracts:
– exchanges*....................................................
– other contracts...............................................
201,526
1,426,813
60,083
788,864
7,084
264,046
268,693
2,479,723
211,007
2,051,854
Total 2002 .......................................................
1,628,339
848,947
271,130
2,748,416
Total 2001........................................................
1,481,538
614,116
167,207
2,262,861
*
Exchanges with margining requirements.
262
(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 ...................................................
2002
Mark-to-
market
values
US$m
5,239
33,829
67,805
3,380
2001
Mark-to-
market
values
US$m
5,069
38,242
67,313
3,302
110,253
113,926
22,306
5,038
34,549
61,893
31,937
578
32,432
64,947
The net trading assets above are funded by liabilities whose fair value is not materially different from their
carrying value.
(ii) Financial instruments not held for trading purposes and for which a liquid and active market exists
2002
2001
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$m
12,900
107,836
4,833
125,569
14,580
16,411
4,431
35,422
Mark-to-
market
values
US$m
12,909
109,839
5,239
127,987
14,877
17,598
4,420
36,895
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
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.
263
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 2002 were US$4,302
million (2001: US$3,137 million) and the unrecognised losses were US$3,261 million (2001: US$2,506
million).
Unrecognised gains of US$1,683 million and unrecognised losses of US$1,389 million are expected to be
recognised in 2003.
Of the gains and losses included in the profit and loss account in 2002, US$1,217 million gains and US$983
million losses were unrecognised at 1 January 2002.
(d) Liquidity management
HSBC’s liquidity management process is discussed in the ‘Financial Review’ section on pages 133 to 135 from
the paragraph under the heading Liquidity management to the bullet point ‘maintenance of liquidity contingency
plans’.
264
39 Memorandum Items
(a) HSBC
Contingent liabilities and commitments
2002
Credit
equivalent
amount
US$m
Risk-
weighted
amount
US$m
Contract
amount
US$m
2001
Credit
equivalent
amount
US$m
Risk-
weighted
amount
US$m
Contract
amount
US$m
4,711
2,785
2,580
4,219
2,840
2,792
46,527
17
36,333
17
28,190
15
39,817
9
30,428
9
24,700
9
51,255
39,135
30,785
44,045
33,277
27,501
Contingent liabilities:
Acceptances and endorsements......
Guarantees and assets pledged as
collateral security:
– guarantees and irrevocable
letters of credit ........................
Other contingent liabilities.............
Commitments:
Documentary credits and short-
term trade-related transactions ...
6,131
2,221
1,157
5,580
1,917
1,125
Forward asset purchases and
forward forward deposits placed
1,464
1,463
Undrawn note issuing and
revolving underwriting facilities
Undrawn formal standby facilities,
credit lines and other
commitments to lend:
85
43
268
42
1,669
1,669
381
156
106
191
– over 1 year ..............................
– 1 year and under......................
41,734
176,215
20,867
–
19,536
–
35,156
155,673
17,690
–
16,106
–
225,629
24,594
21,003
198,459
21,432
17,528
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
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.
Guarantees
HSBC provides guarantees and similar undertakings, both on behalf of third party customers and on behalf of
other entities within the HSBC Group. These guarantees are generally provided in the normal course of HSBC’s
banking business.
The principal types of guarantees provided, and the maximum potential amount of future payments which
HSBC could be required to make, at 31 December 2002 were as follows:
265
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Guarantee Type
Acceptances and endorsements....................................................
Financial guarantees ....................................................................
Standby letters of credit which are financial guarantees..............
Other direct credit substitutes ......................................................
Performance bonds ......................................................................
Bid bonds.....................................................................................
Standby letters of credit related to particular transactions ...........
Other transaction-related guarantees............................................
Other items...................................................................................
Maximum potential amount of future payments
Guarantees by HSBC
Holdings in favour
of other HSBC
Group entities
US$m
48
35,370
87
16
209
34
122
169
–
Guarantees in favour
of third parties
US$m
4,711
15,980
3,144
7,002
4,464
191
4,075
11,659
16
51,242
36,055
Acceptances and endorsements arise where HSBC agrees to guarantee payment on a negotiable instrument
drawn up by a customer. The accepted instrument is then sold into the market on a discounted basis.
Financial guarantees include undertakings to stand behind the obligations of customers or other HSBC entities
and to undertake these obligations if the other entity fails to do so. Intra-group items of this type will also
include guarantees of a capital nature, given to another HSBC entity and intended to be considered as capital by
the relevant regulatory authority.
Standby letters of credit which are financial guarantees are irrevocable obligations to pay a third party where a
customer fails to repay an outstanding commitment.
Other direct credit substitutes include re-insurance letters of credit and trade-related letters of credit which have
been issued without provision for the issuing entity to retain title to the underlying shipment.
Performance bonds, bid bonds, standby letters of credit and other transaction related guarantees are undertakings
where the requirement to make payment under the guarantee depends on the outcome of a future event, which is
independent of the creditworthiness of the customer.
Approximately two thirds of the above guarantees have terms of less than one year. Guarantees with a term of
more than one year will be subject to HSBC’s annual credit review process.
Where HSBC has given a guarantee on behalf of a customer, HSBC will have the right to recover from that
customer any amounts paid under the guarantee. At 31 December 2002, HSBC held collateral amounted to some
US$9.4 billion which could be used to recover amounts paid under the above guarantees.
The above maximum amounts payable reflect HSBC’s maximum exposure under a large number of individual
guarantee undertakings. The risks and exposures arising from guarantees are captured and managed in
accordance with HSBC’s overall credit risk management policies and procedures.
In general, HSBC recognises fee income in respect of guarantee exposures over the period for which the risk is
borne. Where such income is received in advance, it is initially recorded as deferred income and is recognised as
income in the profit and loss account over the period of the guarantee.
The current carrying amount of these liabilities reflects HSBC’s best estimate of the amount which will be
required to settle its obligation under guarantees which it has given. A liability is recognised only where HSBC
considers that it is more likely than not that an obligation exists under the guarantees.
266
At 31 December 2002, HSBC had established the following provisions in respect of its obligations under
outstanding guarantees:
Acceptances and endorsements.......................................................................................................
Guarantees and items pledged as collateral security .......................................................................
Other items......................................................................................................................................
US$m
37
106
32
HSBC believes that the fair value of its liabilities under other guarantees for which no provision has been
established is equal to the amount of deferred income received but not yet recognised for such guarantees.
(b) 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:
Contract amounts
Europe Hong Kong
US$m
US$m
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America *
US$m
Contingent liabilities
2002 ....................................
2001 ....................................
Commitments
2002 ....................................
2001 ....................................
23,697
20,763
89,569
72,397
12,886
9,260
56,810
50,743
6,550
5,576
7,680
7,912
442
534
30,743
26,191
45,484
46,160
3,023
2,968
225,629
198,459
Total
US$m
51,255
44,045
*
Formerly described as Latin America, which included Group entities in Panama and Mexico, which are now included in North
America. Figures for 2001 have been restated to reflect this change.
40 Market risk management
HSBC’s market risk management process is discussed in the ‘Financial Review’ section on pages 135 to 139 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 2002 was:
Total trading activities ...................................
Foreign exchange trading positions ...............
Interest rate trading positions.........................
Equities trading positions...............................
At
31 December
2002
US$m
71.6
12.9
63.2
27.1
Minimum
During the
year
US$m
66.7
2.4
60.2
20.4
Maximum
during the
year
US$m
130.0
47.0
120.9
40.6
Average
for the
year
US$m
93.9
21.0
82.4
29.0
267
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Trading VAR for HSBC for 2001 was:
Total trading activities ...................................
Foreign exchange trading positions ...............
Interest rate trading positions.........................
Equities trading positions...............................
(b) Interest rate sensitivity gap table
At
31 December
2001
US$m
122.0
13.3
111.7
45.5
Minimum
During the
year
US$m
60.8
1.8
48.1
27.4
Maximum
during the
year
US$m
173.4
50.6
160.2
79.6
Average
for the
year
US$m
102.2
22.1
86.7
41.9
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.
268
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
8,857
2,054
1,479
67,568
3,772
4,243
512
438
–
–
12,902
5,239
18,141
262
2,409
78,692
16,804
95,496
241,504
19,510
12,335
39,781
18,249
3,940
335,319
17,025
352,344
42,693
1,902
7,661
–
11,493
–
30,959
–
15,046
–
4,906
81,261
112,758
83,163
71,185
26,159
183,943
109,322
31 December 2002
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.............
362,524
32,997
29,550
71,690
33,557
92,516
622,834
136,412
759,246
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
(32,172)
(391,328)
(1,602 )
(11,945 )
(2,065)
(10,533)
(798)
(4,947)
(408)
(641)
(4,247)
(53,136)
(41,292 )
(472,530 )
(11,641)
(22,908)
(52,933 )
(495,438 )
(12,913)
(29)
(1,859 )
(4 )
(1,112)
(9)
(11,013)
(259)
(1,440)
(45)
(1,590)
(53,187)
(29,927 )
(53,533 )
(5,038)
(45,047)
(34,965)
(98,580)
(3,753)
(1,647 )
(1,094)
(2,616)
(9,261)
–
(18,371 )
–
(18,371 )
–
–
–
–
–
(56,952)
(56,952 )
(2,007)
(58,959)
the trading book...
43,481
3,127
891
2,681
50
(459)
49,771
(49,771)
–
Total liabilities .......
(396,714)
(13,930 )
(13,922)
(16,952)
(11,745)
(169,571)
(622,834 )
(136,412)
(759,246)
Off-balance-sheet
items ...................
(31,517)
1,443
7,630
24,982
(2,538)
–
Interest rate
sensitivity gap ....
(65,707)
20,510
23,258
79,720
19,274
(77,055)
Cumulative
interest rate
sensitivity gap ....
(65,707)
(45,197 )
(21,939)
57,781
77,055
–
–
–
–
–
–
–
–
–
–
A positive interest rate sensitivity gap exists where more assets than liabilities re-price 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 re-pricing periods and among currencies.
Similarly, a negative interest rate sensitivity gap exists where more liabilities than assets re-price during a given
period. In this case, a negative gap position tends to benefit net interest income in a declining interest rate
environment, but again the actual effect will depend on the same factors as for positive interest rate gaps, as
described above.
269
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
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
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
75,678
98,021
77,110
70,615
19,238
168,636
96,348
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
86,610
563,081
133,164
696,245
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
Total liabilities ........
Off-balance-sheet
items ....................
Interest rate
(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)
–
(48,282)
(26,520 )
(48,637 )
(578)
(48,510)
(27,098 )
(97,147 )
(5,016)
(1,286 )
(1,062)
(2,517)
(5,599)
–
(15,480 )
–
(15,480 )
the trading book...
41,005
2,437
2,755
4,309
–
–
–
–
–
76
(51,425)
(51,425 )
(1,464)
(52,889 )
(402)
50,180
(50,180)
–
(367,712)
(16,018 )
(12,113)
(10,257)
(7,770)
(149,211)
(563,081 )
(133,164)
(696,245 )
(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
–
–
–
–
–
–
–
–
–
–
* Figures for 2001 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of
which are set out in Note 1 of the Financial Statements on pages 195 to 197.
270
(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 ....................................................................................................
2002
US$m
250,352
508,894
759,246
238,090
521,156
759,246
2001*
US$m
260,340
435,905
696,245
276,672
419,573
696,245
* Figures for 2001 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of
which are set out in Note 1 of the Financial Statements on pages 195 to 197.
(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 137 and 138.
HSBC’s structural currency exposures as at the year-end were as follows:
2002
Currency of structural exposure
Euros .....................................................................................
Sterling..................................................................................
Hong Kong dollars ................................................................
Mexican pesos.......................................................................
Swiss francs ..........................................................................
Canadian dollars....................................................................
Brazilian reais .......................................................................
Malaysian ringgit ..................................................................
UAE dirham ..........................................................................
Singapore dollars...................................................................
Turkish lira............................................................................
Saudi riyals............................................................................
Australian dollars ..................................................................
Indian rupees .........................................................................
Korean won ...........................................................................
Chilean pesos ........................................................................
Maltese lira............................................................................
Taiwanese dollars..................................................................
Egyptian pounds....................................................................
Thai baht ...............................................................................
Cyprus pounds.......................................................................
Philippine pesos ....................................................................
Argentine pesos*...................................................................
Others, less than US$100 million.. ........................................
Net investments
in overseas
operations
US$m
15,090
10,903
10,172
1,998
1,794
1,008
605
537
495
462
441
423
381
300
269
226
196
195
178
159
125
118
(323 )
320
Borrowings taken out in the
functional currencies of the
overseas operations in order
to hedge the net investments
in such operations
US$m
–
–
–
–
(661)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Remaining
structural
currency
exposures
US$m
15,090
10,903
10,172
1,998
1,133
1,008
605
537
495
462
441
423
381
300
269
226
196
195
178
159
125
118
(323 )
320
Total ......................................................................................
46,072
(661)
45,411
*
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.
271
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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$100 million.. ........
Net investments
in overseas
operations
US$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
Currency
hedges other
than
borrowings
US$m
–
–
(120)
–
–
(301)
–
(97)
–
–
–
–
–
–
–
–
–
–
–
–
–
(64)
Borrowings taken out in the
functional currencies of the
overseas operations in order to
hedge the net investments in
such operations
US$m
–
(3)
–
(559)
–
–
–
–
–
–
–
–
(52)
–
–
–
–
–
–
–
–
–
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
Total ......................................................
38,426
(582)
(614)
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.
272
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*...........................................
Net cash inflow from operating activities
2002
US$m
9,035
355
190
36
862
2,044
(8)
1,321
(1,931)
879
(1,331)
324
11,776
124
715
16,550
(35,332)
2,543
(7,055)
(3,505)
31,161
716
2,935
(1,580)
(2,622)
16,426
2001
US$m
7,153
452
(2,207)
27
1,074
1,933
(640)
2,037
(1,893)
1,229
(542)
125
8,748
1,009
2,200
19,601
(16,072)
(20,307)
(1,856)
(8,546)
19,799
(827)
(1,437)
9,179
1,424
12,915
2000
US$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
15,223
*
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.
42 Changes in financing during the year
Balance at 1 January 2002 .................................
Shares issued in lieu of dividends ......................
Acquisition of subsidiaries
Issued during the year ........................................
Repaid during the year .......................................
Net cash inflow from financing .........................
Exchange and other movements.........................
Subordinated
loan capital
US$m
15,480
–
214
4,105
(1,923)
2,182
495
Balance as at 31 December 2002 .....................
18,371
Preference
shares*
US$m
4,291
–
–
–
(50)
(50)
190
4,431
Ordinary
shares
US$m
4,678
45
–
18
–
18
–
4,741
Share
premium
US$m
3,373
(45)
–
319
–
319
–
3,647
273
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 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$m
16,222
–
24
456
(965)
(509)
(257)
Balance at 31 December 2001 ...........................
15,480
Balance at 1 January 2000 .................................
Shares issued in lieu of dividends ......................
Acquisition of subsidiaries ................................
Shares issued on the acquisition of CCF............
Issued during the year ........................................
Costs incurred with share issue..........................
Repaid during the year .......................................
Own shares acquired by employee share
ownership trust ...............................................
Net cash inflow/(outflow) from financing .........
Capitalised on issue of shares to QUEST ..........
Own shares acquired by employee share
ownership trust ...............................................
Exchange and other movements ........................
15,423
–
860
–
948
–
(708)
–
240
–
–
(301)
Balance as at 31 December 2000 .......................
16,222
*
Preference shares in issue are in subsidiary undertakings (Note 34).
Preference
shares*
US$m
5,171
–
–
–
(825)
(825)
(55)
4,291
1,583
–
–
–
3,626
–
–
–
3,626
–
–
(38)
5,171
Ordinary
shares
US$m
4,634
37
–
7
–
7
–
4,678
4,230
38
–
339
13
–
–
(20)
(7)
14
20
–
4,634
Share
premium
US$m
3,305
(37)
–
105
–
105
–
3,373
2,882
(38)
–
–
151
–
–
(536)
(385)
309
536
1
3,305
43 Analysis of cash
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 2002, these amounted to US$2,154 million (2001: US$2,030 million; 2000:
US$1,604 million).
(a) Changes in cash during the year
Balance at 1 January ...............................................................
Net cash inflow/(outflow) before the effect of foreign
exchange movements ..........................................................
Effect of foreign exchange movements...................................
Balance at 31 December .........................................................
2002
US$m
22,224
3,242
1,404
26,870
2001
US$m
24,338
(1,706)
(408)
22,224
2000
US$m
17,705
7,470
(837)
24,338
274
(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 ..................................................
2002
US$m
7,659
19,211
26,870
2001
US$m
6,185
16,039
22,224
2000
US$m
5,006
19,332
24,338
44 Litigation
HSBC, through a number of its subsidiary undertakings, is named in and is defending legal actions in various
jurisdictions arising from its normal business. None of these proceedings is regarded as material litigation.
45 Capital commitments
Expenditure contracted for..........................................................................................
Expenditure authorised by Directors but not contracted for .......................................
46 Lease commitments
At the year-end, annual commitments under non-cancellable operating leases were:
Leasehold land and buildings
Operating leases which expire:
– within 1 year ............................................................................................................
– between 1 and 5 years ..............................................................................................
– over 5 years ..............................................................................................................
Equipment
Operating leases which expire:
– within 1 year ............................................................................................................
– between 1 and 5 years ..............................................................................................
2002
US$m
1,238
106
1,344
2002
US$m
60
174
171
405
2002
US$m
15
15
30
2001
US$m
592
265
857
2001
US$m
37
159
164
360
2001
US$m
–
11
11
275
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
47 Segmental analysis
As HSBC is not required to disclose turnover, no segmental analysis of turnover is included. Turnover of non-
banking businesses is included in other operating income. The allocation of earnings reflects the benefit of
shareholders’ funds to the extent that these are actually allocated to businesses in the segment by way of intra-HSBC
capital and funding structures. Common costs are included in segments on the basis of the actual recharges made.
(a) By geographical region
Geographical information has been classified by the location of the principal operations of the subsidiary
undertaking, or in the case of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc,
HSBC Bank Middle East and HSBC Bank USA operations, by the location of the branch responsible for
reporting the results or for advancing the funds. Due to the nature of HSBC’s structure, the analysis of profits
and net assets shown below includes intra-HSBC items between geographical regions. The ‘Rest of Asia-
Pacific’ geographical segment includes the Middle East, India and Australasia.
The geographical analysis has been realigned to reflect the reclassification of Mexico and Panama to North
America, from South America (formerly described as Latin America).
Total assets:
Europe*.........................................
Hong Kong....................................
Rest of Asia-Pacific* ....................
North America* ............................
South America* ¶..........................
At 31 December 2002
%
45.7
24.1
10.2
18.9
1.1
US$m
342,118
180,525
76,635
142,032
8,491
At 31 December 2001†
%
43.2
25.6
9.1
20.2
1.9
US$m
297,674
175,744
62,355
138,738
13,097
At 31 December 2000†
%
44.4
26.5
8.5
18.0
2.6
US$m
295,326
176,618
56,901
120,027
17,200
749,801
100.0
687,608
100.0
666,072
100.0
Add: Hong Kong SAR
Government certificates of
indebtedness ..............................
9,445
Total assets....................................
759,246
8,637
696,245
8,193
674,265
*
In 2000 included within total assets in Europe, North America, South America and the rest of Asia-Pacific are amounts of
US$67,784 million, US$788 million, US$2,179 million and US$1,130 million, respectively in relation to businesses acquired that
year.
Net assets:
Europe...........................................
Hong Kong....................................
Rest of Asia-Pacific ......................
North America ..............................
South America ¶ ...........................
At 31 December 2002
%
59.5
18.7
7.3
14.5
0.0
US$m
31,230
9,774
3,811
7,613
(22)
At 31 December 2001†
%
61.7
20.9
7.3
10.6
(0.5)
US$m
28,650
9,683
3,369
4,906
(220)
At 31 December 2000†
%
61.5
18.9
7.1
9.9
2.6
US$m
28,531
8,782
3,308
4,586
1,186
Total net assets..............................
52,406
100.0
46,388
100.0
46,393
100.0
Figures for 2000 and 2001 have been restated to reflect adoption of the UK Financial Reporting Standard 19 ‘Deferred Tax’,
details of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
Formerly described as Latin America, which included Group entities in Panama and Mexico, which are now included in North
America. Figures for 2001 and 2000 have been restated to reflect this change.
†
¶
276
Profit on ordinary activities before tax:
Europe Hong Kong
US$m
US$m
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America
US$m
Year ended 31 December 2002
Interest receivable .............................
Interest payable .................................
Net interest income ...........................
Dividend income...............................
Fees and commissions receivable......
Fees and commissions payable..........
Dealing profits ..................................
Other operating income.....................
12,646
(6,303)
6,343
211
5,397
(869)
508
1,025
Operating income..............................
Operating expenses ...........................
12,615
(8,529)
Operating profit before provisions ....
Provisions for bad and doubtful debts
Provisions for contingent liabilities
4,086
(569)
5,968
(1,835)
4,133
25
1,449
(185)
133
495
6,050
(2,139)
3,911
(246)
and commitments..........................
(15)
(14)
Loss from foreign currency
redenomination in Argentina.........
–
–
Amounts written off fixed asset
investments ...................................
(267)
(10)
3,174
(1,567)
1,607
3
897
(173)
364
83
2,781
(1,561)
1,220
(89)
18
–
(2)
5,796
(3,064)
2,732
24
1,205
(221)
161
333
4,234
(2,821)
1,413
(300)
3
–
(9)
Operating profit/(loss).......................
Share of operating loss in joint
ventures ........................................
Share of operating profit in associates
Gains on disposal of investments and
tangible fixed assets ......................
Profit/(loss) on ordinary activities
3,235
3,641
1,147
1,107
(26)
3
288
–
11
58
–
113
–
(2)
8
125
1,751
(1,106)
645
15
417
(93)
147
110
1,241
(1,084)
157
(117)
(31)
(68)
(36)
(95)
–
–
37
before tax ......................................
3,500
3,710
1,260
1,238
(58)
Intra-
HSBC
items
US$m
(740)
740
–
–
(120)
120
–
(326)
(326)
326
–
–
–
–
–
–
–
–
–
–
Total
US$m
28,595
(13,135)
15,460
278
9,245
(1,421)
1,313
1,720
26,595
(15,808)
10,787
(1,321)
(39)
(68)
(324)
9,035
(28)
135
508
9,650
277
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Profit on ordinary activities before tax:
Europe Hong Kong
US$m
US$m
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America *
US$m
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......................
14,508
(8,945)
5,563
116
5,013
(803)
708
1,022
Operating income...............................
Operating expenses ............................
11,619
(7,920)
8,971
(4,806)
4,165
26
1,358
(186)
218
436
6,017
(2,140)
3,612
(2,130)
1,482
3
810
(129)
395
58
2,619
(1,405)
7,000
(4,550 )
2,450
29
1,068
(155 )
346
207
3,945
(2,685 )
2,306
(1,241 )
1,065
12
624
(130 )
18
356
1,945
(1,511 )
Operating profit before provisions .....
Provisions for bad and doubtful
3,699
3,877
1,214
1,260
434
debts ..............................................
(441)
(197)
(172)
(300 )
(927 )
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 )
–
–
(11)
988
(5)
99
6
–
(5 )
(520 )
(1 )
373
(1,014 )
(7 )
5
132
503
–
1
(3 )
(1,016 )
Intra-
HSBC
items
US$m
Total
US$m
(1,136 )
1,136
35,261
(20,536)
–
–
(117 )
117
–
(257 )
(257 )
257
–
–
–
–
–
–
–
–
–
–
14,725
186
8,756
(1,286)
1,685
1,822
25,888
(15,404)
10,484
(2,037)
(649)
(520)
(125)
7,153
(91)
164
774
8,000
before tax.......................................
3,542
3,883
1,088
*
†
Formerly described as Latin America, which included Group entities in Panama and Mexico, which are now included in North
America. Figures for 2001 have been restated to reflect this change.
Figures for 2001 have been restated to reflect adoption of the UK Financial Reporting Standard 19 ‘Deferred Tax’, details of
which are set out in Note 1 on the Financial Statements on pages 195 to 197.
278
Profit on ordinary activities before tax:
Europe * Hong Kong
US$m
US$m
Rest of
Asia-Pacific
North
America
US$m
US$m
South
America ¶
US$m
Year ended 31 December 2000†
Interest receivable ..............................
Interest payable ..................................
Net interest income ............................
Dividend income................................
Fees and commissions receivable.......
Fees and commissions payable...........
Dealing profits ...................................
Other operating income......................
14,257
(9,269)
4,988
84
4,909
(809)
787
951
Operating income...............................
Operating expenses ............................
10,910
(6,866)
11,447
(7,450)
3,997
34
1,359
(191)
229
359
5,787
(1,987)
Operating profit before provisions .....
Provisions for bad and doubtful
4,044
3,800
debts...............................................
(348)
(248)
3,930
(2,563)
1,367
3
840
(130)
324
48
2,452
(1,297)
1,155
15
5
(3)
7,419
(5,234 )
2,185
68
990
(128 )
229
179
3,523
(2,540 )
2,351
(1,165 )
1,186
8
615
(144 )
57
396
2,118
(1,614 )
983
504
(157 )
(194 )
1
–
–
(1 )
Provisions for contingent liabilities
and commitments...........................
Amounts written off fixed asset
investments ....................................
Operating profit/(loss)........................
Share of operating loss in joint
ventures .........................................
Share of operating profit in
associates .......................................
Gains on disposal of investments and
tangible fixed assets .......................
Profit/(loss) on ordinary activities
(67)
(23)
(10)
(9)
3,606
3,533
1,172
827
309
(51)
(45)
148
–
21
137
–
100
(7)
–
(2 )
35
860
–
1
(9 )
301
before tax .......................................
3,658
3,691
1,265
Intra-
HSBC
items
US$m
Total
US$m
(1,658 )
1658
37,746
(24,023)
–
–
(137 )
137
–
(217 )
(217 )
217
–
–
–
–
–
–
–
–
–
13,723
197
8,576
(1,265)
1,626
1,716
24,573
(14,087)
10,486
(932)
(71)
(36)
9,447
(51)
75
304
9,775
*
†
¶
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$500 million is estimated to relate to Europe).
Figures for 2000 have been restated to reflect adoption of the UK Financial Reporting Standard 19 ‘Deferred Tax’, details of
which are set out in Note 1 on the Financial Statements on pages 195 to 197.
Formerly described as Latin America, which included Group entities in Panama and Mexico, which are now included in North
America. Figures for 2000 have been restated to reflect this change.
(b) By Line of Business
HSBC’s operations include a number of support services and head office functions. The costs of these functions
are allocated to business lines, where it is appropriate, on a systematic and consistent basis. In addition, there are
a number of income and expense items between lines of business and the following profits analysis includes
amounts within each line of business and then eliminates any duplication in a separate column.
During 2002, HSBC has amended the management responsibility for a limited number of businesses. The
principal change aligns private banking in the United States with international private banking. The analysis for
2001 and 2000 has been restated to reflect the new structure.
Total assets and net assets split by line of business are disclosed for 2002 and 2001. Total assets and net assets
by line of business were not presented for 2000 and as a result the underlying information was not available
without undue cost.
279
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking and
Markets
US$m
Private
Banking
US$m
Other
US$m
Intra-
HSBC
items
US$m
Total
US$m
Year ended 31 December 2002
Net interest income............................
Dividend income ...............................
Net fees and commissions..................
Dealing profits...................................
Other operating income .....................
7,581
6
2,979
50
788
Operating income ..............................
11,404
3,855
6
1,934
107
463
6,365
3,521
230
2,164
1,008
610
7,533
556
2
623
137
102
(53 )
–
15,460
34
124
11
905
–
–
–
(1,148 )
278
7,824
1,313
1,720
1,420
1,021
(1,148 )
26,595
Operating expenses............................
(7,159 )
(3,321 )
(4,135 )
(1,251 )
(1,090 )
1,148
(15,808 )
Operating profit/(loss) before
provisions .....................................
4,245
3,044
3,398
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 ...................................
(857 )
(42 )
–
(2 )
(269 )
(184 )
19
–
3
12
–
(109 )
Operating profit/(loss) .......................
Share of operating (loss)/profit in
3,344
2,797
3,117
joint ventures ................................
(23 )
Share of operating profit/(loss) in
associates ......................................
Gains on disposal of investments
and tangible fixed assets ...............
Profit/(loss) on ordinary activities
17
19
2
16
51
(7 )
46
317
before tax......................................
3,357
2,866
3,473
169
(5 )
(21 )
–
(22 )
121
–
(11 )
46
156
(69 )
(6 )
(7 )
(68 )
(194 )
(344 )
–
67
75
(202 )
Segment total assets...........................
171,496
113,525
394,542
48,346
21,892
Add: Hong Kong SAR Government
certificates of indebtedness ...........
Total assets ........................................
Net assets...........................................
12,101
10,290
16,852
7,366
5,797
–
–
–
–
–
–
–
–
–
–
10,787
(1,321 )
(39 )
(68 )
(324 )
9,035
(28 )
135
508
9,650
749,801
9,445
759,246
52,406
280
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking and
Markets
US$m
Year ended 31 December 2001*
Net interest income ..........................
Dividend income...............................
Net fees and commissions .................
Dealing profits ..................................
Other operating income.....................
6,828
5
2,877
53
806
Operating income..............................
10,569
3,821
7
1,751
103
422
6,104
3,419
138
2,140
1,411
568
7,676
Private
Banking
US$m
577
4
602
124
87
Intra-
HSBC
items
US$m
Total
US$m
–
14,725
–
–
–
(1,057 )
186
7,470
1,685
1,822
Other
US$m
80
32
100
(6 )
996
1,394
1,202
(1,057 )
25,888
Operating expenses ...........................
(6,656 )
(3,273 )
(4,124 )
(1,168 )
(1,240 )
1,057
(15,404 )
Operating profit/(loss) before
provisions.....................................
3,913
2,831
3,552
Provisions for bad and doubtful
debts.............................................
Provisions for contingent liabilities
and commitments .........................
Loss from foreign currency
redenomination in Argentina
Amounts written off fixed asset
investments ..................................
Operating profit/(loss).......................
Share of operating (loss)/profit in
joint ventures................................
Share of operating profit/(loss) in
associates .....................................
Gains on disposal of investments
and tangible fixed assets...............
Profit/(loss) on ordinary activities
(767 )
(17 )
–
(5 )
(662 )
16
–
(1 )
(34 )
(14 )
–
(72 )
226
24
(46 )
–
(2 )
(38 )
(598 )
(588 )
(520 )
(45 )
3,124
2,184
3,432
202
(1,789 )
(99 )
44
210
4
28
10
4
33
354
–
–
5
–
59
195
before tax ....................................
3,279
2,226
3,823
207
(1,535 )
Segment total assets
138,908
101,002
374,282
52,135
21,281
Add: Hong Kong SAR Government
certificates of indebtedness...........
Total assets .......................................
Net assets ..........................................
9,309
9,108
15,046
6,195
6,730
–
–
–
–
–
–
–
–
–
–
10,484
(2,037 )
(649 )
(520 )
(125 )
7,153
(91 )
164
774
8,000
687,608
8,637
696,245
46,388
*
Figures for 2001 have been restated to reflect adoption of the UK Financial Reporting Standard 19 ‘Deferred Tax’, details of which are set out in
Note 1 on the Financial Statements on pages 195 to 197.
281
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking and
Markets
US$m
6,508
1
2,644
97
711
9,961
3,541
3
1,681
82
368
5,675
2,849
148
2,305
1,370
610
7,282
Private
Banking
US$m
569
2
555
110
90
Intra-
HSBC
items
US$m
Total
US$m
–
13,723
–
–
–
(931 )
197
7,311
1,626
1,716
Other
US$m
256
43
126
(33 )
868
1,326
1,260
(931 )
24,573
Year ended 31 December 2000
Net interest income ..........................
Dividend income ..............................
Net fees and commissions.................
Dealing profits..................................
Other operating income ....................
Operating income .............................
Operating expenses...........................
(6,343 )
(2,814 )
(3,940 )
Operating profit before provisions ....
Provisions for bad and doubtful
3,618
2,861
3,342
debts ............................................
(602 )
(202 )
(146 )
Provisions for contingent liabilities
and commitments.........................
Amounts written off fixed asset
investments ..................................
Operating profit ................................
Share of operating (loss)/profit in
joint ventures ...............................
Share of operating (loss)/profit in
associates .....................................
Gains on disposal of investments
and tangible fixed assets ..............
Profit on ordinary activities
(31 )
–
5
2
(10 )
(33 )
2,985
2,666
3,153
339
(52 )
(48 )
15
–
22
12
–
53
243
(977 )
349
(6 )
–
(4 )
–
1
19
359
(944 )
931
(14,087 )
316
24
(35 )
(1 )
304
1
47
15
367
–
–
–
–
–
–
–
–
–
10,486
(932 )
(71 )
(36 )
9,447
(51 )
75
304
9,775
before tax ....................................
2,900
2,700
3,449
(c) 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 .............................
2002
US$m
9,504
3,239
2001
US$m
8,394
3,147
2000
US$m
8,596
3,162
Operating income includes intra-HSBC income of US$418 million (2001: US$517 million; 2000: US$506
million). Profit on ordinary activities before tax includes profit arising on intra-HSBC transactions of
US$406 million (2001: US$488 million; 2000: US$492 million).
282
(ii) Geographical analysis of tangible fixed assets
United Kingdom ..............................................................
Other ................................................................................
Total.................................................................................
2002
US$m
6,240
7,941
14,181
2001
US$m
5,270
8,251
13,521
2000
US$m
5,504
8,517
14,021
Other includes assets held in Hong Kong amounting to US$4,180 million (2001: US$4,589 million; 2000:
US$4,954 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$367,665 in
credit card transactions (2001: US$259,172) and
US$14,538,793 in guarantees (2001: US$34,541,955))......
Officers:
Loans and credit card transactions (including US$169,025 in
credit card transactions (2001: US$149,753) and US$nil
in guarantees (2001: US$nil)) .............................................
2002
2001
Number
US$m
Number
US$m
145
931
150
716
28
18
27
13
Particulars of Directors’ transactions are recorded in a register held at the Registered Office of HSBC Holdings
which is available for inspection by members for 15 days prior to the HSBC Holdings Annual General Meeting
and at the Annual General Meeting itself. 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.
283
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Associates
Information relating to associates can be found in the ‘Notes on the Financial Statements’ where the following
are disclosed:
− 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 2002, US$9.8 billion (2001: US$12.5 billion) of HSBC pension fund assets were under
management by HSBC companies of which US$1,155 million (2001: US$1,167 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$23 million (2001: US$27 million). HSBC’s
pension funds had deposits of US$252 million (2001: US$275 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$94 million (2001: US$39 million) in respect of valuations below depreciated historical cost (of which
a credit of US$2 million (2001: US$1 million) relates to minority interests).
In accordance with Financial Reporting Standard 19 ‘Deferred Tax’, HSBC has recognised deferred tax in full on
timing differences between the accounting and taxation treatment of income and expenditure, subject to
recoverability of deferred tax assets. If HSBC had prepared its financial statements in accordance with Hong Kong
Statement of Standard Accounting Practice 12 ‘Income Taxes’ (revised August 2002) it would have recognised
additional deferred tax assets and liabilities, resulting in an increase in reserves at 31 December 2002 of US$119
million (at 31 December 2001*: US$114 million), and an increase in the charge to the profit and loss account in
respect of tax on profit on ordinary activities of US$22 million (2001*: US$188 million).
If HSBC had prepared its financial statements under Hong Kong Statement of Standard Accounting Practice 24
‘Investments in Securities’, US$1,253 million (2001: US$860 million) would have been credited to reserves in
respect of changes in the fair value of its investment securities.
In accordance with UK 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 2002 of US$3,069 million (at 31 December 2001: US$2,700 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 elected to record its investment in HSBC undertakings at cost, less provisions for any
284
impairment, there would have been a reduction in the reserves of HSBC Holdings at 31 December 2002 of
US$13,906 million (at 31 December 2001: US$8,962 million). There would have been no impact on the
consolidated financial statements of HSBC.
HSBC applies UK Statement of Standard Accounting Practice 24 ‘Accounting for pension costs’ to defined benefit
schemes, which requires that the cost of providing pensions be recognised on a systematic and rational basis over the
period during which benefit is gained from the employees’ services. If HSBC had prepared its financial statements
under Hong Kong Statement of Standard Accounting Practice 34 ‘Employee benefits’ a defined benefit pension
liability of US$4,023 million would have been recognised in the balance sheet at 31 December 2002 (at 31
December 2001: US$2,149 million). There would have been an additional charge to the profit and loss account in
2002 of US$7 million.
* The 2001 figures have been calculated by reference to UK GAAP figures restated to reflect the adoption of UK Financial Reporting
Standard 19 ‘Deferred tax’, details of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
285
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 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’.
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. 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’.
286
UK GAAP
Pension costs
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. Where options lapse
before their costs have been fully recognised, any costs
previously recognised relating to lapsed options are
written back.
Goodwill acquired up to 30 June 2001was capitalised
and amortised over its estimated useful life but not
more than 25 years. Goodwill acquired after 30 June
2001 is not amortised. Previously acquired goodwill
ceased to be amortised from 31 December 2001.
SFAS 142 ‘Goodwill and Other Intangible Assets’
requires that goodwill should not be amortised but
should be tested for impairment at least annually at the
reporting unit level by applying a fair-value-based test.
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.
Stock-based compensation
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 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.
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.
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.
UK GAAP 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.
287
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
UK GAAP
Goodwill (continued)
US GAAP
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.
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.
Core deposit intangibles
Under UK GAAP the value of depositor relationships
is not considered to be a separately identifiable asset.
Costs of software for internal use
HSBC generally expenses costs of software developed
for internal use. 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 is capitalised and amortised
over its useful life.
Website design and content development costs are
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.
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.
288
In relation to the acquisition of a deposit taking
institution, a separate intangible asset covering
depositor relationships is recognised. To the extent that
such an asset is recognised there is a commensurate
reduction in the amount of recorded goodwill. The
value ascribed is amortised to net income over the
average life of the depositor relationships in question.
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 their estimated useful life.
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.
UK GAAP
Accruals accounted derivatives
US GAAP
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.
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.
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.
289
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
Accruals accounted derivatives (continued)
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’.
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’.
SSAP 20 ‘Foreign currency translation’ requires
foreign exchange differences on foreign-currency-
denominated monetary items, including securities, to
be recognised in the profit and loss account.
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’.
− 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.
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.
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.
Where an available-for-sale or held-to-maturity
security experiences other-than-temporary decline in
fair value below cost this decline is treated as a realised
loss and included in earnings. This lower fair value
becomes the cost basis for the security.
Trading securities are measured at fair value with
unrealised holding gains and losses included in
earnings.
290
UK GAAP
Foreign currency
Under SSAP 20 ‘Foreign Currency Translation’ a
company’s local currency is the currency of the
primary economic environment in which it operates
and generates net cash flows. Foreign exchange
differences arising when translating non- local
currency assets and liabilities into the local currency
are reported in the profit and loss account.
Own shares held
UK GAAP allows for the inclusion of own shares held
within equity shares.
Dividends payable
US GAAP
Under SFAS 52 ‘Foreign Currency Translation’ an
entitiy’s functional currency is the currency of the
primary economic environment in which it operates.
An entity operating in a single economic environment
may have only one functional currency. Foreign
exchange differences arising when translating non-
functional currency assets and liabilities into the local
currency are reported in the profit and loss account.
AICPA Accounting Research Bulletin 51‘Consolidated
Financial Statements’ requires a reduction in
shareholders’ equity for own shares held.
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.
Deferred taxation
Deferred taxation is generally provided in the accounts
for all timing differences, subject to assessment of the
recoverability of deferred tax assets.
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’.
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.
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.
291
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
UK GAAP
Acceptances
US GAAP
Acceptances outstanding are not included in the
consolidated balance sheet.
Acceptances outstanding and the matching customer
liabilities are included in the consolidated balance
sheet.
Profit and loss presentation
The following items are separately disclosed in the
profit and loss account:
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’.
292
The following tables summarise the significant adjustments to consolidated net income and shareholders’ equity
which would result from the application of US GAAP.
Note
2002
2001*
2000*
US$m
US$m
US$m
US$m
US$m
US$m
NET INCOME
Attributable profit of HSBC (UK GAAP) ...........
Lease financing ........................................................
Debt swaps...............................................................
Shareholders’ interest in long-term assurance fund
Pension costs............................................................
Stock-based compensation .......................................
Goodwill ..................................................................
Internal software costs .............................................
Revaluation of property............................................
Purchase accounting adjustments .............................
Accruals accounted derivatives ................................
Foreign exchange gains on available-for-sale
securities ..............................................................
Other-than-temporary decline in value of
available-for-sale securities..................................
Foreign exchange losses on Argentine overseas
funding .................................................................
Taxation : US GAAP ..............................................
: on reconciling items...............................
Minority interest in reconciling items ......................
Estimated net income (US GAAP)...........................
Per share amounts (US GAAP)
Basic earnings per ordinary share ............................
Diluted earnings per ordinary share .........................
a
b
c
d
e
f
g
h
i
j
k
l
o
o
6,239
(68)
–
(6)
(62)
(240)
845
66
76
15
221
(2,197)
(122)
(390)
445
78
4,900
US$
0.52
0.52
Note
(30)
475
SHAREHOLDERS’ EQUITY
Shareholders’ funds (UK GAAP)..............................................................
Lease financing .........................................................................................
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................................................................
b
c
e
f
g
h
j
l
Minority interest in reconciling items .......................................................
Estimated shareholders’ equity (US GAAP) .............................................
4,992
(40 )
4
(152 )
(26 )
(316 )
(509 )
264
49
(49 )
280
312
–
–
66
36
4,911
US$
0.53
0.53
6,457
(53)
97
(140)
(113)
(234)
(312)
185
69
68
116
–
–
–
80
16
6,236
US$
0.71
0.70
112
(32 )
188
(122)
2002
2001*
US$m
US$m
US$m
US$m
52,406
(406)
(875)
(2,522)
2,575
669
(2,273)
213
782
2,040
(549)
3,069
410
292
55,831
154
256
46,388
(300 )
(798 )
(1,157 )
1,961
570
(2,681 )
104
419
1,342
(608 )
2,700
136
368
48,444
173
(37)
* Figures for 2001 and 2000 have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’ details
of which are set out in Note 1 on the Financial Statements on pages 195 to 197.
293
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note
c
Movement in Shareholders’ Equity (US GAAP)
Balance brought forward...............................................................
Estimated net income...................................................................
Dividends.....................................................................................
Foreign exchange gains on available-for-sale securities ..............
Minimum pension liability...........................................................
Stock based compensation ...........................................................
Accruals accounted derivatives....................................................
Change in fair value of available-for-sale securities ....................
Foreign exchange movements on Argentine overseas funding....
Deferred tax on US GAAP adjustments.......................................
Amounts arising on shares issued in lieu of dividends ................
New share capital subscribed net of costs....................................
Shares issued in connection with acquisition...............................
Other foreign exchange movements and other items ...................
2002
US$m
48,444
4,900
(4,632)
2,197
(1,159)
240
142
698
390
(240)
1,023
337
–
3,491
2001
US$m
48,072
4,911
(4,394)
(312)
–
316
23
26
–
122
866
112
–
(1,298)
2000
US$m
35,930
6,236
(3,137)
–
–
234
–
582
–
(103)
944
176
8,200
(990)
Balance carried forward...............................................................
55,831
48,444
48,072
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 ....................................................................................................
2002
US$m
7,659
5,651
18,141
9,445
95,496
352,353
185,329
1,975
32,441
4,711
50,364
763,565
9,445
52,933
495,438
4,634
34,965
4,711
72,697
2,013
6,266
18,371
6,261
55,831
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
Total liabilities ............................................................................................................
763,565
698,312
294
Net assets arising due to reverse repo transactions of US$18,736 million (2001: US$10,926 million) and US$12,545
million (2001: US$14,823 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$8,271 million (2001: US$7,113 million) and US$13,126 million
(2001: US$9,769 million) are included in ‘Deposits by banks’ and ‘Customer accounts’ respectively. Average repo
liabilities during the year were US$19,624 million (2001: US$23,850 million). The maximum quarter-end repo
liability outstanding during the year was US$21,688 million (2001: US$24,901 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 2002, the impact on ‘Debt securities and equity shares’ and ‘Treasury bills and other eligible bills’
would be to reclassify securities amounting to US$20,061 million as encumbered (2001: US$28,973 million).
As at 31 December 2002, collateral received under reverse repo transactions where HSBC has the right to sell or
repledge the security obtained amounted to US$27,439 million gross (2001: US$35,820 million).
As at 31 December 2002, approximately US$15 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 (2001:
approximately US$34 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 2002, stock lending transactions where the securities lent are subject to sale
or repledge amounted to US$5,050 million (2001: US$3,966 million). At 31 December 2002, stock borrowing
transactions where the securities borrowed are subject to sale or repledge amounted to US$4,643 million (2001:
US$2,972 million).
(a) Debt swaps
Under UK GAAP, assets acquired in exchange for advances in order to achieve an orderly realisation are
included at the net book value of the advance disposed of at the date of exchange, with any provision having
been duly updated. Under SFAS 15, such assets are included at the fair value at the date of acquisition. Under
US GAAP, as the Group disposed of its remaining debt swaps accounted for under SFAS 15 during 2001 there
is no adjustment to shareholders’ funds at 31 December 2002 (2001: nil). Profit before tax would increase by
US$ nil (2001: US$4 million; 2000: US$97 million) to show such assets at their fair value at the date of
acquisition.
(b) Shareholders’ interest in the long-term assurance fund
Under UK GAAP, the value of 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. The net present value of such profits is not recognised under US GAAP.
US GAAP requires the application of different accounting treatments in a number of areas of accounting for the
long-term assurance fund. In particular, the accounting treatment of assets which are held-to-maturity, the
definition and amortisation of deferred acquisition costs and the methodology for determining actuarial reserves
vary between US and UK GAAP.
US GAAP profits in respect of the shareholders’ interest in the long-term assurance fund would have been some
US$6 million lower (2001: US$152 million; 2000: US$140 million) than those under UK GAAP. Shareholders’
equity would be US$875 million (2001: US$798 million) lower under US GAAP. The smaller adjustment to US
GAAP profits in 2002, compared with that in 2001, mainly reflects lower UK GAAP profits, where despite an
increase in new business income, the growth in the present value of in-force policies has been inhibited by weak
markets. This adjustment also reduces other assets by US$875 million (2001: US$798 million) under US
GAAP.
(c) 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 94% of all HSBC’s schemes in
terms of plan assets. For non-US schemes, HSBC has applied SFAS 87 ‘Employers’ Accounting for Pensions’
295
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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.
The projected benefit obligation in excess of plan assets at 28 July 2000 for Crédit Commercial de France was
recognised as a liability under the purchase accounting adjustments of APB 16 ‘Business Combinations’.
Where the accumulated benefit obligation on a pension plan (the value of the benefits accrued based on
employee service up to the balance sheet date) exceeds the fair value of plan assets, the employer recognises an
additional minimum pension liability equal to this excess, so long as the excess is greater than any accrual
which has already been established for unfunded pension costs. At the same time, an intangible asset is
established equal to the lower of the liability recognised for the unfunded benefit obligation and the amount of
any unrecognised prior service cost.
At 31 December 2002, HSBC recognised an additional minimum pension liability of US$1,175 million in
respect of its unfunded accumulated benefit obligations. This liability is partially offset by an intangible asset of
US$16 million. The net impact of these items, after taking account of relevant tax assets of US$335 million, is
to reduce the Group’s shareholders’ equity under US GAAP by US$824 million.
Estimated pension costs for these plans computed under SFAS 87 are as follows:
Components of net periodic benefit cost
Service cost.............................................................................
Interest cost.............................................................................
Expected return on plan assets................................................
Amortisation of prior service cost...........................................
Amortisation of unrecognised net liability at 30 June 1992....
Amortisation of recognised net actuarial loss/(gain)...............
Net periodic pension cost........................................................
Employee contributions ..........................................................
Net periodic pension cost........................................................
2002
US$m
2001
US$m
2000
US$m
438
862
(885)
4
6
14
439
–
439
447
801
(862)
4
6
(1)
395
–
395
445
736
(764)
4
4
(47)
378
(2)
376
The US GAAP pension cost of US$439 million (2001: US$395 million; 2000: US$376 million) compares with
US$377 million for these plans under UK GAAP (2001: US$369 million; 2000: US$263 million) for the
schemes included in the SFAS 87 calculation.
Change in projected benefit obligation
Projected benefit obligation as at 1 January.........................................................
Service cost..........................................................................................................
Interest cost..........................................................................................................
Employee contributions .......................................................................................
Net actuarial (gain) ..............................................................................................
Acquisition...........................................................................................................
Plan amendment...................................................................................................
Benefits paid ........................................................................................................
Exchange movements ..........................................................................................
Projected benefit obligation as at 31 December...................................................
2002
US$m
14,054
438
862
2
(600)
–
1
(565)
1,271
15,463
2001
US$m
14,481
447
801
1
(869)
21
2
(443)
(387)
14,054
296
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 .................................................................................
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 ...........................................................................
Unrecognised prior service cost...........................................................................
Accrued pension cost ...........................................................................................
Additional minimum liability...............................................................................
Unfunded accumulated benefit obligation ...........................................................
Amounts recognised under US GAAP:
Prepaid benefit cost..............................................................................................
Accrued benefit liability ......................................................................................
Accrued pension cost ...........................................................................................
US GAAP adjustment:
Accrued net pension cost under US GAAP .........................................................
Additional minimum liability...............................................................................
Intangible asset ....................................................................................................
Amounts recognised for these schemes under UK GAAP ...................................
2002
US$m
12,097
–
(1,393)
616
2
(565)
1,029
11,786
(3,677)
7
2,291
22
(1,357)
(1,175)
(2,532)
538
(1,895)
(1,357)
(1,357)
(1,175)
16
(6)
(2,522)
2001
US$m
13,828
30
(1,315)
339
1
(443)
(343)
12,097
(1,957)
13
492
23
(1,429)
–
(1,429)
268
(1,697)
(1,429)
(1,429)
–
–
272
(1,157)
Plan asset valuations are as at 31 December.
In 2002, plans with an aggregate accumulated benefit obligation of US$12,776 million (2001: US$11,406
million) and assets with an aggregate fair value of US$9,743 million (2001: US$10,508 million) had an
accumulated benefit obligation in excess of plan assets.
Plans with an aggregate projected benefit obligation of US$14,752 million (2001: US$13,225 million) and
assets with an aggregate fair value of US$10,989 million (2001: US$11,282 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 2002 and 2001 for HSBC’s main pension plans has been
calculated using the following financial assumptions:
297
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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............................................................
2002
% per annum
5.6
5.5
5.6
10.25
6.75
5.5
7.3
8.0
6.9
9.5
2.75
4.5
4.0
6.05
3.75
3.5
2001
% per annum
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
(d) Stock-based compensation
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$240 million (2001:
US$316 million; 2000: US$234 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
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.
2002
2001
2000
Weighted
average
exercise
price
£
6.60
–
6.26
6.91
6.68
Number
(000’s)
102,710
–
(20,982)
(2,083)
79,645
Weighted
average
exercise
price
£
6.56
–
5.34
6.53
6.60
Number
(000’s)
109,424
–
(3,236)
(3,478)
102,710
Weighted
average
exercise
price
£
6.10
7.46
4.11
6.65
6.56
Number
(000’s)
84,765
32,789
(4,059)
(4,071)
109,424
Outstanding at beginning of year ..
Granted in the year........................
Exercised in the year.....................
Less: Forfeited in the year.............
Outstanding at end of year ............
The weighted average fair value of options as at the date of grant during 2000 was US$5.26.
298
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:
2002
2001
2000
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
3,094
4.01
76,551
6.79
4,116
3.94
98,594
6.71
5,600
3.86
103,824
6.71
contractual life (years)....................
3.59
6.59
4.55
7.52
5.49
8.51
Of which exercisable:
Number (‘000)....................................
Weighted average exercise price (£)...
Group Share Option Plan
3,094
4.01
47,344
6.38
4,116
3.94
3,170
6.28
5,600
3.86
35
7.80
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.
2002
2001
2000
Weighted
average
exercise
price
£
8.72
8.40
–
8.62
Number
(000’s)
50,825
57,236
–
(1,897)
Weighted
average
exercise
price
£
9.64
8.71
–
8.72
Number
(000’s)
455
51,357
–
(987)
Weighted
average
exercise
price
£
–
9.64
–
9.64
Number
(000’s)
–
460
–
(5)
Outstanding at beginning of year
Granted in the year........................
Exercised in the year.....................
Less: Forfeited in the year.............
Outstanding at end of year ............
106,164
8.55
50,825
8.72
455
9.64
The weighted average fair value of options granted in the year as at the date of grant was US$2.33 (2001:
US$3.39; 2000: US$4.52).
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 2002, 2001 or 2000.
2002
2001
2000
Exercise price range (£)......................................... £6.00 - £8.00
£8.01 - £10.00
£8.01 - £10.00
£8.01 - £10.00
Number (‘000).......................................................
Weighted average exercise price (£)......................
Weighted average remaining
contractual life (years) .......................................
469
7.46
9.66
105,695
8.55
8.83
50,825
8.72
9.30
455
9.64
9.76
299
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 (2001: 20 per cent; 2000: 15 per cent)
discount to the market value at the date of grant.
2002
2001
2000
Weighted
average
exercise
price
£
5.76
6.32
4.73
5.90
Number
(000’s)
130,450
19,828
(16,455)
(12,303)
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)
Outstanding at beginning of year ..
Granted in the year........................
Exercised in the year.....................
Less: Forfeited in the year.............
Outstanding at end of year ............
121,520
5.97
130,450
5.76
121,312
5.25
The maximum term of options granted in the year is 51/2 years from the date of grant (2001: 51/2 years; 2000:
51/2 years).
The weighted average fair value of options granted in the year as at the date of grant was US$3.58 (2001:
US$3.68; 2000: US$4.31).
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:
2002
2001
2000
Exercise price range (£) ..................... £1.81 - £4.00 £4.01 - £6.75
£1.81 - £4.00 £4.01 - £6.52
£1.81 - £4.00 £4.01 - £6.52
Number (‘000) ...................................
Weighted average exercise price (£) ..
Weighted average remaining
2,382
3.78
119,138
6.02
3,411
3.62
127,039
5.81
15,470
3.16
105,842
5.56
contractual life (years) ...................
0.65
2.02
1.16
2.47
0.68
3.28
Of which exercisable:
Number (‘000) ...................................
Weighted average exercise price (£) ..
–
–
312
4.52
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
significant weighted average assumptions used to estimate the fair value of the options granted in 2002 are as
follows:
Risk-free interest rate (%).......................................
Expected life (years) ...............................................
Expected volatility (%) ...........................................
Group Share
Option Plan
5.6
5.3
25
3 year Savings-
Related Share
Option Schemes
5.47
3.3
30
5 year Savings-
Related Share
Option Schemes
5.6
5.3
30
300
CCF
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.
2002
2001
2000
Weighted
average
exercise
price
Euro
142.50
–
142.50
–
Number
(000’s)
861
–
(4)
–
Weighted
average
exercise
price
Euro
142.50
–
–
142.50
Number
(000’s)
908
–
–
(47)
Weighted
average
exercise
price
Euro
–
142.50
–
142.50
Number
(000’s)
–
909
–
(1)
Outstanding at beginning of year
Granted in the year
Less: Exercised in the year
Less: Forfeited in the year
Outstanding at end of year
857
142.50
861
142.50
908
142.50
The weighted average exercise price of options granted during 2000 was Euro142.50, the fair value as at the
date of grant was US$62.97 and the weighted average remaining contractual life for options outstanding at the
balance sheet date was 9 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.......................................................
2002
Number
(000’s)
6,197
3,667
(261)
(63)
Outstanding at end of year ......................................................
9,540
2001
Number
(000’s)
4,092
2,564
(210)
(249)
6,197
2000
Number
(000’s)
2,085
2,085
–
(78)
4,092
The weighted average purchase price for shares purchased by HSBC for conditional awards under the Restricted
Share Plan in 2002 was US$12.08 (2001: US$13.37; 2000: US$10.70).
The weighted average remaining vesting period as at 31 December 2002 was 2.98 years (2001: 3.29 years;
2000: 3.25 years).
The 2003 conditional awards from the Restricted Share Plan in respect of 2002 will have an aggregate value at
the date of award of US$18.4 million (2002 awards in respect of 2001: US$15.2 million).
301
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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.......................................................
2002
Number
(000’s)
29,049
21,292
(12,262)
(1,907)
Outstanding at end of year ......................................................
36,172
2001
Number
(000’s)
19,363
17,109
(5,389)
(2,034)
29,049
2000
Number
(000’s)
10,747
13,580
(4,964)
–
19,363
The weighted average purchase price for shares purchased by HSBC for other awards under the Restricted Share
Plan in 2002 was US$12.04 (2001: US$13.29; 2000: US$11.00).
The weighted average remaining vesting period as at 31 December 2002 was 1.41 years (2001: 1.25 years;
2000: 2.35 years).
(e) 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 acquisitions made before 1 July 2001, including those made before 1 January
1998, would have been capitalised and amortised over its useful economic life. Goodwill on acquisitions made
after 1 July 2001 is capitalised but not amortised, and is subject to annual impairment testing. Goodwill on
acquisitions made before 1 July 2001 ceased to be amortised on 1 January 2002 and is subject to annual
impairment testing.
At 31 December 2002, the cost of goodwill acquired on a US GAAP basis was US$23,781 million (2001:
US$20,172 million, 2000: US$20,559 million) and accumulated amortised goodwill was US$3,649 million
(2001: US$3,319 million; 2000: US$2,441 million).
The following table shows changes in the carrying value of goodwill during the year:
At 1 January 2002...........................
Additions ........................................
Write down .....................................
Disposals.........................................
Exchange and other movements .....
Europe
13,313
73
–
(56)
1,720
At 31 December 2002.....................
15,050
Hong
Kong
4
6
–
–
8
18
Rest of
Asia-
Pacific
367
5
–
1
7
North
America
2,927
1,676
–
(2)
(49)
South
America
242
–
(31)
(1)
(78)
Total
16,853
1,760
(31)
(58)
1,608
380
4,552
132
20,132
Goodwill amounting to US$31 million was written off in the year in respect of the HSBC’s operations in
Argentina.
302
The following table presents US GAAP reported net income for comparative periods reconciled to net income
adjusted as if the provisions of SFAS 142 had been applied to those previous periods:
Net income:
Reported net income..................................................................
add back: goodwill amortisation ...................................................
Adjusted net income......................................................................
Basic earnings per share:
Reported basic earnings per share ..............................................
add back: goodwill amortisation ...................................................
Adjusted basic earnings per share .................................................
Diluted earnings per share:
Reported diluted earnings per share............................................
add back: goodwill amortisation ...................................................
Adjusted diluted earnings per share ..............................................
2002
US$m
4,900
–
4,900
0.52
–
0.52
0.52
–
0.52
2001
US$m
4,911
1,316
6,227
0.53
0.14
0.67
0.53
0.14
0.67
2000
US$m
6,236
812
7,048
0.71
0.09
0.80
0.70
0.09
0.79
On the acquisition of Grupo Financiero Bital S.A. de C.V. on 25 November 2002 an intangible asset estimated
at US$223 million would have been recognised on a US GAAP basis, relating to non-contractual customer
relationships. The weighted-average amortisation period for these assets is 20 years and there is no significant
residual value. No other significant intangible assets would have been recognised for US GAAP purposes on
business acquisitions during 2002. No amortisation had been charged on these assets at 31 December 2002. The
intangible asset amortisation expense for 2003 to 2007 is estimated to be US$11 million per year.
(f)
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 as
part of intangible assets and amortised over their 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 capitalised costs.
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$35 million was made in 2002 (2001: US$50 million) for
impairment against the US GAAP capitalised amount of development costs. As at 31 December 2002,
capitalised amounts in respect of hsbc.com totalled US$144 million.
(g) 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.
(h) 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 external 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.
303
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 adjustment to US GAAP reported equity of such hedges at 31 December 2002 was to
increase equity by US$42 million (2001: reduction in equity US$38 million).
All other UK GAAP hedging derivatives have been marked to market for US GAAP purposes, giving rise to the
increase in US reported net income of US$221 million (2001: US$280 million; 2000: US$116 million). The
principal impact of applying SFAS133 is to reduce other assets by US$3,114 million (2001: US$2,150 million)
and reduce other liabilities by US$3,896 million (2001: US$2,636 million).
(i) Foreign exchange gains on available-for-sale securities
Within individual legal entities HSBC holds securities in a number of different currencies which are classified
as available-for-sale. For example, within the private bank in Switzerland which has the US dollar as its
reporting currency, the Group holds Euro-denominated bonds which are funded in Euros and Swiss Franc
securities funded in Swiss Francs. No foreign exchange exposure arises from this because, although the value of
the assets in US dollar terms changes according to the exchange rate, there is an identical offsetting change in
the US dollar value of the related funding. Under UK GAAP both the assets and the liabilities are translated at
closing exchange rates and the differences between historical book value and current value are reflected in
foreign exchange dealing profits. This reflects the economic substance of holding currency assets financed by
currency liabilities.
However, under US accounting rules, the change in value of the investments classified as available-for-sale is
taken directly to reserves whereas the offsetting change in US dollar terms of the borrowing is taken to earnings.
This leads to an accounting result, which does not reflect either the underlying risk position or the economics of
the transactions. It is also a situation that will reverse on maturity of the asset or earlier sale.
A similar difference arises where foreign currency exposure on foreign currency assets is covered using forward
contracts, but where HSBC does not manage these hedges to conform with the detailed US designation
requirements.
The result of this is that for 2002 HSBC's US GAAP profits are reduced by some US$2,197 million (2001:
increase of US$ 312 million) compared to its UK GAAP profits. However, future periods will report an increase
in US GAAP profits. There is no difference in shareholders’ equity between UK GAAP and US GAAP as a
result of this item.
The change in the size and direction of the adjustment between 2001 and 2002 mainly reflects the exchange rate
movements in each year. 2001 saw the principal other currencies in which HSBC’s holdings of available-for-
sale securities are denominated weaken against the US dollar by between 2 and 14 per cent. This movement
reversed in 2002 as these currencies strengthened by between 10 and 17 per cent against the US dollar.
(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
304
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 other-than-
temporary declines 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 other-than-temporary declines 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 ..............................................
2002
2001
Book value
US$m
76,424
118,325
4,648
Market
valuation
US$m
76,424
120,468
4,905
Book value
US$m
75,684
103,557
4,703
Market
valuation
US$m
75,684
104,873
4,866
During the year, US$1,229 million (2001: US$442 million, 2000: US$850 million) of net unrealised gains on
available-for-sale securities were included in Other Comprehensive Income (‘OCI’). US$393 million (2001:
US$442 million, 2000: US$270 million) of net gains were reclassified out of OCI and recognised as part of
income for the year.
Upon adoption of SFAS 133 in 2001, 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.
During 2002, HSBC recorded net losses under US GAAP of US$308 million (2001 US$104 million; 2000:
US$25 million) in respect of diminutions in value of available-for-sale securities which were considered to be
other than temporary. These losses were treated as realised items and included in net income.
305
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Trading assets
The following table provides an analysis of trading assets, which are valued at market value and the net
gains/(losses) resulting from trading activities:
US Treasury and Government agencies...........
UK Government...............................................
Hong Kong SAR Government .........................
Other government ............................................
Asset-backed securities....................................
Corporate debt and other securities..................
Equities ............................................................
2002
2001
Market
valuation
US$m
6,722
2,959
4,744
18,457
2,859
37,303
3,380
76,424
Gains/
(losses)
US$m
194
18
15
83
(7)
(228)
(56)
Market
valuation
US$m
17,915
1,645
4,884
8,172
2,619
37,147
3,302
Gains/
(losses)
US$m
161
(8)
–
112
4
42
37
19
75,684
348
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 under US GAAP. The principal impact
of the adjustment described below is to increase the carrying value of investment securities under US GAAP by
US$2,047 million in 2002 (2001: US$1,230 million).
Market
valuation
US$m
Gross SFAS
No. 115
adjustment
US$m
Tax and
minority
interests
US$m
Net SFAS
No. 115
adjustment
US$m
Book value
US$m
As at 31 December 2002
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
117,494
651
173
119,532
747
149
2,038
96
(24)
(594)
(22)
8
1,444
74
(16)
7
40
33
(10)
23
at 31 December 2002 ..........
118,325
120,468
2,143
(618)
1,525
Securities available-for-sale at
31 December 2001 ...............
Movement in the year ended
31 December 2002 ..............
103,557
104,873
1,316
(447)
827
(171)
869
656
(k) Foreign exchange losses on Argentine funding
The mandatory and asymmetrical conversion of onshore US dollar denominated assets and liabilities in
Argentina (“pesification”) caused significant erosion of the capital base of HSBC Argentina, in part because of
the asymmetry of the conversion and in part through the creation of a structural foreign exchange mismatch to
306
the extent of residual external US dollar liabilities which were no longer matched with US dollar assets. HSBC
recognised these losses through its income statement in 2001; these amounted to US$520 million.
Following pesification, HSBC Argentina’s balance sheet primarily reflected Argentine peso assets more than
fully funded by Argentine peso liabilities and this represents HSBC’s ongoing business in Argentina. On top of
this HSBC Argentina had residual external US dollar liabilities which essentially represented a portion of the
loss recognised in 2001.
Under UK GAAP these US dollar liabilities, as they are no longer funding the ongoing business, are treated as a
separate operation with the US dollar as the unit of account. To date, these liabilities have been settled as they
fall due by the Group outside Argentina. As HSBC prepares its accounts in US dollars no further translation
effect arises.
Under US GAAP this accounting treatment is not possible and the US dollar liabilities are treated as part of the
Argentine operation which accounts in Argentine pesos. As a result, as the Argentine peso weakens, the US
dollar denominated liabilities generate a substantial loss in Argentine pesos which is reflected in US GAAP
income. However, as HSBC accounts in US dollars and economically there is no change in the amount of US
dollars owing an exactly offsetting gain is reflected in the US GAAP accounts in shareholders’ equity.
(l) Taxation
The components of the net deferred tax liability calculated under SFAS No. 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) under SFAS No. 109......................................................
Included within ‘other assets’ under US GAAP ..................................................
Included within ‘deferred tax liabilities’ under US GAAP ..................................
2002
US$m
1,247
73
44
1,060
460
2,884
1,259
908
1,316
661
4,144
(868)
3,276
(392)
(2,585)
2,193
2001
US$m
1,041
79
24
938
354
2,436
743
1,014
901
892
3,550
(920)
2,630
(194)
(1,509)
1,315
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. A valuation
allowance is established to reduce deferred tax assets if, based on available evidence, it is considered more
likely than not that some portion or all of the deferred tax assets will not be realised.
(m) Loans and advances
SFAS 114 ‘Accounting by Creditors for Impairment of a Loan’ as amended by SFAS No. 118 ‘Accounting by
Creditors for Impairment of a Loan – Income Recognition and Disclosures’ is effective for accounting periods
307
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 2002, 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 2002
amounted to US$10,520 million (2001: US$9,658 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$8,294 million (2001:
US$8,085 million). The impairment reserve in respect of these loans estimated in accordance with the
provisions of SFAS 114 was US$4,868 million (2001: US$4,441 million). During the year ended 31 December
2002, impaired loans, including those excluded from SFAS 114, averaged US$9,153 million (2001: US$9,617
million) and interest income recognised on these loans was US$258 million (2001: US$261 million; 2000:
US$324 million).
(n) 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 310 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 191 to 313.
308
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
In addition, the fair value of non-derivative off balance sheet financial instruments is the same as their carrying
value under US GAAP.
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:
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 interest 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.
309
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 ..........................
2002
2001
Carrying
value
US$m
447,840
107,900
4,756
651
548,371
34,965
18,371
4,431
Fair
value
US$m
449,968
109,897
5,239
747
548,302
35,297
19,613
4,420
Carrying
value
US$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
The fair value of derivative financial instruments is the same as their carrying value under US GAAP.
(o) Earnings per share
Basic earnings per share under US GAAP, SFAS 128 ‘Earnings per share’, is calculated by dividing net income
of US$4,900 million (2001: US$4,911 million; 2000: US$6,236 million) by the weighted average number of
ordinary shares in issue in 2002 of 9,339 million (2001: 9,237 million; 2000: 8,777 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 2002 of 9,436 million (2001: 9,336 million; 2000: 8,865 million), as shown in Note 11.
(p) Variable interest entities
Application of FIN 46
In January 2003, the FASB issued Interpretation No. 46 (‘FIN 46’), ‘Consolidation of Variable Interest Entities’.
Variable Interest Entities (‘VIEs’) are entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. VIEs are required to be consolidated by their
primary beneficiary. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s
expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable
interests. FIN 46 also requires new disclosures about VIEs.
HSBC implemented FIN 46 for VIEs created after 31 January 2003 on 1 February 2003 with regards to its US
reporting requirements and is evaluating the impact that the provisions of FIN 46 will have on the US GAAP
information within its consolidated financial statements.
310
Nature, purpose and activities of VIEs with which HSBC is involved
HSBC makes limited use of VIE structures in its business and principally engages in these transactions to
facilitate client needs. Any use by HSBC of a VIE structure in a business transaction is commercially driven.
Utilisation of a VIE occurs only after careful consideration has been given to the most appropriate structure
needed to achieve HSBC’s control and risk allocation objectives and to ensure the most efficient structure from
a taxation and regulatory perspective.
Business activities within HSBC where VIEs are utilised primarily include asset-backed commercial paper
conduits, securitisation vehicles, and public and private sector infrastructure related projects and funds.
HSBC currently consolidates entities in which it has a controlling financial interest in accordance with UK
GAAP. HSBC’s interests in entities that may be deemed to be VIEs will change over time as a result of ongoing
commercial activities and it is possible that such entities may be consolidated and deconsolidated at various
points in time. As a result, the accounting treatment of HSBC’s variable interests included below may not be
the same at 31 December 2003.
VIEs where HSBC is the primary beneficiary
At 31 December 2002, the aggregate size of VIEs where HSBC believe that it is the primary beneficiary is
analysed as follows:
Activity
Asset-backed commercial paper conduits....................................
Securitisation vehicles .................................................................
Size
US$ m
2,015
2,949
4,964
Carrying amount
US$ m
2,015
2,949
4,964
The third party liabilities of these entities are supported by the collateral held by the issuing VIEs.
At 31 December 2002, HSBC consolidated all VIEs where it was the primary beneficiary, although one entity
(Clover) is included under the linked presentation method, as explained in Note 16.
VIEs where HSBC is not the primary beneficiary
At 31 December 2002, the aggregate size of VIEs where HSBC does not believe that it is the primary
beneficiary, but has a significant involvement is analysed as follows:
Activity
Asset-backed commercial paper conduits....................................
Securitisation vehicles .................................................................
Public and private sector infrastructure projects and funds..........
Size
US$ m
1,250
1,010
4,217
6,477
HSBC maximum
exposure to loss
US$ m
685
519
433
1,637
In the case of the commercial paper conduits and securitisation vehicles, HSBC’s exposure to loss generally
arises through back-up liquidity facility commitments. In the case of infrastructure projects, HSBC’s exposure
to loss generally arises through on-balance sheet financing of these projects.
(q) 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
311
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 No. 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.
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 .................
2002
US$m
7,659
5,651
19,211
(4,634)
27,887
2001
US$m
6,185
5,775
16,039
(3,798)
24,201
2000
US$m
5,006
6,668
19,332
(4,475)
26,531
312
Set out below is a summary combined statement of cash flows under US GAAP.
Cash flows from operating activities........................................
Cash flows from investing activities ........................................
Cash flows from financing activities........................................
Effect of exchange rate changes on cash and cash
Year ended 31 December
2002
US$m
(1,757)
(24,575)
28,614
2001
US$m
14,324
(20,241)
3,995
2000
US$m
16,464
(31,300)
23,545
equivalents............................................................................
1,404
(408)
(837)
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 .....................
3,686
24,201
27,887
(2,330)
26,531
24,201
7,872
18,659
26,531
The total interest paid by HSBC during the year was US$13,761 million (2001: US$22,301 million; 2000:
US$21,844 million).
51 Approval of accounts
These accounts were approved by the Board of Directors on 3 March 2003.
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H S B C H O L D I N G S P L C
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
2001 second interim dividend and the 2002 first
interim dividend was set out in the Secretary’s letters
to shareholders of 3 April 2002 and 5 September 2002
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.
314
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. Representatives of the
United Kingdom and United States signed a new
income tax treaty on 24 July 2001 and a protocol to
the new convention on 19 July 2002. As of the date
hereof, the new treaty has not yet been ratified by the
United States Senate or the government of the United
Kingdom, and there can be no assurance that it will
enter into force. 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)
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
315
H S B C H O L D I N G S P L C
Taxation of Shares and Dividends (continued)
or in certain other situations.
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 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 financial
intermediaries.
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
316
H S B C H O L D I N G S P L C
Shareholder Information
Financial Calendar 2003
Publication of Annual Report and Accounts
online
3 March
Mailing of Annual Report and Accounts and /or
Annual Review, Notice of Annual General Meeting
and dividend information
2002 second interim dividend payable
Annual General Meeting
Announcement of interim results
Proposed dates for first interim dividend for 2003:
Shares quoted ex-dividend in London and
Hong Kong and ADSs quoted ex-dividend
in New York
1 April
6 May
30 May
4 August
20 August
22 August
25 August
7 October
Record date
Shares quoted ex-dividend in Paris
Payment date
Annual General Meeting
The 2003 Annual General Meeting will be held at the
Barbican Hall, Barbican Centre, London EC2 on 30
May 2003 at 11 am.
Second Interim Dividend for 2002
The Directors have declared a second interim dividend
of US$0.325 per ordinary share (in lieu of a final
dividend) which, together with the first interim
dividend of US$0.205 already paid, will make a total
distribution for the year of US$0.530 per share, an
increase of 10 per cent on 2001. Information on the
scrip dividend scheme and currencies in which the
cash dividend may be paid will be sent to shareholders
on or about 1 April 2003.
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
Shareholder Enquiries
Any enquiries relating to your shareholding, for
example transfers of shares, change of name or
address, lost share certificates or dividend cheques,
should be sent to the registrars:
UK
or
Computershare Investor Services PLC
PO Box 435, Owen House
8 Bankhead Crossway North
Edinburgh EH11 4BR
Hong Kong Computershare Hong Kong Investor
Services 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
8 Canada Square
London E14 5HQ
UK
Telephone: +44 (0)20 7992 1939
Facsimile:
+44 (0)20 7991 4663
E-mail: shareholder@hsbc.com
Annual Report and Accounts 2002
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
8 Canada Square
London E14 5HQ
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
317
H S B C H O L D I N G S P L C
Shareholder Information (continued)
Chinese translation
A Chinese translation of this Annual Report and
Accounts is available on request after 1 April 2003
from the registrars:
Computershare Hong Kong Investor Services Limited
Rooms 1901-1905, Hopewell Centre
183 Queen’s Road East
Hong Kong
Computer Investor Services PLC
P O Box 435, Owen House
8 Bankhead Crossway North
Edinburgh EH11 4BR
United Kingdom
Please also contact the Registrars if you have received
a Chinese translation of this document and do not
wish to receive such translations in future.
Electronic Communications
Shareholders may at any time choose to receive
corporate communications in printed form or
electronically. To register online to receive electronic
communications, or revoke or amend an instruction to
receive electronic communications, go to
www.hsbc.com and select ‘Investor Centre’ and then
‘Electronic Communications’. If you received this
document electronically and would like to receive a
printed copy or would like to receive future
shareholder communications in printed form, please
write to the appropriate Registrars at the address given
above. Printed copies will be provided without charge.
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
318
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 oversea branch share register in Hong
Kong (collectively, the ‘share register’).
As at 31 December 2002, there were a total of
194,371 holders of record of US$0.50 ordinary shares.
As at 31 December 2002, a total of 6,430,390 of
the US$0.50 ordinary shares were registered in the
HSBC Holdings share register in the name of 776
holders of record with addresses in the United States.
These shares represented 0.07 per cent of the total
US$0.50 ordinary shares in issue.
As at 31 December 2002, there were 1,473
holders of record of ADSs holding approximately
32.13 million ADSs, representing approximately
160.7 million US$0.50 ordinary shares. 1,403 of these
holders had addresses in the United States, holding
approximately 32.10 million ADSs, representing
160.5 million US$0.50 ordinary shares. As at 31
December 2002, approximately 1.69 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.
Exchange until 2 July 1999 since on many days, the
75p shares had little or no turnover in Hong Kong.
Share prices have not been given for the 75p
Past share price performance should not be
ordinary shares listed on the Hong Kong Stock
regarded as a guide to future performance.
High and low mid-market closing prices
US$0.50 shares
Low
(pence)
643
608
682
632
High
(pence)
866
1092
1046
866
2002 .....
2001 .....
2000 .....
1999 .....
1998 .....
London
75p shares
High
(pence)
Low
(pence)
HK$10 shares
High
(pence)
Low
(pence)
815
675
519
327
816
638
486
322
Hong Kong
US$0.50 shares
Low
(HK$)
78.8
68.5
82.8
83.3
High
(HK$)
97.5
121.5
117.5
109.0
HK$10 shares
High
(HK$)
Low
(HK$)
100.0
82.3
61.8
44.0
New York
ADSs
High
(US$)
64.4
79.7
76.6
71.4
Low
(US$)
50.3
44.8
54.3
53.8
Paris
US$0.50 shares
Low
(euro)
10.2
9.5
14.2
High
(euro)
13.9
17.3
17.6
London
US$0.50 shares
Hong Kong
US$0.50 shares
New York
ADSs
Paris
US$0.50 shares
2002
4th Quarter ..................................
3rd Quarter..................................
2nd Quarter .................................
1st Quarter...................................
2001
4th Quarter ....................................
3rd Quarter ....................................
2nd Quarter....................................
1st Quarter.....................................
High
(pence)
763
770
866
845
891
852
921
1092
Low
(pence)
643
644
740
753
697
608
815
777
High
(HK$)
92.5
91.8
97.5
95.0
98.5
94.0
101.0
121.5
Low
(HK$)
78.8
80.3
87.0
84.8
79.8
68.5
90.0
89.5
High
(US$)
59.1
59.6
64.4
61.6
63.7
61.9
66.0
79.7
Low
(US$)
50.3
51.5
56.1
55.0
52.5
44.8
57.8
56.4
High
(euro)
12.0
12.1
13.9
13.7
14.2
14.2
15.0
17.3
Low
(euro)
10.2
10.3
11.4
12.4
11.2
9.5
12.9
12.5
2002
December ...................................
November ...................................
October.......................................
September ..................................
August ........................................
July .............................................
London
US$0.50 shares
Hong Kong
US$0.50 shares
New York
ADSs
Paris
US$0.50 shares
High
(pence)
761
763
727
725
770
768
Low
(pence)
683
680
643
644
702
681
High
(HK$)
92.5
91.5
87.5
87.8
91.8
91.5
Low
(HK$)
85.0
85.8
78.8
80.3
84.8
84.3
High
(US$)
58.8
59.1
57.0
57.2
59.6
59.0
Low
(US$)
54.3
54.2
50.3
51.5
54.5
54.3
High
(euro)
12.0
11.9
11.6
11.6
12.1
11.9
Low
(euro)
10.6
10.7
10.2
10.3
11.0
10.5
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.
319
H S B C H O L D I N G S P L C
Shareholder Information (continued)
Dividends on the ordinary shares of
HSBC Holdings
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$10 ordinary shares were entitled to
equal rights, including the right to a dividend, and all
dividends were declared and paid with respect to
both classes of shares. The dividends declared, per
ordinary share*, for each of the last five years were:
2002
2001
2000
1999
1998
First
Interim
0.205
0.130
1.600
0.190
0.129
1.482
0.150
0.103
1.170
0.133
0.081
1.033
0.123
0.073
0.956
Second
Interim
0.325
0.202
2.534
0.290
0.200
2.261
0.285
0.191
2.223
0.207
0.131
1.612
0.185
0.115
1.434
US$..........
£...............
HK$ ........
US$..........
£...............
HK$ .........
US$..........
£...............
HK$ .........
US$..........
£...............
HK$ .........
US$..........
£...............
HK$ .........
Total
0.530
0.332
4.134
0.480
0.329
3.743
0.435
0.294
3.393
0.340
0.212
2.645
0.308
0.188
2.390
*
The second interim dividend for 2002 of US$0.325 per
share has been translated into pounds sterling and Hong
Kong dollars at the closing rate on 31 December 2002.
The dividend will be paid on 6 May 2003
Dividends paid prior to 2 July 1999 have been
restated to reflect a share capital reorganisation
whereby each 75p ordinary share and HK$10
ordinary share was cancelled and three ordinary
shares of US$0.50 issued in substitution therefor.
Dividends are 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.
Memorandum and Articles of
Association
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.
320
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The HSBC Group
Structure of Principal Operating Companies
at January 2003
HSBC Bank
plc
HSBC
Holdings plc
Grupo
Financiero
Bital, S.A. de
C.V.
(99.76%)
(99.55%)
(51%)
CCF SA
(99.99%)
HSBC Bank
A.S.
HSBC Asset
Finance
(UK)
Limited
HSBC
Trinkaus &
Burkhardt
KGaA
(73.47%)
HSBC Life
(UK) Limited
Banco
Internacional
S.A.
(99.31%)
Seguros Bital,
S.A. de C.V.,
Grupo Financ-
iero Bital
(50.87%)
(99.99%)
Pensiones
Bital S.A.
(50.86%)
HSBC
Finance
(Netherlands)
HSBC
Holdings BV
The
Cyprus
Popular Bank
Limited
(21.39%)
HSBC
Investment
Bank
Holdings plc
HSBC Asset
Management
(Taiwan)
Limited
(99.46%)
HSBC
Insurance
Holdings
Limited
HSBC
Insurance
Brokers
Limited
HSBC Latin
America
Holdings (UK)
Limited
HSBC Bank
Brasil S.A. –
Banco
Multiplo
HSBC
Seguros
(Brasil) S.A.
(97.96%)
HSBC Latin
America BV
.
(23.61%)
HSBC
Argentina
Holdings S.A
(76.31%)
Framlington
Group Limited
(51%)
Erisa
(49.99%)
(97.51%)
(21%)
HSBC
Investment
Bank
Holdings
BV
(79%)
HSBC USA
Inc.
HSBC Bank
Malaysia
Berhad
The
Hongkong
and Shanghai
Banking
Corporation
Limited
The Saudi
British
Bank
(40%)
HSBC Bank
Egypt SAE
(94.53%)
HSBC Bank
Middle East
HSBC Bank
Argentina S.A.
(99.92%)
HSBC La
Buenos Aires
Seguros SA
(99.24%)
HSBC
Chacabuco
Inversiones
S.A.
(60%)
(14.30%)
HSBC
Guyerzeller
Holdings BV
(94.43%)
HSBC
Securities,
(USA) Inc.
HSBC Bank
USA
Wells Fargo
HSBC Trade
Bank, N.A.
(20%)
Hang Seng
Bank Limited
(62.14%)
World Finance
International
Limited
(50%)
HSBC
Insurance
(Asia-Pacific)
Holdings
Limited
HSBC Bank
Australia
Limited
British Arab
Commercial
Bank Limited
(46.51%)
(16.99%)
(9.99%)
Maxima SA
AFJP
(55.74%)
(45.01%)
(2.49%)
HSBC
Europe BV
(85.70%)
HSBC
Private
Banking
Holdings
(Suisse) SA
HSBC Bank
Malta p.l.c.
(70.03%)
(94.5%)
(5.5%)
HSBC
Republic
Bank
(Guernsey)
Limited
(66.7%)
HSBC
Investment
Bank Asia
Limited
HSBC
Republic Bank
(UK) Limited
HSBC
Republic
Bank (Suisse)
S.A.
3
2
1
(8%)
HSBC
Guyerzeller
Bank AG
(96.64%)
(25.3%)
(24.64%)
Barrowgate
Limited
(15.31%)
HSBC
Insurance
(Asia)
Limited
HSBC Life
(International)
Limited
HSBC
Republic
Holdings
(Luxembourg)
S.A.
(99.99%)
HSBC Bank
Canada
(99.99%)
NOTES
1) This chart is a simplified ownership diagram only; not all intermediate holding companies are shown
2) A percentage figure in brackets inside a company name box indicates the ultimate percentage owned of that company within the HSBC Group
3) Where no figure appears the company is wholly owned.
4) Places of incorporation are shown in Notes 21, 22 and 26 of the 'Notes on the Financial Statements'.
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
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
Page
3-4
36-133
133-135,
140-142
153-155
36-96
149-152
171-178
161-165,
178-179
28
165-167
182-186
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 Equipment
Five-Year Comparison
Not required for Annual Report
Not required for Annual Report
Not Applicable
Description of Business
Inside back cover page
Description of Business
Description of Business
Organisational Structure
Description of Property
Report of the Directors
Note 25 – Notes on the Financial Statements
10-11
8-33
8
321
34
161
232-234
Operating and Financial Review and Prospects
A. Operating Results
B. Liquidity and Capital Resources
Financial Review
Financial Review
C. Research and Development, Patents and
Licences, etc.
D. Trend Information
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
Report of the Directors
Not Applicable
Financial Review
Board of Directors and Senior Management
Directors’ Remuneration Report
Report of the Directors
Description of Business
Report of the Directors
Directors’ Remuneration Report
Report of the Directors
Shareholder Information
Report of the Directors
Note 48 – Notes on the Financial Statements
Not Applicable
167-168
318
168
283-284
2.
3.
4.
5.
6.
7.
322
8.
9.
10
Financial Information
A. Consolidated Statements and Other
Financial Information
B. Significant Changes
The Offer and Listing
A. Offer and Listing 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. Statement by Experts
H. Documents on Display
I. Subsidiary Information
11.
Quantitative and Qualitative Disclosures
About Market Risk
12.
Description of Securities Other than Equity
Securities
A. Debt Securities
B. Warrants and Rights
C. Other Securities
D. American Depositary Shares
PART II
13.
Defaults, Dividends Arrearages and
Delinquencies
14. Material Modifications to the Rights of
Securities Holders and Use of Proceeds
Financial Statements
Legal Proceedings
Note 44 – Notes on the Financial Statements
Shareholder Information
Not applicable
190-313
35
275
320
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
Description of Business
Exchange controls and other limitations
affecting security holders
Taxation of Shares and Dividends
Not required for Annual Report
Not required for Annual Report
Shareholder Information
Not Applicable
Financial Review
Note 38 and 40 – Notes on the Financial
Statements
Not required for Annual Report
Not required for Annual Report
Not required for Annual Report
Not required for Annual Report
Not Applicable
Not Applicable
318-319
318
320
10-11
7
314-316
318
135-139
257-264
267-272
15.
16.
Controls and Procedures
Disclosure Controls
148
[Reserved]
PART III
17.
Financial Statements
18.
19.
Financial Statements
Exhibits
Certifications
*
Filed with the Securities and Exchange Commission.
Not Applicable
Financial Statements
Certifications
190-313
*
*
323
H S B C H O L D I N G S P L C
SEC 20-F Cross-Reference Sheet and Glossary (continued)
Glossary of Terms
Terms Used
US Equivalent or Brief Description
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
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
324
Amounts in accordance with US GAAP
143 Other information
Cautionary Statement Regarding Forward-
143
Loan maturity and interest sensitivity
H S B C H O L D I N G S P L C
Index
Page
Financial Highlights
Five-Year Comparison
1
3
4
5
6
6
7
8
8
8
9
10
12
14
25
28
28
Looking Statements
Certain Defined Terms
Information about the Enforceability of
Judgements made in the United States
Exchange Controls and Other Limitations
Affecting Equity Security Holders
Description of Business
Introduction
Management and resources
Strategy
History and development
Line of Business
Geographical regions
Competitive environment
Employees
Regulation and supervision
34 Description of Property
35
36
36
37
54
81
96
98
98
Legal Proceedings
Financial Review
Introduction
Summary
Analysis by geographical segment
Analysis by line of business
Critical Accounting Policies
UK GAAP compared with US GAAP
Future accounting developments
101
Average balance sheet and net interest
income
110 Analysis of changes in net interest income
114 Risk management
114 Credit risk management
133 Liquidity management
135 Market risk management
Page
139
140
Operational risk management
Capital management and allocation
analysis
Deposits
Certificates of deposit and other time
deposits
Short-term borrowings
Disclosure Controls
145
147
148
148
149 Board of Directors and Senior Management
153 Report of the Directors
170 Directors’ Remuneration Report
187 Statements of Directors’ Responsibilities in
Relation to Financial Statements
188 Independent auditors’ report to the members of
HSBC Holdings plc
190 Financial Statements
195 Notes on the Financial Statements
314 Taxation of Shares and Dividends
314
315
Taxation
Taxation – US Residents
317 Shareholder Information
317
317
317
317
317
317
317
318
318
320
Financial Calendar 2003
Annual General Meeting
Second Interim Dividend for 2002
Postal Share-Dealing Service
Shareholder Enquiries
Investor Relations
Annual Report and Accounts 2002
Where more information about HSBC is
available
Nature of trading market
Dividends on the ordinary shares of HSBC
Holdings
320
Memorandum and Articles of Association
321 Organisational structure
322 SEC 20-F Cross-Reference Sheet and Glossary
325
HSBC HOLDINGS PLC
Incorporated in 1959 in England with limited liability
under the UK Companies Act 1985.
Registered in England: number 617987
REGISTERED OFFICE AND GROUP HEAD
OFFICE
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: 44 020 7991 8888
facsimile: 44 020 7992 4880
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 702 0137
Hong Kong Overseas Branch Register
Computershare Hong Kong Investor Services Limited
Rooms 1901-1905, Hopewell Centre
183 Queen’s Road East
Hong Kong
Telephone: 852 2862 8628
ADR Depositary
The Bank of New York
101 Barclay Street, 22 West
New York, NY 10286
Telephone: 1 888 269 2377
Paying Agent (France)
CCF
103 avenue des Champs Elysées
75008 Paris
Telephone: 33 1 40 70 22 56
STOCKBROKERS
Cazenove & Co. Ltd
12 Tokenhouse Yard
London EC2R 7AN
United Kingdom
HSBC Bank plc
8 Canada Square
London E14 5HQ
United Kingdom
HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: 44 020 7991 8888
Facsimile: 44 020 7992 4880
Web: www.hsbc.com
HSBC Holdings plc
Annual Report
and Accounts
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