HSBC Holdings plc
Annual Report
and Accounts
H S B C H O L D I N G S P L C
Table of Contents
Page
Page
Certain Defined Terms ................................... below
Board of Directors and Senior Management ... 184
Financial Highlights................................................1
Report of the Directors ...................................... 189
Five-Year Comparison............................................3
Directors’ Remuneration Report ...................... 213
Cautionary Statement Regarding
Statement of Directors’ Responsibilities in
Forward-Looking Statements ............................5
Relation to Financial Statements .................. 230
Information about the Enforceability of
Independent Auditors’ Report .......................... 231
Judgements Made in the United States .............6
Exchange Controls and Other Limitations
Affecting Equity Security Holders.....................6
Financial Statements .......................................... 233
Notes on the Financial Statements .................... 239
Description of Business ...........................................7
Taxation of Shares and Dividends .................... 367
Regulation and Supervision .................................30
Shareholder Information ................................... 370
Description of Property ........................................35
Organisational Structure ................................... 375
Legal Proceedings .................................................35
Glossary............................................................... 376
Financial Review ...................................................36
Index .................................................................... 377
Other Information...............................................177
Certain Defined Terms
Unless the context requires otherwise, ‘HSBC
Holdings’ means HSBC Holdings plc and ‘HSBC’ or
the ‘Group’ 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’.
This document comprises the Annual Report and Accounts 2003 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 2003 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’s Financial Statements and Notes thereon, as set out on pages 233 to 366, are prepared in accordance with
UK Generally Accepted Accounting Principles (‘UK GAAP’). HSBC 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.
As HSBC is listed on the New York Stock Exchange, it also reconciles certain financial information to US Generally
Accepted Accounting Principles (‘US GAAP’), which differ in certain respects from UK GAAP as explained on
page 326 and reconciled in Note 50 of the ‘Notes on the Financial Statements’. Unless otherwise stated, the numbers
presented in this document have been prepared in accordance with UK GAAP.
HSBC judges its own performance by comparing returns before goodwill amortisation on cash invested as
HSBC believes this gives an important measure of its underlying performance and facilitates comparison with its
peer group. Profit before goodwill amortisation is derived by adjusting reported earnings to eliminate the impact of
the amortisation of goodwill arising on acquisitions. The derivation of non-GAAP measures from the equivalent
reported measures is explained in the ‘Footnotes to Financial Highlights’ on page 4.
For the year (excluding goodwill amortisation)
Operating profit before provisions1 ......................................................................................................
Profit on ordinary activities before tax2 ................................................................................................
Profit attributable to shareholders2 ........................................................................................................
For the year (as reported)
Operating profit before provisions ........................................................................................................
Profit on ordinary activities before tax .................................................................................................
Profit attributable to shareholders .........................................................................................................
Dividends .............................................................................................................................................
2003
US$m
19,990
14,401
10,359
18,540
12,816
8,774
(6,532)
At year-end
Shareholders’ funds3 .............................................................................................................................
Capital resources ..................................................................................................................................
Customer accounts and deposits by banks ............................................................................................
Total assets3 ..........................................................................................................................................
Risk-weighted assets ............................................................................................................................
74,473
74,042
643,556
1,034,216
618,662
Per ordinary share4
Basic earnings ......................................................................................................................................
Earnings excluding goodwill amortisation5 ..........................................................................................
Diluted earnings ...................................................................................................................................
Dividends .............................................................................................................................................
Net asset value at year end ...................................................................................................................
Share information
US$0.50 ordinary shares in issue ..........................................................................................................
Market capitalisation ............................................................................................................................
Closing market price per ordinary share:
– London ..............................................................................................................................................
– Hong Kong ........................................................................................................................................
Closing market price per American Depositary Share (‘ADS’)6............................................................
US$
0.84
0.99
0.83
0.60
6.79
At
31 December
2003
10,960m
US$172bn
£8.78
HK$122.50
US$78.82
2002
US$m
11,641
10,513
7,102
10,787
9,650
6,239
(5,001)
51,765
57,430
548,371
758,605
430,551
US$
0.67
0.76
0.66
0.53
5.46
At
31 December
2002
9,481m
US$105bn
£6.87
HK$85.25
US$54.98
Total shareholder return to 31 December 20037
– over 1 year .........................................................................................................................................
– since 1 January 19998 .........................................................................................................................
HSBC
Benchmark
136
211
132
126
For the above footnotes, see ‘Footnotes to Financial Highlights’ on page 4.
1
H S B C H O L D I N G S P L C
Financial Highlights (continued)
Capital and performance ratios
Capital ratios
Tier 1 capital .......................................................................................................................................
Total capital .........................................................................................................................................
Performance ratios (excluding goodwill amortisation)
Return on average invested capital9......................................................................................................
Return on average net tangible equity10,11.............................................................................................
Post-tax return on average tangible assets11..........................................................................................
Post-tax return on average risk-weighted assets11.................................................................................
Performance ratios (as reported)
Return on average shareholders’ funds3 ...............................................................................................
Post-tax return on average total assets3 ................................................................................................
Post-tax return on average risk-weighted assets ..................................................................................
Credit coverage ratios
Provisions for bad and doubtful debts as a percentage of operating profits before goodwill
amortisation and provisions ............................................................................................................
Provisions for bad and doubtful debts as a percentage of average gross customer advances:
– in aggregate ......................................................................................................................................
– Consumer Finance (Household)12 .....................................................................................................
– other HSBC ......................................................................................................................................
Total provisions outstanding as a percentage of non-performing loans at year end:
– in aggregate ......................................................................................................................................
– Consumer Finance (Household)12 .....................................................................................................
– other HSBC ......................................................................................................................................
Efficiency and revenue mix ratios
Cost:income ratio (excluding goodwill amortisation)13 .......................................................................
As a percentage of total operating income:
– net interest income ............................................................................................................................
– other operating income .....................................................................................................................
– net fees and commissions .................................................................................................................
– dealing profits ...................................................................................................................................
2003
%
8.9
12.0
13.7
24.7
1.21
2.07
13.0
1.01
1.78
30.5
1.2
5.2
0.4
91.0
110.5
82.1
51.3
62.3
37.7
25.3
5.3
2002
%
9.0
13.3
12.9
20.1
1.11
1.95
12.4
0.97
1.74
11.3
0.4
n/a
0.4
86.7
n/a
86.7
56.2
58.1
41.9
29.4
4.9
Constant currency
Constant currency comparatives in respect of 2002 and 2001, used in the 2003 and 2002 commentaries respectively,
are computed by retranslating into US dollars:
•
the profit and loss accounts for 2002 and 2001 of non-US dollar branches, subsidiary undertakings, joint
ventures and associates at the average rates of exchange for 2003 and 2002 respectively; and
•
the balance sheets at 31 December 2002 and 2001 for non-US dollar branches, subsidiary undertakings, joint
ventures and associates at the rates of exchange ruling at 31 December 2003 and 2002 respectively.
No adjustment is made to the exchange rates used to translate foreign currency denominated assets and
liabilities into the functional currency of any HSBC branches, subsidiary undertakings, joint ventures and associates.
2003 compared with 2002
2002 compared with 2001
As
reported
%
Constant
currency
%
Operating income and cost growth
Net interest income ................................................
Fees and commissions (net) ...................................
Dealing profits .......................................................
Total operating income ..........................................
Administrative expenses (excluding goodwill
amortisation) .....................................................
66
33
66
54
41
For the above footnotes, see ‘Footnotes to Financial Highlights’ on page 4.
58
24
58
46
32
As
reported
%
5
5
(22)
3
2
Constant
currency
%
6
4
(23)
3
(4)
2
Five-year comparison
At year-end
Share capital ...........................................................
Shareholders’ funds ................................................
Capital resources14...................................................
Customer accounts .................................................
Undated subordinated loan capital ..........................
Dated subordinated loan capital ..............................
Loans and advances to customers15 ........................
Total assets .............................................................
For the year
Net interest income .................................................
Other operating income ..........................................
Operating profit before provisions ..........................
Provisions for bad and doubtful debts ....................
Profit on ordinary activities before tax ...................
Profit attributable to shareholders ...........................
Dividends ...............................................................
Per ordinary share4
Basic earnings ........................................................
Earnings excluding goodwill amortisation5 ............
Diluted earnings .....................................................
Dividends ...............................................................
Net asset value at year end .....................................
Share information
US$0.50 ordinary shares in issue ............................
Financial ratios
Dividend payout ratio16 ..........................................
Post-tax return on average total assets ....................
Return on average shareholders’ funds ...................
Average shareholders’ funds to
average total assets ............................................
Capital ratios
Tier 1 capital ..........................................................
Total capital ............................................................
Foreign exchange translation rates to US$
Closing
– US$1:£ ............................................
– US$1:€ ............................................
Average – US$1:£ ............................................
– US$1:€ ............................................
2003
US$m
5,481
74,473
74,042
573,130
3,617
17,580
528,977
1,034,216
25,598
15,474
18,540
(6,093)
12,816
8,774
(6,532)
US$
0.84
0.99
0.83
0.60
6.79
20023
US$m
4,741
51,7653
57,430
495,438
3,540
14,831
352,344
758,6053
15,460
11,135
10,787
(1,321)
9,650
6,239
(5,001)
US$
0.67
0.76
0.66
0.53
5.46
20013
US$m
4,678
45,6883
50,854
449,991
3,479
12,001
308,649
695,5453
14,725
11,163
10,484
(2,037)
8,000
4,992
(4,467)
US$
0.54
0.63
0.53
0.48
4.88
20003
US$m
4,634
45,631
50,964
427,069
3,546
12,676
289,837
673,503
13,723
10,850
10,486
(932)
9,775
6,457
(4,010)
US$
0.74
0.80
0.73
0.435
4.92
1999
US$m
4,230
34,40217
44,270
359,972
3,235
12,188
253,567
569,90817
11,990
9,012
9,653
(2,073)
7,982
5,408
(2,872)
US$
0.65
0.66
0.65
0.34
3.95
10,960m
9,481m
9,355m
9,268m
8,458m
%
60.6
1.01
13.0
7.06
8.9
12.0
0.560
0.793
0.612
0.885
%
69.7
0.973
12.43
6.913
9.0
13.3
0.620
0.953
0.666
1.061
%
76.2
0.863
10.63
6.873
9.0
13.0
0.690
1.130
0.695
1.117
%
54.4
1.31
15.8
6.64
9.0
13.3
0.670
1.076
0.660
1.084
For the above footnotes, see ‘Footnotes to Financial Highlights’ on page 4.
%
51.5
1.20
17.5
6.24
8.5
13.2
0.620
0.996
0.618
0.943
3
H S B C H O L D I N G S P L C
Financial Highlights (continued)
Five-year comparison (continued)
Amounts in accordance with US GAAP
Income statement for the year
Net income available for ordinary
shareholders........................................................
Other comprehensive income ..................................
Dividends ................................................................
Balance sheet at 31 December
Total assets ..............................................................
Shareholders’ funds.................................................
Per ordinary share
Basic earnings ........................................................
Diluted earnings .....................................................
Dividends ...............................................................
Net asset value at year end .....................................
Footnotes to ‘Financial Highlights’
2003
US$m
7,231
7,401
(6,974)
2002
US$m
4,900
5,502
(4,632)
2001
US$m
4,911
(1,439)
(4,394)
2000
US$m
6,236
(511)
(3,137)
1999
US$m
4,889
(776)
(2,617)
1,012,023
80,251
763,565
55,831
698,312
48,444
680,076
48,072
574,588
35,930
US$
0.69
0.69
0.685
7.32
US$
0.52
0.52
0.495
5.89
US$
0.53
0.53
0.48
5.18
US$
0.71
0.70
0.34
5.19
US$
0.59
0.58
0.31
4.25
1 Operating profit before provisions and excluding goodwill amortisation can be reconciled to the equivalent reported measure by
deducting goodwill amortisation of US$1,450 million ( 2002: US$854 million).
2 The profit on ordinary activities before tax and the profit attributable to shareholders excluding, in each case, goodwill amortisation,
can be reconciled to the equivalent reported measures by deducting goodwill amortisation, including that attributable to joint ventures
and associates, of US$1,585 million (2002: US$863 million).
3 The figures for shareholders’ funds, total assets and average total assets for 2002 and, in the Five-year comparison, 2001 and 2000,
have been restated to reflect the adoption of Urgent Issues Task Force (‘UITF’) Abstracts 37 ‘Purchases and sales of own shares’,
and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1 of the ‘Notes on the Financial Statements’ on pages 239 to
240. The 1999 comparatives in the Five-year comparison have not been restated as any adjustment would not significantly alter the
figures. Therefore, any benefit to be obtained from restatement would be outweighed by the cost of the exercise.
4 Per ordinary share amounts reported here and throughout the document reflect the share capital reorganisation on 2 July 1999.
5 Earnings excluding goodwill amortisation per ordinary share are calculated by dividing profit excluding goodwill amortisation
attributable to shareholders (as explained in note 2 above) by the weighted average number of ordinary shares in issue and held
outside the Group during the year, which is the same number used in the calculation of basic earnings per share on a reported basis.
6 Each ADS represents 5 ordinary shares.
7 Total shareholder return (‘TSR’) is defined on page 218.
8 HSBC’s governing objective for its five year strategic plan ended 31 December 2003 was to beat the TSR of its defined peer group
benchmark. An additional target objective was set to achieve a doubling of TSR over the five years beginning on 1 January 1999.
9 The definition of return on invested capital and a reconciliation to the equivalent GAAP measures are set out on page 58 .
10 The return on average net tangible equity is defined as attributable profit excluding goodwill amortisation of US$10,359 million
(2002: US$7,102 million) divided by average shareholders’ funds after deduction of average purchased goodwill of US$42.0 billion
(2002: US$35.3 billion).
11 Average net tangible equity and average tangible assets are calculated by deducting average purchased goodwill net of cumulative
amortisation of US$25.4 billion (2002: US$15.0 billion). The calculation of average risk-weighted assets is the same for both the
reported basis and that excluding goodwill amortisation.
12 Annualised on the basis of the period of ownership in the year of acquisition.
13 The cost:income ratio, excluding goodwill amortisation, is defined as operating expenses excluding goodwill amortisation of
US$1,450 million (2002: US$854 million) divided by operating income.
14 Capital resources are defined on page 173. A detailed computation for 2003 and 2002 is provided on page 175.
15 Net of suspended interest and provisions for bad and doubtful debts.
16 Dividends per share expressed as a percentage of earnings per share (excluding goodwill amortisation).
17 Apart from shareholders’ funds and total assets at the 1999 year-end, the 1999 comparatives have not been restated to reflect the
adoption of UK Financial Reporting Standard 19 ‘Deferred tax’ in 2002 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.
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 US
Securities and Exchange Commission, 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 in which 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;
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 as to the continuing
availability of credit, and price competition
in the market segments served by HSBC.
•
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 US Federal Reserve, the
European Central Bank, the People’s Bank
of China and the central banks of other
leading economies and 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 their consumer markets;
changes in personal bankruptcy legislation
in the principal markets in which HSBC
operates and the consequences thereof;
general changes in governmental 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;
the costs, effects and outcomes of regulatory
reviews, actions or litigation, including any
additional compliance requirements;
5
H S B C H O L D I N G S P L C
Cautionary Statement Regarding Forward-Looking Statements (continued)
−
−
the ability of the Government of Argentina
to attract international support for the
measures necessary to restructure its debt
obligations and create a viable financial
system with stability in monetary, fiscal and
exchange rate policies; and
the effects of competition in the markets
where HSBC operates including increased
competition resulting from new types of
affiliations between banks and financial
services companies, including securities
firms, particularly in the United States.
•
factors specific to HSBC:
−
the success of HSBC in adequately
identifying the risks it faces, such as the
incidence of loan losses or delinquency, and
managing those risks (through account
management, hedging and other
techniques). Effective risk management
depends on, among other things, HSBC’s
ability through stress testing and other
techniques to prepare for events that cannot
be captured by the statistical models it uses;
and
the success of HSBC in integrating the
recently acquired Grupo Financiero Bital
S.A. de C.V. (now Grupo Financiero HSBC
S.A. de C.V. (‘HSBC Mexico’)), Household
International, Inc. (‘Household’), Losango
Promotora de Vendas, and The Bank of
Bermuda Limited.
−
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. 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. The
enforceability of any judgement in the United
Kingdom will depend on the particular facts of the
case as well as the laws and treaties in effect at the
time.
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 distributable profits by way
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.
6
H S B C H O L D I N G S P L C
Description of Business
Introduction
HSBC is one of the largest banking and financial
services organisations in the world, with a market
capitalisation of US$172 billion at
31 December 2003.
Headquartered in London, HSBC operates
through long-established businesses and has an
international network of over 9,500 offices in
79 countries and territories in five regions: Europe;
Hong Kong; the rest of Asia-Pacific, including the
Middle East and Africa; North America; and South
America. Within these geographical regions, a
comprehensive range of financial services is offered
to personal, commercial, corporate, institutional,
investment and private banking clients. HSBC
manages its business through the following customer
groups: Personal Financial Services; Commercial
Banking; Corporate, Investment Banking and
Markets; and Private Banking. Whilst part of
Personal Financial Services, the consumer finance
operations of Household are currently a distinct
business and have been separately identified
accordingly. Services are delivered through
businesses which usually operate as domestic banks,
typically with large retail deposit bases and strong
liquidity and capital ratios. In North America,
Household is one of the largest consumer finance
companies in the US, and is substantially funded in
the wholesale market. 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.
The establishment of HSBC and its hexagon
symbol as a uniform, international brand has ensured
that it has become an increasingly familiar sight
across the world.
History and development
The founding member of HSBC, The Hongkong and
Shanghai Banking Corporation Limited (‘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, whilst 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 businesses with a view to
maximising the synergy between the various
components. Key to this integration process is to
blend local and international expertise.
The most significant developments are described
below. Other acquisitions in 2003 are discussed in
the section headed ‘Business highlights in 2003’
under the relevant geographical region on pages 15
to 26.
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 Limited) in 1959. 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 Limited (‘Hang Seng Bank’),
consolidating its position in Hong Kong. Hang Seng
Bank is the second-largest listed bank in Hong Kong
by market capitalisation.
From the beginning of the 1980s, The Hongkong
and Shanghai Banking Corporation began to focus its
acquisition strategy on the UK. In 1987, it purchased
a 14.9 per cent interest in Midland Bank plc, now
HSBC Bank plc (‘HSBC Bank’), 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 HSBC Bank. In connection
with this acquisition, HSBC’s head office was
transferred from Hong Kong to London in January
1993. To expand its base in the euro zone, in October
2000 HSBC completed its acquisition of 99.99 per
cent of the issued share capital of CCF S.A. (‘CCF’),
a major French banking group.
The Hongkong and Shanghai Banking
Corporation entered the US market in 1980 by
acquiring a 51 per cent interest in Marine Midland
Banks, Inc. (now HSBC USA Inc.). The remaining
interest was acquired in 1987.
7
H S B C H O L D I N G S P L C
Description of Business (continued)
In 1981, The Hongkong and Shanghai Banking
Corporation incorporated its extant 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 2003.
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, and completed the acquisition of
Grupo Roberts in Argentina.
In December 1999, HSBC acquired Republic
New York Corporation, subsequently merged with
HSBC USA Inc., and Safra Republic Holdings S.A.
(together ‘Republic’).
In 2002, HSBC made further steps in expanding
its presence in North America, completing the
acquisition of 99.59 per cent of Grupo Financiero
Bital S.A. de C.V. (now ‘HSBC Mexico’), the
fifth-largest banking group in Mexico measured by
deposits and assets.
Mainland China remains a critical long-term
growth area for the Group. In 2002, HSBC
completed the acquisition of a 10 per cent equity
stake in Ping An Insurance Company of China
Limited. Ping An Insurance is the second-largest life
insurer and the third-largest insurer in mainland
China.
In March 2003, HSBC acquired Household
International, Inc. (‘Household’) for a consideration
of approximately US$14.8 billion. The acquisition
has significantly increased the contribution from
HSBC’s North American business. In particular,
Household offers HSBC national coverage in the US
for consumer lending, credit cards and credit
insurance through varied distribution channels,
including over 1,300 branch offices in 45 states.
In October 2003, HSBC agreed to acquire The
Bank of Bermuda Limited for US$1.3 billion, adding
a strong position in the local banking market in
Bermuda and significant scale and geographical
spread to HSBC’s existing international fund
administration, private banking, trust and payments,
and cash management businesses. The acquisition
was completed on 18 February 2004.
In December 2003, HSBC acquired substantially
all of Lloyds TSB Group plc’s onshore and offshore
businesses and assets related to Brazil for
US$745 million. Included in the transaction was the
8
acquisition of all the shares of Banco Lloyds TSB
S.A. – Banco Múltiplo and a consumer finance
company, Losango Promotora de Vendas
(‘Losango’).
Outlook
In 2004, the Group has already seen growth in
consumer spending and borrowing, in increased
merger and acquisition activity, and a modest
resumption of growth in demand for equity
investment products. The Group also sees improving
prospects for economic growth and private sector
employment, particularly in the US and in Hong
Kong.
In emerging markets, such as Brazil, Mexico and
the ASEAN countries, relatively stable currencies
and historically low interest rates are promoting
consumer activity, fuelling domestic growth and
reducing export dependence. China plays an
increasingly important role, not only through its
export growth, but also as the fastest growing market
for commodity producing countries and for those
developed countries which are supplying the
technology, equipment and services to support its
economic expansion.
The Group is conscious of the changing nature
of the global economy and the speed of change and
continues to monitor the impact on sentiment and
consumer spending of globally strong property
prices, which continue to rise faster than underlying
wage growth in many developed markets. While
such rises are understandable in the context of low
interest rates and limited appetite for alternative
investment opportunities, in the long run property
prices have to be linked to income growth.
The picture for 2004 therefore is one of
improving sentiment and stronger growth prospects
in the near term, but with the potential risk of an
unexpected shock as a result of circumstances which
would cause a spike in either short-term interest rates
or commodity prices.
Against this backdrop HSBC expects to
concentrate on building its businesses steadily.
HSBC expects to see lending to consumers around
the world rise as a proportion of our total lending,
with the emphasis on real estate secured lending. The
Group also expect to see business in the US grow in
importance to HSBC as the potential of the
Household acquisition is realised and as the US
economy shows its flexibility and responds to the
lower value of the dollar.
Strategy
At the end of 1998, HSBC launched Managing for
Value, a five-year plan to take the Group into the
21st Century. Over the life of the plan, HSBC made
significant progress against the eight strategic
imperatives included therein.
Under Managing for Value, HSBC established
HSBC and its hexagon symbol as a globally
recognised brand and greatly increased the scope and
penetration of its wealth management services in a
number of key markets. Corporate, Investment
Banking and Markets operations were completely
integrated, enabling the Group to pursue a strategy of
seamlessly servicing the needs of the largest
international companies and institutions, and build
corporate origination and cross-selling capabilities. A
risk-adjusted cost of capital methodology was
introduced and applied. (For the application of
economic profit in HSBC and its results for 2003 see
page 58.) Good progress was made against the other
strategic imperatives announced under the initiative.
In financial terms, HSBC achieved its objective
of doubling Total Shareholder Return (‘TSR’) and
beating the TSR performance of a peer group of
leading banks over the period. TSR is a measure of
the growth in the value of a share over a specific
period with dividends reinvested. Starting with a
benchmark of 100 on 31 December 1998, HSBC’s
TSR more than doubled to 211 on 31 December
2003, while that of its peer group stood at 126.
As HSBC worked on its strategic plan for the
next five years it was clear that there were many
opportunities to develop HSBC’s businesses further,
and also that HSBC could build more from the
structural and business changes achieved in the
recent past. For instance, during the five years of
Managing for Value, HSBC made investments in the
US (Republic and Household), France (CCF) and
Mexico (HSBC Mexico), as a result of which an
additional 100,000 employees joined the Group. This
expansion changed the profile of HSBC’s business,
increased the complexity of the Group and brought
new management and business challenges as well as
exciting opportunities.
The new plan, developed to build on the
achievements of the Managing for Value strategy and
take the Group forward, is now being implemented.
This plan, called Managing for Growth, was
launched at the end of 2003. It provides HSBC with
a blueprint for growth and development during the
next five years. The plan is an evolutionary, not
revolutionary, strategy. It builds on HSBC’s strengths
and it addresses the areas where further improvement
is considered both desirable and attainable.
Management’s vision for the Group remains
unchanged: HSBC aims to be the world’s leading
financial services company. In this context, ‘leading’
means preferred, admired and dynamic, and being
recognised for giving the customer a fair deal. HSBC
will strive to secure and maintain a leading position
within each of its customer groups in selected
markets.
HSBC will remain focused on growing its TSR.
In an era of low interest rates and low nominal
growth rates, HSBC remains committed to exceeding
a benchmark based on peer group comparison. For
full details of the benchmark, see page 217. The peer
group of banks has been updated to include HSBC’s
current principal competitors, and HSBC will chart
its TSR progress on a three-year rolling basis and
over the five-year plan period.
HSBC’s core values are integral to its strategy,
and communicating them to shareholders, customers
and employees is intrinsic to the plan. These values
comprise a preference for long-term, ethical client
relationships; high productivity through teamwork; a
confident and ambitious sense of excellence; being
international in outlook and character; prudence;
creativity and strong marketing.
In the plan, HSBC also recognises its corporate
social responsibility (‘CSR’), which is essential to
sustaining the Group’s long-term success in the
community. HSBC has always had a strong sense of
corporate social responsibility, and believes that
there is no fundamental conflict between being a
good corporate citizen and being sustainably
profitable. Moreover, the pressures to comply with
public expectations across a wide spectrum of social,
ethical and environmental issues are growing rapidly.
The strategy therefore calls for a renewed
recognition of HSBC’s wider obligations to society
and for increased external communication of the
Group’s CSR policies and performance, particularly
on education and the environment, which will remain
9
H S B C H O L D I N G S P L C
Description of Business (continued)
the principal beneficiaries of HSBC’s philanthropic
activities.
HSBC’s new plan is led by customer groups, and
specific strategies will be implemented for each of
them. The expression ‘customer group’ is new in
2003. Previously ‘customer groups’ were called
‘lines of business’, but HSBC believes the new term
reinforces more accurately to all its employees the
Group’s customer focus.
The acquisition of Household in 2003
highlighted the importance within Personal Financial
Services of a distinctive customer group, Consumer
Finance, to augment HSBC’s existing activities in
Personal Financial Services. HSBC’s other customer
groups are Corporate, Investment Banking and
Markets; Commercial Banking; and Private Banking.
Key elements in achieving HSBC’s objectives
for its customer groups will be accelerating the rate
of growth of revenue; developing the brand strategy
further; improving productivity; and maintaining the
Group’s prudent risk management and strong
financial position. Developing the skills of HSBC’s
staff will also be critical and it will be necessary to
ensure that all employees understand how they can
contribute to the successful achievement of the
Group’s objectives. Employees who achieve this
contribution will be rewarded accordingly.
Operating management will continue to be
organised geographically under four regional
intermediate head offices, with business activities
concentrated in locations where growth and critical
mass are to be found.
The plan contains eight strategic imperatives:
• Brand: make HSBC and its hexagon symbol one
of the world’s leading brands for customer
experience and corporate social responsibility;
• Personal Financial Services (‘PFS’): drive
growth in key markets and through appropriate
channels to make HSBC the strongest global
player in PFS;
• Consumer Finance: extend HSBC’s new
business to existing customers and penetrate
new markets;
• Corporate, Investment Banking and Markets:
accelerate growth through enhanced capital
markets and advisory capabilities focused on the
client;
10
• Commercial Banking: make the most of HSBC’s
international customer base through effective
customer relationship management and
improved product offering in all the Group’s
markets;
• Private Banking: serve the Group’s highest value
personal clients around the world, utilising the
investments already made;
• Attract, develop and motivate HSBC’s people,
rewarding success and rejecting mediocrity; and
• TSR: fulfil HSBC’s TSR target by achieving
strong competitive performances in earnings per
share growth and efficiency.
Employees and management
At 31 December 2003, HSBC’s customers were
served by 232,000 employees (including part-time
employees) worldwide, compared with 192,000 at
31 December 2002 and 180,000 at 31 December
2001. The main centres of employment are the UK
with 56,000 employees, the US (43,000), Hong Kong
(24,000), Brazil (25,000), Mexico (18,500) and
France (14,000). HSBC negotiates with recognised
unions, and estimates that approximately 44 per cent
of its employees are unionised. The highest
concentrations of union membership are in Brazil,
France, India, Malaysia, Malta, Mexico, the
Philippines, Singapore and the UK. HSBC has not
experienced any material disruptions to its operations
from labour disputes during the past five years.
In support of its new strategy, HSBC continues
to focus on attracting, developing and motivating the
very best individuals. Emphasis is therefore given to
performance management; reward; talent
management, including graduate recruitment and
international secondments; diversity; and learning
and development. Ensuring that employee
satisfaction with the working experience is kept as
high as possible is seen as beneficial to shareholders,
employees and customers alike.
HSBC is proud of its diverse workforce, which
is able to communicate with HSBC’s customers in
local languages and dialects across 79 countries and
territories. A continuing 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 positioning HSBC as an employer of choice.
HSBC operates in a highly competitive and
international business environment and as such is
obliged to manage its costs realistically, responding
to the availability of talent pools which are proven to
be both efficient and cost effective. This can lead to
the migration of tasks to different geographical
locations as education levels improve, and as
investments in technology and telecommunications
facilitate access to those locations. As a result, job
losses can arise. HSBC has a good record of
communicating openly and sensitively in these
circumstances and of reassigning employees and
minimising compulsory redundancies, wherever
possible.
The quality of HSBC’s employees represents a
significant competitive advantage. The international
mix of staff, working in a meritocracy, enables
HSBC to resource operations with employees who
have a detailed knowledge of local markets, whilst
maintaining a global perspective. To maintain this
balance, international mobility is seen as vital to
sharing best practice and is actively encouraged and
managed. HSBC promotes and recruits the most able
and attaches great importance to cultivating its own
talent. It values teamwork and collective
management. Senior management succession is
planned to be as seamless as possible.
Customer Groups
Profit before tax by customer group
Year ended 31 December 2003
5,604
6,000
5,000
4,000
3,000
2,000
1,000
0
4,036
2,895
281
0
US$ Million
Personal Fin Services
Corp, Inv Bkg & Mkts
Other
Commercial Banking
Private Banking
Total assets1 by customer group
Year ended 31 December 2003
%
Corp, Invest. Bkg & Mkts
45.2
Personal Fin Services
Commercial Banking
Private Banking
Other
34.5
12.5
5.3
2.5
1
Excludes Hong Kong Government certificates of
indebtedness.
Personal Financial Services
Personal Financial Services provides some
39 million individual and self-employed customers
with a wide range of banking and related financial
services. Customer Relationship Management
(‘CRM’) systems and processes are used by HSBC
employees to recognise and fulfil customer needs by
identifying appropriate products and services and
delivering them to the customer through their
channel of preference. Examples include current,
cheque and savings accounts; loans and home
finance; cards; payments; insurance; and investment
services, including securities trading. Insurance
products sold and distributed by HSBC through its
branch networks include loan and health protection;
life, property, casualty and health insurance; and
pensions. HSBC acts as both a broker and an
underwriter, and sees continuing opportunities to
deliver insurance products to its personal customer
base.
Personal Financial Services are increasingly
delivered via self-service terminals, the telephone
and the internet. Comprehensive financial planning
services, covering customers’ investment, retirement,
personal and asset protection needs are offered
through specialist financial planning managers.
High net worth individuals and their families
who choose the differentiated services offered within
Private Banking are not included in this segment.
The most valuable of the 39 million Personal
Financial Service customers worldwide are offered
HSBC Premier. HSBC currently has more than
880,000 HSBC Premier customers, who have access
to more than 250 specialised Premier centres located
in 31 countries. In addition to the standard range of
personal banking products and services, HSBC
11
H S B C H O L D I N G S P L C
Description of Business (continued)
Premier customers receive dedicated relationship
management and 24 hour priority telephone access
and global travel assistance. In 2003 HSBC Premier
International Services were introduced in eight
countries, providing seamless account opening and
credit history transfer across borders for HSBC
Premier customers.
Consumer Finance
Within Personal Financial Services, Household’s
operations in the US, the UK and Canada make
credit available to customer groups not well catered
for by traditional banking operations, facilitate point
of sale credit in support of retail trading purchases
and support major affiliate credit card programmes.
At 31 December 2003 Household had over
60 million customers with total gross advances of
US$121.7 billion. Consumer Finance products are
offered through the following businesses:
Household’s consumer lending business is one
of the largest sub-prime home equity originators in
the US, marketed under the HFC and Beneficial
brand names through a network of over 1,300
branches in 45 states, direct mail, telemarketing,
strategic alliances and the internet. ‘Sub-prime’ is a
US categorisation which describes customers who
have limited credit histories, modest incomes, high
debt-to-income ratios, high loan-to-value ratios (for
real estate secured products) or have experienced
credit problems caused by occasional delinquencies,
prior charge-offs, bankruptcy or other credit related
actions. Consumer lending products include secured
and unsecured loans such as first and second lien
closed-end mortgages, open-ended home equity
loans, personal loans and retail finance contracts.
Household’s mortgage services business
purchases first and second lien residential mortgage
loans from a network of over 200 unaffiliated third
party lenders (‘correspondents’) in the US. Purchases
are either of pools of loans (‘bulk acquisitions’) or
individual loan portfolios (‘flow acquisitions’) made
under predetermined underwriting guidelines.
Forward commitments are offered to selected
correspondents to strengthen relationships and create
a sustainable growth channel for this business.
Household, through its subsidiary Decision One, also
offers mortgage loans referred by mortgage brokers.
Household’s retail services business is one of the
largest providers of third party private label credit
cards (or store cards) in the US based on receivables
12
outstanding, with over 60 merchant relationships and
14 million active customer accounts.
In addition to originating and refinancing motor
vehicle loans, Household’s motor vehicle finance
business purchases retail instalment contracts of US
customers who do not have access to traditional
prime based lending sources. The loans are largely
sourced from a network of approximately
5,000 motor dealers.
Household’s credit card services business is the
seventh largest issuer of MasterCard1 and Visa1
credit cards in the US, and also includes affiliation
cards such as the GM Card ® and the AFL-CIO
Union Plus2 ® credit card. Also, credit cards issued
in the name of Household’s Household Bank and
Orchard Bank brands are offered to customers under-
served by traditional providers, or are marketed
primarily through merchant relationships established
by the retail services business.
A wide range of insurance services is offered
by Household to customers in the US, the UK and
Canada who are typically under-insured by
traditional sources. The purchase of insurance is
never a condition of any loan or credit advanced by
Household.
The refund lending business accelerates access
to funds for US taxpayers who are entitled to tax
refunds. The business is seasonal with most revenues
generated in the first three months of the year.
Household’s business in the UK provides mid-
market consumers with mortgages, secured and
unsecured loans, insurance products, credit cards and
retail finance products. It concentrates on customer
service through its 216 HFC Bank and Beneficial
branches, and finances consumer electronics through
its retail finance operations. In Canada, similar
products are offered and, deposits are taken through
Household’s trust operations there.
Commercial Banking
HSBC is one of the world’s leading banks in the
1 MasterCard is a registered trademark of MasterCard
International, Incorporated and Visa is a registered
trademark of Visa USA, Inc.
2 The Union Plus MasterCard and Visa credit card
programme is an affinity arrangement with Union Privilege
under which credit cards are offered to members of unions
affiliated with the American Federation of Labor and
Congress of Industrial Organisations (‘AFL-CIO’).
provision of financial services and products to small
and medium-sized businesses, with over 2 million
business customers including sole proprietors,
partnerships, clubs and associations, incorporated
businesses and publicly quoted companies.
At 31 December 2003, HSBC had total
commercial customer deposits of US$111.5 billion
and total commercial customer loans and advances,
net of suspended interest and provisions for bad and
doubtful debts, of US$103.5 billion.
The Commercial Banking segment places
particular emphasis on multi-disciplinary and
geographical collaboration in meeting its commercial
customers’ needs. This differentiated service allows
HSBC to broaden and enhance its offering to its
Commercial Banking customers. The range of
products includes:
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
provision of financial services to commercial
customers is continuing innovation and flexibility in
electronic delivery solutions.
Wealth management services: These include
advice and products related to savings and
investments. They are provided to commercial
banking customers and their employees through
HSBC’s worldwide network of branches and
business banking centres.
Insurance: HSBC offers insurance protection,
employee benefits programmes and pension schemes
designed to meet the needs of businesses and their
employees, and to help fulfill the applicable statutory
obligations of client companies. These products are
provided by HSBC either as an intermediary (broker,
agent or consultant) or as a supplier of in-house or
third party offerings. Products and services include a
full range of commercial insurance, including
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 experience in trade services. A complete range of
traditional documentary credit, collections and
financing products is offered, as well as specialised
services such as insured export finance, international
factoring and forfaiting. HSBC’s expertise is
supported by highly automated systems.
Leasing, finance and factoring: HSBC
provides leasing, finance (including instalment and
invoice finance) and domestic factoring services,
primarily to commercial customers in the UK, Hong
Kong and France. Special divisions have been
established to finance vehicles, plant and equipment,
materials handling, machinery and large complex
leases.
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, this
customer group operates a long-term relationship
management approach to build a full understanding
of clients’ financial requirements. Sectoral client
service teams comprising relationship managers and
product specialists develop financial solutions to
meet individual client needs. With dedicated offices
in over 50 countries and with access to HSBC’s
worldwide presence and capabilities, this business
serves subsidiaries and offices of these clients on a
global basis.
Products and services offered include:
Global Markets: HSBC’s operations in Global
Markets consist of 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, credit, equity 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
13
H S B C H O L D I N G S P L C
Description of Business (continued)
trading for institutional, corporate, private
clients and asset management services, including
global investment advisory and fund
management services; and
•
capital raising, both publicly and privately,
including debt and equity capital, structured
finance and syndicated finance, and distribution
of these instruments utilising links with HSBC’s
global networks.
Global Transaction Banking: This includes
international, regional and ‘in-country’ payments and
cash management services; trade services,
particularly the specialised ‘supply chain’ product;
and securities services, where HSBC is one of the
world’s leading custodians providing custody and
clearing services and funds administration to both
domestic and cross-border investors. Factoring and
banknotes services are also provided by specialist
units.
adoption of HSBC Private Bank as the worldwide
marketing name for its principal private banking
business.
Drawing on the strength of the HSBC Group and
utilising the best products from the marketplace,
Private Banking works with its clients to offer both
traditional and innovative ways to manage and
preserve wealth whilst optimising returns. Products
and services offered include:
Investment services: These comprise both
advisory and discretionary investment services. A
wide range of investment vehicles is covered,
including bonds, equities, derivatives, structured
products, mutual funds and hedge funds. Supported
by five major advisory centres in Hong Kong,
Singapore, Geneva, New York and London, Private
Banking selects and validates the most suitable
investments for clients’ needs and investment
strategies.
Corporate and Institutional Banking: This
Global wealth solutions: These comprise
includes:
•
•
•
•
•
•
direct lending, including structured finance for
complex investment facilities;
leasing finance with an emphasis on ‘large
ticket’ transactions; and
deposit-taking.
Global Investment Banking: This comprises:
corporate finance and advisory services for
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, and working closely with
all major export credit agencies; and
financing and risk advisory services.
Asset management services: This comprises
Asset Management products and services for
institutional investors, intermediaries and individual
investors and their advisors.
Private Banking
HSBC is one of the world’s leading international
private banking groups with total client funds under
management of US$169 billion at 31 December
2003. In December 2003, HSBC announced the
14
planning, trustee and other fiduciary services
designed to protect existing wealth and create
tailored structures to preserve wealth for future
generations. Areas of expertise include trusts,
foundations, charitable trusts, private investment
companies, insurance vehicles and offshore
structures.
Specialist advisory services: Private Banking
offers expertise in several specialist areas of wealth
management including tax advisory, family office
advisory, charities and foundations, media, diamonds
and jewellery, and real estate. Such specialist
advisers are available to deliver products and
services which are tailored to meet the full range of
high net worth clients’ individual financial needs.
General banking services: These are the
ancillary services necessary for the management of
clients’ finances. They include treasury and foreign
exchange, offshore and onshore deposits, tailor-made
loans and internet banking. The skills and products
available in HSBC’s other customer groups, such as
corporate banking, investment banking and insurance
are also offered to Private Banking clients.
HSBC Private Bank is the marketing name for
the private banking business conducted by the
principal private banking subsidiaries of the HSBC
Group worldwide. Private Banking services are also
provided by HSBC Guyerzeller and HSBC Trinkaus
& Burkhardt.
Geographical Regions
General
Profit before tax split by geographical region
Year ended 31 December 2003
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
3,969
3,728
3,613
1,391
US$ Million
115
Europe
Rest of Asia-Pacific
South America
Hong Kong
North America
• The remarkable efforts of colleagues in Turkey
ensured that business returned to normal
following the two bomb blasts on 20 November,
2003 which severely damaged the Head Office
and a branch in Istanbul. All branches were
operating as normal the day after, with the
exception of Beyoglu, which was damaged by
the bomb at the British Consulate. Head Office
employees relocated to a contingency site and
the bank’s business recovery planning proved
both highly effective and invaluable. In the face
of the terrible events, colleagues responded with
incredible courage and commitment. HSBC
immediately launched support initiatives for the
bereaved and those most impacted by the tragic
events.
Total assets1 split by geographical region
•
As at 31 December 2003
Europe
Hong Kong
Rest of Asia Pacific
North America
South America
%
41.6
19.3
9.6
28.3
1.2
1 Excludes Hong Kong Government certificates of
indebtedness.
Business highlights in 2003
For additional information regarding business
developments in 2003, as well as comparative
information relating to developments in 2002 and
2001, please refer to the ‘Financial Review’ on pages
36-117.
Europe
HSBC’s principal banking subsidiaries in Europe are
HSBC Bank, CCF and HSBC Private Bank. HSBC
provides a wide range of banking, treasury and
financial services to personal, commercial and
corporate customers in the UK, France, and across
continental Europe, with strong coverage in Malta
and Turkey. The bank’s strategy is to build long-term
relationships attracting customers through value-for-
money products and high-quality service.
In March, HSBC added the consumer finance
business, HFC Bank plc (‘HFC Bank’), to its
European network as a consequence of the
Household acquisition. HFC Bank provides a
range of loan and insurance products to over
3.5 million customers throughout the UK,
making it one of the country’s largest pure
consumer finance businesses.
Personal Financial Services
• For the second year running, HSBC won a major
category of the ‘What Mortgage?’ award in the
UK and was the Mortgage Magazine winner of
the ‘Lender of the Year’ award. First Direct won
the Mortgage Advisor and Home Buyer
Magazine award for ‘Offset Mortgage of the
Year’.
•
In July, HSBC became the first British high
street bank to offer an Islamic mortgage to the
estimated UK Muslim population of 1.8 million.
The Amanah Home Finance product was
launched with the backing of HSBC's Dubai-
based Amanah Finance division.
• The Premier customer base in the UK grew by
57 per cent to over 280,000. Premier
International, offering credit history transfer
across borders and seamless account opening,
was launched in the UK, Jersey (Offshore) and
France, while Malta and Greece became the 30th
and 31st countries to offer the HSBC Premier
service.
15
H S B C H O L D I N G S P L C
Description of Business (continued)
•
In July, HSBC launched HSBC InvestDirect, a
new online and telephone investment service in
the UK. This provides internet and telephone
share-dealing and price information across a
broad range of UK equities and gilts.
• HSBC in the UK was awarded the coveted ‘Five
Star Award’ from Money Management magazine
for its regular premium stakeholder pensions.
• HSBC’s Private Clients service was ranked the
number one UK Independent Financial Adviser
(‘IFA’) in a survey of the top 50 IFAs by
Professional Advisor Magazine again in 2003.
•
In the UK, individual service reviews (a review
of a customer’s financial service needs) were
completed for more than 800,000 customers
during the year, an increase of 67 per cent on
2002.
• By the end of 2003, over 2 million customers in
the UK were registered for personal internet
banking and over 4.7 million customers are now
registered for telephone banking.
• Significant progress was made in migrating the
UK card issuing business onto Household’s
credit card system, improving both operational
and cost efficiency. HSBC Card Services issued
its highest ever number of new credit cards and
gained a record number of competitor balance
transfers in the UK, boosted by the introduction
of a ‘0%’ balance transfer offer in July.
• Following successful participation in the UK
‘chip and pin’ trials earlier in the year, HSBC
will begin issuing chip and pin enabled credit
and debit cards in 2004, delivering greater
security for card users and reducing exposure to
fraud costs.
• HSBC expanded its UK debt counselling service
for customers with potential repayment
difficulties. The service works with customers to
construct plans to manage debt more effectively
ahead of possible problems.
Consumer Finance
In June, HFC Bank announced a long-term
agreement with the John Lewis Partnership, the
employee-owned UK department store and
supermarket group, for the joint management
and operation of the John Lewis, Peter Jones and
Waitrose store card business. The agreement
•
16
involves the transfer of US$400 million of loans
and 1.8 million cardholders to HFC Bank on a
revenue-sharing basis. The bank will work with
the John Lewis Partnership to enhance its credit
card offering to existing and potential customers.
Commercial Banking
• HSBC’s commitment to supporting new
businesses in the UK helped in the formation of
over 102,000 start-ups during the year through
its ‘Start-up Stars’ programme. Additionally, the
bank attracted more than 23,000 new competitor
balance transfers in 2003.
• The Chartered Institute of Management
Accountants (‘CIMA’) voted HSBC ‘Best Small
Business Bank’ following feedback from its
Members in Practice Group. The CIMA
recognition follows the Forum of Private
Business’s announcement of HSBC as the ‘Best
High Street Clearing Bank for Small
Businesses’, while the UK 200 Group, a
consortium of leading accountants, also named
HSBC the best bank for business.
• A new Business Money Manager deposit
product was launched in January, attracting an
average of 1,700 new accounts per week.
• During 2003, in response to depolarisation in the
UK investments market, the bank introduced a
number of Commercial Independent Financial
Advisors to provide quality independent
financial advice to business customers. Based on
the success of the initial pilot, the initiative is
being expanded across the network. HSBC is
now the number one provider of income
protection products in the UK.
• HSBC DriverQuote won the award for the ‘most
innovative e-delivery channel’ at the Institute of
Financial Services’ Financial Innovation Awards
2003. HSBC DriverQuote is the UK bank’s
online quotation and ordering system and allows
businesses to manage their company car policy
over the internet.
• HSBC Invoice Finance (UK) Limited was
awarded the Best Factoring Award by Trade
Finance Magazine in 2003.
• Business Moneyfacts, a leading independent
finance guide, named HSBC the UK’s ‘Best
Computer Banking Provider’. Over 130,000
customers in the UK registered for business
internet banking in 2003. Fifty-four per cent of
all new business customers register for internet
banking at the time of account opening. The
value of payments generated using business
internet banking now exceeds US$786 million
per month. At the Institute of Financial Services’
Financial Innovation Awards HSBC won the
award for the ‘Best Internet Banking Service’
and the ‘Grand Prix Award’ for general
innovation in the financial services industry.
• By the end of 2003, over 280,000 UK customers
were registered for business telephone banking,
utilising the bank’s telephone centres in the UK
and India. These handle some 3,000 sales and
more than 100,000 in-bound calls per month,
leaving relationship managers to focus on
customer service.
• Group ‘Secure E-Payments’ remote payments
solution successfully launched in June 2003.
HSBC’s offering has enhanced security features
over other providers and includes compliance
with MasterCard ‘Securecode’ and verification
by Visa standards for internet merchants.
Corporate, Investment Banking and Markets
•
In June, HSBC announced the appointment of
co-heads of its global Corporate, Investment
Banking and Markets business. Under this new
management structure, HSBC combined its
origination capabilities with its broad-based
trading and sales platform to ensure a seamless
banking, financing and investor service for the
Group’s corporate and institutional clients.
business, creating a single platform for all
trading and sales operations. In addition, HSBC
announced the restructuring of the research
offering so as to align macro, sectoral and price
driven research with both institutional investor
and corporate client needs.
•
In the international bond market, HSBC’s market
share rose to 4.4 per cent, and in the fourth
quarter, HSBC came third in the international
bond bookrunner league table.
• HSBC was joint adviser to Safeway on its
£3 billion recommended merger with Morrison
in the UK and advised LNM Holdings on its
US$1.2 billion acquisition of Polish steel maker
Polski Huty Stali.
• The London and Paris dealing rooms were fully
integrated with each site taking a lead role in
specific product areas. This dual-hub structure in
Europe has proved to be a key competitive
advantage.
• HSBC won a five-year contract to support
British Telecommunications plc’s (‘BT’)
corporate card programme. The BT programme
is the largest in both the UK and Europe with
more than 35,000 corporate cards in issue and an
annual spend of over £100 million (US$164
million).
• The Universities Superannuation Scheme, the
UK’s third largest pension fund, appointed
HSBC Global Fund Services Limited as sole
provider of a full range of investment accounting
and performance measurement services.
• During 2003, the business strengthened its client
•
coverage model, adopting a sector-based
relationship approach to client servicing. The
origination businesses were restructured to
reflect this sectoral approach and reinforced
through selective recruitment. As a result of this
investment, HSBC strengthened its corporate
client service offering, winning a number of
notable contracts.
In March 2003, the payments and cash
management, trade services, securities services
and banknotes businesses were brought together
under a single management and organisation
structure, Global Transaction Banking.
In September, HSBC commenced the integration
of its equities business into the Global Markets
•
•
In response to the anticipated growth in
employee share saving schemes and personal
retirement schemes, CCF created HSBC CCF
Épargne Enterprise, following the acquisition of
minority shareholdings in Elysees Gestion and
Elysees Fonds.
Private Banking
• HSBC Private Bank was rated among the top
three ‘Best Global Private Banks’ in
Euromoney’s first annual survey of wealth
management providers published in January
2004.
• HSBC Private Bank’s alternative investments
attracted in excess of US$3 billion new assets,
raising total client assets invested in hedge funds
17
H S B C H O L D I N G S P L C
Description of Business (continued)
to US$14 billion. In Switzerland, four new
hedge funds were launched. HSBC Private Bank
was voted ‘Best European High Net
Worth/Retail Hedge Fund of Funds Product
Provider’ for 2003 at the ‘Hedge Funds Review’
and received Financial Adviser magazine’s gold
award as a ‘Top Provider’ in the long/short funds
of funds sector.
• Strategic Investment Solutions (‘SIS’) was
launched in July, providing clients with
externally managed multi-manager investment
portfolios.
• The Family Office Advisory team launched
Consolidation and Analysis of Investment
Portfolios providing wealthy clients and their
families with a single set of statements covering
all their wealth. For clients with more complex
portfolios, the service provides a means of
developing coherent tax and investment
management strategies.
• The Group’s four French private banking
subsidiaries combined into a single operating
unit, HSBC Private Bank France, to create a
major player in the French private banking
market, with over US$15 billion in assets under
management. The new unit comprises three
divisions: resident private clients, international
clients and institutional clients.
Other
• HSBC Actuaries and Consultants Limited were
appointed as actuarial consultant for a UK trust,
The Pensions Trust for Charities & Voluntary
Organisations (the ‘Pensions Trust’). With assets
approaching £2 billion (US$3.6 billion), the
Pensions Trust is the leading multi-employer
occupational pension fund for employees
involved in the charitable, social, educational,
voluntary and not-for-profit sectors.
Hong Kong
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 is HSBC’s flagship
bank in the Asia-Pacific region. It is one of Hong
Kong’s three note-issuing banks, accounting for
more than 62 per cent by value of banknotes in
18
circulation in 2003.
General
• Surveys indicated that HSBC has the strongest
brand equity amongst all banks in Hong Kong.
With its ‘The world's local bank’ positioning,
HSBC combines a strong global brand with local
reach and knowledge.
• To support the recovery of the Hong Kong
economy post-SARS (severe acute respiratory
syndrome), HSBC launched the ‘HSBC
Supports Hong Kong’ campaign, investing up to
HK$100 million (US$12.8 million) to provide
financial assistance to those affected by atypical
pneumonia, and to stimulate local consumer
spending. This leadership position received a
very positive reaction from all sectors of the
community.
• Hang Seng Bank celebrated its 70th anniversary
on 3 March 2003. The anniversary tagline, ‘70
Years of Excellence’, highlighted the bank’s
commitment to providing high quality services
that exceed customer expectations.
Personal Financial Services
• HSBC’s position as one of the leading providers
of wealth management services was sustained
amid keen competition. Income from wealth
management, including commissions on sales of
unit trust products, funds under management,
and securities transactions, grew by 38 per cent
to US$408 million. A wide range of new retail
unit trusts, certificates of deposit, bonds and
structured deposits were launched to provide
products to meet customers’ needs in the
low-interest rate environment.
• HSBC increased sales of new regular premium
individual life insurance by 59 per cent, growing
its market share from 13.9 per cent to 18.6 per
cent.
• On the back of this success, HSBC continued to
add to its dedicated sales force, and the number
of sales staff gaining professional qualifications
in investment and insurance business also rose.
• HSBC maintained its position as the number one
credit card issuer in Hong Kong and, through
strong and targeted customer marketing,
increased card usage despite the subdued
economy.
• HSBC continued to focus on operational
efficiency, with the Group Service Centres in
mainland China expanding to provide about half
the operational support for credit cards in Hong
Kong.
• HSBC continues to have the largest market share
in online banking in Hong Kong, with more than
665,000 registered users at December 2003, up
by 41 per cent on 2002. A 62 per cent increase
in monthly website visits was achieved in 2003,
following the introduction of tailored web pages
for customer segments, alert services and market
information.
• HSBC was judged the best consumer internet
bank in Hong Kong for the second year in a row
by Global Finance and also won awards for the
best consumer online securities trading service;
the best consumer online credit service in Asia,
and the best consumer web site design in Asia.
• Hang Seng Bank continued to enhance its
internet banking services, launching the e-Fund
Supermarket in July to provide customers with
comprehensive one-stop online investment fund
services. By the year-end the number of Hang
Seng customers registered for Personal
e-Banking services in Hong Kong had risen by
34 per cent to 337,000, and internet transactions
represented 20 per cent of total transactions.
• HSBC increased the number of Premier centres
in Hong Kong to 36, which support an enlarged
Premier customer base of 224,000.
• HSBC was named the Best Bank in Hong Kong
in 2003 by Euromoney, The Asset, and The
Banker, and Best Local Bank in Hong Kong by
Finance Asia. HSBC was also named as the Best
Managed Company in Hong Kong for the
second consecutive year by Asiamoney, and won
the Hong Kong Retail Management
Association’s 2003 Award for Services:
Customer Service Grand Award.
• Hang Seng Bank was named the Best Domestic
Commercial Bank in Hong Kong by The Asset
and Asiamoney.
• Hang Seng Bank strengthened its suite of
insurance and investment products by widening
its product range. The number of funds under the
Hang Seng Investment series launched by Hang
Seng Bank rose from 60 to 90 in 2003, and
funds under management increased by 30 per
cent to HK$30 billion (US$3.9 billion) at the
year end.
• Hang Seng Investment Management Limited
introduced the first exchange traded fund
tracking the Hang Seng China Enterprises Index.
This fund was listed on the Hong Kong stock
exchange in December 2003.
• Hang Seng Bank launched Leisure Class in June
2003, a new service which offers retirees and
those who are planning to retire, comprehensive
investment services and benefits and a range of
leisure activities including Chinese painting and
calligraphy classes and seminars on Chinese
medicine.
• Following the relaxation of restrictions on
individual travel to Hong Kong by mainland
China visitors, the People’s Bank of China and
the Hong Kong Monetary Authority announced
consent at the end of 2003 for Hong Kong banks
to commence specified renminbi services,
including exchange, deposit taking, remittances
and renminbi credit cards. HSBC and Hang
Seng Bank launched renminbi services in
February 2004.
Commercial Banking
• HSBC maintained its position as the leading
trade services bank in 2003, growing market
share and being named the Best Trade Finance
Bank in Asia by Global Finance. With 80 per
cent of HSBC’s substantial trade income coming
from Commercial Banking customers,
instant@dvice, an internet based service which
supports electronic documentary credits
advising, was launched.
• Launched in August 2001, HSBC’s Business
Internet Banking service continued to be well
received in the market. HSBC was recognised
by Global Finance as the Best Corporate/
Institutional Internet Bank in Hong Kong in
2003. Surveys indicated that HSBC had the
largest online business banking market share in
Hong Kong with over 31,000 companies
registered as users. In addition, Hang Seng Bank
had some 13,000 business e-banking customers
by the year-end compared with 5,000 at the end
of 2002.
• Hang Seng Bank launched the Integrated
Business Solutions Account in September 2003,
19
H S B C H O L D I N G S P L C
Description of Business (continued)
offering small and medium-sized enterprises
one-stop financial services to facilitate their
business growth.
• Hang Seng Bank opened its first branch in the
Macau SAR in December 2003 to serve the
trade finance needs of its customers with
business operations there.
Corporate, Investment Banking and Markets
• HSBC increased its market share in G3 and local
currency bond issuance in the Hong Kong
market from 33 per cent in 2002 to 45 per cent
in 2003, with 249 issues totalling US$11 billion.
It was named Best Hong Kong Bond House by
IFR.
• HSBC was a joint bookrunner on Hutchison
Whampoa’s US$5 billion global bond issue, the
largest bond issue in Asia to date.
• The debt finance group set up Cheung Kong’s
HK$10 billion (US$1.3 billion) retail bond
programme and led Hong Kong’s largest retail
bond to date, for Kowloon-Canton Railway
Corporation.
• The securitisation team led the industry’s first
securitisation of taxi and public light bus loans
and the first synthetic securitisation of non-
mortgage consumer and small and medium-sized
enterprise (‘SME’) obligors in Hong Kong and
the rest of Asia-Pacific.
• The equity capital markets team executed equity
placements amounting to US$576 million.
• HSBC Asset Management celebrated its 30th
anniversary on 4 September 2003, with the
theme ‘Your Advantage in Investment In Asia
and Around the World’, highlighting its
commitment to providing investment solutions
and delivering results.
• By the end of 2003, HSBC Asset Management
had launched 14 capital guaranteed funds,
covering a wide range of sector and country
themes, with US$3.5 billion in assets at the year-
end, which represented more than 80 per cent of
the guaranteed fund market in Hong Kong.
Private Banking
• HSBC Private Bank was named the Best Private
Bank in Hong Kong in 2003 by Euromoney.
20
• HSBC Private Bank continued to expand its
family office capabilities with the relaunch of its
tax consulting service as Wealth and Tax
Advisory Services (‘WTAS’) (Asia) Limited.
•
In October 2003, HSBC and Hang Seng Bank
launched one-stop private banking services to
cater to the needs of applicants to the Hong
Kong Government’s Capital Investment Entrant
Scheme.
Rest of Asia-Pacific (including the Middle East)
The Hongkong and Shanghai Banking Corporation
offers personal, commercial, corporate and
investment banking and markets services in
mainland China. The bank’s network spans 11 major
cities, comprising nine branches and two
representative offices. Hang Seng Bank offers
personal and commercial banking services and
operates five branches, a sub-branch, and two
representative offices in seven cities.
Outside Hong Kong and mainland China, the
HSBC Group conducts business in the Asia-Pacific
region primarily through branches and subsidiaries
of The Hongkong and Shanghai Banking
Corporation, with particularly strong coverage in
India, Indonesia, Korea, Singapore, Taiwan and
Thailand. HSBC’s presence in the Middle East is led
by HSBC Bank Middle East Limited, the largest
foreign-owned bank in the region; in Australia by
HSBC Bank Australia Limited; and in Malaysia by
HSBC Bank Malaysia Berhad, which has the second
largest presence of any foreign-owned bank in the
country.
General
•
In 2003 HSBC celebrated 150 years of doing
business in India.
• HSBC remains committed to the local
communities in which it operates across the
region. With the World Health Organization
declaring the SARS virus contained worldwide
in July, HSBC launched the ‘Shop Asia, Dine
Asia’ programme to stimulate affected
industries. Over 2,500 outlets across
Asia-Pacific joined with HSBC to support the
programme.
• HSBC entered into an agreement to acquire a
14.71 per cent stake in UTI Bank Limited, an
Indian retail bank, for a consideration of
•
•
•
Rs3.1 billion (US$66 million), with the option to
acquire a further 5.37 per cent stake. UTI has
some 200 branches and extension counters and
over 1,000 ATMs nationwide, and offers a
comprehensive range of corporate banking,
retail lending and deposit products, and an
internet banking service, to its one million
customers.
In New Zealand, HSBC purchased the retail
banking business of AMP Bank Limited, which
comprised mortgage lending of US$1.1 billion
and deposits of US$122 million. The purchase,
which complements HSBC’s existing retail
franchise in New Zealand, involved the
acquisition of approximately 25,000 customer
accounts and substantially increased HSBC’s
mortgage and deposit business.
In October, HSBC Insurance Brokers Limited
entered into a joint venture agreement to offer
insurance broking and risk management services
to domestic and international clients in mainland
China, the first foreign joint venture in China to
obtain such a licence. HSBC holds a 24.9 per
cent stake in the new company, Beijing HSBC
Insurance Brokers Limited.
In December, HSBC and China Ping An Trust &
Investment Co. Limited (‘Ping An’) announced
an agreement to acquire 50 per cent each of
Fujian Asia Bank Limited for not more than
US$20 million in cash. Completion of the
transaction is expected to be at the end of March
2004, by which time Ping An is committed to
injecting a further US$23 million into Fujian
Asia bank, diluting HSBC’s share to 27 per cent.
• Also in December, Hang Seng Bank signed an
agreement to acquire 15.98 per cent of Industrial
Bank Co. Limited’s (‘Industrial Bank’) enlarged
capital for a consideration of 1.7 billion
renminbi (US$208 million) in cash, subject to
regulatory and shareholder approval. With this
transaction, Hang Seng Bank will become the
first foreign bank to acquire more than 15 per
cent of a mainland Chinese bank. Industrial
Bank has assets of 190 billion renminbi (US$23
billion).
•
In January 2004, HSBC and the Bank of
Shanghai launched the Shanghai International
Credit Card, which enables mainland Chinese
customers to make purchases when travelling
outside the mainland at any merchant accepting
Visa credit cards, and settle their payments in
renminbi through a Bank of Shanghai account.
• Six new branches were opened during the year,
one in Bangladesh, one in New Zealand and four
in India, further building HSBC’s position in the
region.
•
In March, HSBC was among the first foreign
banks in mainland China to receive full approval
to offer custodian services to Qualified Foreign
Institutional Investors (‘QFII’s) in China’s
A-share market. HSBC also provides custodian
services for China’s B-share market, in which it
has a leading market position.
• HSBC obtained approval for its QFII licence in
August and as a result is able to invest in
renminbi-denominated securities in China’s
A-share market.
• HSBC has been providing renminbi banking
services to foreign-invested companies and
foreign nationals through its Shanghai and
Shenzhen branches since 1997 and 1998
respectively. In November 2003, HSBC received
approval to provide these services through its
branches in Guangzhou, Qingdao and Tianjin. In
a further development, with effect from 1
December 2003, foreign banks have also been
allowed, subject to regulatory approval, to offer
renminbi services to local corporations in
selected cities. HSBC will introduce these
services in the first half of 2004.
• Hang Seng Bank expanded its services in
mainland China to help customers capture
business opportunities arising from the Closer
Economic Partnership Arrangement (‘CEPA’)
between Hong Kong and the mainland. The bank
opened its fifth mainland branch in Nanjing in
the economically important Yangtze River Delta
area in August, and a sub-branch in Puxi,
Shanghai in October, and applied to upgrade its
Beijing representative office to a branch.
• Hang Seng Bank commenced renminbi services
at its Guangzhou branch in October – the bank’s
second branch, after Shanghai in 2002, to offer
such services – and its Shenzhen branch in
January 2004.
• Hang Seng Investment Management Limited
opened a representative office in Shenzhen in
March.
21
H S B C H O L D I N G S P L C
Description of Business (continued)
Personal Financial Services
• HSBC continued to broaden its range of
products and services across the Asia-Pacific
region, notably in investment products.
Structured deposit products were launched
across the region, and a wide range of unit trusts
were sold, driving funds under management up
year-on-year.
• HSBC’s credit card business in the rest of Asia-
Pacific achieved significant growth in 2003,
with over 3.7 million cards in force.
• An enhanced credit card processing system was
implemented in five countries, improving
operational efficiency. The new system applies
state-of-the-art technology to risk and fraud
management allowing HSBC to better protect its
customers.
• As part of the strategic management of costs,
selected processing activities were moved into
the Group Service Centres in Bangalore, Kuala
Lumpur and Shanghai from Australia, New
Zealand, the Philippines and Singapore. In
January 2004, HSBC announced plans to open a
new Group Service Centre in Colombo, Sri
Lanka, during the year.
• HSBC continued to upgrade and enhance its
online banking offering, and the number of
personal internet banking customers increased
by 52 per cent to 378,000. The quality of its
services was recognised in Malaysia where
HSBC was named the Best Consumer Internet
Banking Site by Global Finance.
• HSBC was the first international bank in the
United Arab Emirates to offer a range of Shariah
(Islamic law) compliant personal financial
services. Two services were launched initially –
the HSBC Amanah Current Account and HSBC
Amanah Personal Finance.
• HSBC was named Asia-Pacific Bank of the Year
by The Banker, and Best Foreign Bank in
mainland China, India and Indonesia by
FinanceAsia.
Commercial Banking
• HSBC achieved impressive growth of over
49 per cent in its loan book in mainland China in
2003, with its branches in Hong Kong,Taiwan
and the mainland working closely together on
22
cross-border referrals and knowledge transfer.
The increase is also attributable to strong growth
in trade advances.
• A Commercial Banking intranet was developed
in 2003 that facilitates the spread of best practice
and cross-border referrals between different
members of the Group.
•
In Malaysia, new business facilities approval
increased by 65 per cent.
• Delivery channels were further developed across
the region. In Malaysia, HSBC recorded a 150
per cent increase in internet, and an 80 per cent
increase in telephone banking customers, and
significantly enhanced the electronic delivery of
trade services to its customers.
• As part of its wider Islamic Banking initiatives,
HSBC won approval from the Bangladesh Bank
to launch an Islamic Banking service in the
country with specific focus on Commercial
Banking products.
• HSBC launched a Shariah banking service in
Indonesia, the first foreign bank to do so. The
Group’s Indonesian Shariah business will
initially focus on the corporate and institutional
sectors, providing structured financial
capabilities and debt capital markets advisory
services. In the medium term, HSBC intends to
extend the service to provide a broad range of
wealth management and investment products
and services.
• HSBC Bank Middle East launched a new
factoring service to assist businesses financing
their outstanding invoices. The service provides
domestic and international factoring facilities for
businesses trading on open account payment
terms.
• Trade Services continued to build on its leading
presence in the region and HSBC was named
Best Trade Finance Bank in Asia by
FinanceAsia. Document Tracker, a new service
which provides customers with a convenient
way to check the delivery status of international
documents sent through HSBC’s Trade Services
offices, is now available in eight countries in
Asia following its rollout in 2003 in Bangladesh,
mainland China, Korea, Malaysia and Thailand.
• HSBC was named Best Bank in India, the
Philippines and Thailand in The Asset
Magazine’s Triple A Country Awards 2003.
Corporate, Investment Banking and Markets
• HSBC’s rankings and market share improved,
with the bank raising more debt in a single year
than any other bank in Hong Kong and the rest
of Asia-Pacific and leading more deals than any
other firm. It led 311 G3 and local currency
deals with a market share of 15 per cent, and
raising US$14.8 billion. HSBC was named the
Best International Bond House and Best Local
Currency Bond House by FinanceAsia.
• HSBC won Euromoney’s award for Best at
Treasury and Risk Management in Asia for the
sixth consecutive year.
• The Ministry of Finance of the State of Qatar
selected HSBC as joint lead manager of its debut
Islamic bond issue. The issue, launched in
September, was fully compliant with Shariah
law.
• Corporate Finance and Advisory was the sole
financial advisor to mainland China’s largest
brewery, Tsingtao Brewer, in a strategic alliance
with the world’s largest brewery, Anheuser-
Busch. A mandatory convertible bond structure
was used for the first time for a foreign
investment in a mainland-listed company.
• HSBC continued to be at the forefront of the
development of local currency bond markets.
The successful placing of the Republic of
Philippines’ Peso74.3 billion retail treasury bond
benefited from the streamlined documentation
framework HSBC has developed for bond
placement.
• HSBC’s strength in Payments and Cash
Management gained recognition, with HSBC
named the Best Cash Management Bank in Asia
by AsiaMoney and FinanceAsia. Roll out across
the region of the integrated payments and
receivables proposition continued and was
successfully completed in Hong Kong during
2003.
• HSBC was voted the number one cash
management bank in the Middle East in a 2003
poll of Euromoney readers. The bank took top
honours for the scope of its services and
customer satisfaction. It was also recognised for
its achievements in building new product lines,
as well as integrating existing services to
provide tailor made solutions to its customers.
• HSBC was named the best-rated sub-custody
provider in 21 different countries in the Global
Custodian Survey. This strong performance was
reflected in further client business for our sub-
custody network.
• HSBC Asset Management continued to enjoy
strong growth in 2003. Assets in the HSBC
Chinese Equity Fund and the HSBC Indian
Equity Fund grew significantly, making them the
world’s largest Chinese and Indian equity funds.
• HSBC Asset Management, which began
operating in India in 2002, achieved strong
growth there in 2003, with funds under advice
and management growing to US$1.8 billion. The
client base increased to more than 50,000 from
18,000 in 2002.
Private Banking
• HSBC Private Bank continued its expansion in
Asia, working with strategic partners to
strengthen offshore banking business for the
mainland China market. Development of the
private banking market in Japan, and exploration
of the market in Malaysia, continued in
partnership with HSBC’s local branch networks.
•
In Singapore, HSBC Private Bank was granted a
wholesale banking licence in May 2003 which
has allowed its range of services to be expanded.
North America
HSBC’s North American business covers the United
States, Canada, Mexico and Panama. Operations are
primarily conducted in the US through HSBC Bank
USA in New York State and Household, based in
Chicago. HSBC’s Canadian and Mexican operations
are run through HSBC Bank Canada and HSBC
Mexico respectively.
General
• Household’s membership of the HSBC Group
provided it with a source of direct funding and
improved access to the capital markets, lowering
its funding costs and expanding its access to a
worldwide pool of potential investors.
23
H S B C H O L D I N G S P L C
Description of Business (continued)
•
In December 2003, upon receipt of regulatory
approval, Household sold US$2.8 billion of its
higher quality real estate secured receivables to
HSBC Bank USA. The sale represented the first
step in a strategy to lower the Group’s overall
borrowing costs by utilising liquidity at HSBC
Bank USA. Further asset transfers are planned in
2004, subject to regulatory approval.
• The major power cut in northeast USA and
southeast Canada in August resulted in minimal
disruption for HSBC’s customers. The events
management protocol and business continuity
plans for all critical areas of the North American
operations were successfully invoked with all
transactions processed and settled within
accepted customer service standards and with no
financial losses.
• The back-up site and production centre for
HSBC’s Canadian IT operations were
transferred to the Group’s state of the art facility
in Amherst, New York, allowing for greater
economies of scale in the use of technology.
•
In Mexico, significant new acquisitions in 2003
included the purchase for US$144 million of
ING’s 49 per cent stake in the joint-venture
insurance company jointly owned with
HSBC Bank Mexico, and the acquisition of a
pension fund company (AFORE Allianz
Dresdner) from Allianz A.G. for
US$175 million. These new acquisitions
strengthened product offerings to HSBC’s
extensive customer base and will lead to
increased cross-selling.
• On 31 December 2003, HSBC announced its
agreement to sell to CIT Group Inc. substantially
all of the factoring assets (approximately
US$1 billion) and liabilities of HSBC Bank
USA. Net assets amounted to approximately
US$270 million. The sale agreement reflected
HSBC’s strategic emphasis on its core US
businesses.
•
In January 2004, HSBC rebranded all its
Mexican banking operations as HSBC Bank
Mexico.
Personal Financial Services
• HSBC’s residential loan portfolio continued to
grow in the US, with total originations by HSBC
24
Bank USA increasing to US$30 billion in 2003
from US$21 billion in 2002.
• Personal Internet Banking registrations in the US
reached 520,000, an increase of 25 per cent in
the year. In Canada, 28 per cent of customers are
registered, up from 14 per cent in 2002.
• The number of HSBC Premier customers in the
US grew by 37 per cent from approximately
53,000 to over 73,000, with the launch of
Premier International Services helping to propel
the growth. In Canada, the number of Premier
customers increased by 87 per cent to 28,500 in
2003.
•
clientCONNECT, an integrated customer
relationship management system, was
successfully rolled out to all branches in Canada
and across the US, resulting in increased
contacts and cross-sales.
• The direct brokerage operation, Merrill Lynch
HSBC Canada Inc., was rebranded as HSBC
InvestDirect Inc. prior to becoming a division of
HSBC Securities (Canada) Inc., thereby
completing the reintegration of the direct
investing channel into HSBC.
Consumer Finance
• Significant progress was made in 2003 in
integrating Household’s and HSBC’s technology
teams and systems, including initiatives to
consolidate data centres and convert HSBC’s
credit card portfolios onto the Household
system. Using the combined buying power of
HSBC and Household, a number of supplier
contracts, including tele-communications, were
renegotiated. Efficiency savings were also
achieved elsewhere through the integration of
various functions including purchasing, human
resources, facilities and finance.
• A number of initiatives are being developed to
expand business opportunities in consumer
finance. These included broadening the range of
products, such as offering mortgage insurance
and HSBC banking services to existing
Household customers; cross referring consumer
finance and retail services customers between
Household and HSBC; and automating HSBC’s
auto finance loan process. Also, in the US,
HSBC and Household initiated a customer
referral programme and developed near-prime
and prime products to provide Household’s
customers with a full range of options.
• Household and HSBC in Mexico plan to
introduce a remittance service between
Household’s customers in the US and their
families and friends in Mexico in 2004. This
includes the provision of a web-based service
enabling recipients in Mexico to use stored value
cards to access funds from Automated Teller
Machines, and a remittance service through
HSBC branches and kiosks. Both services are
expected to provide cross-selling opportunities.
•
In April 2003, Household’s private label credit
card business acquired US$1.2 billion in
receivables as a result of entering into a new
relationship with a major retail merchant, Saks,
Inc.
• During 2003, Household’s US MasterCard/Visa
credit card business acquired approximately
US$0.9 billion of receivables in two separate
transactions, taking advantage of weakness
elsewhere in the sector.
Commercial Banking
• Loans to small businesses in the US grew by
19 per cent in 2003 as HSBC moved up to
second in the Small Business Association lender
ranking in New York State.
• HSBC Bank Canada was rated the highest for
overall quality of customer service to the SME
market among all banks included in an
independent survey of SME owners, published
by the Canadian Federation of Independent
Business in October.
• Business internet banking penetration in the US
increased from 9 per cent to 15 per cent of
commercial customers, with 28,500 now using
it. The service was launched in Canada and
reached 14 per cent of customers there.
Corporate, Investment Banking and Markets
• HSBC made significant investments in its US
relationship management function, strengthening
its sector approach and improving coverage of
major institutional and corporate clients. New
business generated from its Corporate and
Institutional Banking client base rose 80 per cent
compared with 2002.
• Capital markets platforms in the US were
considerably strengthened through selective
hiring, and this contributed to a significant rise
in the number and value of mandates won.
• Augmenting the investment in primary
capabilities, HSBC’s market distribution
capabilities in the US were enhanced by key
hires in sales and origination, as co-ordination
was improved across the region.
• Renewed interest from US institutional account-
holders resulted in a considerable increase in the
volume of customer trades in Global Markets
products, including foreign exchange, structured
products, and debt. This partly reflected changes
in relationships with other financial institutions
which followed the regulatory reviews of certain
US market practices in 2002.
• HSBC’s service proposition in the US was
enhanced by the introduction of e-platforms
which enable clients to trade online in bonds via
Trade Web, and in foreign exchange via FXAll.
Private Banking
• Private Banking streamlined its operations in the
US by successfully merging the management
and support infrastructure of its domestic and
international clients. The product range was
broadened to include alternative investments,
structured products and investment management
products.
South America
HSBC’s operations in South America principally
comprise HSBC Bank Brasil and HSBC Bank
Argentina S.A.
In Brazil, HSBC has an extensive domestic
network, with over 1,300 branches and offices,
3.4 million personal customers and over 240,000
business and institutional customers. HSBC operates
the tenth largest insurance business in Brazil,
offering a broad range of insurance products.
In Argentina, HSBC has over 4,000 employees
and a total of 101 sales points. HSBC also has one of
the largest insurance businesses in Argentina, HSBC
La Buenos Aires and, through HSBC Máxima and
HSBC New York Life, offers pensions and life
assurance. Notwithstanding the financial crisis in
Argentina, HSBC continues to provide a full range of
25
H S B C H O L D I N G S P L C
Description of Business (continued)
financial services to its customers, and remains one
of a few such market participants.
campaigns were successful and exceeded
internal targets.
General
•
•
In February 2003, HSBC acquired from Bank of
America the right to manage its mutual funds
and managed accounts in Brazil, and by June,
seventy-five funds amounting to US$0.4 billion
had been transferred. Funds under management
grew from US$7 billion in June 2002 to
US$10 billion in December 2003.
In December, HSBC bought substantially all of
Lloyds TSB Group plc’s on-shore and off-shore
Brazilian businesses and assets. The new
business, which is mainly consumer finance,
added approximately US$1.7 billion of assets
and over 7 million to the customer base.
• HSBC Seguros’s health insurance portfolio was
sold to Sul América Co. in June as part of
HSBC’s strategic decision to focus on more
profitable lines of business in Brazil.
•
•
In December, HSBC acquired the remaining
40 per cent of HSBC Salud (Argentina) S.A.
following the exercise by New York Life Inc. of
its put option. As the provision of prepaid health
insurance is not considered to be a core business
for HSBC, the Group agreed to sell the entire
issued share capital of HSBC Salud to Swiss
Medical Group on 23 December 2003.
In response to changes in the global re-insurance
market, HSBC La Buenos Aires withdrew from
serving the large corporate risk segment during
2003 in order to focus on commercial and
middle market business.
Personal Financial Services
•
In August 2003, ExtraMoney was launched to
440,000 customers in Brazil, by which funds are
advanced to employees of business customers
and repayments made as a deduction from their
payroll. ExtraMoney Senior, a personal credit
product for retired Brazilian customers, was
launched in September.
• HSBC reinforced its presence in Brazil with
several marketing initiatives, including the
‘Mata Tarifas’ campaign in April, which targeted
customer acquisition and credit card sales and,
in August, the ‘Verdades’ campaign, the biggest
HSBC advertising drive in Brazil to date. The
26
• New customers increased by 23 per cent and the
HSBC Premier segment grew by 38 per cent,
with seven specialised HSBC Premier branches
opening in 2003.
• Sales of banking products increased by 16 per
cent. Credit card sales continued to grow
strongly in 2003 with a 31 per cent growth in
cards in issuance. ‘Autofinance’ lending grew by
91 per cent in the year.
• The number of active users of personal internet
banking increased by 18 per cent in 2003 with
transaction usage increasing 46 per cent.
• HSBC selectively relaunched personal lending
products in Argentina, as the domestic economy
recovered from the depths reached in the
currency crisis.
Commercial Banking
• Small business clients in Brazil were segmented
according to a relationship index and
differentiated in terms of price and services.
•
In Brazil, loans increased 43 per cent in 2003
following successful sales campaigns and the
roll out of a new receivables discount system.
• Brazil ended 2003 with 211,000 credit card
affiliations, consolidating its position as the 3rd
largest bank in Brazil in the credit card acquirer
business.
• The number of active users of business internet
banking increased by 41 per cent in 2003.
•
Joint initiatives between the bank and the
insurance businesses were successfully
undertaken in 2003, with growth of 15 per cent
in sales of insurance products to Commercial
Banking customers.
Corporate, Investment Banking and Markets
• Standard & Poor’s awarded HSBC in Brazil the
‘Top Fixed Income Fund Manager’ prize for
2003.
Competitive environment
HSBC faces keen competition in all the markets it
serves. It competes in the provision of commercial
banking products and services with other major
financial institutions, including commercial banks;
savings and loan associations; credit unions;
consumer finance companies; major retailers;
brokerage firms; and investment companies. In
investment banking, HSBC faces competition from
both pure investment banks and the investment
banking operations of other commercial banks.
Global factors
Consolidation in the banking industry: There is an
increasing trend towards bank consolidation, at both
national and international levels, creating more banks
capable of competing directly with HSBC across a
broader range of services.
Limited market growth: In HSBC’s largest
current markets, the UK, 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 wider range of
financial services to existing customers and also
through expansion into new market segments.
Advances in technology: The rapid
convergence of information and communication
technologies is altering radically HSBC’s range of
competitors. Specialist providers and non-financial
organisations are now able to deliver a diverse range
of financial services across a variety of electronic
channels without the need for a traditional branch
network. These innovations increase the pressure on
established banks to enhance service quality while
also investing in the provision of similar services.
HSBC continues to adapt its business to provide
customers with access to its full range of services in
the manner they most prefer, with internet,
interactive TV, mobile phone, WAP and telephone
banking all complementing the branch system.
Regional factors
Europe
UK
Overall market growth in the UK has remained
relatively limited. However, the expanding demand
for consumer credit in recent years has led to greater
competition and the introduction of a wide array of
new channels, products and entrants. Traditional
banks now face competition in the retail market from
a variety of non-financial institutions including
supermarkets, clothing and grocery retailers, car
manufacturers and utilities, as well as from internet
banks and specialist market providers.
The Competition Commission Report on the
supply of banking services to small and medium-
sized businesses came into effect during the year. In
response, HSBC introduced an enhanced package of
services for small and medium-sized customers and
paid interest on all qualifying current accounts from
1 January 2003. Further initiatives included the
introduction of a new instant access savings account
and improved terms for start-up businesses.
On 11 February 2003, the Office of Fair Trade
(‘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, infringed the
Competition Act 1998. The OFT gave 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 Act. This
matter is still under review.
In May, the OFT reported its initial findings
from its review of payment systems in the UK. The
review welcomed industry progress to agree
proposals to shorten clearing cycles and stated that
the OFT will continue to monitor the progress of
these initiatives.
The OFT launched a study into store cards in
September in response to concerns raised by the
Treasury Select Committee. The study, which is
expected to be released in early 2004, will review the
application of competition law, marketing and sales
practices, transparency issues and interest rates.
France
Like the other economies in the eurozone, the French
banking sector was affected in 2003 by the poor
economic environment but benefited from high
volumes of sight deposits and slightly improved
lending margins.
Consolidation in the banking industry saw one
significant combination during the year and this
trend is expected to continue. Non-bank competitors
encroached further into traditional banking sectors
with, as an example, the Post Office being granted
approval to expand its mortgage activities.
27
H S B C H O L D I N G S P L C
Description of Business (continued)
The rule forbidding the payment of interest on
demand deposits was challenged in 2003 through the
European Court of Justice in Luxembourg. While the
outcome of the challenge is currently uncertain, it
opens the possibility that this restriction could be
lifted in the near future, potentially raising the cost
of deposits.
A number of new tax efficient pension products
were approved in a pension reform act which was
enacted during the year. The expansion of the
retirement market is likely to introduce both new
opportunities for personal banking and new sources
of competition.
Hong Kong
Banks in Hong Kong faced pressure on traditional
core products due to the low interest rate
environment and fierce pricing competition. To
diversify income streams and enhance fee-based
business, financial institutions actively promoted
investment and insurance products, and increased
public awareness of insurance protection products
following the outbreak of SARS.
Competition for credit card, mortgage and
consumer assets business remained intense in a
highly liquid but relatively subdued lending market.
An improvement in the economic outlook and
proactive debt-restructuring by lenders led to a
welcome drop in the level of bankruptcies in the
second half of the year.
Several regulatory changes, including the new
Securities and Futures Ordinance, deregulation of
minimum brokerage commission, and consumer
credit data-sharing, occurred in 2003. These changes
opened the market further and intensified
competition for quality customers and assets.
To pave the way for the full opening of mainland
China’s financial sector, Hong Kong banks were
active in key mainland cities and maintained regular
dialogue with Chinese financial institutions. Various
government announcements regarding the CEPA and
the introduction of personal renminbi business in
Hong Kong are expected to drive demand from
mainland China and boost Hong Kong’s GDP.
As market leaders in Hong Kong, The
Hongkong and Shanghai Banking Corporation and
Hang Seng Bank are well placed to meet these
competitive challenges.
28
Rest of Asia-Pacific (including Middle East)
The Asia-Pacific economies experienced mixed
fortunes in the first half of 2003, due mainly to the
impact of SARS, although growth rebounded in the
second half of the year. The competitive environment
varied greatly across the region, depending on the
level of regulation, number of entrants, and the
maturity of the markets. However, competition
remained intense throughout Asia-Pacific across all
customer groups served by HSBC. Additionally, in
many countries in the region, the relatively young
population and its increasing sophistication in
financial services continued to provide further
growth opportunities for HSBC.
North America
In the US, continuing mergers and acquisitions in the
banking, insurance and securities industries are
bringing consolidation and a blending of services.
HSBC Bank USA also faced 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.
These continuing trends will increase
competitive pressures. Commercial banks appear to
have recovered from portfolio credit problems
experienced in 2001 and 2002, particularly in the
technology, energy and telecommunications sectors.
Household competes with non-bank lenders for
sub-prime and other consumers who do not conform
to US banking industry requirements. Household’s
consumer finance businesses are highly regulated,
and are subject to laws relating to consumer
protection, discrimination in extending credit, use of
credit reports, privacy matters, disclosure of credit
terms and correction of billing errors. They are also
subject to regulations and legislation that limit
operations in certain jurisdictions. Failure to comply
with laws and regulations may limit the ability of
Household’s licensed lenders to collect or enforce
loan agreements made with consumers and may
leave Household liable for damages and penalties.
There has been a significant amount of
legislative activity in the US, nationally, locally and
at the state level, aimed at curbing lending practices
deemed to be ‘predatory’. In addition, states have
sought to alter lending practices through consumer
protection actions. Household continues to work with
regulators and consumer groups to create appropriate
safeguards to eliminate abusive practices while
allowing middle-market borrowers to continue to
have unrestricted access to credit for personal
purposes. During 2003 Household implemented all
the actions required under its 2002 settlement with
the Attorneys General of 50 States and the District of
Columbia.
The Canadian financial services industry
continues to be dominated by the five largest banks
in the country. However, the market remains highly
competitive as other banks, insurance companies and
financial institutions offer comparable products and
services. This was aided by reform of the Bank Act
of Canada in late 2001 which provided the stimulus
for more competition. One of the key changes
concerned the access provided in the national
payments system. This change allowed non-deposit
taking institutions to participate in cheque payments,
credit card systems, debit card networks and
automated bank machine networks.
Whilst merger activity amongst the largest banks
in Canada remains a possibility, major financial
institutions continue to look elsewhere for growth.
During the year a number of Canadian banks and
insurance companies completed strategic
acquisitions of financial institutions in the US.
In Mexico, the banking industry has seen
significant concentration in recent years with over
76 per cent of banking assets and 79 per cent of
deposits owned by subsidiaries of five major foreign
banks. Given that Mexico has a population of
approximately 100 million, the majority of whom do
not use the banking system, the growth opportunities
in the retail sector are favourable in the medium to
long term. With its extensive branch network and
growing young customer base, HSBC is well
positioned to take full advantage of this economic
and competitive environment.
Currently there is strong regulatory pressure to
reduce banking and pension management fees and
commissions, constraining growth in non-funds
income. Government regulators are also intent on
increasing credit availability in the market,
specifically lending for residential mortgages and
small business loans.
Mexico’s economy is very closely linked to
those of the US and Canada, and over 90 per cent of
Mexico’s exports are to the North American market.
HSBC’s growing presence across the region provides
a competitive advantage.
South America
There are over 165 banks in Brazil operating through
a network of over 16,000 branches and offices.
Consolidation in the banking industry continues,
increasingly involving foreign banks (at the end of
2003 there were 45 banks in Brazil with foreign
ownership interests). With a population of
178 million and an estimated 46 per cent of the
eligible population ‘unbanked’, there are growth
opportunities in the retail sector, in particular in the
medium to long-term.
2003 saw continued consolidation in the
Brazilian financial services industry, and HSBC
Brazil, following its purchase of Lloyds TSB Group
plc’s Brazilian businesses and assets, is well placed
to take advantage of the economic development that
is bringing new entrants to the financial system. This
consolidation has heightened the focus on retail
customer growth, and further highlighted the
importance of customer service as a means of
competitive differentiation. Competition at the top
end of this retail market is particularly strong, and
HSBC continues to focus on differentiating its
product range and service quality.
In Argentina, international financial groups are
HSBC’s main competitors, as most major banking
and insurance players in the market are foreign
controlled.
The fallout from the crisis in Argentina
continues to have a profound impact on the financial
services market. HSBC is one of a few participants
providing a comprehensive range of financial
services to its customers. The outlook for the
financial services industry has improved but
sustained improvement depends upon the resolution
of outstanding government debt and, following that,
the pending economic, fiscal and political reforms
required to build confidence in the country’s
prospects. HSBC will continue to monitor carefully
developments to evaluate the opportunities and risks
within the financial services industry in Argentina.
In 2003, competition between banks re-emerged
as the economy started to grow and the population
regained some confidence in the financial system.
The local banks benefited from sharply increased
deposits from the government who deposited surplus
tax revenues in the system.
29
H S B C H O L D I N G S P L C
Regulation and Supervision
HSBC’s operations throughout the world are
regulated and supervised by approximately 370
different central banks and regulatory authorities in
those jurisdictions in which HSBC has offices,
branches or subsidiaries. HSBC estimates the cost of
this regulation and supervision to be approximately
US$400 million in 2003. 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. The rules include 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 regulations requiring
a specified percentage of local ownership; and
restrictions on investment and other financial flows
entering or leaving the country. The supervisory and
regulatory regimes of the countries where HSBC
operates 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. In
addition, each operating bank within HSBC is
regulated by local supervisors. The primary
regulatory authorities are those in the UK, Hong
Kong and the US, the Group’s principal areas of
operation.
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’).
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 is responsible for authorising and
supervising UK banking institutions and regulates all
investment business in the UK from retail life and
pensions business to custody, branch share dealing,
and treasury and capital markets activity. HSBC
Bank is HSBC’s principal authorised institution in
the UK.
30
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 will periodically 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 has the
right to 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
ongoing supervision and the review of routine and ad
hoc reports relating to financial and prudential
matters. The FSA meets regularly with HSBC’s
senior executives to discuss HSBC’s adherence to the
FSA’s prudential guidelines. The FSA and senior
executives in the UK also regularly discuss
fundamental matters relating to HSBC’s business in
the UK and internationally, including areas 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 173 to 174.
UK 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 per cent of the first £2,000 (US$3,600)
of a claim plus 90 per cent of any further amount up
to £33,000 (US$59,000) (the maximum amount
payable being £31,700 (US$56,600)). Payments
under the scheme in respect of investment business
compensation are limited to 100 per cent of the first
£30,000 (US$53,600) of a claim plus 90 per cent of
any further amount up to £20,000 (US$35,700) (the
maximum amount payable being £48,000
(US$85,700)).
The European Union reached final agreement to
a new directive regarding the taxation of savings
income on 3 June 2003. Under the directive, each
Member State, other than Austria, Belgium, and
Luxembourg, will be required, beginning in 2005, 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 will impose a
withholding tax on such income. The withholding tax
rate will initially be 15 per cent, increasing to 20 per
cent from 2008 and 35 per cent from 2011. Subject to
future conditions being met, Austria, Belgium, and
Luxembourg may cease to apply the withholding tax
and instead comply with the automatic exchange of
information rules applicable to the other Member
States. Implementation of the directive is dependent
upon Switzerland, Liechtenstein, San Marino and
Andorra applying equivalent measures.
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 Hong Kong 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 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.
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 Accord
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.
The marketing of, dealing in and provision of
advice and asset management services in relation to
securities in Hong Kong are subject to the provisions
31
H S B C H O L D I N G S P L C
Regulation and Supervision (continued)
of the Securities and Futures Ordinance of Hong
Kong (Chapter 571) (the ‘Securities and Futures
Ordinance’). Entities engaging in activities regulated
by the Securities and Futures Ordinance are required
to be licensed. The Monetary Authority is the
primary regulator for banks involved in the securities
business, while the Securities and Futures
Commission is the regulator for non-banking entities.
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
Federal Deposit Insurance Corporation (‘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,
is a New York state-chartered bank and a member of
the Federal Reserve System. As such, HSBC Bank
USA is subject to regulation, supervision and
examination by both the Federal Reserve Board and
the State of New York Banking Department. HSBC
also owns Household Bank (SB), N.A. (‘Household
Bank’), a nationally chartered ‘credit card bank’
subject to regulation, supervision and examination by
the Office of the Comptroller of the Currency
(‘OCC’). The deposits of HSBC Bank USA and
Household Bank are insured by the FDIC and both
banks 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. 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. Prior to 13 March 2000,
however, the BHCA generally prohibited HSBC
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. On that date HSBC
became a financial holding company (‘FHC’) under
32
the Gramm-Leach-Bliley Act amendments to the
BHCA, 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 continuing to meet certain
criteria set forth in the BHCA, including
requirements that its US depository institution
subsidiaries, HSBC Bank USA and Household Bank
be ‘well-capitalised’ and ‘well-managed’, and that
they have achieved at least a satisfactory record in
meeting community credit needs during their most
recent examination pursuant to the Community
Reinvestment Act. These requirements also apply to
Wells Fargo HSBC Trade Bank, N.A., in which
HSBC has a 20 per cent voting interest in equity
capital and a 40 per cent economic interest. Each of
these depository institution subsidiaries achieved at
least the required rating during their most recent
examinations. In general under the BHCA, an FHC
would be required, upon notice by the Federal
Reserve Board, to enter into an agreement with the
Federal Reserve Board to correct any failure to
comply with the requirements to maintain FHC
status. Until such deficiencies are corrected, the
Federal Reserve Board may impose limitations on
the US activities of an FHC and its subsidiaries as it
deems appropriate. If such deficiencies are not
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 generally prohibited under the BHCA
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.
The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the ‘Riegle-Neal
Act’) permits a US 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 1988 Basel Capital
Accord and US banking regulatory authorities have
adopted risk-based capital requirements for US
banks and bank holding companies that are generally
consistent with the Accord. 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 with FHC
status is not 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 intermediate US bank holding
companies.
HSBC Bank USA, Wells Fargo HSBC Trade
Bank, N.A. and Household Bank, like other FDIC-
insured banks, may be required to pay assessments to
the FDIC for deposit insurance under the FDIC’s
Bank Insurance Fund. Under the FDIC’s risk-based
system for setting deposit insurance assessments, an
institution’s assessments vary according to the level
of capital an institution holds, its deposit levels and
other factors.
The Federal Deposit Insurance Corporation
Improvement Act of 1991 provides for extensive
regulation of depository institutions (such as HSBC
Bank USA, Wells Fargo HSBC Trade Bank, N.A.
and Household Bank), including requiring federal
banking regulators to take ‘prompt corrective action’
with respect to FDIC-insured banks that do not meet
minimum capital requirements.
As at 31 December 2003, HSBC Bank USA,
Wells Fargo HSBC Trade Bank, N.A. and Household
Bank were each well-capitalised under Federal
Reserve Board regulations.
The USA Patriot Act (‘Patriot Act’) signed into
law in October 2001, imposes significant record
keeping and customer identity requirements,
expanded the US federal government’s powers to
freeze or confiscate assets and increases the available
penalties that may be assessed against financial
institutions for failure to comply with obligations
imposed on such institutions to detect, prevent and
report money laundering and terrorist financing.
Among other things, the Patriot Act requires the US
Treasury Secretary to develop and adopt final
regulations with regard to the anti-money laundering
compliance obligations of financial institutions (a
term which, for this purpose, includes insured US
depository institutions, US branches and agencies of
foreign banks, US broker-dealers and numerous
other entities). The US Treasury Secretary delegated
this authority to a bureau of the US 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 previously imposed on HSBC Bank USA
under the Bank Secrecy Act (which was amended in
certain respects by the Patriot 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. On 30 April 2003, HSBC Bank USA
entered into a written agreement with the Federal
Reserve Bank of New York and the New York State
Banking Department to enhance its compliance with
anti-money laundering requirements. HSBC Bank
USA has implemented certain improvements in its
compliance, reporting, and review systems and
procedures and is in the process of making additional
improvements in these areas
HSBC’s US consumer finance operations are
also subject to extensive regulation in the US, and to
laws relating to consumer protection; discrimination
in extending credit; use of credit reports; privacy
matters; disclosure of credit terms; and correction of
billing errors. They also are subject to regulations
and legislation that limit operations in certain
jurisdictions. For example, limitations may be placed
on the amount of interest or fees that a loan may
bear, the amount that may be borrowed, the types of
actions that may be taken to collect or foreclose upon
delinquent loans or the information about a customer
that may be shared. HSBC’s US consumer branch
lending offices are generally licensed in those
jurisdictions in which they operate. Such licences
33
H S B C H O L D I N G S P L C
Regulation and Supervision (continued)
have limited terms but are renewable, and are
revocable for cause. Failure to comply with
applicable laws and regulations may limit the ability
of these licensed lenders to collect or enforce loan
agreements made with consumers and may cause the
consumer lending subsidiary to be liable for damages
and penalties.
HSBC’s US credit insurance operations are
subject to regulatory supervision under the laws of
the states in which they operate. Regulations vary
from state to state but generally cover licensing of
insurance companies; premiums and loss rates;
dividend restrictions; types of insurance that may be
sold; permissible investments; policy reserve
requirements; and insurance marketing practices.
Certain US source payments to foreign persons
may be subject to US 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.
Various HSBC operations outside the US are
qualified intermediaries.
34
H S B C H O L D I N G S P L C
Description of Property
At 31 December 2003, HSBC had some 9,700
operational properties worldwide, of which
approximately 3,300 were located in Europe, 600 in
Hong Kong and the rest of Asia Pacific, 3,700 in
North America (including 1,500 in Mexico) and
1,700 in Brazil. Additionally, properties with a net
book value of US$715 million were held for
investment purposes. Of the total net book value of
HSBC properties, more than 73 per cent were owned
or held under long-term leases. Further details are
included in Note 25 of the ‘Notes on the Financial
Statements’.
HSBC values its properties on an annual basis
and updates their balance sheet values accordingly.
Legal Proceedings
HSBC, together with a number of its subsidiary
undertakings, is named in and is defending legal
actions in various jurisdictions arising from its
normal business. None of the above proceedings is
regarded as material litigation.
35
H S B C H O L D I N G S P L C
Financial Review
Summary
Year ended 31 December
Net interest income ..........................................
Other operating income ...................................
Total operating income .................................
Operating expenses excluding goodwill
amortisation ..................................................
Goodwill amortisation .....................................
Operating profit before provisions ...............
Provisions for bad and doubtful debts .............
Provisions for contingent liabilities and
commitments ................................................
Loss from foreign currency redenomination
in Argentina ..................................................
Amounts written off fixed asset investments . ..
2003
Household1
US$m
8,305
1,878
10,183
(3,406)
(381)
6,396
(4,575)
–
–
–
Total
US$m
25,598
15,474
41,072
(21,082)
(1,450)
18,540
(6,093)
(35)
(9)
(106)
Rest of
HSBC
US$m
17,293
13,596
30,889
(17,676)
(1,069)
12,144
2002
2001
US$m
15,460
11,135
26,595
(14,954)
(854)
10,787
US$m
14,725
11,163
25,888
(14,605)
(799)
10,484
(1,518)
(1,321)
(2,037)
(35)
(9)
(106)
(39)
(68)
(324)
9,035
(28)
135
532
(24)
9,650
(2,534)
7,116
(877)
6,239
(649)
(520)
(125)
7,153
(91)
164
754
20
8,000
(1,988)
6,012
(1,020)
4,992
Operating profit .............................................
12,297
1,821
10,476
Share of operating loss in joint ventures ..........
Share of operating profit in associates .............
Gains/(losses) on disposal of
– investments ...............................................
– tangible fixed assets ..................................
(116)
221
451
(37)
Profit on ordinary activities before tax ........
12,816
Tax on profit on ordinary activities .................
Profit on ordinary activities after tax ...........
Minority interests ............................................
Profit attributable to shareholders ...............
(3,120)
9,696
(922)
8,774
Profit before tax excluding goodwill
–
–
6
–
1,827
(463)
1,364
–
1,364
(116)
221
445
(37)
10,989
(2,657)
8,332
(922)
7,410
amortisation ................................................
14,401
2,208
12,193
10,513
8,807
Profit attributable to shareholders excluding
goodwill amortisation .................................
10,359
1,745
8,614
7,102
5,799
1 The results shown cover the period since the date of acquisition, 28 March 2003.
Year ended 31 December 2003 compared with
year ended 31 December 2002
In the sections which follow, analysis of these results
highlights the contributions from Household,
acquired at the end of March 2003, and HSBC
Mexico, acquired in November 2002, together with
the impact of a weaker US dollar on translating
revenues and costs arising in other currencies. These
factors are important to an understanding of HSBC’s
performance in 2003. It is also important to
recognise the structural effect on reported financial
performance of the acquisition of Household. In
2004, HSBC’s results will reflect a full year’s
contribution from Household.
36
The shape of the Group’s profit and loss account
changed as a result of the Household acquisition,
reflecting the nature of its business model.
Household generally serves non-conforming and
sub-prime customers who, for a variety of reasons,
have a higher delinquency and credit loss probability.
These customers are charged a higher rate of interest
to compensate for this additional risk of loss. As a
consequence, Household’s net interest income is a
much higher proportion of its total revenues than in
the rest of HSBC, and a much higher proportion of
Household’s pre-provision profitability is absorbed
in bad and doubtful debt charges than is normally the
case in the rest of HSBC.
In the following discussion, the phrase ‘on an
underlying basis’ is used to describe performance
excluding the acquisitions of Household and
HSBC Mexico.
HSBC made a profit on ordinary activities
before tax of US$12,816 million in 2003, an increase
of US$3,166 million, or 33 per cent, compared with
2002. Household and HSBC Mexico accounted for
over 70 per cent of this increase. Household
contributed US$1,827 million in its first nine
months, while HSBC Mexico contributed US$441
million in its first full year.
Excluding goodwill amortisation, Household
and HSBC Mexico contributed US$2,208 million
and US$534 million respectively to profit before tax,
which grew by US$3,888 million or 37 per cent to
US$14,401 million. Underlying growth, on a
constant currency basis, was 7 per cent. Goodwill
amortisation increased by US$722 million to
US$1,585 million in 2003, reflecting acquisitions,
currency movements and the write down of goodwill
attributed to a fund management company previously
acquired as part of the CCF acquisition.
Net interest income of US$25,598 million in
2003 was US$10,138 million, or 66 per cent, higher
than in 2002. Of this increase, Household contributed
US$8,305 million and HSBC Mexico
US$874 million. Excluding these acquisitions, and in
terms of constant currency, net interest income was
marginally higher. This reflected a number of
offsetting factors. The net interest margin benefited
from the change in asset mix, with growth of over
80 per cent in the year in personal lending, mainly in
the US (including Household) and in Europe.
However, deposit margins fell as interbank
placements matured and were redeployed at lower
yields. Growth in the volume of deposits raised only
partially compensated for this, while the impact of
the Competition Commission ruling on paying
interest on qualifying small business accounts in the
UK cost US$136 million. Net interest income
declined in Hong Kong, reflecting spread
compression on the value of deposits and continued
pressure on mortgage margins.
Other operating income of US$15,474 million
was US$4,339 million, or 39 per cent, higher than in
2002. Household contributed US$1,878 million and
HSBC Mexico US$599 million of this increase. The
acquisitions of Household and HSBC Mexico
reduced the proportion of fee revenues exposed to
stock market levels by bringing into the Group
significant levels of account service fees (HSBC
Mexico) and credit card fee income (Household).
Fees from credit cards now constitute close to 24 per
cent of total fees receivable compared with 13 per
cent in 2002. This will increase in 2004 as
Household is consolidated for a full year. On an
underlying basis, and at constant currency, the
increase was 9 per cent. Strong growth in dealing
profits in HSBC Markets benefited from investment
made in 2002 and 2003 to upgrade dealing room
capabilities in the major centres and broaden the
range of products offered to customers. Debt trading
benefited from favourable credit spread movements.
Foreign exchange revenues increased due to currency
volatility and increased levels of corporate sales. In
addition, higher income was earned from increased
demand from corporate customers for structured
tailored products. In constant currency, fees and
commission income increased by 4 per cent on an
underlying basis, reflecting growth in income from
card transactions, insurance and lending.
Operating expenses, excluding goodwill
amortisation, rose US$6,128 million, or 41 per cent,
of which Household contributed US$3,406 million
and HSBC Mexico US$881 million. Excluding the
effect of these acquisitions, and expressed in terms of
constant currency, operating expenses increased by
5 per cent, primarily due to increased employment
costs. Pension costs and social taxes, together with
restructuring costs, added over US$300 million to
employment costs in 2003. HSBC’s cost:income
ratio, excluding goodwill amortisation, decreased to
51.3 per cent from 56.2 per cent in 2002.
The charge for bad and doubtful debts was
US$6,093 million in 2003, US$4,772 million higher
than in 2002. This was essentially all attributable to
the acquisitions, with Household accounting for
US$4,575 million and HSBC Mexico
US$110 million. On an underlying basis, and in
constant currency, the increase in provisioning was
around 2 per cent. Credit charges increased in line
with the growth in personal lending, and the
commercial customer base continued to perform
well. New corporate provisions increased in Europe
in the engineering and power sectors, and in Hong
Kong in the electronics sector, but these were partly
offset by a lower charge in North America reflecting
the improved credit environment.
Other charges of US$44 million in 2003 were
US$63 million, or 59 per cent, lower than in 2002.
37
H S B C H O L D I N G S P L C
Financial Review (continued)
Losses in Argentina, which continue to arise from
judicial orders or ‘amparos’, were mitigated in 2003
following the receipt of ‘compensation bonds’ in part
settlement of the original asymmetrical pesification.
Amparos allow certain depositors relief from the
mandatory pesification rules and recovery of their
historical US dollar deposits at current exchange
rates.
Amounts written off fixed asset investments of
US$106 million were lower than in 2002, which was
dominated by a US$143 million charge writing down
the carrying value of HSBC’s stake in a major
European life assurer.
The US$116 million share of operating losses in
joint ventures principally reflected a write-down of
HSBC’s share of goodwill attributed to a UK fund
management company acquired as part of the CCF
acquisition.
Gains on disposal of investments of
US$451 million were US$81 million lower than in
2002. Gains on sales of investment debt securities
were slightly lower than in the prior year. Gains in
2002 benefited from the sale of HSBC’s share of
Lixxbail to its joint venture partner and the sale of
HSBC’s 6.99 per cent share in Banco Santiago S.A.
Year ended 31 December 2002 compared with
year ended 31 December 2001
The translation of revenues and costs arising in 2002,
and consequently the results reported for the year,
were affected by the weaker US dollar against other
major currencies and significantly weaker South
American currencies against all currencies. 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. Profit before tax, excluding goodwill
amortisation, 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
in 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 arose from foreign exchange
translation and US$85 million was contributed by
HSBC Mexico. Underlying growth reflected higher
levels of average interest-earning assets and the
38
benefits from lower funding costs. Net interest
income in South America was US$0.4 billion lower
than in 2001 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 fees and
commission income from securities market activities.
Dealing profits were 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 from
56.4 per cent in 2001.
The charge for bad and doubtful debts was
US$1,321 million in 2002, US$716 million lower
than in 2001. The main component of the charge,
which related to the personal sector, 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 in Asia as the economic conditions
in some Asian countries improved. The substantial
reduction in the total charge in 2002 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 included US$68 million in 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 had 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 were consolidated fully on a line
by line basis.
Gains on disposal of investments of
US$532 million included profit on the sale 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
made to adjust to changes in interest rate conditions.
In aggregate, disposal gains on investments were
US$222 million lower than in 2001.
39
H S B C H O L D I N G S P L C
Financial Review (continued)
Net interest income
Total
US$m
%
2003
Household1
US$m
Rest of HSBC
US$m
%
%
Year ended 31 December
2002
2001
US$m
%
US$m
%
7,540
3,901
1,740
11,777
640
29.5
15.2
6.8
46.0
2.5
438
–
–
7,867
–
5.3
–
–
94.7
–
7,102
3,901
1,740
3,910
640
41.0
22.6
10.1
22.6
3.7
6,343
4,133
1,607
2,732
645
41.0
26.7
10.4
17.7
4.2
5,563
4,165
1,482
2,450
1,065
37.8
28.3
10.1
16.6
7.2
By geographical
region
Europe ..............
Hong Kong .......
Rest of Asia-
Pacific ...........
North America..
South America..
Net interest
income ..........
25,598
100.0
8,305
100.0
17,293
100.0
15,460
100.0
14,725
100.0
Net interest income .................................................................................
Average interest-earning assets ..............................................................
Gross interest yield (per cent)2 ...............................................................
Net interest spread (per cent)3..................................................................
Net interest margin (per cent)4 ................................................................
Year ended 31 December
2003
US$m
25,598
778,415
5.13
3.06
3.29
2002
US$m
15,460
608,749
4.70
2.27
2.54
2001
US$m
14,725
579,665
6.08
2.09
2.54
1 Since the date of acquisition.
2 Gross interest yield is the average interest rate earned on average interest-earning assets (AIEA).
3 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.
4 Net interest margin is net interest income expressed as a percentage of average interest-earning assets.
Year ended 31 December 2003 compared with
year ended 31 December 2002
Net interest income in 2003 was US$10,138 million,
or 66 per cent higher than 2002, at US$25,598
million. Of this increase, Household contributed
US$8,305 million, and HSBC Mexico US$874
million. Excluding these acquisitions, and at constant
exchange rates, net interest income was only
marginally higher than in 2002, as the impact of
growth in interest-earning assets was offset by
continuing margin compression from the effect of
low interest rates worldwide. This impact is expected
to continue in 2004 unless interest rates rise ahead of
market expectations.
In Europe, net interest income was
US$1,197 million, or 19 per cent, higher than in
2002. HFC Bank contributed US$438 million of this
increase. Excluding this acquisition and at constant
exchange rates, net interest income was slightly
higher than in 2002, reflecting strong growth in
average interest-earning assets. This was partly offset
by the cost of paying interest on small and medium-
sized business accounts in the UK and the impact of
liquidity being redeployed at lower yields as assets
matured. In North America, net interest income
40
increased by US$9,045 million. On an underlying
basis, the growth was US$304 million, or 11 per
cent, primarily reflecting the benefits of strong
growth in mortgage lending and savings products,
and good balance sheet management, which
improved the mix of lending by exiting less
profitable business. Benefit was also gained from the
elimination of funding costs following the closure of
certain arbitrage trading activities in the US. In Hong
Kong, net interest income declined by 6 per cent,
largely due to spread compression on the value of
deposits and continued pressure on margins in the
mortgage business. Continued pressure on margins
depressed mortgage yields in an environment of very
low credit demand. This was partly offset by a 7 per
cent growth in average interest-earning assets,
increased customer deposits and the redeployment of
interbank placements in holdings of debt securities.
Credit card lending also grew by 6 per cent,
improving the mix of assets.
In the rest of Asia-Pacific, net interest income
increased by 8 per cent. In constant currency, this
increase was 5 per cent, driven by growth in
mortgages and credit card lending, and the beneficial
effect of the acquisition of the retail deposit and loan
business of AMP Bank Limited in the first half of
2003.
In South America, net interest income was
broadly in line with last year. In constant currency,
net interest income grew by 10 per cent. In Brazil,
net interest income was marginally higher than in
2002, benefiting from the acquisition of the Brazilian
businesses and assets of Lloyds TSB Group plc in
December 2003. Excluding this, the favourable effect
of higher levels of customer lending and deposits
were fully offset by reduced spreads as interest rates
fell during the year. Argentina recorded net interest
income of US$14 million in 2003 compared with a
net interest expense in 2002. As the domestic
economy began to recover and the trade surplus
grew, interest rates fell. The effect of the continuing
reduction in average interest-earning assets was more
than offset by the lower cost of funding the
non-performing loan portfolio.
Overall, average interest-earning assets
increased by US$169.7 billion, or 28 per cent,
compared with 2002. Of the increase, Household
contributed US$92.0 billion and HSBC Mexico
US$17.8 billion. At constant exchange rates,
underlying average interest-earning assets increased
by 4 per cent. This growth was driven principally by
higher mortgage balances and personal lending in the
UK, France, the US, Canada, Malaysia, Australia and
Singapore, and an increase in holdings of long-term
securities in the US and debt securities in Hong
Kong.
HSBC’s net interest margin was 3.29 per cent in
2003, compared with 2.54 per cent in 2002. The
acquisitions of Household and HSBC Mexico
increased net interest margin by 77 and 6 basis points
respectively. On an underlying basis, HSBC’s net
interest margin fell by 8 basis points to 2.46 per cent.
In Europe, the fall in net interest margin was
primarily due to a decline in the benefit of net free
funds, mainly as a result of paying interest on current
account balances belonging to small and medium
sized enterprises in the UK. In Hong Kong, HSBC’s
net interest margin also declined because of lower
spreads on deposits and lower yields on redeployed
interbank placements. In Hang Seng Bank, net
interest margin narrowed due to lower mortgage
yields, narrower spreads on deposits and debt
securities, and a lower contribution from net free
funds, partly offset by switching liquidity from
interbank placements to debt securities. In the rest of
Asia-Pacific, net interest margin fell in several
countries, mainly from narrower spreads on deposits,
lower yields on mortgages, the maturing of higher
yielding assets, and a reduced contribution from net
free funds. In the US, growth in mortgage balances
and a shift in the treasury portfolio to higher yielding
fixed rate investments led to an improvement in net
interest margin.
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, as well as the acquisition of
HSBC Mexico 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, HSBC
Mexico 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
performance in Global Markets, 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
(‘NRMA’) in Australia in 2001.
In South America 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
41
H S B C H O L D I N G S P L C
Financial Review (continued)
position the balance sheet more conservatively. 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
per cent, driven principally by the placement of
customer deposits in the UK, Taiwan, India, Korea,
mainland China and the Middle East, together with
personal lending growth in the UK, France, US,
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 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 from the increasing investment of
surplus liquidity in higher yielding investment grade
corporate debt securities, instead of interbank
placements. In addition, margins benefited from the
fall in short-term interest rates as relative returns
earned on liquidity deployed in longer dated assets
by Global Markets increased as the yield curve
steepened. A reduced benefit from a higher level of
net free funds mitigated this effect on the net interest
margin.
In the UK, net interest margin fell as an
improved contribution from Global Markets
activities and the benefit of higher levels of personal
customer lending were more than offset by reduced
earnings from net free funds. In Hong Kong, The
Hongkong and Shanghai Banking Corporation
maintained its margin through improved Global
Markets 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,
primarily from a combination of lower earnings on
net free funds as interest rates fell and narrower
spreads on mortgages. For Hang Seng Bank these
drivers were much more significant than for The
Hongkong and Shanghai Banking Corporation. In the
US, the net interest margin improved as the result of
a strong performance in Global Markets activities, as
a steeper yield curve reduced funding costs, and
growth in average mortgage balances.
HSBC moved increasingly to differentiated
product pricing in 2002. This competitive approach
reflected the value to HSBC of its loyalest
customers, but resulted in narrower spreads on a
number of products, particularly mortgages and
savings. The benefit of this strategy was seen in the
mix and volume of HSBC’s core current account and
savings products, particularly in the UK, Hong Kong
and the US.
42
Other operating income
Total
US$m
%
7,555
2,3312
1,350
3,982
678
47.4
14.7
8.5
25.1
4.3
Year ended 31 December
2003
Household1
US$m
%
Rest of HSBC
US$m
%
2002
2001
US$m
%
US$m
%
198
–
–
1,680
–
10.5
–
–
89.5
–
7,357
2,331
1,350
2,302
678
52.6
16.6
9.6
16.4
4.8
6,272
1,917
1,174
1,502
596
54.8
16.7
10.2
13.1
5.2
6,056
1,852
1,137
1,495
880
53.0
16.2
10.0
13.1
7.7
15,896
100.0
1,878
100.0
14,018
100.0
11,461
100.0
11,420
100.0
(422)
15,474
–
1,878
(422)
13,596
(326)
(257)
11,135
11,163
By geographical
region
Europe ..............
Hong Kong .......
Rest of Asia-
Pacific ...........
North America..
South America..
Intra-HSBC
elimination ....
Other operating
income ..........
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
2003
Household1
US$m
12
1,216
–
–
–
–
–
4
62
–
584
650
Total
US$m
222
10,394
1,239
330
251
358
2,178
553
473
2062
1,448
2,680
Rest of
HSBC
US$m
210
9,178
1,239
330
251
358
2,178
549
411
206
864
2,030
2002
2001
US$m
US$m
278
7,824
1,167
47
75
24
1,313
490
313
182
735
1,720
186
7,470
1,120
159
311
95
1,685
465
373
251
733
1,822
Total other operating income ....................
15,474
1,878
13,596
11,135
11,163
1 Since the date of acquisition.
2 This figure has been reduced by the reversal of a US$42 million profit made on own shares, as a result of compliance with UITF
Abstracts 37 and 38, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
43
H S B C H O L D I N G S P L C
Financial Review (continued)
Analysis of fees and commissions receivable and payable
Account services ...............................................
Credit facilities ..................................................
Remittances .......................................................
Cards .................................................................
Imports/exports ..................................................
Underwriting .....................................................
Insurance ...........................................................
Mortgage servicing rights ..................................
Trust income ......................................................
Broking income .................................................
Global custody ...................................................
Maintenance income on operating leases ...........
Funds under management ..................................
Unit trusts ..........................................................
Corporate finance ..............................................
Other .................................................................
Total fees and commissions receivable ...........
Less: fees payable ..............................................
Net fees and commissions ................................
1 Since the date of acquisition.
Year ended 31 December
2003
Household1 Rest of HSBC
US$m
US$m
138
–
–
1,495
–
–
35
–
–
–
–
–
–
–
–
6
1,674
(458)
1,216
2,179
966
288
1,481
609
175
926
75
145
873
338
171
1,096
358
189
1,017
10,886
(1,708)
9,178
Total
US$m
2,317
966
288
2,976
609
175
961
75
145
873
338
171
1,096
358
189
1,023
12,560
(2,166)
10,394
2002
US$m
1,715
752
268
1,242
556
173
775
77
125
773
296
160
1,026
284
122
901
9,245
(1,421)
7,824
2001
US$m
1,620
628
246
1,116
524
135
668
78
114
928
308
165
965
481
115
665
8,756
(1,286)
7,470
Year ended 31 December 2003 compared with
year ended 31 December 2002
Other operating income of US$15,474 million, was
US$4,339 million, or 39 per cent, higher than in
2002. Of this increase, Household contributed
US$1,878 million and HSBC Mexico contributed
US$599 million. On an underlying basis, and at
constant exchange rates, growth in other operating
income was 9 per cent, principally as a result of
higher dealing profits throughout HSBC’s
operations.
The acquisitions of Household and HSBC
Mexico reduced the proportion of fee revenues
exposed to stock market fluctuations by bringing into
the Group significant levels of account service fees
(HSBC Mexico) and credit card fee income
(Household). Fees from credit cards now constitute
close to 24 per cent of total fees receivable compared
with 13 per cent in 2002.
Fees and commission income, excluding
Household and HSBC Mexico and at constant
exchange rates, increased by 4 per cent compared
with 2002. In Europe, fee income increased by
US$664 million, or 15 per cent, of which HFC Bank
contributed US$49 million. Excluding this
acquisition and at constant exchange rates, fee
income increased by 2 per cent, mainly from growth
in sales of creditor protection insurance, cards
44
transactions and loan fees. Within the UK, personal
loan protection premiums grew by 19 per cent,
reflecting growth in mortgages and personal loans.
However, this was partly offset by a decline in sales
of investment and pension products, mainly
reflecting uncertainty in the equity markets.
In North America, excluding US$1,167 million
and US$453 million relating to Household and
HSBC Mexico respectively, fee income was
marginally higher than in 2002. Growth in income
from securities advisory services, deposit-related
service charges and card fees was partly offset by
lower earnings from mortgage servicing.
In Hong Kong, fee income increased by
US$119 million, primarily due to higher revenues
from wealth management services. There was strong
growth in fees from sales of unit trusts and capital-
guaranteed funds, which increased by US$1.6 billion
in 2003. HSBC expanded its range of structured
deposit products, further benefiting fee income.
Revenues from securities and stockbroking also
increased in line with a buoyant stock market in the
second half of the year and increased market share.
In addition, the insurance business generated strong
results reflecting growth in new individual life
business written.
HSBC’s operations in the rest of Asia-Pacific
increased fee income by US$81 million with strong
growth in wealth management income, reflecting
higher unit trust sales and funds under management.
Fee income from credit cards rose in a number of
countries.
In South America, fee income increased by
10 per cent at constant exchange rates, mainly in
Brazil. The increase reflected good growth in credit-
related revenue, account service fees and cards. In
Argentina a decline in fee income was recorded.
Dealing profits of US$2,178 million were
US$865 million, or 66 per cent, higher than in 2002
and reflected investment in and refocusing of
HSBC’s markets businesses, primarily in the US and
in Europe. In Asia, a wider range of structured
solutions was offered to customers which boosted
revenues. Acquisitions were not significant
contributors to growth in this area with HSBC
Mexico contributing US$103 million. Within dealing
profits, there was strong growth in fixed income
earnings, predominantly in Europe and Hong Kong,
as a result of favourable credit spreads and strong
investor demand for yield enhancement products.
Foreign exchange revenues increased in both Europe
and North America, with volatility in the major
currencies driving sales of hedging products and
sales activity generally. In Hong Kong, a greater
focus on tailored solutions generated a significant
increase in corporate sales during the year.
Other operating income further benefited from
expansion of the insurance businesses in Argentina
and Hong Kong and growth in the rail leasing
business in the UK.
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 of 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.
With the exception of equity market-related
activities, namely broking income and custody fees,
growth was achieved in virtually all elements of
other operating income.
Net fees and commissions, at US$7,824 million,
were US$354 million, or 5 per cent, higher than in
2001 and represented 29 per cent of total operating
income in both 2002 and 2001. At constant exchange
rates, net fees and commissions were 4 per cent
higher than in 2001.
In Europe, fee income increased by
US$318 million, or 8 per cent (3 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. In the UK, growth of 17 per cent was
achieved in HSBC branded life, pensions and
investment products sold through the tied salesforce.
Sales of life protection products grew by 4 per cent
and creditor protection insurance by 29 per cent.
In North America, fee income was
US$24 million higher than in 2001, excluding the
US$47 million increase arising from the acquisition
of HSBC Mexico. Growth in fee income from the
sale of annuities and mutual funds, and across a
range of banking services, more than offset a lower
level of broking income.
In Hong Kong, where the demand for credit
products was muted, emphasis was placed on
generating fee income. A combination of initiatives
meant fee income was 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 HSBC’s capital guaranteed funds,
and 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
contributions from credit cards in Taiwan, Malaysia,
Indonesia, the Middle East, Thailand and India.
In South America, fee income fell nominally by
US$170 million, though by only US$27 million at
constant exchange rates. Fee earning opportunities
contracted in the subdued economic environment
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 earnings from debt securities
45
H S B C H O L D I N G S P L C
Financial Review (continued)
US$236 million lower as credit spreads on
corporate bonds widened sharply in response to an
erosion of market confidence caused by low earnings
growth and news of corporate scandals in the United
States. Dealing profits were also affected by
weaknesses in the equity markets.
Fees in debt capital markets grew strongly by
30 per cent, or US$40 million, as HSBC improved its
position in European markets.
46
Operating expenses
Total
US$m
9,529
2,212
1,741
6,947
1,075
%
44.3
10.3
8.1
32.3
5.0
21,504
100.0
(422)
21,082
758
3
35
643
11
52.3
0.2
2.4
44.3
0.8
1,450
100.0
2003
Household1
US$m
Year ended 31 December
Rest of HSBC
2002
2001
%
US$m
%
US$m
%
US$m
%
299
–
–
3,107
–
3,406
–
3,406
23
–
–
358
–
381
8.8
–
–
91.2
–
100.0
6.0
–
–
94.0
–
100.0
9,230
2,212
1,741
3,840
1,075
51.1
12.2
9.6
21.2
5.9
7,878
2,139
1,528
2,675
1,060
51.6
14.0
10.0
17.5
6.9
7,288
2,140
1,397
2,540
1,497
49.0
14.4
9.4
17.1
10.1
18,098
100.0
15,280
100.0
14,862
100.0
(422)
17,676
(326)
14,954
(257)
14,605
735
3
35
285
11
68.7
0.3
3.3
26.7
1.0
1,069
100.0
651
–
33
146
24
854
76.2
3.9
17.1
2.8
100.0
632
–
8
145
14
799
79.1
1.0
18.1
1.8
100.0
22,532
3,787
18,745
15,808
15,404
By geographical
region
Europe ..............
Hong Kong .......
Rest of Asia–
Pacific ..........
North America..
South America..
Intra-HSBC
elimination ...
Goodwill
amortisation
Europe ..............
Hong Kong .......
Rest of Asia-
Pacific ...........
North America..
South America..
Total operating
expenses .......
Year ended 31 December
2003
Household1
US$m
1,794
299
1,203
3,296
99
11
381
3,787
%
33.4
Total
US$m
12,111
2,331
5,243
19,685
1,382
15
1,450
22,532
%
51.3
Rest of
HSBC
US$m
10,317
2,032
4,040
16,389
1,283
4 4
1,069
18,745
%
57.2
2002
2001
US$m
8,609
1,824
3,331
13,764
1,189
1
854
15,808
%
56.2
US$m
8,553
1,639
3,279
13,471
1,133
1
799
15,404
%
56.4
By expense category
Staff costs ..........................................................
Premises and equipment (excluding
depreciation) .................................................
Other administrative expenses ...........................
Administrative expenses ....................................
Depreciation and amortisation
– tangible fixed assets ........................................
– intangible assets ..............................................
– goodwill ..........................................................
Total operating expenses ...................................
Cost:income ratio (excluding goodwill
amortisation) .................................................
1 Since the date of acquisition.
As at 31 December
2003
2002
2001
Total
Household
Staff numbers (full-time equivalent)
Europe ................................................................
Hong Kong .........................................................
Rest of Asia-Pacific ............................................
North America ....................................................
South America ....................................................
73,943
23,636
31,827
65,021
28,292
Total staff numbers .............................................
222,719
4,075
–
–
28,872
–
32,947
Rest of
HSBC
69,868
23,636
31,827
36,149
28,292
72,260
23,786
28,630
34,207
25,522
73,326
24,654
26,259
19,291
27,519
189,772
184,405
171,049
47
H S B C H O L D I N G S P L C
Financial Review (continued)
Year ended 31 December 2003 compared with
year ended 31 December 2002
continued its policy of migrating back office
processing functions to the Group Service Centres.
Growth in operating expenses of US$6,724 million,
or 43 per cent, principally reflected the acquisitions
of Household, US$3,787 million, and HSBC
Mexico, US$964 million. Excluding the impact of
these acquisitions and expressed in terms of constant
currency, underlying operating expenses, excluding
goodwill amortisation, were 5 per cent higher than in
2002. Virtually all of this growth was in staff costs,
reflecting restructuring costs, higher social taxes and
pension costs. In addition, Corporate, Investment
Banking and Markets incurred higher costs reflecting
expansion of the business and increased profitability.
Notwithstanding this growth, the cost:income ratio of
Corporate, Investment Banking and Markets
improved by 3 per cent to 48.9 per cent. HSBC’s
cost:income ratio excluding goodwill amortisation
was 51.3 per cent for 2003, compared with 56.2 in
2002. Excluding Household, the cost:income ratio
was 57.2 per cent.
In 2003, HSBC’s Group Service Centre in
Malaysia became operational. Overall, the Group’s
Global Resource centres now employ in excess of
8,000 employees.
In Europe, costs excluding goodwill
amortisation increased by US$1,651 million
compared with 2002, of which Household
contributed US$299 million. At constant exchange
rates and excluding Household and goodwill
amortisation, expenses were 5 per cent higher than in
2002. This increase in expenses was primarily due to
higher pension provision and employment costs,
particularly in the UK, where social taxes were
raised. Redundancy and property provisioning costs
also increased, as HSBC restructured and relocated
positions to the Group Service Centres in order to
reduce its long-term staff costs. In addition, higher
bonus accruals reflected stronger Global Markets
revenues.
Operating expenses in Hong Kong, excluding
goodwill amortisation, were marginally higher than
in 2002. Increased staff costs were mainly
attributable to higher performance-related bonuses,
reflecting strong Global Markets performance, and
provisions for restructuring costs. Marketing
expenses also rose in Personal Financial Services as
Hong Kong’s economy rebounded after SARS
abated. These increases were partly offset by
reductions in staff numbers in Hong Kong as HSBC
48
In the rest of Asia-Pacific, costs in 2003,
excluding goodwill amortisation, increased by
US$213 million, or 14 per cent, compared with 2002.
At constant exchange rates, the increase was 9 per
cent, primarily from recruitment to support business
expansion, branch opening costs, acquisitions and
provisions for restructuring. In addition, the
continued migration of processing activities from
other regions to the Group Service Centres in India,
Malaysia and mainland China added to costs.
In North America, operating expenses, excluding
goodwill amortisation, increased by US$284 million,
or 11 per cent, in 2003 excluding Household and
HSBC Mexico. This increase was largely driven by
higher staff costs, namely pension and healthcare
provisions, performance-related incentives, and
expenses associated with long-term restructuring
programmes. In the US during 2003, severance costs
of US$47 million were recorded for expense
reduction initiatives, global resourcing moves and
Household integration efforts, a US$28 million
increase over the prior year. In addition, costs rose
from the first full year inclusion of HSBC’s high net
worth personal tax advisory business. These
increases were partly offset by the benefits obtained
from discontinuing certain of HSBC’s government
and agency securities arbitrage operations in the US,
and from business disposals.
In South America, operating expenses, excluding
goodwill amortisation, were broadly in line with
2002. At constant exchange rates and excluding
goodwill amortisation, costs were 6 per cent higher
than in 2002. The rise in Brazil was due to higher
staff costs, driven by increases in labour claims,
together with higher marketing costs and increased
transaction taxes on higher operating income as the
personal lending portfolio was expanded. In addition,
the Group’s newly acquired businesses in Brazil
added to cost growth. Costs in Argentina were down
on 2002, mainly because of lower severance costs.
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. The increase
reflected organic growth, acquisitions made during
2002, and the full year effect of acquisitions and the
expansion of business activities in 2001, particularly
in North America and the rest of Asia Pacific. 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 was
goodwill amortised on GFBital for the one month of
its ownership, and US$20 million was a non-
recurring charge to write-off the balance of
purchased goodwill on the Group’s insurance
activities in Argentina.
In Europe, costs excluding goodwill
amortisation increased by US$590 million in 2002
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.
US$165 million of this increase was attributable to
acquisitions and changes in Group structure. These
comprised 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 consequent increases in vacant space
provisioning, 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
Bad and doubtful debts
a pension top-up in Hang Seng Bank, offset increases
in costs associated with business expansion.
In the rest of Asia-Pacific, costs excluding
goodwill amortisation increased by US$131 million,
or 9 per cent, in 2002 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 Australia, the
latter through the acquisition of NRMA.
Operating expenses in North America, excluding
goodwill amortisation, increased by US$135 million,
or 5 per cent, in 2002. This increase largely arose
from the acquisition of GFBital and the costs
associated with the establishment of the Wealth and
Tax Advisory Services (‘WTAS’) business in the US.
A reduction in the costs associated with ongoing
development of hsbc.com offset additional costs
from the closure of the institutional equity business
in Canada and the restructuring of the merchant
banking business in the US.
In South America, operating expenses, excluding
goodwill amortisation, fell by US$437 million, or
29 per cent, during 2002. At constant exchange rates,
operating expenses excluding goodwill amortisation
were 4 per cent higher than in 2001. The increase
related to industry-wide salary adjustments agreed
with unions in Brazil and costs of severance as
headcount reductions were made in the recessionary
environment.
Total
US$m
%
874
400
85
4,676
58
–
14.3
6.6
1.4
76.7
1.0
–
Year ended 31 December
2003
Household1
US$m
%
Rest of HSBC
US$m
%
2002
2001
US$m
%
US$m
%
180
–
–
4,395
–
–
3.9
–
–
96.1
–
–
694
400
85
281
58
–
45.7
26.4
5.6
18.5
3.8
–
569
246
89
300
43.1
18.6
6.7
22.7
313
(196)
23.7
(14.8)
441
197
172
300
327
600
21.6
9.7
8.4
14.7
16.1
29.5
6,093
100.0
4,575
100.0
1,518
100.0
1,321
100.0
2,037
100.0
By geographical
region
Europe ..............
Hong Kong .......
Rest of Asia-
Pacific ...........
North America..
South America..
– normal ..........
– additional2 ....
Total charge for
bad and
doubtful debts
1 Since the date of acquisition.
2 Additional general (recoveries)/provision against Argentine exposures.
49
H S B C H O L D I N G S P L C
Financial Review (continued)
Bad and doubtful debts (continued)
Specific provisions
New provisions ...............................................
Release of provisions no longer required ........
Recoveries of amounts previously written off
General provisions
Argentine additional provision .......................
Other ..............................................................
Total ...............................................................
Customer non-performing loans .....................
Customer bad and doubtful debt provisions ...
1 Since the date of acquisition.
Year ended 31 December
2003
Household1
US$m
4,773
(4)
(307)
4,462
–
113
113
4,575
4,706
5,201
Total
US$m
7,777
(953)
(610)
6,214
–
(121)
(121)
6,093
15,050
13,691
Rest of
HSBC
US$m
3,004
(949)
(303)
1,752
–
(234)
(234)
1,518
10,344
8,490
2002
2001
US$m
US$m
2,678
(826)
(180)
1,672
(196)
(155)
(351)
1,321
10,523
9,117
2,566
(817)
(285)
1,464
600
(27)
573
2,037
9,649
8,161
Year ended 31 December 2003 compared with
year ended 31 December 2002
The acquisition of Household significantly affected
the geographical and customer segment distribution
of the Group’s lending activities and, more
markedly, the distribution of its credit costs. At
31 December 2003, 76 per cent of customer lending
was located, fairly equally, in Europe and North
America, compared with 69 per cent in 2002, with
Europe two-thirds of that total. At 31 December
2003, personal lending accounted for 56 per cent of
the customer loan portfolio compared with 42 per
cent at 31 December 2002.
Excluding the effect of foreign exchange
translation and the acquisition of Household, over
90 per cent of loan growth in 2003, excluding the
financial sector, was generated in personal lending,
predominantly mortgages, credit cards and other
personal products.
Over 90 per cent of the charge for bad and
doubtful debts in 2003 related to lending to the
personal sector, including consumer finance,
compared with 65 per cent in 2002. Similarly, over
90 per cent of the charge related to lending in the US
and Europe, compared with 66 per cent in 2002.
The charge for specific bad and doubtful debts
adjusts the specific balance sheet provisions to the
level that management deems adequate to absorb
actual and inherent losses in the Group’s loan
portfolio from homogenous portfolios of assets and
individually identified customer loans. Following the
50
acquisition of Household, the majority of specific
provisions are now determined on a portfolio basis.
In addition, the acquisition of Household has resulted
in a significant increase in the extent to which HSBC
employs statistical calculations using roll rate
methodology to determine specific provisions for bad
and doubtful debts. Other than this, there have been
no significant changes to HSBC’s procedures in
determining the various components of the charge
for specific bad and doubtful debts. The charge for
specific provisions in 2003 was US$6,214 million
compared with US$1,672 million in 2002, an
increase of US$4,542 million. New specific
provisions, which increased by US$5,099 million,
principally reflected the acquisitions of Household
(US$4,773 million) and HSBC Mexico
(US$47 million). Excluding the effect of the
acquisitions, new specific provisions rose by
US$249 million, or 9 per cent, compared with 2002.
General provisions augment specific provisions
and provide cover for loans which are impaired at the
balance sheet date but which will not be individually
identified as such until some time in the future. In
determining the level of general provisions
management takes into account historical loss
experience, the estimated period between a loss
occurring and that loss being identified and use their
judgement as to whether current economic and credit
conditions are likely to increase or reduce the actual
level of inherent losses. There was a net general
provision release of US$121 million in 2003,
US$230 million lower than the net release of
US$351 million in 2002. In Household and HSBC
Mexico, general provisions were augmented by
US$191 million due to growth in personal lending.
Excluding this, the net release of general provisions
of US$312 million was in line with that of 2002.
This reflected improved underlying economic
conditions, and progress made with refinancing and
restructuring problem credits.
The aggregate customer bad and doubtful debt
provisions at 31 December 2003 of US$13.7 billion
represented 2.66 per cent of gross customer advances
(net of suspended interest, reverse repos and
settlement accounts) compared with 2.68 per cent at
31 December 2002. As in 2003, HSBC cross-border
exposures did not necessitate significant provisions.
Non-performing loans (net of suspended
interest) of US$15 billion at 31 December 2003
included US$5 billion relating to Household’s loan
book. Excluding Household, and at constant
exchange rates, there was a decrease in the level of
non-performing loans (net of suspended interest) in
2003 compared with 2002 mainly as a result of the
write-off of loans from the legacy portfolio acquired
on the acquisition of HSBC Mexico.
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 HSBC 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 with 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.
Changes in the concentration risk and asset
quality of HSBC’s loan portfolio arose from the
incorporation of the domestic loan book of HSBC
Mexico. 13 per cent of HSBC Mexico’s loan book of
US$9.7 billion was non-performing, including
significant proportions 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
HSBC Mexico’s loan exposure was peso-
denominated Mexican Government risk. HSBC
Mexico also had impaired assets in the agricultural
and other government-supported sectors. These loan
assets were critically reviewed and provisions
restated where necessary to conform with the
requirements of both UK GAAP and US GAAP
during the fair value exercise undertaken as at the
date of acquisition of HSBC Mexico.
Excluding HSBC Mexico, there was a decrease
in the level of non-performing loans during 2002 of
US$350 million. This was due to a combination of
write-offs, recoveries and upgradings in Hong Kong
and a number of other Asian countries, partly offset
by a rise of US$813 million in non-performing loans
in Europe. The European increase came primarily
from 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 individual Argentinian non-
performing loans as the effects of the economic crisis
manifested themselves. By the end of 2002, almost
three-quarters of the non-government loan book was
classified as non-performing. The impact of this was
recognised in the general provision established at the
end of 2001.
Aggregate customer bad and doubtful debt
provisions at 31 December 2002 of US$9.1 billion
represented 2.52 per cent of gross customer advances
compared with 2.57 per cent at 31 December 2001.
As in 2001, HSBC’s cross-border exposures did
not necessitate significant provisions.
There were no significant changes to the
Group’s procedures for determining the various
components of the provision for bad and doubtful
debts.
51
H S B C H O L D I N G S P L C
Financial Review (continued)
Gains on disposal of investments
Gains/(losses) on disposal of:
– debt securities ..........................................................................................................
– equity investments ...................................................................................................
– other participating interests ......................................................................................
– associates .................................................................................................................
– subsidiaries ..............................................................................................................
– other ........................................................................................................................
Year ended 31 December
2003
US$m
2002
US$m
2001
US$m
161
233
1
1
37
18
451
170
226
69
47
16
4
532
170
305
4
257
21
(3)
754
Year ended 31 December 2003 compared with
year ended 31 December 2002
Year ended 31 December 2002 compared with
year ended 31 December 2001
During 2003, HSBC made 26 business acquisitions
and completed 14 business disposals.
During 2002, HSBC made 23 business acquisitions
and completed 20 business disposals.
HSBC’s profit on disposal of investments was
HSBC’s European results included
US$451 million, US$81 million lower than in 2002.
The profits in 2002 included gains of US$39 million
on the sale of HSBC’s 50 per cent share of Lixxbail
to its joint venture partner, and US$38 million on the
sale of HSBC’s 6.99 per cent share in Banco
Santiago S.A..
Realised gains on the sale of debt and equity
investment securities during the period were broadly
in line with 2002. The reductions in interest rates and
improvement in equity markets drove growth of
US$59 million in the unrecognised gains on HSBC’s
debt and equity investment portfolios.
US$213 million of profits on the sales of securities
from investment portfolios, principally as HSBC
adjusted its exposure to changes in interest rates.
HSBC also disposed of its 50 per cent stake in
Lixxbail to its joint venture partner, generating a
profit of US$39 million.
In the US, gains were taken 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 in response to exposures to interest rates and
sovereign credit.
HSBC’s South American results included a gain
of US$38 million on the sale of HSBC’s 6.99 per
cent stake in Banco Santiago S.A.
52
Taxation
Current taxation
UK corporation tax charge .........................................................................................
Overseas taxation .......................................................................................................
Joint ventures .............................................................................................................
Associates ...................................................................................................................
Deferred taxation
Origination and reversal of timing differences ...........................................................
Effect of (increased)/decreased tax rate on opening asset ...........................................
Adjustment in respect of prior periods .......................................................................
Total charge for taxation ............................................................................................
Effective taxation (per cent) .......................................................................................
Standard UK corporation tax rate (per cent) ...............................................................
Analysis of overall tax charge
Taxation at UK corporation tax rate of 30 per cent (2002 and 2001: 30.0 per cent) ...
Impact of differently taxed overseas profits in principal locations .............................
Tax free gains .............................................................................................................
Argentine losses .........................................................................................................
Goodwill amortisation ................................................................................................
Amortisation of acquisition accounting adjustments ..................................................
Prior period adjustments .............................................................................................
Other items .................................................................................................................
Overall tax charge .......................................................................................................
Year ended 31 December
2003
US$m
547
2,590
1
19
3,157
(5)
(7)
(25)
(37)
3,120
24.3
30.0
2002
US$m
684
1,217
(6)
17
1,912
615
–
7
622
2,534
26.3
30.0
Year ended 31 December
2003
US$m
3,845
(366)
(17)
(25)
476
(331)
(230)
(232)
3,120
2002
US$m
2,895
(472)
(19)
87
261
–
(90)
(128)
2,534
2001
US$m
416
1,570
(13)
26
1,999
(176)
3
162
(11)
1,988
24.9
30.0
2001
US$m
2,400
(616)
(102)
336
263
–
(167)
(126)
1,988
Year ended 31 December 2003 compared with
year ended 31 December 2002
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 2003
(2002: 30 per cent).
HSBC’s effective tax rate of 24.3 per cent in
2003 was lower than the corporation tax rate of 30
per cent. The geographic mix of profits; fair value
accounting adjustments, which are ignored for tax
purposes; and prior period adjustments were the
main factors which reduced the rate. These were
partially offset by the effect of goodwill
amortisation, which is also ignored for tax purposes,
which increased the rate.
Overseas tax included Hong Kong profits tax of
US$483 million (2002: US$408 million) provided at
a rate of 17.5 per cent (2002: 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.
Profits arising in North America represented a
higher percentage of HSBC’s profits in 2003
compared with 2002 largely because of the
acquisition of Household. US profits are taxed at a
higher rate than the average for the rest of the Group
and this change in mix raised the effective tax rate.
A number of fair value acquisition accounting
adjustments relating to Household and HSBC
Mexico resulted in net credits to the profit and loss
account with no corresponding tax charge. A more
detailed explanation of the acquisition accounting
adjustments is disclosed in Note 8 of the ‘Notes to
the Financial Statements’.
Prior period adjustments arose in 2003 which
reduced HSBC’s overall tax charge. These related
mainly to the recognition of deferred tax assets on
losses, which became more likely to be utilised. The
Group also reached agreement on a number of
settlements. in respect of outstanding matters on
prior year computations which allowed contingency
reserves to be released.
53
H S B C H O L D I N G S P L C
Financial Review (continued)
Goodwill amortisation was higher than in the
previous year, mainly due to the acquisition of
Household.
At 31 December 2003, there were potential
future tax benefits of US$963 million (2002:
US$885 million). The potential benefits are 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
been recognised because realisation of the benefits
was not considered more likely than not.
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 changes in the geographic mix
of profits and certain non-recurring items occurring
in 2001 which reduced the 2001 rate.
In particular, profits arising in North America
represented a higher percentage of HSBC’s profits in
2002 compared with 2001 because profits in the US
were abnormally suppressed in 2001 by the provision
relating to the Princeton Note settlement. US profits
were 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 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, though to a lesser extent in 2002.
In 2002, prior year adjustments which resulted
in a reduction in the tax rate, mainly relating to audit
settlements, were less than similar adjustments in
2001.
At 31 December 2002 there were potential
future tax benefits of US$885 million (2001: US$906
million). The potential benefits were in respect of
trading losses, allowable expenditure charged to the
profit and loss account but not yet allowable for tax,
and capital losses which had not been recognised
because realisation of the benefits was not
considered more likely than not.
54
Asset deployment
Loans and advances to customers ...................................................................................
Loans and advances to banks ..........................................................................................
Debt securities ................................................................................................................
Treasury bills and other eligible bills ..............................................................................
Equity shares ..................................................................................................................
Goodwill and intangible assets .......................................................................................
Other ..............................................................................................................................
Hong Kong Government certificates of indebtedness .....................................................
Loans and advances to customers include:
– reverse repos ...............................................................................................................
– settlement accounts .....................................................................................................
Loans and advances to banks include:
– reverse repos ...............................................................................................................
– settlement accounts .....................................................................................................
At 31 December
2003
US$m
528,977
117,173
205,722
20,391
12,879
28,640
109,447
%
51.7
11.4
20.1
2.0
1.3
2.8
10.7
20021
US$m
352,344
95,496
175,730
18,141
7,664
17,192
82,593
%
47.1
12.7
23.5
2.4
1.0
2.3
11.0
1,023,229
100.0
749,160
100.0
10,987
1,034,216
17,777
8,594
23,220
7,039
9,445
758,605
12,545
8,385
18,736
4,717
1 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
Year ended 31 December 2003 compared with
year ended 31 December 2002
HSBC’s total assets (excluding Hong Kong
Government certificates of indebtedness) at
31 December 2003 were US$1,023 billion, an
increase of US$274 billion, or 37 per cent, since
31 December 2002. Of this increase, US$131 billion
were assets (including the related goodwill) added as
at the date of the acquisition of Household.
Excluding this and at constant exchange rates, total
assets grew by US$92 billion or 11 per cent.
The impact of Household on asset mix by
geography and customer type, which was operating
primarily in North America in personal financial
services, is also significant and is illustrated in the
table below.
Loans and advances to customers (gross)
Europe ....................................................................................................................................................
North America ........................................................................................................................................
Hong Kong and rest of Asia-Pacific .......................................................................................................
South America ........................................................................................................................................
Personal and consumer lending ..............................................................................................................
31 December
2003
%
31 December
2002
%
39.6
36.5
22.9
1.0
100.0
56.2
46.5
22.1
30.4
1.0
100.0
42.3
At 31 December 2003, HSBC’s balance sheet
remained highly liquid, reflecting continued strong
growth in customer deposits. Notwithstanding the
acquisition of Household, the proportion of assets
deployed in customer advances rose modestly from
47 per cent to 52 per cent. As a result of the
Household acquisition, lending in Europe and North
America rose to over 75 per cent of the total lending
portfolio.
Foreign exchange translation had a significant
impact on reported growth within the balance sheet,
as the US dollar weakened by 9.7 per cent and by
16.8 per cent over the year against sterling and the
euro respectively.
At constant exchange rates, gross loans and
advances to customers (excluding loans to the
financial sector and settlement accounts) were
US$145 billion higher than at 31 December 2002. Of
this growth, US$108 billion related to loans
outstanding at the time Household was acquired.
55
H S B C H O L D I N G S P L C
Financial Review (continued)
Growth in lending in 2003 was concentrated in
the personal sector. Excluding loans outstanding at
the time Household was acquired, and at constant
exchange rates, personal lending increased by
US$34 billion, or 21 per cent, compared with
31 December 2002. This was mainly as a result of
increased mortgage lending in the UK and the US,
the acquisitions in Brazil and New Zealand, and
post-acquisition growth in Household, where lending
grew by over 11 per cent following acquisition.
Commercial and corporate lending, excluding
lending to governments, grew by under 2 per cent as
corporate demand for credit remained subdued and
HSBC maintained its cautious lending criteria.
Surplus funds from increased customer deposits in
most geographic regions were increasingly deployed
in investment securities in order to diversify risk
concentration away from interbank lending.
In Europe, growth in assets was driven primarily
by increased mortgage lending in the UK, the post-
acquisition growth in personal lending in HFC Bank
and higher balances from trading activities in the UK
and France. In addition, there was strong growth in
consumer credit in the UK and secured lending in
Switzerland driven by private banking customers
seeking to maximise the overall earnings potential of
their investments by borrowing to reinvest in higher
returning securities.
In Hong Kong, there was only modest growth in
customer lending against a backdrop of weak
consumer demand, the impact of SARS and intense
competition in the mortgage market. Additionally,
loan balances under the Hong Kong Government
Home Ownership Scheme continued to fall following
the suspension of this programme in 2001.
Encouragingly, however, there was a 5 per cent
growth in commercial and corporate lending,
particularly in the second half of the year, as business
confidence improved post-SARS, and initiatives
announced by the mainland government to eliminate
restrictions on tourists entering Hong Kong took
effect.
In the rest of Asia-Pacific, growth in assets was
also driven by increased personal customer advances.
At constant exchange rates, personal lending
increased by 33 per cent compared with
31 December 2002, mainly as a result of increased
mortgage lending in Australia and New Zealand,
where HSBC acquired the AMP Bank’s mortgage
business, and in Korea, Singapore, India, Malaysia
56
and Taiwan. Other personal lending increased in
most countries in the region.
In North America, the increase in total assets
(excluding that relating to the acquisition of
Household) was primarily in residential mortgages
and other personal lending in both the US and
Canada, as customers took the opportunity to
consolidate their debt and re-mortgage at the lower
prevailing interest rates.
In South America, growth in total assets
reflected the inclusion of the consumer lending
portfolios of Losango and the ex-Lloyds TSB
corporate lending portfolio.
At 31 December 2003, assets held by the Group
as custodian amounted to US$1,869 billion. Custody
is the safekeeping and administration of securities
and financial instruments on behalf of others. Funds
under management amounted to US$399 billion at
31 December 2003.
Debt securities and equity shares
Debt securities held on an accruals basis in the
investment book at 31 December 2003 showed an
aggregate unrecognised gain, net of off-balance sheet
hedges, of US$1,160 million compared with an
unrecognised gain of US$1,278 million at
31 December 2002. Equity shares included
US$5,390 million held on investment account,
compared with US$4,284 million at 31 December
2002, on which there was an unrecognised gain of
US$827 million, compared with a gain of
US$473 million at 31 December 2002.
Funds under management
Funds under management of US$399 billion were
US$47 billion, or 13 per cent, higher than at 30 June
2003 and US$93 billion, or 30 per cent, higher than
at the end of 2002. During the year both the asset
management and private banking businesses reported
net fund inflows. The weakening of the US dollar
benefited the translation of sterling and euro-
denominated funds, and contributed to the positive
market performance which resulted from the upturn
in global equity markets. As at 31 December 2003,
HSBC’s asset management business, including
affiliates, reported funds under management of
US$193 billion, and the private banking business
reported funds under management of US$169 billion.
2003
US$bn
2002
US$bn
Funds under management
At 1 January 2003 ...............................
Additions ............................................
Withdrawals .......................................
Value change ......................................
Exchange and other ............................
At 31 December 2003..........................
306
136
(94)
25
26
399
284
116
(86)
(26)
18
306
Economic profit
HSBC’s internal performance measures include
economic profit, a measure which compares the
return on the financial capital invested in HSBC by
its shareholders with the cost of that capital. HSBC
prices its cost of capital internally and the difference
between that cost and post-tax profit attributable to
ordinary shareholders represents 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. Internally HSBC emphasises the trend in
economic profit within business units rather than
absolute amounts in order to concentrate on external
factors rather than measurement bases. As a result of
this, HSBC has consistently used a benchmark cost
of capital of 12.5 per cent on a consolidated basis.
Given recent changes in interest rates and in the
composition of HSBC, HSBC believes that its true
cost of capital on a consolidated basis is now
approximately 10 per cent, and this rate will be
adopted from 2004 onwards within the Group’s new
strategic plan. HSBC has used the figure of 12.5 per
cent for the duration of the current five year strategic
plan period, which expired at the end of last year, in
order to ensure consistency and to help
comparability.
On this basis, economic profit increased fourfold
to US$934 million, compared with 2002, reflecting
the benefit of Household and HSBC Mexico in 2003
as well as organic improvement. Measurement of
economic profit involves a number of assumptions
and, therefore, management believes that the trend
over time is more relevant than the absolute
economic profit reported for a single period.
Average shareholders' funds ...................................................................................
Add: cumulative goodwill written off and amortised ..............................................
dividends declared but not paid ......................................................................
Less: property revaluation reserves .........................................................................
Average invested capital2 ........................................................................................
Profit after tax .........................................................................................................
Add: goodwill amortisation ....................................................................................
depreciation charged on property revaluations ...............................................
Less: equity minority interest ..................................................................................
preference dividends .....................................................................................
Return on invested capital3 ......................................................................................
Year ended 31 December
2003
US$m
67,585
8,172
1,773
(1,824)
75,706
9,696
1,585
38
(487)
(435)
10,397
%1
12.8
2.1
–
(0.6)
(0.6)
13.7
2002
US$m4
50,266
6,554
953
(2,180)
55,593
7,116
863
80
(505)
(372)
7,182
%1
12.8
1.6
0.1
(0.9)
(0.7)
12.9
Benchmark cost of capital .......................................................................................
(9,463)
(12.5)
(6,949)
(12.5)
Economic profit/spread ...........................................................................................
934
1.2
233
0.4
1 Expressed as a percentage of average invested capital.
2 Average invested capital is measured as shareholders’ funds after adding back goodwill amortised and goodwill previously written-off
directly to reserves and after deducting property revaluation reserves. This measure reflects capital initially invested and subsequent
profit (excluding goodwill amortisation).
3 Return on invested capital is based on attributable profit excluding goodwill amortisation adjusted for depreciation attributable to
revaluation surpluses.
4 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240
57
H S B C H O L D I N G S P L C
Financial Review (continued)
Analysis by customer group and by geographical region
By customer group:
Profit/(loss) excluding goodwill amortisation
Personal
Financial
Services
US$m
Consumer
Finance4
US$m
8,654
6
3,623
133
865
4,627
8,289
12
1,219
-
674
1,905
Total
Personal
Financial
Services
US$m
16,943
18
4,842
133
1,539
6,532
Total
Net interest income ............
Dividend income .................
Net fees and commissions ...
Dealing profits .....................
Other income .......................
Other operating income .......
Operating income ..............
13,281
10,194
23,475
Year ended 31 December 2003
Corporate,
Investment
Banking &
Markets
US$m
Commercial
Banking
US$m
Private
Banking
US$m
4,196
3
2,256
118
597
2,974
7,170
3,899
161
2,315
1,764
810
5,050
8,949
574
3
822
209
50
1,084
1,658
Inter-
segment
elimination
US$m
–
–
–
–
(1,208)
(1,208)
(1,208)
Other5
US$m
(14)
37
159
(46)
892
1,042
1,028
Total
US$m
25,598
222
10,394
2,178
2,680
15,474
41,072
(8,263)
(3,397)
(11,660)
(3,778)
(4,378)
(1,149)
(1,325)
1,208
(21,082)
5,018
6,797
11,815
3,392
4,571
509
(297)
doubtful debts ................
(1,058)
(4,575)
(5,633)
(274)
(297)
(2)
(2)
–
(3)
113
25
(9)
6
(19)
–
(18)
–
–
–
(19)
–
(18)
14
–
–
(53)
–
(91)
3,923
2,222
6,145
3,132
4,130
502
(162)
11
47
27
–
–
3
11
47
30
–
20
6
8
80
225
4,008
2,225
6,233
3,158
4,443
%
27.8
62.2
%
15.5
33.3
%
43.3
49.7
%
21.9
52.7
%
30.9
48.9
–
–
61
563
%
3.9
69.3
US$m
US$m
US$m
US$m
US$m
US$m
–
74
92
4
%
–
128.9
US$m
–
–
–
–
–
–
–
–
–
–
19,990
(6,093)
(35)
(9)
(106)
13,747
19
221
414
14,401
%
100.0
51.3
US$m
173,613
206,721
290,540
116,409
145,383
232
290,022
352,104
290,772
103,495
128,093
111,515
115,092
462,998
119,335
18,109
54,510
50,951
2,259
25,524
557
528,977
1,023,229
573,130
101,277
186,139
65,882
110,905
379
–
379
249
1
250
628
1
629
263
–
263
272
135
407
282
–
282
5
(1)
4
1,450
135
1,585
Operating expenses
excluding goodwill
amortisation1 ...................
Operating profit/(loss)
before provisions1 .........
Provisions for bad and
Provisions for contingent
liabilities and
commitments ..................
Loss from foreign currency
redenomination in
Argentina ........................
Amounts written off fixed
asset investments ............
Operating profit/(loss)1 ......
Share of operating profit in
joint ventures2 ................
Share of operating profit in
associates2 ......................
Gains on disposal of
investments and tangible
fixed assets .....................
Profit/(loss) on ordinary
activities before tax3 .....
Share of HSBC’s pre-tax
profits3 ...........................
Cost:income ratio1 ...............
Selected balance sheet
data6
Loans and advances to
customers (net) ...............
Total assets7 .........................
Customer accounts ..............
The following assets and
liabilities were
significant to customer
groups as noted:
Loans and advances to
banks (net) .....................
Debt securities, treasury bills
and other eligible bills ....
Deposits by banks ................
Debt securities in issue .........
Goodwill amortisation:
1 excluded from (1) above ..
2 excluded from (2) above ..
3 excluded from (3) above ..
For other footnotes, see page 65.
58
Year ended 31 December 2002
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
549
2
623
137
102
864
1,413
Inter-
segment
elimination
US$m
–
–
–
–
(1,148)
(1,148)
(1,148)
Other
US$m
(53)
34
124
11
905
1,074
1,021
Total
US$m
15,460
278
7,824
1,313
1,720
11,135
26,595
3,835
6
1,934
107
463
2,510
6,345
3,700
230
2,164
1,008
610
4,012
7,712
(6,973)
(3,153)
(3,899)
(987)
(1,090)
1,148
(14,954)
Operating income ..........................
11,252
Total
Net interest income ........................
Dividend income .............................
Net fees and commissions ...............
Dealing profits .................................
Other income ...................................
Other operating income ...................
Operating expenses excluding
goodwill amortisation1 ...............
Operating profit/(loss) before
provisions1,8 ..............................
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 ................................
7,429
6
2,979
50
788
3,823
(857)
(42)
–
(2)
4,279
3,192
3,813
(269)
(184)
19
–
3
Operating profit/(loss)1,8 ................
3,378
2,945
Share of operating profit/(loss) in
joint ventures2 ............................
Share of operating profit in
associates2 ..................................
Gains on disposal of investments
and tangible fixed assets ...............
Profit/(loss) on ordinary activities
before tax3,8 ...............................
Share of HSBC’s pre-tax profits3,8 ...
Cost:income ratio1,8 .........................
Selected balance sheet data6
Loans and advances to customers
(net) ...........................................
Total assets7,9 ...................................
Customer accounts ..........................
The following assets and liabilities
were significant to Corporate,
Investment Banking and Markets:
Loans and advances banks (net) ......
Debt securities, treasury bills and
other eligible bills ......................
Deposits by banks ............................
Goodwill amortisation:
1 excluded from (1) above .............
2 excluded from (2) above .............
3 excluded from (3) above .............
For other footnotes, see page 65.
(23)
17
19
3,391
%
32.3
62.0
US$m
3
15
51
3,014
%
28.7
49.7
US$m
143,696
171,496
257,880
90,562
113,525
92,884
186
–
186
168
–
168
12
–
(109)
3,532
2
45
317
3,896
%
37.1
50.6
US$m
101,770
394,542
95,351
80,870
162,583
48,895
236
8
244
426
(5)
(21)
–
(22)
378
(1)
(10)
46
413
%
3.8
69.9
US$m
14,115
48,346
49,012
(69)
(6)
(7)
(68)
(194)
(344)
-
68
75
(201)
%
(1.9)
106.8
US$m
2,201
21,251
311
264
–
264
–
1
1
–
–
–
–
–
–
–
–
–
–
11,641
(1,321)
(39)
(68)
(324)
9,889
(19)
135
508
10,513
%
100.0
56.2
US$m
352,344
749,160
495,438
854
9
863
59
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation (continued)
Total
Net interest income ........................
Dividend income .............................
Net fees and commissions ...............
Dealing profits .................................
Other income ...................................
Other operating income ...................
Personal
Financial
Services
US$m
6,828
5
2,877
53
806
3,741
Operating income ..........................
10,569
Year ended 31 December 2001
Commercial
Banking
US$m
3,821
7
1,751
103
422
2,283
6,104
Corporate,
Investment
Banking &
Markets
US$m
3,419
138
2,140
1,411
568
4,257
7,676
Private
Banking
US$m
577
4
602
124
87
817
1,394
Inter-
segment
elimination
US$m
–
–
–
–
(1,057)
(1,057)
(1,057)
Other
US$m
80
32
100
(6)
996
1,122
1,202
Total
US$m
14,725
186
7,470
1,685
1,822
11,163
25,888
Operating profit/(loss)1 ..................
3,303
2,341
3,636
(6,477)
(3,116)
(3,920)
(919)
(1,230)
1,057
(14,605)
4,092
2,988
3,756
(767)
(17)
–
(5)
(662)
16
–
(1)
(34)
(14)
–
(72)
(99)
43
210
6
28
10
10
33
354
3,457
2,385
4,033
%
39.3
61.3
%
27.1
51.0
%
45.8
51.1
475
24
(46)
–
(2)
451
–
–
5
456
%
5.2
65.9
US$m
US$m
US$m
US$m
113,844
138,908
228,931
81,999
101,002
81,038
99,260
374,282
88,618
12,137
52,135
51,199
(28)
(598)
(588)
(520)
(45)
(1,779)
–
60
195
(1,524)
%
(17.4)
102.3
US$m
1,409
20,581
205
–
–
–
–
–
–
–
–
–
–
11,283
(2,037)
(649)
(520)
(125)
7,952
(83)
164
774
8,807
%
100.0
56.4
US$m
308,649
686,908
449,991
83,312
155,330
49,785
204
6
210
179
(1)
178
157
2
159
249
–
249
10
1
11
799
8
807
Operating expenses excluding
goodwill amortisation1 ...............
Operating profit/(loss) before
provisions1 ................................
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 ................................
Share of operating profit/(loss) in
joint ventures2 ............................
Share of operating profit in
associates2...................................
Gains on disposal of investments
and tangible fixed assets ...............
Profit/(loss) on ordinary activities
before tax3 .................................
Share of HSBC’s pre-tax profits3 .....
Cost:income ratio1 ...........................
Selected balance sheet data6
Loans and advances to customers
(net) ...........................................
Total assets7,9 ...................................
Customer accounts ..........................
The following assets and liabilities
were significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) ....................................
Debt securities, treasury bills and
other eligible bills ......................
Deposits by banks ............................
Goodwill amortisation:
1 excluded from (1) above .............
2 excluded from (2) above .............
3 excluded from (3) above .............
For other footnotes, see page 65.
60
Personal Financial Services
Profit/(loss) excluding goodwill amortisation
Net interest income ...................................
Dividend income ........................................
Net fees and commissions ..........................
Dealing profits ............................................
Other income ..............................................
Other operating income ..............................
Operating income .....................................
Operating expenses excluding goodwill
amortisation1 ............................................
Operating profit before provisions1,8 .......
Provisions for bad and doubtful debts ........
Provisions for contingent
liabilities and commitments ......................
Amounts written off fixed
asset investments .....................................
Operating profit1,8 ....................................
Share of operating profit/(loss) in joint
ventures2 ..................................................
Share of operating profit in associates2 .......
Gains on disposal of investments and
tangible fixed assets .................................
Profit on ordinary activities before
tax3,8 .........................................................
By geographic region:
Europe ........................................................
Hong Kong .................................................
Rest of Asia-Pacific ....................................
North America ............................................
South America ............................................
Profit on ordinary activities before
tax3,8 .........................................................
Share of HSBC’s pre-tax profits3,8 ..............
Cost:income ratio1,8 ....................................
Selected balance sheet data6
Loans and advances to
customers (net) ........................................
Total assets7 ................................................
Customer accounts .....................................
The following liabilities were significant
to Consumer Finance:
Debt securities in issue .............................
Goodwill amortisation:
1 excluded from (1) above..........................
2 excluded from (2) above..........................
3 excluded from (3) above..........................
For other footnotes, see page 65.
Total
Personal
Financial
Services
US$m
16,943
18
4,842
133
1,539
6,532
23,475
(11,660)
11,815
(5,633)
(19)
(18)
6,145
11
47
30
6,233
1,424
1,740
158
2,938
(27)
6,233
%
43.3
49.7
US$m
290,022
352,104
290,772
628
1
629
Year ended 31 December
2003
Consumer
Finance4
US$m
8,289
12
1,219
–
674
1,905
Personal
Financial
Services
US$m
8,654
6
3,623
133
865
4,627
2002
Personal
Financial
Services
US$m
7,429
6
2,979
50
788
3,823
2001
Personal
Financial
Services
US$m
6,828
5
2,877
53
806
3,741
10,194
13,281
11,252
10,569
(3,397)
6,797
(4,575)
–
–
2,222
–
–
3
2,225
157
–
–
2,068
–
2,225
%
15.5
33.3
US$m
116,409
145,383
232
110,905
379
–
379
(8,263)
5,018
(1,058)
(19)
(18)
3,923
11
47
27
4,008
1,267
1,740
158
870
(27)
4,008
%
27.8
62.2
US$m
(6,973)
4,279
(857)
(42)
(2)
3,378
(23)
17
19
3,391
987
1,705
127
605
(33)
3,391
%
32.3
62.0
US$m
(6,477)
4,092
(767)
(17)
(5)
3,303
(99)
43
210
3,457
1,091
1,631
80
593
62
3,457
%
39.3
61.3
US$m
173,613
206,721
290,540
143,696
171,496
257,880
113,844
138,908
228,931
249
1
250
186
–
186
179
(1)
178
61
H S B C H O L D I N G S P L C
Financial Review (continued)
Commercial Banking and Corporate, Investment Banking and Markets
Profit/(loss) excluding goodwill amortisation
Commercial Banking
Year ended 31 December
Corporate, Investment Banking
and Markets
Year ended 31 December
2003
US$m
3,899
161
2,315
1,764
810
5,050
8,949
(4,378)
4,571
(297)
(53)
(91)
4,130
8
80
225
2002
US$m
3,700
230
2,164
1,008
610
4,012
7,712
(3,899)
3,813
(184)
12
(109)
3,532
2
45
317
2001
US$m
3,419
138
2,140
1,411
568
4,257
7,676
(3,920)
3,756
(34)
(14)
(72)
3,636
10
33
354
2003
US$m
4,196
3
2,256
118
597
2,974
7,170
(3,778)
3,392
(274)
14
–
2002
US$m
3,835
6
1,934
107
463
2,510
6,345
(3,153)
3,192
(269)
19
3
2001
US$m
3,821
7
1,751
103
422
2,283
6,104
(3,116)
2,988
(662)
16
(1)
3,132
2,945
2,341
3
15
51
6
28
10
–
20
6
3,158
1,303
711
450
595
99
3,158
%
21.9
52.7
US$m
1,344
733
423
435
79
3,014
%
28.7
49.7
US$m
103,495
128,093
111,515
90,562
113,525
92,884
3,014
2,385
4,443
3,896
4,033
986
726
277
410
(14)
2,385
%
27.1
51.0
US$m
81,999
101,002
81,038
1,623
1,275
732
837
(24)
4,443
%
30.9
48.9
US$m
115,092
462,998
119,335
1,438
1,226
706
494
32
3,896
%
37.1
50.6
US$m
1,438
1,244
725
441
185
4,033
%
45.8
51.1
US$m
101,770
394,542
95,351
99,260
374,282
88,618
101,277
80,870
83,312
186,139
65,882
162,583
48,895
155,330
49,785
263
–
263
168
–
168
157
2
159
272
135
407
236
8
244
204
6
210
Net interest income ................................
Dividend income .....................................
Net fees and commissions .......................
Dealing profits .........................................
Other income ...........................................
Other operating income ...........................
Operating income ..................................
Operating expenses excluding goodwill
amortisation1 .........................................
Operating profit before provisions1,8 ....
Provisions for bad and doubtful debts .....
Provisions for contingent liabilities and
commitments ........................................
Amounts written off fixed asset
investments ...........................................
Operating profit1,8 .................................
Share of operating profit in joint
ventures2 ...............................................
Share of operating profit in associates2.....
Gains on disposal of investments and
tangible fixed assets ..............................
Profit on ordinary activities before
tax3,8 .....................................................
By geographic region:
Europe .....................................................
Hong Kong ..............................................
Rest of Asia-Pacific .................................
North America .........................................
South America .........................................
Profit on ordinary activities before
tax3,8 ........................................................
Share of HSBC’s pre-tax profits3,8 ...........
Cost:income ratio1,8 .................................
Selected balance sheet data6
Loans and advances to customers (net) ...
Total assets7 .............................................
Customer accounts ..................................
The following assets and liabilities were
significant to Corporate, Investment
Banking and Markets:
Loans and advances to banks (net) .......
Debt securities, treasury bills and
other eligible bills ..............................
Deposits by banks .................................
Goodwill amortisation:
1 excluded from (1) above.......................
2 excluded from (2) above.......................
3 excluded from (3) above.......................
For other footnotes, see page 65.
62
Private Banking
Year ended 31 December
Other5
Year ended 31 December
2003
US$m
574
3
822
209
50
1,084
1,658
2002
US$m
2001
US$m
549
2
623
137
102
864
577
4
602
124
87
817
1,413
1,394
2003
US$m
(14)
37
159
(46)
892
1,042
1,028
2002
US$m
(53)
34
124
11
905
1,074
1,021
2001
US$m
80
32
100
(6)
996
1,122
1,202
(1,149)
(987)
(919)
(1,325)
(1,090)
(1,230)
Private Banking and Other
Profit/(loss) excluding goodwill amortisation
Operating profit/(loss)1,8 ........................
502
Net interest income ................................
Dividend income .....................................
Net fees and commissions .......................
Dealing profits .........................................
Other income ...........................................
Other operating income ...........................
Operating income ..................................
Operating expenses excluding goodwill
amortisation1 .........................................
Operating profit/(loss) before
provisions1,8 .........................................
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 ...........................................
Share of operating profit/(loss) in joint
ventures2 ...............................................
Share of operating profit/(loss) in
associates2..............................................
Gains on disposal of investments and
tangible fixed assets ..............................
Profit/(loss) on ordinary activities
before tax3,8 ..........................................
By geographic region:
Europe .....................................................
Hong Kong ..............................................
Rest of Asia-Pacific .................................
North America .........................................
South America .........................................
Profit on ordinary activities before
tax3,8 ........................................................
Share of HSBC’s pre-tax profits3,8 ...........
Cost:income ratio1,8 .................................
Selected balance sheet data6
Loans and advances to customers (net) ...
Total assets7,9 ...........................................
Customer accounts ..................................
Goodwill amortisation:
1 excluded from (1) above.......................
2 excluded from (2) above.......................
3 excluded from (3) above.......................
For other footnotes, see page 65.
509
(2)
(2)
–
(3)
–
–
61
563
339
127
36
63
(2)
563
%
3.9
69.3
426
(5)
(21)
–
(22)
378
(1)
(10)
46
413
236
107
25
57
(12)
413
%
3.8
69.9
475
24
(46)
–
(2)
451
–
–
5
456
310
84
(16)
81
(3)
456
%
5.2
65.9
US$m
US$m
US$m
18,109
54,510
50,951
282
–
282
14,115
48,346
49,012
264
–
264
12,137
52,135
51,199
249
–
249
(297)
113
25
(9)
6
(162)
–
74
92
4
173
(123)
50
(176)
80
4
%
–
128.9
US$m
2,259
25,524
557
5
(1)
4
(69)
(6)
(7)
(68)
(194)
(344)
–
68
75
(28)
(598)
(588)
(520)
(45)
(1,779)
–
60
195
(201)
(1,524)
155
(61)
12
(207)
(100)
(201)
%
(1.9)
106.8
US$m
2,201
21,251
311
–
1
1
357
198
30
(877)
(1,232)
(1,524)
%
(17.4)
102.3
US$m
1,409
20,581
205
10
1
11
63
H S B C H O L D I N G S P L C
Financial Review (continued)
By geographical region:
In the analysis of profit by geographical region which follows, operating income and operating expenses include
intra-HSBC items of US$422 million in 2003, US$326 million in 2002 and US$257 million in 2001.
Profit/(loss) on ordinary activities before tax
Europe .................
Hong Kong ..........
Rest of Asia-
Pacific ..............
North America.....
South America.....
Total
US$m
3,969
3,728
1,391
3,613
115
%
30.9
29.1
10.9
28.2
0.9
Total ...................
12,816
100.0
2003
Household10
US$m
%
Year ended 31 December
Rest of HSBC
US$m
3,835
3,728
1,391
1,920
115
%
34.9
33.9
12.7
17.5
1.0
2002
US$m
3,500
3,710
1,260
1,238
(58)
%
36.3
38.4
13.1
12.8
(0.6)
2001
US$m
3,542
3,883
1,088
503
(1,016)
%
44.3
48.5
13.6
6.3
(12.7)
7.3
–
–
92.7
–
100.0
10,989
100.0
9,650
100.0
8,000
100.0
134
–
–
1,693
–
1,827
Included within
the above:
Princeton
settlement11 ......
Argentina
provisions12 .....
–
–
(9)
(0.1)
–
–
–
–
–
–
(9)
(0.1)
–
–
–
–
(575)
(7.2)
(1,120)
(14.0)
Profit/(loss) on ordinary activities before tax excluding goodwill amortisation
Europe .................
Hong Kong ..........
Rest of Asia-
Pacific ..............
North America.....
South America.....
Total
US$m
4,862
3,730
1,426
4,257
126
%
33.7
25.9
9.9
29.6
0.9
2003
Household10
US$m
%
157
–
–
2,051
–
7.1
–
–
92.9
–
Year ended 31 December
Rest of HSBC
US$m
4,705
3,730
1,426
2,206
126
%
38.6
30.6
11.7
18.1
1.0
2002
2001
US$m
4,160
3,710
1,293
1,384
(34)
%
39.5
35.3
12.3
13.2
(0.3)
US$m
4,182
3,883
1,096
648
(1,002)
%
47.5
44.1
12.4
7.4
(11.4)
Total ...................
14,401
100.0
2,208
100.0
12,193
100.0
10,513
100.0
8,807
100.0
Included within
the above:
Princeton
settlement11 ......
Argentina
provisions12 .....
Total assets
–
–
(9)
(0.1)
–
–
–
–
–
–
(9)
(0.1)
–
–
–
–
(575)
(6.5)
(1,120)
(12.7)
Total
US$m
425,312
197,487
98,081
289,800
12,549
%
41.6
19.3
9.6
28.3
1.2
At 31 December
2003
Household10
US$m
%
10,665
–
–
136,727
–
7.2
−−−−
−−−−
92.8
−−−−
Rest of HSBC
414,647
197,487
98,081
153,073
12,549
%
47.4
22.5
11.2
17.5
1.4
20028
US$m
341,569
180,433
76,635
142,032
8,491
%
45.6
24.1
10.2
19.0
1.1
Europe .............................
Hong Kong7.....................
Rest of Asia-Pacific.........
North America.................
South America.................
Total ................................
1,023,229
100.0
147,392
100.0
875,837.
100.0
749,160
100.0
For above footnotes, see page 65.
64
Basis of preparation and Footnotes to ‘Analysis by customer group and by geographical region’
Basis of preparation
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 customer group 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 intra-segment
funding as well as inter-company and inter-business
line transactions. All such transactions are
undertaken on arm’s-length terms. Intra-segment
funding and placements of surplus funds are
generally undertaken at market interest rates.
Footnotes to ‘Analysis by customer group and by geographic region’
11,2,3 Goodwill amortisation excluded from profit/(loss) is disclosed in the tables on pages 58 to 63.
14 Comprises Household’s consumer finance activities since the date of acquisition.
15 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. Net fees and commissions and other income of
the Group’s wholesale insurance operations amounted to US$382 million in 2003 (2002:US$324 million; 2001: US$297 million).
16 Third party only.
17 Excluding Hong Kong Government certificates of indebtedness.
18 In 2003, North America implemented a revised funds transfer pricing system to transfer interest rate risk from the business units to
Corporate, Investment Banking and Markets. The figures for 2002 have been restated to reflect the impact of transfer pricing had it
been in place on a similar basis. The effect on the figures for 2001 is immaterial.
19 The figures for ‘Total assets’ for 2002 and 2001, and for total assets for ‘Other’ for 2002 and 2001, have been restated to reflect the
adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’ and 38 ‘Accounting for ESOP trusts’, details of which are set out
in Note 1 of the ‘Notes on the Financial Statements’ on pages 239 to 240.
10 Since the date of acquisition.
11 Deducted in arriving at the profit on ordinary activities before tax of North America.
12 Deducted in arriving at the profit on ordinary activities before tax of South America.
65
H S B C H O L D I N G S P L C
Financial Review (continued)
Europe
Profit/(loss) before tax excluding goodwill amortisation
Year ended 31 December
Personal Financial Services .......................................................
United Kingdom ...........................................................................
France ...........................................................................................
Other ............................................................................................
Consumer Finance1 ....................................................................
United Kingdom ...........................................................................
France ...........................................................................................
Other ............................................................................................
Total Personal Financial Services .............................................
United Kingdom ...........................................................................
France ...........................................................................................
Other ............................................................................................
Commercial Banking .................................................................
United Kingdom ...........................................................................
France ...........................................................................................
Other ............................................................................................
Corporate, Investment Banking and Markets ..........................
United Kingdom ...........................................................................
France ...........................................................................................
Other ............................................................................................
Private Banking ..........................................................................
United Kingdom ...........................................................................
France ...........................................................................................
Other ............................................................................................
Other ...........................................................................................
United Kingdom ...........................................................................
France ...........................................................................................
Other ............................................................................................
Total2
United Kingdom ...........................................................................
France ...........................................................................................
Other ............................................................................................
1 Comprises Household since the date of acquisition.
2 Goodwill amortisation excluded:
– arising on subsidiaries ............................................................
– arising on associates and joint ventures .................................
– total ........................................................................................
2003
US$m
1,267
1,050
165
52
157
157
–
–
1,424
1,207
165
52
1,303
939
257
107
1,623
1,234
129
260
339
73
21
245
173
139
12
22
4,862
3,592
584
686
758
135
893
2002
US$m
987
826
139
22
–
–
–
–
987
826
139
22
1,344
929
325
90
1,438
1,118
147
173
236
88
8
140
155
176
(130)
109
4,160
3,137
489
534
651
9
660
2001
US$m
1,091
906
133
52
–
–
–
–
1,091
906
133
52
986
742
186
58
1,438
1,188
52
198
310
114
33
163
357
196
83
78
4,182
3,146
487
549
632
8
640
66
Profit before tax
Year ended 31 December
Europe
Net interest income .........................................
Dividend income ..............................................
Net fees and commissions ................................
Dealing profits ..................................................
Other income ....................................................
Other operating income ....................................
Total
US$m
7,540
150
5,192
960
1,253
7,555
Total operating income ..................................
15,095
Staff costs .........................................................
Premises and equipment ...................................
Other ................................................................
Depreciation and intangible asset amortisation..
Goodwill amortisation ......................................
Operating expenses ...........................................
Operating profit before provisions ................
Provisions for bad and doubtful debts ..............
Provisions for contingent liabilities and
commitments .................................................
Amounts written off fixed asset investments ....
Operating profit ..............................................
Share of operating loss in joint venture ............
Share of operating profit/(loss) in associates ....
Gains on disposal of investments and
tangible fixed assets ......................................
Profit on ordinary activities before tax .........
Share of HSBC’s pre-tax profits (excluding
goodwill amortisation) ...................................
Share of HSBC’s pre-tax profits .......................
Cost:income ratio (excluding goodwill
amortisation) ..................................................
Period-end staff numbers (full-time equivalent)
Selected balance sheet data2
Loans and advances to customers (net) ............
Loans and advances to banks (net) ...................
Debt securities, treasury bills and other
eligible bills ...................................................
Total assets3 ......................................................
Deposits by banks .............................................
Customer accounts ...........................................
(5,576)
(1,058)
(2,068)
(827)
(9,529)
(758)
(10,287)
4,808
(874)
(33)
(64)
3,837
(127)
47
212
3,969
%
33.7
30.9
63.1
73,943
US$m
210,605
51,783
82,656
425,312
47,500
242,724
2003
Household1
US$m
438
–
49
–
149
198
636
(146)
(56)
(70)
(27)
(299)
(23)
(322)
314
(180)
–
–
134
–
–
–
134
%
1.0
1.0
47.0
4,075
US$m
8,452
27
66
10,665
831
231
Rest of
HSBC
US$m
7,102
150
5,143
960
1,104
7,357
2002
2001
US$m
6,343
211
4,528
508
1,025
6,272
US$m
5,563
116
4,210
708
1,022
6,056
14,459
12,615
11,619
(5,430)
(1,002)
(1,998)
(800)
(9,230)
(735)
(9,965)
4,494
(694)
(33)
(64)
3,703
(127)
47
212
3,835
%
32.7
29.9
63.8
69,868
US$m
202,153
51,756
82,590
414,647
46,669
242,493
(4,425)
(966)
(1,763)
(724)
(7,878)
(651)
(8,529)
4,086
(569)
(15)
(267)
3,235
(26)
3
288
3,500
%
39.5
36.3
62.4
72,260
US$m
164,701
39,373
71,446
341,569
34,559
197,362
(4,227)
(786)
(1,619)
(656)
(7,288)
(632)
(7,920)
3,699
(441)
(30)
(90)
3,138
(79)
42
441
3,542
%
47.5
44.3
62.7
73,326
US$m
133,380
40,641
66,255
297,066
36,908
169,371
1 Since the date of acquisition.
2 Third party only.
3 Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
67
H S B C H O L D I N G S P L C
Financial Review (continued)
Year ended 31 December 2003 compared with
year ended 31 December 2002
The UK economy expanded by 2.3 per cent in 2003.
After a slow first six months, growth accelerated in
the third quarter and that momentum continued into
the final months of the year. Growth in consumer
spending slowed during the course of the year but
nevertheless remained robust and, in particular, the
housing market and household appetite to borrow
remained strong. However, low real income growth,
together with the expectation of further rises in
interest rates, are expected to dampen household
activity in the forthcoming months. Elsewhere, there
are a few encouraging signs that industrial activity in
particular and corporate confidence in general is
starting to improve from a low base. Going forward,
stronger global demand, if maintained, should
provide a boost to the corporate sector.
Having slipped into recession in the first half of
the year, the eurozone economy returned to growth in
the second half, expanding by 0.4 per cent
quarter-on-quarter in the third quarter and by 0.3 per
cent in the fourth quarter. Once again, however, it
was stronger exports that drove the third quarter
improvement, while the domestic economies
remained subdued. Consumer spending was flat and
investment contracted for the third consecutive
quarter. The pick-up in exports occurred despite the
appreciating euro, which rose more than 16 per cent
against the US dollar during the course of the year. In
the fourth quarter, growth seemed to have been
largely the result of inventory build up, with exports
falling back after the strength of the third quarter,
and with limited growth in consumer spending.
Interest rates were cut twice during 2003, with the
European Central Bank’s repo rate dropping by 75
basis points to 2 per cent. By contrast, however,
longer-term interest rates have moved higher, rising
by about 80 basis points between June and the end of
December, as the bond market anticipated economic
recovery.
low interest rate environment also meant that the
value of HSBC’s maturing liquidity reduced as it was
redeployed in lower yielding assets.
The same factors, low interest rates and weak
equity markets, increased the cost of pension
provision by US$96 million in the UK. Employment
costs also grew, notably in the UK, as social taxes
were raised. In order to adjust for this higher cost
environment, HSBC took steps to reduce its staff
costs, announcing both 1,400 redundancies in the UK
and the shift over the next three years of 4,000
positions to the Group Service Centres. In the short
term these actions incurred both redundancy and
excess property provisioning costs totalling over
US$176 million.
European operations contributed pre-tax profit
of US$3,969 million in 2003 compared with
US$3,500 million last year. Excluding goodwill
amortisation, European operations contributed
pre-tax profit of US$4,862 million and represented
around one-third of HSBC’s total profit on this basis.
At constant exchange rates, and excluding the
US$157 million contribution from HFC, which was
the only major change in the composition of the
Group in Europe, pre-tax profit, excluding goodwill
amortisation, was 2 per cent higher than last year.
Goodwill amortisation of US$893 million increased
by US$233 million compared with 2002, mainly
reflecting a goodwill write-down in respect of a UK
fund management company previously acquired as
part of the CCF acquisition, and exchange rate
movements.
The commentaries that follow are based on
constant exchange rates.
Pre-tax profit, before goodwill amortisation, of
US$1,267 million in Personal Financial Services,
excluding Consumer Finance, was 16 per cent higher
than in 2002, reflecting strong growth in UK
mortgage and consumer lending, and in deposit-
taking activities.
In 2003, personal credit expansion in the UK
Net interest income increased by 10 per cent,
was the major growth area as consumers took
advantage of historically low interest rates, enabling
HSBC to generate strong growth in mortgages and
consumer lending. Conversely, sales of investment
and pension products fell, reflecting a lack of
confidence in equity markets. In this environment,
HSBC grew its deposit base as customers sought
flexibility and security for their savings,
notwithstanding the low interest rates available. The
driven by strong growth in mortgages and personal
lending in the UK and, to a lesser extent, in France.
The net interest margin fell modestly as rates
remained at historically low levels. However,
balance sheet growth more than compensated for
this. UK mortgage balances increased by 25 per cent
to US$37.4 billion, as borrowers continued to take
advantage of the low interest rate environment to
refinance their mortgages. In France, a similar
68
pattern was seen, and CCF’s mortgage balances
increased by 11 per cent over 2002. Gross new
mortgage lending in the UK grew by 12 per cent to
US$17.9 billion. First Direct contributed to this
growth with a US$280 million, or 14 per cent,
increase over 2002, reflecting the continuing success
of its Offset mortgage product. Both HSBC and First
Direct continued to win major awards for their
mortgage products in 2003.
In the UK, personal lending balances, excluding
mortgages and credit cards, grew by 15 per cent
reflecting the success of targeted marketing
campaigns and improved utilisation of customer
relationship management systems. Card balances
grew by 18 per cent to US$4.2 billion, due to strong
consumer expenditure and targeted marketing
campaigns, resulting in an overall increase in fee
income from cards of 13 per cent.
HSBC’s Premier service was further enhanced
and the number of customers using this service in the
UK grew by 57 per cent to over 280,000. Significant
growth was achieved in HSBC Premier savings
accounts in 2003, which contributed to an overall
increase in UK personal savings balances of 20 per
cent to US$35.7 billion. UK personal current account
balances grew by 13 per cent to US$18.0 billion.
Other operating income was broadly in line with
2002. The strong growth in mortgages and personal
loans boosted sales of repayment protection products
in the UK, producing a 19 per cent increase in
personal loan protection premiums. HSBC
maintained its position as the leading provider of
income protection products in the UK, with a market
share of 17 per cent at the end of September 2003.
Lack of customer confidence in equity markets led to
a decline in sales of investments and pension
products. This trend also adversely affected the value
of HSBC’s long-term assurance business in the UK.
However, weakness in investment product sales
reflected market conditions rather than competitive
positioning and the bank was awarded the coveted
‘Five Star Award’ from Money Management
magazine for its regular premium stakeholder
pensions in the UK again in 2003.
HSBC Turkey benefited from additional card fee
income following the acquisition of Benkar in
September 2002, contributing to an overall increase
in its other operating income of 51 per cent.
Operating expenses, excluding goodwill
amortisation, increased by 2 per cent. This was
largely due to restructuring costs and external factors
in the UK, including higher social taxes and the
amortisation of the UK pension scheme deficit
reported at the end of 2002. The relocation of the
bank’s headquarters to Canary Wharf contributed to
higher premises costs, following the upgrade of
equipment and infrastructure. Additional costs were
also incurred migrating the card issuing business in
the UK to the more efficient platform used by
Household in the US. Costs in France were largely
unchanged compared with 2002.
Low interest rates, stable employment and a
gradual upturn in economic conditions in the UK
provided the environment for continuing low levels
of credit charges. The charge for bad and doubtful
debts at US$267 million was 14 per cent higher than
in 2002, a satisfactory performance in view of the
growth of over 20 per cent in UK personal lending.
Overall, credit quality improved.
In Consumer Finance, HFC Bank, which joined
HSBC in the UK in March as part of the Household
acquisition, contributed US$157 million to pre-tax
profit, before goodwill amortisation, in its first nine
months of ownership. Integration with the HSBC
Group is running on schedule.
In Commercial Banking, pre-tax profits, before
amortisation of goodwill, declined by 13 per cent
compared with 2002 mainly reflecting lower net
interest income and a higher cost base.
Net interest income decreased by 3 per cent to
US$1,961 million. Following the recommendations
of the UK’s Competition Commission, HSBC
applied credit interest to all qualifying small and
medium-sized customer accounts, increasing interest
expense by US$136 million. The move did, however,
lead HSBC to strengthen its product proposition
within those market segments in the UK, and
business current account balances consequently rose
by 21 per cent to just over US$10 billion. In addition,
HSBC’s popular ‘Start-up Stars’ competition
continued to raise the profile of the bank’s small
business proposition in the UK and helped to attract
over 102,000 new business start-ups and over 23,000
customer transfers. Enhanced customer targeting and
the introduction of risk-based relationship pricing
improved HSBC’s competitive position in the UK
market, increasing lending balances by over
US$2.2 billion and net interest income by
10 per cent.
69
H S B C H O L D I N G S P L C
Financial Review (continued)
Overall, deposit balances in the UK grew by
At US$204 million, the overall charge for bad
9 per cent to just over US$9 billion, increasing
market share and partly offsetting the effects of
reduced deposit book spreads. Balances grew as a
consequence of the introduction of the new Business
Money Manager account, launched in response to
customer demand for flexible savings accounts. The
new product attracted an average of 1,700 new
accounts per week and generated US$95 million of
net interest income.
In France, overall net interest income was
broadly in line with 2002. The subdued economic
climate saw businesses adopt a more conservative
investment policy that was reflected in a 3 per cent
rise in sight deposits. Short-term higher spread
lending fell by 8 per cent, but was partly offset by
growth in medium and longer-term lending, which
increased by 4 per cent.
In the UK, other operating income was
marginally higher than 2002. Overdraft fees rose by
12 per cent, or US$19 million, reflecting the further
benefit of improved account management initiatives
introduced last year, whilst loan fees increased
significantly in line with the growth in customer
numbers.
In France, higher income was generated through
a volume-led increase in banking transaction fees
and the introduction of a variety of guaranteed
investment funds during the year. The former was
achieved after specific initiatives directed towards
middle market enterprises (‘MMEs’). The successful
launch of several structured financial products led to
higher trading fees within CCF and the take-up of
Asset Management products increased by 9 per cent.
Overall, wealth management income declined as
continued uncertainty in equity markets led to a fall
in sales of savings and investment products.
Operating expenses, excluding goodwill
amortisation, were 7 per cent higher than last year at
US$2,113 million. This was largely due to an
increase in staff costs in the UK. Pension costs rose
to compensate for the scheme deficit and one-off
redundancy costs were incurred as migration was
planned to the Group’s global processing
capabilities. The costs of distributing and supporting
business services and products within the UK
increased in line with the growth in volumes and
continued investment was made in electronic
delivery channels across Europe.
70
and doubtful debts was 9 per cent lower than in
2002. In the UK there was a release of general
provision which recognised the gradual improvement
in the economic outlook for businesses over the year.
Offsetting this there was a higher specific charge,
reflecting a number of large provisions across
various industries. Additionally, the charge in France
increased due to lower recoveries in two of the
regional banks. Underlying credit quality in France
remained stable.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$1,623 million, an increase of 2 per
cent compared with last year. In Global Markets
Europe, performance was strong. This reflected
income growth in foreign exchange, derivatives and
debt securities, partly offset by higher bad debt
provisions in Corporate Banking. HSBC also
absorbed the costs of restructuring and repositioning
the equities and investment banking businesses.
In Global Markets UK, earnings from deploying
the excess liquidity of the bank declined as long-term
assets matured and proceeds were reinvested at lower
rates. Overall, net interest income was 5 per cent
lower than in 2002.
Other operating income increased by 9 per cent,
reflecting a substantial growth in dealing profits that
more than offset lower fee and commission income.
Foreign exchange revenues remained strong as
volatility in the major currency pairs prompted
customers to hedge their currency exposures.
Continued weakening of the US dollar provided a
clear trend in the markets for position taking. Fixed
income earnings showed a strong year-on-year
growth reflecting a combination of tightening credit
spreads and strong investor demand for yield in the
low interest rate environment, which boosted sales of
corporate bonds. In line with a greater business focus
on risk management products, revenues from trading
increased, reflecting the benefit successful interest
rate positioning and continued growth in customer
mandates from corporate customers. Additional
growth in revenue resulted from a strong presence in
each of the euro vanilla and structured derivatives
markets.
Fees and commission income decreased by 6 per
cent. Difficult operating conditions in equity markets
resulted in lower commissions and new-issue fees,
but these were partly offset by higher fees from
merger and advisory business as greater focus was
given to HSBC’s core customer sectors and regions.
Fees from debt capital markets activities were also
strong. Generally, fees benefited from the high level
of activity in the primary markets, as customers
sought long-term financing at low interest rates.
Staff costs rose, with higher bonuses reflecting
increased profitability in specific product lines.
Restructuring and research costs of US$24 million
were also incurred to build and reshape HSBC’s
investment banking and equities businesses.
Premises and equipment expenses were lower as a
result of savings in rental payments from the London
office move to Canary Wharf.
Credit experience was generally satisfactory
although new specific provisions were higher, mainly
due to a single name in the engineering sector which
was extensively restructured in the second half of the
year. Corporate weakness in the power generation
sector was also dealt with through raising additional
specific provisions, although these were partly
offset by recoveries in the transport and
telecommunications sectors, as balance sheets were
strengthened.
Gains on investment disposals were lower than
in 2002, mainly due to a reduction in profits from the
disposal of venture capital investments in CCF.
Against the background of a recovery from
recent lows in European stock markets, Private
Banking activities continued to grow during 2003.
Pre-tax profit, excluding goodwill amortisation,
increased by 48 per cent as a result of strong growth
in dealing income, lower costs and the
non-recurrence of contingencies and write downs
in 2002.
Net interest income was broadly in line with
2002. A 30 per cent increase in lending balances was
driven by clients seeking to maximise the overall
earnings potential of their investments by borrowing
to reinvest in higher returning securities. These
additional earnings were mostly offset by a decline in
yield on free funds as lower interest rates prevailed
throughout the year.
Net fees and commissions increased by 2 per
cent to US$556 million. The low interest rate
environment improved the attractiveness of
investment markets, particularly for sophisticated
investors with access to structured products which
offered potentially higher returns than from cash
deposits. Consequently, funds under management
increased by US$20 billion to US$91 billion, with a
move by clients away from liquid positions bringing
in some US$9 billion of new client funds. A strong
rise in discretionary mandates together with client
demand for structured products and Household’s
commercial paper contributed to the increase.
Transaction and safe custody fees rose in line with
the growth in client funds while an increased focus
on product enrichment produced strong growth in
income from structured products. In Germany, fee
income was boosted by the placement of two new
property funds. However, income in France was
weaker as stock market activity remained subdued.
Volatility in the major currencies resulted in
higher volumes of client transactions in the foreign
exchange markets, and combined with proprietary
equity gains in 2003, contributed to the 37 per cent
improvement in dealing profits to US$94 million.
Total operating expenses, before goodwill
amortisation, fell by 4 per cent to US$709 million.
This was achieved through cost savings realised
following the merger of three banks in Switzerland in
2002 and lower property expenses.
Provisions for contingent liabilities and
commitments were lower than in 2002, which
included amounts provided for litigation. Amounts
written off fixed asset investments were lower than
in 2002 following a specific write down of a debt
security in 2002. Gains on disposal of investments
and tangible fixed assets increased by 22 per cent to
US$61 million, principally reflecting a gain on a
long-term private placement transaction.
Year ended 31 December 2002 compared with
year ended 31 December 2001
The UK registered strong consumer-led GDP growth
of 1.7 per cent in 2002. Structural disparities within
the UK 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.
Economic activity slowed further in 2002, as
early indicators pointing to a standard cyclical
recovery in economic activity diminished and the
71
H S B C H O L D I N G S P L C
Financial Review (continued)
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.
European operations contributed
US$3,500 million to HSBC’s pre-tax profit in 2002.
Europe’s pre-tax profits, before goodwill
amortisation, were US$4,160 million, and
represented 40 per cent of HSBC’s profits on this
basis. Goodwill amortisation of US$660 million was
broadly in line with 2001. Operating performance
was strong with pre-provision profit rising 9 per cent
to US$4,737 million before goodwill amortisation. 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 Global Markets UK’s
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 the 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 were successfully integrated during
2002, and by the end of the year over 500,000
customers in Turkey were being served through a
combination of call centres, internet banking and a
network of 163 branches.
Internal restructuring 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 2002.
The commentaries on the Europe results that
follow are based on constant exchange rates.
In Personal Financial Services, pre-tax profit,
before goodwill amortisation, of US$987 million was
13 per cent lower than in 2001. However, after
adjusting for the US$200 million profit from the sale
72
of the Group’s stake in British Interactive
Broadcasting in 2001, profit increased by 6 per cent.
The underlying increase was driven by strong growth
in lending and savings products and increased
spreads, as funding costs reflected the low interest
rate environment across Europe. Higher operating
expenses, due in part to the full year impact of
acquisitions, one-off property costs and vacant space
provisions, partly offset the growth in income.
Net interest income, at US$2,541 million, was
14 per cent higher than in 2001. UK mortgage
balances increased by 24 per cent and gross new
lending by 57 per cent as HSBC increased its market
share from 4 per cent to 6 per cent in a buoyant
housing market. HSBC’s UK mortgage balances
have almost doubled over the past five years through
a combination of innovative products and
competitive pricing. ‘HomeStart’, an innovative
mortgage allowing first time buyers to pay only the
interest costs during the first three years, was a major
contributor to growth during the year.
In the UK, personal current account balances
increased by 11 per cent 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 France, CCF’s net interest income of US$386
million was 7 per cent higher than in 2001. Net
interest income grew strongly, driven by growth in
personal lending and sight deposits as customers
preferred liquidity and security in the face of falling
equity markets. In Turkey, net interest income
increased substantially reflecting the full year’s
contribution of Demirbank and the acquisition of
Benkar in September 2002.
Other operating income at US$1,767 million
was 3 per cent lower than in 2001. This reflected
lower income from equity market-related activity and
sales of investment products, largely offset by strong
growth in sales of life, critical illness and income
protection products. Credit card income particularly
benefited from the inclusion of a full year’s income
for Demirbank, and three months contribution from
Benkar.
In the UK, sales of HSBC branded life, critical
illness and income protection products, through the
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 rise in sales of creditor protection insurance,
driven by the growth in personal lending. The bank
continued to deepen customer relationships through a
broader range of products with particular focus on
wealth management. The bank’s combined market
share for its principal investment products, Open
Ended Investment Companies and ISAs, was
maintained at over 5 per cent during the year despite
the difficult investment market conditions. However,
overall wealth management income fell, principally
as a result of the fall in the investment markets and
adjustments to the value of long-term assurance
business. In France, a similar pattern was seen. Good
growth was achieved in fee income on credit
facilities, cards and from sales of investment
protection products. This was partly offset by lower
stockbroking fees.
Operating expenses, excluding goodwill
amortisation, increased by 8 per cent, and included a
full year’s costs for Demirbank, the acquisition of
Benkar and the integration of Merrill Lynch HSBC.
Excluding these, costs rose by 3 per cent, due in part
to one-off property and vacant space costs relating to
the relocation of the bank’s headquarters to Canary
Wharf 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. Non-staff costs increased, reflecting the cost
of outsourcing HSBC Bank’s cash and cheque
processing services and 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 transferred to India
during the year. In France, CCF’s staff costs were
broadly unchanged on 2001, despite the full year
impact of Banque Hervet, and was achieved in part
through a small reduction in headcount.
The charge for bad and doubtful debts at
US$215 million was 3 per cent higher than in 2001.
Increased provisions in CCF were partly offset by a
lower charge in the UK where credit quality
remained stable and improved debt counselling
services proved effective.
Losses from joint ventures fell significantly,
reflecting the full consolidation of Merrill Lynch
HSBC from the second half of 2002.
Commercial Banking reported pre-tax profit,
before goodwill amortisation, of US$1,344 million,
an increase of 32 per cent compared with 2001. The
increase reflected higher net interest income and fee
income together with lower provisions for bad and
doubtful debts.
Net interest income rose by 11 per cent. Term
lending balances grew by 9 per cent, with a
corresponding increase in income of 10 per cent, as a
result of customer segmentation and the introduction
of tiered pricing in the UK. A general move away
from equity investments towards deposits helped
increase balances by 9 per cent. The customer base
rose by 7 per cent, on the back of an increased share
of the business start-up market and relatively low
attrition levels. During 2002, over 87,000 business
start-up accounts were opened, an increase on last
year of some 26,000 accounts or 42 per cent. This
was attributed to effective marketing, particularly the
‘Start-Up Stars’ campaign.
CCF’s net interest income also grew with the
rise in customer stocks, leading to an increase in
sight deposits of 8 per cent and growth in the loan
book of 4 per cent, combined with an improvement
in spreads.
Other operating income increased by 11 per
cent. UK overdraft fees rose by 28 per cent,
reflecting improved account management. Fee
income from UK invoice financing activities grew by
7 per cent, with an increase of 13 per cent in the
number of clients opting for credit protection. This
reflected greater economic uncertainty, particularly
in the manufacturing sector. Along with other
specialisms, such as vehicle and equipment finance,
the invoice finance salesforce was integrated into the
network, improving the level of cross sale
introductions and contributing to a 10 per cent
increase in its client base. Sales of business
protection products such as key man insurance and
partnership protection grew by 11 per cent in the UK.
These were sold along with pension and investment
products aimed at assisting businesses in managing
wealth and offering protection.
Underlying operating expenses rose by 5 per
cent in 2002. The UK experienced increased
premises costs with the opening of the new
headquarters at Canary Wharf in the latter half of
2002 and the rationalisation of the property portfolio,
resulting in one-off property and vacant space costs.
IT costs increased Europe-wide from the systems
modifications necessitated by the introduction of
the Euro.
73
H S B C H O L D I N G S P L C
Financial Review (continued)
In order to increase customer choice, further
investment was made in alternative sales channels
such as business telephone banking and business
internet banking. A business outbound centre was
established at Leicester in the UK. January 2002 saw
the launch of business internet banking
(www.bib.hsbc.com) to the UK’s business customers,
with 35,000 registering in its first year. Dedicated
business-banking centres were set-up in Swansea,
Edinburgh and Hyderabad, handling calls from
approximately 134,000 registered users.
The net charge for bad and doubtful debts
reduced by 23 per cent, mainly due to a fall in CCF,
where lower provisions combined with higher
releases and recoveries in 2002. The UK saw an
improvement in the risk profile of commercial
customers leading to a net release of the general
provisions held. Against this, new specific provisions
were required in the private health, leisure and
manufacturing sectors and the overall charge
remained flat.
Gains on disposal of investments of US$40
million mainly reflected the sale of CCF’s holding in
Lixxbail.
2002 included full year contributions from
Banque Hervert in France and Demirbank in Turkey.
Both performed in line with expectations and
integrated well into HSBC.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$1,438 million in 2002, unchanged
from 2001. Growth in net interest income was offset
by lower dealing profits and a higher charge for bad
debts.
Net interest income increased by 15 per cent
compared with 2001, primarily because of earnings
on money market business, which benefited from the
steeper yield curve following interest rate cuts during
2002. The impact of this diminished during the
second half of the year as maturing liquidity was re-
deployed in lower yielding assets. Net interest
income also grew as Global Markets increased the
proportion of liquid assets held in high quality
corporate and institutional bonds relative to interbank
placement. Increased equity swap activity also
generated additional cash deposits.
Net fees and commissions were broadly in line
with 2001. Markets in global new equity issues and
financial advisory services continued to be
74
depressed, and trading volumes on stock markets
remained at subdued levels, adversely affecting
commission revenues. However, fee income from
fixed income products designed for corporate clients
increased, and HSBC achieved the number one
ranking in bond issuance for UK and French
corporates in all currencies.
Dealing profits decreased by 38 per cent.
Dealing losses were generated on interest rate
derivatives undertaken to hedge the interest rate risk
arising on holdings of corporate bonds, although this
was offset by increased net interest income on the
bonds. Also, foreign exchange revenues grew by
11 per cent following expansion in emerging markets
business and currency options. In the UK, increased
activity in equity swap transactions generated dealing
losses, which were offset by a rise in dividend
income.
Operating expenses were in line with 2001.
Increased revenue-related costs in Global Markets
were offset by a significant reduction in staff costs
following a restructuring of Investment Banking to
reflect market conditions.
The charge for bad and doubtful debts, at
US$153 million, reflected an increase in specific
provisions for a small number of telecommunications
related exposures in the UK.
In Private Banking, HSBC continued to
restructure and strengthen its operations with the
integration of HSBC Guyerzeller and CCF’s private
banking operations outside France with HSBC
Private Banking Holdings (Suisse). The comments
below assume that this structure was in place during
2001.
Despite the decline in the European stock
markets, growth in clients’ funds under management
continued, in part due to a significant increase in
client referrals from Personal Financial Services.
Net interest income fell by 10 per cent compared
with 2001 as lower interest rates reduced earnings on
Private Banking’s investment portfolio and 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.
Transaction and safe custody fees increased in
line with the US$4 billion growth in funds under
management to US$71 billion, despite falls in world
stock markets. Investment fees benefited strongly
from the success of the Hermitage Fund, which
offered clients access to Russian investment
opportunities. In France, fee income was affected by
lower stock market indices while interest arbitrage
activities on securities boosted net interest income at
the expense of dealing income. The latter was further
undermined by mark-to-market losses.
Dealing profits fell by 13 per cent compared
with 2001, mainly in France and HSBC Guyerzeller,
reflecting difficult market conditions.
Underlying operating expenses excluding
goodwill amortisation were in line with last year.
The credit for provisions for bad and doubtful
debts in 2002 was smaller than in 2001, when a
larger reduction in general provisions was booked
following a reassessment of provisions required.
Amounts written off fixed asset investments
were higher than last year following a write down of
a specific debt instrument of a company in the
telecommunications sector.
The share of loss in associated undertakings of
US$10 million in 2002 reflected a drop in the value
of a partially owned private equity company.
The gain on disposal of investments and tangible
assets increased to US$48 million. The increase
reflected debt instruments sold during the year and
the liquidation of a Russian Recovery fund
established in 2000 to manage previously written
down Russian debt instruments.
75
Inter-
segment
elimination
US$m
Other
US$m
216
4
259
(26)
371
608
824
–
–
–
–
(239)
(239)
(239)
Total
US$m
7,540
150
5,192
960
1,253
7,555
15,095
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group
Personal
Financial
Services
US$m
Consumer
Finance4
US$m
Total
Personal
Financial
Services
US$m
Europe
Year ended 31 December 2003
Corporate,
Investment
Banking &
Markets
US$m
Commercial
Banking
US$m
Private
Banking
US$m
Net interest income ............
3,082
438
–
49
–
149
198
636
3,520
4
1,838
37
278
2,157
5,677
1,961
2
1,335
16
294
1,647
3,608
1,509
138
1,204
839
539
2,720
4,229
334
2
556
94
10
662
996
4
1,789
37
129
1,959
5,041
Dividend income .................
Net fees and commissions ...
Dealing profits .....................
Other income .......................
Other operating income .......
Operating income ..............
Operating expenses
excluding goodwill
amortisation1 ....................
Operating profit before
provisions1 .......................
Provisions for bad and
(3,471)
(299)
(3,770)
(2,113)
(2,471)
(709)
(705)
239
(9,529)
1,570
337
1,907
1,495
1,758
287
119
–
–
–
–
–
–
–
–
–
5,566
(874)
(33)
(64)
4,595
8
47
212
4,862
%
33.7
63.1
US$m
doubtful debts ...................
(267)
(180)
(447)
(204)
(218)
Provisions for contingent
liabilities and
commitments ....................
Amounts written off fixed
asset investments ..............
(29)
(1)
–
–
(29)
(1)
10
–
(52)
(42)
(4)
(2)
(3)
Operating profit1 ...............
1,273
157
1,430
1,301
1,446
278
Share of operating profit in
joint ventures2 ..................
Share of operating profit
in associates2 .....................
Gains/(losses) on disposal
of investments and
–
3
tangible fixed assets ..........
(9)
Profit on ordinary
activities before tax3 .......
Share of HSBC’s pre-tax
profits3 ..............................
Cost:income ratio1 ...............
1,267
%
8.8
68.9
–
–
–
157
%
1.1
47.0
–
3
–
3
8
13
(9)
(1)
156
1,424
%
9.9
66.4
1,303
%
9.0
58.6
1,623
%
11.3
58.4
–
–
61
339
%
2.4
71.2
(1)
40
(18)
140
–
28
5
173
%
1.1
85.6
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Selected balance sheet
data5
Loans and advances to
customers (net) .................
Total assets ..........................
Customer accounts ..............
The following assets and
liabilities were significant
to the customer groups
noted:
Loans and advances to
banks (net) ....................
Debt securities, treasury
bills and other eligible
bills ...............................
Deposits by banks ............
Debt securities in issue ......
76,439
92,890
102,192
8,452
10,526
231
84,891
103,416
102,423
52,947
67,107
45,558
61,085
209,885
63,556
11,681
40,964
31,187
1
3,940
–
210,605
425,312
242,724
43,699
67,692
44,261
3,232
Goodwill amortisation:
1 excluded from (1) above ..
2 excluded from (2) above ..
3 excluded from (3) above ..
4 Comprises Household since the date of acquisition.
5 Third party only.
123
–
123
23
–
23
146
–
146
160
–
160
192
135
327
257
–
257
3
–
3
758
135
893
76
Europe
Net interest income .........................
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
Operating income ...........................
Operating expenses excluding
goodwill amortisation1 ...................
Operating profit before
provisions1 ....................................
Provisions for bad and doubtful
debts ..............................................
Provisions for contingent liabilities
and commitments ..........................
Amounts written off fixed asset
investments ...................................
Operating profit1 ............................
Share of operating profit/(loss) in
joint ventures2 ...............................
Share of operating profit/(loss) in
associates2 ......................................
Gains/(losses) on disposal of
investments and tangible fixed
assets .............................................
Profit on ordinary activities
before tax3 ....................................
Share of HSBC’s pre-tax profits3 ......
Cost:income ratio1 ............................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets5 ......................................
Customer accounts ...........................
The following assets and liabilities
were significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills and
other eligible bills .......................
Deposits by banks .........................
Year ended 31 December 2002
Personal
Financial
Services
US$m
Commercial
Banking
US$m
2,541
3
1,570
31
163
1,767
4,308
1,800
4
1,128
18
303
1,453
3,253
Corporate,
Investment
Banking &
Markets
US$m
1,444
202
1,137
385
508
2,232
3,676
Private
Banking
US$m
300
2
471
63
16
552
852
Inter-
segment
elimination
US$m
–
–
–
–
(281)
(281)
(281)
Other
US$m
258
–
222
11
316
549
807
Total
US$m
6,343
211
4,528
508
1,025
6,272
12,615
(3,076)
(1,759)
(2,197)
(618)
(509)
281
(7,878)
1,232
1,494
1,479
(215)
(204)
(23)
(1)
993
(22)
(1)
17
987
%
9.4
71.4
US$m
58,421
72,817
84,486
11
3
1,304
3
(3)
40
1,344
%
12.8
54.1
US$m
43,104
56,934
35,614
234
7
(21)
(22)
198
–
(10)
48
236
%
2.2
72.5
298
(4)
21
(175)
140
–
14
1
155
%
1.4
63.1
US$m
US$m
(153)
(3)
(72)
1,251
2
3
182
1,438
%
13.7
59.8
US$m
54,099
172,665
45,818
9,077
35,920
31,444
–
3,233
–
31,402
53,897
31,741
–
–
–
–
–
–
–
–
–
4,737
(569)
(15)
(267)
3,886
(17)
3
288
4,160
%
39.5
62.4
US$m
164,701
341,569
197,362
Goodwill amortisation:
1 excluded from (1) above ...............
2 excluded from (2) above ...............
3 excluded from (3) above ...............
4 Third party only.
5 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP
112
–
112
133
–
133
169
8
177
238
–
238
(1)
1
–
trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
651
9
660
77
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group (continued)
Europe
Net interest income .........................
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
Operating income ...........................
Operating expenses excluding
goodwill amortisation1 ...................
Operating profit before
provisions1 ....................................
Provisions for bad and doubtful
debts ..............................................
Provisions for contingent liabilities
and commitments ..........................
Amounts written off fixed asset
investments ...................................
Operating profit1 ............................
Share of operating profit/(loss) in
joint ventures2 ...............................
Share of operating profit/(loss) in
associates2 ......................................
Gains/(losses) on disposal of
investments and tangible fixed
assets .............................................
Profit on ordinary activities
before tax3 ....................................
Share of HSBC’s pre-tax profits3 ......
Cost:income ratio1 ............................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets5 ......................................
Customer accounts ...........................
The following assets and liabilities
were significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills and
other eligible bills .......................
Deposits by banks .........................
Year ended 31 December 2001
Personal
Financial
Services
US$m
Commercial
Banking
US$m
2,136
2
1,535
22
189
1,748
3,884
1,551
5
963
12
274
1,254
2,805
Corporate,
Investment
Banking &
Markets
US$m
1,213
105
1,086
603
486
2,280
3,493
Private
Banking
US$m
334
4
452
71
18
545
879
Inter-
segment
elimination
US$m
–
–
–
–
(216)
(216)
(216)
Other
US$m
329
174
–
271
445
774
Total
US$m
5,563
116
4,210
708
1,022
6,056
11,619
(2,715)
(1,606)
(2,133)
(608)
(442)
216
(7,288)
1,169
1,199
1,360
(199)
(244)
(17)
(5)
948
(87)
27
203
1,091
%
12.4
69.9
11
(2)
964
6
15
1
986
%
11.2
57.3
(33)
(5)
(54)
1,268
10
1
159
1,438
%
16.3
61.1
271
35
(15)
(2)
289
–
1
20
310
%
3.5
69.2
332
–
(4)
(27)
301
–
(2)
58
357
%
4.1
57.1
US$m
US$m
US$m
US$m
US$m
43,170
58,170
68,384
35,792
49,054
28,361
46,608
150,033
41,840
7,808
37,756
30,777
2
2,053
9
–
–
–
–
–
–
–
–
–
4,331
(441)
(30)
(90)
3,770
(71)
42
441
4,182
%
47.5
62.7
US$m
133,380
297,066
169,371
26,927
51,703
33,967
Goodwill amortisation:
1 excluded from (1) above ...............
2 excluded from (2) above ...............
3 excluded from (3) above ...............
4 Third party only.
5 Figures for 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP
122
(1)
121
123
2
125
163
6
169
222
–
222
2
1
3
632
8
640
trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
78
Hong Kong
Profit/(loss) before tax excluding goodwill amortisation
Personal Financial Services ...............................................................
Commercial Banking .........................................................................
Corporate, Investment Banking and Markets ....................................
Private Banking .................................................................................
Other .................................................................................................
Total1 .................................................................................................
1 Goodwill amortisation excluded:
– arising on subsidiaries ...............................................................
– arising on associates and joint ventures .....................................
– total ............................................................................................
Profit before tax
Hong Kong
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 and intangible asset amortisation ..................................
Goodwill amortisation .......................................................................
Operating expenses ............................................................................
Operating profit before provisions .................................................
Provisions for bad and doubtful debts ...............................................
Provisions for contingent liabilities and commitments ......................
Amounts written off fixed asset investments .....................................
Operating profit ...............................................................................
Share of operating profit in associates ...............................................
Gains on disposal of investments and tangible fixed assets ...............
Profit on ordinary activities before tax ..........................................
Share of HSBC’s pre-tax profits (excluding goodwill amortisation) .
Share of HSBC’s pre-tax profits ........................................................
Cost:income ratio (excluding goodwill amortisation) ........................
Period-end staff numbers (full-time equivalent) ................................
Selected balance sheet data1
Loans and advances to customers (net) .............................................
Loans and advances to banks (net) ....................................................
Debt securities, treasury bills and other eligible bills ........................
Total assets2,3 .....................................................................................
Deposits by banks ..............................................................................
Customer accounts ............................................................................
2003
US$m
1,740
711
1,275
127
(123)
3,730
3
(1)
2
2003
US$m
3,901
31
1,383
321
596
2,331
6,232
(1,276)
(240)
(502)
(194)
(2,212)
(3)
(2,215)
4,017
(400)
(6)
31
3,642
18
68
3,728
%
25.9
29.1
35.5
23,636
US$m
73,988
38,640
66,158
197,487
4,777
164,024
Year ended 31 December
2002
US$m
1,705
733
1,226
107
(61)
3,710
–
–
–
Year ended 31 December
20023
US$m
4,133
25
1,264
133
495
1,917
6,050
(1,249)
(233)
(459)
(198)
(2,139)
–
(2,139)
3,911
(246)
(14)
(10)
3,641
11
58
3,710
%
35.3
38.4
35.4
23,786
US$m
69,948
33,359
60,083
180,433
2,379
148,904
2001
US$m
1,631
726
1,244
84
198
3,883
–
–
–
20013
US$m
4,165
26
1,172
218
436
1,852
6,017
(1,279)
(234)
(428)
(199)
(2,140)
–
(2,140)
3,877
(197)
6
(18)
3,668
17
198
3,883
%
44.1
48.5
35.6
24,654
US$m
67,359
42,516
49,625
175,652
3,271
146,544
1 Third party only.
2 Excluding Hong Kong Government certificates of indebtedness.
3 Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
79
H S B C H O L D I N G S P L C
Financial Review (continued)
Year ended 31 December 2003 compared with
year ended 31 December 2002
The Hong Kong economy faced challenging
conditions during the first half of 2003. Slower
growth in major export markets, rising
unemployment and a weak property market
dampened consumer demand, whilst the outbreak of
the SARS virus had a significant adverse impact on
the entertainment, leisure and tourism sectors.
However, by the third quarter there was clear
evidence of a bounce-back with GDP growing
6.4 per cent quarter-on-quarter, more than reversing
the 3.7 per cent dip in the second quarter of 2003.
The growth rate benefited significantly from the
release of demand deferred during the SARS period.
Growth also drew support from stronger export
demand and improving sentiment after the central
government unveiled a series of economic measures
to help Hong Kong, including the relaxation of
controls on mainland residents travelling to Hong
Kong. Local consumer spending grew for the first
time in two years and even more encouraging was a
pick-up in investment reflecting an improved
business outlook.
HSBC’s operations in Hong Kong performed
well in these circumstances and reported a pre-tax
profit of US$3,728 million, broadly in line with
2002. Excluding goodwill amortisation, profit before
tax was US$3,730 million and represented 26 per
cent of HSBC’s total profit on that basis. Goodwill
amortisation was US$2 million in 2003.
Personal Financial Services in Hong Kong
reported a pre-tax profit, before goodwill
amortisation, of US$1,740 million, 2 per cent higher
than in 2002. Given the pressure on net interest
income as a consequence of muted credit demand
and the impact of lower interest rates on the value of
deposits, there was continued focus on the insurance
business and wealth management. Sales of unit trusts
and of capital guaranteed funds were particularly
successful.
Net interest income fell by US$161 million or
7 per cent compared with 2002, largely due to a
reduction in spreads on the value of deposits taken in
the low interest rate environment and continued
pressure on yields in the mortgage business, although
there was some benefit from lower cost of funds.
Partly offsetting the decline in net interest
income, other operating income at US$1,182 million
was 13 per cent higher than in 2002. HSBC’s
80
position as one of Hong Kong’s leading providers of
insurance and wealth management services was
sustained amid keen competition. Income from
wealth management initiatives, including
commissions on sales of unit trust products, funds
under management, and securities transactions, grew
by 38 per cent to US$408 million. This was achieved
by strong growth in sales of unit trusts and capital
guaranteed funds, which increased by
US$1.6 billion, or 32 per cent, over 2002.
Net fee income from credit cards was broadly in
line with 2002. Despite fierce competition in the
market, HSBC maintained its position as the largest
credit card issuer in Hong Kong with some 3.1
million cards in circulation, 9 per cent higher than in
2002.
During the year, HSBC continued to place
significant emphasis upon the growth and
development of its insurance business. HSBC
increased sales of regular premium individual life
insurance by 59 per cent, growing its market share
from 13.9 per cent to 18.6 per cent. Income from the
insurance business, including the Mandatory
Provident Fund, grew by 53 per cent or
US$118 million.
Operating expenses, excluding goodwill
amortisation, were 5 per cent lower than in 2002,
with savings in staff costs partly offset by higher
marketing costs. Headcount reduced as HSBC
continued to migrate a wide range of back office and
call centre functions to the Group Service Centres in
Guangzhou and Shanghai. The Group Service
Centres in mainland China now provide about half
the operational support for credit card operations in
Hong Kong.
Provisions for bad and doubtful debts were
broadly in line with last year. The charge for specific
provisions for bad and doubtful debts decreased
compared with 2002, mainly due to a reduced charge
for unsecured lending (including credit cards), in line
with lower personal bankruptcy filings and improved
economic conditions in the latter half of the year.
This was partly offset by higher provisions against
mortgage lending. 2002 benefited from a higher
release of general provision. As the economy grows
and property prices stop falling the environment for
personal credit is expected to improve in 2004.
Commercial Banking in Hong Kong
contributed a pre-tax profit, before amortisation of
goodwill, of US$711 million, a fall of US$22
million, or 3 per cent.
Net interest income declined by 7 per cent
largely due to lower recoveries of suspended interest
and the effect of lower spreads on deposits. There
was good volume growth in the loan book, despite
the impact of SARS and the war in Iraq. This was
offset by narrower spreads caused by limited local
investment and market pressure as banks competed
for quality business. Loan growth was driven by
increased demand for finance to support record trade
flows between mainland China and the rest of the
world, especially in the US. This was particularly
evidenced in the manufacturing and transportation
sectors. Several new business banking/trade service
centres were opened to focus on the business needs
of small and medium-sized customers and start-ups.
Other operating income rose by US$57 million,
or 14 per cent, reflecting growth in cash management
and trade services. Both benefited from the increase
in trade flows and closer liaison between branches of
the bank in Hong Kong and mainland China. This
was developed in order to service the growth of
investment in the Pearl River delta by Hong
Kong-based customers. Additionally, Hang Seng
Bank opened its first branch in Macau aimed at
assisting customers setting-up offices in the territory.
Results of this alignment were particularly
successful, with referrals significantly higher than
anticipated. Trade finance benefited from a campaign
specifically aimed at the increase in export trade
business which occurs during the peak summer
season. Insurance income rose as a consequence of
business expansion, increasing by 36 per cent.
Operating expenses were in line with 2002. Staff
costs increased marginally as headcount rose to
support the insurance business expansion. This was
offset by lower legal and professional fees.
Overall, credit quality remained stable reflecting
improved economic conditions in the latter part of
the year. There was a lower release in general
provisions in 2003 as last year benefited from a
reduction in latent losses.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$1,275 million, 4 per cent higher
than in 2002. Exceptional Global Markets
performance was partly offset by a shift from net
recovery to net charge for bad and doubtful debts.
Net interest income of US$1,157 million was
broadly in line with last year. Reduced corporate
lending spreads, which remained under pressure
throughout the year, and weak loan demand, were
mitigated by a strong Global Markets performance.
Global Markets benefited from successful interest
rate positioning and an increased value of funds was
switched to debt securities from interbank
placements in order to enhance yields.
Other operating income grew strongly to
US$648 million, an increase of US$184 million or
40 per cent. This was achieved through a significant
increase in dealing profits to US$205 million. HSBC
significantly expanded its derivatives capabilities and
higher income was earned from both successful
positioning and a growing demand from corporate
customers for structured tailored solutions. Increased
sales of structured transactions, offering yield
enhancement products to retail clients, generated
further revenue. Debt securities trading achieved a
strong turnaround in income during the year, as
losses caused by widening credit spreads in 2002 did
not recur. Foreign exchange profits rose compared
with 2002, with a significant increase in corporate
sales. Trading profits were generated as the bank
took advantage of US dollar volatility, and the
general weakening of the US dollar during the year.
This was partly offset by lower Corporate and
Investment Banking fees and commissions reflecting
a decrease in income from credit facilities.
Operating expenses, before goodwill
amortisation, increased by 5 per cent to US$491
million, with the significant increase in Global
Markets’ profitability reflected in higher
performance-related staff costs.
There was a net charge for bad and doubtful
debts of US$52 million compared with a release of
US$68 million in 2002. This was primarily due to
new specific provisions raised against two corporate
accounts.
HSBC’s Private Banking activities in Hong
Kong reported pre-tax profit, before goodwill
amortisation, of US$127 million, an increase of
19 per cent over 2002. Funds under management
grew by 12 per cent to US$56 billion, benefiting
from US$7 billion of net new funds as clients moved
away from liquid positions into the investment
markets.
Net interest income declined by US$7 million,
or 8 per cent, to US$84 million. Lower margins from
81
H S B C H O L D I N G S P L C
Financial Review (continued)
free funds and the investment portfolio reflected
falling interest rates while the flattening of the yield
curve during the year meant that the significant
income earned on longer dated assets in 2002 was
not repeated. This more than offset the impact of an
increase in lending balances as clients borrowed on
margin against their investments to reinvest in higher
returning securities.
A general improvement in investment markets in
the second half of the year saw greater client activity
across a range of products. Brokerage, trust services
and safekeeping all benefited from the upturn in the
markets, and associated fee and commission income
increased by 19 per cent to US$87 million. Greater
market activity also stimulated higher sales of
tailored structured products for clients and higher
volumes of debt securities and derivatives
transactions, resulting in a 68 per cent increase in
dealing profits. Overall, other operating income
increased by 31 per cent to US$164 million.
Total operating expenses grew by US$9 million
or 8 per cent, reflecting a rise in headcount to support
increased client activity and the migration of regional
support from Singapore to Hong Kong during the
year. There was also higher performance-related
remuneration in line with increased profits.
Year ended 31 December 2002 compared with
year ended 31 December 2001
Hong Kong continued to suffer from deflation in
2002 and domestic demand remained subdued. An
improvement in trade failed to stimulate demand, as
unemployment increased and salaries fell.
Against this backdrop, HSBC’s operations in
Hong Kong reported an operating profit, before
provisions, of US$3,911 million, an increase of
US$34 million, or 1 per cent, compared with 2001,
largely through income growth from wealth
management products. Pre-tax profit 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 and represented
35 per cent of HSBC’s pre-tax profit on this basis.
There was no goodwill amortisation in Hong Kong
during 2002 and 2001.
Personal Financial Services reported pre-tax
profit, before goodwill amortisation, of US$1,705
million, US$74 million, or 5 per cent, higher than
2001. The improvement was driven by growth in
revenues from wealth management products and
82
increased card fee income. Significantly higher
personal bankruptcy filings during the year resulted
in additional provisions for credit card accounts
compared with 2001.
Net interest income at US$2,364 million was
broadly in line with 2001. The benefits of increased
credit card and mortgage lending together with
improved spreads from lower funding costs were
largely offset by competitive pricing on residential
mortgages and a lower benefit from free funds.
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 personal credit
card issuer in Hong Kong with 2.8 million cards in
circulation and led the market in cardholder spending
and balances. The implementation in 2001 of an
enhanced card processing system and continued
migration of work to HSBC’s Group Service Centres
in Guangzhou enabled operational efficiency to be
further improved.
Other operating income at US$1,048 million
grew by 19 per cent, compared with 2001, driven by
growth in revenues from initiatives related to
investment products and the insurance business.
Sales of unit trusts and capital guaranteed funds were
strong, including the sale of over US$4.9 billion of
funds during the year, a rise of 36 per cent compared
with 2001. Revenues from insurance and
underwriting also increased significantly.
HSBC had grown to be one of the leading
distributors of retail funds in Hong Kong by the end
of the year. 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
for capital protection. In the low interest rate
environment, HSBC also introduced a range of
alternative deposit products. There was strong
growth in funds under management, which rose
68 per cent compared with 2001.
The insurance business remained a key focus in
HSBC’s strategy in Hong Kong. Significant growth
in personal insurance was achieved, outpacing
market growth and giving HSBC a larger market
share of new business.
Costs in Hong Kong were in line with 2001. The
increased cost of continuing marketing initiatives and
higher IT costs supporting business growth were
funded by a reduction in staff costs. Costs fell as
back office processing functions were transferred to
HSBC’s Group Service Centres in India and China,
and pension top-up fees in Hang Seng Bank in 2001
were not repeated.
Customer demand for remote services continue
to grow and the bank responded with further
investment in internet banking. According to various
surveys in 2002, HSBC has the largest online
banking market share in Hong Kong, with over
470,000 registered users. The e-channel proposition
was enhanced during 2002 introducing a number of
new solutions and a new investment page.
Online@hsbc won a number of awards in 2002,
offering more than 50 services, including a range of
insurance personal loans, and payment services.
Hang Seng Bank’s comprehensive range of internet
banking services had similarly become an important
part of its multi-channel delivery network. By the
end of 2002, more than 250,000 customers had
registered for its Personal e-Banking Services, and
internet transactions had grown to more than 14 per
cent of total transactions.
The provision for bad and doubtful debts rose by
44 per cent to US$362 million as significantly higher
personal bankruptcy filings resulted in a higher
charge for both credit cards and other retail lending.
However, provisions against the mortgage portfolio
fell as delinquency rates reduced.
Commercial Banking in Hong Kong
contributed a pre-tax profit, before amortisation of
goodwill, of US$733 million, broadly in line with
2001.
Net interest income decreased by
US$69 million, or 10 per cent, as low interest rates
reduced the value of interest-free balances. In
addition, there were lower balances and reduced
spreads on deposits, partly offset by a higher release
of suspended interest.
Net fees and commissions increased by US$16
million, or 6 per cent, due to higher levels of fee
income on investment funds as a result of
cross-selling initiatives with HSBC Asset
Management and Treasury. Insurance and trade
services income also increased. Operating expenses
were US$33 million, or 8 per cent, lower than 2001
due to rationalisation of sales teams within the area
and the transfer of back office processing functions
to Group Service Centres.
The net release of provisions for bad and
doubtful debts was higher than 2001 mainly due to
releases of general provisions reflecting a reduction
in latent losses.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$1,226 million, broadly in line with
2001.
Net interest income was 5 per cent higher than in
2001 reflecting the benefit of a strong performance in
Global Markets as the accrual books were well
positioned for the low interest rate environment. This
was partly offset by lower net interest income from
Corporate and Institutional Banking business, as
lower spreads on deposits in HSBC combined with
reduced spreads on lending and subdued loan
demand in Hang Seng Bank. There was also a
considerable reduction in the benefit of net free funds
as average interest rates fell.
Other operating income was US$83 million, or
15 per cent, lower as growth in fee income was more
than offset by lower dealing profits. Dealing profits
fell by US$108 million as debt securities used for
interest rate trading purposes generated net interest
income while corresponding derivative positions
produced dealing losses in the current low interest
rate environment. In addition, there were dealing
losses on debt securities trading due to widening
credit spreads following a series of corporate
scandals in the US. Growth in fee income reflected
higher income from structured finance and from
corporate finance transactions.
Operating expenses were in line with 2001.
The net release of provisions during 2002 was
US$68 million, reflecting releases of specific
provisions against corporate customers. In addition,
there was a release of general provisions reflecting a
reduction in latent losses.
HSBC’s Private Banking activities in Hong
Kong reported pre-tax profits, before goodwill
amortisation, in 2002 of US$107 million, an increase
of 27 per cent over 2001. Funds under management
grew by 23 per cent to US$50 billion at 31 December
2002, benefiting from net new funds from clients,
which more than offset the effect of falling stock
prices.
Net interest income at US$91 million was 17 per
cent higher than in 2001. The steeper yield curve,
reflecting the fall in short-term interest rates
83
H S B C H O L D I N G S P L C
Financial Review (continued)
compared with long-term rates, increased margins as
surplus funds were deployed in longer-dated assets.
Higher income also resulted from the growth of the
investment portfolio.
Other operating income increased by 18 per cent
to US$125 million. Fees and commission income for
the period was US$73 million, an increase of 9 per
cent over 2001. This growth was driven by higher
insurance referral fees and fund management
income. Dealing income rose to US$44 million, an
increase of US$11 million, primarily due to a higher
volume of client transactions in the debt securities
and derivatives markets and increased sales of client-
tailored structured products.
Operating expenses, excluding goodwill
amortisation, of US$109 million increased by
US$12 million, or 12 per cent, compared with 2001.
The increase was predominantly driven by costs
associated with the reorganisation of Private Banking
activities in Hong Kong.
84
Profit/(loss) excluding goodwill amortisation by customer group
Year ended 31 December 2003
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
1,157
3
382
205
58
648
602
1
315
31
107
454
1,056
1,805
Private
Banking
US$m
84
–
87
74
3
164
248
(1,286)
(372)
(491)
(118)
2,099
684
1,314
130
Hong Kong
Net interest income .........................
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
Operating income ..........................
Operating expenses excluding
goodwill amortisation1 ...................
Operating profit/(loss) before
provisions1 ....................................
Provisions for bad and doubtful
debts .............................................
Provisions for contingent liabilities
and commitments ..........................
Amounts written off fixed asset
investments ...................................
2,203
2
630
40
510
1,182
3,385
(366)
–
–
Operating profit/(loss)1 ...................
1,733
5
2
1,740
%
12.1
38.0
US$m
33,494
36,410
111,145
Share of operating profit in
associates2 ......................................
Gains/(losses) on disposal of
investments and tangible fixed
assets..............................................
Profit/(loss) on ordinary activities
before tax3 .....................................
Share of HSBC’s pre-tax profits3 ......
Cost:income ratio1 ............................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets5.......................................
Customer accounts ...........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills and
other eligible bills .......................
Deposits by banks .........................
Goodwill amortisation:
1 excluded from (1) above ...............
2 excluded from (2) above ...............
3 excluded from (3) above ...............
4 Third party only.
5 Excluding Hong Kong Government certificates of indebtedness.
–
–
–
2
–
2
22
1 –
–
707
–
4
711
%
5.0
35.2
US$m
12,760
17,783
31,490
(52)
–
5
(2)
–
–
1,267
128 -
(190)
–
(1)
127
%
0.9
47.6
11
56
(123)
%
(1.0)
255.6
US$m
US$m
2,357
7,555
7,862
1,936
14,849
241
1 –
7
1,275
%
8.9
27.2
US$m
23,441
120,890
13,286
34,165
57,831
4,665
1
–
1
Other
US$m
(145)
25
(31)
(29)
313
278
133
(340)
(207)
(2)
(7)
26
Inter-
segment
elimination
US$m
–
–
–
–
(395)
(395)
(395)
Total
US$m
3,901
31
1,383
321
596
2,331
6,232
395
(2,212)
–
–
–
–
–
–
–
–
4,020
(400)
(6)
31
3,645
17
68
3,730
%
25.9
35.5
US$m
73,988
197,487
164,024
–
–
–
–
(1)
(1)
3
(1)
2
85
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group (continued)
Year ended 31 December 2002
Hong Kong
Net interest income .........................
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
Operating income ...........................
Operating expenses excluding
goodwill amortisation1 ...................
Operating profit/(loss) before
provisions1 ....................................
Provisions for bad and doubtful
debts .............................................
Provisions for contingent liabilities
and commitments ..........................
Amounts written off fixed asset
investments ...................................
2,364
3
543
45
457
1,048
3,412
2,061
(362)
–
–
Operating profit/(loss)1 ...................
1,699
3
3
1,705
%
16.2
39.6
US$m
34,447
36,369
103,413
Share of operating profit in
associates2 ......................................
Gains on disposal of investments
and tangible fixed assets.................
Profit/(loss) on ordinary activities
before tax3 .....................................
Share of HSBC’s pre-tax profits3 ......
Cost:income ratio1 ............................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets5,6 ....................................
Customer accounts ...........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills and
other eligible bills .......................
Deposits by banks .........................
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
1,161
3
399
21
41
464
648
2
284
25
86
397
1,045
1,625
Private
Banking
US$m
91
–
73
44
8
125
216
Inter-
segment
elimination
US$m
–
–
–
–
(459)
(459)
(459)
Other
US$m
(131)
17
(35)
(2)
362
342
211
Total
US$m
4,133
25
1,264
133
495
1,917
6,050
(1,351)
(371)
(469)
(109)
(298)
459
(2,139)
674
54
1
–
729
–
4
733
%
6.9
35.5
US$m
10,797
15,097
27,019
1,156
107
68
–
(4)
–
–
–
(87)
(6)
(15)
(6)
1,220
107
(114)
–
–
107
%
1.0
50.5
US$m
1,917
7,346
7,142
8
45
(61)
%
(0.5)
141.2
US$m
2,084
13,558
176
–
6
1,226
%
11.7
28.9
US$m
20,703
108,063
11,154
29,284
53,689
2,170
–
–
–
–
–
–
–
–
3,911
(246)
(14)
(10)
3,641
11
58
3,710
%
35.3
35.4
US$m
69,948
180,433
148,904
Goodwill amortisation:
1 excluded from (1) above ...............
2 excluded from (2) above ...............
3 excluded from (3) above ...............
4 Third party only.
5 Excluding Hong Kong Government certificates of indebtedness.
6 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
86
Year ended 31 December 2001
Hong Kong
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Net interest income .........................
2,355
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
3
478
39
357
877
717
2
268
23
81
374
Corporate,
Investment
Banking &
Markets
US$m
1,105
4
376
129
38
547
Operating income ...........................
3,232
1,091
1,652
Private
Banking
US$m
78
–
67
33
6
106
184
Inter-
segment
elimination
US$m
–
–
–
–
(485)
(485)
(485)
Other
US$m
(90)
17
(17)
(6)
439
433
343
Total
US$m
4,165
26
1,172
218
436
1,852
6,017
(1,353)
(404)
(494)
(97)
(277)
485
(2,140)
Operating expenses excluding
goodwill amortisation1 ...................
Operating profit before
provisions1 ....................................
Provisions for bad and doubtful
debts .............................................
Provisions for contingent liabilities
and commitments ..........................
Amounts written off fixed asset
investments ...................................
1,879
(252)
–
–
Operating profit1 ............................
1,627
2
2
1,631
%
18.6
41.9
US$m
34,248
35,765
102,536
Share of operating profit in
associates2 ......................................
Gains on disposal of investments
and tangible fixed assets.................
Profit on ordinary activities
before tax3 .....................................
Share of HSBC’s pre-tax profits3 ......
Cost:income ratio1 ............................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets5,6 ....................................
Customer accounts ...........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills and
other eligible bills .......................
Deposits by banks .........................
687
30
4
–
721
–
5
726
%
8.2
37.0
US$m
9,790
13,843
25,659
1,158
23
11
(2)
1,190
(1)
55
1,244
%
14.1
29.9
US$m
87
(1)
–
–
86
(2)
–
84
%
1.0
52.7
66
3
(9)
(16)
44
18
136
198
%
2.2
80.8
US$m
US$m
20,183
106,791
11,749
1,232
6,573
6,590
1,906
12,680
10
–
–
–
–
–
–
–
–
3,877
(197)
6
(18)
3,668
17
198
3,883
%
44.1
35.6
US$m
67,359
175,652
146,544
37,558
44,528
3,359
Goodwill amortisation:
1 excluded from (1) above ...............
2 excluded from (2) above ...............
3 excluded from (3) above ...............
4 Third party only.
5 Excluding Hong Kong Government certificates of indebtedness.
6 Figures for 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
–
–
–
87
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)
Profit before tax excluding goodwill amortisation
Personal Financial Services ................................................................
Commercial Banking...........................................................................
Corporate, Investment Banking and Markets .....................................
Private Banking ..................................................................................
Other ..................................................................................................
Total1 ..................................................................................................
1 Goodwill amortisation excluded:
– arising on subsidiaries ................................................................
– arising on associates and joint ventures ......................................
– total .............................................................................................
Australia and New Zealand ................................................................
Brunei .................................................................................................
India ...................................................................................................
Indonesia ............................................................................................
Japan ..................................................................................................
Mainland China ..................................................................................
Malaysia .............................................................................................
Middle East (excluding Saudi Arabia) ................................................
Philippines ..........................................................................................
Saudi Arabia .......................................................................................
Singapore ...........................................................................................
South Korea ........................................................................................
Taiwan ................................................................................................
Thailand .............................................................................................
Other ..................................................................................................
Year ended 31 December
2002
US$m
127
423
706
25
12
1,293
33
–
33
Year ended 31 December
2002
US$m
34
34
85
73
44
50
129
225
32
103
223
60
80
39
82
2003
US$m
158
450
732
36
50
1,426
35
–
35
2003
US$m
96
28
94
75
39
42
149
236
16
133
198
69
80
54
117
2001
US$m
80
277
725
(16)
30
1,096
8
–
8
2001
US$m
22
24
86
(26)
18
33
141
201
31
86
270
53
44
51
62
1,426
1,293
1,096
88
Profit before tax
Rest of Asia-Pacific (including the Middle East)
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 and intangible asset amortisation .......................................
Goodwill amortisation ............................................................................
Operating expenses .................................................................................
Operating profit before provisions ......................................................
Provisions for bad and doubtful debts ....................................................
Provisions for contingent liabilities and commitments ...........................
Amounts written off fixed asset investments ..........................................
Operating profit ....................................................................................
Share of operating loss in joint ventures .................................................
Share of operating profit in associates ....................................................
Gains on disposal of investments and tangible fixed assets ....................
Profit on ordinary activities before tax ...............................................
Share of HSBC’s pre-tax profits (excluding goodwill amortisation) ......
Share of HSBC’s pre-tax profits .............................................................
Cost:income ratio (excluding goodwill amortisation) .............................
2003
US$m
1,740
4
805
421
120
1,350
3,090
(952)
(164)
(527)
(98)
(1,741)
(35)
(1,776)
1,314
(85)
(1)
(2)
1,226
–
149
16
1,391
%
9.9
10.9
56.3
Period-end staff numbers (full-time equivalent) .....................................
31,827
Selected balance sheet data1
Loans and advances to customers (net) ..................................................
Loans and advances to banks (net) .........................................................
Debt securities, treasury bills and other eligible bills .............................
Total assets ............................................................................................
Deposits by banks ...................................................................................
Customer accounts .................................................................................
1 Third party only.
US$m
47,952
12,944
25,980
98,081
6,967
65,441
Year ended 31 December
2002
US$m
1,607
3
724
364
83
1,174
2,781
(826)
(156)
(454)
(92)
(1,528)
(33)
(1,561)
1,220
(89)
18
(2)
1,147
–
113
–
1,260
%
12.3
13.1
54.9
28,630
US$m
37,078
10,708
21,622
76,635
5,362
54,172
2001
US$m
1,482
3
681
395
58
1,137
2,619
(771)
(143)
(401)
(82)
(1,397)
(8)
(1,405)
1,214
(172)
(43)
(11)
988
(5)
99
6
1,088
%
12.4
13.6
53.3
26,259
US$m
30,666
11,253
13,623
62,355
4,010
45,498
89
H S B C H O L D I N G S P L C
Financial Review (continued)
Year ended 31 December 2003 compared with
year ended 31 December 2002
The rest of the Asia-Pacific economies experienced
mixed fortunes in the first half of 2003 but
performed better in the second half of the year on the
back of strong exports (particularly to China), strong
commodity prices and improving domestic demand.
Inflation and interest rates remained very low and
many of the region’s central banks implemented
programmes to limit currency appreciation against
the US dollar.
HSBC’s operations in the rest of Asia-Pacific
region reported pre-tax profit of US$1,391 million,
an increase of US$131 million, or 10 per cent, over
2002. Excluding goodwill amortisation, pre-tax
profit was US$1,426 million and represented 10 per
cent of HSBC’s total equivalent profit. At constant
exchange rates, pre-tax profit, before goodwill
amortisation, increased by 8 per cent over 2002.
Goodwill amortisation of US$35 million was
marginally higher than last year due to an acquisition
in Singapore.
The commentaries that follow are based on
constant exchange rates.
In Personal Financial Services pre-tax profit,
before goodwill amortisation, of US$158 million,
increased by 25 per cent compared with 2002 and
was broadly double that achieved in 2001.
Net interest income grew by 15 per cent
compared with 2002, reflecting strong asset growth
in a number of countries across the region. The
impact on deposit taking business of lower margins
in generally low interest rate environments was more
than offset by increased customer deposits and the
growth in mortgage lending. The latter increased by
38 per cent mainly due to growth in Korea,
Singapore, Malaysia and India. Net interest income
also benefited from the acquisition of the mortgage
business of AMP Bank Limited in New Zealand in
the first half of 2003. Strong growth in card balances
contributed to a 34 per cent increase in net interest
income in Indonesia.
Other operating income grew by 25 per cent to
US$345 million. The acquisition of Keppel
Insurance, which was renamed HSBC Insurance
(Singapore) Pte Ltd, contributed US$17 million to
this increase during the year. HSBC continued to
expand its wealth management initiatives and a
number of structured deposit products were launched
90
across the region. Wealth management income grew
by 10 per cent, reflecting strong growth in unit trust
sales and funds under management, particularly in
Taiwan, Korea, Indonesia and India, while fee
income from credit cards rose in a number of
markets across the region. At 31 December 2003, the
bank’s card base in Asia, outside Hong Kong,
exceeded 3.7 million, 20 per cent higher than at the
end of 2002. An enhanced credit card processing
system was implemented in five countries in the
region, applying state-of-the-art technology to risk
and fraud management.
Operating expenses, excluding goodwill
amortisation, of US$835 million were 18 per cent
higher than in 2002. This reflected increased costs to
support business expansion and provisions for
restructuring costs of US$34 million. The acquisition
of HSBC Insurance (Singapore) Pte Ltd in the year
accounted for US$6 million of the increase.
Headcount in the region increased by 2,500
compared with last year, as HSBC continued to
migrate a number of processing activities to the
Group Service Centres in India, Malaysia and
mainland China, and as a result of business
expansion in the region.
Provisions for bad and doubtful debts were
38 per cent higher than in 2002. Provisions against
personal lending increased in Singapore, India,
Korea and Australia in line with growth in advances.
Commercial Banking reported pre-tax profits,
before goodwill amortisation, of US$450 million, an
increase of 4 per cent, compared with 2002.
Net interest income was in line with 2002. There
were lower margins in most countries across the
region, in particular Malaysia, Indonesia and
Singapore. Consolidation in the financial services
sector increased competition in Singapore, whilst
Indonesia was impacted by a lower interest rate
environment. In addition, Malaysia suffered lower
margins on lending. These effects were offset by
increased income in both the Middle East and
Australia. In the Middle East an intensive marketing
campaign led to an expansion in term lending in
addition to a growth in overdraft balances. Net
interest income in Australia was boosted by the full
year contribution from the acquisition of State Street
Bank’s trade finance portfolio in July 2002.
Other operating income rose by 12 per cent to
US$296 million. HSBC Bank Middle East reported a
strong performance despite a subdued first quarter as
a result of the war in Iraq. In addition, insurance
income in Singapore increased as a result of the
acquisition of Keppel Insurance, as detailed
previously.
Operating expenses increased by 5 per cent to
US$334 million, mainly due to restructuring costs in
India and Singapore and the impact of the acquisition
in Singapore.
Credit experience continued to be very good,
benefiting from ongoing success in recovering
historical troubled debt. The net release of provisions
increased 46 per cent to US$52 million in 2003 with
higher net releases of specific provisions in Malaysia
than last year. This was partly offset by an increase
in specific provisions in Indonesia.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$732 million, which was broadly in
line with 2002.
Net interest income fell by 7 per cent compared
with last year, with reductions in Singapore, and to a
lesser extent in the Middle East, as higher yielding
assets matured and the proceeds were reinvested at
lower rates. This was partly offset by an increase in
net interest income from corporate banking business
in India, Korea and mainland China.
Dealing profits increased, primarily in Taiwan,
Japan and Thailand, reflecting a broader product
offering, more customer-focused sales activity and
successful positioning to take advantage of
directional trends in the generally more volatile
market conditions. Higher fee income was generated
from brokerage and corporate finance transactions in
the Middle East.
Operating expenses, before goodwill
amortisation, of US$526 million, increased by 3 per
cent, mainly due to restructuring costs in India and
Singapore.
There was a net release of US$5 million for bad
and doubtful debts compared with a net charge of
US$26 million in 2002, at constant exchange rates. A
specific provision raised against a New Zealand
corporate customer in 2002 was recovered during the
year.
was achieved through strong growth in dealing
profits, which rose by 55 per cent to US$38 million,
and more than compensated for a reduction of 7 per
cent in net interest income.
The fall in net interest income reflected
significant income earned in 2002 from the
deployment of liquidity into longer dated assets
which benefited from the fall in short-term interest
rates. With the flattening of the yield curve this was
not repeated in 2003.
Dealing profits benefited from a higher volume
of client transactions in the debt securities and
derivatives markets and increased sales of client-
tailored structured products.
Operating expenses, excluding goodwill
amortisation, increased by 25 per cent to US$47
million, primarily to support business growth.
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
drove growth in Australia and New Zealand. Interest
rates and inflationary pressures remained low across
the region. Improving economic fundamentals in
Thailand, Malaysia and Singapore positioned those
economies to benefit from a recovery in direct
investment in the future. The Japanese economy
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$1,220 million to operating
profit before provisions, broadly in line with 2001.
Pre-tax profit, before goodwill amortisation, of
US$1,293 million was 18 per cent higher than in
2001. This amounted to 12 per cent of HSBC’s pre-
tax profit, before goodwill amortisation. The increase
in pre-tax profit resulted largely from lower bad debt
charges, particularly in the Middle East and
Indonesia. Goodwill amortisation increased from
US$8 million to US$33 million in 2002 reflecting
acquisitions in Taiwan and Indonesia.
HSBC’s Private Banking activities in the rest
The commentaries that follow are based on
of Asia-Pacific reported pre-tax profit, before
goodwill amortisation, of US$36 million in 2003, an
increase of 46 per cent, compared with 2002. This
constant exchange rates.
Pre-tax profit, before goodwill amortisation, of
US$127 million for Personal Financial Services
91
H S B C H O L D I N G S P L C
Financial Review (continued)
was 59 per cent higher than in 2001, driven by
significant growth in credit cards and other personal
lending, partly offset by increased costs due to
business expansion and global processing costs.
Net interest income grew by 21 per cent,
generated by strong growth in credit card advances
and personal lending across the region, in particular
in Taiwan, Singapore and India. In Malaysia, growth
resulted from acquisition of the ABN AMRO
mortgage portfolio in the first half of 2002, together
with a significant increase in credit card advances. In
Australia, the inclusion of a full year’s income from
the acquisition of NRMA in November 2001
contributed to the increase in net interest income.
HSBC’s credit card business recorded a 25 per
cent increase in balances in 2002. In the difficult
economic environment, HSBC’s focus switched from
the acquisition of customers to their retention.
Investment was made in staff, training and systems
to support expected growth in the credit card
business in 2003.
Other operating income rose by 30 per cent over
2001. Net fees grew by 25 per cent to US$211
million, largely due to the significant increase in
credit card income, principally in Malaysia, the
Middle East and Indonesia, and growth in account
service fees. In Australia, fee income for 2002 more
than doubled, following HSBC’s acquisition of
NRMA Building Society in 2001 and the acquisition
of HSBC Stockbroking Australia. The financial
planning services team in the Middle East, which
provides savings, retirement education and
protection planning services throughout the region,
reported a 19 per cent growth in fee and commission
income.
HSBC’s strong presence in mainland China was
supported by a wide range of business capabilities.
With further liberalisation of China’s financial
market, banking regulations were relaxed to permit
foreign banks to provide foreign currency services to
mainland Chinese companies and citizens, and
HSBC became the first foreign bank to offer them, at
10 locations across the country. In December 2002,
HSBC launched online personal banking services to
local citizens and international customers in
mainland China.
Operating costs, before goodwill amortisation,
increased by 20 per cent compared with 2001. This
growth primarily reflected a higher staff complement
in the Group Service Centres in India and mainland
92
China and business expansion in the Middle East,
Australia and Taiwan. During the year, The
Hongkong and Shanghai Banking Corporation
opened eight new branches in the region.
The year saw 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 249,000,
covering 8 per cent of the personal banking customer
base in 12 countries.
Provisions for bad and doubtful debts increased
by 13 per cent to US$104 million, following
increased credit card lending in India, Indonesia and
Taiwan, partly offset by lower provisioning
requirements in Indonesia and the Middle East, led
by improved credit control procedures.
Commercial Banking reported pre-tax profits,
before goodwill amortisation, of US$423 million, an
increase of 58 per cent, compared with 2001.
Net interest income declined by 11 per cent
compared with 2001, as a result of subdued
commercial loan demand and lower lending margins,
particularly in Mauritius, Singapore and Indonesia.
Net fees and commissions were slightly higher than
in 2001, reflecting the acquisition of the trade
finance portfolio from State Street Bank Australia in
July.
Operating expenses, excluding goodwill
amortisation, were in line with 2001. HSBC
continued to expand its utilisation of Group Service
Centres, with new centres opening in Shanghai and
Bangalore in addition to existing facilities in
Hyderabad and Guangzhou. By the end of the year,
12,400 calls from UK business telephone banking
customers were being answered each week in the
Bangalore call centre.
There was a net release of provisions for bad and
doubtful debts in 2002, mainly in Indonesia,
Singapore, Taiwan and Thailand. These releases were
partly offset by additional provisions in India and
Mauritius. In 2001, significant specific provisions
were raised in Indonesia in view of the deteriorating
political and economic environment.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$706 million, broadly in line with
2001.
Net interest income grew by 16 per cent, to
US$561 million, due to strong Global Markets
performance in most areas across the region. In
particular, the accrual books were well positioned for
the low interest rate environment.
Other operating income was 7 per cent lower,
mainly due to reduced dealing profits. In the
Philippines and Singapore, income from interest rate
derivatives and debt securities trading was lower.
Operating expenses were broadly in line with 2001.
With the exception of a significant recovery
relating to a historic Olympia and York exposure in
2001, the overall charge for bad and doubtful debts
was essentially unchanged in 2002 as business
responded to the economic upturn, though
provisioning experience differed across the region.
There was a release of provisions for contingent
liabilities in Japan and Thailand in 2002, while a
provision was raised in respect of a customer in
Australia in 2001.
HSBC’s Private Banking activities in the rest
of Asia-Pacific reported pre-tax profits, before
goodwill amortisation, of US$25 million, compared
with losses of US$16 million reported in 2001.
Most of the improvement arose from the non-
recurrence of a US$31 million provision in 2001 for
contingent liabilities and commitments in Lebanon,
relating to an operation which was subsequently
closed.
Operating income rose by 16 per cent to
US$65 million, driven by strong growth in dealing
profits. An active Eurobond market in the first half of
the year stimulated customer trades.
Operating expenses, excluding goodwill
amortisation, decreased by 14 per cent to US$37
million. While higher staff costs reflected higher
bonuses in line with the growth in operating income,
this was more than offset by lower costs following
the reorganisation of Private Banking’s activities in
Asia.
93
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group
Rest of Asia-Pacific (including
the Middle East)
Net interest income .........................
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
Operating income ...........................
1,099
Year ended 31 December 2003
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination
US$m
Other
US$m
754
–
239
35
71
345
419
–
220
46
30
296
715
541
–
324
301
21
646
1,187
33
–
10
38
-
48
81
(7)
4
12
1
56
73
66
–
–
–
–
(58)
(58)
(58)
Total
US$m
1,740
4
805
421
120
1,350
3,090
(835)
(334)
(526)
(47)
(57)
58
(1,741)
264
(145)
–
–
119
–
39
–
158
%
1.1
76.0
381
52
(1)
–
432
–
17
1 –
450
%
3.1
46.7
661
5
(1)
(1)
664
–
65
3
732
%
5.1
44.3
34
2
–
–
36
–
–
–
36
%
0.2
58.0
9
1
1
(1)
10
–
28
12
50
%
0.4
86.4
US$m
US$m
US$m
US$m
US$m
17,848
20,128
26,592
13,383
14,402
13,006
5
–
5
1
–
1
15,129
56,495
22,146
10,452
23,279
6,405
28
–
28
1,481
2,813
3,693
111
4,243
4
–
–
–
1
–
1
–
–
–
–
–
–
–
–
–
1,349
(85)
(1)
(2)
1,261
-
149
16
1,426
%
9.9
56.3
US$m
47,952
98,081
65,441
35
–
35
Operating expenses excluding
goodwill amortisation1 ...................
Operating profit before
provisions1 ....................................
Provisions for bad and doubtful
debts .............................................
Provisions for contingent liabilities
and commitments ..........................
Amounts written off fixed asset
investments ...................................
Operating profit1 .............................
Share of operating loss in joint
ventures2 ........................................
Share of operating profit in
associates2 ......................................
Gains on disposal of investments
and tangible fixed assets.................
Profit on ordinary activities
before tax3 ....................................
Share of HSBC’s pre-tax profits3 ......
Cost:income ratio1 ............................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets .......................................
Customer accounts ...........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills and
other eligible bills .......................
Deposits by banks .........................
Goodwill amortisation:
1 excluded from (1) above ...............
2 excluded from (2) above ...............
3 excluded from (3) above ...............
4 Third party only.
94
Rest of Asia-Pacific (including
the Middle East)
Net interest income .........................
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
Operating income ...........................
Operating expenses excluding
goodwill amortisation1 ...................
Operating profit/(loss) before
provisions1 ....................................
Provisions for bad and doubtful
debts .............................................
Provisions for contingent liabilities
and commitments ..........................
Amounts written off fixed asset
investments ...................................
Operating profit/(loss)1 ...................
Share of operating loss in joint
ventures2 ........................................
Share of operating profit in
associates2 ......................................
Gains/(losses) on disposal of
investments and tangible fixed
assets..............................................
Profit on ordinary activities
before tax3 ....................................
Share of HSBC’s pre-tax profits3 ......
Cost:income ratio1 ............................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets .......................................
Customer accounts ...........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills and
other eligible bills .......................
Deposits by banks .........................
Goodwill amortisation:
1 excluded from (1) above ...............
2 excluded from (2) above ...............
3 excluded from (3) above ...............
4 Third party only.
Year ended 31 December 2002
Personal
Financial
Services
US$m
Commercial
Banking
US$m
633
–
211
27
31
269
902
417
–
213
37
9
259
676
Corporate,
Investment
Banking &
Markets
US$m
561
–
293
278
18
589
1,150
Private
Banking
US$m
35
–
6
24
–
30
65
(683)
(309)
(478)
(37)
219
(104)
–
–
115
–
13
(1)
127
%
1.2
75.7
367
31
5
–
403
–
18
2
423
%
4.1
45.7
672
(18)
13
(2)
665
–
42
(1)
706
%
6.7
41.6
28
(3)
–
–
25
–
–
–
25
%
0.2
56.9
US$m
US$m
US$m
US$m
Other
US$m
(39)
3
1
(2)
63
65
26
(59)
(33)
5
–
–
(28)
–
40
–
12
%
0.1
226.9
US$m
116
2,824
40
1,392
2,336
3,413
11,812
13,471
22,613
10,795
11,624
11,600
1
–
1
3
–
3
12,963
46,380
16,506
9,249
19,094
4,830
29
–
29
–
–
–
–
–
–
Inter-
segment
elimination
US$m
–
–
–
–
(38)
(38)
(38)
Total
US$m
1,607
3
724
364
83
1,174
2,781
38
(1,528)
–
–
–
–
–
–
–
–
–
1,253
(89)
18
(2)
1,180
–
113
–
1,293
%
12.3
54.9
US$m
37,078
76,635
54,172
33
–
33
95
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group (continued)
Year ended 31 December 2001
Personal
Financial
Services
US$m
Commercial
Banking
US$m
524
–
169
24
14
207
731
464
–
203
36
10
249
713
Corporate,
Investment
Banking &
Markets
US$m
483
–
303
319
17
639
1,122
(567)
(288)
(492)
164
(93)
–
–
71
(5)
14
–
80
%
0.9
77.6
425
(171)
8
1
263
–
13
1
277
%
3.2
40.4
630
94
(20)
(11)
693
–
33
(1)
725
%
8.2
43.9
Private
Banking
US$m
30
–
10
16
–
26
56
(43)
13
2
(31)
–
(16)
–
–
–
(16)
%
(0.2)
76.8
US$m
US$m
US$m
US$m
1,194
4,526
2,278
8,794
10,146
20,585
10,520
11,094
10,365
–
–
–
2
–
2
10,058
32,704
12,211
9,610
10,933
3,463
2
–
2
Other
US$m
(19)
3
(4)
–
58
57
38
(48)
(10)
(4)
–
(1)
(15)
–
39
6
30
%
0.3
126.3
US$m
100
3,885
59
Inter-
segment
elimination
US$m
–
–
–
–
(41)
(41)
(41)
Total
US$m
1,482
3
681
395
58
1,137
2,619
41
(1,397)
–
–
–
–
–
–
–
–
–
1,222
(172)
(43)
(11)
996
(5)
99
6
1,096
%
12.4
53.3
US$m
30,666
62,355
45,498
8
–
8
–
–
–
4
–
4
Rest of Asia-Pacific (including
the Middle East)
Net interest income .........................
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
Operating income ...........................
Operating expenses excluding
goodwill amortisation1 ...................
Operating profit/(loss) before
provisions1 ....................................
Provisions for bad and doubtful
debts .............................................
Provisions for contingent liabilities
and commitments ..........................
Amounts written off fixed asset
investments ...................................
Operating profit/(loss)1 ...................
Share of operating loss in joint
ventures2 ........................................
Share of operating profit in
associates2 ......................................
Gains/(losses) on disposal of
investments and tangible fixed
assets..............................................
Profit/(loss) on ordinary activities
before tax3 ....................................
Share of HSBC’s pre-tax profits3 ......
Cost:income ratio1 ............................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets .......................................
Customer accounts ...........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances
to banks (net) .............................
Debt securities, treasury bills and
other eligible bills .......................
Deposits by banks .........................
Goodwill amortisation:
1 excluded from (1) above ...............
2 excluded from (2) above ...............
3 excluded from (3) above ...............
4 Third party only.
96
North America
Profit/(loss) before tax excluding goodwill amortisation
Personal Financial Services ..........................................................
USA .................................................................................................
Canada .............................................................................................
Mexico ............................................................................................
Other ...............................................................................................
Consumer Finance2 ........................................................................
USA .................................................................................................
Canada .............................................................................................
Mexico ............................................................................................
Other ...............................................................................................
Total Personal Financial Services ................................................
USA .................................................................................................
Canada .............................................................................................
Mexico ............................................................................................
Other ...............................................................................................
Commercial Banking .....................................................................
USA .................................................................................................
Canada .............................................................................................
Mexico ............................................................................................
Other ...............................................................................................
Corporate, Investment Banking and Markets .............................
USA .................................................................................................
Canada .............................................................................................
Mexico ............................................................................................
Other ...............................................................................................
Private Banking .............................................................................
USA .................................................................................................
Canada .............................................................................................
Mexico ............................................................................................
Other ...............................................................................................
Other ..............................................................................................
USA .................................................................................................
Canada .............................................................................................
Mexico ............................................................................................
Other ...............................................................................................
Total1 ..............................................................................................
USA .................................................................................................
Canada .............................................................................................
Mexico ............................................................................................
Other ...............................................................................................
1 Goodwill amortisation excluded:
– arising on subsidiaries .............................................................
– arising on associates and joint ventures ...................................
– total ..........................................................................................
2003
US$m
870
446
66
345
13
2,068
2,002
66
–
–
2,938
2,448
132
345
13
595
292
162
121
20
837
651
121
66
(1)
63
63
–
–
–
(176)
(193)
–
–
17
4,257
3,261
415
532
49
643
1
644
Year ended 31 December
20023
US$m
605
519
59
23
4
–
–
–
–
–
605
519
59
23
4
435
281
162
9
(17)
494
447
47
3
(3)
57
53
–
–
4
(207)
(209)
(1)
–
3
1,384
1,091
267
35
(9)
146
–
146
2 Comprises Household since the date of acquisition.
3 In 2003, North America implemented a revised funds transfer pricing system to transfer interest rate risk from the business units to
Corporate, Investment Banking and Markets. The figures for 2002 have been restated to reflect the impact of transfer pricing had it
been in place on a similar basis. The effect on the figures for 2001 is immaterial.
2001
US$m
593
546
61
–
(14)
–
–
–
–
–
593
546
61
–
(14)
410
273
101
14
22
441
368
68
–
5
81
80
–
–
1
(877)
(883)
–
–
6
648
384
230
14
20
145
–
145
97
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit before tax
North America
Net interest income .........................................
Dividend income ..............................................
Net fees and commissions ................................
Dealing profits ..................................................
Other income ....................................................
Other operating income ....................................
Total
US$m
11,777
34
2,676
340
932
3,982
Total operating income ..................................
15,759
Staff costs .........................................................
Premises and equipment ...................................
Other ................................................................
Depreciation and intangible asset amortisation..
Goodwill amortisation ......................................
Operating expenses ...........................................
Operating profit before provisions ................
Provisions for bad and doubtful debts ..............
Provisions for contingent liabilities and
commitments .................................................
Amounts written off fixed asset investments ....
(3,723)
(745)
(2,241)
(238)
(6,947)
(643)
(7,590)
8,169
(4,676)
3
(9)
Year ended 31 December
2003
Household1
US$m
7,867
12
1,167
–
501
1,680
9,547
(1,648)
(243)
(1,133)
(83)
(3,107)
(358)
(3,465)
6,082
(4,395)
–
–
Rest of
HSBC
US$m
3,910
22
1,509
340
431
2,302
6,212
(2,075)
(502)
(1,108)
(155)
(3,840)
(285)
(4,125)
2,087
(281)
3
(9)
Operating profit ..............................................
3,487
1,687
1,800
Share of operating profit/(loss) in joint
ventures .........................................................
Share of operating profit in associates ..............
Gains on disposal of investments and
tangible fixed assets .......................................
Profit on ordinary activities before tax .........
Share of HSBC’s pre-tax profits (excluding
goodwill amortisation) ...................................
Share of HSBC’s pre-tax profits .......................
Cost:income ratio (excluding goodwill
amortisation)...................................................
Period-end staff numbers (full-time equivalent)
Selected balance sheet data2
Loans and advances to customers (net) .............
Loans and advances to banks (net) ...................
Debt securities, treasury bills and other
eligible bills ...................................................
Total assets .......................................................
Deposits by banks .............................................
Customer accounts ...........................................
1 Since the date of acquisition.
2 Third party only.
11
6
109
3,613
%
29.6
28.2
44.1
65,021
US$m
191,450
11,884
49,168
289,800
10,354
93,996
–
–
6
1,693
%
14.3
13.2
32.5
28,872
US$m
108,124
–
8,633
136,727
3
1
11
6
103
1,920
%
15.3
15.0
61.8
36,149
US$m
83,326
11,884
40,535
153,073
10,351
93,995
2002
2001
US$m
2,732
24
984
161
333
1,502
4,234
(1,537)
(356)
(651)
(131)
(2,675)
(146)
(2,821)
1,413
(300)
3
(9)
1,107
(2)
8
125
1,238
%
13.2
12.8
63.2
34,207
US$m
77,589
10,391
39,270
142,032
9,972
90,137
US$m
2,450
29
913
346
207
1,495
3,945
(1,440)
(323)
(653)
(124)
(2,540)
(145)
(2,685)
1,260
(300)
(582)
(5)
373
(7)
5
132
503
%
7.4
6.3
64.4
19,291
US$m
73,088
7,979
45,661
138,738
8,113
81,055
98
Year ended 31 December 2003 compared with
year ended 31 December 2002
Fuelled by fiscal stimuli and a further interest rate
reduction, the US economy steadily gained
momentum in 2003. GDP expanded at an annualised
rate of 8.2 per cent in the third quarter, the strongest
rate since 1984. A strong revival in profits growth
boosted investment spending while consumer
spending remained strong, supported by tax cuts, a
buoyant housing market, and equity releases from
refinancing mortgages at record low interest rates.
By the end of the year there was some evidence of
the long-awaited recovery in the labour market, with
the economy adding jobs, albeit modestly. In June
the Federal Reserve cut its Fed Funds rate by 25
basis points to 1 per cent. Subsequently, 10-year
bond yields rose by 100 basis points from their
mid-June low of 3.1 per cent. Equity markets
recovered strongly following the end of the Iraq war:
by the end of December the S&P 500 had risen by
39 per cent from its March low and was at its highest
level since July 2002. This supported consumer
confidence. However, with the US current account
deficit continuing to deteriorate, the US dollar
remained under downward pressure, falling to
US$1.26 against the euro by the end of the year.
Canada’s central bank was the first of the G7
countries to embark on a policy of raising interest
rates in 2003. In response to inflationary pressures in
the early part of the year, overnight lending rates
were raised on two occasions, by a total of 50 basis
points. However, with the Canadian dollar
strengthening against the US dollar, inflation worries
easing, and concerns about subdued GDP growth, the
Central Bank reversed the earlier interest rate rises to
take the overnight rate back down to 2.75 per cent in
September. Many of the reasons for the
disappointing growth were temporary, such as
SARS, BSE, forest fires and the Ontario power
blackout, and their immediate impact abated.
Consumer spending growth remained robust all year,
but the ongoing impact of the strong Canadian dollar
appears set to continue, restraining export growth.
This notwithstanding, a solid macro-economic
foundation has been established and is expected to be
maintained.
On 28 March 2003, HSBC completed its
acquisition of Household for a consideration of
US$14.8 billion, expanding significantly its existing
North American business. The addition of
Household’s substantial consumer lending portfolio
increased the proportion of HSBC’s assets in North
America from 19 per cent to 28 per cent of the
Group.
Household’s results for the period from
29 March to 31 December 2003 are tabulated
separately under Consumer Finance in order to
highlight their significance to HSBC’s overall
performance in North America. HSBC’s results at the
pre-tax level and before amortising goodwill also
benefited from a US$534 million contribution from
HSBC Mexico in its first full year. The integration of
both Household and HSBC Mexico progressed well,
with synergy benefits and business opportunities
generally meeting or exceeding expectations.
The following discussion of HSBC’s North
American performance highlights the impact of the
additions of Household and HSBC Mexico. The
phrase ‘on an underlying basis’ is used to describe
performance excluding these acquisitions.
HSBC’s operations in North America
contributed US$3,613 million to HSBC’s profit
before tax, an increase of US$2,375 million,
compared with 2002. Excluding goodwill
amortisation, pre-tax profit was US$4,257 million,
compared with US$1,384 million in 2002, which was
equivalent to 30 per cent of HSBC’s total pre-tax
profit on this basis. On an underlying basis, HSBC’s
pre-tax profit, before goodwill amortisation, of
US$1,672 million was US$320 million, or 24 per
cent, higher than in 2002. Goodwill amortisation was
US$644 million in 2003, compared with
US$146 million last year, predominantly reflecting
the acquisition of Household and, to a lesser extent,
HSBC Mexico.
The Mexican economy continued to lag behind
The commentaries that follow are based on
the US recovery, largely because, apart from
technology, the US manufacturing sector remained
subdued. However, the impact of stronger US growth
is expected to benefit Mexico in the near term,
boosting exports and growth. Meanwhile, political
conflicts delayed the passage of critical reform
legislation, threatening approval of the 2004 budget.
constant exchange rates.
Personal Financial Services, excluding
Consumer Finance, generated pre-tax profit, before
goodwill amortisation, of US$870 million in 2003,
40 per cent higher than last year. HSBC Mexico
contributed US$350 million to pre-tax profit for the
99
H S B C H O L D I N G S P L C
Financial Review (continued)
year. On an underlying basis, pre-tax profit, before
goodwill amortisation, was 13 per cent lower than in
2002 mainly due to lower earnings from mortgage
servicing and higher staff costs.
Net interest income increased by 53 per cent to
US$2,116 million mainly as a result of the inclusion
of HSBC Mexico. The first full year’s result for
HSBC Mexico was strong and ahead of expectations.
Growth in Mexico from a relatively weak
performance in 2002 reflected an improvement in net
interest income driven by a greater level of low cost
deposits and an expanding consumer loan portfolio.
Interest spreads benefited from a change in asset
mix, with over 25 per cent growth in higher yielding
assets, including motor vehicle finance, credit cards
and payroll loans.
On an underlying basis, growth in net interest
income of 7 per cent was mainly driven by growth of
US$2.5 billion in residential mortgage balances in
the US and Canada. In both countries, the low
interest rate environment proved attractive to new
homebuyers and encouraged existing homeowners to
refinance their mortgages. In the US, net interest
income further benefited from improved spreads on
mortgages and an improved mix of loans and savings
deposits.
Other operating income of US$825 million was
62 per cent higher than in 2002. Operations in
Mexico contributed US$461 million to other
operating income in the year. Transaction volumes
on core banking related products, such as credit
cards, deposit-related services and ATMs, grew
significantly. HSBC Mexico led the market with a
34 per cent share in domestic interbank ATM
transactions across Mexico, delivering fee revenue of
US$92 million. In addition, a growing level of fee
income was generated from bancassurance sales and
international remittances.
On an underlying basis, other operating income
fell by 23 per cent. This was primarily caused by a
fall in mortgage banking-related income in the US.
Total servicing-related income decreased by
US$210 million compared with 2002. This decrease
was driven by accelerated amortisation and large
write-downs of mortgage servicing rights (‘MSRs’)
as many customers refinanced mortgages in order to
take advantage of the low interest rate environment.
MSR income also declined as a result of significant
losses on derivative instruments used to protect the
economic value of MSRs.
100
In addition, the June/July time period was one of
the more difficult periods related to derivative
activity. Specifically, in June, positions were taken in
derivative instruments to further reduce HSBC’s
exposure to these losses as mortgage rates continued
to fall. However, in July extreme interest rate
volatility ensued and there was a significant rise in
interest rates resulting in a substantial loss in the
value of the derivative instruments. These losses
were only partly offset by subsequent falls in interest
rates, and gains from the sale of certain mortgage-
backed securities available-for-sale that were used as
on-balance sheet economic hedges of the MSRs.
While the value of MSRs generally declines in a
falling interest rate environment as mortgages are
repaid, the effect of this decline is often mitigated by
income from refinancing mortgage loans and
subsequent sales to mortgage agencies. Total loan
volumes sold in 2003 were US$20.1 billion
compared with US$12.4 billion in 2002. Market
conditions during 2003 permitted favourable pricing
which allowed HSBC to earn higher gains on loans
sold as well as a higher spread on refinanced loans.
As a result, sales-related income for 2003 increased
by US$82 million compared with 2002.
Overall, the US mortgage banking business
contributed US$210 million to pre-tax profit in 2003,
compared with US$251 million in 2002. In the US,
HSBC generated increases in deposit-related service
charges and in card fees, though sales of investment
products fell reflecting a lack of confidence in the
equity markets. Increased fees in Canada reflected
higher insurance sales and increased commissions
from retail broking activities as the equity markets
rebounded in 2003.
Growth in operating expenses, excluding
goodwill amortisation, of 65 per cent to US$1,965
million was substantially attributable to the addition
of HSBC Mexico, which contributed US$758 million
to the overall cost base in 2003. In Mexico, savings
in operating expenses were achieved from merging
HSBC Mexico with HSBC’s existing operations in
the country. These savings funded investment to
improve technology support for HSBC Mexico’s
branch network.
On an underlying basis, operating expenses,
excluding goodwill amortisation, increased by 7 per
cent. Pension costs rose due to falls in the long-term
rates of return on assets, and higher profitability
drove increased staff incentive payments. Following
the integration with Household, long-term
restructuring programmes, including the
rationalisation of staff functions, were initiated,
adding US$20 million of costs in the year.
Operations in Mexico contributed
US$67 million to the overall net charge for bad and
doubtful debts of US$142 million. On an underlying
basis, credit provisions in Personal Financial
Services were broadly in line with the prior year, a
good performance in view of strong growth in
personal lending. Overall credit quality improved,
reflecting the improved economic environment.
Consumer Finance contributed
US$2,068 million to pre-tax profit, before goodwill
amortisation, in the nine months since Household
became a member of HSBC. The integration of
Household into HSBC delivered anticipated benefits
in improved funding costs, and technology and
administrative cost savings. Significant progress has
been made in exporting Household’s core skills,
particularly in the areas of credit risk management,
sales-focused organisation and customer-centred
technology, to other parts of the Group. Further
synergies are planned in card processing, IT
contingency rationalisation, purchasing, call-centre
operations and the shared use of HSBC’s Group
Service Centres. Household’s business model is
being taken to selected markets overseas and
established alongside existing HSBC operations to
meet the growing global demand for consumer
finance.
Net interest margin benefited by US$531 million
from purchase accounting adjustments relating to the
acquisition of Household in the nine months in
which Household was part of the HSBC Group. This
comprised of a US$946 million benefit in respect of
debt funding, offset by the amortisation of purchase
accounting adjustments relating to loans and
advances to customers totalling US$415 million.
Purchase accounting adjustments restated the book
value of debt to fair value at that date and, therefore,
reflected the improvement in spread already in the
market as well as falling interest rates. They are
being amortised in line with the residual maturity of
the debt. Assuming credit spreads remain consistent,
savings on future debt issues will replace the fair
value adjustments relating to credit spreads. Since
acquisition, Household’s funding costs on new issues
have, in fact, fallen as the credit spreads sought by
the market decreased, reflecting the improvement in
Household’s credit rating on joining the HSBC
Group. During 2003, net interest income benefited
by US$124 million as a result of such savings.
All consumer portfolios grew during the year,
except for personal unsecured loans, with the
strongest growth in the real estate secured and
private label portfolios. The secured real estate
portfolio growth was driven by the correspondent
business while the private label portfolio benefited
from a number of new relationships added during the
year. Growth in MasterCard and Visa loans benefited
from portfolio acquisitions made during the year in
advantageous circumstances and growth in the
General Motors portfolio. The motor vehicle finance
business also benefited from new originations from
strategic alliances during the year.
Included within operating expenses were one-off
retention payments arising on the change of control
amounting to US$52 million. Headcount increased to
support business expansion, particularly in the
consumer lending and mortgage services businesses.
The charge for bad and doubtful debts in 2003
reflected receivables growth, increases in personal
bankruptcy filings and the weak US economy.
However, in the second half of the year credit quality
stabilised and improvement was seen in a number of
key indicators, including early stage delinquency,
charge-offs, bankruptcy filings and collection
activities. The improvement reflected resumed
domestic economic growth which is forecast to
continue into 2004.
Commercial Banking in North America
reported pre-tax profit, before goodwill amortisation,
of US$595 million, an increase of 32 per cent,
compared with 2002. On an underlying basis, HSBC
generated pre-tax profit, before goodwill
amortisation, of US$498 million, 12 per cent higher
than last year.
Net interest income on an underlying basis was
marginally lower than 2002. In Canada, income
growth was generated from increased balances on
loans and deposits. There were increases in
commercial real estate lending where growth in
market share was concentrated primarily in New
York. Service delivered to SMEs was enhanced as
part of the strategy to focus on that market. Notably,
the credit application process was re-engineered to
make it easier for customers and the number of
relationship managers doubled. As a result, lending
to SMEs increased by 17 per cent. Net interest
income further benefited from steady growth in
101
H S B C H O L D I N G S P L C
Financial Review (continued)
deposit balances and lower funding costs. Offsetting
this was the impact of business disposals as HSBC
disposed of its equipment leasing portfolio in the
first half of 2003 following a re-evaluation of its core
businesses.
On an underlying basis, other operating income
rose by 20 per cent, reflecting income on the sale of
the factoring business and increases in fees related to
commercial real estate lending, deposit taking and
trade.
The inclusion of Household’s commercial
portfolio reduced other operating income by
US$17 million. These losses were more than offset
by tax credits, resulting in an overall benefit to post
tax profits of US$40 million.
HSBC Mexico contributed US$325 million to
total operating income in the Commercial Banking
segment in North America, reflecting a strong
position in customer deposits. In addition, a growing
level of fee income was generated from payments
and cash management, loan and credit card fees.
Of the total increase in operating expenses,
US$163 million was attributable to HSBC Mexico.
Underlying operating expenses, excluding goodwill
amortisation, increased by 9 per cent to US$614
million. This was driven by higher pension and
incentive compensation expenses. In Canada, staff
costs increased, primarily due to increased variable
incentive payments.
Credit quality remained satisfactory. On an
underlying basis, provisions for bad and doubtful
debts fell by 40 per cent to US$88 million, reflecting
the improved credit environment in North America in
2003. Low interest rates, declining credit spreads and
positive economic sentiment all contributed to this
improvement.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$837 million, an increase of 70 per
cent, compared with 2002. On an underlying basis,
the Corporate, Investment Banking and Markets
business generated pre-tax profit, before amortisation
of goodwill, of US$772 million, 58 per cent higher
than in 2002. In generally favourable trading
conditions, Global Markets achieved higher
customer sales from structured finance and hedging
products as institutional and corporate borrowers
took advantage of low interest rates to raise finance
or fix the cost of existing facilities.
102
HSBC’s North American securities trading and
debt capital markets business was substantially
restructured and refocused towards the end of 2002
and this was reflected positively in its 2003 financial
performance. Government and agency securities
arbitrage activities were wound down. Corporate
bond trading returned to profitability, contrasting
with the heavy losses suffered in 2002 as a result of
widening credit spreads, particularly in the
telecommunications and auto sectors. The turnaround
in performance added US$67 million to profit before
tax. Investment in relationship management
generated new business from major institutional and
corporate clients. Global Markets also expanded its
structured credit derivatives trading in response to
the evolving requirements of its institutional
customer base, allowing these clients to risk manage
their portfolios more actively, thereby generating
fees and trading revenues for HSBC.
Underlying net interest income of
US$685 million, increased by 28 per cent, compared
with 2002. This was partly attributable to the
restructuring initiatives in the securities trading and
debt capital markets business. As part of this
restructuring, large arbitrage trading portfolios,
which had historically contributed dealing profits but
incurred significant funding costs, were eliminated.
Net interest income further benefited from good
balance sheet management and effective interest rate
positioning in the US and Canada.
Underlying total other operating income, at
US$738 million improved by 32 per cent. Strong
foreign exchange and domestic dollar book trading
activity contributed to increased revenues, driven by
historically low interest rates and volatile currency
markets. Derivatives trading revenues increased,
reflecting the growth in demand for the structuring of
tailored products for corporate and institutional
customers.
HSBC Mexico generated other operating income
of US$90 million, of which US$64 million was
accounted for by dealing profits. Volatility in the
Mexican markets enabled the Group to increase
trading volumes and capitalise on favourable market
movements. These positive market conditions led to
increased profits from foreign exchange and fixed
income.
Underlying operating expenses, before goodwill
amortisation, of US$706 million, increased by 9 per
cent. Investment in the core business added to the
expenditure but was partly funded by lower costs in
the securities trading and debt capital markets
business, elements of which were wound down.
Credit experience on major corporate customers
in the US was better in 2003. Many accounts which
were potentially problematic at the end of 2002 were
successfully refinanced and restructured in the strong
debt market at the start of 2003. Elsewhere, credit
quality remained satisfactory and consequently, on
an underlying basis, there was a net release of
US$7 million for bad and doubtful debts.
Profits on disposal of investments, on an
underlying basis, were US$57 million, a decline of
53 per cent compared with 2002, which included a
higher level of securities disposals arising from the
restructuring of investment portfolios.
HSBC’s Private Banking operations in North
America contributed US$63 million to pre-tax
profits, before goodwill amortisation, an increase of
11 per cent compared with 2002.
During the year the North American business
continued its evolution from a deposit-based
business to broader wealth advisory service, with a
resulting shift from net interest income to fees and
commissions. Despite this, net interest income was
3 per cent higher than 2002, reflecting an improved
funding environment in 2003.
An increase in net fees and commissions and
other income of US$52 million, or 37 per cent,
mainly reflected the benefit from increased
investment activity by clients and a greater emphasis
on fee-based non-discretionary advisory and
structured products. In addition, WTAS (HSBC’s tax
advisory service for high net-worth clients), in its
first full year of operation, contributed to this
increase.
The inclusion of WTAS was the principal
contributor to the US$48 million increase in
operating expenses, before goodwill amortisation.
Cost savings from the alignment of international and
domestic client servicing units offset higher staff and
restructuring costs. Excluding this operating
expenses were essentially flat year-on-year.
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 fiscal stimulus 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 was 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
showed upward pressure. It was expected that the
Canadian economy would be slowed by the
performance of the US economy during 2003.
Economic growth in Mexico also remained
subdued, relying on the US economy for 25 per cent
of its GDP. However, growth in industrial output was
an encouraging sign for Mexico’s future prospects.
Although the devaluation in the value of the peso had
increased inflationary pressures, the economic
indicators in 2002 did not appear to present cause for
concern with regard to Mexico’s creditworthiness.
HSBC’s operations in North America
contributed US$1,413 million to operating profit
before provisions, up US$153 million, or 12 per cent,
compared with 2001. Profit before tax increased by
US$735 million to US$1,238 million. Goodwill
amortisation at US$146 million was in line with
2001. 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.
The commentaries that follow are based on
constant exchange rates.
Personal Financial Services in North America
reported a pre-tax profit, before goodwill
amortisation, of US$605 million, 3 per cent higher
than in 2001. The continued growth in the mortgage
business and higher brokerage and insurance sales
contributed to a significant increase in operating
income. This was partially offset by higher IT costs
reflecting increased business volumes and systems
development.
103
H S B C H O L D I N G S P L C
Financial Review (continued)
Net interest income rose by 8 per cent to
Commercial Banking in North America
US$1,352 million of which US$60 million reflected
the inclusion of HSBC Mexico for the period
following its acquisition. Excluding HSBC Mexico,
the rise in net interest income reflected growth in
deposits and record mortgage banking activity.
Customers sought to minimise risks from volatile
equity markets, while homeowners 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 from net free funds.
Excluding HSBC Mexico, which contributed
US$40 million, other operating income was 15 per
cent higher than in 2001, driven by growth in
brokerage and wealth management products and
successful re-pricing of account service charges.
Brokerage revenues increased by 32 per cent over
2001, due in part to sales of annuity products and
increased transaction volumes. Insurance revenue
also grew strongly. By the end of 2002, more than
1,500 professionals were licensed to sell insurance
and a number of annuity products through the retail
network in the US.
HSBC in 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
programme designed to remove routine tasks from
branches and enable staff to concentrate on
deepening relationships with customers.
Operating expenses, before goodwill
amortisation, increased by 19 per cent to US$1,172
million, of which US$72 million reflected the impact
of HSBC Mexico. The underlying increase of 11 per
cent was mainly due to increased revenue-related
staff costs and higher IT and marketing expenses. As
part of its strategy of providing customers with
multiple choices for product and service delivery,
HSBC offered a comprehensive internet banking
service in the US. By the end of the year, more than
405,000 customers had registered, up from
approximately 275,000 at the end of 2001. The
HSBC Bank USA website, us.hsbc.com, where
customers can apply for accounts, conduct financial
planning and link to online services, received
approximately 50,000 visits every day during 2002.
104
reported pre-tax profit, before goodwill amortisation,
of US$435 million, an increase of 6 per cent,
compared with 2001. HSBC Mexico accounted for
US$6 million of this increase.
Net interest income was broadly in line with
2001. The effect of including HSBC Mexico was
offset by reduced net interest income in the US,
reflecting lower lending levels. On an underlying
basis, other operating income rose 8 per cent to
US$287 million, as a result of higher fees from
deposit services, credit and trade finance activity. A
repricing initiative on deposit account services
resulted in higher fee income in both the US and
Canada. Dealing profits fell in HSBC’s Mexican
operation following a decline in gains on exchange
valuations on the loan portfolio.
Operating expenses, on an underlying basis,
were slightly lower than in 2001 in both the US and
Canada, mainly due to operating cost controls and
one-off costs incurred in 2001. Provisions for bad
and doubtful debts were broadly in line with last
year. Despite the uncertain economic climate, the US
and Canada experienced fewer problem credits for
larger companies, though this was partly offset by
higher provisions in Panama.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$494 million, an increase of 15 per
cent, compared with 2001. This was primarily driven
by improved spreads in Global Markets in the low
interest rate environment. HSBC’s US securities
trading and debt capital markets business reported a
pre-tax loss of US$100 million. A significant
widening of credit spreads in the first half of the year
resulted in losses on bond holdings.
Net interest income increased by 53 per cent to
US$539 million. The principal driver of growth was
significantly reduced funding costs as the steeper
yield curve led to a 54 basis point increase in spread.
Global Markets benefited from the lower funding
costs. Net interest income in the debt capital markets
business weakened due to increased funding costs on
corporate bond trading portfolios.
Other operating income at US$557 million was
17 per cent lower than in 2001, mainly due to dealing
losses. Difficult conditions in the capital markets
prevented a recurrence of 2001’s strong dealing
profits and profits on domestic US dollar trading fell.
Partially offsetting the dealing losses were higher
levels of other income from bank note servicing and
increased numbers of structured transactions for
corporate customers. In Canada, HSBC’s operations
reported reduced equity market-related fees. HSBC
withdrew from the institutional equity trading and
research business in the first half of 2002. Other
operating income in the debt capital markets business
fell by US$46 million, largely resulting from losses
on corporate bond trading.
Total operating expenses, before amortisation of
goodwill, were broadly in line with 2001. In the US
securities trading and debt capital markets business,
revenue-related pay decreased due to the losses
incurred in 2002.
Provisions for bad and doubtful debts decreased
by 18 per cent. HSBC Bank USA’s charge for bad
and doubtful debts fell, predominantly due to the
non-recurrence of specific provisions raised in 2001
against corporate customers. The charge in Canada
increased following a provision for an exposure in
the telecommunications sector.
Profits on the disposal of investments declined
by 10 per cent reflecting reduced sales of securities.
HSBC’s Private Banking operations in North
America contributed US$57 million to pre-tax profits
before goodwill amortisation. Net interest income at
US$117 million was US$10 million lower than in
2001 as lower interest rates reduced the benefit of
free funds. Other operating income, including fees
and commissions, increased by US$20 million, or 16
per cent, reflecting the inclusion of WTAS, which
became operational in the second half of 2002.
Operating expenses, before goodwill amortisation,
increased by US$52 million, partly as a result of the
launch of WTAS.
105
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group
Year ended 31 December 2003
Corporate,
Investment
Banking &
Markets
US$m
Commercial
Banking
US$m
Private
Banking
US$m
North America
Personal
Financial
Services
US$m
Consumer
Finance4
US$m
Net interest income ........
2,116
Dividend income .............
Net fees and commissions
Dealing profits .................
Other income ...................
Other operating income ...
–
720
19
86
825
Operating income ..........
2,941
7,851
12
1,170
–
525
1,707
9,558
Total
Personal
Financial
Services
US$m
9,967
12
1,890
19
611
2,532
1,046
–
292
18
152
462
743
20
351
301
156
828
12,499
1,508
1,571
Inter-
segment
elimination
US$m
–
–
–
–
(56)
(56)
(56)
Other
US$m
(100)
1
(12)
–
33
22
(78)
Total
US$m
11,777
34
2,676
340
932
3,982
15,759
121
1
155
2
36
194
315
Operating expenses
excluding goodwill
amortisation1 .................
Operating profit/(loss)
before provisions1 .......
Provisions for bad and
doubtful debts ...............
Provisions for contingent
liabilities and
commitments ................
Amounts written off fixed
asset investments ..........
Operating profit/(loss)1 ..
Share of operating profit
in joint ventures2 ..........
Share of operating profit
in associates2 .................
Gains on disposal of
investments and tangible
fixed assets....................
Profit/(loss) on ordinary
activities before tax3 ....
Share of HSBC’s pre-tax
profits3 ..........................
Cost:income ratio1 ...........
Selected balance sheet
data5
Loans and advances to
customers (net) .............
Total assets ......................
Customer accounts ..........
The following assets and
liabilities were also
significant to the customer
groups noted:
Loans and advances to
banks (net) ................
Debt securities, treasury
bills and other eligible
bills ...........................
Deposits by banks ........
Debt securities in issue. .
(1,965)
(3,098)
(5,063)
(786)
(777)
(254)
(123)
56
(6,947)
976
6,460
7,436
722
794
61
(201)
(142)
(4,395)
(4,537)
(133)
–
–
–
–
–
–
4
–
(6)
–
(9)
1
–
–
(1)
(1)
–
834
2,065
2,899
593
779
62
(203)
11
–
25
870
%
6.0
66.8
–
–
3
11
–
28
2,068
2,938
%
14.4
32.4
%
20.4
40.5
–
–
2
595
%
4.1
52.1
–
–
58
837
%
5.8
49.5
–
–
1
63
%
0.4
80.6
–
7
20
(176)
%
(1.1)
(157.7)
US$m
US$m
US$m
US$m
US$m
US$m
US$m
–
–
–
–
–
–
–
–
–
8,812
(4,676)
3
(9)
4,130
11
7
109
4,257
%
29.6
44.1
US$m
43,608
53,082
48,576
107,957
134,857
1
151,565
187,939
48,577
23,553
27,444
20,032
13,758
70,223
17,239
2,574
3,108
8,148
–
1,086
–
191,450
289,800
93,996
11,577
36,026
9,958
45
–
45
474
–
474
100
–
100
25
–
25
–
–
–
643
1
644
107,673
Goodwill amortisation:
1 excluded from (1) above
2 excluded from (2) above
3 excluded from (3) above
4 Comprises Household since the date of acquisition.
5 Third party only.
117
1
118
356
–
356
106
Year ended 31 December 2002
North America
Net interest income ........................
Dividend income .............................
Net fees and commissions ...............
Dealing profits .................................
Other income ...................................
Other operating income ...................
Personal
Financial
Services
US$m
1,352
–
437
(63)
126
500
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
844
–
222
18
61
301
539
24
268
204
61
557
Operating income ..........................
1,852
1,145
1,096
Private
Banking
US$m
117
–
61
9
78
148
265
Operating expenses excluding
goodwill amortisation1 .................
Operating profit/(loss) before
provisions1,5 .................................
Provisions for bad and doubtful
debts .............................................
Provisions for contingent liabilities
and commitments .........................
Amounts written off fixed asset
investments ..................................
Operating profit/(loss)1,5 ................
Share of operating loss in joint
ventures2 .......................................
Share of operating profit in
associates2 .....................................
Gains/(losses) on disposal of
investments and tangible
fixed assets....................................
Profit/(loss) on ordinary activities
before tax3,5 .................................
Share of HSBC’s pre-tax profits3,5 ...
Cost:income ratio1,5 .........................
Selected balance sheet data4
Loans and advances to customers
(net) ..............................................
Total assets ......................................
Customer accounts ..........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) ................................
Debt securities, treasury bills and
other eligible bills ......................
Deposits by banks ........................
(1,172)
(567)
(649)
(206)
680
578
(76)
(150)
–
–
604
(1)
2
–
605
%
5.8
63.3
2
–
430
–
–
5
435
%
4.1
49.5
447
(66)
2
(9)
374
–
–
120
494
%
4.7
59.2
59
(2)
–
–
57
(1)
–
1
57
%
0.5
77.7
US$m
US$m
US$m
US$m
37,922
46,777
46,002
25,361
29,166
17,717
1,701
2,707
6,969
12,604
63,161
19,396
9,948
34,926
9,545
Inter-
segment
elimination
US$m
–
–
–
–
(22)
(22)
(22)
Total
US$m
2,732
24
984
161
333
1,502
4,234
22
(2,675)
–
–
–
–
–
–
–
–
–
1,559
(300)
3
(9)
1,253
(2)
8
125
1,384
%
13.2
63.2
US$m
77,589
142,032
90,137
Other
US$m
(120)
–
(4)
(7)
29
18
(102)
(103)
(205)
(6)
(1)
–
(212)
–
6
(1)
(207)
%
(1.9)
(101.0)
US$m
1
221
53
Goodwill amortisation:
1 excluded from (1) above ..............
2 excluded from (2) above ..............
3 excluded from (3) above ..............
4 Third party only.
5 In 2003, North America implemented a revised funds transfer pricing system to transfer interest rate risk from the business units to Corporate, Investment
Banking and Markets. The figures for 2002 have been restated to reflect the impact of transfer pricing had it been in place on a similar basis. The effect on
the results for 2001 is immaterial.
55
–
55
32
–
32
34
–
34
25
–
25
–
–
–
146
–
146
107
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group (continued)
Year ended 31 December 2001
North America
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Net interest income .........................
1,247
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
–
368
(38)
71
401
869
–
190
28
48
266
354
29
291
357
10
687
Operating income ...........................
1,648
1,135
1,041
Private
Banking
US$m
127
–
64
1
63
128
255
Inter-
segment
elimination
US$m
–
–
–
–
(15)
(15)
(15)
Total
US$m
2,450
29
913
346
207
1,495
3,945
15
(2,540)
–
–
–
–
–
–
–
–
–
1,405
(300)
(582)
(5)
518
(7)
5
132
648
%
7.4
64.4
US$m
73,088
138,738
81,055
Other
US$m
(147)
–
–
(2)
30
28
(119)
(193)
(312)
3
(575)
–
(884)
–
5
2
(877)
%
(10.0)
(162.2)
US$m
1
136
79
(988)
(572)
(648)
(154)
660
(70)
–
–
590
(7)
–
10
593
%
6.7
60.0
563
(149)
(7)
–
407
–
–
3
410
%
4.7
50.4
393
(80)
–
(5)
308
–
–
133
441
%
5.1
62.2
101
(4)
–
–
97
–
–
(16)
81
%
0.9
60.4
US$m
US$m
US$m
US$m
26,013
32,302
35,066
24,754
25,713
15,392
20,515
77,556
19,315
1,805
3,031
11,203
7,549
45,230
7,791
36
–
36
50
–
50
32
–
32
27
–
27
–
–
–
145
–
145
Operating expenses excluding
goodwill amortisation1..................
Operating profit/(loss) before
provisions1 ...................................
Provisions for bad and doubtful
debts .............................................
Provisions for contingent liabilities
and commitments .........................
Amounts written off fixed asset
investments ..................................
Operating profit/(loss)1 ..................
Share of operating loss in joint
ventures2 .......................................
Share of operating profit in
associates2 .....................................
Gains/(losses) on disposal of
investments and tangible fixed
assets.............................................
Profit/(loss) on ordinary activities
before tax3 ...................................
Share of HSBC’s pre-tax profits3 .....
Cost:income ratio1 ...........................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets .......................................
Customer accounts ...........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills
and other eligible bills ................
Deposits by banks .........................
Goodwill amortisation:
1 excluded from (1) above ..............
2 excluded from (2) above ..............
3 excluded from (3) above ..............
4 Third party only.
108
South America
Profit/(loss) before tax excluding goodwill amortisation
Personal Financial Services ..........................................................
Brazil ...............................................................................................
Argentina .........................................................................................
Other ...............................................................................................
Commercial Banking ....................................................................
Brazil ...............................................................................................
Argentina .........................................................................................
Other ...............................................................................................
Corporate, Investment Banking and Markets .............................
Brazil ...............................................................................................
Argentina .........................................................................................
Other ...............................................................................................
Private Banking .............................................................................
Brazil ...............................................................................................
Argentina .........................................................................................
Other ...............................................................................................
Other ..............................................................................................
Brazil ...............................................................................................
Argentina .........................................................................................
Other ...............................................................................................
Total1 ..............................................................................................
Brazil ...............................................................................................
Argentina .........................................................................................
Other ...............................................................................................
1 Goodwill amortisation excluded:
– arising on subsidiaries .............................................................
– arising on associates and joint ventures ...................................
– total ..........................................................................................
Year ended 31 December
2003
US$m
2002
US$m
2001
US$m
(27)
(31)
3
1
99
65
34
–
(24)
49
(72)
(1)
(2)
(1)
–
(1)
80
1
83
(4)
126
83
48
(5)
11
–
11
(33)
11
(45)
1
79
54
27
(2)
32
125
(101)
8
(12)
(1)
–
(11)
(100)
(62)
(91)
53
(34)
127
(210)
49
24
–
24
62
34
29
(1)
(14)
46
(59)
(1)
185
146
29
10
(3)
(2)
–
(1)
(1,232)
(88)
(1,151)
7
(1,002)
136
(1,152)
14
14
–
14
109
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) before tax
South America
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 and intangible asset amortisation ...................................
Goodwill amortisation ........................................................................
Operating expenses .............................................................................
Operating profit/(loss) before 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/(loss) ......................................................................
Share of operating profit in associated undertakings ...........................
Gains/(losses) on disposal of investments and tangible fixed assets ...
Profit/(loss) on ordinary activities before tax .................................
Share of HSBC’s pre-tax profits (excluding goodwill amortisation) ...
Share of HSBC’s pre-tax profits .........................................................
Cost:income ratio (excluding goodwill amortisation) .........................
Period-end staff numbers (full-time equivalent) .................................
Selected balance sheet data1
Loans and advances to customers (net) ..............................................
Loans and advances to banks (net) .....................................................
Debt securities, treasury bills and other eligible bills .........................
Total assets .........................................................................................
Deposits by banks ...............................................................................
Customer accounts .............................................................................
1 Third party only.
2003
US$m
640
3
338
136
201
678
1,318
(584)
(124)
(327)
(40)
(1,075)
(11)
(1,086)
232
(58)
2
(9)
(62)
105
1
9
115
%
0.9
0.9
81.6
28,292
US$m
4,982
1,922
2,151
12,549
828
6,945
Year ended 31 December
2002
US$m
645
15
324
147
110
596
1,241
(572)
(113)
(330)
(45)
(1,060)
(24)
(1,084)
157
(117)
(31)
(68)
(36)
(95)
–
37
(58)
%
(0.3)
(0.6)
85.4
25,522
US$m
3,028
1,665
1,450
8,491
661
4,863
2001
US$m
1,065
12
494
18
356
880
1,945
(836)
(153)
(435)
(73)
(1,497)
(14)
(1,511)
434
(927)
–
(520)
(1)
(1,014)
1
(3)
(1,016)
%
(11.4)
(12.7)
77.0
27,519
US$m
4,156
2,252
3,386
13,097
1,338
7,523
110
Year ended 31 December 2003 compared with
year ended 31 December 2002
2003 was a year of recovery across the region
following the economic and political uncertainty
experienced during 2002.
In Brazil, the turnaround in 2003 was
noteworthy. After a difficult start, the new
Government demonstrated prudent control of
macroeconomic policy including, importantly,
inflation. A difficult and costly disinflationary
programme was put into effect with the central
bank’s reference rate reaching 26.5 per cent in June.
The programme was successful within a surprisingly
short time horizon. Inflation fell from 17.3 per cent
to 9.3 per cent, and reference interest rates ended the
year at 16.5 per cent. Actions to reduce Brazil’s two
key vulnerabilities, its fiscal and external deficits,
were effective. On the fiscal front, Brazil’s Congress
approved public sector social security reforms and
2003 was the fifth consecutive year IMF fiscal
targets were achieved. On the external front, Brazil is
expected to register its first current account surplus
in over a decade.
Buoyed by a surge in exports and large trade
surpluses, the Argentinian economy recovered at a
fast pace. Inflation remained under control and the
Argentine peso appreciated from 3.60 to the US
dollar in May 2002 to 2.93 at December 2003.
Unemployment fell and tax revenues and collections
increased.
Fundamental legal uncertainty persists,
particularly regarding the position of pension fund
assets following pesification, the ability of utilities to
raise prices, and the position of holders of pesified
and defaulted government bonds. Although the
financial system is emerging slowly from near
collapse, questions about the sustainability of the
recovery persist and a resolution of the historic
sovereign debt default is a pre-condition for stability
and sustained new investment.
HSBC’s operations in South America reported a
pre-tax profit of US$115 million, compared with a
loss of US$58 million in 2002. Excluding goodwill
amortisation, pre-tax profit was US$126 million,
compared with a loss of US$34 million in 2002. Key
to this improvement was a turnaround in Argentina,
from a loss of US$210 million to a modest profit of
US$48 million. This followed the release of part of
the general provision previously raised against
customer advances, as the economy improved and, in
December 2003, compensation bonds with a face
value of US$109 million were received from the
Argentine government. These have been included at
an estimated fair value of US$63 million in the
results of the Other segment. Goodwill amortisation
at US$11 million was US$13 million lower than in
2002, which included a goodwill write-off relating to
the purchase of insurance subsidiaries.
The commentaries that follow are based on
constant exchange rates.
In Personal Financial Services there was a
pre-tax loss, before goodwill amortisation, of
US$27 million, an improvement against the loss
suffered in 2002. The acquisition of Lloyds TSB
Group’s businesses and assets in Brazil contributed
US$7 million to this overall improvement. Lending
growth was stronger in Brazil, while higher bad debt
recoveries benefited operations in Argentina.
Net interest income was broadly in line with last
year. The benefit from higher personal lending
balances in Brazil was offset by lower interest
income from the insurance businesses in Argentina,
largely due to lower CER, an inflation adjustment
applied to all pesified loans.
Other operating income of US$316 million was
51 per cent higher than in 2002, largely due to a
strong performance in Brazil. Growth in customer
lending volumes generated an increase in credit-
related fee income and account service fees.
Following strong marketing support, fee income
from cards in Brazil grew by 24 per cent, driven by a
30 per cent increase in cards in circulation to
1.4 million. Other operating income also improved in
Argentina, reflecting a strong performance in the
insurance business.
Operating expenses, excluding goodwill
amortisation, were broadly in line with 2002. In
Brazil, costs increased by 15 per cent, largely due to
higher staff costs, notably labour claims, together
with higher costs from marketing initiatives taken in
2003 and an increase in the transactional taxation
charge on higher operating income. Costs in
Argentina were significantly lower than prior year,
mainly due to lower severance costs.
The provision for bad and doubtful debts of
US$138 million was 50 per cent higher than in 2002.
In Brazil, specific provisions increased,
predominantly in the first half of 2003, reflecting the
prevailing economic conditions. High inflation,
111
H S B C H O L D I N G S P L C
Financial Review (continued)
interest rates and unemployment reduced customers’
repayment capacity. However, credit quality began to
show signs of improvement in the second half of the
year.
Commercial Banking in South America
contributed pre-tax profit, before amortisation of
goodwill, of US$99 million, 23 per cent higher than
in 2002.
Net interest income increased by 39 per cent, to
US$168 million. In Argentina, net interest income
benefited from lower Argentine peso rates paid on
deposits and recoveries of interest suspended on non-
performing loans. In Brazil, successful marketing
campaigns led to a significant growth in income
from overdrafts and working capital products. Other
growth areas included discounted receivables and
vehicle leasing, supported by the introduction of pre-
approved facilities.
Other operating income increased by 23 per cent
to US$115 million. Credit related fee income in
Brazil increased, reflecting the expansion in the
current account customer base by 8 per cent. Fees
earned on foreign exchange rose from a higher
volume of transactions. In response to aggressive
pricing by competitors, the introduction of a new fee
pricing structure in the first half of 2003 stimulated
an increase in the volume of loan fees and funds
under management leading to higher fee income.
At US$173 million, total operating expenses,
before goodwill amortisation, were 25 per cent
higher than 2002. The cost increases partly reflected
increased business volumes as well as the impact of
various initiatives which had been delayed pending
evidence of improvement in economic conditions.
These included increased advertising, the
implementation of a sales structure to support
business development, and investment in new
products and delivery channels. These were partly
funded by the centralisation of support processes
which resulted in a reduction of associated costs and
reduced the administrative workload for relationship
managers, leaving them more time for their
customers.
Corporate, Investment Banking and Markets
reported a loss, before amortisation of goodwill, of
US$24 million, broadly in line with 2002, at constant
exchange rates. Profit before tax and amortisation of
goodwill in Brazil was US$49 million, compared
with US$104 million in 2002. Argentina recorded a
112
loss of US$72 million compared with a loss of
US$143 million in 2002.
Net interest expense was US$51 million, an
increase of 16 per cent compared with 2002. In
Brazil, net interest income decreased due to lower
spreads in Global Markets, partly offset by the
impact of downward yield curve movements which
allowed the funding of long positions at lower rates.
In corporate banking, a lack of attractive risks
restricted lending growth. In Argentina, the lower
cost of funding non-performing assets and a lower
level of suspended interest resulted in a decrease in
net interest expense.
Dealing profits were broadly in line with 2002.
In Brazil, higher dealing profits reflected gains
resulting from a fall in interest rates. Brokerage,
custody and clearing businesses also grew
significantly, taking advantage of market
opportunities. These factors were offset in part by
lower foreign exchange income in Argentina.
Staff costs were higher than in 2002, mainly in
Brazil, reflecting improved performance in specific
products.
Provisions for bad and doubtful debts rose in
difficult market conditions. Higher interest rates,
currency weakness, and a reduced availability of
foreign currency funding all contributed to problems
encountered by corporate customers in the first half
of 2003 in Brazil. Although the situation improved
during the year, new specific provisions were raised
against two sizeable corporate accounts as a
consequence of business failure in one case and
fraud in the other.
Private Banking’s pre-tax loss, before goodwill
amortisation, of US$2 million compared with a loss
of US$12 million in 2002. A lower bad debt charge
reflected an improvement in the overall credit quality
of the segment.
Within the Other customer group, there was a
US$113 million release of general provision raised in
respect of Argentina. This release followed a period
of improved market conditions and collections
within the lending portfolios.
Provisions for contingent liabilities and
commitments reflected court decisions (amparos)
relating to formally frozen US dollar denominated
customer deposits required to be settled at the
prevailing market rate.
Year ended 31 December 2002 compared with
year ended 31 December 2001
2002 was a year of uncertainty in both Brazil and
Argentina. Although the Argentine government had
been in talks with the International Monetary Fund
and World Bank for over a year, an agreement on the
resumption of lending had yet to be reached. The
Argentine economy 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 were expected to take place in
the second quarter of 2003.
Brazil avoided major fall-out from the collapse
of the Argentine economy and steadily improved its
current account position by growing its trade surplus
with the rest of the world. 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, lower
interest rates and a stronger currency towards the end
of 2002.
HSBC’s operations in South America reported
an operating profit before provisions, of
US$157 million, compared with US$434 million in
2001. Excluding goodwill amortisation, operating
profit before provisions was US$181 million,
compared with US$448 million in 2001. At constant
exchange rates, operating profit before provisions
and excluding goodwill amortisation was 43 per cent
lower than in 2001. Losses before tax excluding
goodwill amortisation improved substantially to
US$34 million, compared with a loss of
US$1,002 million in 2001. Goodwill amortisation
was US$24 million compared with US$14 million.
The increase reflects the write-off by HSBC of the
remaining goodwill that arose on the purchase of its
insurance subsidiaries.
The commentaries that follow are based on
constant exchange rates.
In Personal Financial Services there was a
pre-tax loss, before goodwill amortisation, of
US$33 million, compared with a profit of
US$62 million in 2001.
Net interest income of US$539 million was
31 per cent higher than in 2001. Competitive pricing
initiatives and targeted marketing campaigns led to
strong growth in personal lending products in Brazil,
particularly personal overdrafts and credit cards. In
Argentina, margins deteriorated reflecting the effect
of the severe economic conditions and the impact of
non-performing loans.
Other operating income decreased by 12 per
cent compared with 2001. In Brazil, the decline in
fee income reflected competitive pricing initiatives
and the loss of revenue from account fees, as the
Brazilian government had outlawed the levying of
fees on certain accounts. This was partly offset by
strong growth in credit-related fee income. Net
revenues from the insurance businesses in Argentina
fell considerably as 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.
Operating expenses, before goodwill
amortisation, rose by 33 per cent to US$691 million,
as savings from a reduction in headcount were offset
by related severance payments. Staff costs were
higher in Brazil, partly due to an increase in
inflation-linked pension costs and an industry-wide
union-agreed salary increase. Other administration
expenses increased as a result of higher levels of
transactional taxation, including an additional tax
imposed on foreign companies.
The provision for bad and doubtful debts of
US$100 million was slightly lower than in 2001.
New provisions raised in Brazil to reflect the
increased level of personal lending were more than
offset by a number of releases, particularly in the
credit card portfolio, reflecting the bank’s pro-active
management of its personal loan book.
Commercial Banking in South America
contributed pre-tax profit, excluding goodwill
amortisation, of US$79 million, compared with a
small reported loss in 2001.
Net interest income was broadly in line with
2001. Other operating income increased, reflecting
strong growth in credit-related fee income in Brazil.
Total operating expenses before goodwill
amortisation rose by 36 per cent, to US$147 million,
in 2002. Staff costs increased, mainly due to higher
pension and salary costs in Brazil and severance
payments in Argentina.
113
H S B C H O L D I N G S P L C
Financial Review (continued)
The favourable movement in provisions for bad
and doubtful debts reflected improved economic
conditions in Argentina together with releases in
Brazil.
Corporate, Investment Banking and Markets
reported pre-tax profit, excluding goodwill
amortisation, of US$32 million.
In Brazil, profit before tax, excluding goodwill
amortisation was US$125 million, an increase of 15
per cent at constant exchange rates. In Argentina,
loss before tax was US$101 million, compared with
a small profit in 2001.
The net interest expense was attributable to the
high cost of funding non-performing assets in
Argentina, and a reduction in government bond
securities in Brazil, as HSBC sought to minimise its
exposure in the uncertain economic climate. Dealing
profits increased, primarily due to income from
interest rate derivatives trading and foreign exchange
trading in Brazil. In Argentina, foreign exchange
dealing profits improved as some resumption in
activity was permitted. Fee income declined in
investment banking services in Brazil.
Operating expenses rose in constant currency
terms, reflecting higher pension contributions in
Brazil and severance payments in Argentina.
Provisions for bad and doubtful debts mainly
reflected a specific provision in Brazil against a
corporate exposure.
Private Banking’s operations recorded a pre-
tax loss, before goodwill amortisation, of
US$12 million compared with a loss of US$3 million
in 2001. Adverse economic conditions in Uruguay,
combined with the deterioration in the Argentine
peso, were primarily responsible for the increased
loss.
Within the Other customer group, provisions for
contingent liabilities and commitments reflected
court decisions (amparos) which required formerly
frozen US dollar denominated customer deposits to
be settled at the prevailing market rate.
114
Profit/(loss) excluding goodwill amortisation by customer group
Year ended 31 December 2003
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination
US$m
Other
US$m
South America
Net interest income .........................
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
Operating income ...........................
Operating expenses excluding
goodwill amortisation1...................
Operating profit before
provisions1.....................................
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)1 ...................
Share of operating profit in
associates2 .....................................
Gains/(losses) on disposal of
investments and tangible fixed
assets..............................................
Profit/(loss) on ordinary activities
before tax3 ....................................
Share of HSBC’s pre-tax profits3.......
Cost:income ratio1 ............................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets .......................................
Customer accounts ...........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills
and other eligible bills ...............
Deposits by banks .........................
Customer accounts ........................
Goodwill amortisation:
1 excluded from (1) above ..............
2 excluded from (2) above ..............
3 excluded from (3) above ..............
4 Third party only.
499
–
245
2
69
316
815
168
–
94
7
14
115
283
(51)
–
54
118
36
208
157
(706)
(173)
(113)
109
(138)
10
–
(17)
(36)
–
9
(27)
%
(0.2)
86.6
110
(11)
–
–
–
99
–
–
99
%
0.7
61.1
44
(26)
–
–
(44)
(26)
1
1
(24)
%
(0.2)
72.0
US$m
US$m
US$m
2,224
4,211
2,035
852
1,357
1,429
4
–
4
–
–
–
1,679
5,505
3,108
1,384
1,311
593
6
–
6
2
–
14
1
1
16
18
(21)
(3)
1
–
–
–
(2)
–
–
(2)
%
0.0
116.7
US$m
16
70
61
22
3
(69)
8
119
61
83
(100)
(17)
116
(8)
(9)
(1)
81
–
(1)
80
%
0.6
120.5
US$m
211
1,406
312
Total
US$m
640
3
338
136
201
678
1,318
–
–
–
–
(38)
(38)
(38)
38
(1,075)
–
–
–
–
–
–
–
–
–
243
(58)
2
(9)
(62)
116
1
9
126
%
0.9
81.6
US$m
4,982
12,549
6,945
–
–
–
1
–
1
11
–
11
115
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group (continued)
Year ended 31 December 2002
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
539
–
218
10
11
239
778
126
–
87
9
4
100
226
(5)
1
67
120
(18)
170
165
Private
Banking
US$m
6
–
12
(3)
–
9
15
Inter-
segment
elimination
US$m
–
–
–
–
(22)
(22)
(22)
Other
US$m
(21)
14
(60)
11
135
100
79
Total
US$m
645
15
324
147
110
596
1,241
(691)
(147)
(106)
(17)
(121)
22
(1,060)
87
(100)
(19)
–
(1)
(33)
–
(33)
%
(0.3)
88.8
79
–
–
–
–
79
–
79
%
0.8
65.0
US$m
US$m
1,094
2,062
1,366
505
704
934
18
–
59
(15)
–
–
(22)
22
10
32
%
0.3
64.2
US$m
1,401
4,273
2,477
987
977
609
4
(2)
(7)
–
–
–
(9)
(3)
(12)
%
(0.1)
113.3
US$m
28
37
44
(42)
5
(12)
(68)
(13)
(130)
30
(100)
%
(1.0)
153.2
US$m
–
1,415
42
–
–
–
–
–
–
–
–
181
(117)
(31)
(68)
(36)
(71)
37
(34)
%
(0.3)
85.4
US$m
3,028
8,491
4,863
1
1
24
South America
Net interest income .........................
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
Operating income ...........................
Operating expenses excluding
goodwill amortisation1....................
Operating profit/(loss) before
provisions1.....................................
Provisions for bad and doubtful
debts ..............................................
Provisions for contingent liabilities
and commitments ..........................
Loss from foreign currency
redenomination in Argentina ..........
Amounts written off fixed asset
investments ...................................
Operating profit/(loss)1 ...................
Gains/(losses) on disposal of
investments and tangible fixed
assets..............................................
Profit/(loss) on ordinary activities
before tax1 ....................................
Share of HSBC’s pre-tax profits .......
Cost:income ratio .............................
Selected balance sheet data2
Loans and advances to customers
(net) ...............................................
Total assets .......................................
Customer accounts ...........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills and
other eligible bills .......................
Deposits by banks .........................
Goodwill amortisation:
1 excluded from (1) above ..............
2 Third party only.
116
Year ended 31 December 2001
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination
US$m
Other
US$m
Operating income ...........................
1,074
South America
Net interest income .........................
Dividend income ..............................
Net fees and commissions ................
Dealing profits ..................................
Other income ....................................
Other operating income ....................
Operating expenses excluding
goodwill amortisation1...................
Operating profit /(loss) before
provisions1 ....................................
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)1 ...................
Share of operating profit in
associates2……………..
Gains/(losses) on disposal of
investments and tangible fixed
assets..............................................
Profit/(loss) on ordinary activities
before tax3 ....................................
Share of HSBC’s pre-tax profits3 ......
Cost:income ratio1 ............................
Selected balance sheet data4
Loans and advances to customers
(net) ...............................................
Total assets .......................................
Customer accounts ...........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net) .................................
Debt securities, treasury bills and
other eligible bills .......................
Deposits by banks .........................
Goodwill amortisation:
1 excluded from (1) above ..............
2 excluded from (2) above ..............
3 excluded from (3) above ..............
4 Third party only.
220
–
127
4
9
140
360
264
–
84
3
17
104
368
8
–
9
3
–
12
20
(854)
(246)
(153)
(17)
220
114
(153)
(128)
–
–
–
215
(38)
–
–
–
3
(8)
–
–
–
7
12
(53)
2
198
159
166
(270)
(104)
(600)
–
(520)
(1)
(14)
177
(5)
(1,225)
–
–
(14)
%
(0.2)
68.3
–
8
185
%
2.1
41.6
1
1
–
(7)
(3)
(1,232)
%
–
85.0
%
(14.0)
162.7
566
–
327
6
175
508
–
–
–
67
–
(5)
62
%
0.7
79.5
US$m
US$m
US$m
US$m
US$m
98
249
351
(600)
1,827
48
1,619
2,525
2,360
1,143
1,298
1,261
7
–
7
–
–
–
1,896
7,198
3,503
1,668
2,936
1,205
3
–
3
Total
US$m
1,065
12
494
18
356
880
1,945
–
–
–
–
(43)
(43)
(43)
43
(1,497)
–
–
–
–
–
–
–
–
–
448
(927)
–
(520)
(1)
(1,000)
1
(3)
(1,002)
%
(11.4)
77.0
US$m
4,156
13,097
7,523
–
–
–
4
–
4
14
–
14
117
H S B C H O L D I N G S P L C
Financial Review (continued)
Critical accounting policies
Introduction
The results of HSBC Holdings 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 described in detail in Note 2 in the ‘Notes on the
Financial Statements’ on pages 239 to 366 of the
Annual Report and Accounts 2003.
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 (‘FRS’) 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 in the ‘Notes on the Financial
Statements’ on pages 327 to 365.
The accounting policies that are deemed critical
to the Group’s UK GAAP results and financial
position, in terms of materiality and the degree of
judgement and estimation involved, 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) in the ‘Notes on the Financial Statements’
on pages 241 to 243 of the Annual Report and
Accounts 2003.
Charges for provisions for bad and doubtful
debts are reflected in HSBC’s profit and loss account
under the caption ‘Provision for bad and doubtful
debts’. Any increase in these provisions has the
effect of lowering HSBC’s profit on ordinary
activities by a corresponding amount (while any
decrease in provisions or release of provisions would
have the opposite effect).
Specific provisions
Specific provisions are established either on a
118
portfolio basis or on a case-by-case basis depending
on the nature of the exposure and the manner in
which risks inherent in that exposure are managed. In
addition, provisions for the sovereign risk inherent in
cross-border credit exposures are established for
certain countries; this element is not currently
significant.
When specific provisions are raised on a
portfolio basis, the most important factors in
calculating the quantum of the required provision
are:
•
•
the roll or loss rates set for each category; and
the periods embedded in the calculations of roll
and loss rates which are designed to reflect fully
but not excessively losses inherent at the
reporting date and not future losses.
The factor over which management has most
discretion are the periods used in the various roll and
loss rate calculations. If management were to take a
more conservative view and increase the embedded
periods, this would have the effect of increasing the
provisions charged and lowering HSBC’s profit on
ordinary activities.
The portfolio basis is applied to overdue
accounts in Household’s consumer portfolios and in
the following in the rest of HSBC:
•
•
•
small corporate accounts (typically less than
US$15,000) in certain countries;
residential mortgages less than 90 days overdue;
and
credit cards and other unsecured consumer
lending products.
When establishing specific provisions on a
case-by-case basis, the most important factors are:
•
•
•
•
an assessment of the ability of the borrower to
trade profitably and generate cash flow to repay
or refinance outstanding debt obligations;
the amount and timing of cashflows forecast to
be received from the borrower;
the enforceability of any security held and the
amount which may be recovered from its sale;
and
in complex situations the hierarchy of competing
claims against the borrowers’ cash flows and the
impact of litigation on the timing and direction
of ultimate cash settlements.
In many cases, the determination of these factors
will be judgemental, because either the security may
not be readily marketable or the cashflows will
require an assessment of the customer’s future
performance or the impact of litigation. HSBC’s
practice is to make estimates against these factors
and to review and update them regularly. If
management were to take a more cautious view of
the customer’s future cash flows (either by being less
optimistic of the ability of the customer to generate
profits or general economic conditions) or the
availability or value of any security, the provision
charge would be higher and HSBC’s profit on
ordinary activities would be lower.
This method of determining provisions is
applied to most corporate loans and, with the
exception of Household, which utilises portfolio
analysis, to residential mortgages 90 days or more
overdue.
HSBC has no individual loans where changes in
the underlying factors upon which specific bad and
doubtful debt provisions have been established could
cause a material change to the Group’s reported
results.
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 by taking into account
the structure and risk characteristics of each
company’s loan portfolios. Provisions held against
homogenous portfolios of assets which are not
overdue and which have neither been restructured
nor are in bankruptcy are classified as general rather
than specific.
The most important factors in determining
general loan loss provisions are:
•
•
historical roll and loss rates for each separately
identified portfolio;
the period between losses occurring and the
establishment of a specific provision for this loss
(which in general is between four and twelve
months); and
• management’s judgement as to whether, in
current economic and credit conditions, probable
inherent losses are likely to be greater or less than
those suggested by historical experience.
The main areas of judgement are in determining
the periods during which latent losses emerge and
assessing whether current economic conditions are
likely to produce credit default rates and loss severity
in line with historical precedent. These factors are
kept under 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.
If management were to take a more conservative
view of economic conditions or increase the loss
emergence periods, the provisions charged would
increase and HSBC’s profit on ordinary activities
would be lower.
Goodwill impairment
HSBC’s accounting policy for goodwill is described
in Note 2(e) in the ‘Notes on the Financial
Statements’ on page 244 of the Annual Report and
Accounts 2003.
Amortisation of goodwill is recorded on HSBC’s
profit and loss account under the caption
‘Depreciation and Amortisation – Goodwill’. Any
impairments or reductions of goodwill are also
charged to the profit and loss account (hence
reducing HSBC’s operating profit on ordinary
activities after tax by a corresponding amount) and
also result in a corresponding reduction of
‘Goodwill’ on the balance sheet.
In accordance with the requirements of FRS 10
‘Goodwill and intangible assets’, HSBC reviews
goodwill which has arisen on the acquisition of
subsidiary undertakings, joint ventures and interests
in associates at the end of the first full year after an
acquisition, and whenever there is an indication that
impairment may have taken place. Impaired goodwill
is accounted for in accordance with FRS 11
‘Impairment of fixed assets and goodwill’.
Indications of impairment include any events or
changes in circumstance that cast doubt on the
recoverability of the carrying amount of goodwill.
If management believes that a possible
impairment is indicated in respect of a particular
entity, the valuations of each of the entity’s relevant
‘Income Generating Units’ (‘IGUs’) are compared
with their respective carrying values (including
119
H S B C H O L D I N G S P L C
Financial Review (continued)
related goodwill). The IGU valuations are derived
from discounted cashflow models. Significant
management judgement is involved in two elements
of the process of identifying and evaluating goodwill
impairment.
First, the cost of capital assigned to an individual
IGU and used to discount its future cashflows can
have a significant effect on its valuation. The cost of
capital percentage is generally derived from an
appropriate capital asset pricing model, which itself
depends on a number of financial and economic
variables which are established on the basis of
management’s judgement.
Second, management judgement is required in
deriving discounted cashflow valuations of IGUs.
These valuations are sensitive to the cashflows in the
initial periods for which detailed forecasts are
available, and to assumptions regarding the long-
term sustainable growth rates of cashflows thereafter.
While the acceptable range within which underlying
assumptions can be applied is governed by the
requirement for resulting forecasts to be compared
with actual performance and verifiable economic
data in future years, the cashflow forecasts
necessarily reflect management’s view of future
business prospects.
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 an estimated fair value that is lower than
the carrying value of the IGU, an impairment of
goodwill will be recorded and HSBC’s profit on
ordinary activities will be lower.
Valuation of unquoted and illiquid debt and
equity securities
HSBC’s accounting policy for these instruments is
described in Note 2(c) in the ‘Notes on the Financial
Statements’ on page 243 in the Annual Report and
Accounts 2003.
HSBC carries debt and equity securities held for
trading purposes at fair value. For those debt and
equity securities not held for trading purposes, and
carried in the accounts at amortised historical cost,
consideration as to whether any such asset should be
written down to reflect a permanent impairment
takes into account the fair value of the relevant
security. Changes in the value of securities held for
120
trading purposes are reflected in ‘Dealing profits’
and hence directly impact HSBC’s profit on ordinary
activities. Any permanent impairment in the value of
debt and equity securities not held for trading
purposes is reported in ‘Amounts written off fixed
asset investments’ and hence reduces HSBC’s profit
on ordinary activities.
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 look to a valuation
of comparable securities for which an independent
price can be established or use a discounted cashflow
model (particularly for debt securities) or model the
valuation of complex illiquid securities based on a
components approach where independent pricing is
available for the underlying components.
The main factors which management considers
when applying a cashflow model are:
•
•
the likelihood and expected timing of future
cashflows on the instrument. These cashflows
are usually governed 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.
When valuing instruments by reference to
comparable securities, management takes into
account the maturity, structure and rating of the
security to which the position held is being
compared.
When valuing instruments on a model basis
using the fair value of underlying components,
management additionally takes into account model
tracking error and liquidity.
In assessing the valuation of securities,
management also takes account of the size of the
position held relative to market liquidity and
prevailing market conditions. When considered
appropriate, the assessed fair value of the securities
is reduced to reflect the amount which management
estimates could be realised on their sale.
Changes in any of the assumptions used in the
management valuation will give rise to changes in
the recorded fair value of unquoted securities where
the securities affected are carried in the accounts at
fair value. For securities carried at amortised cost a
permanent diminution in value may result from
changes in their estimated fair value if management
changes its assumptions regarding the above
variables. In such circumstances, it will also be
necessary for management to exercise judgement as
to whether or not the indicative change in estimated
fair value arising from revisions to the underlying
valuation assumptions are only temporary.
HSBC has no individual unquoted or illiquid
securities where changes in assumptions used in the
management valuation of such securities could cause
a material change to the Group’s reported results.
UK GAAP compared with US GAAP
Net income
US GAAP ........................
UK GAAP .......................
Shareholders’ equity
US GAAP ........................
UK GAAP .......................
2003
US$m
7,231
8,774
80,251
74,473
2002
US$m
4,900
6,239
2001
US$m
4,911
4,992
55,831
51,7651
48,444
45,6881
1 Figures for 2002 and 2001 have been restated to reflect the
adoption of UITF Abstracts 37 ‘Purchases and sales of own
shares’, and 38 ‘Accounting for ESOP trusts’, details of
which are set out in Note 1 in the ‘Notes on the Financial
Statements’ on pages 239 to 240.
Differences in net income and shareholders’ equity
are explained in Note 50 of the ‘Notes on the
Financial Statements.
Future accounting developments
The Accounting Standards Board (‘ASB’) (UK
GAAP) and the Financial Accounting Standards
Board (‘FASB’) (US GAAP) have issued the
following accounting standards, which become fully
effective in future financial statements.
UK GAAP
FRS 17 ‘Retirement benefits’ was issued in
December 2000. If applied in full, FRS 17 would
replace SSAP 24 ‘Accounting for pension costs’.
There are also amendments to other accounting
standards and UITF Abstracts.
Under FRS 17 as originally issued, the primary
statement impact was to have been recognised 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.
As such, it will be superseded by the transition to
International Financial Reporting Standards.
FRS 17, if adopted in full, would require 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.
In the period until full implementation the
transitional disclosures required by FRS 17 are
included in the ‘Notes on the Financial Statements’
in the Annual Report and Accounts 2003. The effect
on reserves at 31 December 2003, if the FRS 17
pension liability were to be recognised, would be a
reduction of US$2,398 million.
US GAAP
Statement of Financial Accounting Standards
(‘SFAS’) 132 (revised 2003) ‘Employers’
disclosures about pensions and other post-retirement
benefits’ was issued in December 2003. This
statement is effective for HSBC’s UK (domestic)
pension and post-retirement benefit schemes for
fiscal years ending after 15 December 2003, except
for future benefit payments, which together with all
non-domestic schemes, is required for fiscal years
ending after 15 June 2004. The disclosures in respect
of HSBC’s UK (domestic) pension schemes are set
out in Note 50 of the ‘Notes on the Financial
Statements’.
In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities
(‘VIEs’) (FIN 46). FIN 46 requires a VIE to be
consolidated by a company if that company’s
variable interests absorb a majority of the VIE’s
expected losses, or is entitled to receive a majority of
VIEs residual returns, or both. FIN 46 increases
required disclosures by a company consolidating a
VIE and also requires disclosures about VIEs that the
company is not required to consolidate, but in which
it has a significant variable interest. HSBC has
adopted the requirements of FIN 46 at
31 December 2003 for all entities created after
121
H S B C H O L D I N G S P L C
Financial Review (continued)
31 January 2003. As a foreign private issuer that
does not file quarterly accounts, HSBC is permitted
to defer adoption of FIN 46 for entities created
before 1 February 2003 until 2004.
A modified version of FIN 46 was issued in
December 2003 by the FASB (‘FIN 46R’). FIN 46R
addresses certain implementation issues that arose
under FIN 46 and changes some of the criteria used
to determine whether HSBC is the primary
beneficiary of an entity. HSBC has applied FIN 46R
to its assessment of certain entities where the impact
of the modifications in FIN 46R is known. However,
HSBC is still assessing the impact of FIN 46R on
other entities. HSBC is required to adopt FIN 46R
for all interests in VIEs for accounting periods
ending after 15 March 2004.
Further information regarding HSBC’s interest
in VIEs under FIN 46 is provided in Note 50 of the
‘Notes on the Financial Statements’.
The American Institute of Certified Public
Accountants (‘AICPAs’) Accounting Standards
Executive Committee issued Statement of Position
(‘SOP’) 03-1, ‘Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts’
on 7 July 2003. The SOP provides guidance on
accounting and reporting by insurance enterprises for
certain non-traditional long-duration contracts and
for separate accounts. SOP 03-1 is effective for
financial statements occurring in fiscal years
beginning after 15 December 2003. Restatement of
previously issued annual financial statements is not
permitted. HSBC is still assessing the impact of this
SOP on its US GAAP financial statements.
In December 2003, the AICPA released SOP 03-
3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer: The SOP addresses
accounting for differences between contractual cash
flows and cash flows expected to be collected from
an investor’s initial investment in loans or debt
securities acquired in a transfer if those differences
122
are attributable to credit quality. This SOP is
effective for loans acquired in accounting periods
beginning after 15 December 2004. HSBC is still
assessing the impact of this SOP on its US GAAP
financial statements.
Transition to International Financial
Reporting Standards (‘IFRS’)
HSBC has established a project steering committee
to co-ordinate the transition to IFRS and since 2002
has been following a transition plan that has three
phases: preliminary assessment, detailed impact
study and implementation.
i. Preliminary assessment – this phase began in
2002 and was completed in early 2003. It
involved identification of GAAP differences and
areas where business practices are affected
giving rise to significant systems implications.
ii. Detailed impact study – this phase began at the
end of 2002 and is currently ongoing as new
standards and amendments to existing standards
evolve. The publication of IAS 32
‘Financial Instruments: Disclosure and
Presentation’ and IAS 39 ‘Financial Instruments:
Recognition and Measurement’ (except for the
proposals regarding fair value hedge accounting
for a portfolio hedge of interest rate risk) in
December 2003 enables a significant proportion
of the work in this phase to be progressed
towards completion.
iii. Implementation process – this phase began early
in 2004 and will include the running of a
separate IFRS financial reporting consolidation
system and amendments to systems within key
business areas.
Towards the end of 2004, HSBC intends to file
with the US Securities and Exchange Commission a
summary of the applicable significant differences
between UK GAAP and IFRS. In May 2005, HSBC
intends to file all restated comparative data under
IFRS.
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 131.
Assets
Average
balance
2003
Interest
income
US$m US$m
Short-term funds and loans to banks
Europe
Hong Kong
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Hang Seng Bank .....................
The Hongkong and Shanghai
22,534
3,394
17,519
10,172
Banking Corporation ..........
20,735
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
6,893
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East ........
North America HSBC USA Inc .......................
HSBC Bank Canada ...............
HSBC Markets Inc. .................
HSBC Mexico1 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
Other operations .................................................
693
1,925
1,808
1,711
2,535
4,199
1,237
231
7,206
657
75
573
212
517
138
17
29
35
31
20
214
242
2
159
102,792
2,921
Year ended 31 December
2002
Interest
income
% US$m US$m
Yield
Yield A
2001
Interest
income
% US$m US$m
Average
balance
2.92
16,691
2.21
3.27
2.08
5,500
12,650
15,205
2.49
17,776
595
144
647
409
496
3.56
13,841
2.62
5.11
2.69
10,529
12,600
19,285
803
488
787
905
2.79
23,455
1,129
4.81
2.00
6,686
187
2.80
5,710
547
1,857
2,248
1,291
3,756
421
1,065
164
8,577
15
39
63
26
48
32
177
14
328
2.74
2.10
2.80
2.01
1.28
7.60
16.62
8.54
1,346
1,846
3,845
1,574
3,136
–
1,306
746
3.82
10,977
2.45
1.51
1.94
1.81
0.79
5.10
19.56
0.87
2.21
2.84
268
43
78
179
64
85
–
206
39
710
94,434
3,220
3.41
110,196
5,784
Yield
%
5.80
4.63
6.25
4.69
4.69
3.19
4.23
4.66
4.07
2.71
–
15.77
5.23
6.47
5.25
Loans and advances to customers
Europe
HSBC Bank plc ...................... 130,178
HSBC Private Banking
6,739
5.18
105,456
5,865
5.56
89,987
6,056
6.73
Holdings (Suisse) S.A. .......
CCF ........................................
Household1 ..............................
Hang Seng Bank .....................
The Hongkong and Shanghai
3,385
37,456
5,934
29,138
79
1,897
671
938
2.33
5.06
11.31
3.22
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
Banking Corporation ..........
41,517
1,517
3.65
39,040
1,713
4.39
37,142
2,324
6.26
The Hongkong and Shanghai
Banking Corporation ..........
28,594
1,457
5.10
22,898
1,284
5.61
20,343
1,351
6.64
Hong Kong
Rest of Asia-
Pacific
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East ........
North America HSBC USA Inc .......................
Household1 ..............................
HSBC Bank Canada ...............
HSBC Markets Inc. .................
HSBC Mexico1 .......................
South America Brazilian operations.................
HSBC Bank Argentina S.A. ...
4,567
5,725
45,727
81,973
18,791
3,515
9,103
2,930
792
Other operations .................................................
20,284
266
352
2,256
9,631
982
24
862
1,044
103
627
5.82
6.15
4.93
11.75
5.23
0.68
9.47
35.63
13.01
4,237
5,243
44,130
–
15,631
8,975
913
2,542
889
3.09
16,118
251
366
2,419
–
835
115
102
821
261
671
5.92
6.98
5.48
–
5.34
1.28
11.17
32.30
29.36
3,829
4,668
41,457
–
14,731
7,197
–
2,879
2,122
4.16
15,222
242
410
2,815
–
988
183
–
896
371
745
469,609
29,445
6.27
326,884
17,524
5.36
296,504
19,886
1 Yields annualised on the basis of the period of ownership in the year of acquisition.
6.32
8.78
6.79
–
6.71
2.54
–
31.12
17.48
4.89
6.71
123
H S B C H O L D I N G S P L C
Financial Review (continued)
Assets (continued)
Trading securities
Average
balance
2003
Interest
income
US$m US$m
Europe
Hong Kong
HSBC Bank plc ......................
CCF ........................................
24,758
7,043
Hang Seng Bank .....................
The Hongkong and Shanghai
536
Banking Corporation ..........
11,351
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
2,823
HSBC Bank Malaysia
Berhad ................................
North America HSBC USA Inc ......................
HSBC Bank Canada ...............
HSBC Markets Inc. ................
HSBC Mexico1 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
377
4,236
774
8,837
4,303
–
7
945
236
15
334
124
11
102
17
303
261
–
1
Other operations ................................................
4,115
138
69,160
2,487
Investment securities
Year ended 31 December
2002
Interest
income
% US$m US$m
Average
balance
Yield
%
Yield
2001
Average
Interest
income
balance
US$m US$m
3.82
3.35
2.80
25,104
10,435
1,084
235
569
18
4.32
2.25
3.16
18,352
13,275
761
2.94
11,915
432
3.63
10,667
963
508
40
545
Yield
%
5.25
3.83
5.26
5.11
4.39
2,452
112
4.57
2,042
113
5.53
2.92
2.41
2.20
3.43
6.07
–
14.29
3.35
3.60
309
4,294
755
16,768
346
34
2
1,818
9
140
18
752
27
–
–
84
74,801
2,911
2.91
3.26
2.38
4.48
7.80
–
–
4.62
3.89
223
3,898
475
17,439
–
104
116
1,974
7
181
19
877
–
8
16
135
69,326
3,412
3.14
4.64
4.00
5.03
–
7.69
13.79
6.84
4.92
5.70
5.37
5.36
–
5.31
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Household1 ..............................
Hang Seng Bank .....................
The Hongkong and Shanghai
16,449
14,298
3,365
231
16,458
Banking Corporation ..........
31,774
The Hongkong and Shanghai
659
397
210
2
460
829
4.01
13,071
2.78
6.24
0.87
2.79
14,454
2,052
–
10,629
2.61
29,945
623
503
141
–
375
955
4.77
14,939
3.48
6.87
–
3.53
11,376
2,425
–
8,529
851
611
130
–
453
3.19
24,937
1,173
4.70
Banking Corporation ..........
13,906
487
3.50
10,534
448
4.25
8,587
475
5.53
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East ........
North America HSBC USA Inc ......................
Household1 .............................
HSBC Bank Canada ...............
HSBC Markets Inc. ................
HSBC Mexico1 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
Other operations ................................................
1,101
873
18,753
3,370
2,681
17
2,041
1,323
120
8,056
37
24
894
59
75
1
254
250
13
345
3.36
2.75
4.77
1.75
2.80
5.88
12.44
18.90
10.83
4.28
981
760
17,795
–
2,440
17
175
1,470
185
7,117
34
30
927
–
78
1
14
314
34
323
3.47
3.95
5.21
–
3.20
5.88
8.00
21.36
18.38
4.54
733
755
19,244
–
2,105
17
–
2,745
949
5,481
28
48
1,232
–
99
1
–
462
113
365
134,816
4,996
3.71
111,625
4,800
4.30
102,822
6,041
3.82
6.36
6.40
–
4.70
5.88
–
16.83
11.91
6.66
5.88
1 Yields annualised on the basis of the period of ownership in the year of acquisition.
124
Assets (continued)
Other interest-earning assets
Average
balance
2003
Interest
income
US$m US$m
Europe
Hong Kong
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Hang Seng Bank .....................
The Hongkong and Shanghai
6,190
5,420
3,276
1,097
Banking Corporation .......... 12,680
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
4,511
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East ........
North America HSBC USA Inc .......................
Household1 ..............................
HSBC Bank Canada ...............
HSBC Markets Inc. .................
HSBC Mexico1 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
22
491
371
484
170
159
74
162
44
173
102
34
25
264
81
1
9
17
23
10
4
3
27
2
Other operations ................................................. (33,113)
2,038
(656)
119
Total interest-earning assets
Year ended 31 December
2002
Interest
income
% US$m US$m
Average
balance
Yield
%
Yield
Average
balance
2001
Interest
income
US$m US$m
Yield
%
2.79
10,384
1.88
1.04
2.28
3,964
2,701
1,158
2.08
9,128
1.80
4,349
25
744
320
–
1
64
–
196
53
4.55
1.83
4.58
4.75
5.88
2.52
4.05
16.67
4.55
1.98
5.84
198
119
56
33
238
87
1
17
24
–
1
2
–
24
6
1.91
2,981
218
7.31
3.00
2.07
2.85
287
1,586
1,081
85
82
56
29.62
5.17
5.18
2.61
7,958
353
4.44
2.00
4,799
181
3.77
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
10.00
4.81
16.89
(32,082)
(666)
2.08
(20,001)
(963)
1,005
140
13.93
817
138
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ...................... 200,109
HSBC Private Banking
Holdings (Suisse) S.A. ....... 26,497
CCF ........................................ 68,659
Household1 ..............................
6,165
Hang Seng Bank ..................... 57,401
The Hongkong and Shanghai
9,173
4.58
170,706
8,365
4.90
140,100
8,891
6.35
653
2,950
673
1,650
2.46
4.30
10.92
2.87
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
Banking Corporation .......... 118,057
3,461
2.93
107,804
3,834
3.56
104,159
5,524
5.30
The Hongkong and Shanghai
Banking Corporation .......... 56,727
2,287
4.03
46,919
2,118
4.51
41,481
2,388
5.76
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East ........
6,760
9,014
North America HSBC USA Inc ....................... 70,895
Household1 .............................. 85,827
HSBC Bank Canada ............... 24,127
HSBC Markets Inc. ................. 15,063
HSBC Mexico1 ....................... 19,720
5,652
1,194
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
Other operations .................................................
6,548
332
414
3,304
9,713
1,115
352
1,594
1,563
121
613
Summary
778,415
39,968
4.91
4.59
4.66
11.32
4.62
2.34
8.08
27.65
10.13
9.36
5.13
6,099
8,604
68,787
–
20,118
29,580
1,855
5,307
1,293
1,548
310
452
3,573
–
958
918
175
1,336
315
740
5.08
5.25
5.19
–
4.76
3.10
9.43
25.17
24.36
47.80
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
608,749
28,595
4.70
579,665
35,261
5.22
7.11
6.44
6.21
4.12
–
21.50
13.66
7.27
6.08
Total interest-earning assets ........................
Provisions for bad and doubtful debts .........
Non interest-earning assets ..........................
Total assets and interest income ..................
39,968
5.13
778,415
(12,816)
192,251
957,850
39,968
4.17
608,749
(7,809)
132,2272
733,167
28,595
4.70
35,261
6.08
579,665
(7,816)
124,5592
28,595
3.90
696,408
35,261
5.06
1 Yields annualised on the basis of the period of ownership in the year of acquisition.
2 Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
125
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
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Household1 ..............................
Hang Seng Bank......................
The Hongkong and Shanghai
Banking Corporation ..........
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East ........
North America HSBC USA Inc ......................
Household1 ..............................
HSBC Bank Canada ...............
HSBC Markets Inc. ................
HSBC Mexico1 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
Other operations (including consolidation
adjustments) ...................................................
Year ended 31 December
2002
%
28.7
3.8
9.7
–
7.9
18.6
7.1
0.8
1.2
11.5
–
2.8
5.3
0.3
1.1
0.2
1.0
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
100.0
100.0
2003
%
27.8
3.0
9.3
0.7
6.4
16.7
6.8
0.7
1.0
9.6
10.2
2.6
2.6
2.1
0.9
0.1
(0.5)
100.0
1 Yields annualised on the basis of the period of ownership in the year of acquisition.
126
Liabilities and shareholders’ funds
Deposits by banks1
Average
balance
2003
Interest
expense
US$m US$m
Europe
Hong Kong
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Household2 ..............................
Hang Seng Bank .....................
The Hongkong and Shanghai
19,898
1,865
12,594
734
161
Banking Corporation ..........
2,358
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
2,599
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East ........
North America HSBC USA Inc .......................
HSBC Bank Canada ...............
HSBC Markets Inc. .................
HSBC Mexico2 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
121
764
3,915
501
2,191
1,039
527
176
Other operations .................................................
5,346
404
28
398
31
2
28
81
3
16
39
11
22
59
93
14
80
54,789
1,309
Year ended 31 December
2002
Interest
expense
% US$m US$m
Average
balance
Cost
%
Cost
2001
Average
Interest
expense
balance
US$m US$m
Cost
%
2.03
18,259
1.50
3.16
4.22
1.24
1,976
13,456
–
83
1.19
2,066
376
60
596
–
1
35
2.06
13,890
451
3.25
3.04
4.43
–
1.20
1,708
17,393
–
256
1.69
1,933
66
1,136
–
9
70
3.86
6.53
–
3.52
3.62
3.12
2,683
103
3.84
2,757
146
5.30
2.48
2.09
1.00
2.20
1.00
5.68
17.65
7.95
1.50
2.39
113
531
4,216
679
3,190
213
693
164
3
15
46
26
44
11
79
69
4,772
122
53,094
1,586
2.65
2.82
1.09
3.83
1.38
5.16
11.40
42.07
2.56
2.99
32
315
3,702
439
3,654
–
1,177
432
5,506
1
14
100
18
114
–
106
29
199
53,194
2,459
Customer accounts1
Europe
Hong Kong
HSBC Bank plc ...................... 134,421
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Household2 ..............................
Hang Seng Bank .....................
The Hongkong and Shanghai
19,238
17,435
412
49,492
Banking Corporation ..........
86,836
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
35,933
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East ........
North America HSBC USA Inc .......................
HSBC Bank Canada ...............
HSBC Markets Inc. .................
HSBC Mexico2 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
4,796
5,863
44,986
15,775
4,915
11,542
3,888
778
Other operations .................................................
29,130
2,741
2.04
106,301
2,551
2.40
90,055
3,300
401
606
28
289
379
719
142
61
553
326
52
408
755
57
510
2.08
3.48
6.80
0.58
20,476
11,841
–
48,074
0.44
82,535
2.00
29,965
2.96
1.04
1.23
2.07
1.06
3.53
19.42
7.33
4,347
6,176
45,438
13,708
6,972
1,032
3,066
757
1.75
25,917
549
593
–
448
616
705
131
106
860
257
112
51
491
217
653
2.68
5.01
–
0.93
20,839
12,174
–
937
665
–
49,842
1,502
0.75
81,484
2,219
2.35
25,581
969
145
250
1,609
474
295
–
598
226
4,456
6,311
45,817
12,876
7,820
–
4,086
2,689
23,919
1,062
387,949
14,251
3.01
1.72
1.89
1.87
1.61
4.94
16.01
28.67
2.52
2.05
1 Further analysis is given on pages 179 and 180.
2 Costs annualised on the basis of the period of ownership in the year of acquisition.
465,440
8,027
1.72
406,605
8,340
3.13
4.44
2.70
4.10
3.12
–
9.01
6.71
3.61
4.62
3.66
4.50
5.46
–
3.01
2.72
3.79
3.25
3.96
3.51
3.68
3.77
–
14.64
8.40
4.44
3.67
127
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 instruments1
Average
balance
2003
Interest
expense
US$m US$m
Europe
Hong Kong
HSBC Bank plc ......................
CCF ........................................
Hang Seng Bank .....................
The Hongkong and Shanghai
5,417
5,739
1,399
Banking Corporation ..........
8,257
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
3,163
HSBC Bank Malaysia
Berhad ................................
North America HSBC USA Inc. .....................
Household2 .............................
HSBC Bank Canada ...............
HSBC Mexico2 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
263
1,604
5,522
3,132
4,052
63
–
Other operations .................................................
1,479
151
162
36
321
121
8
26
60
84
169
12
–
59
40,090
1,209
Loan capital
Europe
HSBC Bank plc ......................
CCF ........................................
Household2 .............................
8,790
5,686
2,230
Hong Kong
The Hongkong and Shanghai
Banking Corporation ..........
1,796
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
270
North America HSBC USA Inc. .....................
Household2 .............................
HSBC Bank Canada ...............
HSBC Mexico2 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
3,284
71,346
1,288
188
205
353
Other operations .................................................
9,324
466
187
111
80
17
178
1,779
66
13
46
30
133
104,760
3,106
Year ended 31 December
2002
Interest
expense
% US$m US$m
Average
balance
Cost
%
Cost
2001
Average
Interest
expense
balance
US$m US$m
Cost
%
5.17
4.72
4.61
6.28
4.53
–
4.74
–
13.79
7.39
0.63
5.02
3.98
4.14
3.02
1,257
5,547
2,040
4.84
3,851
65
262
94
242
4.16
1,298
67
5.16
6
4.96
121
2,030
–
2,193
–
29
284
475
4.73
2.71
–
2.58
6.92
26.42
6.67
2.10
3.92
2.79
2.82
2.57
2,088
4,856
2,150
3.89
5,331
3.83
1,659
148
2,286
–
2,168
318
53
105
763
3.04
1.62
1.09
2.68
4.17
19.05
–
3.99
3.02
83
201
65
258
69
7
62
–
56
22
14
7
16
21,925
860
19,125
960
5.30
3.29
4.98
7,053
3,941
–
463
164
–
6.56
4.16
–
10,136
2,939
–
625
163
–
6.17
5.55
–
4.45
1,786
83
4.65
1,805
99
5.48
6.30
5.42
2.49
5.12
6.91
22.44
8.50
1.43
2.96
151
3,396
–
1,014
19
271
319
7,148
12
214
–
65
2
44
62
167
25,098
1,276
7.95
6.30
–
6.41
10.53
16.24
19.44
2.34
5.08
47
3,969
–
1,272
–
208
245
5,952
26,573
1,552
6
12.77
7.05
–
6.29
–
5.29
9.80
4.44
5.84
92
–
104
–
4
21
3
280
–
80
–
11
24
264
1 Further analysis is given on page 181.
2 Costs annualised on the basis of the period of ownership in the year of acquisition.
128
Liabilities and shareholders’ funds
(continued)
Other interest bearing liabilities
Average
balance
2003
Interest
expense
US$m US$m
Year ended 31 December
2002
Interest
expense
% US$m US$m
Average
balance
Cost
%
Cost
2001
Average
Interest
expense
balance
US$m US$m
Cost
%
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Household1 ..............................
Hang Seng Bank .....................
The Hongkong and Shanghai
21,502
1,509
12,994
1,359
639
Banking Corporation ..........
8,178
The Hongkong and Shanghai
213
26
327
65
15
136
0.99
21,006
1.72
2.52
4.78
2.35
1,645
10,725
–
684
1.66
7,753
253
37
154
–
19
179
1.20
10,273
525
5.11
2.25
1.44
–
2.78
1,152
6,496
–
869
69
92
–
42
5.99
1.42
–
4.83
2.31
7,367
309
4.19
Banking Corporation ..........
10,732
202
1.88
8,744
195
2.23
7,433
273
3.67
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East .........
North America HSBC USA Inc .......................
Household1 ..............................
HSBC Bank Canada ...............
HSBC Markets Inc. .................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
246
335
10,317
2,077
691
7,680
296
346
3
9
240
7
16
276
48
16
1.22
2.69
2.33
0.34
2.32
3.59
16.22
4.62
51
179
9,545
–
415
19,141
467
299
1
6
280
–
15
832
1.96
3.35
2.93
–
3.61
4.35
79
(5)
16.92
(1.67)
40
46
7,425
–
374
16,568
633
80
1
4
462
–
16
740
133
19
Other operations .................................................
(49,719)
(880)
1.77
(47,127)
(972)
2.06
(30,800)
(1,371)
29,182
719
2.46
33,527
1,073
3.20
27,956
1,314
2.50
8.70
6.22
–
4.28
4.47
21.01
23.75
4.45
4.70
1 Costs annualised on the basis of the period of ownership in the year of acquisition.
129
H S B C H O L D I N G S P L C
Financial Review (continued)
Liabilities and shareholders’ funds
(continued)
Total interest bearing liabilities
Average
balance
2003
Interest
expense
US$m US$m
Year ended 31 December
2002
Interest
expense
US$m
Cost
%
Average
balance
% US$m
Cost
Average
balance
US$m
2001
Interest
expense
US$m
Cost
%
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank plc ...................... 190,028
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Household1 .............................
Hang Seng Bank .....................
The Hongkong and Shanghai
22,612
54,448
4,735
51,691
Banking Corporation .......... 107,425
The Hongkong and Shanghai
3,975
2.09
154,707
3,726
2.41
125,611
4,966
3.95
455
1,680
235
342
944
2.01
3.09
4.96
0.66
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
0.88
99,471
1,171
1.18
96,440
2,939
3.05
Banking Corporation ..........
52,697
1,140
2.16
43,202
1,084
2.51
37,116
1,461
3.94
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East ........
North America HSBC USA Inc ......................
Household1 .............................
HSBC Bank Canada ...............
HSBC Markets Inc. . ...............
HSBC Mexico1 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
5,426
6,962
64,106
78,945
21,387
14,786
16,821
4,979
1,653
156
86
1,036
1,846
503
350
649
954
117
2.88
1.24
1.62
2.34
2.35
2.37
3.86
19.16
7.08
4,659
6,886
64,881
–
17,984
29,303
1,582
4,550
1,644
142
127
1,462
–
419
988
86
707
350
3.05
1.84
2.25
–
2.33
3.37
5.44
15.54
21.29
Other operations..................................................
(4,440)
(98)
2.21
(8,527)
(14)
0.16
4,649
6,672
62,943
–
17,154
28,042
–
6,133
3,730
5,052
153
268
2,543
–
692
1,149
–
852
319
157
694,261
14,370
2.07
540,249
13,135
2.43
514,797
20,536
3.29
4.02
4.04
–
4.03
4.10
–
13.89
8.55
3.11
3.99
Summary
Total interest-bearing liabilities .......................... 694,261
Non interest-bearing current accounts ................
44,233
Shareholders’ funds & other non interest-
bearing liabilities ............................................ 219,356
14,370
2.07
13,135
2.43
540,249
40,220
152,698 2
20,536
3.99
514,797
36,090
145,521 2
Total liabilities & interest expense ..................... 957,850
14,370
1.50
733,167
13,135
1.79
696,408
20,536
2.95
1 Costs annualised on the basis of the period of ownership in the year of acquisition.
2 Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’ and 38
‘Accounting for ESSP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
130
Net interest margin
Europe
Hong Kong
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Household1 ..............................
Hang Seng Bank .....................
The Hongkong and Shanghai
Banking Corporation ..........
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
HSBC Bank Malaysia
Berhad ................................
HSBC Bank Middle East .........
North America HSBC USA Inc. ......................
Household1 ..............................
HSBC Bank Canada ...............
HSBC Markets Inc. .................
HSBC Mexico1 .......................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
Other operations .................................................
Year ended 31 December
2002
%
2.72
0.75
1.81
–
2.46
2.47
2.20
2.76
3.78
3.07
–
2.68
(0.24)
4.80
11.85
(2.71)
48.71
2.54
2003
%
2.60
0.75
1.85
7.10
2.28
2.13
2.02
2.60
3.64
3.20
9.17
2.54
0.01
4.79
10.77
0.34
10.86
3.29
2001
%
2.80
0.90
1.61
–
2.56
2.48
2.23
2.76
3.84
2.76
–
2.55
–
–
9.99
5.65
6.12
2.54
1 Net interest margins annualised on the basis of the period of ownership in the year of acquisition.
Notes
(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 to which it has been received.
(iii) Balances and transactions with fellow subsidiaries are reported gross in the principal commercial banking and consumer finance
entities within ‘Other interest-earning assets’ and ‘Other interest-bearing liabilities’ as appropriate and the elimination entries are
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 and consumer
finance 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.
131
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 2003 compared
with 2002, and for 2002 compared with 2001.
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
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Hang Seng Bank .....................
The Hongkong and Shanghai
Banking Corporation ..........
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
HSBC Bank Malaysia
Berhad.................................
HSBC Bank Middle East ........
North America HSBC USA Inc ......................
HSBC Bank Canada ...............
HSBC Markets Inc .................
HSBC Mexico ........................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
Other operations .................................................
Loans and advances to customers
Europe
Hong Kong
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .........
CCF ........................................
Household .............................
Hang Seng Bank .....................
The Hongkong and Shanghai
Banking Corporation ...........
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ...........
HSBC Bank Malaysia
Berhad ..................................
HSBC Bank Middle East ........
North America HSBC USA Inc. .....................
Household .............................
HSBC Bank Canada ...............
HSBC Markets Inc .................
HSBC Mexico ........................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
Other operations .................................................
2003 compared with 2002
Increase/(decrease)
2002 compared with 2001
Increase/(decrease)
2003
US$m
Volume
US$m
Rate
US$m
2002
US$m
Volume
US$m
Rate
US$m
2001
US$m
657
75
573
212
517
138
17
29
35
31
20
214
242
2
159
2,921
208
(55)
249
(135)
83
6
4
1
(12)
8
(16)
287
29
6
(52)
285
6,739
1,375
79
1,897
671
938
1,517
1,457
266
352
2,256
9,631
982
24
862
1,044
103
627
14
475
671
12
109
320
20
34
88
9,631
169
(70)
915
125
(28)
173
(146)
(14)
(323)
(62)
(62)
(55)
(2)
(11)
(16)
(3)
(12)
(105)
36
(18)
(117)
(584)
(501)
(16)
(235)
–
(157)
(305)
(147)
(5)
(48)
(251)
–
(22)
(21)
(155)
98
(130)
(217)
595
144
647
409
496
187
15
39
63
26
48
32
177
14
328
3,220
165
(233)
3
(191)
(373)
(111)
(143)
(305)
803
488
787
905
(273)
(360)
1,129
46
(26)
0
(74)
(12)
17
32
(38)
(30)
(160)
(827)
(127)
(2)
(39)
(42)
(26)
(54)
–
9
5
(222)
268
43
78
179
64
85
–
206
39
710
(1,737)
5,784
5,865
1,041
(1,232)
81
1,657
–
1,083
1,713
1,284
251
366
2,419
–
835
115
102
821
261
671
8
237
–
9
119
170
26
51
182
–
60
45
102
(105)
(216)
(13)
(39)
(285)
–
(614)
(730)
(237)
(17)
(95)
(578)
–
(213)
(113)
–
30
106
(61)
6,056
112
1,705
–
1,688
2,324
1,351
242
410
2,815
–
988
183
–
896
371
745
29,445
13,240
(1,319)
17,524
2,038
(4,400)
19,886
132
Interest income (continued)
Trading securities
Europe
Hong Kong
HSBC Bank plc ......................
CCF ........................................
Hang Seng Bank .....................
The Hongkong and Shanghai
Banking Corporation ..........
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
HSBC Bank Malaysia
Berhad .................................
North America HSBC USA Inc........................
HSBC Bank Canada ...............
HSBC Markets Inc ..................
HSBC Mexico ........................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ....
Other operations .................................................
Investment securities
Europe
HSBC Bank plc ......................
HSBC Private Banking
Hong Kong
Holdings (Suisse) S.A. .......
CCF ........................................
Household ..............................
Hang Seng Bank .....................
The Hongkong and Shanghai
Banking Corporation ..........
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
HSBC Bank Malaysia
Berhad .................................
HSBC Bank Middle East ........
North America HSBC USA Inc .......................
Household ..............................
HSBC Bank Canada ...............
HSBC Markets Inc ..................
HSBC Mexico ........................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ....
Other operations .................................................
2003 compared with 2002
Increase/(decrease)
2002 compared with 2001
Increase/(decrease)
2003
US$m
Volume
US$m
Rate
US$m
2002
US$m
Volume
US$m
Rate
US$m
2001
US$m
945
236
15
334
124
11
102
17
303
261
–
1
138
2,487
659
397
210
2
460
829
487
37
24
894
59
75
1
254
250
13
345
4,996
(15)
(76)
(1)
(20)
17
2
(2)
–
(355)
309
–
–
106
(219)
161
(5)
90
2
206
58
143
4
4
50
59
8
–
149
(31)
(12)
43
903
(124)
77
(2)
(78)
(5)
–
(36)
(1)
(94)
(75)
–
1
(52)
1,084
235
18
432
112
9
140
18
752
27
–
–
84
354
(109)
(10)
64
23
3
18
11
(34)
27
(5)
(16)
(14)
(233)
(164)
(12)
(177)
(24)
(1)
(59)
(12)
(91)
–
(3)
–
(37)
963
508
40
545
113
7
181
19
877
–
8
16
135
(205)
2,911
269
(770)
3,412
(125)
(101)
(21)
–
(121)
(184)
(104)
(1)
(10)
(83)
–
(11)
–
91
(33)
(9)
(21)
623
503
141
–
375
955
448
34
30
927
–
78
1
14
314
34
323
(106)
(122)
165
(20)
–
112
236
108
9
–
(93)
–
16
–
14
(215)
(91)
107
(273)
31
–
(190)
(454)
(135)
(3)
(18)
(212)
–
(37)
–
–
67
12
(149)
(707)
4,800
517
(1,758)
851
611
130
–
453
1,173
475
28
48
1,232
–
99
1
–
462
113
365
6,041
133
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
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Household .............................
Hang Seng Bank .....................
The Hongkong and Shanghai
Banking Corporation ..........
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
HSBC Bank Malaysia
Berhad.................................
HSBC Bank Middle East ........
North America HSBC USA Inc . .....................
HSBC Bank Canada ...............
HSBC Markets Inc .................
HSBC Mexico ........................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
Other operations .................................................
Customer accounts
Europe
Hong Kong
HSBC Bank plc ......................
HSBC Private Banking
Holdings (Suisse) S.A. .......
CCF ........................................
Household .............................
Hang Seng Bank .....................
The Hongkong and Shanghai
Banking Corporation ..........
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
HSBC Bank Malaysia
Berhad.................................
HSBC Bank Middle East ........
North America HSBC USA Inc. ......................
HSBC Bank Canada ...............
HSBC Markets Inc .................
HSBC Mexico ........................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ....
Other operations .................................................
134
2003 compared with 2002
Increase/(decrease)
2002 compared with 2001
Increase/(decrease)
2003
US$m
Volume
US$m
Rate
US$m
2002
US$m
Volume
US$m
Rate
US$m
9
(29)
(160)
–
–
(12)
(19)
–
(6)
(4)
(8)
(8)
5
33
(60)
(57)
376
60
596
–
1
35
103
3
15
46
26
44
11
79
69
122
(334)
1,586
142
10
(257)
–
(6)
5
(4)
3
10
14
10
(14)
11
(44)
(18)
(30)
(5)
(443)
(115)
(267)
–
(172)
(269)
140
(126)
14
(5)
(9)
39
(33)
519
132
6
81
(3)
(40)
(298)
30
(27)
(162)
132
(166)
(224)
2,551
595
(1,344)
(16)
(18)
–
(53)
(372)
(54)
–
(1,001)
29
(1,632)
549
593
–
448
616
705
131
106
860
257
112
51
491
217
653
166
(4)
(5)
(13)
31
(32)
51
(149)
(162)
84
685
8,027
1,202
(1,515)
8,340
(6,596)
14,251
2001
US$m
451
66
1,136
–
9
70
146
1
14
100
18
114
–
106
29
199
3,300
937
665
–
1,502
2,219
969
145
250
1,609
474
295
–
598
226
1,062
(217)
(16)
(283)
–
(2)
(40)
(39)
(1)
(9)
(68)
(2)
(56)
–
17
58
(47)
(430)
(10)
(139)
(736)
(248)
(151)
–
42
153
(493)
(868)
2,459
19
(3)
(38)
31
1
5
(3)
–
7
(3)
(7)
(14)
43
(19)
5
15
57
633
(33)
280
28
13
32
404
28
398
31
2
28
81
3
16
39
11
22
59
93
14
80
1,309
2,741
401
606
28
289
379
719
142
61
553
326
52
408
755
57
510
Interest expense (continued)
CDs and other money market instruments
Europe
Hong Kong
HSBC Bank plc ......................
CCF ........................................
Hang Seng Bank .....................
The Hongkong and Shanghai
Banking Corporation ..........
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
HSBC Bank Malaysia
Berhad .................................
North America HSBC USA Inc .......................
Household ..............................
HSBC Bank Canada ...............
HSBC Mexico ........................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ...
Other operations .................................................
Loan capital
Europe
HSBC Bank plc ......................
CCF ........................................
Household ..............................
Hong Kong
The Hongkong and Shanghai
Banking Corporation ..........
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..........
North America HSBC USA Inc. ......................
Household ..............................
HSBC Bank Canada ...............
HSBC Mexico ........................
South America Brazilian operations ................
HSBC Bank Argentina S.A. ....
Other operations .................................................
2003 compared with 2002
Increase/(decrease)
2002 compared with 2001
Increase/(decrease)
2003
US$m
Volume
US$m
Rate
US$m
2002
US$m
Volume
US$m
Rate
US$m
2001
US$m
151
162
36
321
121
8
26
60
84
169
12
–
59
1,209
466
187
111
80
17
178
1,779
66
13
46
30
133
132
37
(23)
142
63
5
(18)
60
25
258
3
(7)
15
556
114
73
111
–
9
(7)
1,779
18
18
(11)
7
51
(64)
(76)
(6)
(79)
(11)
(4)
(18)
–
3
(111)
(5)
–
28
83
201
65
258
69
7
62
–
56
22
14
7
16
(207)
860
(111)
(50)
–
(3)
(4)
(29)
–
(17)
(7)
13
(39)
(85)
463
164
–
83
12
214
–
65
2
44
62
167
3,106
2,199
(369)
1,276
43
(33)
5
93
19
1
12
–
(1)
22
3
(13)
(18)
141
(190)
56
–
(1)
13
(40)
–
(16)
2
3
7
52
(86)
(25)
(28)
(34)
(77)
(17)
–
(42)
–
(47)
–
7
(1)
31
(241)
28
(55)
–
(15)
(7)
(26)
–
1
–
30
31
(149)
(190)
65
262
94
242
67
6
92
–
104
–
4
21
3
960
625
163
–
99
6
280
–
80
–
11
24
264
1,552
135
H S B C H O L D I N G S P L C
Financial Review (continued)
Risk management
All HSBC’s activities involve analysis, evaluation,
acceptance 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 these risks, to set appropriate
risk limits and controls, and to monitor the 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 and in best practice risk
management processes. Training, individual
responsibility and accountability together with a
disciplined, cautious and conventional culture of
control lie at the heart of HSBC’s management of
risk.
The Group Management Board (formerly the
Group Executive Committee), under authority
delegated by the Board of Directors, formulates high
level risk management policy. A separately
constituted Risk Management Meeting monitors risk
and receives reports which allow it to review the
effectiveness of HSBC’s risk management policies.
Credit risk management
Credit risk is the risk that financial loss arises from
the failure of a customer or counterparty to meet its
obligations under a contract. 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, a separate function,
Group Credit and Risk, is mandated to provide high-
level centralised management of credit risk for
HSBC on a worldwide 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:
• Formulating credit policies. These are embodied
in HSBC standards with which all HSBC’s
operating companies are required to comply in
formulating and recording in dedicated manuals
their own more detailed credit policies and
136
procedures. All such credit policies and
procedures are monitored by Group Credit and
Risk.
• Establishing and maintaining HSBC’s large
•
credit exposure policy. This policy sets controls
over the maximum level of HSBC’s exposure to
customers, customer groups and other risk
concentrations in an approach which is designed
to be more conservative than internationally
accepted regulatory standards. All operating
companies within HSBC are required to adopt
this.
Issuing lending guidelines to HSBC’s operating
companies on the Group’s attitude towards, and
appetite for lending to, inter alia, specified
market sectors, industries and products. Each
HSBC operating company and major business
unit is required to base its own lending
guidelines on HSBC’s guidelines, regularly
update them and make them available to all
credit and marketing executives.
• Undertaking an independent review and
objective assessment of risk. Group Credit and
Risk assesses all commercial non-bank credit
facilities over designated limits originated by all
HSBC’s operating companies, prior to the
facilities being offered to customers. Operating
companies may not proceed to confirm credit
approval without this concurrence. Similarly,
renewals and reviews of commercial non-bank
facilities over designated levels are subject to the
same process.
• Controlling exposures to banks and financial
institutions. HSBC’s credit and settlement risk
limits to counterparties in the finance and
government sectors are approved centrally to
optimise the use of credit availability and 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.
• Controlling cross-border exposures. Country and
cross-border risk is 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, and applying local business knowledge.
Transactions with countries deemed to be high
risk are considered on a case-by-case basis
• Controlling exposures to selected industries.
Group Credit and Risk controls HSBC’s
exposure to the shipping and aviation industries,
and closely monitors exposures to other
industries such as telecommunications,
insurance and real estate. Where necessary,
restrictions are imposed on new business, or
exposure within HSBC’s operating companies is
capped.
• Maintaining and developing HSBC’s facility
grading process in order to categorise exposures
into meaningful segments and facilitate focused
management of the identified risks. HSBC’s
current grading structure contains a minimum of
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. For banks, the grading
structure involves ten tiers, six of which cover
satisfactory risk. Grading methodology is based
upon a wide range of financial analytics together
with market data-based tools which are core
inputs to the assessment of counterparty risk.
Responsibility for setting facility grades rests
with the final approving executive in each case.
Facility grades are reviewed frequently and
amendments, where necessary, are implemented
promptly. A more sophisticated grading
framework, based on default probability and loss
estimates, is being piloted in the US and Canada.
This new approach will allow a more granular
analysis of risk and will be extended
progressively to the Group’s other major
business units.
• Reviewing the efficiency and effectiveness of
operating companies’ credit approval processes.
Regular reports are provided to Group Credit
and Risk on the credit quality of local portfolios
and corrective action is taken where necessary.
• Reporting to certain senior executives on aspects
of the HSBC loan portfolio. These executives, as
well as the Group Management Board (formerly
called the Group Executive Committee), Group
Audit Committee and the Board receive a
variety of regular reports covering:
−
risk concentrations and exposure to industry
sectors;
−
−
−
−
−
−
large customer group exposures;
emerging market debt and provisioning;
large non-performing accounts and
provisions;
specific segments of the portfolio: real
estate, telecommunications, insurance,
aviation and shipping, as well as ad hoc
reviews;
country limits and cross-border exposures;
and
causes of unexpected loss and lessons
learned.
• Managing and directing credit-related systems
initiatives. HSBC has a centralised database of
large corporate, sovereign and bank facilities
and is constructing a database comprising all
Group lending assets. A systems-based credit
application process for bank lending is
operational in all jurisdictions and a standard
electronic corporate credit application system is
deployed in most of the Group’s major
businesses. Coverage will be further extended in
2004.
• Providing advice and guidance to HSBC’s
operating companies in order to promote best
practice throughout the Group on credit-related
issues such as:
−
−
−
regulatory matters;
environmental and social
responsibility policies;
scoring and portfolio provisioning;
− new products;
−
−
training courses; and
credit-related reporting.
• Acting as the primary interface for credit-related
issues on behalf of HSBC Holdings with
external parties including the Bank of England,
the UK Financial Services Authority (‘FSA’),
rating agencies, corporate analysts, trade
associations and counterparts in the world’s
major banks and non-bank financial institutions.
Responsibility for the quality and performance
of the credit portfolios in each of the Group’s
operating companies rests with local management.
137
H S B C H O L D I N G S P L C
Financial Review (continued)
Each operating company is required to
implement credit policies, procedures and lending
guidelines which conform to HSBC Group standards,
with credit approval authorities delegated from the
Board of Directors of HSBC Holdings to the relevant
Chief Executive Officer. In each major subsidiary,
management includes a Chief Credit Officer who, in
most cases, reports to his local Chief Executive
Officer on credit-related issues. In the case of
Household, the Chief Credit Officer reports to the
Chief Operating Officer of that business, in line with
historic practice. All Chief Credit Officers have a
functional reporting line to the Group General
Manager, Group Credit and Risk.
Each operating company is responsible for all
assets in its portfolio, including those subject to
central approval by Group Credit and Risk, and for
managing its own risk concentrations on market
sector, geographical and product bases. Local
systems are in place throughout the Group to enable
operating companies to control and monitor
exposures by customer and counterparty.
Special attention is paid to problem loans. When
appropriate, specialist units are established by
HSBC’s operating companies to provide customers
with intensive management and control support in
order to help them avoid default wherever possible
and maximise recoveries. Regular audits of operating
companies’ credit processes are undertaken by
HSBC’s Internal Audit function. Audits include
consideration of the completeness and adequacy of
credit manuals and lending guidelines, an in-depth
analysis of a representative sample of accounts, an
overview of homogenous portfolios of similar assets
to assess the quality of the loan book and other
exposures, and adherence to Group standards and
policies in the extension of credit facilities.
Individual accounts are reviewed to ensure that
facility grades are appropriate, that credit and
collection procedures have been properly followed
and that, where an account or portfolio evidences
deterioration, adequate provisions are raised in
accordance with the Group’s established processes.
Internal Audit will discuss with management facility
gradings they consider to be inappropriate, and their
subsequent recommendations for revised grades must
then be assigned to the facilities concerned.
Provisions for bad and doubtful debts
It is HSBC policy that each operating company
makes provision for bad and doubtful debts promptly
138
when required and on a consistent basis in
accordance with established Group guidelines.
HSBC’s grading process for credit facilities
extended by members of the Group is designed to
highlight exposures requiring greater management
attention based on a higher probability of default and
potential loss. Management particularly focuses on
the appropriateness of grades assigned to facilities to
those borrowers and portfolio segments classified
below satisfactory grades. Amendments, where
necessary, are required to be undertaken promptly.
Management also regularly performs an assessment
of the adequacy of the established provisions for bad
and doubtful debts by conducting a detailed review
of the loan portfolio, comparing performance and
delinquency statistics against historical trends and
undertaking an assessment of current economic
conditions.
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 homogenous
portfolios of assets and individually identified
accounts. Specific provisions are deducted from
loans and advances in the balance sheet. Following
the acquisition of Household, the majority of specific
provisions are now determined on a portfolio basis.
Portfolios
Where homogenous groups of assets are reviewed on
a portfolio basis (e.g. credit cards, other unsecured
consumer lending, motor vehicle financing and
residential mortgage loans), two alternative methods
are used to calculate specific provisions:
• When appropriate empirical information is
available, the Group utilises roll rate
methodology (a statistical analysis of historical
trends of the probability of default and amount
of consequential loss, assessed at each time
period for which payments are overdue), other
historical data and an evaluation of current
economic conditions, to calculate an appropriate
level of specific provision based on inherent
loss. Additionally, in certain highly developed
markets, sophisticated models also take into
account behavioural and account management
trends such as bankruptcy and restructuring
statistics. Roll rates are regularly benchmarked
against actual outcomes to ensure they remain
appropriate.
•
In other cases, when information is insufficient
or not sufficiently reliable to adopt a roll rate
methodology, the Group adopts a formulaic
approach which allocates progressively higher
loss rates in line with the period of time for
which a customer’s loan is overdue.
The portfolio basis is applied to accounts in
Household’s consumer portfolios and, in the rest of
HSBC, to the following portfolios:
•
•
•
small business accounts (typically less than
US$15,000) in certain countries;
residential mortgages less than 90 days overdue;
and
credit cards and other unsecured consumer
lending products.
These portfolio provisions are generally
reassessed monthly and charges for new provisions,
or releases of existing provisions, are calculated for
each separately identified portfolio.
The Group’s intention is to extend the use of the
roll rate and model methodologies to all homogenous
portfolios of assets for calculating specific provisions
as information becomes available.
Individually assessed accounts
Specific provisions on individually assessed accounts
are determined by an evaluation of the exposures on
a case-by-case basis. This procedure is applied to all
accounts that do not qualify for, or are not subject to,
a portfolio based approach (typically those with
facilities of more than US$15,000 and, in some
jurisdictions, all house mortgage loans and motor
vehicle finance facilities). In determining such
provisions on individually assessed accounts, the
following factors are considered:
•
•
•
the Group’s aggregate exposure to the customer
(including contingent liabilities);
the viability of the customer’s business model
and the capability of management to trade
successfully out of financial difficulties and
generate sufficient cash flow to service their
debt obligations;
the likely dividend available on liquidation or
bankruptcy;
•
•
•
•
•
•
the extent of other creditors’ commitments
ranking ahead of, or pari passu with, the Group
and the likelihood of other creditors continuing
to support the company;
the complexity of determining the aggregate
amount and ranking of all creditor claims and
the extent to which legal and insurance
uncertainties are evident;
the amount and timing of expected receipts and
recoveries;
the realisable value of security (or other credit
mitigants) and likelihood of successful
repossession;
the deduction of any costs involved in recovery
of amounts outstanding; and
the ability of the borrower to obtain the relevant
foreign currency if loans are not in local
currency.
Group policy requires a review of the level of
specific provisions on individual facilities above
materiality guidelines at least half-yearly, or more
regularly where individual circumstances require.
This will normally include a review of collateral held
(including reconfirmation of its enforceability) and
an assessment of actual and anticipated receipts. For
significant commercial and corporate debts,
specialised loan ‘work-out’ teams with experience in
insolvency and specific markets are used. In
management’s view, utilising this expertise enables
likely losses on significant individual exposures to be
assessed more accurately. Releases on individually
calculated specific provisions are recognised
whenever the Group has reasonable evidence that the
established estimate of loss has been reduced.
Cross-border exposures
Specific provisions are established in respect of
cross-border exposures to countries assessed by
management to be vulnerable to foreign currency
payment restrictions. This assessment includes
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 debtor
country’s financing requirements. Political factors
taken into account include assessment of the stability
of the country and its government, potential threats
to security and the quality and independence of the
legal system.
139
H S B C H O L D I N G S P L C
Financial Review (continued)
Provisions are applied to all qualifying
exposures within these countries unless these
exposures:
•
•
•
are fully performing and of less than one year’s
maturity;
are mitigated by acceptable security cover held
outside the country concerned; or
are represented by securities held for trading
purposes for which a liquid and active market
exists, and which are marked to market 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 individually
identified as such until some time in the future.
HSBC requires each operating company to maintain
a general provision which is determined after taking
into account:
•
•
historical loss experience in portfolios of similar
risk characteristics (for example, by industry
sector, loan grade or product);
the estimated period between a loss occurring
and that loss being identified and evidenced by
the establishment of a specific provision against
that loss; and
• management’s judgement as to whether the
current economic and credit conditions are such
that the actual level of inherent losses is likely to
be greater or less than that suggested by
historical experience.
The estimated period between a loss occurring
and its identification (as evidenced by the
establishment of a specific provision for this loss) is
determined by local management for each identified
portfolio. In general, the periods used vary between
four and twelve months.
In normal circumstances, historical experience is
the most objective and accurate framework used to
assess inherent loss within each portfolio. Historical
loss experience is generally benchmarked against the
weighted average annual rate of provisions over a
five-year period.
In certain circumstances, such as in Argentina in
2001, economic conditions are such that it is clear
that historical loss experience provides insufficient
evidence of the inherent loss in a given portfolio. In
140
such circumstances, management uses its judgement,
supported by relevant experience from similar
situations, to determine an appropriate general
provision.
The basis used to establish the general provision
within each reporting entity is documented and
reviewed by senior Group credit management for
conformity with Group policy.
Suspended and non-accrual interest
For individually assessed accounts, 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 not normally credited to the
profit and loss account and either interest accruals
will cease (‘non-accrual loans’) or interest will be
credited to an interest suspense account in the
balance sheet which is netted against the relevant
loan (‘suspended interest’).
Within portfolios of low value, high volume,
homogenous loans, interest will normally be
suspended on facilities 90 days or more overdue. In
certain operating subsidiaries, interest income on
credit cards may continue to be included in earnings
after the account is 90 days overdue, provided that a
suitable provision is raised against the portion of
accrued interest which is considered to be
irrecoverable.
The designation of a loan as non-performing and
the suspension of interest may be deferred for up to
12 months in either of the following situations:
•
•
cash collateral is held covering the total of
principal and interest due and the right to set-off
is legally sound; or
the value of any 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.
On receipt of cash (other than from the
realisation of security), the overall risk is re-
evaluated and, if appropriate, suspended or non-
accrual interest is recovered and taken to the profit
and loss account. Amounts received from the
realisation of security are applied to the repayment of
outstanding indebtedness, with any surplus used to
recover specific provisions and then suspended
interest.
provisions, the provisioning methodology reflects the
increased propensity of such accounts to default.
Charge-offs
Loans (and the related provisions) are normally
charged off, either partially or in full, when there is
no realistic prospect of recovery of these amounts
and when the proceeds from the realisation of
security have been received. Unsecured consumer
facilities are charged off between 150 and 210 days
overdue. In the case of Household, this period is
generally extended to 300 days overdue (270 days
for secured products) and collections can continue
for up to 360 days post default where it is expected
to improve recovery rates. In the case of bankruptcy,
charge-off can occur earlier.
US banks typically write off problem lending
more quickly than is the practice in the UK. This
approach means that HSBC’s reported level of credit
risk elements and associated provisions are likely to
be higher than for comparable US banks.
Restructuring of loans
Restructuring activity is designed to maximise cash
recovery on accounts which are overdue, by slowing
down the formal steps in collection management to
allow qualifying customers to repair or renegotiate
satisfactory maintenance of their accounts. This will
normally involve resetting an overdue consumer
account to current status following an agreed
restructuring. Restructuring is typically utilised to
assist customers who have suffered from a lifestyle
event such as redundancy, divorce or illness, to
manage their obligations while they adjust to their
new circumstances. Restructuring policies and
practices are based on indicators, or criteria, which,
in the judgement of local management, evidence
continued payment probability. These policies are
continually reviewed and their application varies
depending upon the nature of the market, the product
and the availability of empirically based data. Where
empirical evidence indicates an increased propensity
to default on restructured accounts, and roll rate
methodologies are deployed in the calculation of
Restructuring activity is used most commonly
within consumer finance portfolios. The largest
concentration is domiciled in the US in Household.
The majority of restructured amounts related to
secured lending.
In addition to restructuring, HSBC’s consumer
lending businesses, principally Household, use other
account management techniques on a more limited
basis, such as extended payment arrangements,
approved external debt management plans, deferring
foreclosure, modification, loan rewrites and/or
deferral of payments pending a change in
circumstances. When using such techniques,
accounts may be treated as current, although if
payment difficulties are subsequently experienced,
they will be redesignated as delinquent. At
31 December 2003, the total value of accounts which
have been either restructured or subject to other
account management techniques was US$18 billion
or some 15 per cent of the Household loan book.
Assets acquired
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 subsequent provisions are based
on any further deterioration in value.
Loan portfolio
Loans and advances to customers are well 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$145 billion, or
41 per cent, during 2003 of which US$108 billion, or
31 per cent, related to the acquisition of Household.
As a result, personal lending comprised 56 per cent
of HSBC’s loan portfolio and over 90 per cent of the
growth in loans in 2003 (excluding the financial
sector) related to personal and consumer lending.
141
H S B C H O L D I N G S P L C
Financial Review (continued)
Gross loans and advances to customers
Personal
Residential mortgages ......................................
Hong Kong Government Home Ownership
Scheme .........................................................
Other personal ..................................................
2002
US$m
96,984
7,255
48,562
Total personal ...................................................
152,801
Corporate and commercial
Commercial, industrial and international trade..
Commercial real estate .....................................
Other property-related ......................................
Government ......................................................
Other commercial1 ............................................
79,015
29,267
15,347
8,953
40,674
Total corporate and commercial .......................
173,256
Financial
Non-bank financial institutions .........................
Settlement accounts ..........................................
Total financial ..................................................
27,487
8,385
35,872
On
acquisition of
Household
US$m
Constant
currency
effect
US$m
Under-
lying
change
US$m
2003
US$m
39,293
–
68,927
108,220
–
–
–
–
157
157
–
–
–
6,841
33
3,871
10,745
7,907
2,447
823
193
3,917
15,287
2,006
376
2,382
28,414
22,346
165,464
(998)
12,785
34,133
(1,254)
3,374
970
444
(718)
2,816
7,598
(167)
7,431
6,290
134,145
305,899
85,668
35,088
17,140
9,590
44,030
191,516
37,091
8,594
45,685
44,380
543,100
Total gross loans and advances to customers ....
361,929
108,377
1 Other commercial includes advances in respect of agriculture, transport, energy and utilities.
The commentary below is on a constant currency
basis and excludes the impact of the acquisition of
Household except where stated.
Residential mortgages increased by
US$22.3 billion, of which US$7 billion arose in
Household post-acquisition. Including Household,
mortgages comprised 31 per cent of total gross loans
to customers at 31 December 2003. Residential
mortgages in Europe increased by US$9 billion, of
which US$8 billion arose in UK Banking, reflecting
the success of a number of marketing initiatives,
including competitive pricing and First Direct’s
Offset mortgage product, as well as the continuing
high level of mortgage refinancing activity in the
market. Residential mortgage lending in Hong Kong
declined as the property market weakened and
demand fell, although there were tentative signs of
recovery towards the end of the year. The suspension
of the sale of new homes under the Hong Kong
Government Home Ownership Scheme in 2001
resulted in lower outstanding balances on these
loans.
In the rest of Asia-Pacific, residential mortgages
grew by US$4 billion, with strong growth in Korea,
Singapore, Australia and New Zealand, the latter
from the acquisition of AMP Bank’s mortgage
business.
142
Other personal lending increased by
US$12.8 billion, or 24 per cent, of which
US$6 billion arose in Household post-acquisition.
Including Household, other personal lending
increased to 25 per cent of total gross loans to
customers at 31 December 2003. There was strong
growth in the UK, with credit card balances
increasing by 18 per cent. European Private Banking
customers increased other personal lending by 25 per
cent taking advantage of interest rates to finance
higher returning securities. Across the rest of
Asia-Pacific loan increase was about 18 per cent. In
South America other personal lending nearly doubled
primarily due to the acquisition of Losango. In Hong
Kong, the improving economic conditions saw
growth of 5 per cent in other personal lending which
rose to US$7,420 million.
Loans and advances to the corporate and
commercial lending (excluding settlement accounts)
grew by less than 2 per cent reflecting subdued
corporate loan demand.
The following tables analyse loans by industry
sector and by the location of the principal operations
of the lending subsidiary or, in the case of The
Hongkong and Shanghai Banking Corporation,
HSBC Bank plc, HSBC Bank Middle East and
HSBC Bank USA operations, by the location of the
lending branch.
Customer loans and advances by industry sector
At 31 December 2003
Europe
US$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
%
51,721
23,664
12,101
77,754
224
165,464
–
42,041
93,762
49,468
15,517
5,416
2,462
24,239
97,102
21,226
3,068
24,294
6,290
7,420
37,374
10,966
8,548
5,075
927
6,754
32,270
4,921
556
5,477
–
7,135
19,236
14,892
3,149
2,597
1,450
5,735
27,823
2,027
188
2,215
–
75,173
152,927
8,907
7,785
3,994
4,104
6,619
31,409
8,839
4,767
13,606
–
2,376
2,600
1,435
89
58
647
683
2,912
78
15
93
6,290
134,145
305,899
85,668
35,088
17,140
9,590
44,030
191,516
37,091
8,594
45,685
30.3
1.2
24.7
56.2
15.8
6.5
3.2
1.8
8.1
35.4
6.8
1.6
8.4
215,158
75,121
49,274
197,942
5,605
543,100
100.0
39.7%
5,701
13.8%
1,671
9.1%
1,538
36.4%
5,4444
1.0%
696
100.0%
15,050
2.6%
2.2%
3.1%
2.8%
12.4%
2.8%
3,554
629
981
5,1844
530
10,878
62.3%
37.6%
63.8%
95.2%4
76.1%
72.3%
Personal
Residential mortgages ................
Hong Kong Government Home
Ownership Scheme ...............
Other personal ...........................
Total personal ............................
Corporate and commercial
Commercial, industrial and
international trade .................
Commercial real estate ..............
Other property-related ...............
Government ...............................
Other commercial1......................
Total corporate and commercial
Financial
Non-bank financial institutions ..
Settlement accounts ...................
Total financial ...........................
Total gross loans and advances
to customers2 .........................
Percentage of Group loans and
advances by geographical
region.....................................
Non-performing loans3 ...............
Non-performing loans as a
percentage of gross loans and
advances to customers3 ..........
Specific provisions outstanding
against loans and advances ...
Specific provisions outstanding
as a percentage of non-
performing loans3 ..................
1 Other commercial includes advances in respect of agriculture, transport, energy and utilities.
2 Included within this total is credit card lending of US$48,634 million.
3 Net of suspended interest.
4 Includes non-performing loans of US$4,380 million and specific provisions of US$4,448 million in Household; excluding Household
specific provisions outstanding as a percentage of non-performing loans was 69.2 per cent.
Included in gross loans and advances to customers are the following numbers in respect of Household, 93 per cent of
which relate to North America:
Residential mortgages ........................................................................................................................................................
Motor vehicle finance .........................................................................................................................................................
MasterCard/Visa credit cards .............................................................................................................................................
Private label cards ..............................................................................................................................................................
Other unsecured personal lending ......................................................................................................................................
Corporate and commercial lending .....................................................................................................................................
2003
US$m
46,057
8,868
21,207
15,413
30,130
101
Total ...................................................................................................................................................................................
121,776
143
H S B C H O L D I N G S P L C
Financial Review (continued)
Customer loans and advances by industry sector (continued)
At 31 December 2002
Rest of
Europe Hong Kong Asia-Pacific
US$m
US$m
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
%
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
168,467
71,207
38,727
79,952
3,576
361,929
100.0
46.5%
4,495
19.7%
1,724
10.7%
2,055
22.1%
1,773
1.0%
476
100.0%
10,523
2.7%
2.4%
5.3%
2.2%
13.3%
2.9%
Personal
Residential mortgages .................
Hong Kong Government Home
Ownership Scheme ..................
Other personal .............................
Total personal ..............................
Corporate and commercial
Commercial, industrial and
international trade ....................
Commercial real estate ................
Other property-related .................
Government .................................
Other commercial1 .......................
Total corporate and commercial ..
Financial
Non-bank financial institutions ....
Settlement accounts .....................
Total financial .............................
Total gross loans and advances to
customers2 ...............................
Percentage of Group loans and
advances by geographical
region.......................................
Non-performing loans3 ................
Non-performing loans as a
percentage of gross loans and
advances to customers3 ............
Specific provisions outstanding
against loans and advances ......
2,774
688
1,321
1,482
341
6,606
Specific provisions outstanding
as a percentage of non-
performing loans3 ....................
61.7%
39.9%
64.3%
83.6%
71.6%
62.8%
1 Other commercial includes advances in respect of agriculture, transport, energy and utilities.
2 Included within this total is credit card lending of US$9,950 million.
3 Net of suspended interest.
144
At 31 December 2001
Rest of
Europe Hong Kong Asia-Pacific
US$m
US$m
US$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
%
27,282
23,125
5,134
22,126
548
78,215
–
21,065
48,347
38,476
9,475
3,630
2,393
20,510
74,484
11,329
2,361
13,690
8,123
6,227
37,475
9,662
8,474
4,710
543
6,349
29,738
1,546
223
1,769
–
4,616
9,750
11,226
2,395
2,169
900
5,457
22,147
752
189
941
–
6,273
28,399
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
136,521
68,982
32,838
73,819
5,208
317,368
100.0
43.0%
3,682
21.7%
2,028
10.3%
2,723
23.3%
672
1.7%
544
100.0%
9,649
2.7%
2.9%
8.3%
0.9%
10.4%
3.0%
Personal
Residential mortgages .................
Hong Kong Government Home
Ownership Scheme ..................
Other personal .............................
Total personal ..............................
Corporate and commercial
Commercial, industrial and
international trade ....................
Commercial real estate ................
Other property-related .................
Government .................................
Other commercial1 .......................
Total corporate and commercial ..
Financial
Non-bank financial institutions ....
Settlement accounts .....................
Total financial .............................
Total gross loans and advances to
customers2 ...............................
Percentage of Group loans and
advances by geographical
region .......................................
Non-performing loans3 ................
Non-performing loans as a
percentage of gross loans and
advances to customers3 ............
Specific provisions outstanding
against loans and advances ......
2,204
856
1,786
289
365
5,500
Specific provisions outstanding
as a percentage of non-
performing loans3 ....................
59.8%
42.2%
65.6%
43.0%
67.1%
57.0%
1 Other commercial includes advances in respect of agriculture, transport, energy and utilities.
2 Included within this total is credit card lending of US$8,289 million.
3 Net of suspended interest.
145
H S B C H O L D I N G S P L C
Financial Review (continued)
Customer loans and advances by industry sector (continued)
At 31 December 2000
Rest of
Europe Hong Kong Asia-Pacific
US$m
US$m
US$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
%
24,048
23,121
3,723
19,931
809
71,632
–
20,537
44,585
38,012
10,053
3,121
2,572
19,570
73,328
10,374
3,946
14,320
7,353
4,923
35,397
9,584
8,293
3,850
130
7,459
29,316
1,664
142
1,806
–
4,110
7,833
11,583
2,749
1,815
574
5,406
22,127
629
361
990
–
6,847
26,778
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
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
132,233
66,519
30,950
62,600
6,389
298,691
100.0
44.3%
3,376
22.3%
2,521
10.4%
3,081
20.9%
684
2.1%
710
100.0%
10,372
2.6%
3.8%
9.9%
1.1%
11.1%
3.5%
Personal
Residential mortgages .................
Hong Kong Government Home
Ownership Scheme ..................
Other personal .............................
Total personal ..............................
Corporate and commercial
Commercial, industrial and
international trade ....................
Commercial real estate ................
Other property-related .................
Government .................................
Other commercial1 .......................
Total corporate and commercial ..
Financial
Non-bank financial institutions ....
Settlement accounts .....................
Total financial .............................
Total gross loans and advances to
customers2 ...............................
Percentage of Group loans and
advances by geographical
region .......................................
Non-performing loans3 ................
Non-performing loans as a
percentage of gross loans and
advances to customers3 ............
Specific provisions outstanding
against loans and advances ......
2,135
1,241
1,929
278
482
6,065
Specific provisions outstanding
as a percentage of non-
performing loans3 ....................
63.2%
49.2%
62.6%
40.6%
67.9%
58.5%
1 Other commercial includes advances in respect of agriculture, transport, energy and utilities.
2 Included within this total is credit card lending of US$7,604 million.
3 Net of suspended interest.
146
At 31 December 1999
Rest of
Europe Hong Kong Asia-Pacific
US$m
US$m
US$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
%
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
9,762
8,987
2,093
140
6,874
27,856
2,262
114
2,376
–
3,979
7,007
12,250
3,353
2,033
749
5,249
23,634
984
200
1,184
–
5,864
22,826
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
106,075
64,820
31,825
54,010
5,621
262,351
100.0
40.5%
2,679
24.7%
3,133
12.1%
3,535
20.6%
599
2.1%
427
100.0%
10,373
2.5%
4.8%
11.1%
1.1%
7.6%
3.9%
Personal
Residential mortgages .................
Hong Kong Government Home
Ownership Scheme ..................
Other personal .............................
Total personal ..............................
Corporate and commercial
Commercial, industrial and
international trade ....................
Commercial real estate ................
Other property-related .................
Government .................................
Other commercial1 .......................
Total corporate and commercial ..
Financial
Non-bank financial institutions ....
Settlement accounts .....................
Total financial .............................
Total gross loans and advances to
customers2 ...............................
Percentage of Group loans and
advances by geographical
region .......................................
Non-performing loans3 ................
Non-performing loans as a
percentage of gross loans and
advances to customers3 ............
Specific provisions outstanding
against loans and advances ......
1,411
1,428
2,221
261
371
5,692
Specific provisions outstanding
as a percentage of non-
performing loans3 ....................
52.7%
45.6%
62.8%
43.6%
86.9%
54.9%
1 Other commercial includes advances in respect of agriculture, transport, energy and utilities.
2 Included within this total is credit card lending of US$6,927 million.
3 Net of suspended interest.
147
H S B C H O L D I N G S P L C
Financial Review (continued)
Customer loans and advances by principal area within rest of Asia-Pacific and South America
At 31 December 2003
Residential
mortgages
US$m
Other
personal
US$m
Property-
related
US$m
Commercial,
international
trade and
other
US$m
Loans and advances to customers (gross)
Australia and New Zealand ..............................
India .................................................................
Indonesia ..........................................................
Japan ................................................................
Mainland China ................................................
Malaysia ...........................................................
Middle East ......................................................
Singapore .........................................................
South Korea ......................................................
Taiwan ..............................................................
Thailand ...........................................................
Other ................................................................
5,4361
424
13
13
78
1,837
61
1,521
1,430
1,073
32
183
Total of rest of Asia-Pacific ..............................
12,101
Argentina ..........................................................
Brazil ................................................................
Other ................................................................
Total of South America ....................................
47
176
1
224
497
305
135
75
6
518
1,660
2,420
81
506
129
803
7,135
62
2,313
1
2,376
1,835
10
20
613
614
311
923
1,142
–
–
82
196
5,746
16
122
9
147
3,460
1,329
670
2,731
1,887
2,591
4,726
2,219
847
852
743
2,237
24,292
9752
1,715
168
2,858
Total
US$m
11,228
2,068
838
3,432
2,585
5,257
7,370
7,302
2,358
2,431
986
3,419
49,274
1,100
4,3263
179
5,605
1 The acquisition of the AMP Bank mortgage business added US$1,246 million during the year.
2 Includes US$644 million of loan exposures to the Argentine Government received in exchange for debt securities.
3 The acquisitions of Losango and Lloyds TSB’s Brazilian businesses and assets added US$855 million and US$133 million respectively
to other personal lending and to corporate lending in 2003.
At 31 December 2002
Residential
mortgages
US$m
Other
personal
US$m
Property-
related
US$m
Commercial,
international
trade and
other
US$m
Loans and advances to customers (gross)
Australia and New Zealand ..............................
India .................................................................
Indonesia ..........................................................
Japan ................................................................
Mainland China ................................................
Malaysia ...........................................................
Middle East ......................................................
Singapore .........................................................
South Korea ......................................................
Taiwan ..............................................................
Thailand ...........................................................
Other ................................................................
Total of rest of Asia-Pacific ..............................
Argentina ..........................................................
Brazil.................................................................
Other ................................................................
Total of South America ....................................
2,742
216
9
12
29
1,558
36
960
800
918
26
201
7,507
94
158
1
253
290
288
91
67
4
453
1,544
2,023
67
420
80
573
5,900
31
979
2
1,012
1,187
18
27
592
298
333
1,086
925
–
1
26
239
4,732
15
48
9
72
1 Includes US$558 million of loan exposures to the Argentine Government received in exchange for debt securities.
148
Total
US$m
7,040
1,758
708
2,681
1,741
4,865
6,184
6,204
1,722
2,248
837
2,739
38,727
1,080
2,347
149
2,821
1,236
581
2,010
1,410
2,521
3,518
2,296
855
909
705
1,726
20,588
9401
1,162
137
2,239
3,576
(24)
(23)
(22)
(30)
(24)
Total
US$m
9,140
(7,456)
610
6,093
4,769
559
13,715
5,201
8,514
Gross
loans and
advances
to banks
US$m
Provisions
for bad
and
doubtful
debts
US$m
Analysis of loans and advances to banks by geographical region
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
North
America
US$m
South
America
US$m
51,806
38,639
12,948
11,885
1,922
39,398
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
31 December 2003 ...............................
Suspended interest ................................
Total .....................................................
31 December 2002 ...............................
Suspended interest ................................
Total .....................................................
31 December 2001 ...............................
Suspended interest ................................
Total .....................................................
31 December2000 ................................
Suspended interest ................................
Total .....................................................
31 December 1999 ...............................
Suspended interest ................................
Total .....................................................
117,200
(3)
117,197
95,521
(2)
95,519
104,665
(2)
104,663
126,064
(2)
126,062
100,102
(1)
100,101
Provisions against total loans and advances
At 1 January 2003 ...................................................................................................
Amounts written off ................................................................................................
Recoveries of advances written off in previous years ..............................................
Charge/(credit) to profit and loss account ................................................................
Acquisitions ............................................................................................................
Exchange and other movements ..............................................................................
At 31 December 2003 ..............................................................................................
– Household ...........................................................................................................
– Rest of HSBC ......................................................................................................
Provisions against loans and advances to customers
Year ended 31 December 2003
Specific
US$m
General
US$m
6,629
(7,456)
610
6,214
4,269
636
10,902
4,588
6,314
2,511
–
–
(121)
500
(77)
2,813
613
2,200
2003
2002
2001
2000
1999
Total provisions to gross lending1
Specific provisions ...............................
General provisions
Additional general provisions held
against Argentine risk .......................
Other ....................................................
Total provisions ....................................
Total Household
%
%
Rest of
HSBC
%
2.11
3.77
1.59
–
0.54
2.65
–
0.50
4.27
–
0.56
2.15
%
1.94
0.04
0.70
2.68
%
1.90
0.21
0.71
2.82
%
2.17
–
0.75
2.92
1 Net of suspended interest, reverse repo transactions and settlement accounts.
%
2.28
–
0.92
3.20
149
H S B C H O L D I N G S P L C
Financial Review (continued)
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 follows these tables.
Year ended 31 December 2003
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:
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 account1:
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 movements2 .........
Provisions at 31 December
Provisions against banks:
Specific provisions ........................................
Provisions against customers:
Specific provisions ........................................
General provisions3 .......................................
Provisions at 31 December ...............................
Provisions against customers as a percentage
of loans and advances to customers:
Specific provisions ........................................
General provisions ........................................
Total .................................................................
Rest of
Asia-
Pacific
US$m
1,496
North
America
US$m
2,356
South
America
US$m
477
Europe
US$m
3,668
(338)
(31)
(3)
(1)
(54)
(4)
(471)
(902)
25
3
2
–
49
1
62
142
(6)
286
15
(1)
–
216
–
482
(118)
874
653
Hong
Kong
US$m
1,143
(71)
(12)
(13)
–
(65)
(121)
(302)
(584)
16
–
–
–
4
6
16
42
–
(3)
(18)
1
–
78
102
271
(31)
400
54
(201)
(18)
(21)
(1)
(42)
(16)
(146)
(445)
18
4
5
–
11
1
35
74
3
(45)
(8)
(17)
1
(4)
23
116
16
85
(29)
4,435
1,055
1,181
20
3,554
861
4,435
1.65
0.40
2.05
–
629
426
1,055
0.84
0.57
1.41
4
981
196
1,181
1.99
0.40
2.39
Total
US$m
9,140
(1,016)
(179)
(67)
(2)
(295)
(675)
(5,222)
(7,456)
82
9
11
–
81
13
414
610
(3)
376
(11)
(23)
1
339
552
4,983
(121)
6,093
5,328
13,715
24
10,878
2,813
13,715
2.00
0.52
2.52
(337)
(113)
(30)
–
(104)
(529)
(4,225)
(5,338)
20
2
4
–
10
4
295
335
–
78
(1)
(5)
–
55
421
3,992
136
4,676
4,432
6,461
–
5,184
1,277
6,461
2.62
0.65
3.27
(69)
(5)
–
–
(30)
(5)
(78)
(187)
3
–
–
–
7
1
6
17
–
60
1
(1)
–
(6)
6
122
(124)
58
218
583
–
530
53
583
9.46
0.95
10.41
1 See table below ‘Net charge to the profit and loss account for bad and doubtful debts’.
2 Other movements include amounts of US$129 million in Europe and US$4,524 million in North America transferred in on the
acquisition of Household, and of US$116 million in South America transferred in on the acquisition of Lloyds TSB Group’s Brazilian
businesses and assets.
3 General provisions are allocated to geographical segments based on the location of the office booking the provision. Consequently, the
general provision booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in the rest of
Asia-Pacific, as well as those booked in Hong Kong.
150
Year ended 31 December 2002
North
America
US$m
723
South
America
US$m
1,033
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 .........................................
Residential mortgages ...................................
Other personal ...............................................
Total recoveries .............................................
Net charge to profit and loss account1:
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 movements2 .........
Provisions at 31 December
Provisions against banks:
Specific provisions ........................................
Provisions against customers:
Specific provisions ........................................
General provisions3 .......................................
Provisions at 31 December ...............................
Provisions against customers as a percentage
of loans and advances to customers:
Specific provisions ........................................
General provisions ........................................
Total .................................................................
Europe
US$m
3,067
–
(161)
(31)
(4)
(1)
(54)
(2)
(199)
(452)
15
6
–
–
7
1
29
58
(2)
345
(4)
3
(1)
50
–
243
(65)
569
426
Hong
Kong
US$m
1,408
–
(59)
(18)
(11)
–
(11)
(109)
(328)
(536)
1
–
–
–
3
7
14
25
–
(22)
9
(14)
–
(22)
70
322
(97)
246
–
Rest of
Asia-
Pacific
US$m
1,952
–
(255)
(88)
(2)
–
(116)
(7)
(132)
(600)
4
2
1
–
14
–
31
52
–
38
(11)
(29)
–
(22)
11
93
9
89
3
3,668
1,143
1,496
23
2,774
871
3,668
1.65
0.52
2.17
–
688
455
1,143
0.97
0.64
1.61
–
1,321
175
1,496
3.42
0.45
3.87
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
–
(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
1 See table below ‘Net charge to the profit and loss account for bad and doubtful debts’.
2 Other movements include amounts transferred in on the acquisition of HSBC Mexico of US$1,704 million.
3 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.
151
H S B C H O L D I N G S P L C
Financial Review (continued)
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 .........................................
Residential mortgages ...................................
Other personal ...............................................
Total recoveries .............................................
Net charge to profit and loss account1:
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 provisions2 .......................................
Provisions at 31 December ...............................
Provisions against customers as a percentage
of loans and advances to customers:
Specific provisions ........................................
General provisions ........................................
Total .................................................................
Year ended 31 December 2001
Rest of
Asia-
Pacific
US$m
2,091
North
America
US$m
739
South
America
US$m
540
Europe
US$m
3,025
(5)
(123)
(27)
(5)
–
(54)
(4)
(224)
(442)
12
1
–
–
17
1
34
65
(1)
164
(35)
(2)
(2)
143
(47)
257
(36)
441
(22)
Hong
Kong
US$m
1,802
–
(238)
(29)
(53)
–
(34)
(121)
(155)
(630)
1
2
3
–
12
5
8
31
–
15
16
(20)
–
(84)
111
168
(9)
197
8
–
(256)
(18)
(5)
–
(48)
(7)
(93)
(427)
11
1
1
–
99
–
26
138
–
157
(6)
(14)
–
(58)
10
82
1
172
(22)
3,067
1,408
1,952
22
2,204
841
3,067
1.61
0.62
2.23
–
856
552
1,408
1.24
0.80
2.04
–
1,786
166
1,952
5.44
0.51
5.95
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
–
(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
12.873
19.90
1 See table below ‘Net charge to the profit and loss account for bad and doubtful debts’
2 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.
3 Includes US$600 million of additional provisions held against Argentine loans.
152
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 .........................................
Residential mortgages ...................................
Other personal ...............................................
Total recoveries .............................................
Net charge to profit and loss account1:
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 movements2 .........
Provisions at 31 December
Provisions against banks:
Specific provisions ........................................
Provisions against customers:
Specific provisions ........................................
General provisions3 .......................................
Provisions at 31 December ...............................
Provisions against customers as a percentage
of loans and advances to customers:
Specific provisions ........................................
General provisions ........................................
Total .................................................................
Europe
US$m
2,153
Hong
Kong
US$m
1,887
Year ended 31 December 2000
Rest of
Asia-
Pacific
US$m
2,686
North
America
US$m
864
South
America
US$m
430
(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
–
(202)
(9)
(8)
–
(68)
(82)
(73)
(442)
–
3
–
–
–
4
1
8
16
–
81
40
–
–
(30)
101
55
1
248
93
–
(191)
(58)
(3)
–
(149)
(5)
(88)
(494)
–
3
2
2
–
23
–
19
49
–
107
19
(3)
–
(18)
5
63
(188)
(15)
(135)
3,025
1,802
2,091
30
2,135
860
3,025
1.61
0.65
2.26
–
1,241
561
1,802
1.87
0.84
2.71
–
1,929
162
2,091
6.23
0.53
6.76
–
(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
–
(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
1 See table below ‘Net charge to the profit and loss account for bad and doubtful debts’.
2 Other movements include amounts transferred in on the acquisition of CCF of US$882 million.
3 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.
153
H S B C H O L D I N G S P L C
Financial Review (continued)
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 account1:
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 provisions2 .......................................
Provisions at 31 December ...............................
Provisions against customers as a percentage
of loans and advances to customers:
Specific provisions ........................................
General provisions ........................................
Total .................................................................
Europe
US$m
1,932
Hong
Kong
US$m
1,554
Year ended 31 December 1999
Rest of
Asia-
Pacific
US$m
2,181
North
America
US$m
599
South
America
US$m
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
(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)
2,153
1,887
2,686
24
1,411
718
2,153
1.33
0.68
2.01
–
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$m
6,658
(434)
(74)
(38)
–
(133)
(24)
(483)
(1,186)
1
22
17
20
11
21
73
165
(4)
946
154
132
(64)
274
102
580
(47)
2,073
310
8,020
24
5,692
2,304
8,020
2.17
0.88
3.05
1 See table below ‘Net charge to the profit and loss account for bad and doubtful debts’.
2 General provisions are allocated to geographical segments based on the location of the office booking the provision. Consequently, the
general provision booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in the rest of
Asia-Pacific, as well as those booked in Hong Kong.
154
Net charge to the profit and loss account for bad and doubtful debts
The charge for bad and doubtful debts and non-performing customer loans and related customer provisions can be
analysed as follows:
Europe
US$m
Hong Kong
US$m
Year ended 31 December 2003
North
America
US$m
Rest of
Asia-Pacific
US$m
South
America
US$m
1,485
193
1,292
(351)
–
(351)
(142)
(25)
(117)
992
–
13
(131)
(118)
874
(6)
880
655
–
655
(182)
–
(182)
(42)
–
(42)
431
–
–
(31)
(31)
400
–
400
412
–
412
(269)
–
(269)
(74)
-
(74)
69
–
–
16
16
85
3
82
4,962
4,580
382
(87)
(4)
(83)
(335)
(282)
(53)
4,540
–
100
36
136
4,676
–
4,676
263
–
263
(64)
–
(64)
(17)
–
(17)
182
–
–
(124)
(124)
58
–
58
Total
US$m
7,777
4,773
3,004
(953)
(4)
(949)
(610)
(307)
(303)
6,214
–
113
(234)
(121)
6,093
(3)
6,096
0.41%
0.53%
0.17%
2.36%
1.03%
1.12%
5,701
326
5,375
4,415
154
4,261
1,671
–
1,671
1,055
–
1,055
1,538
–
1,538
1,177
–
1,177
5,444
4,380
1,064
6,461
5,047
1,414
Specific provisions
New provisions: ................
Household1 ....................
Rest of HSBC ...............
Release of provisions no
longer required: .............
Household1 ....................
Rest of HSBC ...............
Recoveries of amounts
previously written off:....
Household1 ....................
Rest of HSBC ...............
General provisions
Argentine additional
provision .......................
Household1 .......................
Rest of HSBC ...................
Total bad and doubtful
debt charge ....................
Bank...............................
Customer........................
Customer bad and
doubtful debt charge as
a percentage of closing
gross loans and
advances .......................
31 December 2003
Non-performing loans ......
Household .....................
Rest of HSBC ...............
Provisions .........................
Household .....................
Rest of HSBC ...............
1 Since the date of acquisition.
The total bad and doubtful debt charge for Household includes charges for:
Europe
US$m
Hong Kong
US$m
Year ended 31 December 2003
North
America
US$m
Rest of
Asia-Pacific
US$m
Residential
mortgages.......................
Credit cards .......................
Other personal lending ......
–
59
122
–
–
–
–
–
–
423
1,740
2,228
696
–
696
583
–
583
South
America
US$m
–
–
–
15,050
4,706
10,344
13,691
5,201
8,490
Total
US$m
423
1,799
2,351
155
H S B C H O L D I N G S P L C
Financial Review (continued)
Bad and doubtful debt provisions (continued)
Europe
US$m
Hong Kong
US$m
Year ended 31 December 2002
North
America
US$m
Rest of
Asia-Pacific
US$m
South
America
US$m
963
(271)
(58)
634
–
(65)
(65)
569
569
528
(160)
(25)
343
–
(97)
(97)
246
246
400
(268)
(52)
80
–
9
9
89
89
399
(79)
(35)
285
–
15
15
300
300
388
(48)
(10)
330
(196)
(17)
(213)
117
117
Total
US$m
2,678
(826)
(180)
1,672
(196)
(155)
(351)
1,321
1,321
0.34%
0.35%
0.23%
0.38%
3.27%
0.36%
4,495
3,645
1,724
1,143
2,055
1,496
1,773
2,356
476
477
10,523
9,117
Europe
US$m
Hong Kong
US$m
Year ended 31 December 2001
North
America
US$m
Rest of
Asia-Pacific
US$m
South
America
US$m
802
(260)
(65)
477
–
(36)
(36)
441
441
449
(212)
(31)
206
–
(9)
(9)
197
197
577
(268)
(138)
171
–
1
1
172
172
392
(42)
(43)
307
–
(7)
(7)
300
300
346
(35)
(8)
303
600
24
624
927
927
Total
US$m
2,566
(817)
(285)
1,464
600
(27)
573
2,037
2,037
0.32%
0.29%
0.52%
0.41%
17.80%
0.64%
3,682
3,045
2,028
1,408
2,723
1,952
672
723
544
1,033
9,649
8,161
Specific provisions
New provisions ..................
Release of provisions no
longer required .............
Recoveries of amounts
previously written off ...
General provisions
Argentine additional
provision .......................
Other .................................
Total bad and doubtful
debt charge ...................
Customer bad and doubtful
debt charge ...................
Customer bad and doubtful
debt charge as a
percentage of closing
gross loans and
advances .......................
31 December 2002
Non-performing loans .......
Provisions ..........................
Specific provisions
New provisions ..................
Release of provisions no
longer required .............
Recoveries of amounts
previously written off ...
General provisions
Argentine additional
provision .......................
Other .................................
Total bad and doubtful
debt charge ...................
Customer bad and doubtful
debt charge ...................
Customer bad and doubtful
debt charge as a
percentage of closing
gross loans and
advances .......................
31 December 2001
Non-performing loans .......
Provisions ..........................
156
Specific provisions
New provisions ..................
Release of provisions no
longer required .............
Recoveries of amounts
previously written off ...
General provisions
Special provision reflecting
Asian risk raised in 1997
Other .................................
Total bad and doubtful
debt charge ...................
Customer bad and doubtful
debt charge ...................
Customer bad and doubtful
debt charge as a
percentage of closing
gross loans and
advances .......................
31 December 2000
Non-performing loans .......
Provisions ..........................
Specific provisions
New provisions ..................
Release of provisions no
longer required .............
Recoveries of amounts
previously written off ...
General provisions
Argentine additional
provision .......................
Other .................................
Total bad and doubtful
debt charge ...................
Customer bad and doubtful
debt charge ...................
Customer bad and doubtful
debt charge as a
percentage of closing
gross loans and
advances .......................
31 December 1999
Non-performing loans .......
Provisions ..........................
Europe
US$m
Hong Kong
US$m
Year ended 31 December 2000
North
America
US$m
Rest of
Asia-Pacific
US$m
South
America
US$m
609
(248)
(56)
305
–
43
43
348
346
454
(192)
(15)
247
–
1
1
248
248
543
(321)
(49)
173
(174)
(14)
(188)
(15)
(15)
395
(72)
(31)
292
–
(135)
(135)
157
157
232
(28)
(9)
195
–
(1)
(1)
194
194
Total
US$m
2,233
(861)
(160)
1,212
(174)
(106)
(280)
932
930
0.26%
0.37%
–
0.25%
3.04%
0.31%
3,376
2,995
2,521
1,802
3,081
2,091
684
739
710
540
10,372
8,167
Europe
US$m
Hong Kong
US$m
Year ended 31 December 1999
North
America
US$m
Rest of
Asia-Pacific
US$m
South
America
US$m
764
(255)
(90)
419
–
19
19
438
440
720
(91)
(10)
619
–
(34)
(34)
585
585
1,084
(244)
(17)
823
–
(14)
(14)
809
811
231
(56)
(44)
131
–
(23)
(23)
108
108
194
(63)
(3)
128
–
5
5
133
133
Total
US$m
2,993
(709)
(164)
2,120
–
(47)
(47)
2,073
2,077
0.41%
0.90%
2.55%
0.20%
2.25%
0.79%
2,679
2,129
3,133
1,887
3,534
2,686
584
864
595
430
10,525
7,996
157
H S B C H O L D I N G S P L C
Financial Review (continued)
Year ended 31 December 2003 compared with
year ended 31 December 2002
The increase in the level of new specific provisions
was principally driven by:
• New provisions in North America, which were
US$4,563 million higher than in 2002,
essentially reflected the acquisition of
Household, which reported US$4,580 million of
new provisions. The majority of Household’s
customer loans are in the consumer finance
sector and are geographically well-spread across
the United States. During the period since its
acquisition, Household’s new provisions
reflected the impact of the weak economy,
including higher personal bankruptcy filings and
a higher level of amounts becoming past due. In
the latter part of 2003, there were signs of an
improvement in credit quality and delinquency
levels stabilised. At 31 December 2003,
Household’s two-month-and-over consumer
contractual delinquency ratio was 5.8 per cent. A
charge of US$48 million from HSBC Mexico
arose from consumer lending and credit card
portfolios, which are provisioned on a portfolio
basis. In Canada, new provisions in 2003 were
US$66 million lower than in 2002, when
significant new provisions for a small number of
commercial facilities were necessary, most
notably in the telecommunications sector.
In Europe, new provisions were US$522 million
higher than in 2002 of which US$193 million
related to Household’s UK consumer finance
business, which is provisioned on a portfolio
basis. Elsewhere in the UK, the increase in new
provisions in personal lending reflected the
growth in loan portfolios. In the corporate and
commercial portfolio, new provisions were
raised to cover a number of accounts in the
energy and manufacturing sectors. In France,
there were higher provisions, principally due to
the deterioration of a borrower in the
engineering sector.
•
• New provisions in Hong Kong were
US$127 million higher than in 2002. Higher
levels of new provisions were required in the
electronics sector against a small number of
customers in niche markets which suffered from
a combination of technological developments
and excess market capacity. New specific
provisions for personal lending (including credit
158
cards) reduced in 2003, reflecting a reduction in
bankruptcy filings and improving economic
conditions. This more than offsets increased
charges in respect of residential mortgages,
which reflected the fall in the first half of 2003
in the value of residential property. The second
half of 2003 saw property prices stabilise,
delinquencies fall and the percentage of the
mortgage book with negative equity reduce.
• New specific provisions in the rest of
Asia-Pacific were broadly in line with 2002,
reflecting the relatively stable and improving
economic environment across much of the
region during 2003.
•
In South America, new provisions decreased by
US$125 million, mainly reflecting an
improvement in the economic conditions in
Argentina. This was partly offset by increased
new provisions in Brazil’s personal lending as a
difficult economic environment led to higher
levels of delinquencies. There were also higher
new specific provisions for corporate customers
in the commodities and food sectors as a result
of business failure and, in one case, fraud.
In aggregate, releases and recoveries increased
by US$557 million compared with 2002. Household
contributed US$311 million of the increase due to
collections and sales of written-off accounts. In
Europe, excluding Household, releases and
recoveries were US$139 million higher, mainly the
result of a recovery from an exposure in the transport
sector and the upgrading of corporate exposures in
the telecommunications and retail sectors.
There was a net release of general provisions of
US$121 million in 2003 compared with a release of
US$351 million in 2002. There were general
provision charges of US$113 million in Household
and US$78 million in HSBC Mexico, reflecting
growth in lending. In Europe, excluding Household’s
UK consumer finance business, a net release of
general provision of US$131 million reflected an
improved economic outlook and successful
restructuring and refinancing activity in industry
sectors which had been causing concern. In
Argentina, a net release of US$122 million reflected
success in collections and the improved environment
and hence quality of the remaining loan book. At 31
December 2003, specific and general provisions
together covered about 47 per cent of
non-government loans (net of suspended interest) in
Argentina.
Year ended 31 December 2002 compared with
year ended 31 December 2001
•
The main factors contributing to the decrease in the
bad debt charge against customer loans were:
New specific provisions increased by
US$112 million, or 4 per cent, principally driven by:
• 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 were 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 more
widespread debt counselling services proved
effective. Provisioning against such unsecured
loans was determined on a formula based, inter
alia, on the number of days loans were
delinquent. No major changes were made during
the year to the assumptions underpinning this
provisioning. The level of new specific
provisions against residential mortgages in
Europe remained very low.
• 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 those 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.
• 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 a rise of US$127 million in new provisions
against personal lending, principally on credit
cards.
In aggregate, releases and recoveries were
US$96 million less than those recorded in 2001.
2001 benefited from exceptional recoveries
against a long-standing 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
reflected the Group’s historical experience of the rate
at which such losses occur and are identified, 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 who 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 became
impaired, this caused an underlying increase in the
level of non-performing loans in South America. The
loss experience on corporate credit in Argentina
during 2002 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.
159
H S B C H O L D I N G S P L C
Financial Review (continued)
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
%
Year ended 31 December
2003
New provisions ..................
Releases and recoveries ......
Net charge for specific
provisions .....................
Total provisions charged ...
Amount written off net of
recoveries .....................
Year ended 31 December
2002
New provisions ..................
Releases and recoveries ......
Net charge for specific
provisions .....................
Total provisions charged ...
Amount written off net of
recoveries .....................
Year ended 31 December
2001
New provisions ..................
Releases and recoveries ......
Net charge for specific
provisions .....................
Total provisions charged ...
Amount written off net of
recoveries .....................
0.76
(0.25)
0.51
0.45
0.39
0.62
(0.21)
0.41
0.37
0.25
0.60
(0.24)
0.36
0.33
0.28
0.89
(0.30)
0.59
0.54
0.73
0.75
(0.26)
0.49
0.35
0.72
0.66
(0.36)
0.30
0.29
0.88
0.96
(0.80)
0.16
0.20
0.86
1.13
(0.90)
0.23
0.25
1.55
1.85
(1.31)
0.54
0.55
0.93
2.91
(0.25)
2.66
2.74
2.93
0.51
(0.15)
0.36
0.38
0.41
0.55
(0.12)
0.43
0.42
0.39
6.09
(1.88)
4.21
1.34
3.94
9.97
(1.48)
8.49
3.01
3.91
5.72
(0.71)
5.01
15.36
5.78
Total
%
1.60
(0.32)
1.28
1.25
1.40
0.78
(0.29)
0.49
0.38
0.56
0.82
(0.35)
0.47
0.65
0.61
Areas of special interest
Telecommunications industry exposure
Telecommunications 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 sector as a percentage of
total loans and advances was 0.72 per cent as at 31
December 2003 compared with 1.34 per cent at 31
December 2002. This exposure had the following
characteristics:
160
Percentage of telecommunications
industry exposure
At
31 December
2003
%
At
31 December
2002
%
66
21
79
21
3
56
57
33
79
21
6
59
Investment grade under
HSBC gradings ..............
Under one year remaining
maturity .........................
Telecom operators ...............
Telecom manufacturers .......
Non-performing accounts ...
of which provided ..........
Argentina
The exposure of HSBC’s banking operations to
Argentina at 31 December 2003 amounted to US$1.8
billion (31 December 2002: US$1.7 billion). Of this
amount, US$1.5 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 2003 amounted to total assets of
US$0.7 billion, of which US$0.5 billion related to
long-term assurance assets attributable to
policyholders, mainly comprising loans to the
Argentine Government received in exchange for debt
securities. Overall, in-country provisions of US$198
million were held against gross customer non-
government loans of US$456 million. There were
also cross-border provisions of US$118 million held
against exposures to customers in Argentina.
During 2003, HSBC recovered some
US$122 million equivalent of general credit
provisions raised in 2001 as the credit portfolio
stabilised and non-performing accounts fell due to
success in collections and a better environment. The
improved environment reflects both political and
economic progress in the period. The return of a
democratically elected president substantially
improved the political scene and economically the
country began to grow again, driven by improved
sentiment and the impact on the export sector of the
massive devaluation suffered since 2001.
Argentina, however, continues to face, and must
resolve, fundamental structural challenges including
reaching a settlement with its international creditors.
HSBC continues to monitor developments in
Argentina closely and plans to continue to operate
there and contribute to a revitalised financial sector.
However, HSBC is prepared to take the necessary
actions if required to protect the value of its
shareholders’ interests in the event of unforeseen
political or economic events.
Risk elements in the loan portfolio
The SEC requires disclosure of credit risk elements
under the following headings that reflect US
accounting practice and classifications:
•
•
•
loans accounted for on a non-accrual basis;
accruing loans contractually past due 90 days or
more as to interest or principal; and
troubled debt restructurings not included in the
above.
In accordance with UK accounting practice, a
number of operating companies suspend interest
rather than ceasing to accrue. This additional
category is also reported below, as are assets
acquired in exchange for advances.
Non-performing loans and advances1
31 December
2003
US$m
31 December
2002
US$m
Banks ..............................................
24
17
Customers
– Household .....................................
– Other HSBC..................................
Total non-performing loans and
advances.......................................
Total provisions cover as a
percentage of non-performing
loans and advances ......................
1 Net of suspended interest.
4,706
10,344
15,050
15,074
–
10,523
10,523
10,540
91.0%
86.7%
Non-performing customer loans1 and related
specific provisions outstanding by geographical
segment
2003
2002
Non-
performing
loans
US$m
5,701
1,671
Specific
Provisions
US$m
3,554
629
Non-
Performing
loans
US$m
4,495
1,724
Specific
provisions
US$m
2,774
688
1,538
5,444
696
981
5,184
530
2,055
1,773
476
15,050
10,878
10,523
1,321
1,482
341
6,606
Europe................
Hong Kong.........
Rest of Asia-
Pacific ...........
North America ...
South America ...
1 Net of suspended interest.
Total non-performing loans to customers increased
by US$4,527 million during 2003, largely as a
consequence of the Household acquisition. At
31 December 2003, non-performing loans
represented 2.8 per cent of total lending compared
with 2.9 per cent at 31 December 2002.
Portfolio provisioning methodologies for
unsecured personal finance (using roll rates or loss
rates) normally leads to a provision coverage of
non-performing loans in excess of 100 per cent, as
significant loss or roll rates are applied to performing
loans. As a consequence, therefore, of the acquisition
of Household, the overall coverage of
non-performing loans has risen from 86.7 per cent
at 31 December 2002 to 91.0 per cent at
31 December 2003. The overall specific provision
coverage of non-performing loans similarly
increased from 62.8 per cent to 72.3 per cent.
Excluding the impact of Household, the coverage
percentage declined to 60.8 per cent. This was due to
US$936 million of write-offs of largely provided
161
restructurings may be discontinued after the first year
if the debt is performing in accordance with the new
terms.
Troubled debt restructurings increased in
Mexico from restructuring of commercial accounts,
and in Europe arising from the restructuring of a
corporate borrower in the telecommunications
equipment sector. The reduction in Hong Kong
reflected the full repayment of balances on certain
restructured borrowings.
Accruing loans past due 90 days or more
Accruing loans past due 90 days increased as a result
of the acquisition of Household. In common with
other card issuers including other parts of HSBC,
Household continues to accrue interest on credit
cards past 90 days until charged off at 180 days past
due. Appropriate provisions are raised against the
proportion of interest thought to be irrecoverable.
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 2003, all loans and advances in
Argentina and all cross-border loans to Argentina
which were not otherwise included as part of total
risk elements, have been designated as potential
problem loans.
At 31 December 2003, there were potential
problem loans of US$701 million (31 December
2002: US$599 million) in respect of Argentine loans.
Risk elements
The following table provides an analysis of risk
elements in the loan portfolios at 31 December for
the past five years:
H S B C H O L D I N G S P L C
Financial Review (continued)
non-performing loans in HSBC Mexico, partly offset
by an increase in the percentage coverage in South
America as unsecured personal finance loans grew
faster than corporate and commercial lending.
In both the UK and France, underlying credit
quality remained stable. Household’s European
operations added US$326 million to non-performing
loans. Excluding this, and at constant exchange rates,
non-performing loans increased by US$264 million,
or 5 per cent. The rise in the level of non-performing
loans reflected the deterioration of a small number of
corporate accounts. In value terms, this was
concentrated in the energy, engineering, and
telecommunications sectors.
In Hong Kong, non-performing loans decreased
slightly during 2003, largely due to recoveries and
loan repayments.
In the rest of Asia-Pacific, non-performing loans
decreased by US$517 million during 2003 due
mainly to write-offs and recoveries in Malaysia,
New Zealand, Indonesia and Singapore.
The level of non-performing loans in North
America increased significantly due to the
acquisition of Household. In Mexico,
non-performing loans fell following write-offs of
US$936 million in the commercial and consumer
loan books as management continued to review
critically the acquired loan assets. The level of
non-performing loans elsewhere in North America
remained in line with the level at 31 December 2002.
In South America, there was a decrease in non-
performing loans in 2003 in Argentina as recoveries
were made on a number of accounts; about 56 per
cent of the non-government customer loan book is
now classified as non-performing compared with 74
per cent at 31 December 2002. In Brazil, the level of
non-performing loans increased as the relatively high
prevailing interest rates resulted in higher
delinquencies in both the personal and
commercial/corporate portfolios.
Troubled debt restructurings
US GAAP requires separate disclosure of any loans
whose terms have been modified to grant
concessions other than warranted by market
conditions due to problems with the borrower. These
are classified as ‘troubled debt restructurings’ and
are distinct from the normal restructuring activities
described above. Disclosure of troubled debt
162
31 December
2003
US$m
31 December
2002
US$m
31 December
2001
US$m
31 December
2000
US$m
31 December
1999
US$m
Loans accounted for on a non-accrual basis
Europe ........................................................................
Household ................................................................
Other ........................................................................
Hong Kong .................................................................
Rest of Asia-Pacific ....................................................
North America ............................................................
Household ................................................................
Other ........................................................................
South America ............................................................
Total ...........................................................................
Loans on which interest has been accrued but suspended
Europe ........................................................................
Household ................................................................
Other ........................................................................
Hong Kong .................................................................
Rest of Asia-Pacific ....................................................
North America ............................................................
Household ................................................................
Other ........................................................................
South America ............................................................
Total ...........................................................................
Assets acquired in exchange for advances
Europe ........................................................................
Household ................................................................
Other ........................................................................
Hong Kong .................................................................
Rest of Asia-Pacific ....................................................
North America ............................................................
Household ................................................................
Other ........................................................................
South America ............................................................
Total ...........................................................................
3,138
326
2,812
166
168
4,618
3,683
935
601
8,691
2,542
–
2,542
1,504
1,351
33
–
33
95
5,525
32
–
32
2
30
794
697
97
–
858
2,393
–
2,393
247
294
1,624
–
1,624
293
4,851
2,086
–
2,086
1,460
1,714
48
–
48
183
5,491
26
–
26
17
54
101
–
101
–
198
2,052
–
2,052
213
195
593
–
593
429
3,482
1,553
–
1,553
1,795
2,497
67
–
67
115
6,027
84
–
84
19
32
14
–
14
–
149
1,985
–
1,985
236
429
627
–
627
550
3,827
1,389
–
1,389
2,259
2,627
39
–
39
160
6,474
25
–
25
26
24
19
–
19
–
94
1,176
–
1,176
163
435
550
–
550
447
2,771
1,514
–
1,514
2,898
3,097
34
–
34
133
7,676
27
–
27
72
2
17
–
17
–
118
Total non-performing loans ........................................
15,074
10,540
9,658
10,395
10,565
Troubled debt restructurings
Europe ........................................................................
Household ................................................................
Other ........................................................................
Hong Kong .................................................................
Rest of Asia-Pacific ....................................................
North America ............................................................
Household ................................................................
Other ........................................................................
South America ............................................................
Total ...........................................................................
159
–
159
571
68
210
2
208
837
1,845
Accruing loans contractually past due 90 days or more as to principal or interest
Europe ........................................................................
Household ................................................................
Other ........................................................................
Hong Kong .................................................................
Rest of Asia-Pacific ....................................................
North America ............................................................
Household ................................................................
Other ........................................................................
South America ............................................................
Total ...........................................................................
34
–
34
205
45
1,252
1,215
37
2
1,538
Total risk elements
Europe ........................................................................
Household ................................................................
Other ........................................................................
Hong Kong .................................................................
Rest of Asia-Pacific ....................................................
North America ............................................................
Household ................................................................
Other ........................................................................
South America ............................................................
Total ...........................................................................
Provisions for bad and doubtful debts as a % of total
risk elements ........................................................
5,905
326
5,579
2,448
1,662
6,907
5,597
1,310
1,535
18,457
74.3
41
–
41
396
89
4
–
4
669
1,199
16
–
16
193
33
42
–
42
7
291
4,562
–
4,562
2,313
2,184
1,819
–
1,819
1,152
12,030
76.0
–
–
–
381
131
3
–
3
144
659
15
–
15
98
38
52
–
52
47
250
3,704
–
3,704
2,506
2,893
729
–
729
735
10,567
77.4
–
–
–
395
231
7
–
7
142
775
11
–
11
76
66
64
–
64
82
299
3,410
–
3,410
2,992
3,377
756
–
756
934
11,469
71.5
–
–
–
266
138
9
–
9
146
559
21
–
21
84
54
59
–
59
58
276
2,738
–
2,738
3,483
3,726
669
–
669
784
11,400
70.3
163
H S B C H O L D I N G S P L C
Financial Review (continued)
Interest foregone on non-performing lendings
The following tables analyse the aggregate of in-
Interest income that would have been recognised
under the original terms of the non-accrual,
suspended interest and restructured loans amounted
to approximately US$380 million in 2003 compared
with US$406 million in 2002, US$640 million in
2001 and US$955 million in 2000. Interest income of
approximately US$230 million in 2003 from such
loans was recorded in 2003, compared with
US$258 million in 2002, US$261 million in 2001,
US$324 million in 2000.
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.
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. For
2003, outstandings to counterparties in the UK were
collected on a comparable basis to that required for
the Form C1 for the first time. For 2002 and 2001,
the UK outstandings, which are not recorded on
Form C1 because the UK is HSBC’s country of
domicile, have not been collected or disclosed.
164
United Kingdom .................................
Germany .............................................
United States.......................................
France .................................................
The Netherlands..................................
Hong Kong .........................................
Canada................................................
Italy.....................................................
United States ......................................
Germany ............................................
France ................................................
The Netherlands .................................
Hong Kong ........................................
Canada ...............................................
Japan ..................................................
Italy ....................................................
Australia ............................................
Germany ............................................
United States ......................................
France ................................................
The Netherlands .................................
Hong Kong ........................................
Italy.....................................................
Canada ...............................................
Japan ..................................................
31 December 2003
Government and
official institutions
US$bn
3.1
8.0
8.4
2.3
0.6
0.7
3.2
5.2
31 December 2002
Government and
official institutions
US$bn
9.6
2.4
1.7
0.4
0.7
2.9
4.1
2.2
0.5
31 December 2001
Government and
official institutions
US$bn
2.1
9.8
1.5
0.3
0.7
1.5
2.2
4.4
Banks
US$bn
14.2
16.0
5.5
9.5
9.0
1.1
6.0
4.4
Banks
US$bn
5.6
16.9
5.8
7.5
0.9
4.8
4.0
4.7
5.8
Banks
US$bn
22.0
5.1
8.1
6.9
0.8
8.3
5.6
3.4
Other
US$bn
20.4
3.7
12.3
5.5
4.6
10.0
1.8
0.8
Other
US$bn
9.7
2.7
5.0
4.0
9.1
2.4
1.0
1.1
1.6
Other
US$bn
2.4
9.6
4.1
3.4
9.0
0.6
1.5
0.8
Total
US$bn
37.7
27.7
26.2
17.3
14.2
11.8
11.0
10.4
Total
US$bn
24.9
22.0
12.5
11.9
10.7
10.1
9.1
8.0
7.9
Total
US$bn
26.5
24.5
13.7
10.6
10.5
10.4
9.3
8.6
As at 31 December 2003, HSBC had in-country
foreign currency and cross-border outstandings to
counterparties in Australia and Japan of between
0.75 per cent and 1 per cent of total assets. The
aggregate in-country foreign currency and cross-
border outstandings were: Australia:US$9.1 billion;
Japan:US$7.9 billion.
As at 31 December 2002, HSBC had in-country
foreign currency and cross-border outstandings to
counterparties in Belgium of between 0.75 per cent
and 1 per cent of total assets. The aggregate
in-country foreign currency and cross-border
outstandings were US$5.9 billion.
At 31 December 2001, HSBC had in-country
foreign currency and cross-border outstandings to
counterparties in Australia, of between 0.75 per cent
and 1 per cent of total assets. The aggregate in-
country foreign currency and cross-border
outstandings were: US$6.0 billion.
.
165
H S B C H O L D I N G S P L C
Financial Review (continued)
Liquidity and funding management
In HSBC, liquidity policy is designed to ensure that
all commitments, both contractual and those
expended on the basis of behavioural patterns, which
are required to be funded, can be met out of readily
available and secure sources of funding. In addition,
excess liquid assets are held in each market which,
together with recourse to available funding facilities,
provide further sources of funding in the event of
stress conditions. Funding policy seeks to ensure that
the necessary sources of funds are available at an
optimised cost.
The management of liquidity and funding is
carried out locally in the operating companies of
HSBC and is not centralised. This is because it is
HSBC policy that each legal entity should be self
sufficient with regard to funding its own operations,
except for certain short-term treasury requirements
and small start-up operations which are funded under
strict guidelines from HSBC’s largest banking
operations. There are also regulatory restrictions and
limitations on the transfer of resources between
HSBC entities to meet liquidity and funding needs
across the range of currencies, markets, regulatory
jurisdictions and time zones within which HSBC
operates.
It is the responsibility of local management to
ensure compliance with local regulatory and Group
Management Board (formerly Group Executive
Committee) requirements on liquidity management.
The latter vary by entity and take account of the
depth and liquidity of the market in which the local
financial unit operates. HSBC requires operating
entities to maintain a strong liquidity position and to
manage the liquidity profile of their assets, liabilities
and commitments so that cash flows are
appropriately balanced and all funding obligations
are met when due. Liquidity is managed on a daily
basis by local treasury functions, with the larger
regional treasury sites providing support to smaller
entities as required and where regulations permit.
HSBC accesses professional markets in order to
provide funding for operating subsidiaries that do not
accept deposits, to maintain a presence in local
money markets and to optimise funding of asset
maturities not naturally matched by core deposit
funding.
166
Compliance with liquidity and funding
requirements is monitored by local Asset and
Liability Management Committees which report to
Group Head Office on a regular basis. This process
includes:
•
projecting cash flows by major currency and
considering the level of liquid assets necessary
in relation thereto;
• monitoring balance sheet liquidity ratios against
internal and regulatory requirements;
• maintaining a diverse range of funding sources
with adequate back-up facilities;
• managing the concentration and profile of debt
maturities;
• maintaining debt financing plans;
• monitoring depositor concentration in order to
avoid undue reliance on large individual
depositors and ensure a satisfactory overall
funding mix; and
• maintaining liquidity and funding contingency
plans. These plans identify early indicators of
stress conditions and describe actions to be taken
in the event of difficulties arising from systemic
or other crises while minimising any adverse
long-term implications for the business.
HSBC
Current accounts and savings deposits payable on
demand or at short notice form a significant part of
HSBC’s funding for the majority of operating
companies. HSBC places considerable importance
on the stability of these deposits. This is achieved
through enhancing HSBC’s brand value in terms of
trust and stability across the Group’s geographically
diverse retail banking network and by maintaining
depositor confidence in HSBC’s capital strength.
With the exception of Household, limited use is
made of wholesale market funding. In fact, in
aggregate, HSBC is a liquidity provider to financial
markets placing significantly more funds with other
banks than it borrows.
Household funds itself principally through
taking term funding in the professional markets and
through securitisation of assets. At 31 December
2003, US$106 billion of Household’s liabilities were
drawn from professional markets, utilising a range of
products, maturities and currencies to avoid undue
reliance on any particular funding source. Since
Household became a member of the HSBC Group,
its access to funding improved in terms of both the
breadth of available sources and the pricing.
Although not utilised in the management of
HSBC’s liquidity, consolidated figures provide a
useful insight into the elements comprising the
Group’s overall liquidity position.
In aggregate, 51 per cent (2002: 46 per cent) of
HSBC’s balance sheet is lent to customers and some
33 per cent (2002: 38 per cent) is held in liquid
assets, namely interbank lending and debt securities.
Of total liabilities of US$1,034 billion at
31 December 2003, funding from customers
amounted to US$573 billion, of which
US$558 billion was contractually repayable within
one year. However, although the contractual
repayments of many customer accounts are on
demand or at short notice, in practice deposit
balances remain stable with deposits and
withdrawals offsetting each other as customers
remain confident that their funds will be available
when required. Other liabilities included
US$70 billion of deposits by banks (US$65 billion
repayable within one year), US$30 billion of short
positions in securities and US$154 billion of
securities in issue (against which US$34 billion of
loans and advances to customers have been pledged).
Assets available to meet these liabilities, and to
cover outstanding commitments to lend
(US$429 billion), included cash, central bank
balances, items in the course of collection and
treasury and other bills (US$46 billion); loans to
banks (US$117 billion, including US$ 113 billion
repayable within one year); and loans to customers
(US$529 billion, including US$218 billion repayable
within one year). In the normal course of business, a
proportion of customer loans contractually repayable
within one year will be extended. In addition, HSBC
held debt securities marketable at a value of
US$206 billion. Of these assets, some US$73 billion
of debt securities and treasury and other bills have
been pledged to secure liabilities.
HSBC would meet unexpected net cash outflows
by selling securities and accessing additional funding
sources such as interbank markets or securitisations.
Customer accounts and deposits by banks
2003
US$m
70,426
271,040
302,090
643,556
%
10.9
42.1
47.0
100.0
2002
US$m
52,933
213,071
282,367
548,371
%
9.7
38.8
51.5
100.0
2001
US$m
53,640
171,651
278,340
503,631
%
10.7
34.1
55.2
100.0
Deposits by banks....
Current.....................
Savings and other
deposits ...............
Total ........................
Deposits by banks....
Current.....................
Savings and other
deposits ...............
Total ........................
HSBC Holdings
HSBC Holdings’ primary source of cash is from its
deployment in short term bank deposits of capital
receipts from its subsidiaries which have not been
distributed to shareholders. On an ongoing basis
HSBC Holdings replenishes its liquid resources
through interest on and repayment of intragroup
loans, from interest earned on its own liquid funds
and, most importantly, through dividends from its
directly and indirectly held subsidiaries. The ability
of these subsidiaries to pay dividends or advance
monies to HSBC Holdings depends, among other
things, on their respective regulatory capital
requirements, statutory reserves, and financial and
operating performance.
HSBC actively manages the cash flows from its
subsidiaries to optimise the amount of cash held at
the holding company level, and expects to continue
doing so in the future. The wide range of HSBC’s
activities means that HSBC Holdings is not
dependent on a single source of profits to fund its
dividends. With its accumulated liquid assets, HSBC
Holdings believes that dividends and interest from
subsidiaries will enable it to meet anticipated cash
obligations. HSBC Holdings also has, in normal
circumstances, full access on favourable terms to
debt capital markets.
At 31 December 2003, the short-term liabilities
of HSBC Holdings totalled US$4.9 billion, including
US$1.3 billion in respect of the proposed second
interim dividend for 2003 and US$2.6 billion in
respect of the proposed third interim dividend for
167
H S B C H O L D I N G S P L C
Financial Review (continued)
2003. In practice, the full amount of the proposed
dividend may not be paid out as shareholders can
elect to receive their dividend entitlement in scrip
rather than in cash. Short-term assets of US$12.9
billion, consisting mainly of cash at bank and money
market deposits of US$7.9 billion and other amounts
(including dividends) due from HSBC undertakings
of US$2.5 billion, exceeded short-term liabilities.
Market risk management
Market risk is the risk that foreign exchange rates,
interest rates, credit spreads, 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). The
main valuation sources are securities prices, foreign
exchange rates, interest rate yield curves and
volatilities.
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.
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 those prices. In less
liquid markets and/or where positions have been held
for extended periods, portfolios are valued by
reference to bid or offer prices as appropriate.
For certain products, such as over-the-counter
derivative instruments, there are no independent
prices quoted in the markets. In these cases,
reference is made to standard industry models, which
typically utilise discounted cash flow techniques to
derive market values. The models may be developed
in-house or may be software vendor packages.
Where applicable, prices are amended if the
transaction involves an illiquid position, particularly
if its size is considered significant in comparison
with the normal market trading volume in that
product.
The vast majority of HSBC’s derivative
transactions are in plain vanilla instruments,
primarily comprising interest rate and foreign
exchange contracts, where market values are readily
168
determinable by reference to independent prices and
valuation quotes, as described above.
Occasionally, when standard industry models are
not available, and there is no directly relevant market
quotation, HSBC will develop its own proprietary
models for performing valuations. This situation
normally arises when HSBC has tailored a
transaction to meet a specific customer need. All
such models are checked independently and are
subject additionally to internal audit review on a
periodic basis to ensure that the assumptions
underlying the models remain valid over the lives of
the transactions, which are generally less than five
years.
The management of market risk is principally
undertaken in Global Markets through risk limits
approved by Group Management Board. 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 which management deem to have
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, and value
at risk limits at a portfolio level. Options risks are
controlled through full revaluation limits in
conjunction with limits on the underlying variables
that determine each option’s value.
Additionally, market risk related to the
residential mortgage business in the USA is primarily
managed by the mortgage business under guidelines
established by its Asset and Liability Policy
Committee.
Trading value at risk (‘VAR’)
VAR is a technique that estimates the potential
losses that could occur on risk positions as a result of
movements in market rates and prices over a
specified time horizon and to a given level of
confidence.
HSBC’s VAR is calculated daily. It is
HSBC recognises these limitations by
predominantly calculated on a variance/co-variance
basis, uses historical movements in market rates and
prices, a 99 per cent confidence level and a 10-day
holding period, and takes account of correlations
between different markets and rates within the same
risk type. 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.
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 is analysed in Note 40
in the ‘Notes on the Financial Statements’.
HSBC’s VAR should be viewed in the context of
Market-risk related revenues
the limitations of the methodology used. For
example:
•
•
•
•
•
the model assumes that changes in risk factors
follow a normal distribution. This may not be
the case in reality, and the probability of extreme
market movements may be underestimated;
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 at times of severe illiquidity, when a
10-day holding period may be insufficient to
liquidate or hedge all positions fully;
the use of a 99 per cent confidence level does
not take into account 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 be accurate and VAR may not
fully capture market risk where variables exhibit
correlation;
• VAR is calculated at the close of business, with
intra-day exposures not subjected 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.
The average daily revenue earned from market
risk-related activities in 2003, including accrual book
net interest income, funding of dealing positions, and
hedging of mortgage servicing rights, was
US$17.1 million compared with US$14.6 million in
2002. The standard deviation of these daily revenues
was US$12.5 million compared with US$8.9 million
in 2002.
The increase in the standard deviation of daily
revenues and the maximum daily loss and profit over
the corresponding figures for 2002, reflects the
impact of the volatility of the Hong Kong dollar
against the US dollar during the second half of the
year on the long US dollar position which the Group
carries in Hong Kong.
This position arises from the significant surplus
that has arisen in recent years between the increasing
levels of Hong Kong dollar deposits placed with the
Group, and the limited opportunities for the
deployment of those deposits in Hong Kong dollar
assets.
The Group has, accordingly, in recent years,
placed a proportion of these surplus Hong Kong
dollar deposits into highly liquid US dollar assets,
and it is the resultant foreign exchange exposures,
coupled with increased volatility in the US$:HK$
exchange rate that has resulted in the profit and loss
revenues being more widely dispersed than in prior
years.
169
H S B C H O L D I N G S P L C
Financial Review (continued)
Daily distribution of market risk revenues in 2003
Structural currency exposure
Number of days
80
70
60
50
40
30
20
10
0
66
49
45
32
7
5
24
16
5
1
1
0 0
1 0
0
1
0
0
0
2
1 2
1
-90 -85 -80
-40 -35 -30 -25 -20 -15 -10 -5
0
5
10 15 20 25 30 35 40 45 50 55 60
85 90
Revenues (US$m)
(cid:1)(cid:1)(cid:1)(cid:1) Profit and loss frequency
Daily distribution of market risk revenues in 2002
Number of days
40
35
30
25
20
15
10
5
0
32
28 28
21
16
14
13
18
15
14
11
10
7
3
4
1
0
2
2
0
6
5
3
2
0
2
1
1
-27 -25 -9
-7
-5
-3
-1
1
3
5
7
9
11 13 15 17 19
21
23 25 27 29 31 33
35 37 39 41
Revenues (US$m)
(cid:1) Profit and loss frequency
Foreign exchange exposure
HSBC’s foreign exchange exposures comprise
trading exposures and structural foreign currency
translation exposure.
Trading exposures
Foreign exchange trading exposures comprise those
which arise from foreign exchange dealing within
Global Markets, and currency exposures originated
within HSBC’s commercial banking businesses. The
latter exposures are transferred to local treasury units
where they are managed together with exposures
which result from dealing activities, within limits
approved by the Group Management Board. VAR on
foreign exchange trading positions is shown in
Note 40 in the ‘Notes on the Financial Statements’
on page 310.
The average one-day foreign exchange revenue
in 2003 was US$3.4 million compared with
US$3.2 million for 2002.
170
HSBC’s main operations are in the UK, the US,
Hong Kong, France, Mexico and Brazil, although it
also has operations elsewhere in Europe, the rest of
Asia-Pacific, North America and South America.
The main operating (or functional) currencies in
which HSBC’s business is transacted are, therefore,
sterling, the US dollar, the Hong Kong dollar, the
euro, the Mexican peso and the Brazilian real.
As the US dollar and currencies linked to it form
the dominant currency bloc in which HSBC’s
operations transact business, HSBC Holdings
prepares its consolidated financial statements in US
dollars. HSBC’s consolidated balance sheet is
therefore affected by movements in exchange rates
between all other functional currencies and the US
dollar. These currency exposures, which reflect the
extent to which the Group’s capital is invested in
non-US dollar denominated capital investments in
subsidiaries, branches and associated undertakings,
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.
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 in place during 2003. There
was no material effect from foreign currency
exchange rate movements on HSBC’s tier 1 capital
ratio during the period.
Interest rate exposures
HSBC’s interest rate exposures comprise those
originating in its Global Markets trading activities
and structural interest rate exposures: both are
managed under limits described on page 168. Interest
rate risk arises on both trading positions and accrual
books. The average daily revenue earned from these
interest rate activities in 2003 was US$13.1 million
compared with US$10.7 million for 2002.
The interest rate risk on interest rate trading positions
is set out in the trading VAR table in Note 40 in the
‘Notes on the Financial Statements’.
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 on each
product in its business and transfers the interest rate
risks to either its local treasury unit for management
or to separate books managed by the local Asset and
Liability Management Committee (‘ALCO’). The
aim is to ensure that all interest rate risks are
managed by either the local treasury or ALCO.
The transfer of interest rate risk is usually
achieved by a series of internal deals between the
business units and the local treasury or ALCO
managed books. When the behavioural
characteristics of a product are different from its
contractual characteristics, the behavioural
characteristics are assessed to determine the true
underlying interest rate risk. Local ALCOs regularly
monitor all such interest rate risk positions, subject to
interest rate risk limits agreed with Group
Management Board. In the course of managing
interest rate risk, quantitative techniques and
simulation models are used where appropriate to
identify and assess the potential net interest income
and market value effects of these interest rate
positions in different interest rate scenarios. Interest
rate swaps are the principal product used to manage
interest rate risk, adjust it to appropriate levels and
contain it within agreed limits. The primary objective
of this exercise is to limit potential adverse effects of
interest rate movements on net interest income.
Assuming no management action in response to
interest rate movements, an immediate hypothetical
100 basis points parallel fall in all yield curves
worldwide on 1 January 2004 would decrease
planned net interest income for the 12 months to
31 December 2004 by US$463 million while a
hypothetical 100 basis points parallel rise in all yield
curves would decrease planned net interest income
by US$819 million.
Instead of assuming that all interest rates move
together, HSBC’s interest rate exposures can be
grouped into currency blocs whose interest rates are
considered more likely to move together. The
sensitivity of projected net interest income for
January to December 2004 can then be described as
follows:
171
H S B C H O L D I N G S P L C
Financial Review (continued)
Change in 2004 projected net
interest income
+100 basis points shift in yield
curves ...................................
-100 basis points shift in yield
curves ...................................
Change in 2003 projected net
interest income
+100 basis points shift in yield
curves ...................................
-100 basis points shift in yield
curves ...................................
US dollar
bloc
US$m
Rest of
Americas
bloc
US$m
Hong Kong
dollar
bloc
US$m
Rest of
Asia
bloc
US$m
Sterling
bloc
US$m
Euro
bloc
US$m
Total
US$m
(428)
368
(8)
(225)
92
(115)
77
(84)
(326)
(807)
(203)
(461)
(1)
(2)
(22)
24
(21)
(26)
(47)
6
(135)
119
(49)
50
(819)
(463)
(252)
(690)
A fall of 100 basis points would adversely affect
the net interest income derived from customer
deposits in the sterling, Hong Kong dollar, rest of
Americas and rest of Asia blocs as this cut would not
offer scope to reduce rates on current and savings
accounts by as much as the full 100 basis points.
Household does not face this risk as its portfolio is
wholesale funded, and as a result would benefit from
falling rates. By contrast the cost of Household’s
wholesale funding would be adversely affected by
rising rates. The exposure to interest rate movements
is actively managed through treasury and local
ALCOs to reflect the economic outlook.
The interest rate sensitivities set out in the table
above are illustrative only and are based on a single
simplified scenario. For example, 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. These projections do
not capture the impact of changes in the value of
instruments such as mortgage servicing rights, which
are interest rate sensitive. The projections also make
other simplifying assumptions, including that all
positions run to maturity. In practice, these exposures
are actively managed.
Equities exposure
HSBC’s equities exposure comprises those
originating in its equities trading activities, forming
the basis of VAR, and long-term equity investments.
The latter are reviewed annually by the Group
Management Board and are regularly monitored by
the subsidiaries’ ALCOs. VAR on equities trading
172
positions is set out in Note 40 in the ‘Notes on the
Financial Statements’.
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
transactions are reconciled and monitored. This is
supported by an independent programme of periodic
reviews undertaken by internal audit, and by
monitoring external operational risk events, 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.
HSBC codified its operational risk management
process by issuing a high level standard in May
2002. This explains how HSBC manages operational
risk by identifying, assessing, monitoring,
controlling and mitigating the risk, rectifying
operational risk events, and implementing any
additional procedures required for compliance with
local regulatory requirements. The processes
undertaken to manage operational risk are
determined by reference to the scale and nature of
each HSBC operation. The HSBC standard covers
the following:
• Operational risk management responsibility is
assigned at senior management level within the
business operation.
•
Information systems are used to record the
identification and assessment of operational
risks and generate appropriate, regular
management reporting.
• Operational risks are identified by risk
assessments covering operational risks facing
each business and risks inherent in processes,
activities and products. Risk assessment
incorporates a regular review of risks identified
to monitor significant changes.
• Operational risk loss data is collected and
reported to senior management. Aggregate
operational risk losses are recorded and details
of incidents above a materiality threshold are
reported to the Group Audit Committee. This
reporting commenced at the beginning of 2001.
• Risk mitigation, including insurance, is
considered where this is cost-effective.
In each of HSBC’s subsidiaries local
management is responsible for implementation of the
HSBC standard on operational risk, throughout their
operations and where deficiencies are evident these
are required to be rectified within a reasonable
timeframe. Subsidiaries acquired by HSBC since the
standard was issued are in the process of assessing
and planning the implementation of the
requirements.
HSBC maintains and tests contingency facilities
to support operations in the event of disasters.
Additional reviews and tests were conducted
following the terrorist events of 11 September 2001
and, more recently, the two bomb blasts in Istanbul,
to incorporate lessons learned in the operational
recovery from those circumstances.
Fair value and price verification control
Certain financial instruments are carried on the
Group’s balance sheet at their mark-to-market
values. These financial instruments comprise assets
held in the trading portfolio, obligations related to
securities short sold and derivative financial
instruments (excluding non-trading derivatives
accounted for on an accruals basis).
The determination of mark-to-markets value is a
significant element in reporting of the Group’s
Global Markets activities. Accordingly, the mark-to-
market valuation and the related price verification
processes are subject to careful governance across
the Group.
The responsibility for the determination of
accounting policies and procedures governing
valuation ultimately rests with the Group Finance
and Corporate, Investment Banking and Markets
Finance functions, which report to the Group
Finance Director. All significant valuation policies,
and changes thereto, must be approved by Senior
Finance Management. HSBC’s policies stipulate that
Financial Control departments across the Group are
independent of the risk taking businesses with the
Finance functions having ultimate responsibility for
the determination of fair values included in the
financial statements, and for ensuring that the
Group’s policies and relevant accounting standards
are adhered to. Management assesses the resourcing
and expertise of Finance functions on an ongoing
basis to ensure that the financial control and price
verification processes are properly staffed to support
the control infrastructure.
Capital management and allocation
Capital measurement and allocation
The FSA supervises HSBC on a consolidated basis
and, as such, receives information on the capital
adequacy of, and sets capital requirements for,
HSBC as a whole. Individual banking subsidiaries
are directly regulated by their local banking
supervisors, which set and monitor their capital
adequacy requirements. In some jurisdictions, certain
non-banking subsidiaries are subject to the
supervision and capital requirements of 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. The guidelines agreed in
1988, referred to as the Basel Accord, are applied on
a consistent basis across the European Union through
directives, which are then implemented by member
states.
In implementing 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 taking into account both balance sheet assets
173
H S B C H O L D I N G S P L C
Financial Review (continued)
and off-balance-sheet transactions. Under the
European Union’s Amending Directive to the Capital
Adequacy Directive, the FSA allows banks to
calculate capital requirements for market risk in the
trading book using VAR techniques.
HSBC’s capital is divided into two tiers: tier 1,
comprising shareholders’ funds, innovative tier 1
securities and minority interests in tier 1 capital, but
excluding revaluation reserves; and tier 2,
comprising general loan loss provisions, revaluation
reserves, qualifying subordinated loan capital and
minority and other interests in tier 2 capital. The
amount of innovative tier 1 securities cannot exceed
15 per cent of overall tier 1 capital, qualifying tier
2 capital cannot exceed 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. The book values of goodwill,
intangible assets and, in 2002, own shares held are
deducted in arriving at tier 1 capital. In 2003, no
deduction is required for own shares held because of
the changes to shareholders’ funds introduced by
Urgent Issues Task Force Abstract 37 ‘Purchases and
sales of own shares’, details of which are set out in
Note 1 of the ‘Notes on the Financial Statements’.
Total capital is calculated by deducting the book
values of unconsolidated investments, investments in
the capital of banks, and certain regulatory items
from the total of tier 1 and tier 2 capital.
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, and counterparty risk.
Future developments
In June 1999, the Basel Committee on Banking
Supervision (‘the Basel Committee’) issued a
proposal for a new capital adequacy framework to
174
replace the Basel Accord of 1988. The new capital
framework (commonly known as ‘Basel II’) consists
of three ‘pillars’: minimum capital requirements,
supervisory review process and market discipline.
The supervisory objectives of the Basel Committee
are for Basel II to promote safety and soundness in
the financial system and, as such, at least maintain
the current overall level of capital in the system; to
enhance competitive equality; to constitute a more
comprehensive approach to addressing risks; and to
focus on internationally active banks.
With respect to pillar one, Basel II provides
three approaches, of increasing sophistication, to the
credit risk regulatory capital calculation. The most
basic approach is the standardised approach, which
uses external credit ratings to determine the risk
weighting applied to rated counterparties and groups
other counterparties into broad categories and applies
standardised risk weightings to these categories.
Moving to the internal ratings based foundation
approach will allow banks to calculate their credit
risk regulatory capital requirement on the basis of
their internal assessment of the probability that the
counterparty will default. The internal ratings based
advanced approach will allow banks to use their own
internal assessment of not only the probability of
default, but also the percentage loss suffered if the
counterparty defaults and the quantification of the
exposure to the counterparty. Pillar one will also
introduce capital requirements for operational risk
and again three levels of sophistication are available.
The capital requirement under the basic indicator
approach is a simple percentage of gross revenues,
under the standardised approach it is one of three
different percentages of gross revenues applicable to
each of eight business lines and under advanced
measurement approaches it is an amount determined
using banks’ own statistical analysis techniques on
operational risk data.
Since 1999, the Basel Committee has published
a large number of further papers relating to Basel II,
as well as two full Consultation Papers, entitled ‘The
New Basel Capital Accord’ on 16 January 2001 and
29 April 2003. Most recently, it published three
technical papers on 30 January 2004, one of which
was entitled ‘Modifications to the capital treatment
for expected and unexpected credit losses in the New
Basel Accord’. This paper sets out significant
changes to the calibration of the credit risk
regulatory capital requirement and to regulatory
capital. The Basel II proposals are still incomplete.
The Basel Committee has stated that it intends to
produce the final Basel II Accord by the middle of
2004 and that it will take effect from the end of
2006.
In Europe, Basel II will be given effect by a new
EU Directive. This Directive broadly follows the
Basel II proposals and therefore cannot be finalised
until Basel II is finalised. The new EU Directive will
be required to undergo the same formal process as
other EU Directives and the timescale which will be
required for this is uncertain, although the intention
is to match the implementation date for Basel II.
HSBC continues to participate actively in the
industry consultations surrounding the development
of Basel II and the new EU Directive and fully
supports a more risk-sensitive regulatory capital
framework than the 1988 Basel Accord. In view of
the continuing changes to the proposals, it is too
early to quantify the impact of the new proposals on
HSBC’s capital ratios.
Capital management
It is HSBC’s policy to maintain a strong capital base
to support the development of its 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
required to support planned business growth and
meet local regulatory capital requirements and, in the
case of Household, its ratings targets. 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.
HSBC Holdings is primarily a provider of equity
capital to its subsidiaries. These investments are
substantially funded by HSBC Holdings’ own equity
issuance and profit retentions. Major subsidiaries
usually raise their own non-equity tier 1 and
subordinated debt in accordance with HSBC
guidelines regarding market and investor
concentration, cost, market conditions, timing and
the effect on the composition and maturity profile of
HSBC’s capital. The subordinated debt requirements
of other HSBC companies are met 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 8.25 per cent in considering its long-term
capital planning.
Source and application of tier 1 capital
Movement in tier 1 capital
Opening tier 1 capital.................
Attributable profits ....................
Add back: goodwill
amortisation ............................
Dividends...................................
Add back: shares issued in lieu of
dividends.................................
Increase in goodwill and
intangible assets deducted .......
Merger reserve...........................
Shares issued .............................
Innovative tier 1
capital issued ..........................
Redemption of preference shares
Other (including exchange
movements).............................
Closing tier 1 capital..................
Movement in risk-weighted
assets
2003
US$m
38,949
8,774
1,585
(6,532)
2002
US$m
35,073
6,239
863
(5,001)
1,423
1,023
(13,650)
12,768
1,482
4,263
–
5,801
54,863
(3,729)
–
338
–
(50)
4,193
38,949
Opening risk-weighted assets ....
Movements ................................
430,551
188,111
Closing risk-weighted assets......
618,662
391,478
39,073
430,551
175
H S B C H O L D I N G S P L C
Financial Review (continued)
Capital structure
The table below sets out the analysis of regulatory
capital.
Composition of capital
Tier 1
Shareholders’ funds...................
Minority interests ......................
Innovative tier 1 securities.........
Less :
Property revaluation reserves..
Goodwill capitalised and
intangible assets......................
Own shares held1 ....................
Total qualifying tier 1
2003
US$m
74,473
3,711
8,094
2002
US$m
52,406
3,306
3,647
(1,615)
(1,954)
(29,920)
120
(17,855)
(601)
capital .....................................
54,863
38,949
Tier 2
Property revaluation reserves ....
General provisions.....................
Perpetual subordinated debt ......
Term subordinated debt.............
Minority and other interests in
tier 2 capital............................
Total qualifying tier 2 capital ....
Unconsolidated investments ......
Investments in other
banks ......................................
Other deductions .......................
1,615
2,868
3,608
15,795
523
24,409
(4,101)
(911)
(218)
1,954
2,348
3,542
12,875
775
21,494
(2,231)
(638)
(144)
Total capital...............................
Total risk-weighted assets .........
74,042
618,662
57,430
430,551
Capital ratios (per cent):
Total capital...............................
Tier 1 capital .............................
12.0
8.9
13.3
9.0
1 The treatment of own shares held for regulatory capital
purposes has not changed consequent on the changes to
shareholders’ funds introduced by UITF Abstracts 37
‘Purchases and sales of own shares’ and 38 ‘Accounting for
ESOP trusts’, details of which are set out in Note 1 of the
‘Notes on the Financial Statements’. The comparative
figures have not therefore been restated. The addition in
2003 relates primarily to own shares held within long-term
assurance policyholders’ funds. This reverses their
recognition in the own shares held reserve, as insurance
companies are treated as unconsolidated investments in
regulatory capital calculations.
The above figures were computed in accordance
with the EU Banking Consolidation Directive.
Tier 1 capital increased by US$15.9 billion.
Retained profits (excluding goodwill amortisation)
contributed US$3.8 billion. Shares issued to fund the
acquisition of Household, net of the increased
goodwill, added US$3.4 billion to tier 1 capital at
acquisition. The issue of tier 1 securities contributed
US$4.3 billion and exchange movements on reserves
and other movements also added US$4.4 billion to
tier 1 capital.
176
The increase of US$2.9 billion in tier 2 capital
mainly reflects the proceeds of capital issues, net of
redemption and regulatory amortisation. Tier 2
capital also benefited from debt in issue in
Household and higher levels of general provisions,
mainly reflecting the acquisition of Household.
Total risk-weighted assets increased by
US$188 billion. Household contributed
US$113 billion to this increase. The remaining
increase was largely due to currency translation
differences together with the effect of growth in the
loan book and trading positions. In constant
currency, excluding Household, risk-weighted asset
growth was 8 per cent.
Risk-weighted assets by principal subsidiary
In order to give an indication of how HSBC’s capital
is deployed, the table below analyses the disposition
of risk-weighted assets by principal subsidiary. The
risk-weighted assets are calculated using FSA rules
and exclude intra-HSBC items.
Risk-weighted assets
Hang Seng Bank .......................
The Hongkong and Shanghai
Banking Corporation and
other subsidiaries ...................
The Hongkong and Shanghai
2003
US$m
2002
US$m
34,972
32,350
103,557
87,932
Banking Corporation ............
138,529
120,282
HSBC Private Banking
Holdings (Suisse) S.A............
CCF ...........................................
HSBC Bank plc and other
subsidiaries ............................
HSBC Bank plc .........................
Household .................................
HSBC Bank Canada ..................
HSBC Bank USA and other
subsidiaries ...........................
HSBC North America
22,245
47,741
167,754
237,740
113,186
20,852
63,234
Holdings Inc. ........................
197,272
HSBC Mexico ..........................
7,059
HSBC Bank Middle East
Limited ..................................
HSBC Bank Malaysia Berhad ...
HSBC South American
operations ..............................
HSBC Holdings sub-group ........
7,379
4,979
6,994
2,495
20,374
40,399
138,206
198,979
–
15,499
54,576
70,075
7,853
6,573
4,713
4,865
554
Other..........................................
HSBC risk-weighted assets........
16,215
618,662
16,657
430,551
H S B C H O L D I N G S P L C
Other information
Loan maturity and interest sensitivity analysis
At 31 December 2003, the geographical analysis of loan maturity and interest sensitivity by loan type on a
contractual repayment basis was as follows. All amounts are net of suspended interest.
Maturity of 1 year or less
Loans and advances to banks1 ....................................
50,288
38,590
12,349
10,225
1,904
113,356
Hong
Kong
US$m
Rest
of Asia-
Pacific
US$m
Europe
US$m
North
America
US$m
South
America
US$m
Total
US$m
Commercial loans to customers
Commercial, industrial and international trade .......
Real estate and other property related ....................
Non-bank financial institutions ..............................
Governments ..........................................................
Other commercial ...................................................
Hong Kong Government Home Ownership Scheme ..
Residential mortgages and other personal loans .........
Loans and advances to customers ...............................
28,966
8,930
17,335
675
14,701
70,607
–
20,596
91,203
Total loans maturing in one year or less .....................
141,491
Maturity after 1 year but within 5 years
8,031
4,233
4,130
136
2,436
18,966
742
9,055
28,763
67,353
12,190
2,729
1,837
816
3,558
21,130
–
6,264
27,394
39,743
5,711
3,802
8,133
752
9,620
28,018
–
38,704
66,722
76,947
Loans and advances to banks ......................................
1,001
49
304
82
Commercial loans to customers
Commercial, industrial and international trade .......
Real estate and other property related ....................
Non-bank financial institutions ..............................
Governments ..........................................................
Other commercial ...................................................
Hong Kong Government Home Ownership Scheme ..
Residential mortgages and other personal loans .........
Loans and advances to customers ...............................
Total loans maturing after 1 year but within
12,943
7,350
1,768
545
7,324
29,930
–
26,095
56,025
2,699
7,812
693
693
3,424
15,321
2,086
7,447
2,301
2,375
165
442
1,746
7,029
–
4,915
24,854
11,944
2,650
4,755
424
1,892
1,262
10,983
–
37,840
48,823
1,148
114
51
4
560
1,877
–
2,021
3,898
5,802
18
253
28
25
245
118
669
–
499
56,046
19,808
31,486
2,383
30,875
140,598
742
76,640
217,980
331,336
1,454
20,846
22,320
3,075
3,817
13,874
63,932
2,086
76,796
1,168
142,814
5 years ....................................................................
57,026
24,903
12,248
48,905
1,186
144,268
Interest rate sensitivity of loans and advances to
banks and commercial loans to customers:
Fixed interest rate ...................................................
Variable interest rate ..............................................
Total ...........................................................................
1 Excludes sight balances with central banks
6,509
24,422
30,931
56
15,314
15,370
2,009
5,324
7,333
3,291
7,774
11,065
128
559
687
11,993
53,393
65,386
177
H S B C H O L D I N G S P L C
Other information (continued)
Hong
Kong
US$m
Rest
of Asia-
Pacific
US$m
Europe
US$m
North
America
US$m
South
America
US$m
Total
US$m
Maturity after 5 years
Loans and advances to banks .......................................
514
–
Commercial loans to customers
Commercial, industrial and international trade .......
Real estate and other property related .....................
Non-bank financial institutions ...............................
Governments ...........................................................
Other commercial ...................................................
Hong Kong Government Home Ownership Scheme....
Residential mortgages and other personal loans...........
Loans and advances to customers.................................
Total loans maturing after 5 years ................................
Interest rate sensitivity of loans and advances to
banks and commercial loans to customers
Fixed interest rate.....................................................
Variable interest rate ................................................
Total.............................................................................
7,506
4,635
2,106
1,242
5,252
20,741
47,051
67,792
68,306
6,171
15,084
21,255
207
1,563
95
98
1,440
3,403
3,463
14,569
21,435
21,435
31
3,372
3,403
295
306
622
24
192
601
1,745
8,038
9,783
10,078
406
1,634
2,040
1,578
534
3,219
278
1,459
496
5,986
76,379
82,365
83,943
1,791
5,773
7,564
–
2,387
12
1
1
399
9
422
78
500
500
1
421
422
8,565
10,040
2,504
3,390
7,798
32,297
3,463
146,115
181,875
184,262
8,400
26,284
34,684
178
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.
2003
Average
balance
US$m
Average
rate
%
Year ended 31 December
2002
Average
balance
US$m
Average
rate
%
2001
Average
Balance
US$m
Average
rate
%
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 ......................................................................
9,895
6,418
17,877
13,828
48,018
1,253
2,059
450
110
3,872
1,438
737
3,055
664
5,894
1,442
3,161
3,151
2,526
Total........................................................................
10,280
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........................................................................
17
181
273
299
770
14,045
12,556
24,806
17,427
68,834
–
3.3
1.9
2.5
–
1.0
1.1
5.5
–
1.8
3.6
1.7
–
0.7
2.9
1.2
–
8.3
12.8
19.1
–
2.2
2.3
2.6
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
10,530
19
385
296
180
880
10,825
11,806
24,679
16,606
63,916
–
3.0
2.8
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
3.0
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
179
H S B C H O L D I N G S P L C
Other information (continued)
2003
Average
balance
US$m
Average
rate
%
Year ended 31 December
2002
Average
balance
US$m
Average
rate
%
2001
Average
balance
US$m
Average
rate
%
Customer accounts
Europe
Demand and other – non-interest bearing ...............
Demand – interest bearing ......................................
Savings ...................................................................
Time ........................................................................
Other .......................................................................
30,667
101,189
33,876
41,010
9,696
Total ........................................................................
216,438
Hong Kong
Demand and other – non-interest bearing ...............
Demand – interest bearing ......................................
Savings ...................................................................
Time ........................................................................
Other .......................................................................
8,829
74,818
58,646
10,101
379
Total ........................................................................
152,773
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
6,467
18,483
25,685
6,105
2,304
59,044
21,364
11,648
48,295
6,652
11,672
99,631
1,192
207
4,271
157
246
6,073
Demand and other – non-interest bearing ...............
Demand – interest bearing ......................................
Savings ...................................................................
Time ........................................................................
Other .......................................................................
68,519
206,345
170,773
64,025
24,297
Total ........................................................................
533,959
CDs and other money market instruments
Europe .........................................................................
Hong Kong ..................................................................
Rest of Asia-Pacific ....................................................
North America ............................................................
South America ............................................................
Total ............................................................................
11,156
9,656
4,906
14,309
63
40,090
180
–
1.8
2.3
2.8
3.6
–
0.1
0.9
1.4
1.3
–
1.1
2.7
1.6
1.2
–
1.3
1.2
3.3
3.3
–
1.9
18.1
–
18.3
–
1.1
2.0
2.5
3.3
2.8
3.6
4.1
2.4
19.0
3.0
29,109
77,835
23,587
44,745
6,621
181,897
6,743
62,922
65,914
8,630
413
144,622
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
21,925
–
2.0
2.9
3.1
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
3.0
3.8
4.1
4.0
4.3
3.0
13.8
3.9
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
–
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
Certificates of deposit and other time deposits
At 31 December 2003, the maturity analysis of certificates of deposit and other wholesale time deposits, by
remaining maturity, was as follows:
3 months
or less
US$m
After 3 months
but within
6 months
US$m
After 6 months
but within
12 months
US$m
After
12 months
US$m
Europe
Certificates of deposit ..........................
Time deposits:
– banks ...............................................
– customers ........................................
Total ....................................................
Hong Kong
Certificates of deposit ..........................
Time deposits:
– banks ...............................................
– customers ........................................
Total ....................................................
Rest of Asia-Pacific
Certificates of deposit ..........................
Time deposits:
– banks ...............................................
– customers ........................................
Total ....................................................
North America
Certificates of deposit ..........................
Time deposits:
– banks ...............................................
– customers ........................................
Total ....................................................
South America
Certificates of deposit ..........................
Time deposits:
– banks ...............................................
– customers ........................................
Total ....................................................
Total
Certificates of deposit ..........................
Time deposits:
– banks ...............................................
– customers ........................................
Total ....................................................
6,651
14,600
42,451
63,702
246
655
8,444
9,345
3,496
3,287
6,693
13,476
3,311
1,513
4,074
8,898
–
186
87
273
13,704
20,241
61,749
95,694
234
2,549
2,261
5,044
651
14
441
1,106
313
359
323
995
29
166
766
961
–
75
45
120
1,227
3,163
3,836
8,226
115
620
1,348
2,083
483
6
143
632
33
178
63
274
8
178
235
421
–
57
23
80
639
1,039
1,812
3,490
1
1,450
3,035
4,486
8,152
37
1,121
9,310
101
392
322
815
–
263
748
1,011
–
1
–
1
8,254
2,143
5,226
15,623
Total
US$m
7,001
19,219
49,095
75,315
9,532
712
10,149
20,393
3,943
4,216
7,401
15,560
3,348
2,120
5,823
11,291
–
319
155
474
23,824
26,586
72,623
123,033
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$100,000 and over or the equivalent in other currencies.
181
H S B C H O L D I N G S P L C
Other information (continued)
Short-term borrowings
HSBC includes short-term borrowings within customer accounts, deposits by banks and debt securities in issue and
does not show short-term borrowings separately on the balance sheet. Short-term borrowings are defined by the SEC
as Federal funds purchased and securities sold under agreements to repurchase, commercial paper and other short-
term borrowings. HSBC’s only significant short-term borrowings are securities sold under agreements to repurchase
and debt securities in issue. Additional information on these is provided in the tables below.
Securities sold under agreements to repurchase
Outstanding at 31 December ...........................................................................
Average amount outstanding during the year ..................................................
Maximum quarter-end balance outstanding during the year ............................
Weighted average interest rate during the year ................................................
Weighted average interest rate at the year-end ................................................
Short term bonds
Outstanding at 31 December ...........................................................................
Average amount outstanding during the year ..................................................
Maximum quarter-end balance outstanding during the year ............................
Weighted average interest rate during the year ................................................
Weighted average interest rate at the year-end ................................................
Off-balance sheet arrangements
Year ended 31 December
2003
US$m
27,427
25,883
30,938
2.0%
1.9%
2002
US$m
21,397
21,089
21,468
4.0%
3.9%
Year ended 31 December
2003
US$m
29,979
17,445
29,979
2.5%
2.5%
2002
US$m
2,775
3,093
4,422
4.3%
4.7%
2001
US$m
16,882
23,850
24,901
4.9%
5.1%
2001
US$m
2,351
2,771
3,167
4.7%
6.1%
HSBC enters into certain off-balance sheet arrangements with customers in the ordinary course of business, as
described below.
(i) Financial guarantees, letters of credit and similar undertakings
Note 39(a) of the ‘Notes on the Financial Statements’ describes various types of guarantees and discloses the
maximum potential future payments under such arrangements.
(ii) Commitments to lend
Undrawn credit lines are disclosed in Note 39(a) of the ‘Notes on Financial Statements’. HSBC generally has
the right to change or terminate any conditions of a customer’s overdraft, credit card or other credit line upon
notification to the customer.
(iii) Credit derivatives
HSBC enters into credit derivatives through the dealing operations of certain Group companies, acting as an
intermediary between a broad range of users, structuring deals to produce risk management products for its
customers. Virtually all risk is offset through entering into a credit derivative contract with another counterparty.
For a more detailed description of credit derivatives and information regarding their carrying amounts in 2003
and 2002 refer to Note 38(a) of the ‘Notes on Financial Statements’.
(iv) Special purpose and variable interest entities
HSBC uses special purpose entities (‘SPEs’), or variable interest entities (‘VIEs’), to securitise loans and
advances it has originated where such a source of funding is cost effective. Such loans and advances generally
remain on-balance sheet under UK GAAP.
HSBC also administers SPEs that have been established for the purpose of providing alternative sources of
financing to HSBC's customers. Such arrangements also enable HSBC to provide tailored investment
opportunities for investors.
182
These SPEs, commonly referred to as asset-backed or multi-seller conduits, purchase interests in a diversified
pool of receivables from customers or in the market using finance provided by a third party. The cash flows
received by the SPE on the pool of receivables are used to service the finance provided by investors. HSBC
administers this arrangement, which facilitates diversification of funding sources and the tranching of credit
risk. HSBC also provides part of the liquidity facilities to the entities and secondary credit enhancement.
HSBC’s association with SPEs also includes interests in and management of investment funds, providing
finance to public and private sector infrastructure projects, and capital funding through the issue of preference
shares via partnerships.
The activities of SPE administered by HSBC are closely monitored by senior management. However, the use of
SPEs is not a significant part of HSBC's activities. For a further discussion of HSBC’s involvement with VIEs
and the accounting treatments under UK and US GAAP see Note 50(q) of the ‘Notes on the Financial
Statements’.
Contractual obligations
The table below provides details of HSBC’s material contractual obligations as at 31 December 2003.
Long-term debt obligations ............................................................................
Capital (finance) lease obligations ..................................................................
Operating lease obligations ............................................................................
Purchase obligations .......................................................................................
Short positions in debt securities ....................................................................
Total ...............................................................................................................
Disclosure controls
Payments due by period
Less than
1 year
US$m
1–5 years
US$m
More than
5 years
US$m
64,668
25
130
1,314
27,764
93,901
61,836
20
374
237
–
62,467
44,638
540
223
–
–
45,401
Total
US$m
171,142
585
727
1,551
27,764
201,769
The Group Chairman and Group Finance Director, with the assistance of other members of management, carried out
an evaluation of the effectiveness of the design and operation of HSBC Holdings’ disclosure controls and procedures
as of 31 December 2003. Based upon and as of that evaluation, the Group Chairman and Group Finance Director
concluded that the disclosure controls and procedures were effective to provide reasonable assurance that
information required to be disclosed in the reports the company files and submits under the US Securities Exchange
Act is recorded, processed, summarised and reported as and when required.
There were no changes in HSBC Holdings’ internal control over financial reporting during the year ended
31 December 2003 that have materially affected, or are reasonably likely to materially affect, HSBC Holdings’
internal control over financial reporting.
183
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 62. 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 and a Director of
The Hongkong and Shanghai Banking Corporation
Limited. A Director of Ford Motor Company and a
member of the Court of the Bank of England.
* The Baroness Dunn, DBE, Deputy Chairman and
senior non-executive Director
Age 64. 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 member
of the Nomination Committee. 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 65. A member of the Court of the Bank of
England and a non-executive Director of Nosmas
Investment Holdings BV. A non-executive Director
since 1998. Chairman of the Group Audit Committee
and of the Nomination Committee. Former Chairman
of Corus Group plc.
S K Green
Age 55. Group Chief Executive. An executive
Director since 1998. Executive Director, Corporate,
Investment Banking and Markets from 1998 to May
2003. Joined HSBC in 1982. Group Treasurer from
1992 to 1998. Chairman of HSBC Bank Middle East
Limited and HSBC Private Banking Holdings
(Suisse) S.A. Deputy Chairman of HSBC Bank plc.
A Director of CCF S.A., Grupo Financiero HSBC,
S.A. de C.V., HSBC North America Holdings Inc.,
HSBC Trinkaus & Burkhardt KGaA, The Bank of
Bermuda Limited and The Hongkong and Shanghai
Banking Corporation Limited.
A W Jebson
Age 54. Group Chief Operating Officer. Group IT
Director from 2000 to May 2003. An executive
184
Director since 2000. Joined HSBC in 1978. A
Director of Household International, Inc. Group
General Manager, Information Technology from
1996 to 2000.
W F Aldinger
Age 56. Chairman and Chief Executive Officer of
Household International, Inc. An executive Director
since 25 April 2003. Chairman and Chief Executive
Officer of HSBC North America Holdings Inc.
Chairman, President and Chief Executive Officer of
HSBC North America Inc., and Chief Executive
Officer of Household Finance Corporation.
Chairman of HSBC Bank USA, HSBC Bank Canada
and HSBC USA Inc. A Director of MasterCard
International, Inc., Illinois Tool Works, Inc., AT&T
Corp., and the combined board of the Children’s
Memorial Medical Center/Children’s Memorial
Hospital and the Children’s Memorial Foundation.
Past Vice Chairman of Wells Fargo Bank.
† The Rt. Hon. the Lord Butler of Brockwell,
KG, GCB, CVO
Age 66. Master, University College, Oxford and a
non-executive Director of Imperial Chemical
Industries plc. Recently appointed to chair the UK
Government Review of Intelligence on Weapons of
Mass Destruction. A non-executive Director since
1998. Chairman of the Corporate Social
Responsibility Committee and a member of the
Nomination Committee. Chairman of the 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 52. Executive Chairman of chinadotcom
corporation as well as Executive Chairman of
chinadotcom Mobile Interactive Corporation and
Chairman of hongkong.com corporation, both
subsidiaries of chinadotcom corporation. A non-
executive Director since 1998 and a member of the
Group Audit Committee. Non-executive Chairman
of HSBC Private Equity (Asia) Limited, non-
executive Chairman of MTR Corporation Limited
and a Director of Inchcape 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.
Hongkong and Shanghai Banking Corporation
Limited since 1995.
W R P Dalton
M F Geoghegan, CBE
Age 60. An executive Director since 1998. Joined
HSBC in 1980. Director and Chief Executive of
HSBC Bank plc from 1998 to 2003. President and
Chief Executive Officer, HSBC Bank Canada from
1992 to 1997. A Director of CCF S.A., HSBC
Private Banking Holdings (Suisse) S.A. and
Household International, Inc. A non-executive
Director of MasterCard International, Inc.
D G Eldon
Age 58. 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.
† R A Fairhead
Age 42. Finance Director of Pearson plc and former
Executive Vice President, Strategy & Group Control
of ICI plc. A non-executive Director since 1 March
2004. A member of the Group Audit Committee. A
non-executive Director of Harvard Business School
Publishing.
D J Flint
Age 48. 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 55. Group Managing Director and Chief
Executive Officer of Li & Fung Limited. A non-
executive Director since 1998. A member of the
Remuneration Committee and of the Corporate
Social Responsibility Committee. 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
Age 50. An executive Director since 1 March 2004.
Director and Chief Executive, HSBC Bank plc since
January 2004. Joined HSBC in 1973. President of
HSBC Bank Brasil SA – Banco Múltiplo from 1997
to 2003 and responsible for all of HSBC’s business
throughout South America from 2000 to 2003. A
non-executive Director of Young Enterprise.
† S Hintze
Age 59. 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 member of the Corporate Social Responsibility
Committee and of the Remuneration Committee. A
non-executive Director of Safeway plc.
† Sir John Kemp-Welch
Age 67. Former Joint Senior Partner of Cazenove &
Co and former Chairman of the London Stock
Exchange. A Deputy Chairman of the Financial
Reporting Council and a member of the Panel on
Takeovers and Mergers from 1994 to 2000. A non-
executive Director since 2000 and a member of the
Remuneration Committee and of the Group Audit
Committee.
* The Lord Marshall
Age 70. Chairman of British Airways Plc and Pirelli
UK 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 63. Chairman of Anglo American plc. A
non-executive Director since 2001 and Chairman of
the Remuneration Committee. A 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.
185
H S B C H O L D I N G S P L C
Board of Directors and Senior Management (continued)
† S W Newton
Age 62. Founder of Newton Investment
Management, from which he retired in 2002.
Chairman of The Real Return Holdings Company
Limited. A non-executive Director since 2002. A
Member of the Advisory Board of the East Asia
Institute at Cambridge University.
* H Sohmen, OBE
Age 64. Chairman and President of World-Wide
Shipping Group Limited and Chairman of Bergesen
dy ASA and Bergesen Worldwide 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 58. Chair of Canadian Broadcasting
Corporation. A non-executive Director since 2002
and a member of the Corporate Social Responsibility
Committee. Chair of Vancouver Board of Trade from
2001 to 2002. A non-executive Director of HSBC
USA Inc., HSBC North America Inc. and HSBC
Bank USA. A Director of Canfor Corporation and
Fairmont Hotels and Resorts.
Secretary
R G Barber
Age 53. 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.
Group Managing Directors
C-H Filippi
Age 51. A Group Managing Director and Chairman
and Chief Executive Officer of CCF S.A. since
1 March 2004. A Director of HSBC Bank plc. Joined
HSBC in 1987 having previously held senior
appointments in the French civil service. Appointed
a Group General Manager in 2001 as Global Head of
Corporate and Institutional Banking.
S T Gulliver
Age 44. A Group Managing Director since
1 March 2004. Co-Head Corporate, Investment
Banking and Markets since June 2003. Joined HSBC
in 1980. Head of Treasury and Capital Markets in
Asia-Pacific from 1996 to 2002 and Head of Global
Markets from 2002 to 2003.
† Sir Brian Williamson, CBE
Y A Nasr
Age 59. Chairman of Electra Investment Trust plc
and a member of the Supervisory Board of Euronext
NV. A non-executive Director since 2002. Senior
adviser to Fleming Family and Partners. Former
Chairman of London International Financial Futures
and Options Exchange and Gerrard Group plc. A
former Director of the Financial Services Authority
and a former Director of the Court of The Bank of
Ireland.
* Non-executive Director
† Independent non-executive Director
Adviser to the Board
D J Shaw
Age 57. An Adviser to the Board since 1998.
Solicitor. A partner of Norton Rose from 1973 to
1998. A Director of HSBC Private Banking
Holdings (Suisse) S.A.
186
Age 49. A Group Managing Director since
1 March 2004. President, HSBC Bank Brasil S.A.-
Banco Múltiplo since October 2003. Joined HSBC in
1976. Appointed a Group General Manager in 1998.
President and Chief Executive Officer of
HSBC USA Inc. and HSBC Bank USA from 1999 to
2003. President and Chief Executive Officer of
HSBC Bank Canada from 1997 to 1999.
J J Studzinski
Age 47. A Group Managing Director since 1 March
2004. Co-Head Corporate, Investment Banking and
Markets since June 2003. Joined HSBC in June 2003
having previously been with Morgan Stanley from
1980 to 2003 most recently as Deputy Chairman of
Morgan Stanley International. Appointed a Group
General Manager in August 2003.
Group General Managers
M J G Glynn
R J Arena
Age 55. Group General Manager, Global e-business.
Joined HSBC in 1999. Appointed a Group General
Manager in 2000.
C C R Bannister
Age 45. Chief Executive Officer, Group Private
Banking. Joined HSBC in 1994. Appointed a Group
General Manager in 2001.
Age 52. Group General Manager, President and
Chief Executive Officer, HSBC Bank USA. Joined
HSBC in 1982. Appointed a Group General Manager
in 2001.
D H Hodgkinson
Age 53. Group General Manager and Deputy
Chairman, HSBC Bank Middle East Limited. Joined
HSBC in 1969. Appointed a Group General Manager
in May 2003.
R E T Bennett
A P Hope
Age 52. Group General Manager, Legal and
Compliance. Joined HSBC in 1979. Appointed a
Group General Manager in 1998.
Age 57. Group General Manager, Insurance. Joined
HSBC in 1971. Appointed a Group General Manager
in 1996.
N S K Booker
D D J John
Age 45. Group General Manager and Chief
Executive Officer, India. Joined HSBC in 1981.
Appointed a Group General Manager in January
2004.
Z J Cama
Age 56. 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 55. Executive Director, The Hongkong and
Shanghai Banking Corporation Limited and Chief
Executive Officer, Hang Seng Bank Limited. Joined
HSBC in 1978. Appointed a Group General Manager
in 1995.
R J Duke
Age 53. General Manager Banking Services, HSBC
Bank plc. Joined HSBC in 1971. Appointed a Group
General Manager in October 2003.
A A Flockhart
Age 52. Group General Manager and Chief
Executive Officer, Mexico. Joined HSBC in 1974.
Appointed a Group General Manager in 2002.
Age 53. Chief Operating Officer and Director, HSBC
Bank plc. Joined HSBC in 1971. Appointed a Group
General Manager in 2000.
M J W King
Age 47. Group General Manager, Internal Audit.
Joined HSBC in 1986. Appointed a Group General
Manager in 2002.
M B McPhee
Age 62. Group General Manager, Credit and Risk.
Joined HSBC in 1984. Appointed a Group General
Manager in 1997.
T W O’Brien, OBE
Age 56. Group General Manager, Strategic
Development. Joined HSBC in 1969. Appointed a
Group General Manager in 1992.
R C F Or
Age 54. General Manager, The Hongkong and
Shanghai Banking Corporation Limited. Joined
HSBC in 1972. Appointed a Group General Manager
in 2000.
187
H S B C H O L D I N G S P L C
Board of Directors and Senior Management (continued)
K Patel
D A Schoenholz
Age 55. Group General Manager and Head of
Corporate, Investment Banking and Markets,
Emerging Europe & Africa. Joined HSBC in 1984.
Appointed a Group General Manager in 2000.
Age 52. President and Chief Operating Officer,
Household International, Inc. Joined HSBC in 1985.
Appointed a Group General Manager in October
2003.
R C Picot
M R P Smith, OBE
Age 46. Group Chief Accounting Officer. Joined
HSBC in 1993. Appointed a Group General Manager
in October 2003.
A F Rademeyer
Age 45. 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.
J C S Rankin
Age 62. Group General Manager, Human Resources.
Joined HSBC in 1960. Appointed a Group General
Manager in 1990.
B Robertson
Age 49. Group General Manager and Head of
Corporate, Investment Banking and Markets, HSBC
Bank USA. Joined HSBC in 1975. Appointed a
Group General Manager in March 2003.
Dr S Rometsch
Age 65. Chairman of the Managing Partners, HSBC
Trinkaus & Burkhardt KGaA. Joined HSBC in 1983.
Appointed a Group General Manager in 2001.
Age 47. Chief Executive Officer, The Hongkong and
Shanghai Banking Corporation Limited. Joined
HSBC in 1978. Appointed a Group General Manager
in 2000.
I A Stewart
Age 45. Group General Manager and Head of
Transaction Banking, Corporate, Investment
Banking and Markets. Joined HSBC in 1980.
Appointed a Group General Manager in 2000.
P E Stringham
Age 54. Group General Manager, Marketing. Joined
HSBC in 2001. Appointed a Group General Manager
in 2001.
P A Thurston
Age 50. General Manager, Personal Financial
Services, Asia-Pacific. Joined HSBC in 1975.
Appointed a Group General Manager in October
2003.
188
H S B C H O L D I N G S P L C
Report of the Directors
Results for 2003
HSBC reported operating profit before provisions of
US$18,540 million. Profit attributable to
shareholders of HSBC Holdings was
US$8,774 million, a 13.0 per cent return on
shareholders’ funds. The retained profit transferred
to reserves was US$2,242 million.
A first interim dividend of US$0.24 per ordinary
share was paid on 7 October 2003 and a second
interim dividend of US$0.12 per ordinary share was
paid on 20 January 2004. The Directors have
declared a third interim dividend of US$0.24 per
ordinary share in lieu of a final dividend, making a
total distribution for the year of US$6,532 million.
The third interim dividend will be payable on 5 May
2004 in cash in United States dollars, or in sterling or
Hong Kong dollars at exchange rates to be
determined on 26 April 2004, with a scrip dividend
alternative. The reserves available for distribution
before accounting for the third interim dividend of
US$2,627 million are US$11,598 million.
Further information about the results is given in
the consolidated profit and loss account on page 233.
Principal activities and business
review
Through its subsidiary and associated undertakings,
HSBC provides a comprehensive range of banking
and related financial services. HSBC operates
through long-established businesses and has an
international network of over 9,500 offices in
79 countries and territories in five regions: Europe;
Hong Kong; the rest of Asia-Pacific, including the
Middle East and Africa; North America and South
America. Taken together, the five largest customers
of HSBC do not account for more than 2 per cent of
HSBC’s income.
On 17 February 2003 HSBC acquired Keppel
Insurance Pte Ltd, a Singapore-based insurer, for a
consideration of US$91 million.
On 28 March 2003 HSBC acquired Household
International, Inc. for a consideration of US$14,798
million.
On 28 October 2003 HSBC announced that it
had entered into an agreement to acquire The Bank
of Bermuda Limited for a consideration of
US$1.3 billion. The acquisition was completed on
18 February 2004.
On 12 November 2003 HSBC acquired AFORE
Allianz Dresdner S.A., a Mexican pension fund
management company, for a consideration of
US$175 million.
On 2 December 2003 HSBC entered into an
agreement to acquire 14.71 per cent of UTI Bank
Limited, a retail bank in India, for a consideration of
US$66.42 million. In addition, HSBC has the option
to acquire a further 5.37 per cent from an existing
shareholder for US$24.26 million.
On 15 December 2003 HSBC completed the
acquisition of Lloyds TSB Group plc’s onshore and
offshore businesses and assets related to Brazil for an
aggregate consideration of US$745 million.
On 17 December 2003 Hang Seng Bank
Limited, a 62.14 per cent subsidiary of HSBC,
entered into an agreement, subject to the approval of
regulatory authorities and Industrial Bank
shareholders to acquire 15.98 per cent of Industrial
Bank Co Ltd, a mainland China commercial bank,
for US$209 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 7 to 29
HSBC’s five-year strategy to 31 December
2003, Managing for Value, was designed to focus on
shareholder value. The governing objective was 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 five-year period was 211 per cent,
compared to 126 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 217.
In order to build on the achievements of
Managing for Value a new plan was launched in
November 2003 to provide a blueprint for HSBC’s
growth and development during the next five years.
Key elements of the strategy are accelerating the rate
of revenue growth, developing the brand strategy
further, improving productivity and maintaining
HSBC’s prudent risk management and strong
financial position. Further details are given on pages
9 and 10.
189
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Capital and reserves
The following events in relation to the HSBC
Holdings ordinary shares of US$0.50 each occurred
during the year:
Acquisition of Household International, Inc.
1.
2.
3.
1,273,297,057 ordinary shares were issued on
31 March 2003 under the exchange offer for
shares of Household. The exchange offer was
2.675 ordinary shares for each Household
common share.
51,072,691 ordinary shares were issued at prices
ranging from US$9.5960 to US$9.6002 in
connection with the early settlement of
Household International, Inc. 8.875% Adjustable
Conversion-Rate Equity Units.
26,576 ordinary shares were issued at prices
ranging from US$10.25 to US$13.43 in
connection with the exercise of options under
Household share plans that have been converted
into options over HSBC Holdings ordinary
shares.
Scrip dividends
4.
5.
41,462,641 ordinary shares were issued at par on
6 May 2003 to shareholders who elected to
receive new shares in lieu of the 2002 second
interim dividend. The market value per share
used to calculate shareholders’ entitlements to
new shares was US$10.7146, being the United
States dollar equivalent of £6.796.
77,279,634 ordinary shares were issued at par on
7 October 2003 to shareholders who elected to
receive new shares in lieu of the 2003 first
interim dividend. The market value per share
used to calculate shareholders’ entitlements to
new shares was US$12.6732 being the United
States dollar equivalent of £8.069.
All-Employee share plans
6.
9,946,842 ordinary shares were issued at prices
ranging from £4.5206 to £6.7536 per share in
connection with the exercise of options under
the HSBC Holdings savings-related share option
plans. Options over 31,886,988 ordinary shares
lapsed.
7.
1,507,770 ordinary shares were issued at prices
ranging from £3.7768 to £6.3078 per share in
190
connection with the exercise of options under
the HSBC Holdings Savings-Related Share
Option Scheme: USA Section.
8. 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 2003,
the QUEST held 1,488,895 ordinary shares.
During 2003, HSBC QUEST Trustee (UK)
Limited, the corporate trustee of the QUEST,
subscribed for 2,200,630 ordinary shares at
market values ranging from £6.41 to £9.07 using
funds from those employees who exercised
options under the HSBC Holdings Savings-
Related Share Option Plan. In addition,
3,175,232 ordinary shares were transferred from
the QUEST to employees who exercised options
under the HSBC Holdings Savings-Related
Share Option Plan. At 31 December 2003, the
QUEST held 514,293 ordinary shares.
9. Under the authority granted by shareholders at
the Annual General Meeting in 2000, 4,039,938
ordinary shares were issued at €7.8714 per share
in connection with a Plan d’Epargne Entreprise
for the benefit of non-UK resident employees of
CCF and its subsidiaries.
10. Options over 23,860,338 ordinary shares were
awarded at nil consideration on 23 April 2003
and options over 24,452,594 ordinary shares
were awarded at nil consideration on 8 May
2003 to over 56,000 HSBC employees resident
in more than 50 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 2003 at a price of £5.3496
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
11. 18,316,624 ordinary shares were issued at prices
ranging from £2.1727 to £7.46 per share in
connection with the exercise of options under
the HSBC Holdings Executive Share Option
Scheme. Options over 1,889,621 ordinary shares
lapsed.
12. 2,000 ordinary shares were issued at prices
ranging from £8.405 to £8.712 per share in
connection with the exercise of options under
the HSBC Holdings Group Share Option Plan.
Options over 4,283,355 ordinary shares lapsed.
13. Options over 57,471,110 ordinary shares were
awarded at nil consideration on 2 May 2003
under the HSBC Holdings Group Share Option
Plan. The options are normally exercisable
between the third and 10th anniversaries of the
award at a price of £6.91 per share, the market
value of the ordinary shares on the date of
award.
14. Options over 577,270 ordinary shares were
awarded at nil consideration on 29 August 2003
under the HSBC Holdings Group Share Option
Plan. The options are normally exercisable
between the third and 10th anniversaries of the
award at a price of £8.13 per share, the market
value of the ordinary shares on the date of
award.
15. Options over 4,069,800 ordinary shares were
awarded at nil consideration on 3 November
2003 under the HSBC Holdings Group Share
Option Plan. The options are normally
exercisable between the third and 10th
anniversaries of the award at a price of £9.1350
per share, the market value of the ordinary
shares on the date of award.
Authority to repurchase shares
16. At the Annual General Meeting in 2003
shareholders gave authority for the Company to
make market repurchases of up to 948,200,000
ordinary shares. Your Directors have not
exercised this authority.
Authority to allot shares
17. At the Annual General Meeting in 2003
shareholders gave authority for the Directors to
allot up to 1,896,400,000 ordinary shares.
Within this amount the Directors were granted
authority to allot up to 474,100,000 ordinary
shares wholly for cash to persons other than
existing shareholders. The Directors were also
given authority to allot up to 10,000,000 non-
cumulative preference shares of £0.01 each,
10,000,000 non-cumulative preference shares of
US$0.01 each and 10,000,000 non-cumulative
preference shares of €0.01 each.
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 maximum number of new HSBC Holdings
ordinary shares that may be issued or become
issuable under all the share option plans in any ten
year period is 848,847,000 HSBC Holdings ordinary
shares (approximately 7.7 per cent of HSBC
Holdings’ issued ordinary share capital on 1 March
2004). 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 550,000,000 HSBC
Holdings ordinary shares on 1 March 2004). Under
these plans there were options outstanding over
347,007,843 HSBC Holdings ordinary shares at
31 December 2003. Particulars of options over
HSBC Holdings shares held by Directors of HSBC
Holdings are set out on pages 225 to 229 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 overall
contributions of up to £250 (or equivalent) each
month 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, at
their election, to exercise the options; alternatively
191
H S B C H O L D I N G S P L C
Report of the Directors (continued)
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 normal retirement age or over, the
transfer of the employing business to another party,
or a change of control of the employing company,
options may be exercised before completion of the
relevant savings contract.
HSBC Holdings Savings-Related Share Option Plan
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
9 Apr 1997
6 Apr 1998
1 Apr 1999
10 Apr 2000
11 Apr 2001
11 Apr 2001
2 May 2002
2 May 2002
23 Apr 2003
23 Apr 2003
Exercise
price (£)
4.5206
5.2212
5.3980
6.0299
6.7536
6.7536
6.3224
6.3224
5.3496
5.3496
Exercisable
from 1
1 Aug 2002
1 Aug 2003
1 Aug 2004
1 Aug 2005
1 Aug 2004
1 Aug 2006
1 Aug 2005
1 Aug 2007
1 Aug 2006
1 Aug 2008
Exercisable
until 2
31 Jan 2003
31 Jan 2004
31 Jan 2005
31 Jan 2006
31 Jan 2005
31 Jan 2007
31 Jan 2006
31 Jan 2008
31 Jan 2007
31 Jan 2009
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 20 per
cent. The all-employee share plans will terminate on
26 May 2010 unless the Directors resolve to
terminate the plans at an earlier date.
Options at
1 January
2003
227,409
8,736,570
11,535,187
14,145,104
3,471,866
8,310,144
3,183,586
7,380,267
–
–
Options
awarded
during
year
–
–
–
–
–
–
–
–
9,464,339 4
14,375,052 4
Options
exercised
during
year 3
197,671
8,406,291
319,429
233,203
59,625
32,048
23,481
13,589
1,505
1,173
Options
lapsed
during
year
29,738
144,114
617,076
2,748,077
1,541,388
4,106,665
1,418,386
2,730,534
406,161
299,388
Options at
31 December
2003
–
186,165
10,598,682
11,163,824
1,870,853
4,171,431
1,741,719
4,636,144
9,056,673
14,074,491
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 the death of a participant the executors may exercise the option up to
six months beyond the normal exercise period.
3 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.70.
4 The closing price per share on 22 April 2003 was £6.79.
HSBC Holdings Savings-Related Share Option Plan: Overseas Section
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
9 Apr 1997
6 Apr 1998
1 Apr 1999
10 Apr 2000
11 Apr 2001
11 Apr 2001
2 May 2002
2 May 2002
23 Apr 2003
23 Apr 2003
8 May 2003
8 May 2003
Exercise
price (£)
4.5206
5.2212
5.3980
6.0299
6.7536
6.7536
6.3224
6.3224
5.3496
5.3496
5.3496
5.3496
Exercisable
from 1
1 Aug 2002
1 Aug 2003
1 Aug 2004
1 Aug 2005
1 Aug 2004
1 Aug 2006
1 Aug 2005
1 Aug 2007
1 Aug 2006
1 Aug 2008
1 Aug 2006
1 Aug 2008
Exercisable
until 2
31 Jan 2003
31 Jan 2004
31 Jan 2005
31 Jan 2006
31 Jan 2005
31 Jan 2007
31 Jan 2006
31 Jan 2008
31 Jan 2007
31 Jan 2009
31 Jan 2007
31 Jan 2009
Options at
1 January
2003
84,417
3,187,395
11,836,581
24,582,865
9,426,806
2,934,534
6,195,939
2,404,887
–
–
–
–
Options
awarded
during
year
–
–
–
–
–
–
–
–
10,459 4
10,488 4
17,868,561 5
6,584,033 5
Options
exercised
during
year 3
82,129
3,059,376
211,480
357,866
83,609
12,417
21,660
4,324
–
–
1,198
–
Options
lapsed
during
year
2,288
49,785
682,565
7,602,821
3,570,119
1,462,880
2,780,617
1,175,866
–
–
434,785
83,735
Options at
31 December
2003
–
78,234
10,942,536
16,622,178
5,773,078
1,459,237
3,393,662
1,224,697
10,459
10,488
17,432,578
6,500,298
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 the death of a participant, the executors may exercise the option up
to six months beyond the normal exercise period.
3 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.67.
4 The closing price per share on 22 April 2003 was £6.79.
5 The closing price per share on 7 May 2003 was £7.10.
192
HSBC Holdings Savings-Related Share Option Scheme: USA Section
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
24 Aug 1998
10 Aug 1999
Exercise
price (£)
3.7768
6.3078
Exercisable
from 1
Exercisable
until 2
1 Jul 2003
1 Jul 2004
31 Dec 2003
31 Dec 2004
No options were awarded during the period.
Options at
1 January
2003
2,382,468
1,493,406
Options
exercised
during year 3
Options
lapsed
during year
Options at
31 December
2003
1,492,006
15,764
–
–
890,462
1,477,642
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 the death of a participant, the executors may exercise the option up to
six months beyond the normal exercise period.
3 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.78.
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.
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 generally 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.
193
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
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
Exercise
price (£)
Exercisable
from 1
Exercisable
until 2
Options at
January
2003
Options
exercised
during year 3
Options
lapsed
during year
Options at
31 December
2003
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
22,704
171,774
411,750
1,176,701
1,538,237
14,625
2,687,488
44,423,416
244,350
4,000
29,206,539
22,704
89,295
177,750
574,682
492,063
–
732,564
11,211,845
39,000
–
4,976,721
–
–
–
–
–
–
–
790,899
11,550
–
1,087,172
–
82,479
234,000
602,019
1,046,174
14,625
1,954,924
32,420,672
193,800
4,000
23,142,646
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 the death of a participant, the executors may exercise the option up to
twelve months beyond the normal exercise period.
3 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.28.
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
2 May 2003
29 Aug 2003
3 Nov 2003
Exercise
price (£)
Exercisable
Exercisable
from 1
until 2
9.6420
8.7120
8.2280
8.4050
7.4550
6.9100
8.1300
9.1350
4 Oct 2003
23 Apr 2004
30 Aug 2004
7 May 2005
30 Aug 2005
2 May 2006
29 Aug 2006
3 Nov 2006
4 Oct 2010
23 Apr 2011
30 Aug 2011
7 May 2012
30 Aug 2012
2 May 2013
29 Aug 2013
3 Nov 2013
Options at
1 January
2003
416,526
48,790,498
363,430
56,125,144
468,550
–
–
–
Options
awarded
during
year
Options
exercised
during
year 3
Options
lapsed
during
year
Options at
31 December
2003
–
–
–
–
–
57,471,110 4
577,270 5
4,069,800 6
–
750
–
1,250
–
–
–
–
20,291
1,516,934
6,450
1,780,020
16,200
943,460
–
–
396,235
47,272,814
356,980
54,343,874
452,350
56,527,650
577,270
4,069,800
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 the death of a participant, the executors may exercise the option up to
twelve months beyond the normal exercise period.
3 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.86.
4 The closing price per share on 1 May 2003 was £6.76.
5 The closing price per share on 28 August 2003 was £8.12.
6 The closing price per share on 31 October 2003 was £8.85.
194
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. 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.
CCF S.A.
shares of €5
Date of
award
4 May 1993
23 Jun 1994
22 Jun 1995
9 May 1996
7 May 1997
29 Apr 1998
7 Apr 1999
12 Apr 2000
Exercise
price(€)
Exercisable
from
Exercisable
until
33.69
32.78
34.00
35.52
37.05
73.50
81.71
142.50
4 May 1995
23 Jun 1996
22 Jun 1997
9 May 1998
7 Jun 2000
7 Jun 2000
7 Jun 2000
1 Jan 2002
4 May 2003
23 Jun 2004
22 Jun 2005
9 May 2006
7 May 2007
29 Apr 2008
7 Apr 2009
12 Apr 2010
Options at
1 January
2003
Options
exercised
during year 1
Options
lapsed
during year
Options at
31 December
2003 1
100
10,800
56,130
96,500
360,630
673,400
794,700
856,500
–
–
3,000
7,000
78,000
138,000
6,500
500
100
–
–
–
–
–
–
–
–
10,800
53,130
89,500
282,630
535,400
788,200
856,000
1 Following exercise of the options, the CCF shares will be exchanged for HSBC Holdings ordinary shares in the same ratio as for the
acquisition of CCF (13 HSBC Holdings ordinary shares for each CCF share). At 31 December 2003 The HSBC Holdings Employee
Benefit Trust 2001 (No. 1) held 32,775,055 HSBC Holdings ordinary shares which may be exchanged for CCF shares arising from the
exercise of these options.
Banque Chaix
shares of €16
Date of
award
10 Jul 1998
21 Jun 1999
7 Jun 2000
Exercise
price(€)
Exercisable
from
Exercisable
until
Options at
1 January
2003
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2003
94.52
100.31
105.94
10 Jul 2002
21 Jun 2004
7 Jun 2005
10 Oct 2003
21 Dec 2004
7 Dec 2005
10,000
10,000
10,000
10,000
–
–
–
–
–
–
10,000
10,000
Banque de Baecque Beau
shares of no par value
Date of
award
17 Oct 1997
22 Dec 2000
Banque de Savoie
shares of €16
Date of
award
24 Dec 1998
9 Sep 1999
14 Jun 2000
Exercise
price(€)
Exercisable
from
Exercisable
until
Options at
1 January
2003
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2003
32.88
61.66
17 Oct 2002
22 Dec 2003
17 Oct 2003
22 Dec 2005
28,500
11,500
28,500
–
–
–
–
11,500
Exercise
price(€)
Exercisable
from
Exercisable
until
Options at
1 January
2003
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2003
61.85
64.79
69.52
24 Dec 2003
9 Sep 2004
14 Jun 2005
24 Jun 2004
9 Mar 2005
14 Dec 2005
5,000
5,000
5,100
–
–
–
–
–
–
5,000
5,000
5,100
195
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Banque Dupuy de Parseval
shares of €20
Date of
award
1 Jul 1998
1 Jul 1999
3 Apr 2000
8 Jun 2000
Exercise
price(€)
Exercisable
from
Exercisable
until
Options at
1 January
2003
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2003
33.31
34.76
36.36
39.48
1 Jul 2003
1 Jul 2004
3 Apr 2005
8 Jun 2005
1 Oct 2003
1 Oct 2004
3 Jul 2005
8 Sep 2005
5,000
5,000
5,000
5,000
5,000
–
–
–
–
–
–
–
–
5,000
5,000
5,000
Crédit Commercial du Sud Ouest
shares of €15.25
Date of
award
7 Nov 1997
8 Jul 1998
9 Sep 1999
7 Jun 2000
Exercise
price(€)
Exercisable
from
Exercisable
until
85.68
90.25
95.89
102.29
7 Nov 2002
8 Jul 2003
9 Sep 2004
7 Jun 2005
7 Nov 2003
8 Jan 2004
9 Mar 2005
7 Dec 2005
Options at
1 January
2003
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2003
5,625
7,500
7,500
7,500
5,625
7,500
–
–
–
–
–
–
–
–
7,500
7,500
HSBC Private Bank France
shares of €2
Date of
award
21 Dec 1999
9 Mar 2000
15 May 2001
7 Sep 2001
1 Oct 2002
Exercise
price(€)
Exercisable
from
Exercisable
until
10.84
12.44
20.80
15.475
22.22
21 Dec 2000
27 Jun 2004
15 May 2002
7 Sep 2005
2 Oct 2005
21 Dec 2009
31 Dec 2010
15 May 2011
7 Oct 2007
1 Oct 2012
Options at
1 January
2003 1
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2003
272,250
149,460
259,650
742,000
229,950
–
–
1,125
–
–
–
–
–
293,500
–
272,250
149,460
258,525
448,500
229,950
1 Following the mergers of HSBC Bank France S.A., Banque Eurofin, Banque du Louvre and CCF Banque Privée Internationale on 1
October 2003 options held over shares of Banque Eurofin, Banque du Louvre and CCF Banque Privée Internationale were converted
into options over the shares of the merged entity, HSBC Private Bank France, at exchange ratios determined by reference to their
respective estimated market valuations at the time of the merger. The options outstanding at 1 January 2003 have been adjusted to
reflect the option exchange ratios. On exercise of these options HSBC Private Bank France shares will be exchanged for HSBC
Holdings ordinary shares in the ratio of 1.83 HSBC Holdings ordinary shares for each HSBC Private Bank France share. At 31
December 2003, The CCF Employee Benefit Trust 2001 held 1,900,000 HSBC Holdings ordinary shares which may be exchanged for
HSBC Private Bank France shares arising from the exercise of these options.
Exercise
price(€)
Exercisable
from
Exercisable
until
Options at
1 January
2003
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2003
415
415
22 Dec 2004
19 Dec 2005
22 Dec 2006
19 Dec 2007
2,410
3,340
–
–
–
–
2,410
3,340
Netvalor
shares of €415
Date of
award
22 Dec 1999
19 Dec 2000
196
Sinopia Asset Management
shares of €0.5
Date of
award
18 Mar 1998
22 Mar 1999
15 Oct 1999
18 Feb 2000
Exercise
price(€)
Exercisable
from
Exercisable
until
Options at
1 January
2003
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2003 1
8.61
21.85
18.80
18.66
18 Mar 2003
22 Mar 2004
15 Oct 2004
18 Feb 2005
18 Sep 2003
22 Sep 2004
15 Apr 2005
18 Aug 2005
94,400
79,000
45,000
97,500
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 in the ratio of 2.143 HSBC
Holdings ordinary shares for each Sinopia share. At 31 December 2003 The CCF Employee Benefit Trust 2001 held 483,253 HSBC
Holdings ordinary shares which may be exchanged for Sinopia Asset Management shares arising from the exercise of these options.
Union de Banques à Paris
shares of €16
Date of
award
25 Nov 1998
22 Nov 1999
12 Jul 2000
Exercise
price(€)
Exercisable
from
Exercisable
until
Options at
1 January
2003
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2003
19.97
33.54
47.81
25 Nov 2003
22 Nov 2004
12 Jul 2005
25 May 2004
22 May 2005
12 Jan 2006
27,900
26,200
26,400
–
–
–
900
–
1,000
27,000
26,200
25,400
Household International, Inc. and subsidiary
company plans
Following the acquisition of Household on 28 March
2003, all outstanding options and equity-based
awards over Household common shares were
converted into rights to receive HSBC Holdings
ordinary shares in the same ratio as the share
exchange offer for the acquisition of Household
(2.675 HSBC Holdings ordinary shares for each
Household common share) and the exercise prices
per share were adjusted accordingly. No further
options will be granted under any of these plans. All
outstanding options and other equity-based awards
over Household common shares granted before 14
November 2002 vested on completion of the
acquisition. Options and equity-based awards
granted on or after 14 November 2002 will be
exercisable on their original terms, save that they
have been adjusted to reflect the exchange ratio.
Household International, Inc.
1984 Long-Term Executive Incentive Compensation Plan
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
1 Feb 1994
13 Sep 1994
7 Feb 1995
10 May 1995
17 Jul 1995
13 Nov 1995
Exercise
price (US$)
Exercisable
from
Exercisable
until
4.16
4.74
5.09
5.91
6.42
7.43
1 Feb 1995
13 Sep 1995
7 Feb 1996
10 May 1996
17 Jul 1996
13 Nov 1996
1 Feb 2004
13 Sep 2004
7 Feb 2005
10 May 2005
17 Jul 2005
13 Nov 2005
Options at
28 March
2003
1,272,776
1,337,500
3,101,525
48,150
40,125
2,449,232
Options
exercised
during year 1
Options
lapsed
during year
Options at
31 December
2003
1,137,149
1,337,500
1,569,291
–
–
393,225
–
–
–
–
–
–
135,627
–
1,532,234
48,150
40,125
2,056,007
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.10.
197
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Household International, Inc.
1996 Long-Term Executive Incentive Compensation Plan
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
11 Nov 1996
14 May 1997
21 Oct 1997
10 Nov 1997
15 Jun 1998
1 Jul 1998
9 Nov 1998
17 May 1999
3 Jun 1999
31 Aug 1999
8 Nov 1999
30 Jun 2000
8 Feb 2000
13 Nov 2000
12 Nov 2001
25 Feb 2002
20 Nov 2002
Exercise
price (US$)
Exercisable
from
Exercisable
until
11.43
11.29
14.16
14.60
17.08
19.21
13.71
16.99
16.32
13.96
16.96
15.70
13.26
18.40
21.37
18.44
10.66
11 Nov 2006
11 Nov 1997
14 May 2007
14 May 1998
21 Oct 2007
21 Oct 1998
10 Nov 2007
10 Nov 1998
15 Jun 2008
15 Jun 1999
1 Jul 2008
1 Jul 1999
9 Nov 2008
9 Nov 1999
17 May 2009
17 May 2000
3 Jun 2009
3 Jun 2000
31 Aug 2009
31 Aug 2000
8 Nov 2009
8 Nov 2000
30 Jun 2010
30 Jun 2001
8 Feb 2010
8 Feb 2001
13 Nov 2010
13 Nov 2001
12 Nov 2011
12 Nov 2002
25 Feb 2003
25 Feb 2012
20 Nov 2003 2 20 Nov 2012
Options at
28 March
2003
2,587,394
200,630
200,625
4,224,670
802,500
80,250
5,139,010
334,375
200,625
345,077
5,020,310
26,846
100,312
6,512,958
7,705,072
401,250
7,446,133
Options
exercised
during year 1
Options
lapsed
during year
Options at
31 December
2003
–
–
–
–
–
–
10,031
–
–
–
–
–
–
–
–
–
23,406
–
–
200,625
–
–
–
200,625
–
–
–
150,469
–
33,437
133,750
133,750
401,250
107,000
2,587,394
200,630
–
4,224,670
802,500
80,250
4,928,354
334,375
200,625
345,077
4,869,841
26,846
66,875
6,379,208
7,571,322
–
7,315,727
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.96.
2 25 per cent of the original award is exercisable on each of the first, second, third and fourth anniversaries of the date of award. May be
advanced to an earlier date in certain circumstances, e.g. retirement.
Household International, Inc.
1996 Long-Term Executive Incentive Compensation Plan1
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
15 Nov 2002
20 Nov 2002
2 Dec 2002
16 Dec 2002
20 Dec 2002
2 Jan 20034
15 Jan 20035
3 Feb 20036
14 Feb 20037
3 Mar 20038
Exercise
price (US$)
Exercisable
from 2
Exercisable
until 2
nil
nil
nil
nil
nil
nil
nil
nil
nil
nil
15 Nov 2005
20 Nov 2005
2 Dec 2005
16 Dec 2005
20 Dec 2005
2 Jan 2006
15 Jan 2006
3 Feb 2006
14 Feb 2006
3 Mar 2006
15 Nov 2007
20 Nov 2007
2 Dec 2007
16 Dec 2007
20 Dec 2007
2 Jan 2008
15 Jan 2008
3 Feb 2008
14 Feb 2008
3 Mar 2008
Rights at
28 March
2003
9,228
2,053,238
10,701
37,852
185,914
1,338
33,438
12,044
307,893
2,676
Rights
exercised
during year 3
Rights
lapsed
during year
Rights at
31 December
2003
–
8,828
–
–
5,350
–
–
–
–
–
2,006
82,962
–
2,006
–
–
–
803
40,125
–
7,222
1,961,448
10,701
35,846
180,564
1,338
33,438
11,241
267,768
2,676
1 Awards of Restricted Stock Rights which represent a right to receive shares if the employee remains in the employment of Household at
the date of vesting.
2 Restricted Stock Rights vest one-third on each of the third, fourth and fifth anniversaries of the date of award. Vesting may be advanced
to an earlier date in certain circumstances, e.g. retirement.
3 The weighted average closing price of the shares immediately before the dates on which rights were exercised was £7.53.
4 The closing price per share on 1 Jan 2003 was £6.865.
5 The closing price per share on 14 Jan 2003 was £7.05.
6 The closing price per share on 2 Feb 2003 was £6.31.
7 The closing price per share on 13 Feb 2003 was £6.57.
8 The closing price per share on 2 Mar 2003 was £6.84.
198
Household International, Inc.
Deferred Fee Plan for Directors
Prior to 28 March 2003, Household directors could choose to defer all or a portion of their cash compensation under
the Deferred Fee Plan for directors. At the end of the deferred period selected by the director, all accumulated amounts
will be paid in shares in one or more instalments. Following the acquisition of Household the rights to receive
Household shares under the plan were converted into rights to receive HSBC Holdings ordinary shares. No further
awards will be granted under this plan. A summary of the rights to receive HSBC Holdings ordinary shares under this
plan is set out below. Full details are available on www.hsbc.com by selecting ‘Investor Centre’, then ‘Share Plans’.
HSBC Holdings ordinary shares of US$0.50 each
Dates of deferral
Range of
prices (US$)
Deferral period
Shares
deferred at
28 March
2003
Shares
delivered
during year 1
Shares
lapsed
during year
Shares
deferred at
31 December
2003
1 Oct 1995 – 15 Jan 2003
5.42 – 25.40
1 Jan 2000 – 31 Dec 2021
195,089
1,209
5,474
188,406
1 The weighted average closing price of the shares immediately before the dates on which shares were delivered was £7.68.
Household International, Inc.
Deferred Phantom Stock Plan for Directors
In 1995, the Household Directors’ Retirement Income Plan was discontinued and the present value of a director’s
accrued benefit was exchanged for a deferred right to receive Household shares. Following the acquisition of
Household the rights to receive Household shares under the plan were converted into rights to receive
HSBC Holdings ordinary shares. When a director dies or leaves the Board due to retirement or resignation, all
accumulated amounts will be released in HSBC Holdings ordinary shares in one or more instalments. No further
awards will be granted under this plan. A summary of the rights to receive HSBC Holdings ordinary shares under
this plan is set out below. Full details are available on www.hsbc.com by selecting ‘Investor Centre’, then ‘Share
Plans’.
HSBC Holdings ordinary shares of US$0.50 each
Dates of deferral
30 Jan 1996 – 15 Jan 2003
Range of
prices (US$)
Deferral period
Shares
deferred at
28 March
2003
7.75 – 25.40
1 Jan 2000 – 31 Dec 2020
111,857
Shares
delivered
during year 1
9,389
Shares
lapsed
during year
–
Shares
deferred at
31 December
2003
102,468
1 The weighted average closing price of the shares immediately before the dates on which shares were delivered was £7.06.
Household International, Inc.
Non-Qualified Deferred Compensation Plan for Restricted Stock Rights
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
Exercise
price (US$)
Exercisable
from
Exercisable
until
10 May 2000
nil
10 May 2002
10 May 2005
Rights at
28 March
2003
294,329
Rights
exercised
during year
–
Rights
lapsed
during year
Rights at
31 December
2003
–
294,329
Household International, Inc.
Non-Qualified Deferred Compensation Plan for Stock Option Exercises
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
2 Feb 1991
Exercise
price (US$)
Exercisable
from
Exercisable
until
2.48
2 Feb 1992
15 Jul 2005
Options at
28 March
2003
20,819
Options
exercised
during year
–
Options
lapsed
during year
Options at
31 December
2003
–
20,819
199
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Beneficial Corporation 1990 Non-Qualified Stock Option Plan
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
18 Nov 1993
15 Nov 1994
15 Nov 1995
20 Nov 1996
13 Dec 1996
14 Nov 1997
19 Nov 1997
1 Dec 1997
Exercise
price (US$)
4.62
4.56
6.00
7.86
7.54
9.20
9.39
9.68
Exercisable
from
18 Nov 1994
15 Nov 1995
15 Nov 1996
20 Nov 1997
13 Dec 1997
14 Nov 1998
19 Nov 1998
1 Dec 1998
Exercisable
until
18 Nov 2003
15 Nov 2004
15 Nov 2005
20 Nov 2006
13 Dec 2006
14 Nov 2007
19 Nov 2007
1 Dec 2007
Options at
28 March
2003
217,797
145,831
215,727
313,162
65,624
131,248
433,380
65,624
Options
exercised
during year 1
217,797
42,149
–
–
–
–
4,245
–
Options
lapsed
during year
Options at
31 December
2003
–
–
–
–
–
–
–
–
–
103,682
215,727
313,162
65,624
131,248
429,135
65,624
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.95.
Beneficial Corporation BenShares Equity Participation Plan
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
Exercise
price (US$)
Exercisable
from
Exercisable
until
31 Jan 1997
15 Nov 1997
9.87
11.04
31 Jan 1998
15 Nov 1998
31 Jan 2007
15 Nov 2007
Options at
28 March
2003
52,399
70,062
Options
exercised
during year 1
Options
lapsed
during year
Options at
31 December
2003
6,156
6,977
–
821
46,243
62,264
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.85.
Renaissance Amended & Restated 1997 Incentive Plan
HSBC Holdings ordinary shares of US$0.50 each
Date of
award
31 Oct 1997
1 Jan 1998
1 Oct 1998
1 Jan 1999
Exercise
price (US$)
Exercisable
from
Exercisable
until
Options at
28 March
2003
Options
exercised
during year 1
Options
lapsed
during year
Options at
31 December
2003
1.25
1.25
1.74
2.24
31 Oct 1998
1 Jan 1999
1 Oct 1999
1 Jan 2000
31 Oct 2007
1 Jan 2008
1 Oct 2008
1 Jan 2009
4,739
5,024
2,810
5,024
–
1,800
–
–
–
–
–
–
4,739
3,224
2,810
5,024
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.53.
Valuation of freehold and leasehold
land and buildings
HSBC’s freehold and long leasehold properties,
together with all leasehold properties in Hong Kong,
were revalued in September 2003 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$352 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
200
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 Management Board under the
leadership of the Group Chief Executive.
The Board of Directors 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.
The names of the Directors serving at the date of
this report, and brief biographical particulars for
each, are listed on pages 184 to 186. There are eight
executive Directors and 14 non-executive Directors,
of whom the Board has determined 11 are
independent. In reaching its determination of each
non-executive Director’s independence the Board has
concluded that there are no relationships or
circumstances which are likely to affect the
Director’s judgement and any relationships or
circumstances which could appear to do so were
considered not to be material.
The Directors who served during the year were
W F Aldinger, Sir John Bond, Lord Butler, R K F
Ch’ien, C F W de Croisset, W R P Dalton, Baroness
Dunn, 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 Brian Moffat, Sir Mark Moody-
Stuart, S W Newton, H Sohmen, C S Taylor, Sir
Keith Whitson and Sir Brian Williamson.
W F Aldinger was appointed a Director on
25 April 2003. Sir Keith Whitson retired as a
Director on 30 May 2003 and C F W de Croisset
retired as a Director on 27 February 2004.
R A Fairhead and M F Geoghegan were
appointed Directors with effect from 1 March 2004.
Having been appointed since the Annual General
Meeting in 2003, they will retire at the forthcoming
Annual General Meeting and offer themselves for re-
election.
Lord Butler, W R P Dalton, Baroness Dunn, W
K L Fung, S Hintze, Sir John Kemp-Welch, Lord
Marshall, Sir Mark Moody-Stuart and H Sohmen
will retire by rotation at the forthcoming Annual
General Meeting. With the exception of
W R P Dalton and Lord Marshall, who are to retire,
they will offer themselves for re-election.
MWM Consulting was commissioned to
undertake an independent performance evaluation of
the Board and its committees. This evaluation
covered board structure, dynamics, capabilities and
processes; corporate governance; strategic clarity and
alignment; and the performance of individual
Directors, including that of the Group Chairman. The
assessment report of the Board and its committees
has been reviewed by the Board and has been used
by the non-executive Directors, led by
Sir Brian Moffat, in their evaluation of the
performance of the Group Chairman.
Following this review the Group Chairman has
confirmed that the Directors standing for re-election
at the Annual General Meeting continue to perform
effectively and demonstrate commitment to their
roles. It is the intention of the Board of HSBC
Holdings to continue to review its performance and
that of its Directors annually.
Seven regular Board meetings were held during
2003. Sir John Bond, Baroness Dunn, Sir Brian
Moffat, S K Green, A W Jebson, 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 Hintze, Sir John Kemp-Welch, Sir
Mark Moody-Stuart and S W Newton attended all of
the Board meetings. Lord Butler, Lord Marshall, H
Sohmen, C S Taylor and Sir Brian Williamson
attended six of the Board meetings. Sir Keith
Whitson attended all three Board meetings held
before his retirement and W F Aldinger attended all
four Board meetings held following his appointment.
During 2003 the Chairman held three meetings
with the non-executive Directors without other
executives being present and there was one meeting
of the non-executive Directors without the Chairman
being present. In addition an informal meeting of
Directors relating to the acquisition of Household
was held in March 2003.
In addition to the meetings of the principal
committees referred to below, 18 meetings of
committees of the Board were held during the year to
discharge business delegated by the Board.
The Board ensures all Directors, including non-
executive Directors, develop an understanding of the
views of major shareholders through attendance at
analyst meetings following results announcements
and other ad hoc meetings with investors and their
representative bodies. An Investor Day, attended by
executive and non-executive Directors, was held in
November 2003 to launch HSBC’s strategy for 2004
to 2008.
Sir Brian Moffat, Deputy Chairman and senior
independent non-executive Director, is available to
shareholders should they have concerns which contact
through the normal channels of Group Chairman,
Group Chief Executive, Group Finance Director or
other executives has failed to resolve or for which
such contact would be inappropriate. Sir Brian
Moffat may be contacted through the Group Company
Secretary at 8 Canada Square, London E14 5HQ.
The Group Chairman’s principal commitments
outside HSBC are as a non-executive Director of
Ford Motor Company and a member of the Court of
the Bank of England. During 2003 he ceased to be
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Report of the Directors (continued)
Chairman of The Institute of International Finance,
Inc.
Full, formal and tailored induction programmes
are arranged for newly appointed Directors and
opportunities to update and develop skills and
knowledge are provided to Directors. The terms and
conditions of appointments of non-executive
Directors are available for inspection at 8 Canada
Square, London E14 5HQ and will be made available
for 15 minutes before the Annual General Meeting
and at the Meeting itself.
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, Group Managing
Directors and, in the case of the Corporate Social
Responsibility Committee, certain co-opted non-
Director members. The following are the principal
committees:
Group Management Board
The Group Management Board (formerly called the
Group Executive Committee) meets regularly and
operates as a general management committee under
the direct authority of the Board. The current
members of the Group Management Board are S K
Green (Chairman), Sir John Bond, W F Aldinger, W
R P Dalton, D G Eldon, D J Flint, M F Geoghegan
and A W Jebson, all of whom are executive
Directors, and C-H Filippi, S T Gulliver,
J J Studzinski and Y A Nasr, all of whom are Group
Managing Directors.
The Group Management Board exercises the
powers, authorities and discretions of the Board in so
far as they concern the management and day to day
running of HSBC in accordance with such policies
and directions as the Board may from time to time
determine. Matters reserved for approval by the
Board include annual plans and performance targets,
procedures for monitoring and control of operations,
specified senior appointments, acquisitions and
disposals above predetermined thresholds and any
substantial change in balance sheet management
policy. The Group Management Board sub-delegates
credit, investment and capital expenditure authorities
to its members.
202
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 during 2003 were Sir Brian Moffat
(Chairman), R K F Ch’ien and Sir John
Kemp-Welch, all of whom are independent non-
executive Directors. R A Fairhead, an independent
non-executive Director, was appointed a member of
the Committee with effect from 1 March 2004.
The Board has determined that Sir Brian Moffat,
a fellow of the Institute of Chartered Accountants,
may be regarded as an audit committee financial
expert for the purposes of section 407 of the
Sarbanes-Oxley Act.
Appointments to the Committee are now made
for periods up to three years, extendable by no more
than two additional three-year periods, so long as
members continue to be independent.
Formal and tailored induction programmes are
held for newly appointed Committee members and
appropriate training is provided on an ongoing and
timely basis.
All Group Audit Committee members attended
each of the five meetings held during 2003.
At the beginning of each meeting the Committee
meets with the external auditor, without management
present, to facilitate the discussion of any matter
relating to its remit and any issue arising from the
audit. Similar arrangements have been adopted for
the Committee to meet with the internal auditor.
The terms of reference of the Committee, which
are reviewed annually, are available on
www.hsbc.com by selecting ‘About HSBC’, then
‘Board of Directors’, then ‘Board Committees’.
The Group Audit Committee is accountable to
the Board and assists the Board in meeting its
responsibilities in ensuring an effective system of
internal control and compliance and for meeting its
external financial reporting obligations. The
Committee is directly responsible on behalf of the
Board for the selection, oversight and remuneration
of the external auditor. At each meeting, the
Committee receives comprehensive reports from
each of the Head of Group Compliance, the Group
General Manager Legal and Compliance, and the
Group General Manager Internal Audit and receives
periodic presentations from other functional heads
and line management.
The key processes used to review the
effectiveness of the system of internal control include
the 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 Committee reports on its activities at each
Board meeting and, twice annually, produces a
written summary of such activity.
The Committee has approved procedures for the
receipt, retention and treatment of complaints
regarding accounting, internal accounting controls
and auditing matters, and the confidential and
anonymous submission by employees of concerns
regarding questionable accounting or auditing
matters.
To ensure continuing auditor objectivity and to
safeguard the independence of HSBC's auditors the
Committee has determined a framework for the type
and authorisation of non-audit services which KPMG
may provide.
The Group Audit Committee has adopted
policies for the pre-approval of specific services that
may be provided by the principal auditor (KPMG)
during 2003 and 2004. These policies are kept under
review and amended as necessary to meet the dual
objectives of ensuring that HSBC benefits in a cost
effective manner from the cumulative knowledge and
experience of its auditors whilst also ensuring that
the auditors maintain the necessary degree of
independence and objectivity. These pre-approval
policies apply to all services where HSBC Holdings
or any of its subsidiaries pays for the service, or is a
beneficiary or addressee of the service and has
selected the service provider, or influences the choice
of service provider. All services entered into with
KPMG Audit Plc and its affiliates (‘KPMG’) after 5
May 2003 were pre-approved by the Group Audit
Committee or were entered into under pre-approval
policies established by the Group Audit Committee.
The pre-approved services relate to the provision
of objective advice, attestation type services or
opinions on areas such as controls and are an input
into management decision making. They fall into the
following four categories:
Audit services
In addition to the statutory audit appointments that
are approved by the Group Audit Committee, this
category includes services that are normally provided
by the independent auditor in connection with
statutory and regulatory filings or engagements, such
as reviews of interim financial information, letters to
securities underwriters in connection with debt or
equity offerings, the inclusion of auditors’ reports in
filings with the SEC and certain reports on internal
control over financial reporting.
Audit-related services
These services are those provided by the principal
auditor that are reasonably related to the performance
of the audit or review of the Group’s financial
statements. Examples of such services are due
diligence services provided in connection with
potential acquisitions, audits or reviews of employee
benefit plans, ad hoc attestation or agreed-upon
procedures reports (including reports requested by
regulators), and accounting and regulatory advice on
actual or contemplated transactions.
Tax services
This category includes both tax advice and
compliance services. Examples of such services are
advice on national and local income taxation matters,
(including assistance in data gathering for
preparation, review and submission as agent of tax
filings), advice on tax consequences of management-
proposed transactions and assistance in responding to
tax examinations by governmental authorities. The
pre-approved tax services explicitly exclude
proposals for tax structures unconnected with a
contemplated transaction whose main motive is to
reduce taxation.
Other services
This category includes various other assurance and
advisory services such as training or advice or
assurance provided on specific elements of financial
data and models, IT security and advice, and
providing due diligence on financial reviews of
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Report of the Directors (continued)
HSBC customers and private equity investments.
The remuneration paid to KPMG for each of the
last three years is disclosed in Note 5(d) of the
‘Notes on the Financial Statements’.
Remuneration Committee
The role of the Remuneration Committee and its
membership are set out in the Directors’
Remuneration Report on page 213.
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 during 2003 were Baroness
Dunn, Lord Butler, H Sohmen and Sir Brian Moffat.
During 2003 Sir Brian Moffat succeeded Baroness
Dunn as Chairman of the Committee and H Sohmen
stepped down as a member of the Committee.
There was one Nomination Committee meeting
during 2003 which all members attended.
The terms of reference of the Committee are
available on www.hsbc.com by selecting ‘About
HSBC’, then ‘Board of Directors’, then ‘Board
Committees’.
The Nomination Committee is responsible for
leading the process for Board appointments and for
identifying and nominating, for approval of the
Board, candidates for appointments to the Board.
The Committee makes recommendations to the
Board concerning plans for succession for both
executive and non-executive directors; the
appointment of any director to executive or other
office; suitable candidates for the role of senior
independent director; the re-election by shareholders
of directors retiring by rotation; the renewal of the
terms of office of non-executive directors;
membership of Board Committees, in consultation
with the Group Chairman and the chairmen of such
committees as appropriate; any matters relating to
the continuation in office of any director at any time;
directors’ fees and committee fees for the Company
and any of its subsidiaries as appropriate; and
appointments and re-appointments to the Boards of
Directors of major subsidiary companies as
appropriate.
204
The Committee regularly reviews the structure,
size and composition of the Board and keeps under
review the leadership needs of HSBC with a view to
ensuring the continued ability of HSBC to compete
effectively in the marketplace.
The Board has satisfied itself that the
Nomination Committee has in place appropriate
plans for orderly succession to the Board and Senior
Management positions as well as procedures to
ensure an appropriate balance of skills and
experience within HSBC and on the Board.
Corporate Social Responsibility Committee
The Corporate Social Responsibility Committee held
its first meeting in February 2004. The Committee is
responsible for overseeing Corporate Social
Responsibility and Sustainability policies, principally
environmental, social and ethical matters and for
advising the Board, committees of the Board and
executive management on such matters. The terms of
reference of the Committee are available on
www.hsbc.com by selecting ‘About HSBC’, then
‘Board of Directors’ then ‘Board Committees’. The
members of the Committee are Lord Butler
(Chairman), W K L Fung, S Hintze, C S Taylor, all
of whom are independent non-executive Directors,
and Baroness Brigstocke, G V I Davis and Lord
May, who are co-opted non-Director members of the
Committee.
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. Considerable progress continues to be
made in these important areas. These responsibilities
now come under the overview of the Corporate
Social Responsibility Committee of which
Lord Butler is Chairman.
Further information is available in the HSBC in
Society: Corporate Social Responsibility Report
2003 brochure.
Corporate governance
HSBC is committed to high standards of corporate
governance. HSBC Holdings 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.
The Combined Code was substantially revised
during the year. The new Code will apply for the
next and subsequent reporting years.
Differences in UK/New York Stock Exchange
corporate governance practices
In November 2003, the US Securities and Exchange
Commission approved the New York Stock
Exchange’s (‘NYSE’) new corporate governance
rules for listed companies. Under these new rules, as
a NYSE-listed foreign private issuer, HSBC
Holdings must disclose any significant ways in
which its corporate governance practices differ from
those followed by US companies under NYSE listing
standards. HSBC Holdings believes the following to
be the significant differences between its corporate
governance practices and NYSE corporate
governance rules applicable to US companies.
US companies listed on the NYSE are required
to adopt and disclose corporate governance
guidelines. The Listing Rules of the UK Financial
Services Authority require each listed company
incorporated in the United Kingdom to include in its
Annual Report and Accounts a narrative statement of
how it has applied the principles of the Combined
Code on Corporate Governance appended to the
Listing Rules (‘Combined Code’) and a statement as
to whether or not it has complied with the best
practice provisions of the Combined Code
throughout the accounting period covered by the
Annual Report and Accounts. A company that has
not complied with the Code provisions, or complied
with only some of the Code provisions or (in the case
of provisions whose requirements are of a continuing
nature) complied for only part of an accounting
period covered by the report, must specify the Code
provisions with which it has not complied, and
(where relevant) for what part of the reporting period
such non-compliance continued, and give reasons for
any non-compliance. As stated on page 204 above,
HSBC Holdings complied throughout 2003 with the
best practice provisions of the Combined Code. The
Combined Code does not require HSBC Holdings to
disclose the full range of corporate governance
guidelines with which it complies.
Under NYSE standards, companies are required
to have a nominating/corporate governance
committee, composed entirely of independent
directors. In addition to identifying individuals
qualified to become board members, this committee
must develop and recommend to the board a set of
corporate governance principles. HSBC’s
Nomination Committee, which follows the
requirements of the Combined Code, includes a
majority of members who are independent. All
members of the Committee are non-executive
Directors and the Committee chairman is an
independent non-executive Director. The
Committee’s terms of reference do not require the
Committee to develop and recommend corporate
governance principles for HSBC Holdings. As stated
above, HSBC Holdings is subject to the corporate
governance principles of the Combined Code.
Pursuant to NYSE listing standards, non-
management directors must meet on a regular basis
without management present and independent
directors must meet separately at least once per year.
During 2003, HSBC Holdings’ non-executive
Directors met three times as a group with the Group
Chairman, but with no other executive Directors
present, and met once as a group without the Group
Chairman or other executive Directors present.
HSBC Holdings’ practice, in this regard, complies
with the Combined Code.
In accordance with the requirements of the
Combined Code, HSBC Holdings discloses in its
annual report how the Board, its committees and the
Directors are evaluated and the results of the
evaluation (on pages 214 to 218) and it provides
extensive information regarding Directors’
compensation in the Directors’ Remuneration Report
(on pages 223 to 229). The terms of reference of
HSBC Holdings’ Audit, Nomination and
Remuneration Committees are available on
www.hsbc.com by selecting ‘About HSBC’, then
‘Board of Directors’, then ‘Board Committees’.
NYSE listing standards require US companies to
adopt a code of business conduct and ethics for
directors, officers and employees, and promptly
disclose any waivers of the code for directors or
executive officers. In addition to the Group Business
Principles and Values, which apply to the employees
of all HSBC companies, pursuant to the requirements
of the Sarbanes-Oxley Act the Board of HSBC
Holdings has adopted a Code of Ethics applicable to
the Group Chairman, the Group Finance Director and
Group Chief Accounting Officer. HSBC Holdings’
Code of Ethics is available on www.hsbc.com by
selecting ‘Investor Centre’, then ‘Corporate
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H S B C H O L D I N G S P L C
Report of the Directors (continued)
Governance’, then ‘Obligations of Senior Financial
Officers’. The Group Business Principles and Values
is available on www.hsbc.com by selecting ‘About
HSBC’, then ‘HSBC in Society’, then ‘Living Our
Values’, then ‘Our People’.
Under NYSE listing rules applicable to US
companies, independent directors must comprise a
majority of the board of directors. Currently, half of
HSBC Holdings’ Directors are independent. The
NYSE rules include detailed tests for determining
director independence while the Combined Code,
which is followed by HSBC Holdings, prescribes a
more general standard for determining director
independence. The Combined Code requires a
company’s board to assess director independence by
affirmatively concluding that the director is
independent of management and free from any
business or other relationship that could materially
interfere with the exercise of independent judgement.
Lastly, a chief executive officer of a US
company listed on the NYSE must annually certify
that he or she is not aware of any violation by the
company of NYSE corporate governance standards.
In accordance with NYSE listing rules applicable to
foreign private issuers, HSBC Holdings’ Group
Chairman is not required to provide the NYSE with
this annual compliance certification. However, in
accordance with rules applicable to both US
companies and foreign private issuers, the Group
Chairman is required to promptly notify the NYSE in
writing after any executive officer becomes aware of
any material non-compliance with the NYSE
corporate governance standards applicable to HSBC
Holdings.
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,
206
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
1 March 2004, the date of approval of the Annual
Report and Accounts. In the case of companies
acquired during the year, including Household, the
internal controls in place are being reviewed against
HSBC’s benchmarks and 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
Management Board under powers delegated by
the Board. Sub-delegation of authority from the
Group Management Board 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
functional and 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,
breaches of law or regulations, unauthorised
activities and fraud. Exposure to these risks is
monitored by asset and liability committees and
executive committees in subsidiaries and by the
Group Management Board for HSBC as a
whole.
• Comprehensive annual financial plans are
prepared by subsidiaries and by each customer
group 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. Plans are prepared by major operating
subsidiaries and for each customer group at least
every five 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
conduct of business to safeguard the Group’s
reputation are established by the Board of HSBC
Holdings, the Group Management Board,
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
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 aspired 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
Management Board, 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
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Report of the Directors (continued)
internal control systems, are communicated through
manuals and statements of policy and are
promulgated through internal communications. The
policies cover SEE issues and set out operational
procedures in all areas of reputational risk, including
money laundering deterrence, environmental 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 HSBC 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 its
quantification of 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 the
Environment indices. Further details are contained in
the HSBC in Society: Corporate Social
Responsibility Report 2003.
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-
208
ordinators based in each country in which HSBC
operates.
HSBC faces a range of threats from terrorists
and criminals across the world. In particular, over the
past year the threat from international terrorism has
become significant in a number of areas where
HSBC operates. This threat has mainly manifested
itself in bomb attacks such as the one in Istanbul last
year in which HSBC’s Turkish headquarters building
was attacked. Despite suffering tragic loss of life and
major damage, existing security measures and well-
managed contingency procedures ensures the
business was able to return to normal operations the
following day.
Group Security provides regular risk
assessments in areas of increased risk to assist
management in judging the level of terrorist threat.
In addition, Regional Security functions conduct
regular security reviews to ensure measures to
protect HSBC staff, buildings, assets and information
are appropriate for the level of threat.
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, HSBC in Society:
Corporate Social Responsibility Report 2003, 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 352 of
the Securities and Futures Ordinance of Hong Kong,
the Directors of HSBC Holdings at the year-end had
the following interests in the shares and loan capital
of HSBC, all beneficial unless otherwise stated.
Under the Securities and Futures Ordinance, share
options and American Depositary Shares are
classified as interests in equity derivatives and are
disclosed as such in the following table.
At 1 January 2003
At 31 December 2003
Total
Interests 1
Beneficial
owner
Child
under 18
or spouse
Trustee
Beneficiary
of a trust
HSBC Holdings ordinary shares of
US$0.50
W F Aldinger ..................
Sir John Bond .................
R K F Ch’ien ..................
C F W de Croisset ..........
W R P Dalton .................
Baroness Dunn ...............
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 Brian Moffat .............
Sir Mark Moody-Stuart ..
S W Newton ...................
H Sohmen .......................
C S Taylor ......................
Sir Brian Williamson ......
32,658,707 2,3
735,070 3
24,273
38,611,219
370,075 3
136,172
312,062 3
294,220 3
328,000
452,946 3
–
278,486 3
406,800
7,578
5,640
5,840
–
2,886,774
500
14,500
–
338,303
45,860
37,441
36,441
130,362
–
50,051
328,000
138,706
2,037
57,794
50,000
7,956
–
5,000
5,000
–
9,500
15,222
–
3,468
–
–
–
–
905
1,877
–
15,052
–
–
5,000
–
–
840
–
389,374
–
–
–
–
–
–
–
–
–
45,000 4
15,125 4 13,404,711 5
538,605 7
–
32,775,055 9
324,245 7
–
289,829 7
332,168 7
–
380,097 7
–
347,381 7
–
–
–
–
–
–
–
–
–
–
356,800 4
–
–
–
–
–
–
–
Jointly
with
another
person
–
62,831
–
–
–
–
46,189
–
–
–
–
–
–
–
10,746
–
–
–
–
–
Other
Equity
derivatives
Total
interests 1
Percentage
of ordinary
shares
in issue
–
–
–
–
–
24,000 4
–
–
–
–
–
–
–
–
–
–
–
2,552,066 11
–
–
2,798 8
–
12,994,749 6 26,414,585
946,005
45,860
3,036,000 10 35,848,496
363,484
154,362
336,923
413,713
328,000
581,925
2,037
406,609
411,800
7,956
10,746
5,840
5,000
2,941,440
10,000
15,222
2,798 8
–
–
29,617 8
–
3,070 8
–
1,434 8
–
–
–
–
–
–
500 12
–
0.24
0.01
0.00
0.33
0.00
0.00
0.00
0.00
0.00
0.01
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.03
0.00
0.00
1 Under the Securities and Futures Ordinance of Hong Kong the share interests of a Director include options over shares. The share interests of the
following Directors under the Companies Act 1985 (i.e. excluding options) at 1 January 2003, or date of appointment if later, were W F Aldinger
2,321,782; Sir John Bond 657,272; C F W de Croisset 35,664; W R P Dalton 242,300; D G Eldon 235,562; D J Flint 264,603; S K Green 450,448; and A
W Jebson 277,052 and at 31 December 2003 were W F Aldinger 2,339,636; Sir John Bond 943,207; C F W de Croisset 37,441; W R P Dalton 360,686;
D G Eldon 336,923; D J Flint 384,096; S K Green 578,855 and A W Jebson 405,175.
2 Interests at 25 April 2003 – date of appointment.
3 Includes awards under Restricted Share Plan, further details of which are set out on page 228.
4 Non-beneficial.
5 Following the acquisition of Household in March 2003, outstanding options and other equity-based awards over Household shares were converted into
rights to receive HSBC Holdings ordinary shares in the same ratio as the offer for Household (2.675 HSBC Holdings ordinary shares for each Household
common share). HSBC Holdings ordinary shares, which may be used to satisfy the exercise of these options or equity-based awards, were purchased by the
HSBC (Household) Employee Benefit Trust 2003. Mr Aldinger has options over 11,630,900 HSBC Holdings ordinary shares, further details of which are
set out in the section headed ‘share options’ in the Directors’ Remuneration Report. However, as a potential beneficiary of the Trust he is deemed to have
a technical interest in all of the 12,444,049 shares held by the Trust. The number shown above therefore comprises the 12,444,049 HSBC Holdings
ordinary shares held by the Trust at 31 December 2003 and Mr Aldinger’s awards of 960,662 HSBC Holdings ordinary shares held under the Restricted
Share Plan, further details of which are set out on page 228.
6 Comprises options to acquire 11,630,900 HSBC Holdings ordinary shares following the conversion of options held over shares of Household (further
details of which are set out in the section headed ‘share options’ in the Directors’ Remuneration Report) and 272,769.8 listed American Depositary
Shares, representing 1,363,849 HSBC Holdings ordinary shares, which under the Securities and Futures Ordinance of Hong Kong are categorised as
equity derivatives.
7 Awards held under the Restricted Share Plan, further details of which are set out on page 228.
8 Options to acquire HSBC Holdings ordinary shares, further details of which are set out in the section headed ‘share options’ in the Directors’
Remuneration Report.
9 Following the acquisition of CCF in 2000, CCF shares issued following the exercise of options over CCF shares became exchangeable for HSBC Holdings
ordinary shares in the same ratio as the exchange offer for CCF (13 HSBC Holdings ordinary shares for each CCF share). HSBC Holdings ordinary
shares, which may be used to satisfy the exchange of CCF shares for HSBC Holdings ordinary shares following exercise of these options, were purchased
by The HSBC Holdings Employee Benefit Trust 2001 (No. 1). Mr de Croisset has options over CCF shares that are exchangeable for 2,418,000 HSBC
Holdings ordinary shares, further details of which are set out in the section headed ‘share options’ in the Directors’ Remuneration Report. However, as a
potential beneficiary of the Trust, he is deemed to have a technical interest in all 32,775,055 HSBC Holdings ordinary shares held by the Trust at 31
December 2003.
10 Comprises options to acquire 618,000 HSBC Holdings ordinary shares under the HSBC Holdings Group Share Option Plan and options over CCF shares
that are exchangeable for 2,418,000 HSBC Holdings ordinary shares, further details of which are set out in the section headed ‘share options’ in the
Directors’ Remuneration Report.
11 Interests held by private investment companies.
12 Under the Securities and Futures Ordinance of Hong Kong interests in listed American Depositary Shares are categorised as equity derivatives.
209
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Sir John Bond has an interest as beneficial
owner 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 an interest as beneficial owner in
300 Hang Seng Bank Limited ordinary shares of
HK$5.00 each, which he held throughout the year.
S K Green has an interest as beneficial owner 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 and his spouse has an
interest in US$3,000,000 of HSBC Bank plc Senior
Subordinated Floating Rate Notes 2009, which were
held throughout the year. H Sohmen’s spouse also
has an interest in 107,800 ordinary shares of US$100
each in International United Shipping and
Investment Company, an associated corporation of
HSBC, representing 35 per cent of the ordinary
shares in issue, which she held throughout the year.
During the year, H Sohmen ceased to have an
interest through a corporate body 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.
As Directors of CCF S.A., C F W de Croisset,
W R P Dalton and S K Green each had an interest as
beneficial owner 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 have undertaken to
transfer these shares to HSBC on ceasing to be
Directors of CCF.
No directors held any short positions as defined
in the Securities and Futures Ordinance of Hong
Kong. Save as stated above and in the Directors'
Remuneration Report, none of the Directors had an
interest in any shares or debentures of any HSBC
corporation at the beginning or at the end of the year,
and none of the Directors or members of their
immediate family was awarded or exercised any
right to subscribe for any shares or debentures during
the period.
210
Since the end of the year, the interests of each of
the following Directors have increased by the
number of HSBC Holdings ordinary shares shown
against their name:
Beneficial
owner Trustee
Child
under 18
or spouse
Beneficiary
of a trust Other
W F Aldinger ............
Sir John Bond ............
R K F Ch’ien .............
C F W de Croisset ......
W R P Dalton ............
Baroness Dunn ...........
D G Eldon .................
D J Flint ....................
S K Green .................
A W Jebson ...............
Lord Marshall.............
Sir Brian Moffat ........
H Sohmen .................
Sir Brian Williamson .
–
482
3625
2965
3006
9295
3645
4077
1,1088
4565
635
455
–
1205
–
–
–
–
–
–
–
–
3555
–
–
–
–
–
–
253
–
–
–
–
75
143
1195
–
–
–
7,6925
–
7,5841
–
4,8404
–
–
–
–
–
2,5591
–
–
–
2,2861
–
2,6211
–
2,9995
–
2,7441
–
–
–
–
–
– 15,5299
–
–
1 Scrip dividend on awards held under Restricted Share Plan.
2 Comprises the automatic reinvestment of dividend income by an
Individual Savings Account and Personal Equity Plan manager
(31 shares) and the acquisition of shares in the HSBC Holdings UK
Share Ownership Plan through normal monthly contributions and the
reinvestment of dividends on shares held in the plan (17 shares).
3 The automatic reinvestment of dividend income by an Individual
Savings Account and Personal Equity Plan manager.
4 Comprises scrip dividend on awards held under Restricted Share Plan
(4,253 shares) and on shares held in a Trust (587 shares).
5 Scrip dividend.
6 Comprises scrip dividend on shares held as beneficial owner (283
shares) and the acquisition of shares in the HSBC Holdings UK Share
Ownership Plan through normal monthly contributions and the
reinvestment of dividends on shares held in the plan (17 shares).
7 Comprises scrip dividend on shares held as beneficial owner (357
shares), the acquisition of shares in the HSBC Holdings UK Share
Ownership Plan through normal monthly contributions and the
reinvestment of dividends on shares held in the plan (17 shares) and
the automatic reinvestment of a cash dividend by an Individual
Savings Account and Personal Equity Plan manager (33 shares).
8 Comprises scrip dividend on shares held as beneficial owner (1,091
shares) and the acquisition of shares in the HSBC Holdings UK Share
Ownership Plan through normal monthly contributions and the
reinvestment of dividends on shares held in the plan (17 shares).
9 Comprises scrip dividend on interests held by private investment
companies.
There have been no other changes in Directors’
interests from 31 December 2003 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 2003, Directors and Senior
Management held, in aggregate, beneficial interests
in 17,038,126 HSBC Holdings ordinary shares
(0.2 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, an intranet site
accessible to all HSBC’s employees worldwide,
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.
Bank plc is the amount due to trade creditors which,
at 31 December 2003, 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.
Notifiable 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 at
that date in 284,604,788 HSBC Holdings ordinary
shares, representing 3.01 per cent of the ordinary
shares in issue at that date.
No substantial interest, being 5 per cent or more,
in any of the equity share capital is recorded in the
register maintained under section 336 of the
Securities and Futures Ordinance of Hong Kong.
Employment of disabled persons
Dealings in HSBC Holdings shares
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
On 8 May 2003, HSBC Life (International) Limited
sold 20,902 HSBC Holdings ordinary shares of
US$0.50 each on the London Stock Exchange at
708.26 pence per share. Save for this and dealings as
intermediaries by HSBC Bank plc and HSBC CCF
Financial Products (France) SNC, which are
members of a European Economic Area exchange,
neither HSBC Holdings nor any subsidiary
undertaking has bought, sold or redeemed any
securities of HSBC Holdings during the 12 months
ended 31 December 2003.
Connected transactions
The following constituted connected transactions
under the rules of The Stock Exchange of Hong
Kong Limited.
In March 2003 CCF, a subsidiary of HSBC
Holdings, agreed to acquire 11.81 per cent of the
capital of Banque Eurofin S.A. (‘Eurofin’) from
Gérard de Bartillat (4.41 per cent) and a company
owned by the Bartillat Family (7.40 per cent). Gérard
de Bartillat was also a Director and the Chief
Executive Officer of Eurofin. The consideration of
€24.2 million in cash was paid on completion. In
April 2003, CCF agreed to acquire 50.03 per cent of
the capital of Société des Cadres Banque Eurofin
S.A.S, which in turn owned 1.18 per cent of Eurofin,
from a company owned by the Bartillat Family. The
211
H S B C H O L D I N G S P L C
Report of the Directors (continued)
consideration of €1.43 million in cash was paid on
completion.
In May 2003 HSBC Mexico (formerly
GF Bital), a subsidiary of HSBC Holdings, agreed to
acquire, subject to regulatory approval, 49 per cent
of the capital of Seguros Bital, S.A. de C.V.
(‘Seguros Bital’) held by ING Insurance
International B.V. for a consideration of
US$148 million. The transaction increased
HSBC Mexico’s interest in Seguros Bital from
51 per cent to 100 per cent.
In September 2003 Elysées Gestion, a subsidiary
of HSBC Holdings, agreed to acquire 49 per cent of
the capital of Elysées Fonds from
Médéric-Prévoyance and URRPIMMEC. The
consideration of €14 million in cash was paid on
completion. The transaction increased Elysées
Gestion’s interest in Elysées Fonds from 51 per cent
to 100 per cent.
In December 2003 HSBC Latin America BV, a
subsidiary of HSBC Holdings, acquired 40 per cent
of the capital of HSBC Salud (Argentina) S.A. from
New York Life Inc. The consideration of
US$30 million was paid in cash on completion. The
transaction increased HSBC Latin America BV’s
interest in HSBC Salud (Argentina) S.A. from 60 per
cent to 100 per cent. The company was subsequently
sold to a third party.
In January 2004 The Hongkong and Shanghai
Banking Corporation Limited, a subsidiary of HSBC
Holdings, exchanged a 50 per cent interest in the
capital of World Finance International Limited for
approximately 7 per cent of Bergesen Worldwide
Limited. Bergesen Worldwide Limited is controlled
by family interests of H Sohmen, a non-executive
Director of HSBC Holdings and The Hongkong and
Shanghai Banking Corporation Limited. The
percentage interest in Bergesen Worldwide Limited
was of an equivalent value to 50 per cent of the
consolidated net asset value of World Finance
International Limited and its subsidiaries as at
31 December 2003, estimated at approximately
US$111 million.
Donations
During the year, HSBC made charitable donations
totalling US$47,374,000. Of this amount,
US$17,069,000 was given for charitable purposes in
the United Kingdom.
212
Following its acquisition on 28 March 2003 and
until 30 September 2003 to allow time for any
commitments to be honoured, Household
International continued its previous policy of making
political donations in the United States. During that
period donations totalling US$455,270 were made,
comprising US$143,250 to 174 affiliates of the
Democratic Party, US$197,000 to 271 affiliates of
the Republican Party and US$115,020 to 18 non-
affiliated organisations. Since 1 October 2003
Household International has adopted HSBC’s
longstanding policy of not making contributions to
any political party. Save for the donations made by
Household before 1 October 2003 no political
donations were made by HSBC during the year.
At the Annual General Meeting in 2003
shareholders gave authority for HSBC Holdings and
HSBC Bank plc to make EU political donations and
incur EU political expenditure up to a maximum
aggregate sum of £250,000 and £50,000 respectively
over a four-year period 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.
Annual General Meeting
The Annual General Meeting of HSBC Holdings will
be held at the Barbican Hall, Barbican Centre,
London EC2 on Friday 28 May 2004 at 11.00 am.
An informal meeting of shareholders will be
held at Level 28, 1 Queen’s Road Central, Hong
Kong on Tuesday 25 May 2004 at 4.30pm.
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
2004 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
1 March 2004
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
2003, the members of the Remuneration
Committee were Sir Mark Moody-Stuart
(Chairman), W K L Fung and Sir John Kemp-
Welch, all of whom are independent non-executive
Directors. S Hintze, an independent non-executive
Director, was appointed a member of the
Committee on 30 January 2004.
There were eight meetings of the
Remuneration Committee during 2003. All of the
members attended each of these meetings. The
terms of reference of the Committee are available
on www.hsbc.com by selecting ‘About HSBC’,
then ‘Board of Directors’, then ‘Board
Committees’.
During 2003, the Committee conducted a
review of external specialist remuneration
consultants. After a rigorous selection process, the
Committee retained the services of Towers Perrin,
a firm of specialist human resources consultants,
who provide independent advice on executive
remuneration issues. A further selection process
will take place in 2006. As a global firm, Towers
Perrin also provide other remuneration, actuarial
and retirement consulting services to various parts
of HSBC. Other than the provision of expert advice
in these areas to the Remuneration Committee and
to HSBC, Towers Perrin have no connection with
HSBC. Other consultants are used from time to
time to validate their findings. The Remuneration
Committee also receives advice from the Group
General Manager, Group Human Resources and
the Senior Executive, Group Reward Management.
General Policy on Employees
As 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 since 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
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 ensure that remuneration is competitive in
relation to comparative organisations in each
of the countries or regions in which HSBC
operates;
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; and
since 1996, to follow a policy of moving
progressively from defined benefit to defined
contribution Group pension schemes for new
employees only.
In line with these principles:
employees’ 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;
employees participate in various bonus
arrangements. 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, encompassing both revenue
generation and expense control; customer
relationships; full utilisation of professional
skills; and adherence to HSBC’s ethical
213
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
•
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 employees 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; and
in order to align the interests of employees
with those of shareholders, employees
generally are eligible to be considered for
discretionary awards of share options under
the HSBC Holdings Group Share Option Plan.
For the majority of employees, the vesting of
share awards under the HSBC Holdings Group
Share Option Plan is subject to the attainment
of TSR targets (full details are set out on pages
217 to 219). Separate transitional
arrangements are currently in place for
employees of CCF.
In addition, to allow more employees to
participate in the success they help to create,
employees may also participate in the HSBC
Holdings savings-related share option plans
and in local share ownership and profit sharing
arrangements.
The impact on existing equity of granting
share options which are to be satisfied by the issue
of new shares is shown in diluted earnings per
share on the face of the consolidated profit and loss
account, with further details disclosed in Note 11
of the ‘Notes on the Financial Statements’. The
effect on basic earnings per share of exercising all
outstanding share options would be to dilute it by
0.40 per cent.
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.
During 2004, the Committee will conduct a
comprehensive and fundamental review of all
share-based remuneration. Before presenting any
214
proposed changes for shareholder approval, the
Committee will ensure appropriate consultation is
undertaken with shareholders and their
representatives.
Directors and Senior Management
HSBC’s operations are substantial, diverse and
international; for example, over 74 per cent of net
income is derived from outside the United
Kingdom.
HSBC Holdings’ Board is currently composed
of 14 non-executive Directors and eight executive
Directors. With businesses in 79 countries and
territories, HSBC aims to attract Directors with a
variety of experience, in both its key markets and
internationally. The Board currently includes
nationals of seven different countries. The eight
executive Directors, four Group Managing
Directors and 27 Group General Managers have in
total more than 900 years of service with HSBC.
Directors’ fees
Directors’ fees are regularly reviewed and
compared with other large international companies.
The current fee, which was approved by
shareholders in 2000, is £35,000 per annum.
Recent developments in corporate governance and
reporting obligations, and the expansion of
HSBC’s business, continue to increase the
commitment required of Directors. In accordance
with the recommendations of an independent
external review, the approval of shareholders will
be sought at the 2004 Annual General Meeting for
the basic fee to be increased to £55,000 per annum
with effect from 1 January 2004.
In addition, non-executive Directors receive,
with effect from 1 January 2004, the following
fees:
Chairman, Audit Committee
Member, Audit Committee
£40,000 p.a.
£15,000 p.a.
During 2003, five Audit Committee meetings were held. A
Director’s commitment to each meeting, including
preparatory reading and review, can be up to 15 hours.
Chairman, Remuneration Committee
Member, Remuneration Committee
£20,000 p.a.
£15,000 p.a.
During 2003, eight meetings of the Remuneration Committee
were held.
Chairman, Nomination Committee
Member, Nomination Committee
£20,000 p.a.
£15,000 p.a.
The Nomination Committee met once during 2003. The terms
of reference of the Committee have been broadened
substantially and more meetings will be held in 2004 and
future years.
Chairman, Corporate Social
Responsibility Committee
Member, Corporate Social
Responsibility Committee
£20,000 p.a.
£15,000 p.a.
This Committee first met in February 2004 and will meet on
a quarterly basis.
Executive Directors are normally permitted to
retain only one Director’s fee from HSBC. For
example, 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
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.
Having regard to the broad international nature
of the Group, the annual market survey of senior
executive remuneration takes into account not only
remuneration data in the UK but also in other
overseas markets.
Consistent with the principles applied by the
Committee to employees generally, there are four
key components to the executive Directors’
remuneration:
•
•
•
•
salary;
annual cash bonus;
long-term incentives; and
pension.
The Committee generally provides, on a
discretionary basis, long-term share incentives to
executive Directors and members of senior
management through conditional awards of
Performance Shares under the HSBC Holdings
Restricted Share Plan 2000 rather than through the
HSBC Holdings Group Share Option Plan, as
explained under ‘Long-term incentive plan’ below.
The level of awards available to the executive
Directors under the annual cash bonus scheme and
the HSBC Holdings Restricted Share Plan 2000 is
entirely dependent on performance. Remuneration
policy for executive Directors is intended to
provide competitive rates of base salary but with
the potential for the majority of the value of the
remuneration package to be delivered in the form
of both short and long-term incentives. This
typically results in base salary comprising around
40 per cent of total direct pay and the remaining 60
per cent split equally between annual bonus and the
expected value of Performance Share awards. The
remuneration package of W F Aldinger has a
smaller proportion of fixed salary and a higher
proportion of annual bonus and Restricted Share
awards. The awards are in accordance with the
minimum level of awards set out under his
employment agreement entered into at the time of
the acquisition of Household.
Each component of executive Directors’
remuneration is explained in detail below. The
current approach and structure of remuneration has
been in place since 2000 and the Committee
believes it has served HSBC well. The Committee
has, however, made the following modifications to
the performance condition for future awards of
Performance Shares under the HSBC Holdings
Restricted Share Plan 2000 in order to make the
condition more relevant and long-lasting:
•
•
the elimination of any re-testing provision so
that awards lapse if the performance condition
is not satisfied after the initial three-year
performance period; and
a change to the benchmark group (set out on
page 217) to make it more relevant as a
benchmark against which HSBC’s
performance is measured.
The use of Performance Shares and the HSBC
Holdings Restricted Share Plan 2000 will fall
within the Committee’s review of share-based
remuneration to be undertaken in 2004.
Salary
The Committee reviews salary levels for executive
Directors each year in the same context as other
employees. With respect to market practice and
taking account of the international nature of the
Group, the Committee benchmarks the salary of
each Director and member of Senior Management
against those of comparable executives in large,
diverse companies.
215
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Base salaries with effect from April 2004 will
Awards
be:
W F Aldinger .............................................
Sir John Bond ............................................
W R P Dalton ............................................
D G Eldon .................................................
D J Flint .....................................................
M F Geoghegan .........................................
S K Green ..................................................
A W Jebson ...............................................
US$1,000,000
£1,202,800
£521,500
US$290,340
£462,500
£575,000
£700,000
£515,000
This represents an average increase from 2003
of 18.9 per cent.
As an International Manager, D G Eldon’s
current base salary, shown above, is calculated on a
net basis and will be subject to a separate review in
April 2004.
Annual cash bonus
Cash bonuses for executive Directors and members
of Senior Management are based on two key
factors: individual performance, taking into
account, as appropriate, results against plan of the
business unit or performance of the support
function for which the individual is responsible;
and Group performance, measured by comparing
operating profit before tax with 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.
Measurement against these key performance
factors may, exceptionally, result in discretionary
cash bonuses up to 250 per cent of basic salary. For
2003, bonuses have ranged from 60 per cent to
250 per cent of base salary, with all but two of the
executive Directors and members of Senior
Management receiving discretionary bonuses of
less than 110 per cent of base salary.
Long term incentive plan
The HSBC Holdings Restricted Share Plan 2000 is
the principal long-term incentive plan used 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 vesting of
Performance Share awards is subject to the
attainment of a predetermined TSR target.
216
In recent years the Remuneration Committee has
adopted a policy that the face value of annual
awards of Performance Shares 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).
Additionally, executive Directors and
members of Senior Management who participate in
the HSBC Holdings Restricted Share Plan 2000
have not received awards under the HSBC
Holdings Group Share Option Plan.
The Remuneration Committee has proposed to
the Trustee of the HSBC Holdings Restricted Share
Plan 2000 that the following conditional awards
should be made to executive Directors in 2004:
Sir John Bond ....................................................
D G Eldon .........................................................
D J Flint ............................................................
M F Geoghegan .................................................
S K Green ..........................................................
A W Jebson .......................................................
Total ..................................................................
£000
2,100
750
1,040
780
1,430
1,040
7,140
The Trustee to the Plan will be provided with
funds to acquire HSBC Holdings ordinary shares at
an appropriate time after the announcement of the
annual results. The 2004 conditional awards
proposed for executive Directors and members of
Senior Management in respect of 2003 will have an
aggregate value at the date of award of
£16.86 million.
Under the terms of his employment agreement
entered into at the time of the acquisition of
Household, W F Aldinger will receive an award of
US$5.5 million which will be used to purchase
Restricted Shares in HSBC Holdings. These
Restricted Shares are not subject to the TSR
performance conditions set out on pages 217 to
219. One-third of this award of Restricted Shares
will vest on each of the three anniversaries
following the date of grant.
C F W de Croisset, who retired from HSBC on
29 February 2004, has not received any awards of
Performance Shares under the HSBC Holdings
Restricted Share Plan since the acquisition of CCF
in 2000. Rather, in accordance with the
arrangements agreed with CCF in 2000, Mr de
Croisset received share option awards under the
HSBC Holdings Group Share Option Plan. The
awards in 2001 and 2002 were not subject to
performance conditions; 50 per cent of the award
made in 2003 was subject to the TSR performance
conditions set out below.
W R P Dalton, who is to retire at the Annual
General Meeting on 28 May 2004, will not receive
an award of Performance Shares under the HSBC
Holdings Restricted Share Plan in 2004.
Performance conditions
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 228.
TSR is defined as the growth in share value
and declared dividend income, measured in
sterling, during the relevant period. In calculating
TSR, dividend income is assumed to be reinvested
in the underlying shares.
The TSR performance condition for awards of
Performance Shares under the Restricted Share
Plan remained the same from 1999 to 2003, the
five years of the Managing for Value strategy. For
awards made in 2004, changes have been made to
the peer group (as described below) and re-testing
provisions have been eliminated so that awards
will lapse if the performance condition is not
satisfied after the initial three-year performance
period.
Having regard to HSBC Holdings’ size and
status within the financial sector, a benchmark for
HSBC Holdings’ TSR has been established which
takes account of the TSR performance of:
1.
a peer group of nine banks weighted by market
capitalisation which are considered most
relevant to HSBC in terms of size and
international scope. For performance periods
up to and including the one beginning in 2003,
this group comprised ABN AMRO Holding
N.V., The Bank of East Asia Limited,
Citigroup Inc., Deutsche Bank A.G., J P
Morgan Chase & Co., Lloyds TSB Group plc,
Mitsubishi Tokyo Financial Group Inc.,
Oversea-Chinese Banking Corporation Ltd.
and Standard Chartered plc. To be more
relevant to HSBC in terms of size and
international scope, this peer group has been
amended for conditional awards made in 2004
and onwards by the replacement of Lloyds
TSB Group plc, Oversea-Chinese Banking
Corporation Ltd., Mitsubishi Tokyo Financial
Group Inc. and The Bank of East Asia Limited
with Bank of America Corporation, The Royal
Bank of Scotland plc, Banco Santander
Central Hispano S.A. and UBS AG;
2.
3.
the five largest banks from each of the US, the
UK, continental Europe and the Far East, other
than any within paragraph 1 above, weighted
by market capitalisation; and
the banking sector of the Morgan Stanley
Capital International World Index, excluding
any within paragraph 1 and paragraph 2 above,
weighted by market capitalisation.
By combining the weighted average TSR for
each of the above three groups and weighting that
average so that 50 per cent is applied to
paragraph 1, 25 per cent is applied to paragraph 2
and 25 per cent is applied to paragraph 3, an
appropriate single TSR benchmark for market
comparison is determined.
The extent to which awards will vest will be
determined by reference to HSBC Holdings’ TSR
measured against the TSR benchmark. 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 2004 is 1 March. The starting point will be,
therefore, the average over the period 1 to 26
March inclusive. TSR for the benchmark
constituents will be based on their published share
prices on 26 March 2004.
If HSBC Holdings’ TSR over the performance
period exceeds the benchmark TSR, awards with a
value, at the date of grant, of up to 100 per cent of
the individual’s 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 the individual’s
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.
217
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
For awards made in 2004 and thereafter, under
the HSBC Holdings Restricted Share Plan 2000
only, the initial performance period will be three
years from the date of grant. As before, if the upper
quartile performance target is achieved, 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 is achieved, full vesting and
transfer of the shares will not generally occur until
the fifth anniversary of the date of grant. If the
performance test is not passed at the third
anniversary, the shares will be forfeited.
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.
In determining whether HSBC has achieved a
sustained improvement in performance the
Remuneration Committee will take account of,
among other factors, the comparison against
history and the peer group in the following areas:
1.
2.
3.
revenue growth;
revenue mix;
cost efficiency;
4.
credit performance as measured by risk-
adjusted revenues; and
5. cash return on cash invested, dividend
performance and total shareholder return.
Awards will vest immediately in cases of death.
The Remuneration Committee retains discretion to
recommend early release of the shares to the plan
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.
Pension
The pension entitlements earned by the executive
Directors during the year are set out on pages 224
and 225.
218
Total Shareholder Return
Graph 1 below shows HSBC Holdings’ TSR
performance against the benchmark TSR. 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 (graph
2), the Morgan Stanley Capital International
(MSCI) World Index (graph 3) and Morgan
Stanley Capital International (MSCI) Financials
Index (graph 4). These measures have been chosen
as they are the main published indices against
which HSBC monitors its performance.
Graph 1: HSBC TSR and TSR Benchmark
Graph 2: HSBC TSR and FTSE 100 Index
220%
210%
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
80%
Dec 1998
Dec 1999
Dec 2000
Dec 2001
Dec 2002
Dec 2003
HSBC TSR
TSR Benchmark
220%
210%
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
80%
70%
Dec 1998
Dec 1999
Dec 2000
Dec 2001
Dec 2002
Dec 2003
HSBC TSR
FTSE 100
Graph 3: HSBC TSR and MSCI World Index
Graph 4: HSBC TSR and MSCI Financials Index
220%
210%
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
80%
70%
220%
210%
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
80%
Dec 1998
Dec 1999
Dec 2000
Dec 2001
Dec 2002
Dec 2003
Dec 1998
Dec 1999
Dec 2000
Dec 2001
Dec 2002
Dec 2003
Source: Datastream
HSBC TSR
MSCI World Index
HSBC TSR
MSCI Financials
219
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
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 Group, seek to minimise termination
payments.
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 W F Aldinger and C F W de
Croisset, details of which are set out below.
Mr Aldinger entered into a new employment
agreement with Household on 14 November 2002
for a term of three years, such term to commence
on the effective date of the acquisition of
Household by HSBC. Full details of the agreement
were set out in the Discloseable Transaction
Circular relating to the acquisition of Household
sent to shareholders on 26 February 2003 in
advance of the Extraordinary General Meeting to
approve the acquisition. The terms of the
employment agreement, which were an integral
part of the Household acquisition that shareholders
approved at the Extraordinary General Meeting,
are unchanged. The effective date of acquisition,
and commencement date of the contract, was
28 March 2003.
During the term of the agreement Mr Aldinger
will be paid an annual base salary equal to his
annual base salary as at the date of the merger
agreement between Household and HSBC
(US$1 million) and an annual bonus in an amount
at least equal to the annual average of
Mr Aldinger’s bonuses earned with respect to the
three-year period ended 2001 (pro rated for any
partial year) (US$4 million). Within 30 days of the
effective date, Mr Aldinger received a one-time
special retention grant of HSBC Holdings ordinary
shares under the HSBC Holdings Restricted Share
Plan 2000 with a value equal to US$10 million.
These Restricted Shares will vest in three equal
instalments on each of the first three anniversaries
220
of the effective date, as set out on page 228. After
each of the second and third anniversaries of the
effective date, subject to the approval of the
Trustee of the HSBC Holdings Restricted Share
Plan 2000, Mr Aldinger will receive an additional
grant of HSBC Holdings ordinary shares with a
value equal to at least US$5.5 million. The purpose
of these arrangements is to retain the services of
Mr Aldinger through the initial integration of
Household. HSBC considers it is essential that the
experience, knowledge and skills of Mr Aldinger
be retained for the benefit of HSBC shareholders.
If Mr Aldinger’s employment is terminated by
him during its term for ‘good reason’, or by
Household for reasons other than ‘cause’ or
disability, he will be entitled to: a pro rata target
annual bonus for the financial year of the date of
termination; a payment equal to his annual base
salary, plus the average of his annual bonuses with
respect to the three-year period ended 2001, times
the number of full and partial months from the date
of termination until the third anniversary of the
effective date, divided by twelve; the immediate
vesting and exercisability of each stock option,
restricted stock award and other equity-based
award or performance award (or cash equivalent)
that is outstanding as at the date of termination and
treatment as retirement eligible for purposes of
exercising any such award; for the remainder of his
life and that of his current spouse, continued
medical and dental benefits at Household’s cost;
and his retirement benefits (as set out on page 224)
in a lump sum.
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. In accordance with French
legal requirements and practice, this contract was
suspended while he served as an executive Director
of CCF. On 29 February 2004, Mr de Croisset took
early retirement from the Group, relinquishing his
role as Chairman and CEO of CCF. In light of
French legal requirements a review of market
practice was undertaken and it was agreed that a
one-off payment of €2,427,000 would be made by
CCF to Mr de Croisset, which is considered to be
appropriate in all the circumstances. He will also
receive a pension as set out on page 224.
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.
M F Geoghegan, who is to stand for re-
election at the forthcoming Annual General
Meeting, is employed on a rolling contract which
requires 12 months’ notice to be given by either
party.
S K Green is employed on a rolling contract
dated 9 March 1998 which requires 12 months’
notice to be given by either party.
A W Jebson is employed on a rolling contract
dated 14 January 2000 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 subsequent
Annual General Meetings. 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 as follows: in 2005 Baroness Dunn and H
Sohmen; in 2006 Sir John Kemp-Welch,
S W Newton, C S Taylor and Sir Brian
Williamson; and in 2007 Lord Butler, R K F
Ch’ien, R A Fairhead, W K L Fung, S Hintze, Sir
Brian Moffat and Sir Mark Moody-Stuart.
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.
Sir John Bond retains his fees as a
non-executive director of the Ford Motor
Company, which are provided partly in the form of
restricted shares, which become unrestricted over a
period of five years. During 2003 the fees received
were US$83,000 in cash and US$35,000 deferred
into Ford common stock units. In addition, Ford
provides US$200,000 of life assurance and
US$500,000 of accidental death or dismemberment
insurance. The life assurance can be continued
after retirement from the Board or Sir John Bond
could elect to have it reduced to US$100,000 and
receive US$15,000 a year for life. The accidental
death or dismemberment insurance ends upon
retirement from the Board.
W F Aldinger retains his fees as a non-
executive director of Illinois Tool Works, Inc. and
as a non-executive director of AT&T Corp. During
2003 the fee received from Illinois Tool Works,
Inc. was US$60,800 in the form of deferred stock
and the fee received from AT&T Corp. was
US$26,500 in cash and US$15,000 in the form of
deferred shares. In addition, AT&T Corp. provide
travel accident insurance when on AT&T Corp.
company business and US$100,000 of life
assurance.
221
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Employees’ emoluments
Set out below is information in respect of the five
individuals who are not Directors of HSBC
Holdings whose emoluments (excluding
commissions or bonuses related to the revenue or
profits generated by employees individually or
collectively with others engaged in similar
activities) were the highest in HSBC for the year
ended 31 December 2003.
Basic salaries, allowances and benefits in
kind ...........................................................
Pension contributions ....................................
Bonuses paid or receivable ............................
Inducements to join paid or receivable ...........
Compensation for loss of office
– contractual .................................................
– other ..........................................................
Total ..............................................................
Total (US$000) ..............................................
£000
1,340
122
30,117
5,653
–
–
37,232
60,836
Their emoluments are within the following
bands:
£4,100,001 – £4,200,000 ..............................
£4,900,001 – £5,000,000 ..............................
£10,500,001 – £10,600,000 ..........................
£12,600,001 – £12,700,000 ..........................
Number of
Employees
1
2
1
1
The basic salaries of Group Managing
Directors and 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 Managing
Directors and Group
General Managers
9
14
7
1
The aggregate remuneration of Directors and
Senior Management for the year ended 31
December 2003 was US$100,150,000.
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 2003 was US$4,321,000.
At 31 December 2003, executive Directors and
Senior Management held, in aggregate, options to
subscribe for 5,656,876 HSBC Holdings ordinary
shares 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 2004 and 2013 at prices ranging from
£2.1727 to £9.642.
222
Audited information
Directors’ emoluments
The emoluments of the Directors of HSBC Holdings for 2003 were as follows:
Salary and
other
remuneration
£000
Fees
£000
Benefits
in kind1
£000
Bonuses2
£000
Executive Directors
W F Aldinger3 ...................................
Sir John Bond ...................................
C F W de Croisset ............................
W R P Dalton ...................................
D G Eldon5 .......................................
D J Flint ............................................
S K Green .........................................
AW Jebson .......................................
Sir Keith Whitson6 ............................
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 ....................
S W Newton .....................................
H Sohmen..........................................
C S Taylor .........................................
Sir Brian Williamson.........................
Total .................................................
–
35
35
35
20
35
35
35
15
45
159
35
65
35
55
35
50
50
35
25
64
35
933
Total (US$000) .................................
1,525
431
1,007
382
582
376
564
551
472
358
–
–
–
–
–
–
–
–
–
–
–
–
–
65
5
–
14
505
8
1
1
10
–
–
–
–
–
–
–
–
–
–
–
–
–
1,686
1,100
917
–
279
450
650
450
500
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
2003
£000
2,182
2,147
1,334
631
1,180
1,057
1,237
958
883
45
159
35
65
35
55
35
50
50
35
25
64
35
Total
2002
£000
–
1,885
609
627
1,226
960
965
648
2,170
40
167
35
61
35
48
45
45
40
9
27
17
9
4,723
7,717
609
995
6,032
9,856
12,297
20,093
9,716
14,579
1 Benefits in kind for executive Directors include provision of company car, medical insurance, other insurance cover and travel
assistance.
2 These discretionary bonuses are in respect of 2003 and will be paid in 2004. W F Aldinger’s guaranteed minimum bonus of
US$4,000,000 has been prorated in respect of the period from 25 April 2003 (the date of his appointment) to 31 December 2003.
3 Appointed on 25 April 2003. W F Aldinger has elected to waive any fees payable to him by HSBC Holdings – 2003: £23,300.
4 In return for the prior waiver of bonus, the employer contribution into the pension scheme has been increased by the amount of
£1,250,000 (2002: £400,000) which would otherwise have been paid.
5 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.
6 Retired on 30 May 2003.
7 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.
8 Includes fee as a non-executive Director of The Hongkong and Shanghai Banking Corporation Limited.
9 Fees as a non-executive Director and member of the Audit Committee of The Hongkong and Shanghai Banking Corporation Limited.
H Sohmen has elected to waive any fees payable to him by HSBC Holdings – 2003: £35,000 (2002: £35,000).
10 Includes fee as a non-executive Director of HSBC Bank USA.
223
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Audited information
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. Save as stated below no
other Director participated in any HSBC pension
schemes, none of the Directors participating in
HSBC’s UK ‘approved’ pension schemes is subject
to the earnings cap introduced by the 1989 Finance
Act and only basic salary is pensionable. With four
exceptions (see paragraphs below on W F Aldinger,
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.
Before commencement of his new employment
agreement on 28 March 2003, W F Aldinger
participated in Household’s ‘qualified’ and
‘non-qualified’ defined benefit pension plans. The
annual pension benefit under these arrangements was
a function of service and a percentage of Final
Average Earnings (which included bonus). The
‘non-qualified plans’ were enhanced before
commencement of Mr Aldinger’s new employment
agreement. The benefits under the ‘qualified’ and
‘non-qualified’ defined benefit pension plans were
then frozen and will be payable in a lump sum on the
earlier of the termination of Mr Aldinger’s
employment or on Mr Aldinger’s retirement. No
further benefits have accrued under these
arrangements since 28 March 2003.
Since commencement of his new employment
agreement on 28 March 2003, Mr Aldinger has
continued to participate in the Household
International Tax Reduction Investment Plan (TRIP),
which is a ‘qualified’ funded deferred profit-sharing
and savings plan for eligible employees, although no
employer contributions have been made since
28 March 2003. Mr Aldinger also participated in
Supplemental TRIP (a ‘non-qualified’ plan), which is
an unfunded arrangement under which additional
employer provision of US$41,539 has been made
since 28 March 2003.
The pension arrangements for Sir John Bond,
S K Green and A W Jebson to contractual retirement
age of 60 are, and for Sir Keith Whitson were,
provided under the HSBC Bank (UK) Pension
Scheme. The pensions accrue at a rate of one-
224
thirtieth of pensionable salary per year of
pensionable service in the UK.
Until his retirement from CCF on 29 February
2004, C F W de Croisset was eligible for pension
benefits which were supplementary to those accrued
under the French State and Compulsory
arrangements. The amount of this supplementary
pension, payable from age 60, accrued at the rate of
€6,098 per annum for each year of service
(maximum 18 years) as an executive Director of
CCF. Consequent upon Mr de Croisset’s early
retirement from CCF and following a review of
market practice, it has been agreed to provide a total
pension of €341,467 per annum (equivalent to
32.5 per cent of his average total cash compensation
over a three-year period) payable from 1 March
2004. The whole cost of this pension 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 2003 of £1,379,000 (2002: £529,000),
including a bonus waiver of £1,250,000
(2002: £400,000).
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 2003 of £81,943
(2002: £80,092). 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.
Audited information
Accrued
annual
pension at
31 December
2003
£000
Increase in
accrued
pension
during 2003
£000
Increase in
accrued
pension
during 2003,
excluding
any increase
for inflation
£000
Transfer
value
of accrued
pension at
1 January
2003
£000 1
Transfer
value
of accrued
pension at
31 December
2003
£000 1
Increase of
transfer value of
accrued pension
(less personal
contributions)
in 2003
£000 1
Transfer value
(less personal
contributions) at
31 December
2003 relating to
increase in
accrued pensions
during 2003,
excluding any
increase for
inflation
£000 1
Sir John Bond2 ..............
C F W de Croisset .........
W R P Dalton ...............
D G Eldon3 ...................
S K Green .....................
A W Jebson5 .................
Sir Keith Whitson6 ........
398
64
274
251
178
141
–
74
9
17
17
19
17
36
66
7
14
11
15
14
29
5,504
626
3,680
4,703
1,901
1,384
4,514
7,924
860
4,258
5,045
2,367
1,769
5,713
2,420
234
578
342 4
466
385
1,199
1,306
97
212
205
193
175
611
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 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 2003, is shown above.
3 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 2003, is shown above.
4 D G Eldon made personal contributions towards his pension of £14,625 in respect of 2003.
5 A W Jebson’s entitlement has been supplemented by an employer contribution of £175,000 in return for the prior waiver of part of his
bonus in respect of 2002.
6 Sir Keith Whitson retired from the Group with effect from 30 May 2003, with a gross pension of £287,472 per annum. Sir Keith Whitson
elected to commute part of this pension for a lump sum payment of £664,825 leaving a residual pension of £233,737 per annum. As a
result, the pension in payment at 31 December 2003 is lower than the accrued pension at 1 January 2003. The increase in accrued
pension during 2003 reflects the gross pension before commutation. The transfer value of benefits at 31 December 2003 reflects both
the pension in payment and the commutation lump sum, increased with interest.
The following unfunded pension payments, in
respect of which provision has been made, were
made during 2003 to four former Directors of HSBC
Holdings:
B H Asher ...................
R Delbridge .................
Sir Brian Pearse ...........
Sir William Purves .......
2003
£
83,277
119,777
49,947
88,158
341,159
2002
£
81,564
117,313
48,918
86,343
334,138
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 2003, the undernamed Directors
held options to acquire the number of HSBC
Holdings ordinary shares set against their respective
names. The options were awarded for nil
consideration at exercise prices equivalent to the
market value at the date of award, except that options
awarded under the HSBC Holdings savings-related
share option plans before 2001 are exercisable at a
15 per cent discount to the market value at the date
of award and those awarded since 2001 at a 20 per
cent discount. The options are categorised as unlisted
physically settled share options under the Securities
and Futures Ordinance of Hong Kong.
Except as otherwise indicated, no options were
exercised or lapsed during the year and there are no
remaining performance criteria conditional upon
which the outstanding options are exercisable. The
market value of the ordinary shares at 31 December
2003 was £8.78. The highest and lowest market
values during the year were £9.135 and £6.31.
Market value is the mid-market price derived from
the London Stock Exchange Daily Official List on
the relevant date.
On 27 August 2003, a payment of £400,000
was made to J M Gray, a former director of the
Company and Chairman of The Hongkong and
Shanghai Banking Corporation Limited, who
retired in 1996. The payment, which was effected
after having taken legal advice, represents
compensation in respect of losses suffered by Mr
225
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Audited information
Gray as a result of alleged negligent advice given
to Mr Gray at the time of his retirement. The
advice concerned the impact of his retirement on
his then existing share options and the time at
which these options would lapse. The
compensation payment represents a portion of the
loss suffered by Mr Gray on the lapse of those
options.
Options
held at
1 January
2003
75,000 2
2,798
206,000
206,000
–
22,704
30,273
36,000
36,000 2
2,798
36,000
40,500 2
27,000 2
2,617
2,498 4
–
1,434
60,000 1
2,798
Options
awarded
during
year
–
–
–
–
206,000 6
–
–
–
–
–
–
–
–
–
–
3,070 4
–
–
–
Options
exercised
during
year
Options
held at
31 December
2003
75,000 3
–
–
–
–
22,704 7
30,273 7
36,000 7
36,000 7
–
36,000 8
40,500 8
–
–
–
–
–
60,000 11
–
–
2,798 4
206,000 5
206,000 5
206,000 5
–
–
–
–
2,798 4
–
–
27,000
2,617 4
– 9
3,070 4
1,434 4
–
2,798 12
Exercise
price (£)
Date of
award
Exercisable
from 1
Exercisable
until
3.3334
6.0299
8.7120
8.4050
6.9100
2.4062
2.8376
2.1727
3.3334
6.0299
2.1727
3.3334
3.3334
6.3224
6.7536
5.3496
1 Apr 1996
10 Apr 2000
1 Apr 1999
1 Aug 2005
1 Apr 2006
31 Jan 2006
23 Apr 2001
7 May 2002
2 May 2003
12 Oct 1993
8 Mar 1994
7 Mar 1995
1 Apr 1996
10 Apr 2000
23 Apr 2004
7 May 2005
2 May 2006
23 Apr 2011
7 May 2012
1 May 2013
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
7 Mar 1995
1 Apr 1996
7 Mar 1998
1 Apr 1999
7 Mar 2005
1 Apr 2006
1 Apr 1996
2 May 2002
1 Apr 1999
1 Aug 2007
1 Apr 2006
31 Jan 2008
11 Apr 2001
23 Apr 2003
1 Aug 2006
1 Aug 2008
31 Jan 2007
31 Jan 2009
6.7536
11 Apr 2001
1 Aug 2004
31 Jan 2005
3.3334
6.0299
1 Apr 1996
10 Apr 2000
1 Apr 1999
1 Aug 2005
1 Apr 2006
31 Jan 2006
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 Whitson10 .
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.
3 At the date of exercise, 31 March 2003, the market value per share was £6.49.
4 Options awarded under the HSBC Holdings Savings-Related Share Option Plan.
5 Options awarded under the HSBC Holdings Group Share Option Plan.
6 Vesting of 50 per cent of the award is subject to the performance tests set out in the section headed ‘Performance Conditions’ on pages 217 to 219.
7 At the date of exercise, 5 March 2003, the market value per share was £6.70.
8 At the date of exercise, 27 May 2003, the market value per share was £7.20.
9 Options lapsed on 9 April 2003 following closure of the associated savings-related account by the Director.
10 Retired on 30 May 2003.
11 At the date of exercise, 11 March 2003, the market value per share was £6.53.
12 Options held under the HSBC Holdings Savings-Related Share Option Plan at date of retirement (30 May 2003).
At 31 December 2003, 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. 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. No options
over CCF shares of €5 each were awarded to or
exercised by Mr de Croisset during the year.
226
Audited information
Options
held at
1 January 2003
CCF S.A. shares of €5
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
Equivalent
HSBC Holdings
ordinary
shares at 31
December
2003
Options
held at
31 December
2003
Date
of award
Exercisable
from
Exercisable
until
10,000
30,000
30,000
30,000
30,000
28,000
28,000
130,000
390,000
390,000
390,000
390,000
364,000
364,000
23 Jun 1994
22 Jun 1995
9 May 1996
7 May 1997
29 Apr 1998
7 Apr 1999
12 Apr 2000
23 Jun 1996
22 Jun 1997
9 May 1998
7 Jun 2000
7 Jun 2000
7 Jun 2000
1 Jan 2002
23 Jun 2004
22 Jun 2005
9 May 2006
7 May 2007
29 Apr 2008
7 Apr 2009
12 Apr 2010
At 31 December 2003, W F Aldinger held
options to acquire HSBC Holdings ordinary shares as
set out in the table below. These options arise from
the conversion of options he held over shares of
Household International into options over HSBC
Holdings ordinary shares in the same ratio as the
offer for Household (2.675 HSBC Holdings ordinary
shares for each Household common share) and the
exercise prices per share adjusted accordingly. The
Household options were granted at nil consideration.
No options over HSBC Holdings ordinary shares
were awarded to Mr Aldinger from 25 April to
31 December 2003.
Options
held at
25 April 20031
Exercise price
per share
(US$)
Options
exercised
during year 2
Options held at
31 December
2003
Date of
award
Exercisable
from
Exercisable
until
HSBC Holdings ordinary
shares of US$0.50
535,000
971,025
971,025
1,003,125
1,203,750
1,337,500
1,230,500
1,605,000
2,140,000
2,140,000
4.74
5.09
7.43
11.43
14.60
13.72
16.96
18.40
21.37
10.66
535,000
971,025
–
–
–
–
–
–
–
–
–
–
971,025
1,003,125
1,203,750
1,337,500
1,230,500
1,605,000
2,140,000
2,140,000
13 Sep 1994
7 Feb 1995
13 Nov 1995
11 Nov 1996
10 Nov 1997
9 Nov 1998
8 Nov 1999
13 Nov 2000
12 Nov 2001
20 Nov 2002
13 Sep 1995
7 Feb 1996
13 Nov 1996
11 Nov 1997
10 Nov 1998
9 Nov 1999
8 Nov 2000
13 Nov 2001
12 Nov 2002
20 Nov 2003 3
13 Sep 2004
7 Feb 2005
13 Nov 2005
11 Nov 2006
10 Nov 2007
9 Nov 2008
8 Nov 2009
13 Nov 2010
12 Nov 2011
20 Nov 2012
1 Date of appointment.
2 At the date of exercise, 19 December 2003, the market value per share was £8.82.
3 535,000 options are exercisable on each of the first, second, third and fourth anniversaries of the date of award.
Save as stated above, none of the Directors, or
members of their immediate families, were awarded
or exercised any right to subscribe for any shares or
debentures during the year.
227
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Audited information
Restricted Share Plan
Awards
held at
1 January
2003
Awards
made
during the
year
Monetary value
of awards
made during
the year
£000
Awards
vested
during
the year 1
Monetary value
of awards
vested during
the year
£000
Awards
held at
31 December
2003 1
Year in
which
awards may
vest
Date of
award
HSBC Holdings ordinary
shares of US$0.50
W F Aldinger.........
–
942,808 2
Sir John Bond........
W R P Dalton ........
D G Eldon .............
D J Flint.................
S K Green..............
A W Jebson ...........
Sir Keith Whitson7.
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
45,715
6,736
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
–
–
–
–
–
159,873 5
–
–
–
–
–
109,004 5
–
–
–
–
–
–
–
–
72,669 5
13,081 6
–
–
–
–
–
109,004 5
–
–
–
–
–
109,004 5
–
–
–
–
–
109,004 5
–
–
–
–
–
6,403
–
–
–
–
–
1,100
–
–
–
–
–
750
–
–
–
–
–
–
–
–
500
90
–
–
–
–
–
750
–
–
–
–
–
750
–
–
–
–
–
750
–
–
–
–
–
–
30,647 4
–
–
–
–
–
20,433 4
–
–
–
–
–
24,516 4
–
–
7,388 6
–
–
–
–
–
–
20,433 4
–
–
–
–
–
24,516 4
–
–
–
–
–
10,216 4
–
–
–
–
–
24,516 4
–
–
–
–
–
960,662
15 Apr 2003 2004 to 2006 3
193
–
–
–
–
–
129
–
–
–
–
–
154
–
–
50
–
–
–
–
–
–
129
–
–
–
–
–
154
–
–
–
–
–
64
–
–
–
–
–
154
–
–
–
–
–
71,386
89,621
83,988
125,767
167,843
–
41,643
40,738
47,994
79,432
114,438
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
2 Mar 1998
–
4 Mar 1999
41,643
10 Mar 2000
40,738
3 Apr 2000
–
47,994
12 Mar 2001
7,072 6 30 Apr 2001
52,955
8 Mar 2002
9,806 6 15 May 2002
76,292
5 Mar 2003
13,329 12 May 2003
–
41,643
36,663
59,992
79,432
114,438
–
41,643
40,738
83,988
99,290
114,438
–
35,693
32,589
71,990
92,671
114,438
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
2 Mar 1998
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
2 Mar 1998
–
58,383 8
4 Mar 1999
55,971 8 10 Mar 2000
64,765 8 12 Mar 2001
97,444 8
8 Mar 2002
2003
2004
2005
2006
2007
2008
2003
2004
2005
2006
2007
2008
2003
2004
2005
2003
2006
2004
2007
2005
2008
2006
2003
2004
2005
2006
2007
2008
2003
2004
2005
2006
2007
2008
2003
2004
2005
2006
2007
2008
2003
2004
2005
2006
2007
Unless otherwise indicated, vesting of these shares is subject to the performance tests set out in the section headed ‘Performance
Conditions’ on pages 217 to 219.
1 Includes additional shares arising from scrip dividends.
2 The market value per share on 15 April 2003 was £6.81. The shares acquired by the Trustee were purchased at an average price
of £6.79.
228
Audited information
3 The shares will vest in three equal instalments on each of the first three anniversaries of 28 March 2003 so long as Mr Aldinger
remains employed on the relevant vesting date, subject to accelerated vesting upon a termination of cause, or by Mr Aldinger for good
reason or due to his death or disability.
4 At the date of vesting, 31 March 2003, the market value per share was £6.49. The market value per share (adjusted for the share capital
reorganisation implemented on 2 July 1999) on 2 March 1998, the date of award, was £6.22. The awards were subject to earnings per
share performance conditions, to be achieved in whole or in part, as follows: (1) earnings per share in the year 2001 to be greater than
earnings per share in 1997 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; (2) earnings per share to increase relative to the
previous year in not less than three of the four years of the performance period; and (3) cumulative earnings per share over the four
years of the performance period, 1998 to 2001 inclusive, must exceed an aggregate figure calculated by compounding 1997 earnings
per share by a factor equivalent to the annual composite rate of inflation plus 2 per cent for each year of the performance period. 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, these conditions were retested over the years
1999 to 2002. The performance conditions were met in full and the shares were released.
5 The market value per share on 5 March 2003 was £6.70. The shares acquired by the Trustee of the Plan were purchased at an average
price of £6.88.
6 50 per cent of D G Eldon’s discretionary bonus in respect of 1999, 2000, 2001 and 2002 respectively was awarded in Restricted Shares
with a three-year restricted period.
7 Retired on 30 May 2003.
8 Interest at date of retirement (30 May 2003).
On behalf of the Board
1 March 2004
Sir Mark Moody-Stuart, Chairman of Remuneration Committee
229
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 their report on pages 231 and 232, 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 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 233 to 366, 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 at any time 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
1 March 2004
230
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 233 to 366. We have also audited the information in the
Directors’ Remuneration Report that is described as having been audited.
This report is made solely to the members of HSBC Holdings plc (‘HSBC Holdings’), as a body, in accordance
with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the
members of HSBC Holdings those matters we are required to state to them in an auditors’ report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than
HSBC Holdings and the members of HSBC Holdings as a body, for our audit work, for this report, or for the
opinions we have formed.
Respective responsibilities of Directors and Auditors
The directors are responsible for preparing the Annual Report and the Directors’ Remuneration report. As
described on page 230, this includes responsibility for preparing the Financial Statements in accordance with
applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are
established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial
Services Authority, and by our profession’s ethical guidance.
We report to you our opinion as to whether the Financial Statements give a true and fair view and whether the
Financial Statements and the part of the Directors’ Remuneration Report 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 (together
‘HSBC’) is not disclosed.
We review whether the statement on pages 204 to 205 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 in accordance with Auditing Standards issued by the Auditing Practices Board. An
audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Financial
Statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the
significant estimates and judgements made by the directors in the preparation of the financial statements, and of
whether the accounting policies are appropriate to HSBC’s circumstances, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered
necessary in order to provide us with sufficient evidence to give reasonable assurance that the Financial Statements
and the part of the Directors’ Remuneration Report to be audited 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 to be
audited.
231
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 (continued)
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 2003 and of the profit of HSBC for the year then ended; and
the Financial Statements and the part of the Directors’ Remuneration Report to be audited have been properly
prepared in accordance with the Companies Act 1985.
KPMG Audit Plc
Chartered Accountants,
Registered Auditor, London
1 March 2004
232
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 2003
2003
2002
2001
Notes
Total
US$m
Household1
US$m
Rest of
HSBC
US$m
US$m
US$m
60
6,887
7,253
8,590
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..............................
– intangible assets....................................
– goodwill................................................
Operating profit before 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 ............................
Profit on ordinary activities before tax
Tax on profit on ordinary activities ........
Profit on ordinary activities after tax ..
Minority interests
– equity ..................................................
– non-equity ...........................................
Profit attributable to shareholders ......
25
24
24
17
32
6
7
8
Dividends ...............................................
10
Retained profit for the period...............
Basic earnings per ordinary share ...........
Diluted earnings per ordinary share ........
Dividends per ordinary share ..................
11
11
10
6,947
33,021
(14,370)
25,598
222
12,560
(2,166)
2,178
2,680
41,072
3
4
7
5,7
(19,685)
(1,382)
(15)
(1,450)
18,540
(6,093)
(35)
(9)
(106)
12,297
(116)
221
451
(37)
12,816
(3,120)
9,696
(487)
(435)
8,774
(6,532)
2,242
US$
0.84
0.83
0.60
10,326
(2,081)
8,305
12
1,674
(458)
–
650
10,183
(3,296)
(99)
(11)
(381)
6,396
(4,575)
–
–
–
1,821
–
–
6
–
1,827
(463)
1,364
–
–
1,364
22,695
(12,289)
17,293
210
10,886
(1,708)
2,178
2,030
30,889
(16,389)
(1,283)
(4)
(1,069)
12,144
(1,518)
(35)
(9)
(106)
10,476
(116)
221
445
(37)
10,989
(2,657)
8,332
(487)
(435)
7,410
21,342
(13,135)
15,460
278
9,245
(1,421)
1,313
1,720
26,595
(13,764)
(1,190)
–
(854)
10,787
(1,321)
(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
0.53
Movements in reserves are set out in Note 36.
The accompanying notes are an integral part of the Consolidated Financial Statements.
All results are from continuing operations.
1 The results of Household cover the period since the date of acquisition, 28 March, 2003.
26,671
(20,536)
14,725
186
8,756
(1,286)
1,685
1,822
25,888
(13,471)
(1,134)
–
(799)
10,484
(2,037)
(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
0.48
233
H S B C H O L D I N G S P L C
Financial Statements (continued)
Consolidated balance sheet at 31 December 2003
Notes
2003
US$m
ASSETS
Cash and balances at central banks .................................................................................
Items in the course of collection from other banks .........................................................
Treasury bills and other eligible bills ..............................................................................
Hong Kong Government certificates of indebtedness .....................................................
Loans and advances to banks ..........................................................................................
Loans and advances to customers ...................................................................................
Debt securities ................................................................................................................
Equity shares ..................................................................................................................
Interests in joint ventures: gross assets ..........................................................................
gross liabilities .....................................................................
Interests in associates ......................................................................................................
Other participating interests ............................................................................................
Goodwill and intangible assets .......................................................................................
Tangible fixed assets ......................................................................................................
Other assets .....................................................................................................................
Prepayments and accrued income ...................................................................................
12
13
15
16
19
20
21
22
23
24
25
27
7,661
6,628
20,391
10,987
117,173
528,977
205,722
12,879
87
(77)
10
1,263
690
28,640
15,748
63,128
14,319
20021
US$m
7,659
5,651
18,141
9,445
95,496
352,344
175,730
7,664
486
(296)
190
1,116
651
17,192
14,181
45,763
7,382
Total assets .....................................................................................................................
1,034,216
758,605
234
Notes
2003
US$m
LIABILITIES
Hong Kong 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 ...........................................................................................................
Subordinated liabilities
– undated loan capital .....................................................................................................
– dated loan capital ........................................................................................................
Minority interests
– equity ..........................................................................................................................
– non-equity ...................................................................................................................
Called up share capital ....................................................................................................
Share premium account ..................................................................................................
Own shares held reserve .................................................................................................
Other reserves .................................................................................................................
Revaluation reserves .......................................................................................................
Profit and loss account ....................................................................................................
Shareholders’ funds ........................................................................................................
13
28
29
30
31
32
33
34
35
36
36
36
36
36
10,987
70,426
573,130
4,383
153,562
94,669
13,760
1,670
5,078
3,617
17,580
2,162
8,719
5,481
4,406
(923)
21,543
1,615
42,351
74,473
20021
US$m
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
(646)
8,729
1,954
33,340
51,765
Total liabilities ................................................................................................................
1,034,216
758,605
MEMORANDUM ITEMS
Contingent liabilities .......................................................................................................
– acceptances and endorsements ....................................................................................
– guarantees and assets pledged as collateral security .....................................................
– other contingent liabilities ...........................................................................................
39
5,412
54,439
29
59,880
Commitments .................................................................................................................
39
428,764
4,711
46,527
17
51,255
225,629
Sir John Bond, Group Chairman
The accompanying notes are an integral part of the Consolidated Financial Statements.
1 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
235
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 2003
FIXED ASSETS
Tangible assets ................................................................................................................
Investments
– shares in HSBC undertakings ......................................................................................
– loans to HSBC undertakings .......................................................................................
– other investments other than loans ..............................................................................
Notes
25
26
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.................................................................................................................
Total assets .....................................................................................................................
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 HSBC undertakings ........................................................................................
Other creditors ................................................................................................................
Second interim dividend declared....................................................................................
Third interim dividend declared ......................................................................................
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
33
10
10
33
Deferred taxation ............................................................................................................
32
NET ASSETS ................................................................................................................
CAPITAL AND RESERVES
Called up share capital ....................................................................................................
Share premium account ..................................................................................................
Own shares held reserve .................................................................................................
Revaluation reserve ........................................................................................................
Reserve in respect of obligations under CCF and Household share options ...................
Profit and loss account ....................................................................................................
35
36
36
36
36
36
2003
US$m
2
80,501
3,788
537
84,828
6,995
2,526
2,412
95
12,028
901
12,929
(700)
–
(261)
(1,309)
(2,627)
(4,897)
8,032
92,860
(5,970)
(6,845)
(5,479)
(93)
74,473
5,481
4,406
(653)
57,041
485
7,713
74,473
20021
US$m
2
57,510
4,163
484
62,159
5,708
1,634
1,012
28
8,382
870
9,252
(1,370)
(350)
(196)
(3,069)
–
(4,985)
4,267
66,426
(5,790)
(3,686)
(5,092)
(93)
51,765
4,741
3,647
(540)
36,883
439
6,595
51,765
Sir John Bond, Group Chairman
The accompanying notes are an integral part of the Consolidated Financial Statements.
1 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
236
Statement of total consolidated recognised gains and losses for the year ended 31 December 2003
Profit for the financial year attributable to shareholders ..................
Unrealised deficit on revaluation of investment properties:
Subsidiaries ..................................................................................
Associates .....................................................................................
Unrealised deficit on revaluation of land and buildings
(excluding investment properties):
Subsidiaries ..................................................................................
Exchange and other movements ......................................................
Total recognised gains and losses for the year .................................
2003
US$m
8,774
(28)
(10)
(292)
5,318
13,762
2002
US$m
6,239
(22)
(1)
(297)
3,781
9,700
2001
US$m
4,992
(18)
(5)
(227)
(1,242)
3,500
Reconciliation of movements in consolidated shareholders’ funds for the year ended 31 December
2003
Profit for the period attributable to shareholders .............................
Dividends ........................................................................................
Other recognised gains and losses relating to the year .....................
New share capital subscribed, net of costs .......................................
Purchases of own shares to meet share awards
and share option awards ..............................................................
Own shares released on vesting of share awards and
exercise of options .......................................................................
Amortisation of shares in restricted share plan .................................
Net purchases and sales of own shares for market making
purposes2 .....................................................................................
Total net change in shareholders’ funds arising from own
shares adjustments .......................................................................
Reserve in respect of obligations under CCF share options .............
New share capital issued in connection with the acquisition
2003
US$m
8,774
(6,532)
2,242
4,988
862
(301)
162
19
(138)
(258)
(41)
of Household ...............................................................................
13,405
Net reserve in respect of obligations under Household
share options ...............................................................................
84
Net reserve in respect of the equity component of
Household 8.875 per cent Adjustable Conversion-Rate
Equity Security Units ..................................................................
Amounts arising on shares issued in lieu of dividends ....................
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 restated ........................................
Shareholders’ funds at end of period ...............................................
3
1,423
22,708
52,406
(641)
51,765
74,473
20021
US$m
6,239
(5,001)
1,238
3,461
337
(5)
45
19
–
59
(41)
–
–
–
1,023
6,077
46,388
(700)
45,688
51,765
20011
US$m
4,992
(4,467)
525
(1,492)
112
(66)
15
25
88
62
(16)
–
–
–
866
57
46,393
(762)
45,631
45,688
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.
1 Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
2 The net purchases and sales for market making purposes relate to long positions. Short positions arising in market making activities are
included within ‘Other liabilities’. In 2003, total purchases and sales for market making purposes (including those related to short
positions) each amounted to about US$8.8 billion, with similar levels of trading in both 2002 and 2001.
237
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 2003
Net cash inflow from operating activities ................................
41
Notes
Dividends received from associated undertakings ...................
Returns on investments and servicing of finance
Interest paid on finance leases and similar hire purchase
contracts .............................................................................
Interest paid on subordinated loan capital .............................
Dividends paid to minority interests
– equity .................................................................................
– non-equity ..........................................................................
Net cash outflow from returns on investments and
servicing of finance ............................................................
Taxation paid ...........................................................................
Capital expenditure and financial investments
Purchase of investment securities .........................................
Proceeds from sale and maturities of investment securities ..
Purchase of tangible fixed assets ..........................................
Proceeds from sale of tangible fixed assets ...........................
Purchase of intangible assets ................................................
Net cash outflow 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.....
Purchase of interests 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 ..............................................
Net purchases and sales of own shares for market making
purposes .............................................................................
Purchases of own shares to meet share awards and share
option awards .....................................................................
Own shares released on vesting of share awards and exercise
of options ...........................................................................
Increase of non equity minority interests ..............................
Decrease of non equity minority interests .............................
Subordinated loan capital issued ...........................................
Subordinated loan capital repaid ...........................................
26
Net cash inflow/(outflow) from financing .............................
Increase/(decrease) in cash ....................................................
42
43
2003
US$m
22,675
108
(37)
(882)
(514)
(392)
(1,825)
(2,631)
(218,196)
206,099
(1,981)
346
(87)
20021
US$m
16,426
114
(29)
(870)
(480)
(357)
(1,736)
(1,371)
(130,166)
122,495
(1,723)
328
–
20011
US$m
12,827
113
(27)
(1,116)
(472)
(599)
(2,214)
(2,106)
(148,760)
145,321
(1,873)
557
–
(13,819)
(9,066)
(4,755)
(2,137)
556
(47)
3
(1,625)
(4,242)
(1,359)
845
(138)
(301)
181
4,104
(206)
2,358
(1,464)
5,379
4,020
264
–
(649)
341
(44)
(3,609)
714
337
–
(5)
64
–
(50)
4,105
(1,923)
2,528
3,242
(834)
26
(154)
79
(883)
(3,528)
(546)
112
88
(66)
40
–
(825)
456
(965)
(1,160)
(1,706)
The accompanying notes are an integral part of the Consolidated Financial Statements.
1 Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.
238
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 UITF Abstract 37 ‘Purchases and sales of own shares’, and UITF
Abstract 38 ‘Accounting for ESOP trusts’. For a discussion of the impact of the adoption of UITF Abstracts 37
and 38 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 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 where management judgement is
necessarily applied 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 118 to 121 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, with the
exception of the banking and insurance subsidiaries of HSBC Bank Argentina, whose financial statements are
made up to 30 June annually to comply with local regulations. Accordingly HSBC uses interim financial
statements for its principal banking and insurance subsidiaries in Argentina, drawn up to 31 December annually,
and these interim financial statements are audited.
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 differs in certain respects from Hong Kong and US generally accepted accounting
principles (‘Hong Kong GAAP’ and ‘US GAAP’). A discussion of the significant differences between UK
GAAP and Hong Kong GAAP is contained in note 49. A discussion of the significant differences between UK
GAAP and US GAAP and a reconciliation to US GAAP of certain amounts is contained in Note 50. The Notes
on the Financial Statements, taken together with the Financial Review, include the aggregate of all disclosures
necessary to satisfy both UK and US reporting requirements.
(e) The presentation in the financial statements of shares in HSBC Holdings held by HSBC changed in 2003
following the adoption of UITF Abstracts 37 and 38. HSBC Holdings shares held on HSBC’s own account are
239
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
now deducted from shareholders’ funds; previously they were included in equity shares and other assets. No
gains or losses are recognised in the profit and loss account reserve on purchases, sales or cancellation of own
shares. The change in accounting policy has been reflected by way of a prior period adjustment. Comparative
figures have been restated as follows:
Consolidated profit and loss account
UITF Abstract 38 does not impact on the profit and loss account. Profit and loss account comparative figures
have not been restated upon the adoption of UITF Abstract 37 since the effect is immaterial. The effect on the
results for the current period of the adoption of UITF Abstract 37 is to reduce profits by US$39 million arising
from the increase in the market value of own shares held within long-term assurance assets attributable to policy
holders (see Note 27).
Consolidated balance sheet
Statement of reclassifications as a result of UITF Abstracts 37 and 38
At 31 December 2002
Under previous policy ................................................
Impact of UITF Abstracts 37 and 38 ..........................
Under new policy .......................................................
At 31 December 2001
Under previous policy ................................................
Impact of UITF Abstracts 37 and 38 ..........................
Under new policy .......................................................
At 31 December 2000
Under previous policy ................................................
Impact of UITF Abstracts 37 and 38 ..........................
Under new policy .......................................................
Other assets
US$m
Equity shares
US$m
Own shares
held reserve
US$m
Profit and loss
account reserve
US$m
45,8551
(92)
45,763
38,632
(92)
38,540
36,030
(92)
35,938
8,213
(549)
7,664
8,057
(608)
7,449
8,104
(670)
7,434
–
(646)
(646)
–
(686)
(686)
–
(723)
(723)
33,335
5
33,340
27,296
(14)
27,282
27,057
(39)
27,018
1 This excludes US$29 million of intangible assets, which have now been combined with Goodwill on the face of the balance sheet.
HSBC Holdings’ balance sheet
Statement of reclassifications as a result of UITF Abstracts 37 and 38
Investments –
shares in HSBC
undertakings
US$m
Investments –
own shares
US$m
Revaluation
reserve
US$m
Own shares
held reserve
US$m
Profit and loss
account
US$m
At 31 December 2002
Under previous policy .....................
Impact of UITF Abstracts 37
and 38 ..........................................
Under new policy ............................
At 31 December 2001
Under previous policy .....................
Impact of UITF Abstracts 37
and 38 .........................................
Under new policy ............................
At 31 December 2000
Under previous policy .....................
Impact of UITF Abstracts 37
and 38 .........................................
Under new policy ............................
57,637
(127)
57,510
49,762
(145)
49,617
47,106
(198)
46,908
514
(514)
–
555
(555)
–
564
(564)
–
37,010
(127)
36,883
32,581
(145)
32,436
32,363
(198)
32,165
–
(540)
(540)
–
(571)
(571)
–
(573)
(573)
6,569
26
6,595
5,276
16
5,292
5,595
9
5,604
240
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) below).
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 consistent basis in accordance with established Group guidelines.
There are two basic types of provision, specific and general, each of which is considered in terms of the charge
and the amount outstanding.
Specific provisions
Specific provisions represent the quantification of actual and inherent losses from homogeneous portfolios of
assets and individually identified accounts. Specific provisions are deducted from loans and advances in the
balance sheet. The majority of specific provisions are determined on a portfolio basis.
Portfolios
Where homogeneous groups of assets are reviewed on a portfolio basis, two alternative methods are used to
calculate specific provisions:
− When appropriate empirical information is available, the Group utilises roll rate methodology (a statistical
analysis of historical trends of the probability of default and amount of consequential loss, assessed at each
time period for which payments are overdue), other historical data and an evaluation of current economic
conditions to calculate an appropriate level of specific provision based on inherent loss. Additionally, in
certain highly developed markets, sophisticated models also take into account behavioural and account
management trends such as bankruptcy and rescheduling statistics. Roll rates are regularly benchmarked
against actual outcomes to ensure they remain appropriate.
−
In other cases, when information is insufficient or not sufficiently reliable to adopt a roll rate methodology,
the Group adopts a formulaic approach which allocates progressively higher loss rates in line with the
period of time for which a customer’s loan is overdue.
Individually assessed accounts
Specific provisions on individually assessed accounts are determined by an evaluation of the exposures on a
case-by-case basis. This procedure is applied to all accounts that do not qualify for, or are not subject to, a
portfolio based approach. In determining such provisions on individually assessed accounts, the following
factors are considered:
−
−
−
the Group’s aggregate exposure to the customer (including contingent liabilities);
the viability of the customer’s business model and the capability of management to trade successfully out of
financial difficulties and generate sufficient cash flow to service their debt obligations;
the likely dividend available on liquidation or bankruptcy;
241
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
−
−
−
−
−
−
the extent of other creditors’ commitments ranking ahead of, or pari passu with, the Group and the
likelihood of other creditors continuing to support the company;
the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to
which legal and insurance uncertainties are evident;
the amount and timing of expected receipts and recoveries;
the realisable value of security (or other credit mitigants) and likelihood of successful repossession;
the deduction of any costs involved in recovery of amounts outstanding; and
the ability of the borrower to obtain the relevant foreign currency if loans are not in local currency.
Releases on individually calculated specific provisions are recognised whenever the Group has reasonable
evidence that the established estimate of loss has been reduced.
Cross-border exposures
Specific provisions are established in respect of cross-border exposures to countries assessed by management to
be vulnerable to foreign currency payment restrictions. This assessment includes analysis of both economic and
political factors.
Provisions are applied to all qualifying exposures within these countries unless these exposures:
−
−
−
are fully performing and of less than one year’s maturity;
are mitigated by acceptable security cover held outside the country concerned; or
are represented by securities held for trading purposes for which a liquid and active market exists, and
which are marked to market daily.
General provisions
General provisions augment specific provisions and provide cover for loans that are impaired at the balance
sheet date but which will not be individually identified as such until some time in the future. HSBC requires
operating companies to maintain a general provision, which is determined after taking into account:
−
−
historical loss experience in portfolios of similar risk characteristics (for example, by industry sector, loan
grade or product);
the estimated period between a loss occurring and that loss being identified and evidenced by the
establishment of a specific provision against that loss; and
− management’s judgement as to whether the current economic and credit conditions are such that the actual
level of inherent losses is likely to be greater or less than that suggested by historical experience.
The estimated period between a loss occurring and its identification (as evidenced by the establishment of a
specific provision for that loss) is determined by local management for each identified portfolio.
Loans on which interest is being suspended and non-accrual loans
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 not normally credited to the profit and loss account and either interest
accruals will cease (‘non-accrual loans’) or interest will be credited to an interest suspense account in the
balance sheet which is netted against the relevant loan (‘suspended interest’).
242
The designation of a loan as non-performing and the suspension of interest may be deferred for up to 12 months
in either of the following situations:
−
−
cash collateral is held covering the total of principal and interest due and the right of set-off is legally
sound; or
the value of any 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.
In certain subsidiaries, principally in the UK and Hong Kong, 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.
In other subsidiaries and in any event where the probability of receiving interest payments is remote, interest is
no longer accrued and any suspended interest balance is written off.
On receipt of cash (other than from the realisation of security), the overall risk is re-evaluated and, if
appropriate, suspended or non-accrual 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.
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 the related provisions) are normally written off, either partially or in full, when there is no realistic
prospect of recovery of these amounts and when the proceeds from the realisation of security have been
received.
Assets acquired in exchange for advances
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 subsequent provisions are based on any further deterioration in 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 earliest maturity 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
243
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
by discounting the expected future cash flows using an appropriate interest rate adjusted for the credit risk of the
counterparty.
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, adjusted for shares held by subsidiaries in HSBC Holdings. Changes in the value 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.
(e) Goodwill and intangible assets
(i) 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 ‘Goodwill and intangible 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. Capitalised goodwill is tested for impairment when necessary by comparing the present value of
the expected future cash flows from an entity with the carrying value of its net assets, including attributable
goodwill. Negative goodwill is credited to the profit and loss account in the periods expected to be
benefited. For acquisitions prior to 1 January 1998, goodwill was charged against reserves in the year of
acquisition.
At the date of disposal of subsidiary undertakings, joint ventures or associates, any unamortised goodwill or
goodwill previously 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.
(ii) Intangible assets represent contracts with retailers and other organisations to originate and promote HSBC
products such as credit cards, store cards and retail loans. They are stated at their cost less amortisation to
write off the assets over the contract lives. Intangible assets are subject to impairment review if there are
events or changes in circumstances that indicate that the carrying amount may not be recoverable.
(f) 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
–
–
244
–
buildings and improvements thereto are depreciated on cost or valuation at the greater of 2 per cent 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.
(g) 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’. 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.
(h) 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 assets
are regarded as recoverable to the extent that it is more likely than not there will suitable taxable profits from
which the future reversal of the underlying timing differences can be deducted. Deferred tax balances are not
discounted.
(i) Pension and other post-retirement benefits
HSBC operates a number of pension and other post-retirement benefit schemes throughout the world.
For UK defined benefit schemes annual contributions are made, on the advice of qualified actuaries, for funding
of retirement benefits in order to build up reserves for each scheme member during the employee’s working life
and used to pay a pension to the employee or dependant after retirement. The costs of providing these benefits
are charged to the profit and loss account on a systematic 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.
245
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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.
(j) 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.
(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.
(k) 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, credit derivative, and commodity markets. Netting is
applied where a legal right of set-off exists.
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, credit derivative
and commodity contracts which are marked-to-market are included in ‘Other assets’. Liabilities, including
losses, resulting from such contracts, are included in ‘Other liabilities’.
Non-trading transactions
Non-trading transactions are those which are held for hedging purposes as part of HSBC’s risk management
strategy against cashflows, assets, liabilities or positions 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 gain 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, foreign exchange 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
246
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 gain or loss arising is taken to the profit and
loss account.
(l) Long-term assurance business
The value placed on HSBC’s interest in long-term assurance business includes a valuation of the discounted
future earnings expected to emerge from business currently in force, using appropriate assumptions in assessing
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 gross in the profit and loss account as part of ‘Other operating income’ after adjusting for
taxation.
Long-term assurance assets excluding own shares held (see note 27) and liabilities attributable to policyholders
are recognised in HSBC’s accounts in ‘Other assets’ and ‘Other liabilities’.
3 Dividend income
Income from equity shares ........................................................................
Income from participating interests other than joint ventures
and associates ........................................................................................
4 Analysis of income from dealing in financial instruments
2003
US$m
213
9
222
2002
US$m
274
4
278
2003
Dividend
and net
interest
income
US$m
31
16
460
198
705
Dealing
profits
US$m
1,239
330
251
358
2,178
2002
Dividend
and net
interest
income
US$m
43
(7)
259
186
481
2001
Dividend
and net
interest
income
US$m
1
20
174
75
270
Total
US$m
1,210
40
334
210
1,794
Dealing
profits
US$m
1,120
159
311
95
1,685
Total
US$m
1,270
346
711
556
2,883
Dealing
profits
US$m
1,167
47
75
24
1,313
Foreign exchange ...............
Interest rate derivatives........
Debt securities ....................
Equities and other trading ...
2001
US$m
184
2
186
Total
US$m
1,121
179
485
170
1,955
247
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 .....................................................................
2003
US$m
10,434
809
868
12,111
2,331
5,243
19,685
2002
US$m
7,367
630
612
8,609
1,824
3,331
2001
US$m
7,329
613
611
8,553
1,639
3,279
13,764
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 ............................................................................................
2003
80,541
23,871
30,247
58,964
25,663
2002
76,924
24,452
27,584
22,262
26,253
2001
77,435
25,081
25,142
21,136
27,888
219,286
177,475
176,682
(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 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 174 pension schemes throughout the world, covering 88 per cent of HSBC’s
employees, with a total pension cost of US$814 million (2002: US$558 million; 2001: US$572 million;), of
which US$443 million (2002: US$316 million; 2001: US$349 million) relates to overseas schemes. Of the
overseas schemes, US$146 million (2002: US$43 million; 2001: US$31 million) has been determined in
accordance with best practice and regulations in the United States and Canada.
Progressively HSBC has been moving to defined contribution schemes for all new employees and this will
be the case for all major subsidiaries in 2004.
The majority of the extant schemes are funded defined benefit schemes, which cover 54 per cent 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$649 million (2002: US$406 million; 2001:
US$428 million) which is assessed in accordance with the advice of qualified actuaries. The schemes are
reviewed at least on a triennial basis or in accordance with local practice and regulations. The actuarial
assumptions used to calculate the projected benefit obligations of HSBC’s pension schemes vary according
to the economic conditions of the countries in which they are situated.
Included in the above figures is the pension cost relating to the HSBC Bank (UK) Pension Scheme. This
comprises:
Regular cost ..........................................................
Amortisation of deficit ..........................................
Total cost for the year ...........................................
2003
US$m
217
87
304
248
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’) which is closed and a defined contribution scheme which was established on 1 July 1996 for new
employees. The latest valuation of the principal scheme was made at 31 December 2002 by C G Singer,
Fellow of the Institute of Actuaries, of Watson Wyatt LLP. At that date, the market value of the principal
scheme’s assets was US$9,302 million. The actuarial value of the assets represented 88 per cent of the
benefits accrued to members, after allowing for expected future increases in earnings, and the resulting
deficit amounted to US$1,270 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 cent per annum, salary
increases of 3.0 per cent per annum, and post-retirement pension increases of 2.5 per cent per annum.
In anticipation of the above valuation result, HSBC made a payment into the scheme in February 2003
amounting to US$817 million. In addition, following receipt of the valuation results, a further payment of
US$137 million was made into the scheme. HSBC has decided to continue ongoing contributions to the
scheme at the rate of 20 per cent of pensionable salaries until completion of the next actuarial valuation, due
as at 31 December 2005.
The deficit as at 31 December 2002 is being amortised over a thirteen year period, the average remaining
service life of the existing employed members. The amortisation is net of the interest benefit from the
payments of US$817 million in February and US$137 million in August 2003.
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 2003 and was performed by E Chiu, Fellow of the
Society of Actuaries of the United States of America, of HSBC Life (International) Limited, a subsidiary of
HSBC Holdings. At that date, the market value of the defined benefit scheme’s assets was US$883 million.
On an ongoing basis, the actuarial value of the scheme’s assets represented 121 per cent of the benefits
accrued to members, after allowing for expected future increases in salaries, and the resulting surplus
amounted to US$156 million. On a wind-up basis, the actuarial value of the scheme’s assets represents
124 per cent of the members’ vested benefits, based on current salaries, and the resulting surplus amounted
to US$169 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 cent per annum and salary
increases of 4.5 per cent 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 2003 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 scheme’s assets was US$878 million. The actuarial
value of the assets represented 92 per cent of the benefits accrued to members, after allowing for expected
future increases in earnings, and the resulting deficit amounted to US$81 million. This deficit was
eliminated by means of contributions made to the scheme in 2003. The method employed for this valuation
was the projected unit credit method and the main assumptions used were a discount rate of 6.75 per cent
per annum and average salary increases of 3.75 per cent per annum.
The acquisition of Household International brought with it additional retirement benefit schemes. The
largest of these is Household International Retirement Income Plan, which comprises a funded defined
benefit scheme (the ‘Household principle scheme’) which is closed and a cash balance plan which was
established on 1 January 2000.
The last reported actuarial valuation was made as at 1 July 2003. At that date, the market value of the
Household principle schemes assets was US$853 million, representing 127 per cent of the benefits accrued
to members, after allowing for future increases in earnings. The resulting surplus amounted to US$181
million. The method employed for this valuation was the projected unit credit method and the main
249
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
assumptions used were a discount rate of 8 per cent per annum and average salary increases of 4 per cent
per annum.
The HSBC Bank (UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefits
Scheme, the HSBC Bank USA Pension Plan and the Household International Retirement Plan cover 41 per
cent (2002: 37 per cent; 2001: 42 per cent) of HSBC’s employees.
The pension cost for defined contribution schemes, which cover 34 per cent (2002: 38 per cent; 2001:
41 per cent) of HSBC’s employees, was US$165 million (2002: US$152 million; 2001: US$144 million).
(ii) FRS 17 Retirement Benefits
At 31 December 2003 the assumptions used to calculate scheme liabilities for HSBC’s main defined benefit
pension schemes under FRS 17 are:
United Kingdom ...................................................
Hong Kong ...........................................................
United States ........................................................
Jersey ...................................................................
Mexico .................................................................
Brazil ...................................................................
France ..................................................................
Other ....................................................................
Rate of increase
for pensions in
payment and
deferred
pension
%
Inflation
assumption
%
2.5
n/a
2.5
2.5
5.0
5.0
2.0
1.5-2.0
2.5
n/a
n/a
2.5
5.0
5.0
2.0
0-1.5
Rate of pay
increase
%
3.0
4.5
3.75
4.25
7.5
5.11
3.5
2.5-3.0
Discount
rate
%
5.5
5.5
6.25
5.5
10.75
11.30
5.25
3.5-6.25
The variation in discount rates between countries reflects the impact of local economic conditions.
At 31 December 2002 the assumptions used to calculate scheme liabilities for HSBC’s main defined benefit
pension schemes under FRS 17 were:
United Kingdom ...................................................
Hong Kong ...........................................................
United States ........................................................
Jersey ...................................................................
Mexico .................................................................
Brazil ...................................................................
France ..................................................................
Other ....................................................................
Discount
rate
%
5.6
5.5
6.75
5.6
10.78
10.25
5.5
3.75-6.75
Inflation
assumption
%
2.25
n/a
2.5
2.25
5.0
5.0
2.0
1.5-2.0
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
Rate of pay
Increase
%
2.75
4.5
3.75
4.0
7.62
6.05
3.5
2.5-3.0
250
At 31 December 2001 the assumptions used to calculate scheme liabilities for HSBC’s main defined benefit
pension schemes under FRS 17 were:
United Kingdom ...................................................
Hong Kong ...........................................................
United States ........................................................
Jersey ....................................................................
Brazil ....................................................................
France ...................................................................
Other ....................................................................
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
Inflation
assumption
%
2.5
n/a
2.75
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
Discount
rate
%
5.9
6.5
7.25
5.9
10.25
5.5
4.5-6.25
The assets in the defined benefit schemes and the expected rates of returns are:
HSBC Bank (UK) Pension Scheme
Other schemes
At 31 December 2003
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 .............................................
Net amounts provided in the balance sheet for
unfunded schemes .............................................
Net pension asset...................................................
Expected rate
of return
%
8.5
5.0
7.0
4.0
Expected rate
of return
%
9.3
5.6
7.0
3.1
Value
US$m
7,232
3,544
1,167
917
12,860
(16,232)
(3,372)
1,012
(2,360)
Value
US$m
2,740
2,124
26
372
5,262
(5,514)
(252)1
45
(207)
388
181
1 Of the deficit in other schemes, US$679 million relates to schemes in deficit and US$427 million relates to schemes in
surplus. Of the schemes in deficit, US$514 million relates to unfunded pension schemes in respect of which a provision, net
of deferred tax, of US$388 million has been made. In relation to main schemes, there is a surplus of US$156 million in the
HSBC Group Hong Kong Local Staff Retirement Benefit Scheme and a surplus of US$112 million in the HSBC Bank USA
Pension Plan.
The net pension liability will have a consequent effect on reserves when FRS17 is fully implemented.
The defined benefit section of the HSBC Bank (UK) Pension Scheme and the HSBC Group Hong Kong
Local Staff Retirement Benefit Scheme are closed to new entrants. For these schemes the current service
cost will increase under the projected unit credit method as the members of the scheme approach retirement.
251
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Equities ................................................................
Bonds ...................................................................
Property ................................................................
Other ....................................................................
Total market value of assets .................................
Present value of scheme liabilities .......................
Deficit in the schemes ..........................................
Related deferred tax asset .....................................
Net pension liability .............................................
Net amounts provided in the balance sheet
for unfunded schemes ........................................
Net unprovided pension liability ..........................
At 31 December 2002
HSBC Bank (UK) Pension Scheme
Other schemes
Expected rate
of return
%
8.5
5.0
7.0
3.75
Expected rate
of return
%
10.75
6.3
–
3.1
Value
US$m
5,682
2,032
1,139
415
9,268
(12,094)
(2,826)
848
(1,978)
Value
US$m
1,491
1,418
–
402
3,311
(4,030)
(719)1
150
(569)
402
(167)
1 Of the deficit in other schemes, US$832 million related to schemes in deficit and US$113 million related to schemes in
surplus. Of the schemes in deficit, US$442 million related to unfunded pension schemes in respect of which a provision, net of
deferred tax, of US$402 million was made. In relation to main schemes, there was a surplus of US$86 million in the HSBC
Group Hong Kong Local Staff Retirement Benefit Scheme and a deficit of US$79 million in the HSBC Bank USA Pension
Plan.
Equities ................................................................
Bonds ...................................................................
Property ................................................................
Other ....................................................................
Total market value of assets .................................
Present value of scheme liabilities .......................
Deficit in the schemes ..........................................
Related deferred tax asset .....................................
Net pension liability .............................................
Net amounts provided in the balance sheet
for unfunded schemes ........................................
Net unprovided pension liability ..........................
At 31 December 2001
HSBC Bank (UK) Pension Scheme
Other schemes
Expected rate
of return
%
7.5
5.1
7.5
4.0
Expected rate
of return
%
9.7
6.0
–
3.4
Value
US$m
6,385
1,329
1,066
865
9,645
(10,736)
(1,091)
327
(764)
Value
US$m
1,652
1,212
–
221
3,085
(3,739)
(654)1
166
(488)
356
(132)
1 Of the deficit in other schemes, US$738 million related to schemes in deficit and US$84 million related to schemes in surplus.
Of the schemes in deficit, US$565 million related to unfunded pension schemes in respect of which a provision, net of
deferred tax, of US$356 million was made. In relation to main schemes, there was a surplus of US$17 million in the HSBC
Group Hong Kong Local Staff Retirement Benefit Scheme and a deficit of US$48 million in the HSBC Bank USA Pension
Plan.
252
The following amounts would be reflected in the profit and loss account and statement of total consolidated
recognised gains and losses on implementation of FRS 17:
Year ended 31 December
2003
2002
HSBC Bank
(UK) Pension
Scheme
US$m
Other
schemes
US$m
HSBC Bank
(UK) Pension
Scheme
US$m
Other
schemes
US$m
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 .....................................................................................
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 gain/(loss) .....................................................................
Movement in deficit in the pension schemes during the year
Deficit in the pension schemes at 1 January .................................
Movement in the year:
Total operating charge ..................................................................
Contributions ................................................................................
Other finance income ....................................................................
Actuarial gain/(loss) .....................................................................
Acquisition of subsidiary undertaking ..........................................
Exchange and other movements ...................................................
Deficit in the pension schemes at 31 December ...........................
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 the scheme liabilities ...........
Total amount recognised in the statement of total consolidated
gains and losses:
277
–
277
728
(675)
53
987
(195)
(1,978)
(1,186)
(2,826)
(277)
1,189
53
(1,186)
–
(325)
(3,372)
987
8%
(195)
(1%)
215
28
243
304
(277)
27
442
19
(184)
277
(719)
(243)
548
27
277
(106)
(36)
(252)
442
8%
19
0.4%
280
–
280
673
(645)
28
(1,825)
(18)
402
(1,441)
(1,091)
(280)
191
28
(1,441)
–
(233)
(2,826)
(1,825)
(20%)
(18)
(0.1%)
– amount .......................................................................................
– percentage of the present value of the scheme liabilities ...........
(1,186)
(7%)
277
5%
(1,441)
(12%)
Most of the employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme. HSBC
Holdings is unable to identify the share of the underlying assets and liabilities of this scheme which are
attributable to its employees.
184
–
184
236
(234)
2
(510)
95
59
(356)
(654)
(184)
445
2
(356)
(15)
43
(719)
(510)
(15%)
95
2%
(356)
(9%)
(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 (2002: US$54 million; 2001: US$39 million). The schemes are unfunded, except for the
253
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
scheme in Mexico which had assets of US$68 million at 31 December 2003 (2002: US$13 million)
comprising US$nil in equities (2002: US$2 million), US$52 million in bonds (2002: US$6 million) and
US$16 million in cash (2002: US$5 million). The latest full actuarial valuations of the liability were carried
out at dates between 31 December 1999 and 31 December 2003 by independent qualified actuaries and
have been updated to 31 December 2003 as necessary. These latest actuarial reviews (in accordance with
FRS 17) estimated the present value of the accumulated post-retirement benefit obligation at US$850
million (2002: US$491 million; 2001: US$404 million), of which US$656 million (2002: US$366 million;
2001: US$269 million) has been provided and US$68 million (2002: US$13 million) is held in assets in the
funded scheme in Mexico. Of the year-end obligation, US$251 million arose on the acquisition of
Household International, Inc. 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 2003 were price inflation of 2.5 per cent
per annum (2002: 2.5 per cent), health-care claims cost escalation of 7.5 per cent per annum (2002: 7.5 per
cent) and a discount rate of 5.3 per cent per annum (2002: 5.6 per cent).
Under FRS 17, the deferred tax asset related to the unprovided liability of US$126 million
(2002: US$112 million) would be US$46 million (2002: US$38 million). The movement in the FRS 17
liability is as follows:
Deficit at 1 January ...............................................................................................
Current service cost ..............................................................................................
Contributions ........................................................................................................
Interest cost on liabilities ......................................................................................
Expected return on scheme assets .........................................................................
Experience gains and losses arising on liabilities ..................................................
Change in assumptions underlying the present value of scheme liabilities ............
Actual return less expected return on scheme assets .............................................
Acquisition of subsidiary undertaking ..................................................................
Exchange and other movements ...........................................................................
Deficit at 31 December..........................................................................................
Amounts provided in the balance sheet for unfunded liabilities.............................
Unprovided liability at 31 December ....................................................................
Related deferred tax asset .....................................................................................
Net unprovided liability at 31 December ..............................................................
Year ended 31 December
2003
US$m
2002
US$m
(478)
(11)
81
(49)
1
32
(67)
(3)
(251)
(37)
(782)
656
(126)
46
(80)
(404)
(5)
15
(28)
–
(21)
40
–
(67)
(8)
(478)
366
(112)
38
(74)
(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 .................................................
2003
US$000
1,525
8,712
9,856
20,093
2,066
1,728
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
In addition, there were payments under retirement benefit agreements with former Directors of US$557,000
(2002: US$501,000; 2001: US$472,000). The provision as at 31 December 2003 in respect of unfunded pension
obligations to former Directors amounted to US$7,273,000 (2002: US$6,942,000; 2001: US$6,281,000).
254
During the year, aggregate contributions to pension schemes in respect of Directors were US$1,294,964 (2002:
US$1,592,024; 2001: US$1,462,000).
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 208 to 210 and ‘Directors’ Remuneration Report’ on pages
213 to 229.
(d) Auditors’ remuneration
Auditors’ remuneration in relation to statutory audit amounted to US$31.7 million (2002: US$24.8 million;
2001: US$24.3 million). The following remuneration was paid by HSBC companies to HSBC’s principal
auditor, KPMG Audit Plc and its affiliated firms (‘KPMG’):
Audit services
– Statutory audit ......................................................................................
– Audit-related regulatory reporting ......................................................
Total audit services .................................................................................
Further assurance services ......................................................................
Tax services ............................................................................................
Other services
– Financial information technology ........................................................
– Other services ......................................................................................
Total other services .................................................................................
Total fees paid to KPMG ........................................................................
2003
US$m
2002
US$m
2001
US$m
30.2
6.1
36.3
6.8
3.3
–
2.5
2.5
48.9
23.5
5.6
29.1
1.3
3.3
0.1
3.5
3.6
37.3
23.8
5.6
29.4
1.2
2.1
0.8
3.6
4.4
37.1
All services entered into with KPMG after 5 May 2003 were pre-approved by the Group Audit Committee or
were entered into under pre-approval policies established by the Group Audit Committee.
Of fees paid to auditors for non-audit work, US$2.1 million were capitalised (2002: US$0.4 million; 2001:
US$0.4 million).
The following is a description of the type of services included within the categories listed above:
− Audit-related regulatory reporting services include services for assurance and other services that are
reasonably related to the performance of the audit or review of financial statements, including comfort
letters and interim reviews.
− Further assurance services include services for advice on accounting matters, reporting on internal controls
not connected with the financial statements, due diligence work and environmental audits.
− Tax services include services for tax compliance, tax advice and tax planning.
− Other services include other assurance and advisory services such as translation services, review of
financial models and advice on IT security.
In addition to the above, KPMG estimate they have been paid fees of US$12 million by parties other than HSBC
but where HSBC is connected with the contracting party. These fees arise principally in respect of services such
as audit of mutual funds managed by HSBC and reviews of the financial position of corporate borrowers where
HSBC is a lender.
255
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
6 Loss from foreign currency redenomination in Argentina
The Argentine Government have issued and propose to issue bonds as compensation to the banks (including HSBC)
who suffered losses as a result of the original redenomination. Certain of these bonds will be issued in exchange for
Argentine Government loans which have been fair valued accordingly. The net effect of these transactions largely
offset losses in 2003 which arose from continued repayment of certain deposits historically denominated in US
dollars at current market rates rather than the pesification rates specified by the Argentine Government.
The losses in 2002 related to the further impact of pesification including revisions to government decrees,
renegotiation of banking contracts, and payments made to certain customers who had obtained court orders requiring
HSBC to repay their deposits historically denominated in US dollars at the then current market rates rather than the
pesification rate specified by the Argentine Government. The loss of US$520 million in 2001 arose on the
redenomination by the Argentine Government of certain in-country US dollar assets and liabilities into pesos at
various mandatory but different rates of exchange.
7 Profit on ordinary activities before tax
Profit on ordinary activities before tax is stated after:
Income
Aggregate rentals receivable under
– finance leases and hire purchase contracts .............................................
– operating leases .....................................................................................
Income from listed investments .................................................................
Profits less losses on debt securities and equities dealing ...........................
Gains on disposal of investment securities .................................................
Charges
Charges incurred with respect to subordinated liabilities ...........................
Finance charges in respect of finance leases and similar hire purchase
contracts ................................................................................................
Hire of plant and machinery .......................................................................
Rentals payable on premises held under operating leases ...........................
2003
US$m
3,279
553
4,276
294
396
958
38
110
773
2002
US$m
2,502
490
4,361
19
405
862
36
81
548
2001
US$m
3,458
465
4,761
348
475
1,074
27
90
516
Gains on the disposal of investments and tangible fixed assets attracted a tax charge of US$84 million (2002:
US$86 million; 2001: US$114 million). Of the after-tax amount, US$23 million (2002: US$23 million; 2001:
US$18 million) is attributable to minority interests.
256
8 Tax on profit on ordinary activities
The charge for taxation comprises:
Current taxation
United Kingdom corporation tax charge – current year .............................
United Kingdom corporation tax charge – adjustment in respect of
prior years .............................................................................................
Relief for overseas taxation .......................................................................
Overseas taxation – current year ................................................................
Overseas taxation – adjustment in respect of prior years ...........................
Joint ventures ............................................................................................
Associates ..................................................................................................
Deferred taxation
Origination and reversal of timing differences ..........................................
Effect of change in tax rate on opening asset .............................................
Adjustment in respect of previous periods .................................................
Total charge for taxation ...........................................................................
HSBC Holdings and subsidiaries tax charge .............................................
Joint ventures tax charge ...........................................................................
Associates tax charge ................................................................................
2003
US$m
1,819
(149)
(1,123)
547
2,646
(56)
1
19
3,157
(5)
(7)
(25)
(37)
3,120
3,100
1
19
3,120
2002
US$m
1,0961
(68)
(344)1
684
1,246
(29)
(6)
17
1,912
615
–
7
622
2,534
2,523
(6)
17
2,534
2001
US$m
1,217
(261)
(540)
416
1,638
(68)
(13)
26
1,999
(176)
3
162
(11)
1,988
1,975
(13)
26
1,988
1 Figures for 2002 have been restated to reflect in greater detail the effect of underlying taxes attributable to overseas group dividends
receivable in the UK. This has no impact on the total tax charge.
HSBC Holdings and its subsidiary undertakings in the United Kingdom provide for UK corporation tax at 30 per
cent (2002 and 2001: 30 per cent). Overseas tax includes Hong Kong profits tax of US$483 million (2002: US$408
million; 2001: US$450 million). Subsidiary undertakings in Hong Kong provide for Hong Kong profits tax at the
rate of 17.5 per cent (2002 and 2001: 16 per cent) on the profits for the year assessable in Hong Kong. Other
overseas subsidiary undertakings and overseas branches provide for taxation at the appropriate rates in the countries
in which they operate.
Analysis of overall tax charge
Taxation at UK corporate tax rate of 30% (2002 and 2001: 30%) ..............
Impact of differently taxed overseas profits in principal locations ..............
Tax free gains .............................................................................................
Argentine losses .........................................................................................
Goodwill amortisation ................................................................................
Amortisation of acquisition accounting adjustments ...................................
Prior period adjustments .............................................................................
Other items ..................................................................................................
Overall tax credit charge .............................................................................
Timing differences subject to deferred tax
Accelerated capital allowances ...................................................................
Timing differences on lease income ............................................................
Provision for bad and doubtful debts ..........................................................
Relief for losses brought forward ................................................................
Provision for Princeton Note settlement .....................................................
Other short-term timing differences ............................................................
Deferred tax credit/(charge) ........................................................................
2003
US$m
3,845
(366)
(17)
(25)
476
(331)
(230)
(232)
3,120
(1)
(187)
356
52
–
(183)
37
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
Current tax charge .......................................................................................
3,157
1,912
1,999
257
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Significant acquisition accounting adjustments arose because certain acquired assets and liabilities were revalued to
their fair value on the purchase of Household and HSBC Mexico. The difference between the fair value of assets and
liabilities, which is included in the accounts, and the previous book value is amortised to the profit and loss account
over the life of the relevant assets and liabilities. The amortisation resulted in a credit to the profit and loss account
of US$957 million and there is no tax associated with this adjustment to net income, which therefore reduces the
effective tax rate for the year. Although similar adjustments arose in prior years the effect was not significant and is
included in ‘Other items’ above.
9 Profit of HSBC Holdings
Profit on ordinary activities before tax ...........................................................
Tax credit on profit on ordinary activities ......................................................
Profit for the financial year attributable to shareholders .................................
2003
US$m
6,097
116
6,213
2002
US$m
5,185
82
5,267
2001
US$m
3,211
71
3,282
Profit on ordinary activities before tax includes dividend income from subsidiary undertakings for the years ended
31 December as follows:
Bank ...............................................................................................................
Non-bank .......................................................................................................
10 Dividends
2003
US$m
2,409
3,933
2002
US$m
1,715
3,745
2001
US$m
2,156
1,251
First interim .......................................................
Second interim ...................................................
Third interim ......................................................
2003
US$ per
share
0.240
0.120
0.240
0.600
US$m
2,596
1,309
2,627
6,532
2002
US$ per
share
0.205
0.325
–
0.530
US$m
1,932
3,069
–
5,001
2001
US$ per
share
0.190
0.290
–
0.480
US$m
1,767
2,700
–
4,467
Of the first interim dividend for 2003, US$979 million (2002: US$166 million; 2001: US$129 million) was settled
by the issue of shares. Of the second interim dividend for 2002, US$444 million (2001: US$857 million; 2000
US$737 million) was settled by the issue of shares in 2003.
11 Earnings per ordinary share
Basic earnings per ordinary share was calculated by dividing the earnings of US$8,774 million (2002: US$6,239
million; 2001: US$4,992 million) by the weighted average number of ordinary shares, excluding own shares held,
outstanding in 2003 of 10,421 million (2002: 9,339 million; 2001: 9,237 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 2003 of 10,539 million
(2002: 9,436 million; 2001: 9,336 million).
258
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 ..........................................................................
Group Share Option Plan .....................................................................................
Restricted Share Plan ...........................................................................................
CCF share options ...............................................................................................
Household share options ......................................................................................
Average number of shares in issue assuming dilution .........................................
Number of shares (millions)
2003
10,421
30
8
4
56
14
6
10,539
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 2003, 130 million were antidilutive (2002
and 2001: nil).
12 Treasury bills and other eligible bills
Treasury bills and similar securities .......................................................................
Other eligible bills .................................................................................................
2003
US$m
19,193
1,198
20,391
2002
US$m
16,759
1,382
18,141
2001
US$m
17,180
791
17,971
Of the total treasury bills and other eligible bills, US$15,799 million (2002: US$12,902 million; 2001: US$12,902
million) are non-trading book investment securities. These are mainly short-term in maturity and are analysed below.
At 1 January 2003 ..............................................................................................................................................................
Additions ............................................................................................................................................................................
Acquisition of subsidiaries .................................................................................................................................................
Disposals and amounts repaid ............................................................................................................................................
Amortisation of discounts and premiums ...........................................................................................................................
Exchange and other movements .........................................................................................................................................
At 31 December 2003 .......................................................................................................................................................
Cost and
book value
US$m
12,902
47,687
3
(46,093)
239
1,061
15,799
Non-trading book treasury bills and other eligible bills are all available-for-sale. Their book value, analysed by type
of borrower, is as follows:
US Treasury and Government agencies .................................................................
UK Government ....................................................................................................
Hong Kong Government .......................................................................................
Other governments ................................................................................................
Corporate debt and other securities .......................................................................
2003
US$m
4,624
955
2,450
6,891
879
15,799
2002
US$m
2,888
740
2,898
5,344
1,032
12,902
2001
US$m
2,303
3,013
2,181
4,907
498
12,902
259
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
The following tables provide an analysis of gross unrealised gains and losses on treasury bills and other eligible
bills:
Carrying
value
US$m
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
Market
valuation
US$m
At 31 December 2003
US Treasury and Government agencies .................................
UK Government .....................................................................
Hong Kong Government ........................................................
Other governments .................................................................
Corporate debt and other securities ........................................
At 31 December 2002
US Treasury and Government agencies .................................
UK Government .....................................................................
Hong Kong Government ........................................................
Other governments .................................................................
Corporate debt and other securities ........................................
31 December 2001
US Treasury and Government agencies .................................
UK Government .....................................................................
Hong Kong Government ........................................................
Other governments .................................................................
Corporate debt and other securities ........................................
4,624
955
2,450
6,891
879
15,799
2,888
740
2,898
5,344
1,032
12,902
2,303
3,013
2,181
4,907
498
12,902
2
–
2
10
–
14
3
–
2
8
–
13
1
6
2
7
–
16
–
–
–
(5)
–
(5)
–
–
–
(1)
–
(1)
–
–
–
(3)
–
(3)
4,626
955
2,452
6,896
879
15,808
2,891
740
2,900
5,351
1,032
12,914
2,304
3,019
2,183
4,911
498
12,915
The amounts shown under ‘other governments’ in the above table includes securities with a book and market value
of US$711 million (2002: US$1,122 million) issued by the Government of Japan.
The maturities of available-for-sale treasury bills and other eligible bills at 31 December 2003 are analysed as
follows:
1 year or less ........................................................................................................................................
5 years or less but over 1 year ..............................................................................................................
10 years or less but over 5 years ...........................................................................................................
Carrying
value
US$m
15,078
676
45
15,799
Market
valuation
US$m
15,103
658
47
15,808
The following table provides an analysis of contractual maturities and weighted average yields of available-for-sale
treasury bills and other eligible bills as at 31 December 2003.
Within
one year
After one year
but within
five years
Amount Yield
%
US$m
Amount Yield
%
US$m
After five years
but within
ten years
Amount Yield
%
US$m
0.9
2.4
0.3
2.9
1.6
4,613
649
2,450
6,507
859
15,078
5.4
4.9
–
6.6
2.7
11
306
–
339
20
676
–
–
–
5.0
–
–
–
–
45
–
45
US Treasury and Government agencies ...........................................
UK Government ...............................................................................
Hong Kong Government ..................................................................
Other governments ...........................................................................
Corporate debt and other securities ..................................................
260
13 Hong Kong currency notes in circulation
The Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the
Government of Hong Kong certificates of indebtedness are held.
14 Credit risk management
HSBC’s credit risk management process is discussed in the ‘Financial Review’ in the section headed ‘Credit risk
management’ on pages 136 to 138, ending with the sentence ‘Internal audit will discuss with management
….assigned to the facilities concerned’.
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) ........................................................................
2003
US$m
25,289
77,188
10,879
1,454
2,387
(24)
117,173
2002
US$m
19,211
63,526
9,536
1,211
2,035
(23)
95,496
Amounts include:
Due from associates
– unsubordinated ..........................................................................................................................
21
53
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 ............................................................................................................................
2003
US$m
60,331
94,001
63,648
142,814
181,874
(13,691)
528,977
202
26,640
65
35
464
2002
US$m
48,463
74,193
41,444
97,068
100,293
(9,117)
352,344
187
655
61
29
460
Loans and advances to customers included US$824 million (2002: US$155 million) of repossessed real estate and
other assets.
261
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Securitisation transactions
Loans and advances to customers include balances that have been securitised. Certain of these balances meet the
requirements for linked presentation under FRS 5 ‘Reporting the substance of transactions’.
The non-recourse finance has been netted against customer loans as follows:
Customer loans ................................................................................................................................
Non-recourse finance .......................................................................................................................
Funding provided by HSBC ............................................................................................................
2003
US$m
2,555
(2,291)
264
2002
US$m
2,294
(2,049)
245
Clover Funding Securitisation
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$2,541 million (2002: US$2,294
million) floating rate notes (‘FRNs’). Clover Funding No.2 plc is in scheduled accumulation and has collected
US$395 million (2002: US$nil) to repay its outstanding Notes in April 2004. 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$1,882 million (2002: US$2,049 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 three-month London Interbank Offered Rate (‘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$73 million (2002: US$66 million) of subordinated FRNs that are repayable after payments
in respect of senior FRNs. HSBC has made subordinated loans of US$46 million (2002: US$42 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$7 million (2002: US$4 million) which comprised US$108 million (2002:
US$96 million) of interest receivable by Clover Funding less US$101 million (2002: US$92 million) of interest on
FRNs and other third party expenses payable by Clover Funding.
HFC Bank Limited Securitisations
HSBC, through its wholly-owned subsidiary company, HFC Bank Limited (formerly HFC Bank plc) (‘HFC Bank’),
has securitised certain amounts of its personal loan portfolios. The transactions were effected through equitable
assignment of those loans to receivables trusts, beneficial interests in which were purchased by several special
purpose companies.
262
To fund the acquisition of these beneficial interests, the special purpose companies have issued asset backed notes,
discounted notes, and subordinated loans, or have received funds on-lent by other companies that have issued such
securities and loans for this purpose. Certain of the notes issued were credit enhanced by a third party to provide the
required ratings at the time of issue. The securitisation documentation sets out the acknowledgement by the special
purpose companies that they will seek to repay their financing only to the extent that repayment is funded by the
proceeds generated by the securitised personal loans, and that they will not seek recourse in any other form from
HFC Bank.
As at 31 December 2003 non-returnable proceeds of US$409 million received by HFC Bank from the receivables
trusts have been deducted from ‘Loans and advances to customers’. Certain of the special purpose companies have
entered into swap agreements with HFC Bank (via a third party swap provider) under which the special purpose
companies pay the fixed rate of interest on the personal loans and receive a floating interest rate. The proceeds
generated from the loans are used in priority to meet the claims of the note holders and other lenders, and amounts
payable in respect of the interest rate swap arrangements after the payment of trustee and administration expenses.
HFC Bank is entitled to any residual income from the personal loans after the claims of the note-holders, other
lenders and swap counterparties are met.
Under the terms of the securitisation agreements, during the initial periods of the securitisations, HFC Bank was able
to substitute securitised loans that were prepaid or expired with further loans that met the same criteria as those
originally securitised. In the period since the acquisition of HFC Bank by HSBC, the special purpose companies
acquired US$94 million of qualifying personal loans from HFC Bank under these arrangements. These initial
periods have now expired, and further substitutions are no longer possible.
There is no provision whatsoever, either in the financing arrangements or otherwise, whereby HFC Bank 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 HFC Bank is in breach of warranty.
HFC Bank is not obliged to support any losses that may be suffered by the note-holders and does not intend to
provide such support.
The entire share capital of the special purpose companies is indirectly held by trustees under the terms of a trust for
charitable purposes.
In the period since the acquisition of HFC Bank by HSBC, HFC Bank recognised net income of US$33 million from
these personal loan securitisations.
263
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 2003 ...............................................................
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 2003 ........................................................
Included in:
Loans and advances to banks (Note 15) ..........................
Loans and advances to customers (Note 16) ...................
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 ..........................................
Loans and advances to customers ...................................
Provisions against advances
Specific
US$m
6,629
(7,456)
610
6,214
–
–
4,269
636
10,902
General
US$m
2,511
–
–
(121)
–
–
500
(77)
2,813
Provisions against advances
Specific
US$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$m
2,102
–
–
5731
–
–
7
(21)
2,661
Suspended
interest
US$m
566
(147)
–
–
240
(182)
–
133
610
Suspended
interest
US$m
861
(327)
–
–
426
(214)
–
(180)
566
Suspended
interest
US$m
1,016
(437)
–
–
542
(228)
–
(32)
861
Total
US$m
9,140
(7,456)
610
6,093
–
–
4,769
559
13,715
24
13,691
13,715
Total
US$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
1 Includes an additional general provision of US$600 million for Argentinian exposures
264
The total of customer advances, net of suspended interest, on which interest is being placed in suspense, is as
follows:
Gross.....................................................................................................................
Net of specific provisions .....................................................................................
2003
US$m
5,513
2,673
2002
US$m
5,485
2,780
2001
US$m
6,022
2,936
18 Concentrations of exposure
HSBC has the following concentrations of gross loans and advances to customers:
Total gross loans and advances to customers
Residential mortgages ........................................
Hong Kong Government Home Ownership
Scheme ..........................................................
Other personal ....................................................
Total personal ....................................................
Commercial, industrial and international trade ..
Commercial real estate .......................................
Other property related ........................................
Government .......................................................
Other commercial1 ..............................................
Total corporate and commercial .........................
Non-bank financial institutions ..........................
Settlement accounts ...........................................
Total financial ....................................................
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
North
America
US$m
South
America
US$m
Total
US$m
51,721
23,664
12,101
77,754
224
165,464
–
42,041
93,762
49,468
15,517
5,416
2,462
24,239
97,102
21,226
3,068
24,294
6,290
7,420
37,374
10,966
8,548
5,075
927
6,754
32,270
4,921
556
5,477
–
7,135
19,236
14,892
3,149
2,597
1,450
5,735
27,823
2,027
188
2,215
–
75,173
152,927
8,907
7,785
3,994
4,104
6,619
31,409
8,839
4,767
13,606
–
2,376
2,600
1,435
89
58
647
683
2,912
78
15
93
6,290
134,145
305,899
85,668
35,088
17,140
9,590
44,030
191,516
37,091
8,594
45,685
At 31 December 2003 .......................................
215,158
75,121
49,274
197,942
5,605
543,100
Residential mortgages ........................................
Hong Kong Government Home
Ownership Scheme ........................................
Other personal ....................................................
Total personal ....................................................
Commercial, industrial and international trade ..
Commercial real estate .......................................
Other property related ........................................
Government .......................................................
Other commercial1 ..............................................
Total corporate and commercial .........................
Non-bank financial institutions ..........................
Settlement accounts ...........................................
Total financial ....................................................
38,719
23,839
–
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
At 31 December 2002 ........................................
168,467
71,207
7,507
–
5,900
13,407
12,582
2,701
2,031
933
5,950
24,197
931
192
1,123
38,727
26,666
–
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 Other commercial includes advances in respect of agriculture, transport, energy and utilities.
253
96,984
–
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
3,576
361,929
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 Limited and HSBC Bank USA, by location of the branch responsible for advancing
the funds.
265
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
19 Debt securities
2003
Book
value
US$m
Market
valuation
US$m
2002
Book
value
US$m
Market
valuation
US$m
2001
Book
value
US$m
Market
valuation
US$m
51,215
6,087
57,302
32,848
1,504
91,654
6,468
67,146
73,614
8,411
32,043
114,068
205,722
62,047
143,675
205,722
276
485
18,852
1,601
54,435
56,028
51,822
6,385
58,207
6,502
67,885
74,387
19,315
1,710
55,166
56,403
42,706
5,369
48,075
27,664
1,095
76,834
6,097
53,753
59,850
11,309
27,737
98,896
175,730
56,052
119,678
175,730
311
594
17,651
1,530
50,221
38,523
43,591
5,670
49,261
6,142
54,494
60,636
18,082
1,640
51,354
38,821
130,916
132,594
107,925
109,897
9,442
2,503
39,850
23,011
205,722
9,158
2,397
29,434
26,816
175,730
39,943
4,908
44,851
27,366
1,091
73,308
6,782
41,633
48,415
10,893
27,963
87,271
160,579
43,803
116,776
160,579
241
(102)
13,769
915
45,750
32,832
93,266
6,525
1,828
35,597
23,363
160,579
40,470
5,014
45,484
6,800
42,030
48,830
13,877
959
46,327
33,151
94,314
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 .......
Total ..................................
Due within 1 year ..............
Due 1 year and over ...........
Amounts include:
Subordinated debt
securities ........................
Unamortised net
premium/(discount) on
investment securities ......
Listing of securities
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 .......................
266
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 market value of such hedges was included, the effective value of investment securities
would be US$132,076 million (2002: US$109,204 million; 2001: US$94,100 million).
Investment securities
Provisions
US$m
Book value
US$m
At 1 January 2003 ...........................................................................................
Additions .........................................................................................................
Acquisition of subsidiaries ..............................................................................
Disposals and amounts repaid .........................................................................
Provisions made ..............................................................................................
Amortisation of discounts and premiums ........................................................
Exchange and other movements ......................................................................
At 31 December 2003 ....................................................................................
Cost
US$m
108,040
164,817
4,041
(153,752)
–
(569)
8,460
131,037
The book value of investment securities, analysed by type of borrower, is as follows:
(115)
–
–
29
(32)
–
(3)
(121)
2002
US$m
18,574
1,064
1,042
18,067
3,697
60,852
2003
US$m
19,215
554
1,124
26,685
7,200
71,626
126,404
103,296
3,637
573
302
4,512
3,918
673
38
4,629
107,925
164,817
4,041
(153,723)
(32)
(569)
8,457
130,916
2001
US$m
17,452
1,880
490
16,212
4,535
48,021
88,590
3,907
769
–
4,676
Available-for-sale
US Treasury and Government agencies ...........................................................
UK Government ..............................................................................................
Hong Kong Government .................................................................................
Other governments ..........................................................................................
Asset-backed securities ...................................................................................
Corporate debt and other securities .................................................................
Held-to-maturity
US Treasury and Government agencies ...........................................................
Obligations of US state and political sub-divisions ..........................................
Corporate debt and other securities ..................................................................
The following table provides an analysis of gross unrealised gains and losses for investment securities by instrument
type as at 31 December for the past three years:
At 31 December 2003
US Treasury and Government agencies ...........................
UK Government ..............................................................
Hong Kong Government .................................................
Other governments ..........................................................
Asset-backed securities ...................................................
Corporate debt and other securities .................................
Available-for-sale
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
224
–
65
427
131
1,007
1,854
(155)
(1)
–
(34)
(9)
(113)
(312)
Carrying
value
US$m
19,215
554
1,124
26,685
7,200
71,626
126,404
Market
valuation
US$m
19,284
553
1,189
27,078
7,322
72,520
127,946
267
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
At 31 December 2002
US Treasury and Government agencies ...............................
UK Government ...................................................................
Hong Kong Government ......................................................
Other governments ...............................................................
Asset-backed securities ........................................................
Corporate debt and other securities ......................................
At 31 December 2001
US Treasury and Government agencies ...............................
UK Government ...................................................................
Hong Kong Government ......................................................
Other governments ...............................................................
Asset-backed securities ........................................................
Corporate debt and other securities ......................................
Carrying
value
US$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
Available-for-sale
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
(7)
–
(2)
(228)
(7)
(121)
(365)
(62)
–
(2)
(158)
(6)
(153)
(381)
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
The amounts shown under other governments in the above table include securities with a book value of US$5,847
million (2002: US$5,616 million) and a market value of US$5,853 million (2002: US$5,630 million) issued by the
Government of Japan.
At 31 December 2003
US Treasury and Government agencies ............................
Obligations of US state and political sub-divisions ...........
Corporate debt and other securities ....................................
At 31 December 2002
US Treasury and Government agencies ............................
Obligations of US state and political sub-divisions ...........
Corporate debt and other securities ...................................
At 31 December 2001
US Treasury and Government agencies ............................
Obligations of US state and political sub-divisions ...........
Held-to-maturity
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
Carrying
value
US$m
Market
valuation
US$m
3,637
573
302
4,512
3,918
673
38
4,629
3,907
769
4,676
121
–
57
178
234
44
1
279
168
32
200
(40)
–
(2)
(42)
(1)
(1)
–
(2)
(9)
(1)
(10)
3,718
573
357
4,648
4,151
716
39
4,906
4,066
800
4,866
268
The maturities of investment securities at 31 December 2003 are analysed as follows:
Available-for-sale
1 year or less ...................................................................................................................................
5 years or less but over 1 year ........................................................................................................
10 years or less but over 5 years .....................................................................................................
Over 10 years .................................................................................................................................
Held-to-maturity
1 year or less ...................................................................................................................................
5 years or less but over 1 year ........................................................................................................
10 years or less but over 5 years .....................................................................................................
Over 10 years .................................................................................................................................
Book
value
US$m
38,953
60,096
8,823
18,532
Market
valuation
US$m
39,135
60,825
8,757
19,229
126,404
127,946
149
173
227
3,963
4,512
150
182
244
4,072
4,648
The following table provides an analysis of contractual maturities and weighted average yields of investment debt
securities as at 31 December 2003:
Within one year
Amount
US$m
Yield
%
After one year but
within five years
Amount
US$m
Yield
%
After five years but
within ten years
Amount
US$m
Yield
%
After ten years
Amount
US$m
Yield
%
Available-for-sale
US Treasury and
Government agencies .......
UK Government ..................
Hong Kong Government .....
Other governments ..............
Asset-backed securities .......
Corporate debt and other
securities ..........................
Held-to-maturity
US Treasury and
Government agencies .......
Obligations of US state and
political sub-divisions ......
Corporate debt and other
securities ..........................
4,113
552
204
8,967
21
25,096
38,953
133
8
8
149
1.26
4.53
3.43
2.38
9.52
2.81
1.50
7.88
2.65
3,361
2
912
14,904
1,017
39,900
60,096
124
49
–
173
2.86
–
4.06
4.57
1.47
3.36
7.17
9.49
–
683
–
8
2,094
1,901
4,137
8,823
119
108
–
227
4.96
–
–
4.20
1.32
4.67
6.80
8.94
–
11,058
–
–
720
4,261
2,493
18,532
3,261
408
294
3,963
4.35
–
–
4.58
1.27
4.75
6.40
9.04
6.05
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 2003 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$153,910 million (2002: US$77,105
million; 2001: US$87,626 million). Gross realised gains of US$182 million (2002: US$247 million; 2001: US$359
million) and gross realised losses of US$21 million (2002: US$77 million; 2001: US$180 million) were recorded on
those sales. All gains and losses arose on sales of securities from the available-for-sale portfolio. 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 2003 was US$164,817 million
(2002: US$85,837 million; 2001: US$94,214 million).
269
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
20 Equity shares
Investment securities:
– listed on a recognised
UK exchange ..............
– listed in Hong Kong ....
– listed elsewhere ...........
– unlisted .......................
Other securities:
– listed on a recognised
UK exchange ..............
– listed in Hong Kong ....
– listed elsewhere ...........
– unlisted .......................
2003
Carrying
value
US$m
Market
valuation
US$m
20021
Carrying
value
US$m
Market
valuation
US$m
20011
Carrying
value
US$m
Market
valuation
US$m
65
379
1,757
4,016
6,217
44
238
1,531
3,577
5,390
129
20
7,303
37
12,879
23
400
1,207
3,127
4,757
14
241
1,163
2,866
4,284
670
9
2,576
125
7,664
87
245
1,389
2,426
4,147
713
74
2,405
110
7,449
93
564
1,436
2,606
4,699
Where securities are carried at market value, and the market value is higher than cost, the difference between cost
and market value is not disclosed as it cannot be determined without unreasonable expense.
At 1 January 20031 .............................................................................................
Additions ............................................................................................................
Acquisition of subsidiaries .................................................................................
Disposals ............................................................................................................
Provisions made .................................................................................................
Provisions written off .........................................................................................
Exchange and other movements .........................................................................
At 31 December 2003 .......................................................................................
Investment securities
Cost
US$m
4,659
5,692
701
(5,874)
–
(8)
568
5,738
Provisions
US$m
Book value
US$m
(375)
–
–
40
(31)
8
10
(348)
4,284
5,692
701
(5,834)
(31)
–
578
5,390
The following table provides an analysis of gross unrealised gains and losses as at 31 December for the past three
years:
31 December 2003 ............................................................
31 December 20021 ............................................................
31 December 20011 ............................................................
Carrying
value
US$m
5,390
4,284
4,147
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
858
603
669
(31)
(130)
(117)
Market
valuation
US$m
6,217
4,757
4,699
1 Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
Equity investment securities include interests in money market mutual funds primarily held by Household for
liquidity management. Proceeds from the sale of investment securities were US$6,117 million (2002: US$1,980
million; 2001: US$1,796 million). Gross realised gains of US$281 million (2002: US$215 million; 2001: US$290
million) and gross realised losses of US$43 million (2002: US$9 million; 2001: US$25 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 2003 was US$5,692 million
(2002: US$1,748 million; 2001: US$1,604 million).
270
21 Interests in joint ventures
At 1 January 2003 ..............................................................................................................................................................
Amortisation and impairment of goodwill ..........................................................................................................................
Transfer to subsidiaries .......................................................................................................................................................
Retained profits and losses .................................................................................................................................................
Exchange and other movements .........................................................................................................................................
At 31 December 2003 .......................................................................................................................................................
(a)
Shares in non-banks .....................................................................................................................
2003
US$m
10
2003
US$m
190
(135)
(47)
18
(16)
10
2002
US$m
190
All shares are unlisted.
(b) HSBC’s joint venture at 31 December 2003 is:
Framlington Group Limited ...........................................
England
Country of
incorporation
Principal
activity
Asset
management
HSBC’s
interest in
equity capital
Issued
equity
capital
51%
£3m
Framlington Group Limited is owned by a subsidiary of HSBC Holdings and makes its financial statements up
to 31 December. Its principal country of operation is England.
Although HSBC owns more than 50 per cent of the equity capital of Framlington Group Limited, the agreement
with another shareholder means that there are severe long-term restrictions which substantially hinder HSBC’s
rights over the assets and management of the entity. HSBC does however continue to exercise significant
influence and together with the other shareholder controls the entity.
(c) HSBC’s share of total operating income in the joint venture is US$36 million (2002: US$19 million).
(d) Included within the Group’s share of the joint venture’s gross assets is goodwill of US$171 million which has
been fully written off as at 31 December 2003 (2002: net book value US$149 million).
22 Interests in associates
At 1 January 2003 ..............................................................................................................................................................
Additions ............................................................................................................................................................................
Acquisitions of subsidiaries ................................................................................................................................................
Disposals ............................................................................................................................................................................
Retained profits and losses (Note 36) .................................................................................................................................
Exchange and other movements .........................................................................................................................................
At 31 December 2003 .......................................................................................................................................................
2003
US$m
1,116
44
10
(1)
80
14
1,263
271
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
There is no goodwill included in the interests in associates at either 31 December 2003 or 2002.
(a)
Shares in banks ..........................................................................................................................
Other ..........................................................................................................................................
Listed shares (all listed outside the United Kingdom and Hong Kong) ......................................
Unlisted shares ...........................................................................................................................
(b) The principal associates of HSBC are:
Financial
statements
made up to
Country of
incorporation
Barrowgate Limited ......................
31.12.03
Hong Kong
Principal
activity
Property
investment
British Arab Commercial Bank
Limited .....................................
The Cyprus Popular Bank
Limited2 .....................................
Erisa ..............................................
The Saudi British Bank .................
Wells Fargo HSBC Trade Bank,
N.A . ..........................................
World Finance International
Limited .....................................
31.12.03
England
Banking
31.12.03
31.12.03
31.12.03
Cyprus
France
Saudi Arabia
Banking
Insurance
Banking
31.12.03
United States
Trade finance
30.6.03
Bermuda
Shipping
1 Issued equity capital is less than HK$1 million.
2 Trading as Laiki Group.
3 Issued equity capital is less than US$1 million.
2003
US$m
777
486
1,263
367
896
1,263
2002
US$m
712
404
1,116
294
822
1,116
HSBC’s
interest in
equity capital
Issued
equity
capital
24.64%
46.51%
21.33%
49.99%
40%
20%
50%
–1
US$81m
£32m fully paid
£5m nil paid
C£152m
€65m
SR2,000m
–3
US$58m
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.
On 20 January 2004 HSBC’s interest in World Finance International Limited was exchanged for a 7 per cent
interest in Bergesen Worldwide. The new investment will be included in equity shares – investment securities
from 2004.
(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$928 million of loan capital in which HSBC has a 24.64 per cent interest;
and The Cyprus Popular Bank Limited which has issued C£15.6 million of convertible debentures in which
HSBC has a 41.9 per cent interest. The last period for conversion of these debentures into equity shares expired
during 2003. HSBC also has a 100 per cent interest in the issued preferred stock (less than US$1 million) of
Wells Fargo HSBC Trade Bank, N.A. HSBC has a 40 per cent economic interest in Wells Fargo HSBC Trade
Bank, N.A. by virtue of the joint agreement under which HSBC’s equity capital and preferred stock interests are
held.
272
23 Other participating interests
Listed other than on a recognised UK exchange or in Hong Kong ...................................................
Unlisted ............................................................................................................................................
Market value of listed securities .......................................................................................................
Other participating interests in banks ...............................................................................................
2003
US$m
4
686
690
29
1
At 1 January 2003 .................................................................................................
Additions ...............................................................................................................
Amounts written off ...............................................................................................
Provisions made ....................................................................................................
Exchange and other movements ............................................................................
At 31 December 2003 ..........................................................................................
704
3
(22)
–
37
722
(53)
–
22
(3)
2
(32)
Cost
US$m
Provisions
US$m
24 Goodwill and intangible assets
Goodwill
US$m
Intangible
assets
US$m
Cost at 1 January 2003 ..........................................................................................
Additions and acquisitions of subsidiaries .............................................................
Exchange and other movements ............................................................................
Cost at 31 December 2003 ...................................................................................
Accumulated amortisation at 1 January 2003 ........................................................
Charge to the profit and loss account .....................................................................
Exchange and other movements ............................................................................
Accumulated amortisation at 31 December 2003 ..............................................
Net book value at 31 December 2003 .................................................................
Net book value at 31 December 2002 ....................................................................
19,579
10,741
2,354
32,674
(2,416)
(1,450)
(330)
(4,196)
28,478
17,163
29
137
12
178
–
(15)
(1)
(16)
162
29
2002
US$m
3
648
651
22
1
Carrying
value
US$m
651
3
–
(3)
39
690
Total
US$m
19,608
10,878
2,366
32,852
(2,416)
(1,465)
(331)
(4,212)
28,640
17,192
The net book value of goodwill at 31 December 2003 is stated net of negative goodwill of US$15 million (2002:
US$58 million). The charge to the profit and loss account in respect of goodwill amortisation is net of a credit
relating to negative goodwill of US$50 million (2002: US$24 million).
Included in ‘Additions and acquisition of subsidiaries’ is goodwill arising on the acquisition of businesses and
increases of holdings in subsidiaries during 2003. Positive goodwill is being amortised over periods of up to 20
years. Negative goodwill is being credited to the profit and loss account over 5 years, the period to be benefited.
273
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
25 Tangible fixed assets
(a) HSBC
Freehold
land and
buildings
US$m
Long
leasehold
land and
buildings
US$m
Short
leasehold
land and
buildings
US$m
Equipment,
fixtures
and fittings
US$m
Equipment
on
operating
leases
US$m
Cost or valuation at 1 January 2003 ...........
Additions ...................................................
Acquisition of subsidiaries .........................
Disposals ...................................................
Reclassification ..........................................
Transfer of accumulated depreciation
arising on revaluation ............................
Surplus/(deficit) on revaluation .................
Exchange and other movements .................
3,115
253
133
(237)
–
(37)
23
397
Cost or valuation at 31 December 2003 ..
3,647
Accumulated depreciation at
1 January 2003 .......................................
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 2003 ................................
Net book value at 31 December 2003 ......
Net book value at 31 December 2002 ........
(76)
3
–
37
(69)
(10)
(115)
3,532
3,039
Total1
US$m
19,748
1,981
591
(1,025)
–
(191)
(352)
1,821
2,771
72
115
(70)
6
(93)
(66)
95
6,480
937
277
(388)
131
–
–
775
4,183
713
50
(311)
–
–
–
460
2,830
8,212
5,095
22,573
(475)
64
(2)
93
(110)
(82)
(4,094)
341
–
–
(882)
(508)
(919)
233
–
–
(261)
(100)
(5,567)
642
–
191
(1,382)
(709)
(512)
(5,143)
(1,047)
(6,825)
3,199
6
16
(19)
(137)
(61)
(309)
94
2,789
(3)
1
2
61
(60)
(9)
(8)
2,781
3,196
2,318
2,296
3,069
2,386
4,048
3,264
15,748
14,181
1 Included in the above are assets held on finance leases with a net book value of US$284 million (2002: US$256 million), on which
the depreciation charge for the year to 31 December 2003 was US$8 million (2002: US$8 million).
(b) HSBC Holdings
Cost or valuation at 1 January 2003 .....................................................................................................................
Additions .............................................................................................................................................................
Disposals .............................................................................................................................................................
Cost or valuation at 31 December 2003 ............................................................................................................
Accumulated depreciation at 1 January 2003 .......................................................................................................
Charge to the profit and loss account ...................................................................................................................
Disposals .............................................................................................................................................................
Accumulated depreciation at 31 December 2003 .............................................................................................
Net book value at 31 December 2003 ................................................................................................................
Net book value at 31 December 2002 ..................................................................................................................
Equipment,
fixtures and
fittings
US$m
4
1
(1)
4
(2)
(1)
1
(2)
2
2
274
(c) Non-investment properties
Cost or valuation of freehold and long and short leasehold land and buildings (excluding
investment properties):
At 2003 valuation (2002: at 2002 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
2003
US$m
7,473
1,078
8,551
8,285
(1,930)
6,355
2002
US$m
7,733
827
8,560
7,839
(1,752)
6,087
HSBC values its non-investment properties on an annual basis. In September 2003, 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 2003.
As a result of the revaluation, the net book value of land and buildings (excluding investment properties)
decreased by US$311 million (2002: decrease US$322 million). A deficit of US$292 million (2002: deficit of
US$297 million), net of minority interest of US$19 million (2002: US$25 million) was debited to reserves at
31 December 2003.
Included within ‘Short leasehold land and buildings’ are the following amounts in respect of assets classed as
improvements to buildings, which are carried at depreciated historical cost:
Cost
US$m
Accumulated
depreciation
US$m
At 1 January 2003 .......................................................................................................................
Additions .....................................................................................................................................
Disposals .....................................................................................................................................
Charge for the year ......................................................................................................................
Exchange and other movements ..................................................................................................
At 31 December 2003 ................................................................................................................
Net book value at 31 December 2003 .......................................................................................
Net book value at 31 December 2002 .........................................................................................
768
69
(64)
–
169
942
619
460
(308)
–
–
(20)
5
(323)
(d) Investment properties
The valuation at which investment properties are included in tangible fixed assets, together with the net book
value of these properties calculated under the historical cost basis, is as follows:
Freehold land and buildings ..........................................
Short and long leasehold land and buildings .................
2003
At valuation
US$m
2002
At cost
US$m
At valuation
US$m
310
405
715
315
144
459
80
445
525
At cost
US$m
80
146
226
275
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 57 per cent by value of HSBC’s investment properties subject to revaluation, were valued by
Chesterton Petty Limited 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$41 million (2002: deficit of
US$36 million). A deficit of US$28 million, net of minority interests of US$13 million, has been debited to
reserves at 31 December 2003.
HSBC Holdings had no investment properties at 31 December 2003 or 2002.
(e) HSBC properties leased to customers
HSBC properties leased to customers, none of which was held by HSBC Holdings, included US$499 million at
31 December 2003 (2002: US$502 million) let under operating leases, net of accumulated depreciation of
US$52 million (2002: US$39 million).
(f) Land and buildings occupied for own activities
Net book value ..........................................................................................................................
2003
US$m
7,902
2002
US$m
7,608
(g) Residual values of equipment on operating leases
Included in the net book value of equipment on operating leases are projected residual values at the end of
current lease terms, which will be recovered through re-letting or disposal in the following periods:
Within 1 year ............................................................................................................................
Between 1-2 years .....................................................................................................................
Between 2-5 years .....................................................................................................................
More than 5 years .....................................................................................................................
Total exposure ..........................................................................................................................
2003
US$m
1,262
121
691
1,164
3,238
2002
US$m
559
1,108
290
715
2,672
Residual value risk arises in relation to operating lease transactions to the extent that the values of the leased
assets at the end of the lease terms (the residual values) actually recovered through disposing of or re-letting the
assets at that time, could be different to that projected at the inception of the respective lease. Residual value
exposure is regularly monitored by the business through reviewing the recoverability of the residual value
projected at lease inception. This entails considering the re-lettability and projected disposal proceeds of
operating lease assets at the end of their lease terms. Provision is made to the extent that the carrying values of
leased assets are impaired through residual values not being fully recoverable.
276
26 Investments
(a) HSBC Holdings
Shares in
HSBC
undertakings
US$m
Loans to
HSBC
undertakings
US$m
Other
investments
other than loans
US$m
At 1 January 20031 ........................................................
Additions .......................................................................
Repayments and redemptions ........................................
Write-up of subsidiary (Note 36) ..................................
At 31 December 2003 ..................................................
57,510
2,796
–
20,195
80,501
4,163
–
(375)
–
3,788
484
53
–
–
537
Total
US$m
62,157
2,849
(375)
20,195
84,826
‘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.
On the historical cost basis, shares in HSBC undertakings would have been included as follows:
Cost less provisions of US$191 million (2002: US$191 million) ................................................
2003
US$m
46,531
2002
US$m
43,731
1 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
(b) The principal subsidiary undertakings of HSBC Holdings are:
Country
of incorporation or
registration
Principal
activity
Issued equity
capital
Europe
CCF S.A. (99.99% owned) ......................................................
HFC Bank Limited ..................................................................
HSBC Bank A.S. .....................................................................
HSBC Asset Management (Europe) Limited ...........................
HSBC Asset Finance (UK) Limited ........................................
HSBC Bank Malta p.l.c. (70.03% owned) ...............................
HSBC Bank Middle East Limited ............................................
HSBC Bank plc (directly owned) ............................................
HSBC Guyerzeller Bank AG (93.51% owned)1 .......................
HSBC Insurance Brokers Limited ...........................................
HSBC Life (UK) Limited ........................................................
HSBC Private Bank (Guernsey) Limited
(formerly HSBC Republic Bank (Guernsey) Limited) ........
HSBC Private Bank (Suisse) S.A.
(formerly HSBC Republic Bank (Suisse) S.A. ....................
HSBC Republic Bank (UK) Limited .......................................
HSBC Trinkaus & Burkhardt KGaA
(partnership limited by shares, 73.47% owned) ...................
Hong Kong
Hang Seng Bank Limited (62.14% owned) .............................
The Hongkong and Shanghai Banking Corporation Limited ...
HSBC Insurance (Asia) Limited ..............................................
France
England
Turkey
England
England
Malta
Jersey
England
Switzerland
England
England
Banking
Financial services
Banking
Investment banking
Finance
Banking
Banking
Banking
Private banking
Insurance
Insurance
Guernsey
Private banking
Switzerland
England
Private banking
Private banking
Germany
Banking
Hong Kong
Hong Kong
Hong Kong
Banking
Banking H
Insurance
Retirement benefits
and life assurance
HSBC Life (International) Limited ..........................................
Bermuda
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 (99.94% owned) ......
Egypt
Australia
Malaysia
Taiwan
Banking
Banking
Banking
Investment banking
€372m
£109m
TRL277bn
£142m
£265m
Lm9m
US$331m
£797m
SFr95m
£2.8m
£94m
US$5m2
SFr683m
£112m
€70m
HK$9,559m
HK$16,254m
HK$125m
HK$327m
E£352m
A$641m
RM$114m
TWD788m
277
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
North America
HSBC Bank Canada ................................................................
HSBC Bank USA .....................................................................
HSBC Securities (USA) Inc. ....................................................
HSBC USA Inc. .......................................................................
Household Finance Corporation ...............................................
Household International, Inc. ...................................................
HSBC Mexico S.A. (99.74% owned)
(formerly Banco Internacional S.A.) ....................................
South America
HSBC Bank Argentina S.A. (99.97% owned) ..........................
HSBC Bank Brasil S.A. – Banco Múltiplo ...............................
HSBC Seguros (Brasil) S.A. (97.98% owned) .........................
HSBC La Buenos Aires Seguros S.A. (99.39% owned) ...........
Country
of incorporation or
registration
Principal
activity
Issued equity
capital
Canada
United States
United States
United States
United States
United States
Banking
Banking
Investment banking
Holding company
Financial services
Holding company
C$950m
US$205m
–3
–3
–3
US$1,100m
Mexico
Banking
MXP3,223m
Argentina
Brazil
Brazil
Argentina
Banking
Banking
Insurance
Insurance
Pension fund
management
ARS512m
BRL1,341m
BRL194m
ARS44m
ARS84m
Máxima S.A. AFJP (59.93% owned) .......................................
Argentina
1 Minority interest of 6.49% is held through HSBC Trinkaus & Burkhardt KGaA.
2 HSBC also owns 100% of the issued redeemable preference share capital of US$17 million.
3 Issued equity capital is less than US$1 million.
All the above subsidiaries are included in the consolidation.
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 Máxima 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 Limited which operates mainly in the Middle East, and HSBC Life (International) Limited which
operates mainly in Hong Kong.
(c) Acquisitions
HSBC made the following acquisitions of subsidiary undertakings or business operations in 2003, which were
accounted for on an acquisition basis:
Household International, Inc.
On 28 March 2003, HSBC acquired 100 per cent of the voting common shares of Household International, Inc.
(‘Household’). Household is the holding company of a group of companies offering a variety of consumer
lending products including consumer loans, credit cards, motor vehicle finance and credit insurance to over 50
million customers across the United States, the United Kingdom, Canada and Ireland. The total consideration of
US$14,798 million comprised:
Purchase price:
Value of HSBC shares ...................................................................................................................................................
Fair value of outstanding Household share options .......................................................................................................
Fair value of the equity component of Household 8.875% Adjustable Conversion-Rate Equity Security Units.............
Cash consideration paid by HSBC for Household cumulative preferred stock ..............................................................
Acquisition costs including stamp duty and stamp duty reserve tax ..............................................................................
UK
GAAP
US$m
13,405
112
21
1,120
140
14,798
278
Under UK GAAP, the value of the shares issued is calculated at the date of completion and was the equivalent
of US$10.57 per share. As part of the consideration for the acquisition, HSBC allotted 1,273,297,057 new
ordinary shares of US$0.50. This included approximately 5.3 million shares, which Household had already
committed to repurchase from third parties under forward purchase agreements. These are excluded from the
purchase price.
The acquisition of Household:
– meets HSBC’s stated objective of growing consumer assets;
–
–
–
–
–
improves the geographical balance of HSBC’s earnings, significantly increasing the contribution from
North America;
delivers to HSBC national coverage in the United States for consumer lending, credit cards and credit
insurance with approximately 1,300 branches in 45 states;
creates a global top 10 credit card issuer, and presents a significant opportunity to achieve cost benefits by
consolidating HSBC’s card processing, currently outsourced in a number of countries, with that of
Household;
offers opportunities to extend Household’s business model into countries and territories currently served by
HSBC; and
provides the opportunity for significant funding, cost and revenue synergies.
HSBC’s financial statements include the results of Household’s operations, commencing 29 March 2003. The
assets and liabilities at the date of acquisition and the total consideration paid are set out in the following table:
At date of acquisition
Items in the course of collection from other banks ..........
Loans and advances to banks1 .........................................
Loans and advances to customers ....................................
Debt securities .................................................................
Equity shares ...................................................................
Intangible assets ...............................................................
Tangible fixed assets .......................................................
Other asset categories ......................................................
Deposits by banks ............................................................
Customer accounts ..........................................................
Debt securities in issue ....................................................
Provisions for liabilities and charges ...............................
Subordinated liabilities ....................................................
Other liability categories .................................................
Net assets acquired ..........................................................
Goodwill ..........................................................................
Total consideration including costs of acquisition ...........
1 Includes cash equivalent balances of US$56 million.
Book
value
US$m
840
431
81,559
3,635
697
1,517
521
10,058
(1,915)
(895)
(78,736)
(576)
(1,130)
(5,954)
10,052
Accounting
policy
alignments
US$m
Revaluations
US$m
–
–
20,990
(44)
–
–
–
(58)
–
–
(21,954)
–
–
25
(1,041)
–
–
1,175
44
–
(1,467)
35
570
–
–
(3,859)
(77)
(62)
(580)
(4,221)
Fair
value
US$m
840
431
103,724
3,635
697
50
556
10,570
(1,915)
(895)
(104,549)
(653)
(1,192)
(6,509)
4,790
10,008
14,798
The adjustments in the above table represent the following:
(a) Accounting policy alignments reflecting primarily:
– securitisations treated as sales under US GAAP but treated as financing transactions under UK GAAP;
– timing of expense recognition on loan origination and software costs; and
– deferred taxation relating to these items.
279
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(b) Revaluations, reflecting the recognition of:
– the fair value of financial instruments acquired;
– the fair value of the pension scheme surplus;
– the tax effect of other revaluations;
– the write-off of goodwill and intangibles previously recognised on Household’s balance sheet; and
– the fair value of separable intangibles at the date of acquisition.
The fair values of the assets and liabilities acquired have been determined on a provisional basis pending
completion of the fair value appraisal process.
The pre-acquisition results for Household for the year ended 31 December 2002 and the period ended 28
March 2003 determined under Household’s US GAAP accounting policies as at those dates were as
follows:
Net interest margin ............................................................................................................
Total operating income .....................................................................................................
Operating profit .................................................................................................................
Profit before tax ................................................................................................................
Taxation ............................................................................................................................
Profit after tax ...................................................................................................................
Other gains and losses (Other comprehensive income) .....................................................
US GAAP
2003
1 January-
28 March
US$m
2002
1 January-
31 December
US$m
1,573
2,693
428
428
182
246
52
6,654
10,432
2,253
2,253
695
1,558
38
Other acquisitions
(i) On 17 February 2003, HSBC Insurance (Asia-Pacific) Holdings Limited, a wholly owned subsidiary of
HSBC, acquired 100 per cent of Keppel Insurance Pte Limited for a cash consideration of US$91 million.
Goodwill of US$16 million arose on this acquisition.
(ii) On 4 August 2003, The Hongkong and Shanghai Banking Corporation Limited, a wholly owned
subsidiary of HSBC, acquired 82.19 per cent of Asset Management Technology Korea for a cash
consideration of US$13 million. Goodwill of US$4 million arose on this acquisition. On
10 December 2003, The Hongkong and Shanghai Banking Corporation Limited increased its stake in
Asset Management Technology Korea from 82.19 per cent to 92.96 per cent for a cash consideration of
US$1 million, on which goodwill of US$1 million arose.
(iii) On 3 October 2003, Grupo Financiero Bital S.A., a 99.59 per cent owned subsidiary of HSBC, increased
its stake in Seguros Bital and its subsidiary Pensiones Bital from 51 per cent to 100 per cent for a cash
consideration of US$144 million. Goodwill of US$95 million arose on this acquisition. Prior to becoming
subsidiary undertakings, HSBC’s 51 per cent interests were accounted for as joint ventures. The fair value
of the assets and liabilities acquired have been determined only on a provisional basis pending completion
of the fair value appraisal process.
(iv)
On 24 October 2003, HSBC Bank plc, a wholly owned subsidiary of HSBC, acquired 100 per cent of
Polski Kredyt Bank S.A. for a cash consideration of US$7 million. Goodwill of US$2 million arose on
this acquisition.
(v) On 12 November 2003, Grupo Financiero Bital, S.A., a 99.59 per cent owned subsidiary of HSBC,
acquired 100 per cent of the shares of AFORE Allianz Dresdner S.A. for a cash consideration of
US$175 million. Goodwill of US$127 million arose on this acquisition. The fair value of the assets and
liabilities acquired have been determined only on a provisional basis pending completion of the fair value
appraisal process.
(vi) On 15 December 2003, HSBC Bank Brasil S.A. – Banco Múltiplo, a wholly owned subsidiary of HSBC,
acquired substantially all of Lloyds TSB Group plc’s Brazilian operations for cash consideration of
US$589 million. This comprised 100 per cent of the shares of Banco Lloyds TSB S.A. – Banco Múltiplo,
280
Losango Promotora de Vendas and selected assets and liabilities of the Brazilian branch of Lloyds TSB
plc. Goodwill of US$437 million arose on these acquisitions. The fair value of the assets and liabilities
acquired have been determined only on a provisional basis pending completion of the fair value appraisal
process.
(vii) On 14 April 2003, The Hongkong and Shanghai Banking Corporation Limited, a wholly owned subsidiary
of HSBC, acquired the New Zealand retail banking business of AMP Bank Limited for a cash
consideration of US$16 million. Goodwill of US$16 million arose on this acquisition. This acquisition has
been excluded from the table below.
(viii) On 31 January 2003, CCF acquired the business in respect of two branches of Banque Worms from
Deutsche Bank Group for a cash consideration of US$2 million. Goodwill of US$2 million arose on this
acquisition. This acquisition has been excluded from the table below.
(ix) HSBC undertook certain other minor acquisitions in the year, which involved assets acquired of less than
US$3 million in aggregate, on which goodwill of US$3 million arose, which are excluded from the table
below.
(x)
Increases in stakes in a number of existing subsidiaries are excluded from the table below.
On 20 February 2003, HSBC Bank plc increased its stake in Equator Holdings Limited from 60 per cent
to 100 per cent for a cash consideration of US$7 million. Negative goodwill of US$2 million arose on this
acquisition.
On 31 March 2003, CCF increased its stake in Banque Eurofin from 59.84 per cent to 61.43 per cent for a
cash consideration of US$2 million. Goodwill of US$2 million arose on this acquisition. On 30 June 2003,
CCF further increased its stake to 77.56 per cent for a cash consideration of US$22 million. Goodwill of
US$13 million arose on this acquisition. On 31 July 2003, CCF increased its stake again to 83.94 per cent
for a cash consideration of US$10 million. Goodwill of US$6 million arose on this acquisition.
On 1 September 2003, CCF increased its stake in Banque de Savoie from 98.2 per cent to 99.94 per cent
for a cash consideration of US$2 million. Goodwill of US$2 million arose on this acquisition.
On 24 November 2003, CCF increased its stake in Elysees Fonds from 51 per cent to 100 per cent for a
cash consideration of US$16 million. Goodwill of US$9 million arose on the acquisition.
281
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
The assets and liabilities at the dates of acquisition and the total consideration paid are set out in the following
table:
At date of acquisition
Cash and balances at central banks ................................
Items in the course of collection from other banks..........
Treasury bills and other eligible bills .............................
Loans and advances to banks1 ........................................
Loans and advances to customers ..................................
Debt securities ...............................................................
Equity shares ..................................................................
Tangible fixed assets ......................................................
Other asset categories ....................................................
Deposits by banks ..........................................................
Customer accounts .........................................................
Debt securities in issue ..................................................
Provisions for liabilities and charges .............................
Other liability categories ................................................
Less: carrying value of HSBC’s existing interest in
Seguros Bital (note iii above)
Less: minority interests – equity ....................................
Net assets acquired ........................................................
Goodwill attributable:
Subsidiaries (Note 24) ...............................................
Total consideration including costs of acquisition .........
1 Includes cash equivalent balances of US$15 million.
Book
value
US$m
Accounting
policy
alignments
US$m
Revaluations
US$m
7
2
3
703
890
972
36
31
619
(952)
(720)
(72)
(138)
(885)
496
(52)
(2)
442
–
–
–
–
–
–
–
–
16
–
–
–
(66)
–
(50)
–
–
(50)
–
–
–
–
(17)
(1)
(1)
4
2
2
8
–
(50)
(1)
(54)
–
–
(54)
Fair
value
US$m
7
2
3
703
873
971
35
35
637
(950)
(712)
(72)
(254)
(886)
392
(52)
(2)
338
682
1,020
The adjustments in the above table represent the following:
(a) Accounting policy alignments reflecting primarily:
– HSBC’s criteria for recognising deferred tax.
(b) Revaluations, reflecting the recognition of:
– the fair value of financial instruments acquired; and
– adjustments to provisions and other liabilities.
282
27 Other assets
Bullion ..................................................................................................................................................
Assets, including gains, resulting from off-balance-sheet interest rate, exchange rate
and equities contracts which are marked to market ..........................................................................
Current taxation recoverable .................................................................................................................
Deferred taxation (Note 32) ..................................................................................................................
Long-term assurance assets attributable to policyholders .....................................................................
Other accounts ......................................................................................................................................
2003
US$m
2,230
27,652
190
2,942
15,634
14,480
63,128
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 .....................................................................................................................................
Own shares held ...................................................................................................................................
Total (Note 31) .....................................................................................................................................
2003
US$m
299
8,070
5,301
2,157
93
(286)
15,634
140
15,774
20021
US$m
2,962
21,163
134
1,135
10,264
10,105
45,763
20021
US$m
234
4,436
3,598
2,131
78
(213)
10,264
92
10,356
Own shares held are recognised in the own shares held reserve. They have been included above to reconcile to the
long-term assurance liabilities attributable to policyholders in Note 31.
1 Figures for 2002 have been restated to reflect the adoption of UITF Abstract 37 ‘Purchases and sales of own shares’, details of which
are set out in Note 1.
28 Deposits by banks
Repayable on demand .........................................................................................................................
With agreed maturity dates or periods of notice, by remaining maturity
– 3 months or less but not repayable on demand ............................................................................
– 1 year or less but over 3 months ..................................................................................................
– 5 years or less but over 1 year .....................................................................................................
– over 5 years .................................................................................................................................
Amounts include:
Due to associates .............................................................................................................................
The composition of deposits by banks on a geographical basis is set out below:
Europe .................................................................
Hong Kong ..........................................................
Rest of Asia-Pacific .............................................
North America .....................................................
South America .....................................................
2003
Non
interest-
bearing
US$m
4,803
1,061
1,267
790
16
7,937
Interest-
bearing
US$m
42,697
3,716
5,700
9,564
812
62,489
Total
US$m
47,500
4,777
6,967
10,354
828
70,426
Interest-
bearing
US$m
29,741
1,741
4,674
9,174
655
45,985
2003
US$m
25,066
34,313
5,299
4,192
1,556
70,426
28
2002
Non
interest-
bearing
US$m
4,818
638
688
798
6
6,948
2002
US$m
18,093
27,416
4,804
1,671
949
52,933
214
Total
US$m
34,559
2,379
5,362
9,972
661
52,933
The geographical analysis of deposits is based on the location of the office in which the deposits are recorded and
excludes balances with HSBC companies.
283
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
29 Customer accounts
Repayable on demand .........................................................................................................................
With agreed maturity dates or periods of notice, by remaining maturity
– 3 months or less but not repayable on demand ............................................................................
– 1 year or less but over 3 months .................................................................................................
– 5 years or less but over 1 year .....................................................................................................
– over 5 years .................................................................................................................................
2003
US$m
323,250
210,717
24,061
13,183
1,919
573,130
Amounts include:
Due to joint ventures .......................................................................................................................
Due to associates .............................................................................................................................
439 4
25
The composition of customer accounts on a geographical basis is set out below:
Europe .................................................................
Hong Kong ..........................................................
Rest of Asia-Pacific ............................................
North America ....................................................
South America ....................................................
2003
Non
interest-
bearing
US$m
27,368
11,519
6,790
14,884
1,412
61,973
Interest-
bearing
US$m
215,356
152,505
58,651
79,112
5,533
511,157
Total
US$m
242,724
164,024
65,441
93,996
6,945
573,130
Interest-
bearing
US$m
169,945
141,267
48,390
75,951
3,745
439,298
2002
Non
interest-
bearing
US$m
27,417
7,637
5,782
14,186
1,118
56,140
The geographical analysis of customer accounts is based on the locations of the offices in which the customer
accounts are recorded and excludes balances with HSBC companies.
30 Debt securities in issue
Bonds and medium-term notes, by remaining maturity
– within 1 year ...............................................................................................................................
– between 1 and 2 years .................................................................................................................
– between 2 and 5 years .................................................................................................................
– over 5 years .................................................................................................................................
Other debt securities in issue, by remaining maturity
– 3 months or less ..........................................................................................................................
– 1 year or less but over 3 months .................................................................................................
– 5 years or less but over 1 year .....................................................................................................
– over 5 years .................................................................................................................................
2003
US$m
29,979
16,950
33,578
30,081
110,588
30,115
3,716
8,726
417
153,562
2002
US$m
256,723
202,578
25,793
9,216
1,128
495,438
421
25
Total
US$m
197,362
148,904
54,172
90,137
4,863
495,438
2002
US$m
2,775
379
4,857
846
8,857
14,966
3,833
6,466
843
34,965
284
The increase in debt securities in issue in 2003 is predominantly as a result of the acquisition of Household in
March. The following table analyses Household’s debt securities in issue at 31 December 2003 with original
maturities greater than one year:
Fixed rate:
8.875% Adjustable Conversion-Rate Equity Security Units
Secured financing:
1.14% to 3.99%; due 2004 to 2007...............................................................................................................................
4.00% to 4.99%; due 2004 to 2006...............................................................................................................................
5.00% to 5.49%; due 2004 to 2005...............................................................................................................................
5.50% to 5.99%; due 2004 to 2007...............................................................................................................................
7.00% to 7.49%; due 2004 to 2005...............................................................................................................................
7.50% to 7.99%; due 2004 to 2005...............................................................................................................................
8.00% to 8.99%; due 2004 to 2005...............................................................................................................................
Other fixed rate senior debt:
2.15% to 3.99%; due 2004 to 2008...............................................................................................................................
4.00% to 4.99%; due 2004 to 2023...............................................................................................................................
5.00% to 5.49%; due 2004 to 2023...............................................................................................................................
5.50% to 5.99%; due 2004 to 2023...............................................................................................................................
6.00% to 6.49%; due 2004 to 2033...............................................................................................................................
6.50% to 6.99%; due 2004 to 2033...............................................................................................................................
7.00% to 7.49%; due 2004 to 2032...............................................................................................................................
7.50% to 7.99%; due 2004 to 2032...............................................................................................................................
8.00% to 9.25%; due 2004 to 2012...............................................................................................................................
Variable interest rate:
Secured financings – 1.73% to 6.00%; due 2004 to 2009 .................................................................................................
Other variable interest rate senior debt – 1.17% to 5.00%; due 2004 to 2018...................................................................
Total Household debt securities in issue ..........................................................................................................................
Household’s debt securities in issue are repayable:
– within 1 year.....................................................................................................................................................................
– between 1 and 2 years.......................................................................................................................................................
– between 2 and 5 years.......................................................................................................................................................
– over 5 years ......................................................................................................................................................................
2003
US$m
609
3,665
445
555
411
665
17
18
3,714
8,373
5,052
6,375
9,834
9,442
6,917
7,968
3,636
26,363
8,506
102,565
21,486
20,758
33,399
26,922
102,565
285
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
31 Other liabilities
Short positions in securities
Debt securities:
Government securities ................................................................................................................
Other public sector securities ......................................................................................................
Other debt securities ...................................................................................................................
Treasury bills and other eligible bills ..............................................................................................
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 ....................................................................................................................................
Short positions in debt securities are in respect of securities
– due within 1 year ........................................................................................................................
– due 1 year and over .....................................................................................................................
– listed ...........................................................................................................................................
– unlisted .......................................................................................................................................
Obligations under finance leases fall due
– within 1 year ...............................................................................................................................
– between 1 and 5 years .................................................................................................................
– over 5 years .................................................................................................................................
32 Provisions for liabilities and charges
(a) Deferred taxation
At 1 January 2003 ..........................................................................................................................
Release to profit and loss account (Note 8) ....................................................................................
Movements arising from acquisitions and disposals .......................................................................
Exchange and other movements .....................................................................................................
At 31 December 2003 ................................................................................................................
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 ................................
Other short-term timing differences ............................
HSBC
2003
US$m
1,670
(2,942)
(1,272)
116
1,586
(2,828)
(231)
85
(1,272)
2002
US$m
1,154
(1,135)
19
115
1,243
(1,192)
(179)
32
19
286
2003
US$m
23,881
27
3,856
27,764
935
1,428
30,127
28,534
2,069
585
3,936
15,774
13,644
94,669
1,317
26,447
27,764
23,986
3,778
27,764
25
20
540
585
2002
US$m
17,141
89
2,336
19,566
1,270
1,470
22,306
22,306
1,463
346
3,069
10,356
12,244
72,090
1,890
17,676
19,566
12,121
7,445
19,566
42
22
282
346
HSBC
US$m
19
(37)
(1,201)
(53)
(1,272)
HSBC
Holdings
US$m
93
–
–
–
93
HSBC Holdings
2003
US$m
2002
US$m
93
–
93
–
–
–
–
93
93
93
–
93
–
–
–
–
93
93
There is no material deferred taxation liability not provided for.
At 31 December 2003, there were potential future tax benefits of approximately US$963 million (2002: US$885
million) in respect of trading losses, allowable expenditure charged to the profit and loss account but not yet
allowed for tax, and capital losses which have not been recognised because recoverability of the potential
benefits is not considered likely.
(b) Other provisions for liabilities and charges
Provisions for
pension and
other post-
retirement
obligations
US$m
Provisions for
contingent
liabilities and
commitments
US$m
Insurance
provisions
US$m
Other
provisions
US$m
At 1 January 2003 ...........................
Additional provisions/increase in
provisions1 ..................................
Acquisition of subsidiaries ..............
Provisions utilised ...........................
Exchange and other movements ......
1,038
110
249
(85)
70
At 31 December 2003 ....................
1,382
574
35
–
(86)
212
735
1,412
305
505
(248)
185
2,159
659
309
126
(362)
70
802
Total
US$m
3,683
759
880
(781)
537
5,078
1 The increase in ‘other provisions’ includes unwinding of discounts of US$9 million (2002: US$7 million) in relation to vacant
space provisions and US$18 million (2002: US$5 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$16 million (2002: US$35 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.
Included within ‘Other provisions’ are:
(i) Provisions for onerous property contracts of US$203 million (2002: US$189 million), of which US$28
million (2002: US$110 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 buildings to attract tenants. Uncertainties relate to movements in market rents, the delay
in finding new tenants and the timing of rental reviews.
(ii) Labour, civil and fiscal litigation provisions in HSBC Brazilian operations of US$217 million (2002:
US$135 million), of which US$56 million arose on the acquisition of Lloyds TSB’s Brazilian operations.
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. The timing of settlement of these potential claims is uncertain.
287
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
33 Subordinated liabilities
Undated subordinated loan capital:
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 ..................................................................................................................................
The total subordinated borrowings of HSBC Holdings were as follows:
Amounts owed to third parties
Amounts falling due after more than 1 year:
US$1,400m 5.25% subordinated notes 2012 ................................................................................
€1,000m 5.375% subordinated notes 2012 ..............................................................................
£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 HSBC undertakings
€1,400m 5.3687% fixed/floating subordinated notes 2043 –
HSBC Capital Funding (Euro 2) LP .........................................................................
US$1,350m 9.547% subordinated step-up cumulative notes 2040 –
HSBC Capital Funding (Dollar 1) LP .......................................................................
US$1,250m 4.61% fixed/floating subordinated notes 2043 –
HSBC Capital Funding (Dollar 2) LP .......................................................................
10.176% subordinated step-up cumulative notes 2040 –
US$900m
HSBC Capital Funding (Dollar 1) LP .......................................................................
£500m
HSBC Capital Funding (Sterling 1) LP ....................................................................
€600m
8.208% subordinated step-up cumulative notes 2040 –
8.03% subordinated step-up cumulative notes 2040 –
HSBC Capital Funding (Euro 1) LP .........................................................................
7.525% subordinated loan 2003 –
US$350m
HSBC Finance Nederland B.V . ................................................................................
288
2003
US$m
3,617
5,970
11,610
17,580
5,970
15,227
21,197
858
718
1,863
14,141
17,580
2002
US$m
3,540
5,790
9,041
14,831
5,790
12,581
18,371
956
862
1,957
11,056
14,831
2003
US$m
2002
US$m
1,394
1,257
1,153
999
440
349
378
–
5,970
1,748
1,338
1,237
889
884
749
–
6,845
12,815
1,394
1,045
1,041
999
397
349
315
250
5,790
–
1,350
–
900
806
630
350
4,036
9,826
HSBC Holdings’ dated subordinated loan capital is repayable
– within 1 year ................................................................................................................................
– between 1 and 2 years ..................................................................................................................
– between 2 and 5 years ..................................................................................................................
– over 5 years ..................................................................................................................................
2003
US$m
–
–
–
12,815
12,815
2002
US$m
350
–
–
9,476
9,826
1 The interest rate on the 9.875 per cent subordinated bonds 2018 changes in April 2013 to become the higher of (i) 9.875 per cent or (ii)
the sum of the yield on the relevant benchmark treasury stock plus 2.5 per cent. The bonds may be redeemed in April 2013 at par and
redemption has also been allowed from April 1998, subject to the prior consent of the Financial Services Authority, for an amount
based on the redemption yields of the relevant benchmark treasury stocks.
2 The interest margin on the Subordinated Step-up coupon floating rate notes 2010 increases by 0.5 per cent from April 2005. The notes
are repayable from their step up date at the option of the borrower, subject to the prior consent of the Financial Services Authority.
3 HSBC exercised its option to repay the notes in November 2003.
At 31 December 2003, the other HSBC subordinated borrowings were as follows:
2003
US$m
2002
US$m
US$1,200m
£500m
€600m
US$750m
£350m
£350m
£300m
US$500m
US$500m
US$400m
£225m
US$375m
£200m
US$300m
US$300m
US$300m
US$300m
US$300m
£150m
£150m
US$250m
JP¥24,800m
US$250m
US$200m
US$200m
BRL608m
US$200m
US$200m
US$200m
HK$3,000m
US$350m
Primary capital subordinated undated floating rate notes ..........................................
5.375% subordinated notes 2033 .............................................................................
4.25% Callable subordinated notes 2016 1 .................................................................
Undated floating rate primary capital notes ..............................................................
Callable subordinated variable coupon notes 20172 ..................................................
5% Callable subordinated notes 20233 ......................................................................
6.5% subordinated notes 2023 ..................................................................................
Undated floating rate primary capital notes ..............................................................
7.625% subordinated notes 2006 ..............................................................................
8.625% subordinated notes 2004 ..............................................................................
6.25% subordinated notes 2041 ................................................................................
Subordinated step-up coupon floating rate notes 20094 .............................................
9% subordinated notes 2005 .....................................................................................
10% trust preferred securities ...................................................................................
Undated floating rate primary capital notes (Series 3) ..............................................
6.95% subordinated notes 2011 ................................................................................
7.65% subordinated notes 20257 ...............................................................................
7% subordinated notes 2006 .....................................................................................
9.25% step-up undated subordinated notes5 ..............................................................
8.625% step-up undated subordinated notes6 ............................................................
5.875% subordinated notes 2008 ..............................................................................
Fixed rate (5.0% to 5.5%) Subordinated Loans 2004.................................................
7.20% subordinated debentures 2097 .......................................................................
8.25% trust preferred securities ................................................................................
7.50% trust preferred securities ................................................................................
Subordinated debentures 2008 ..................................................................................
6.625% subordinated notes 2009 ..............................................................................
7.808% capital securities 2026 .................................................................................
8.38% capital securities 2027 ...................................................................................
Subordinated collared (7% to 9%) floating rate notes 2003 ......................................
7.4% subordinated guaranteed notes 2003 ................................................................
Other subordinated liabilities less than US$200m ....................................................
1,200
893
756
750
625
625
532
500
500
400
399
375
357
329
300
300
299
299
268
268
233
232
216
209
207
210
200
200
200
–
–
3,345
1,200
–
–
750
564
–
480
500
500
399
360
374
322
–
300
300
299
299
242
242
230
209
215
–
–
134
200
200
200
385
350
3,327
15,227
12,581
289
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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%.
1 The interest on the 4.25% Callable subordinated notes changes in March 2011 to three-month EURIBOR plus 1.05 per cent.
2 The interest rate 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.
3 The interest on the 5% Callable subordinated notes changes in March 2018 to become the rate per annum which is the sum of the gross
redemption yield of the prevailing five-year UK gilt plus 1.80 per cent.
4 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.
5 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.
6 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.
7 The 7.65 per cent Subordinated notes are repayable at the option of each of the holders in May 2007.
Footnotes 1 to 6 all relate to notes that are repayable at the option of the borrower on the date of the change of the interest rate, and at
subsequent interest rate reset dates and interest payment dates in some cases, subject to the prior consent of the Financial Services
Authority.
34 Minority interests – non-equity
Preference shares issued by subsidiaries:
€1,400m
US$1,350m
US$1,250m
£700m
US$900m
£500m
€600m
US$150m
US$150m
US$125m
CAD125m
US$75m
US$125m
€77m
5.3687% Non-cumulative Step-up Perpetual Preferred Securities 1 .......................
9.547% Non-cumulative Step-up Perpetual Preferred Securities, Series 11 ..........
4.61% Non-cumulative Step-up Perpetual Preferred Securities1 ..........................
5.844% Non-cumulative Step-up Perpetual Preferred Securities2 ........................
10.176% Non-cumulative Step-up Perpetual Preferred Securities, Series 21 ........
8.208% Non-cumulative Step-up Perpetual Preferred Securities1 ........................
8.03% Non-cumulative Step-up Perpetual Preferred Securities 1 ..........................
Depositary shares each representing 25% interest in a share of
adjustable rate cumulative preferred stock, Series D3 .......................................
Cumulative preferred stock4 .................................................................................
Dutch auction rate transferable securities preferred stock, Series A and B5...........
Non-cumulative redeemable class 1 preferred shares, Series A ............................
Cumulative preferred stock ..................................................................................
7.20% Series A cumulative preference shares6 .....................................................
6.35% Series B cumulative preference shares 6 .....................................................
2003
US$m
1,763
1,338
1,250
1,250
889
884
749
150
150
125
96
75
–
–
2002
US$m
–
1,335
–
–
889
801
622
150
150
125
78
75
125
81
8,719
4,431
1 See Step-up Perpetual Preferred Securities, note (a) Guaranteed by HSBC Holdings.
2 See Step-up Perpetual Preferred Securities, note (b) Guaranteed by HSBC Bank.
3 The preferred stock has been redeemable, at the option of HSBC USA Inc., in whole or in part from 1 July 1999 at par.
4 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.
5 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.
6 The preference shares were redeemed by HSBC Republic Holdings (Luxembourg) S.A. in April 2003.
The redemption of all preference shares is subject to the prior consent of the Financial Services Authority and the
relevant local banking regulator.
Step-up Perpetual Preferred Securities
(a) Guaranteed by HSBC Holdings
The six issues of Non-cumulative Step-up Perpetual Preferred Securities (footnote 1) were made by Jersey
290
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 that they would have had if they had purchased
non-cumulative perpetual preference shares of HSBC Holdings.
The Preferred Securities are perpetual, but redeemable in 2014, 2010, 2013, 2030, 2015 and 2012 respectively
at the option of the general partner of the limited partnerships. If not redeemed the distributions payable step-up
and become floating rate or, for the sterling issue, for each successive five-year period, the sum of the then five-
year benchmark UK gilt plus a margin. There are limitations on the payment of distributions if prohibited under
UK banking regulations or other requirements, if a payment would cause a breach of HSBC’s capital adequacy
requirements, or if HSBC Holdings has insufficient distributable reserves (as defined).
HSBC Holdings has covenanted that if it has been prevented under certain circumstances from paying
distributions on the Preferred Securities in full, it will not pay dividends or other distributions in respect of its
ordinary shares, or effect repurchase or redemption of its ordinary shares, until after a distribution has been paid
in full.
If (i) HSBC’s total capital ratio falls below the regulatory minimum ratio required, or (ii) in view of the
deteriorating financial condition of HSBC Holdings, the Directors expect (i) to occur in the near term, then the
Preferred Securities will be substituted by Preference Shares of HSBC Holdings having economic terms which
are in all material respects equivalent to those of the Preferred Securities and the guarantee taken together.
(b) Guaranteed by HSBC Bank
The 5.844% Non-cumulative Step-up Perpetual Preferred Securities were issued by a Jersey limited partnership
and are guaranteed, on a subordinated basis, by HSBC Bank. The proceeds of the issue were on-lent to HSBC
Bank by the limited partnership by an issue of a subordinated note. The Preferred Securities qualify as
innovative tier 1 capital for HSBC and for HSBC Bank on a solo and consolidated basis and, together with the
guarantee, are intended to provide investors with rights to income and capital distributions and distributions
upon liquidation of HSBC Bank that are equivalent to the rights they would have had if they had purchased
non-cumulative perpetual preference shares of HSBC Bank.
The Preferred Securities are perpetual, but redeemable in 2031at the option of the general partner of the limited
partnership. If not redeemed the distributions payable step-up and become floating rate. The same limitations
on the payment of distributions applies to HSBC Bank, as to HSBC, as above, and HSBC Bank has provided a
similar covenant to that provided by HSBC Holdings, also as above.
If (i) any Preferred Securities are outstanding in November 2048, or (ii) the total capital ratio of HSBC Bank on
a solo and consolidated basis falls below the regulatory minimum ratio required, or (iii) in view of the
deteriorating financial condition of HSBC Bank, the Directors expect (ii) to occur in the near term, then the
Preferred Securities will be substituted by Preference Shares of HSBC Bank having economic terms which are
in all material respects equivalent to those of the Preferred Securities and the guarantee taken together.
291
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
35 Called up share capital
Authorised
The authorised ordinary share capital of HSBC Holdings at 31 December 2003 was US$7,500 million (2002 and
2001: US$7,500 million) divided into 15,000 million (2002 and 2001: 15,000 million) ordinary shares of US$0.50
each, and £301,500 (2002 and 2001: £301,500) divided into 301,500 non-voting deferred shares of £1 each.
At 31 December 2003, 2002 and 2001, 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 €0.01 each.
Issued
At 1 January 2003 .............................................................................................................................
Shares issued on acquisition of Household .......................................................................................
Shares issued in connection with the early settlement of Household 8.875 % Adjustable
Conversion-Rate Equity Security Units ........................................................................................
Shares issued under Household share plans ......................................................................................
Shares issued under QUEST .............................................................................................................
Shares issued under other employee option schemes ........................................................................
Shares issued in lieu of dividends .....................................................................................................
Number of
HSBC Holdings
ordinary shares
9,480,820,796
1,273,297,057
51,072,691
26,576
2,200,630
33,858,455
118,742,275
At 31 December 2003 ......................................................................................................................
10,960,018,480
At 1 January 2002 .............................................................................................................................
Shares issued to QUEST ...................................................................................................................
Shares issued under other employee option schemes ........................................................................
Shares issued in lieu of dividends .....................................................................................................
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 employee 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
4,741
637
26
–
1
17
59
5,481
4,678
3
15
45
4,741
4,634
2
5
37
4,678
The 301,500 non-voting deferred shares were in issue throughout 2001, 2002 and 2003 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 2003 ........................................................
31 December 2002 ........................................................
31 December 2001 ........................................................
Number of
HSBC Holdings
ordinary shares
347,007,843
307,522,913
284,267,280
Period of exercise
Exercise price
2004 to 2013
2003 to 2012
2002 to 2011
£2.1727 – £9.642
£2.1727 – £9.642
£2.1727 – £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 in the same ratio as for the acquisition of CCF (13 HSBC Holdings ordinary shares
for each CCF share).
During 2003, 226,000 (2002: 229,066; 2001: 76,799) CCF shares were issued in connection with the exercise of
employee share options and exchanged for 2,938,000 HSBC Holdings ordinary shares (2002: 2,977,858; 2001:
998,387) and 7,000 CCF shares were exercised in connection with the exercise of employee share options and will
292
be exchanged for 91,000 HSBC Holdings ordinary shares on the fifth anniversary of the award. During 2003,
options over 100 (2002 and 2001: nil) CCF shares lapsed. During 2003, 2,500 (2002: 5,000; 2001: 4,000) CCF
shares previously issued in connection with the exercise of employee share options were exchanged for 32,500
(2002: 65,000; 2001: 52,000) HSBC Holdings ordinary shares. At 31 December 2003, 10,000 (2002: 5,500; 2001:
10,500) CCF shares were in issue and will be exchanged for HSBC Holdings ordinary shares on the fifth anniversary
of the award of the options. There are 2,615,660 CCF employee share options exchangeable for HSBC Holdings
ordinary shares outstanding at 31 December 2003 (2002: 2,848,760; 2001: 3,077,826). At 31 December 2003, The
HSBC Holdings Employee Benefit Trust 2001 (No. 1) held 32,775,055 (2002: 35,745,555; 2001: 38,788,413) HSBC
Holdings ordinary shares which may be exchanged for CCF shares arising from the exercise of options.
CCF options (including shares issued but not exchanged) effectively outstanding over HSBC Holdings ordinary
shares under this arrangement are as follows:
Number of CCF
shares exchangeable
for HSBC Holdings
ordinary shares
Period of exercise
Exercise price
31 December 2003 ....................................................
31 December 2002 .....................................................
31 December 2001 .....................................................
2,625,660
2,854,260
3,088,326
2004 to 2010
2003 to 2010
2002 to 2010
€32.78 – €142.5
€32.78 – €142.5
€32.78 – €142.5
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 195 to 197 and summarised below. On exercise of options over shares of Sinopia
Asset Management (‘Sinopia’) the Sinopia shares are exchangeable for HSBC Holdings ordinary shares. The shares
are exchangeable in the ratio of 2.143 HSBC Holdings ordinary shares for each Sinopia share. During 2003, 94,400
(2002: 91,200; 2001: nil) Sinopia shares were issued in connection with the exercise of employee share options and
exchanged for 202,296 (2002: 195,439; 2001: nil) HSBC Holdings ordinary shares. At 31 December 2003, The CCF
Employee Benefit Trust 2001 held 483,253 (2002: 685,549; 2001: nil) HSBC Holdings ordinary shares which may
be exchanged for Sinopia shares arising from the exercise of options.
Sinopia options effectively outstanding over HSBC Holdings ordinary shares under this arrangement are as follows:
Number of Sinopia
shares exchangeable
for HSBC Holdings
ordinary shares
Period of exercise
Exercise price
31 December 2003 .................................................
31 December 2002 ..................................................
31 December 2001 ..................................................
221,500
315,900
432,100
2004 to 2005
2003 to 2005
2002 to 2005
€8.61 – €21.85
€8.61 – €21.85
€6.13 – €21.85
Following the mergers of HSBC Bank France S.A., Banque Eurofin, Banque du Louvre and CCF Banque Privée
Internationale on 1 October 2003 options held over shares of Banque Eurofin, Banque du Louvre and CCF Banque
Privée Internationale were converted into options over the shares of the merged entity, HSBC Private Bank France.
On exercise of these options HSBC Private Bank France shares will be exchanged for HSBC Holdings ordinary
shares in the ratio of 1.83 HSBC Holdings shares for each HSBC Private Bank France share. At 31 December 2003,
1,125 HSBC Private Bank France shares were in issue and will be exchanged for HSBC Holdings ordinary shares on
the fourth anniversary of the awards of the options. At 31 December 2003, The CCF Employee Benefit Trust 2001
held 1,900,000 HSBC Holdings ordinary shares which may be exchanged for HSBC Private Bank France shares
arising from the exercise of options.
293
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
HSBC Private Bank France options (including shares issued but not exchanged) effectively outstanding over HSBC
Holdings ordinary shares under this arrangement are as follows:
Number of HSBC
Private Bank France
shares exchangeable
for HSBC Holdings
ordinary shares
Period of exercise
Exercise price
31 December 2003 .................................................
1,359,810
2004 to 2012
€10.84 – €22.22
On the acquisition of Banque Hervet in 2001, Banque Hervet shares were held in a Plan d’Epargne Entreprise on
behalf of Banque Hervet employees to vest and be released to employees over a 5 year period. It was agreed to
exchange these Banque Hervet shares, on vesting, for HSBC Holdings ordinary shares in the ratio of 3.46 HSBC
Holdings ordinary shares for each Banque Hervet share. During 2003, 8,303 (2002 and 2001: nil) Banque Hervet
shares were released in connection with the vesting of interests in the Plan d’Epargne Entreprise and exchanged for
28,729 (2002 and 2001: nil) HSBC Holdings ordinary shares. At 31 December 2003, The CCF Employee Benefit
Trust 2001 held 767,971 (2002: 796,700; 2001:796,700) HSBC Holdings ordinary shares which may be exchanged
for Banque Hervet shares from the vesting of interests.
Banque Hervet options effectively outstanding over HSBC Holdings ordinary shares under this arrangement are as
follows:
31 December 2003 .................................................
31 December 2002...................................................
31 December 2001...................................................
221,956
230,259
230,259
Number of Banque Hervet shares exchangeable
for HSBC Holdings ordinary shares
Period of vesting
2004 – 2006
2003 – 2006
2003 – 2006
Following the acquisition of Household on 28 March 2003, all outstanding options and equity-based awards over
Household common shares were converted into rights to receive HSBC Holdings ordinary shares in the same ratio
as the share exchange offer for Household (2.675 HSBC Holdings ordinary shares for each Household common
share) and the exercise prices per share adjusted accordingly. During 2003, options over 4,755,951 HSBC Holdings
ordinary shares were exercised with HSBC Holdings ordinary shares delivered from The HSBC (Household)
Employee Benefit Trust 2003 to satisfy the exercise of these options. At 31 December 2003, The HSBC
(Household) Employee Benefit Trust 2003 held 12,444,049 HSBC Holdings ordinary shares which may be used to
satisfy the exercise of these options and equity-based awards under the Household share plans.
Options and equity-based awards outstanding over HSBC Holdings ordinary shares under the Household share plans
are as follows:
Number of
HSBC Holdings
ordinary shares
Period of exercise
Exercise price
31 December 2003 .......................................................
48,312,607
2004 to 2021
nil – US$25.40
Prior to its acquisition by HSBC Holdings, Household issued 8.875% Adjustable Convertible-Rate Equity Security
Units (‘Units’) consisting of a contract under which the holder agreed to purchase, for US$25, Household common
shares on 15 February 2006, with an option for early settlement. The Units remained outstanding following the
acquisition of Household, with the purchase contracts of the Units becoming contracts to purchase HSBC Holdings
ordinary shares instead. If a holder of Units elects to settle early, the holder will receive 2.6041 HSBC Holdings
ordinary shares per Unit. Units exercised at maturity, 15 February 2006, will entitle the holder to receive a number
of shares based on the market value of HSBC Holdings ordinary shares at the time, up to a maximum of 3.1249
HSBC Holdings ordinary shares for each Unit. During 2003, 51,072,691 HSBC Holdings ordinary shares were
issued in connection with the early settlement of 19,612,420 Units.
294
The maximum number of Units outstanding over HSBC Holdings ordinary shares are as follows:
Number of Units
exchangeable for
HSBC Holdings
ordinary shares
Period of exercise
Exercise price
31 December 2003 ......................................................
2,050,540
2004 to 2006
US$8.00 – US$9.60
The total obligations at 31 December 2003 to deliver HSBC Holdings ordinary shares under all of the above
arrangements and the HSBC Holdings Restricted Share Plan is 496,414,669. The total number of shares at 31
December 2003 held by employee benefit trusts that may be used to satisfy such obligations to deliver HSBC
Holdings ordinary shares is 110,770,974.
36 Reserves
Share premium account
At 1 January 2003 .............................................................................................
Shares issued to QUEST ...................................................................................
Shares issued under other employee option schemes ........................................
Shares issued in lieu of dividends ......................................................................
On redemption of the equity component of Household 8.875 per cent
Adjustable Conversion-Rate Equity Security Units ......................................
Scrip dividend expenses ....................................................................................
At 31 December 2003 ......................................................................................
Own shares held reserve
At 1 January 2003 .............................................................................................
Own shares acquired to meet share awards and share option awards ................
Own shares released on vesting of share awards and exercise of options ..........
Net purchases and sales of own shares for market making purposes .................
At 31 December 2003 ......................................................................................
Other reserves
Reserve in respect of obligations under CCF and Household share options:
At 1 January 2003 .........................................................................................
Reserve in respect of obligations under Household share options .................
Reserve in respect of obligations under the equity component of Household
8.875 per cent Adjustable Conversion-Rate Equity Security Units ...........
On exercise of CCF share options .................................................................
On exercise of Household share options .......................................................
On redemption of the equity component of Household 8.875 per cent
Adjustable Conversion-Rate Equity Security Units ..................................
At 31 December 2003 ..................................................................................
HSBC
US$m
3,647
26
311
(59)
482
(1)
4,406
(646)
(301)
162
(138)
(923)
439
112
21
(41)
(28)
(18)
485
HSBC
Holdings
US$m
Associates
US$m
3,647
26
311
(59)
482
(1)
4,406
(540)
(266)
153
–
(653)
439
112
21
(41)
(28)
(18)
485
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
295
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Merger reserve:
At 1 January 2003 .........................................................................................
On acquisition of Household .........................................................................
At 31 December 2003 ..................................................................................
Total other reserves ...............................................................................................
Revaluation reserves
Investment property revaluation reserve:
At 1 January 2003 .........................................................................................
Unrealised deficit on revaluation of land and buildings ................................
Transfer to revaluation reserve ......................................................................
Realisation on disposal of properties ............................................................
Exchange and other movements ...................................................................
At 31 December 2003 ..................................................................................
Revaluation reserve:
At 1 January 2003 .........................................................................................
Realisation on disposal of properties ............................................................
Transfer from investment property revaluation reserve ................................
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 2003 ..................................................................................
Total revaluation reserves .................................................................................
Profit and loss account
At 1 January 2003 ..............................................................................................
Retained profit/(loss) for the year .....................................................................
Revaluation reserve realised on disposal of properties ......................................
Arising on shares issued in lieu of dividends ....................................................
Transfer of depreciation to revaluation reserve .................................................
Amortisation of shares in restricted share plans ................................................
Exchange and other movements ........................................................................
At 31 December 2003 ......................................................................................
HSBC
US$m
8,290
12,768
21,058
21,543
247
(38)
(1)
(2)
1
207
1,707
(28)
1
(292)
(29)
–
49
1,408
1,615
33,340
2,242
30
1,423
29
19
5,268
42,351
HSBC
Holdings
US$m
Associates
US$m
–
–
–
485
–
–
–
–
–
–
36,883
–
–
–
–
20,195
(37)
57,041
57,041
6,595
(319)
–
1,423
–
14
–
7,713
–
–
–
–
44
(10)
–
–
–
34
6
–
–
–
–
–
2
8
42
243
80
–
–
–
–
1
324
Included within the HSBC profit and loss account reserve at 31 December 2003 are retained losses of US$118
million (2002: US$136 million; 2001: US$119 million) attributable to interests in joint ventures.
Share premium account
At 1 January 2002 .............................................................................................
Shares issued to QUEST ...................................................................................
Shares issued under other employee option schemes ........................................
Shares issued in lieu of dividends .....................................................................
At 31 December 2002 .......................................................................................
Own shares held reserve
At 1 January 2002 .............................................................................................
Own shares acquired to meet share awards and share option awards ................
Own shares released on vesting of share awards and exercise of options ..........
At 31 December 2002 .......................................................................................
HSBC1
US$m
3,373
65
254
(45)
3,647
(686)
(5)
45
(646)
HSBC
Holdings1
US$m
Associates
US$m
3,373
65
254
(45)
3,647
(571)
(11)
42
(540)
–
–
–
–
–
–
–
–
–
296
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 reserve........................
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 .................
Exchange and other movements ....................................................................
At 31 December 2002 ...................................................................................
Total revaluation reserves ......................................................................................
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 .................................................
Amortisation of shares in restricted share plans
Exchange and other movements ........................................................................
At 31 December 2002 .......................................................................................
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 .......................................................................................
Own shares held reserve
At 1 January 2001 .............................................................................................
Own shares acquired to meet share awards and share option awards ................
Own shares released on vesting of share awards and exercise of options ..........
Net purchases and sales of own shares for market making purposes .................
At 31 December 2001 .......................................................................................
HSBC1
US$m
480
(41)
439
8,290
8,729
269
(23)
7
(4)
(2)
247
2,002
(29)
(297)
(37)
–
68
1,707
1,954
27,282
1,238
33
37
1,023
(7)
19
3,715
33,340
HSBC1
US$m
3,305
37
68
(37)
3,373
(723)
(66)
15
88
(686)
HSBC
Holdings1
US$m
Associates
US$m
480
(41)
439
–
439
–
–
–
–
–
–
32,436
(4)
–
–
4,553
(102)
36,883
36,883
5,292
266
4
–
1,023
–
10
–
6,595
–
–
–
–
–
46
(1)
–
–
(1)
44
6
–
–
–
–
–
6
50
255
(11)
–
–
–
–
–
(1)
243
HSBC
Holdings1
US$m
Associates
US$m
3,305
37
68
(37)
3,373
(573)
(15)
17
–
(571)
–
–
–
–
–
–
–
–
–
–
297
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Other reserves
Reserve in respect of obligations under CCF share options:
At 1 January 2001 .........................................................................................
On exercise of CCF share options .................................................................
At 31 December 2001 ...................................................................................
Merger reserve:
At 1 January and 31 December 2001 ............................................................
Total other reserves ...............................................................................................
Revaluation reserves
Investment property revaluation reserve:
At 1 January 2001 .........................................................................................
Unrealised deficit on revaluation of land and buildings ................................
Transfer from revaluation reserve .................................................................
Exchange and other movements ...................................................................
At 31 December 2001 ...................................................................................
Revaluation reserve:
At 1 January 2001 .........................................................................................
Realisation on disposal of properties ............................................................
Unrealised deficit on revaluation of properties .............................................
Transfer of depreciation from profit and loss account reserve ......................
Transfer to investment property revaluation reserve .....................................
Net increase in attributable net assets of subsidiary undertakings .................
Exchange and other movements ...................................................................
At 31 December 2001 ...................................................................................
Total revaluation reserves .....................................................................................
Profit and loss account
At 1 January 2001 .............................................................................................
Retained profit/(loss) for the year .....................................................................
Revaluation reserve realised on disposal of properties ......................................
Arising on shares issued in lieu of dividends ....................................................
Transfer of depreciation to revaluation reserve .................................................
Amortisation of shares in restricted share plans .................................................
Exchange and other movements ........................................................................
At 31 December 2001 .......................................................................................
HSBC1
US$m
496
(16)
480
8,290
8,770
289
(23)
8
(5)
269
2,322
(7)
(227)
(54)
(8)
–
(24)
2,002
2,271
27,018
525
7
866
54
25
(1,213)
27,282
HSBC
Holdings1
US$m
Associates
US$m
496
(16)
480
–
480
–
–
–
–
–
32,165
–
(3)
–
–
247
27
32,436
32,436
5,604
(1,185)
–
866
–
7
–
5,292
–
–
–
–
–
53
(5)
–
(2)
46
10
–
–
–
(4)
–
–
6
52
189
39
–
–
–
27
255
1 Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and
38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1.
The accumulated foreign exchange translation adjustment as at 31 December 2003 increased HSBC’s reserves by
US$5,729 million (2002: increased by US$411 million; 2001: reduced by US$3,370 million).
Cumulative goodwill amounting to US$5,138 million (2002: 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 Household in 2003 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 in respect of CCF and US$12,768 million in
respect of Household was transferred to a merger reserve, as a consequence of which, most of the net asset value
(including goodwill) of Household is reflected in the reserve of HSBC Holdings in the revaluation 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.
298
The HSBC Qualifying Employee Share Ownership Trust was established in 1999 to satisfy options exercised by UK
participants of the HSBC Holdings Savings-Related Share Option Plan. During 2003, HSBC QUEST Trustee (UK)
Limited, the corporate trustee of the QUEST, subscribed at market value for 2,200,630 ordinary shares at a total cost
of US$27 million (2002: US$68 million; 2001: US$39 million). HSBC provided US$nil (2002: US$nil; 2001:
US$nil) for this purpose.
During 2003, 3,175,232 ordinary shares (2002: 9,564,355 shares; 2001: 8,774,315 shares) were transferred from the
QUEST to employees who exercised under the HSBC Holdings Savings-Related Share Option Plan. US$27 million
(2002: US$68 million; 2001: US$39 million) was received from the share option plan participants. The price paid by
option holders ranged from £4.5206 to £6.7536 (2002: £3.059 to £6.7536; 2001: £1.806 to £6.7536) per ordinary
share of US$0.50.
At 31 December 2003, the trust held 514,293 ordinary shares (2002: 1,488,895 shares; 2001: 4,905,939 shares) of
US$0.50 with a market value of US$8,062,509 (2002: 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 UITF Abstract 17 (revised 2000) ‘Employee share schemes’.
HSBC Own shares held reserve
Included within the Own shares held reserve are:
(a) US$33 million (2002: US$29 million; 2001: US$29 million) of shares held by HSBC Life International.
(b) US$134 million (2002: US$nil; 2001: US$nil) of shares held by CCF S.A. for market making activities.
(c) US$653 million (2002: US$540 million; 2001: US$571 million) of shares held by HSBC Holdings as explained
below.
(d) US$58 million (2002: US$56 million; 2001 US$76 million) of ordinary 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 216 to 219. At 31 December 2003, such trusts held
7,562,628 ordinary shares (2002: 5,029,157 ordinary shares; 2001: 3,455,821 ordinary shares).
(e) US$2 million (2002: US$nil; 2001 US$nil) of ordinary 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 2003, such trusts held 100,556 (2002: nil; 2001: nil) ordinary shares.
(f) US$43 million (2002: US$21 million; 2001: US$10 million) of ordinary 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 2003, such trusts held 3,151,224 ordinary shares (2002:
1,482,249 ordinary shares; 2001: 796,700 ordinary shares).
HSBC Holdings Own shares held reserve
Included within the HSBC Holdings Own shares held reserve are:
(a) US$64 million, of HSBC Holdings’ own shares (2002: US$43 million; 2001: US$32 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 216 to 219. At 31 December 2003, the trust held 6,391,497 ordinary
shares (2002: 4,664,315 ordinary shares; 2001: 3,230,422 ordinary shares) with a market value at that date of
US$100,191,651 (2002: US$51,610,678; 2001: US$37,735,716) in respect of these conditional awards.
(b) US$455 million of HSBC Holdings’ own shares (2002: US$497 million; 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 2003, the
trust held 32,775,055 ordinary shares (2002: 35,745,555 ordinary shares; 2001:38,788,413 ordinary shares) with
a market value of US$513,774,295 (2002: US$395,524,816; 2001: US$453,101,339) in respect of these option
holders.
299
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(c) US$134 million of HSBC Holdings’ own shares (2002: US$nil; 2001: US$nil) held in trust which may be used
in respect of the exercise of Household share options as detailed in note 35. At 31 December 2003, the trust held
12,444,051 ordinary shares (2002: US$nil; 2001: US$nil) with a market value of US$195,070,109 (2002:
US$nil; 2001: US$nil) in respect of these option holders.
37 Analyses of assets and liabilities
(a) Assets subject to sale and repurchase transactions
Total assets subject to sale and repurchase transactions ..............................................................
(b) Assets leased to customers
Loans and advances to customers ................................................................................................
Tangible fixed assets – equipment on operating leases (Note 25(a)) ...........................................
2003
US$m
22,299
2003
US$m
10,519
4,048
14,567
2002
US$m
20,061
2002
US$m
9,003
3,264
12,267
The cost of assets acquired during 2003 for letting to customers under finance leases and hire purchase contracts
by HSBC amounted to US$4,370 million (2002: US$3,866 million).
(c) Assets charged as security for liabilities
HSBC has pledged assets as security for liabilities included under the following headings:
Deposits by banks .......................................................................................................................
Customer accounts ......................................................................................................................
Debt securities in issue ...............................................................................................................
Other liabilities ...........................................................................................................................
Amount of liability secured
2003
US$m
1,487
3,709
33,584
3,122
41,902
2002
US$m
1,661
4,204
1,437
2,884
10,186
The amount of assets pledged to secure these liabilities is included under the following headings:
Treasury bills & other eligible securities ....................................................................................
Loans and advances to customers ...............................................................................................
Debt securities ............................................................................................................................
Other ...........................................................................................................................................
Amount of assets pledged
2003
US$m
1,489
37,441
71,690
828
111,448
2002
US$m
1,673
2,514
39,126
1,144
44,457
300
(d) HSBC Holdings
HSBC Holdings’ investment in and indebtedness of and to subsidiary undertakings was as follows:
Investments in subsidiary undertakings1 ......
Amounts owed by HSBC undertakings .......
Subordinated liabilities to HSBC
undertakings ............................................
Other amounts owed to HSBC
Bank
US$m
54,336
11,883
–
undertakings ............................................
1,603
2003
Non-bank
US$m
26,165
4,739
6,845
4,576
Total
US$m
80,501
16,622
6,845
6,179
Bank
US$m
50,752
9,965
–
1,311
20022
Non-bank
US$m
6,758
3,422
4,036
5,151
Total
US$m
57,510
13,387
4,036
6,462
1 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.
2 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
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, equity indices, commodity
prices or credit spreads. They include futures, forwards, swap and options transactions in the foreign exchange,
interest rate, equity, credit and commodity markets. Transactions are negotiated directly with customers, with
HSBC acting as a counterparty, or can be dealt through exchanges.
(i) Nature and terms of derivatives
The following outlines the nature and terms of the most common types of derivatives used by HSBC.
Exchange rate contracts
Forward foreign exchange contracts are agreements to buy or sell fixed amounts of currency at agreed
rates of exchange on a specified future date.
Cross currency swaps are agreements 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.
301
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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.
Equity swaps are bilateral agreements to transfer the risk and returns on an equity in exchange for a stream
of payments, typically interest.
Credit contracts
Credit default swaps are bilateral agreements to transfer credit risks between counterparties. Under the
agreement, the party buying protection makes one or more payments to the party selling protection during
the life of the swap in exchange for an undertaking by the seller to make a payment to the buyer following a
credit event.
Commodity contracts
Commodity derivatives include exchange traded and over the counter contracts involving commodities
and base metals.
(ii) 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, takes positions in the market and acts as an
intermediary between a broad range of users, structuring deals to produce risk management products to suit
individual customer needs. As a result, HSBC can accumulate significant open positions in derivatives
portfolios. These positions are managed constantly to ensure that they are within acceptable risk levels, with
offsetting deals being undertaken to achieve this where necessary. As well as acting as a dealer, HSBC also
uses derivatives (principally interest rate swaps) in the management of its own asset and liability portfolios
and structural positions.
(iii) 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).
302
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 of 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 significant counterparties, notwithstanding the fact that
HSBC deals only with the most creditworthy counterparties.
The credit risk profile generated by the use of credit derivatives has an additional dimension. Where HSBC
purchases protection, credit risk arises through the cost of replacing the contract as set out above and it is
managed and reduced in the same way as for other derivative contracts. Selling protection through credit
derivatives gives rise to additional credit risk. This credit risk arises as a direct consequence of the
obligation of HSBC as the protection seller to make a payment to the protection buyer following a credit
event on a reference name. HSBC manages the credit risk with regards to reference names by including any
such exposures arising from credit derivatives within its overall credit limits structure. In addition the
trading of credit derivatives is restricted to a small number of offices within the major centres which in
management’s view have the control infrastructure and market skills to effectively manage the credit risk
inherent in the products.
(iv) 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.
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
2003
2002
Spot and forward foreign exchange .......................
Currency swaps, futures and options purchased ....
Currency options written .......................................
Other contracts ......................................................
Contract
amount
US$m
792,845
286,283
94,623
14,209
Total exchange rate contracts ................................
1,187,960
Interest rate swaps .................................................
Interest rate futures, forward rate agreements,
and options purchased .......................................
Interest rate options written ...................................
2,170,050
717,114
267,294
Total interest rate contracts ...................................
3,154,458
Equities, futures and options purchased ................
Equities options written .........................................
Other contracts ......................................................
Total equities contracts .........................................
Credit derivatives ..................................................
Netting ..................................................................
24,721
15,171
10,950
50,842
49,613
Total ......................................................................
4,442,873
1 Third party contracts only.
Replacement
cost1
US$m
14,813
8,822
–
668
24,303
21,364
3,654
–
25,018
1,927
–
1,319
3,246
622
(28,578)
24,611
Contract
amount
US$m
668,784
183,070
57,300
7,496
916,650
1,381,970
431,777
151,420
1,965,167
24,582
18,762
5,250
48,594
17,405
2,947,816
Replacement
cost1
US$m
11,096
3,927
–
132
15,155
23,442
2,316
–
25,758
1,593
–
329
1,922
272
(23,822)
19,285
2003
2002
Mark-to-
market values
at year end
US$m
Average
mark-to-
market values
for the year
US$m
Mark-to-
market values
at year end
US$m
Average
mark-to-
market values
for the year
US$m
Exchange rate
Interest rate
Equities
Credit derivatives
Total
assets ...............................
liabilities .........................
assets ...............................
liabilities .........................
assets ...............................
liabilities .........................
assets ...............................
liabilities .........................
assets ...............................
liabilities .........................
Netting ..................................................................
26,961
(27,226)
25,394
(26,824)
3,252
(2,503)
623
(559)
56,230
(57,112)
28,578
20,893
(22,033)
33,913
(32,622)
2,405
(2,802)
409
(346)
57,620
(57,803)
26,146
16,591
(17,055)
26,197
(26,873)
1,923
(1,993)
274
(207)
44,985
(46,128)
23,822
13,148
(13,572)
18,560
(18,173)
1,836
(2,354)
200
(84)
33,744
(34,183)
15,073
The above amounts are stated after deducting cash collateral meeting the offset criteria of FRS 5 as follows:
Offset against assets ..............................................
Offset against liabilities..........................................
3,454
1,221
1,992
327
(v) 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 the 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.
304
Spot and forward foreign exchange .........................
Currency swaps, futures and options purchased ......
Total exchange rate contracts ..................................
Interest rate swaps ...................................................
Interest rate futures, forward rate agreements and
options purchased ................................................
Total interest rate contracts .....................................
Equities, futures and options purchased ..................
Other contracts ........................................................
Total equities contracts ............................................
1 Third party contracts only.
2003
2002
Contract
amount
US$m
67,370
40,130
107,500
358,491
27,288
385,779
91
71
162
Replacement
cost 1
US$m
142
1,342
1,484
906
3
909
59
–
59
Contract
amount
US$m
59,422
17,900
77,322
248,553
19,420
267,973
90
228
318
Replacement
cost 1
US$m
24
77
101
902
16
918
–
–
–
The table below summarises the carrying value and mark-to-market value of derivative contracts held for
risk management purposes. Mark-to-market values for assets and liabilities arising from derivatives held for
non-trading purposes are determined in the same way as those set out for trading derivatives above,
including internal positions.
2003
Carrying
value
US$m
Mark-to-
market values
US$m
2002
Carrying
value
US$m
Mark-to-
market values
US$m
Exchange rate
Interest rate
assets ...............................
liabilities ..........................
assets ...............................
liabilities ..........................
Equities
assets ...............................
3,658
(3,147)
1,824
(2,312)
4
4,297
(3,495)
5,814
(4,136)
59
325
(1,224)
1,532
(617)
7
456
(1,533)
5,975
(3,834)
–
(vi) Concentrations of credit risk
Concentrations of credit risk exist if a number of counterparties are engaged in similar activities or activities
in the same region, or have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other conditions.
The following table analyses the replacement cost of all third party exchange rate, interest rate, equities and
credit derivative contracts with positive mark-to-market gains by category of counterparty and by maturity,
including netting where available at 31 December 2003 and 31 December 2002. The table shows that the
replacement cost of derivatives is predominantly with banks and under five years.
Less than
1 year
US$m
1-5 years
US$m
Governments ......................................
Banks .................................................
Non-bank financial institutions:
Exchanges1 .....................................
Other ..............................................
Other sectors ......................................
Total 2003 .........................................
Total 2002 ..........................................
72
13,363
607
2,846
2,674
19,562
14,731
99
16,457
194
4,060
2,444
23,254
19,622
1 Exchanges with margining requirements.
Residual maturity
Over
5 years
US$m
232
9,339
–
2,407
847
12,825
9,773
Netting
US$m
(287)
(23,074)
(3)
(3,670)
(1,544)
(28,578)
(23,822)
2003
Total
US$m
116
16,085
798
5,643
4,421
27,063
2002
Total
US$m
74
12,751
333
4,326
2,820
20,304
305
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
The following table analyses the maturity profile of the notional principal values of third party derivative
contracts outstanding as at 31 December 2003.
Exchange rate, interest rate, equities and
credit derivative contracts:
Exchanges1 .............................................
Other contracts .......................................
Less than
1 year
US$m
1-5 years
US$m
350,572
1,864,929
152,643
1,206,386
Total 2003 ..................................................
2,215,501
1,359,029
Total 2002 ...................................................
1,628,339
848,947
Residual maturity
Over
5 years
US$m
–
604,778
604,778
271,130
2003
Total
US$m
2002
Total
US$m
503,215
3,676,093
4,179,308
268,693
2,479,723
2,748,416
1 Exchanges with margining requirements.
(b) Other financial instruments
(i) Financial instruments held for trading purposes:
Assets
Treasury bills and other eligible bills ..................................................................................
Loans and advances to banks and customers ......................................................................
Debt securities ....................................................................................................................
Equity shares ......................................................................................................................
Liabilities
Short positions in securities ................................................................................................
Debt securities in issue .......................................................................................................
Deposits by banks and customer accounts ..........................................................................
Mark-to-market values
2003
US$m
4,592
57,448
74,806
7,489
2002
US$m
5,239
33,829
67,805
3,380
144,335
110,253
30,127
3,881
46,167
80,175
22,306
5,038
34,549
61,893
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:
Assets
Treasury bills and other eligible bills.......................
Debt securities .........................................................
Equity shares ...........................................................
Liabilities
Debt securities in issue ............................................
Subordinated liabilities............................................
Non-equity minority interests ..................................
2003
Carrying
value
US$m
Mark-to-
market values
US$m
15,781
130,761
5,390
151,932
130,510
19,825
8,719
159,054
15,794
132,421
6,217
154,432
131,430
20,219
8,715
160,364
2002
Carrying
value
US$m
12,900
107,836
4,284
125,020
14,580
16,411
4,431
35,422
Mark-to-
market values
US$m
12,909
109,839
4,757
127,505
14,877
17,598
4,420
36,895
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.
306
The techniques used in the two tables above 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 2003 were US$7,669
million (2002: US$4,302 million) and the unrecognised losses were US$5,157 million (2002: US$3,261
million).
Unrecognised gains of US$4,767 million and unrecognised losses of US$2,713 million are expected to be
recognised in 2004.
Of the gains and losses included in the profit and loss account in 2003, US$1,683 million of gains and US$1,389
million of losses were unrecognised at 1 January 2003.
(d) Liquidity management
HSBC’s liquidity management process is discussed in the ‘Financial Review’ section on page 166 from the
paragraph under the heading ‘Liquidity and funding management’ to the bullet point ‘maintaining liquidity and
funding contingency plans’.
307
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
39 Memorandum Items
(a) HSBC
Contingent liabilities and commitments
Contingent liabilities
Acceptances and endorsements ..................
Guarantees and assets pledged as
collateral security:
guarantees and irrevocable
letters of credit .......................................
Other contingent liabilities .........................
Commitments
Documentary credits and short-term
trade-related transactions .......................
Forward asset purchases and forward
forward deposits placed .........................
Undrawn note issuing and revolving
underwriting facilities ............................
Undrawn formal standby facilities, credit
lines and other commitments to lend
– over 1 year ..........................................
– 1 year and under .................................
2003
Credit
equivalent
amount
US$m
Contract
amount
US$m
Risk-
weighted
amount
US$m
Contract
amount
US$m
2002
Credit
equivalent
amount
US$m
Risk-
weighted
amount
US$m
5,412
3,327
3,194
4,711
2,785
2,580
54,439
29
59,880
7,511
1,437
671
56,252
362,893
428,764
42,792
29
46,148
2,750
1,437
605
28,126
–
32,918
31,110
28
34,332
1,616
618
66
27,461
–
29,761
46,527
17
51,255
6,131
1,464
85
41,734
176,215
225,629
36,333
17
39,135
2,221
1,463
43
20,867
–
24,594
28,190
15
30,785
1,157
268
42
19,536
–
21,003
The table above gives the nominal principal amounts, credit equivalent amounts and risk-weighted amounts of
off-balance-sheet transactions. The credit equivalent amounts are calculated for the purposes of deriving the
risk-weighted amounts. These are assessed in accordance with the Financial Services Authority’s guidelines
which implement the 1988 Basel Capital Accord on capital adequacy and depend on the status of the
counterparty and the maturity characteristics.
Contingent liabilities and commitments are credit-related instruments which include acceptances, letters of
credit, guarantees and commitments to extend credit. The contractual amounts represent the amounts at risk
should the contract be fully drawn upon and the client default. Since a significant portion of guarantees and
commitments are expected to expire without being drawn upon, the total of the contract amounts is not
representative of future liquidity requirements.
Guarantees
HSBC provides guarantees and similar undertakings on behalf of both third party customers and other entities
within the HSBC Group. These guarantees are generally provided in the normal course of HSBC’s banking
business.
The principal types of guarantees provided, and the maximum potential amount of future payments which
HSBC could be required to make, at 31 December 2003 were as follows:
308
At 31 December 2003
At 31 December 2002
Guarantees in
favour of third
parties
US$m
Guarantees by
HSBC Holdings
in favour of
other HSBC
Group entities
US$m
Guarantees in
favour of third
parties
US$m
Guarantees by
HSBC Holdings
in favour of
other HSBC
Group entities
US$m
Guarantee type
Acceptances and endorsements1 ........................................
Financial guarantees2 .........................................................
Standby letters of credit which are financial guarantees3 ...
Other direct credit substitutes4 ...........................................
Performance bonds5 ...........................................................
Bid bonds5 .........................................................................
Standby letters of credit related to particular transactions5
Other transaction-related guarantees5 ................................
Other items ........................................................................
Balance as at 31 December ................................................
5,412
21,573
2,371
7,188
4,780
290
4,345
13,881
40
59,880
47
41,775
26
34
372
45
343
179
–
42,821
4,711
15,980
3,144
7,002
4,464
191
4,075
11,659
29
51,255
48
35,370
87
16
209
34
122
169
–
36,055
1 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.
2 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 support by the relevant regulatory authority.
3 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.
4 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.
5 Performance bonds, bid bonds, standby letters of credit and other transaction-related guarantees are undertakings whereby 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.
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.
Approximately one half of the above guarantees have a term of less than one year. Guarantees with a term of
more than one year are subject to HSBC’s annual credit review process.
When HSBC has given a guarantee on behalf of a customer, it will have the right to recover from that customer
any amounts paid under the guarantee. At 31 December 2003, HSBC held collateral amounting to some US$9.8
billion (2002: US$9.4 billion) which could be used to recover amounts paid under the above guarantees.
A provision is recognised only where HSBC considers that it is more likely than not that an obligation exists
under the guarantees. At 31 December 2003, HSBC had established the following provisions in respect of its
obligations under outstanding guarantees:
Acceptances and endorsements ...........................................................................................................
Guarantees and items pledged as collateral security ............................................................................
Other items ..........................................................................................................................................
2003
US$m
92
82
25
2002
US$m
37
106
32
HSBC believes that the amortised fair value of its liabilities under other guarantees for which no provision has
been established is broadly equivalent to the amount of deferred income received but not yet recognised for such
guarantees, which at 31 December 2003 amounted to US$32 million.
309
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(b) Geographic concentration of contingent liabilities and commitments
HSBC has the following geographic concentrations of exposure to contingent liabilities and commitments.
These are allocated on the basis set out in Note 47:
Contract amounts
Contingent liabilities
Europe
US$m
Hong Kong
US$m
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America
US$m
2003 ...........................................
2002 ...........................................
27,460
23,697
Commitments
2003 ...........................................
133,475
2002 ...........................................
89,569
16,036
12,886
58,098
56,810
7,686
6,550
40,029
30,743
8,302
7,680
192,779
45,484
396
442
4,383
3,023
Total
US$m
59,880
51,255
428,764
225,629
40 Market risk management
HSBC’s market risk management process is discussed in the ‘Financial Review’ section on pages 168 to 169 from
the paragraph under the heading ‘Market risk management’ to the paragraph ended ‘impact of extreme events on the
market risk exposures of HSBC’.
(a) Trading VAR
VAR is a technique that estimates the potential losses that could occur on risk positions taken due to movements
in market rates and prices over a specified time horizon and to a given level of confidence.
Trading VAR for HSBC for 2003 was:
Total trading activities ...................................................
Foreign exchange trading positions ................................
Interest rate trading positions .........................................
Equities trading positions ...............................................
Trading VAR for HSBC for 2002 was:
Total trading activities ...................................................
Foreign exchange trading positions ................................
Interest rate trading positions .........................................
Equities trading positions ...............................................
At
31 December
2003
US$m
101.0
52.8
64.9
15.9
At
31 December
2002
US$m
71.6
12.9
63.2
27.1
Minimum
during
the year
US$m
48.7
1.2
43.1
10.9
Minimum
during
the year
US$m
66.7
2.4
60.2
20.4
Maximum
during
the year
US$m
234.1
184.4
124.7
23.1
Maximum
during
the year
US$m
130.0
47.0
120.9
40.6
Average
for the
year
US$m
102.4
48.7
70.0
16.9
Average
for the
year
US$m
93.9
21.0
82.4
29.0
310
(b) Interest rate sensitivity gap table
In accordance with FRS 13, the table below discloses the mismatch of the dates on which interest receivable on
assets and interest payable on liabilities are next reset to market rate on a contractual basis or, if earlier, the dates
on which the instruments mature. Actual reset dates may differ from contractual dates owing to prepayments
and the exercise of options. In addition, contractual terms may not be representative of the behaviour of assets
and liabilities. For these reasons, HSBC manages its interest rate risk on a different basis from that presented
below, taking into account the behavioural characteristics of the relevant assets and liabilities.
At 31 December 2003
More
than
three
months
but not
more
than six
months
US$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
Assets
Treasury bills and
other eligible bills ....
11,447
2,275
1,383
Loans and advances
to banks ...................
76,899
5,291
4,377
Loans and advances
694
425
–
–
15,799
4,592
20,391
427
2,954
90,373
26,800
117,173
to customers ............. 357,183
24,249
19,006
61,618
26,804
9,469
498,329
30,648
528,977
Debt securities and
equity shares ............
Other assets .................
53,442
962
8,489
–
12,751
–
40,477
–
15,722
–
5,425
117,092
136,306
118,054
82,295
31,020
218,601
149,074
Total assets .................. 499,933
40,304
37,517
103,214
42,953
134,940
858,861
175,355
1,034,216
Liabilities
Deposits by banks .......
(40,448)
Customer accounts ...... (455,677)
Debt securities in
issue ......................... (124,552)
(243)
Other liabilities ............
Loan capital and
(3,159)
(12,275)
(1,190)
(9,022)
(3,510)
(9,168)
(1,126)
(1,398)
(5,474)
(54,942)
(54,907)
(542,482)
(15,519)
(30,648)
(70,426)
(573,130)
(5,406)
(6)
(3,683)
(10)
(14,379)
(280)
(1,653)
(46)
(8)
(70,802)
(149,681)
(71,387)
(3,881)
(59,160)
(153,562)
(130,547)
other subordinated
liabilities ..................
Minority interests and
shareholders’ funds ..
Internal funding of
(4,916)
(1,487)
(678)
(1,871)
(12,245)
–
(21,197)
–
(21,197)
–
–
–
–
–
(83,531)
(83,531)
(1,823)
(85,354)
the trading book .......
59,643
1,387
2,392
1,346
(22)
(422)
64,324
(64,324)
–
Total liabilities ............ (566,193)
(20,946)
(12,191)
(27,862)
(16,490)
(215,179)
(858,861)
(175,355)
(1,034,216)
Off-balance-sheet
items ........................
(41,162)
(9,525)
15,536
27,430
7,721
–
Interest rate
sensitivity gap .......... (107,422)
9,833
40,862
102,782
34,184
(80,239)
Cumulative interest
rate sensitivity gap ... (107,422)
(97,589)
(56,727)
46,055
80,239
–
–
–
–
–
–
–
–
–
–
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.
311
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
At 31 December 20021
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
Assets
Treasury bills and
other eligible bills ...
8,857
2,054
1,479
Loans and advances
to banks ..................
67,568
3,772
4,243
512
438
Loans and advances
–
–
12,902
5,239
18,141
262
2,409
78,692
16,804
95,496
to customers ...........
241,504
19,510
12,335
39,781
18,249
3,940
335,319
17,025
352,344
Debt securities and
equity shares ...........
Other assets ................
42,693
1,902
7,661
–
Total assets ................
362,524
32,997
11,493
–
29,550
30,959
–
71,690
15,046
–
33,557
4,357
81,169
112,209
83,071
71,185
26,159
183,394
109,230
91,875
622,193
136,412
758,605
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)
the trading book ......
43,481
3,127
891
2,681
–
–
–
–
–
50
(56,311)
(56,311)
(2,007)
(58,318)
(459)
49,771
(49,771)
–
Total liabilities ...........
(396,714)
(13,930)
(13,922)
(16,952)
(11,745)
(168,930)
(622,193)
(136,412)
(758,605)
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
–
–
–
–
–
–
–
–
–
–
1 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
(c) Assets and liabilities denominated in foreign currency
Assets
Denominated in US dollars ..........................................................................................................
Denominated in currencies other than US dollars ........................................................................
2003
US$m
390,911
643,305
Total assets ..................................................................................................................................
1,034,216
Liabilities
Denominated in US dollars ..........................................................................................................
Denominated in currencies other than US dollars ........................................................................
386,418
647,798
Total liabilities .............................................................................................................................
1,034,216
20021
US$m
250,352
508,253
758,605
238,090
520,515
758,605
1 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
312
(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
page 170.
HSBC’s structural currency exposures as at the year-end were as follows:
Currency of structural exposure
Euros ............................................................................................................................................
Sterling .........................................................................................................................................
Hong Kong dollars .......................................................................................................................
Swiss francs1 ................................................................................................................................
Canadian dollars ...........................................................................................................................
Mexican pesos ..............................................................................................................................
Brazilian reais ..............................................................................................................................
Chinese renminbi .........................................................................................................................
Turkish lira....................................................................................................................................
Malaysian ringgit .........................................................................................................................
UAE dirham .................................................................................................................................
Saudi riyals ..................................................................................................................................
Indian rupees ................................................................................................................................
Singapore dollars ..........................................................................................................................
Australian dollars .........................................................................................................................
Korean won...................................................................................................................................
Taiwanese dollars..........................................................................................................................
Maltese lira ...................................................................................................................................
Indonesia rupiah ...........................................................................................................................
Thai baht ......................................................................................................................................
Cyprus pounds .............................................................................................................................
Chilean pesos ...............................................................................................................................
Egyptian pounds ...........................................................................................................................
Argentine pesos2 ..........................................................................................................................
Others, less than US$100 million .................................................................................................
Total .............................................................................................................................................
Net structural currency exposures
2002
US$m
2003
US$m
17,785
15,249
11,881
1,548
1,743
1,536
1,106
813
547
521
520
516
498
440
407
307
272
254
180
173
138
153
143
(297)
570
57,003
15,090
10,903
10,172
1,133
1,008
1,998
605
127
441
537
495
423
300
462
381
269
195
196
141
159
125
226
178
(323)
170
45,411
1 This is shown after deducting borrowings taken out in Swiss francs in order to hedge the net investments of US$741 million (2002:
US$661 million).
2 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.
313
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
41 Reconciliation of operating profit to net cash flow from operating activities
Operating profit ..................................................................................................
Change in prepayments and accrued income ......................................................
Change in accruals and deferred income ............................................................
Interest on finance leases and similar hire purchase contracts ............................
Interest on subordinated loan capital ..................................................................
Depreciation and amortisation ............................................................................
Amortisation of discounts and premiums ...........................................................
Provisions for bad and doubtful debts ................................................................
Loans written off net of recoveries .....................................................................
Provisions for liabilities and charges ..................................................................
Provisions utilised ..............................................................................................
Amounts written off fixed asset investments ......................................................
Net cash inflow from trading activities ..............................................................
Change in items in the course of collection from other banks ............................
Change in treasury bills and other eligible bills ..................................................
Change in loans and advances to banks ..............................................................
Change in loans and advances to customers .......................................................
Change in other securities ..................................................................................
Change in other assets ........................................................................................
Change in deposits by banks ..............................................................................
Change in customer accounts .............................................................................
Change in items in the course of transmission to other banks ............................
Change in debt securities in issue .......................................................................
Change in other liabilities ..................................................................................
Elimination of exchange differences1 .................................................................
Net cash inflow from operating activities ...........................................................
2003
US$m
12,297
(6,825)
6,015
38
958
2,847
338
6,093
(6,846)
759
(781)
66
14,959
(135)
650
(14,537)
(77,614)
(10,518)
(4,302)
14,628
76,085
(251)
13,976
14,443
(4,709)
22,675
2002
US$m
9,035
355
190
36
862
2,044
(8)
1,321
(1,931)
879
(1,331)
324
11,776
124
715
16,550
(35,332)
2,543
(7,055)
(3,505)
31,161
716
2,935
(1,580)
(2,622)
16,426
20012
US$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)
(20,395)
(1,856)
(8,546)
19,799
(827)
(1,437)
9,179
1,424
12,827
1 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 details cannot be determined without unreasonable expense.
2 Figures for 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
314
42 Changes in financing during the year
Subordinated
loan capital
US$m
Preference
shares1
US$m
Ordinary
shares
US$m
Share
premium
US$m
Own
shares held2
US$m
Balance at 1 January 2003.........................
Shares issued in lieu of dividends .............
Acquisition of subsidiaries ........................
Issued during the year ...............................
Repaid during the year ..............................
Net purchases and sales of own shares
during the year ......................................
Net cash inflow/(outflow) from
financing ...............................................
Exchange and other movements ................
Balance at 31 December 2003 .................
Balance at 1 January 2002 ........................
Shares issued in lieu of dividends .............
Acquisition of subsidiaries .......................
Issued during the year ...............................
Repaid during the year ..............................
Net purchases and sales of own shares
during the year .....................................
Net cash inflow/(outflow) from
financing ..............................................
Exchange and other movements ...............
Balance at 31 December 2002 ..................
Balance at 1 January 2001 ........................
Shares issued in lieu of dividends .............
Acquisition of subsidiaries .......................
Issued during the year ...............................
Repaid during the year ..............................
Net purchases and sales of own shares
during the year .....................................
Net cash inflow/(outflow) from
financing ..............................................
Exchange and other movements ...............
Balance as at 31 December 2001 ..............
18,371
–
1,192
2,358
(1,464)
–
894
740
21,197
15,480
–
214
4,105
(1,923)
–
2,182
495
18,371
16,222
–
24
456
(965)
–
(509)
(257)
15,480
4,431
–
–
4,104
(206)
–
3,898
390
8,719
4,291
–
–
–
(50)
–
(50)
190
4,431
5,171
–
–
–
(825)
–
(825)
(55)
4,291
4,741
59
637
44
–
–
44
–
5,481
4,678
45
–
18
–
–
18
–
4,741
4,634
37
–
7
–
–
7
–
4,678
3,647
(59)
–
801
–
–
801
17
4,406
3,373
(45)
–
319
–
–
319
–
3,647
3,305
(37)
–
105
–
–
105
–
3,373
(646)
–
–
–
–
(258)
(258)
(19)
(923)
(686)
–
–
–
–
59
59
(19)
(646)
(723)
–
–
–
–
62
62
(25)
(686)
1 Preference shares in issue are in subsidiary undertakings (Note 34).
2 Figures for 2001 and 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
315
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
43 Analysis of cash
HSBC is required to maintain deposits with central banks as a result of government regulations in the territories in
which it operates. As at 31 December 2003, these amounted to US$2,765 million (2002: US$2,154 million; 2001:
US$2,030 million).
(a) Changes in cash during the year
Balance at 1 January .....................................................................................
Net cash inflow/(outflow) before the effect of foreign
exchange movements ................................................................................
Effect of foreign exchange movements .........................................................
Balance at 31 December ...............................................................................
2003
US$m
26,870
4,020
2,060
32,950
(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 ........................................................................
2003
US$m
7,661
25,289
32,950
2002
US$m
22,224
3,242
1,404
26,870
2002
US$m
7,659
19,211
26,870
2001
US$m
24,338
(1,706)
(408)
22,224
2001
US$m
6,185
16,039
22,224
44 Litigation
HSBC, through a number of its subsidiary undertakings, is named in and is defending legal actions in various
jurisdictions arising from its normal business. None of these proceedings is regarded as material litigation.
45 Capital commitments
Expenditure contracted for ....................................................................................................................
Expenditure authorised by Directors but not contracted for ..................................................................
46 Lease commitments
At the year-end, annual commitments under non-cancellable operating leases were:
Leasehold land and buildings:
Operating leases which expire
– within 1 year .................................................................................................................................
– between 1 and 5 years...................................................................................................................
– over 5 years...................................................................................................................................
Equipment:
Operating leases which expire
– within 1 year .................................................................................................................................
– between 1 and 5 years...................................................................................................................
2003
US$m
1,551
680
2,231
2002
US$m
1,238
106
1,344
2003
US$m
2002
US$m
109
360
223
692
21
14
35
60
174
171
405
15
15
30
316
47 Segmental analysis
As HSBC is not required to disclose turnover, no segmental analysis of turnover is included. Turnover of non-
banking businesses is included in other operating income. The allocation of earnings reflects the benefit of
shareholders’ funds to the extent that these are actually allocated to businesses in the segment by way of intra-HSBC
capital and funding structures. Common costs are included in segments on the basis of the actual recharges made.
(a) By geographical region
Geographical information has been classified by the location of the principal operations of the subsidiary
undertaking, or in the case of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc,
HSBC Bank Middle East Limited, Household International, Inc. and HSBC Bank USA operations, by the
location of the branch responsible for reporting the results or for advancing the funds. Due to the nature of
HSBC’s structure, the analysis of profits and net assets shown below includes intra-HSBC items between
geographical regions. The ‘Rest of Asia-Pacific’ geographical segment includes the Middle East, India and
Australasia.
Total assets:
At 31 December 2003
At 31 December 20021
At 31 December 20011
Europe .........................................................
Hong Kong ..................................................
Rest of Asia-Pacific ....................................
North America ............................................
South America ............................................
US$m
425,312
197,487
98,081
289,800
12,549
%
41.6
19.3
9.6
28.3
1.2
1,023,229
100.0
Add: Hong Kong Government certificates
of indebtedness .......................................
10,987
Total assets ..................................................
1,034,216
Net assets:
US$m
341,569
180,433
76,635
142,032
8,491
749,160
9,445
758,605
%
45.6
24.1
10.2
19.0
1.1
100.0
US$m
297,066
175,652
62,355
138,738
13,097
686,908
8,637
695,545
%
43.2
25.6
9.1
20.2
1.9
100.0
Europe .........................................................
Hong Kong ..................................................
Rest of Asia-Pacific ....................................
North America ............................................
South America ............................................
Total net assets ............................................
At 31 December 2003
At 31 December 20021
At 31 December 20011
US$m
35,102
11,302
5,145
22,044
880
74,473
%
47.1
15.2
6.9
29.6
1.2
100.0
US$m
30,681
9,682
3,811
7,613
(22)
51,765
%
59.3
18.7
7.3
14.7
–
100.0
US$m
28,042
9,591
3,369
4,906
(220)
45,688
%
61.4
21.0
7.4
10.7
(0.5)
100.0
1 Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’,
and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1.
317
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
North
South
America1 America
US$m
US$m
Profit on ordinary activities before tax:
Year ended 31 December 2003
Interest receivable....................................
Interest payable........................................
Net interest income ..................................
Dividend income......................................
Fees and commissions receivable ............
Fees and commissions payable ................
Dealing profits .........................................
Other operating income............................
Operating income.....................................
Operating expenses (excluding
goodwill amortisation).........................
Goodwill amortisation ............................
Operating expenses .................................
Operating profit before provisions ...........
Provisions for bad and doubtful debts......
Provisions for contingent liabilities
and commitments.................................
Loss from foreign currency
redenomination in Argentina ...............
Amounts (written off)/written back on
fixed asset investments ........................
Operating profit .......................................
Share of operating (loss)/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.....
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............................
Operating income.....................................
Operating expenses (excluding
goodwill amortisation).........................
Goodwill amortisation ............................
Operating expenses .................................
Operating profit before 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/(loss)..............................
Share of operating loss in joint ventures .
Share of operating profit in associates .....
Gains on disposal of investments and
Europe
US$m
14,023
(6,483)
7,540
150
6,242
(1,050)
960
1,253
15,095
(9,529)
(758)
(10,287)
4,808
(874)
(33)
–
(64)
3,837
(127)
47
212
3,969
12,646
(6,303)
6,343
211
5,397
(869)
508
1,025
12,615
(7,878)
(651)
(8,529)
4,086
(569)
(15)
–
(267)
3,235
(26)
3
Hong
Kong
US$m
5,293
(1,392)
3,901
31
1,584
(201)
321
596
6,232
(2,212)
(3)
(2,215)
4,017
(400)
(6)
–
31
Rest of
Asia-
Pacific
US$m
3,363
(1,623)
1,740
4
1,006
(201)
421
120
3,090
(1,741)
(35)
(1,776)
1,314
(85)
(1)
–
(2)
16,285
(4,508)
11,777
34
3,434
(758)
340
932
15,759
(6,947)
(643)
(7,590)
8,169
(4,676)
3
–
(9)
3,642
1,226
3,487
–
18
68
3,728
5,968
(1,835)
4,133
25
1,449
(185)
133
495
6,050
(2,139)
–
(2,139)
3,911
(246)
(14)
–
(10)
3,641
–
11
–
149
16
1,391
3,174
(1,567)
1,607
3
897
(173)
364
83
2,781
(1,528)
(33)
(1,561)
1,220
(89)
18
–
(2)
1,147
–
113
11
6
109
3,613
5,796
(3,064)
2,732
24
1,205
(221)
161
333
4,234
(2,675)
(146)
(2,821)
1,413
(300)
3
–
(9)
1,107
(2)
8
tangible fixed assets.............................
288
58
–
125
Profit/(loss) on ordinary activities
before tax.............................................
3,500
3,710
1,260
1,238
318
Intra-
HSBC
items
US$m
(712)
712
–
–
(141)
141
–
(422)
(422)
422
–
422
–
–
–
–
–
–
–
–
–
–
(740)
740
–
–
(120)
120
–
(326)
(326)
326
–
326
–
–
–
–
–
–
–
–
–
–
Total
US$m
39,968
(14,370)
25,598
222
12,560
(2,166)
2,178
2,680
41,072
(21,082)
(1,450)
(22,532)
18,540
(6,093)
(35)
(9)
(106)
12,297
(116)
221
414
12,816
28,595
(13,135)
15,460
278
9,245
(1,421)
1,313
1,720
26,595
(14,954)
(854)
(15,808)
10,787
(1,321)
(39)
(68)
(324)
9,035
(28)
135
508
9,650
1,716
(1,076)
640
3
435
(97)
136
201
1,318
(1,075)
(11)
(1,086)
232
(58)
2
(9)
(62)
105
–
1
9
115
1,751
(1,106)
645
15
417
(93)
147
110
1,241
(1,060)
(24)
(1,084)
157
(117)
(31)
(68)
(36)
(95)
–
–
37
(58)
Europe Hong Kong
US$m
US$m
Rest of
Asia-
Pacific
US$m
North
America
US$m
South
America
US$m
Intra-
HSBC
items
US$m
Total
US$m
Year ended 31 December 2001
Interest receivable ...................................
Interest payable .......................................
14,508
(8,945)
8,971
(4,806)
3,612
(2,130)
7,000
(4,550)
2,306
(1,241)
(1,136)
1,136
35,261
(20,536)
Net interest income .................................
Dividend income.....................................
Fees and commissions receivable............
Fees and commissions payable................
Dealing profits ........................................
Other operating income...........................
Operating income....................................
Operating expenses (excluding
goodwill amortisation) .......................
Goodwill amortisation ............................
Operating expenses ................................
Operating profit before 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/(loss).............................
Share of operating loss in joint ventures .
Share of operating profit in associates.....
Gains/(losses) on disposal of investments
and tangible fixed assets .....................
Profit/(loss) on ordinary activities
5,563
116
5,013
(803)
708
1,022
11,619
(7,288)
(632)
(7,920)
3,699
(441)
(30)
–
(90)
3,138
(79)
42
441
4,165
26
1,358
(186)
218
436
6,017
(2,140)
–
(2,140)
3,877
(197)
6
–
(18)
3,668
–
17
198
1,482
3
810
(129)
395
58
2,619
(1,397)
(8)
(1,405)
1,214
(172)
2,450
29
1,068
(155)
346
207
3,945
(2,540)
(145)
(2,685)
1,260
(300)
1,065
12
624
(130)
18
356
1,945
(1,497)
(14)
(1,511)
434
(927)
(43)
(582)
–
–
(11)
988
(5)
99
6
–
(520)
(5)
373
(7)
5
132
(1)
(1,014)
–
1
(3)
before tax ............................................
3,542
3,883
1,088
503
(1,016)
–
–
(117)
117
–
(257)
(257)
257
–
257
–
–
–
–
–
–
–
–
–
–
14,725
186
8,756
(1,286)
1,685
1,822
25,888
(14,605)
(799)
(15,404)
10,484
(2,037)
(649)
(520)
(125)
7,153
(91)
164
774
8,000
1 See page 106 for the impact of the acquisition Household on the Personal Financial Services customer group in North America.
(b) By Customer Groups
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 customer group and the following profits analysis includes
amounts within each customer group and then eliminates any duplication in a separate column.
In 2003, North America implemented a revised funds transfer pricing system to transfer interest rate risk from
the business units to Corporate, Investment Banking and Markets. The figures for 2002 have been restated to
reflect the impact of transfer pricing had it been in place on a similar basis. The effect on the figures for 2001 is
immaterial.
319
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Total
Personal
Financial
Services1
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Other
US$m
Year ended 31 December 2003
Net interest income .............
Dividend income .................
Net fees and commissions ...
Dealing profits ....................
Other operating income .......
Operating income ................
16,943
18
4,842
133
1,539
23,475
4,196
3
2,256
118
597
7,170
3,899
161
2,315
1,764
810
8,949
574
3
822
209
50
(14)
37
159
(46)
892
1,658
1,028
Intra-
HSBC
items
US$m
–
–
–
–
(1,208)
(1,208)
Total
US$m
25,598
222
10,394
2,178
2,680
41,072
Operating expenses .............
(12,288)
(4,041)
(4,650)
(1,431)
(1,330)
1,208
(22,532)
Operating profit/(loss)
before provisions ............
11,187
3,129
4,299
227
Provisions for bad and
doubtful debts .................
(5,633)
(274)
(297)
(19)
14
(53)
–
(18)
5,517
11
46
30
–
–
2,869
–
20
6
–
(91)
3,858
(127)
80
225
5,604
2,895
4,036
(302)
113
25
(9)
6
(167)
–
75
92
–
–
–
–
–
–
–
–
–
–
–
18,540
(6,093)
(35)
(9)
(106)
12,297
(116)
221
414
12,816
(2)
(2)
–
(3)
220
–
–
61
281
Provisions for contingent
liabilities and
commitments ..................
Loss from foreign currency
redenomination in
Argentina ........................
Amounts (written off)/written
back on fixed asset
investments .....................
Operating profit/(loss) .........
Share of operating profit/
(loss) in joint ventures ....
Share of operating profit
in associates ....................
Gains on disposal of
investments and tangible
fixed assets .....................
Profit on ordinary activities
before tax ........................
Segment total assets ............
Hong Kong Government
certificates of
indebtedness ...................
Total assets .........................
352,104
128,093
462,998
54,510
25,524
1,023,229
10,987
1,034,216
74,473
Total
US$m
8,289
10,194
(3,776)
(4,575)
1,846
Net assets ............................
30,092
11,268
19,529
8,098
5,486
1 The impact of the acquisition of Household on Personal Financial Services is set out below:
Net interest income ..............................................................................................................
Operating income .................................................................................................................
Operating expenses ..............................................................................................................
Provisions for bad and doubtful debts ..................................................................................
Profit on ordinary activities before tax .................................................................................
Europe
US$m
438
636
(322)
(180)
134
North
America
US$m
7,851
9,558
(3,454)
(4,395)
1,712
Total assets ..........................................................................................................................
Net assets .............................................................................................................................
10,526
1,997
134,857
13,923
145,383
15,920
320
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Year ended 31 December 2002
Net interest income .............
Dividend income .................
Net fees and commissions ...
Dealing profits ....................
Other operating income .......
7,429
6
2,979
50
788
Operating income ................
11,252
3,835
6
1,934
107
463
6,345
3,700
230
2,164
1,008
610
7,712
Private
Banking
US$m
549
2
623
137
102
Other
US$m
(53)
34
124
11
905
1,413
1,021
Intra-
HSBC
items
US$m
–
–
–
–
(1,148)
(1,148)
Total
US$m
15,460
278
7,824
1,313
1,720
26,595
Operating expenses .............
(7,159)
(3,321)
(4,135)
(1,251)
(1,090)
1,148
(15,808)
Operating profit/(loss)
before provisions .............
4,093
3,024
3,577
Provisions for bad and
doubtful debts .................
(857)
(269)
(184)
Provisions for contingent
liabilities and
commitments ..................
Loss from foreign currency
redenomination in
Argentina ........................
Amounts (written off)/written
back on fixed asset
investments .....................
Operating profit/(loss) .........
Share of operating profit/
(loss) in joint ventures .....
Share of operating profit/
(loss) in associates ..........
Gains on disposal of
investments and tangible
fixed assets ......................
Profit/(loss) on ordinary
(42)
19
–
(2)
–
3
3,192
2,777
(23)
17
19
3
15
51
12
–
(109)
3,296
(7)
46
317
activities before tax .........
3,205
2,846
3,652
162
(5)
(21)
–
(22)
114
(1)
(10)
46
149
(69)
(6)
(7)
(68)
(194)
(344)
–
67
75
(202)
171,496
113,525
394,542
48,346
21,251
Segment total assets ............
Hong Kong Government
certificates of
indebtedness ....................
Total assets1 ........................
Net assets1 ...........................
12,101
10,290
16,852
7,366
5,156
–
–
–
–
–
–
–
–
–
–
10,787
(1,321)
(39)
(68)
(324)
9,035
(28)
135
508
9,650
749,160
9,445
758,605
51,765
1 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
321
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 &
Markets
US$m
Private
Banking
US$m
Other
US$m
Year ended 31 December 2001
Net interest income .............
Dividend income .................
Net fees and commissions ...
Dealing profits ....................
Other operating income ......
6,828
5
2,877
53
806
Operating income ................
10,569
3,821
7
1,751
103
422
6,104
3,419
138
2,140
1,411
568
7,676
577
4
602
124
87
80
32
100
(6)
996
1,394
1,202
Intra-
HSBC
items
US$m
–
–
–
–
(1,057)
(1,057)
Total
US$m
14,725
186
7,470
1,685
1,822
25,888
Operating expenses .............
(6,656)
(3,273)
(4,124)
(1,168)
(1,240)
1,057
(15,404)
Operating profit/(loss)
before provisions .............
3,913
2,831
3,552
Provisions for bad and
doubtful debts ..................
Provisions for contingent
liabilities and
commitments ...................
Loss from foreign currency
redenomination in
Argentina .........................
Amounts written off fixed
asset investments .............
Operating profit/(loss) .........
Share of operating profit/
(loss) in joint ventures .....
Share of operating profit in
associates .........................
Gains on disposal of
investments and tangible
fixed assets .......................
Profit/(loss) on ordinary
(767)
(662)
(17)
–
(5)
16
–
(1)
3,124
2,184
(99)
44
210
4
28
10
(34)
(14)
–
(72)
3,432
4
33
354
226
24
(38)
(598)
(46)
(588)
–
(2)
(520)
(45)
202
(1,789)
–
–
5
–
59
195
activities before tax .........
3,279
2,226
3,823
207
(1,535)
Segment total assets ............
Hong Kong Government
certificates of
indebtedness ....................
Total assets1 ........................
Net assets1 ...........................
138,908
101,002
374,282
52,135
20,581
9,309
9,108
15,046
6,195
6,030
–
–
–
–
–
–
–
–
–
–
10,484
(2,037)
(649)
(520)
(125)
7,153
(91)
164
774
8,000
686,908
8,637
695,545
45,688
1 Figures for 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
(c) By country of domicile
HSBC Holdings is registered and domiciled in the United Kingdom.
(i) Profit on ordinary activities before tax in the United Kingdom
Operating income .................................................................................
Profit on ordinary activities before tax .................................................
2003
US$m
10,969
3,474
2002
US$m
9,504
3,239
2001
US$m
8,394
3,147
Operating income includes intra-HSBC income of US$359 million (2002: US$418 million; 2001: US$517
million). Profit on ordinary activities before tax includes profit arising on intra-HSBC transactions of
US$376 million (2002: US$406 million; 2001: US$488 million).
322
(ii) Geographical analysis of tangible fixed assets
United Kingdom ...................................................................................
Other.....................................................................................................
Total .....................................................................................................
2003
US$m
7,213
8,535
15,748
2002
US$m
6,240
7,941
14,181
2001
US$m
5,270
8,251
13,521
Other includes assets held in Hong Kong amounting to US$3,877 million (2002: US$4,180 million; 2001:
US$4,589 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$274,198 in credit card
transactions (2002: US$367,665) and US$25,776,133 in guarantees
(2002: US$14,538,793)) ........................................................................
Officers
Loans and credit card transactions (including US$377,611 in credit card
transactions (2002: US$169,025) and US$224,769 in guarantees
(2002: US$nil))......................................................................................
2003
2002
Number
US$m
Number
US$m
82
353
145
931
32
38
28
18
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:
− Note 16: amounts due from joint ventures;
− Note 21: interests in joint ventures and principal joint ventures; and
− Note 29: amounts due to joint ventures.
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.
323
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Pension funds
At 31 December 2003, US$14.7 billion (2002: US$9.8 billion) of HSBC pension fund assets were under
management by HSBC companies of which US$1,315 million (2002: US$1,155 million) of ‘Long-term
assurance assets attributable to policyholders’ were included in HSBC’s balance sheet under ‘Other assets’. Fees
of US$23 million (2002: US$23 million) were earned by HSBC companies for these management services.
HSBC’s pension funds had placed deposits of US$211 million (2002: US$252 million) with its banking
subsidiaries.
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$154 million (2002: US$94 million) in respect of valuations below depreciated historical cost (of
which a credit of US$4 million (2002: US$2 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 2003 of US$174
million (2002: US$119 million). The impact on the charge to the profit and loss account in respect of tax on profit on
ordinary activities would have been nil (2002: increase of US$22 million).
If HSBC had prepared its financial statements under Hong Kong Statement of Standard Accounting Practice 24
‘Investments in Securities’, US$1,746 million (2002: US$1,341 million1) 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 2003 of US$2,627 million (2002: US$3,069 million).
HSBC Holdings has recorded its investment in HSBC undertakings at net asset value, including attributable
goodwill, adjusted for shares held by subsidiaries in HSBC Holdings plc. 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 impairment, there would have been a reduction in
the reserves of HSBC Holdings at 31 December 2003 of US$33,970 million (2002: US$13,779 million1). 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$4,406 million would have been recognised in the balance sheet at 31 December 2003 (2002:
324
US$4,023 million). There would have been an additional credit to the profit and loss account in 2003 of US$206
million (2002: charge of US$7 million).
HSBC has adopted the provisions of UITF Abstracts 37 ‘Purchases and sales of own shares’ and 38 ‘Accounting for
ESOP trusts’. Both HSBC’s previous and its current accounting policies are acceptable under Hong Kong GAAP
and as a result no differences arise.
1 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
325
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:
Leasing
UK 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.
• 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 so 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.
US GAAP
• 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 generally 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 so that in each period the depreciation charge is at least equal to that
which would have arisen on a straight line basis.
Debt swaps
UK GAAP
• 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 loan loss provision having been duly updated. Any subsequent deterioration in their value
will be recorded as an additional loan loss provision.
US GAAP
• Under SFAS 15 ‘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.
Shareholders’ interest in the long-term assurance fund
UK GAAP
• The value placed on HSBC’s interest in long-term assurance business includes a 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’.
326
• Changes in the value of HSBC’s interest in long-term assurance business are calculated on a post-tax basis and
are reported in the profit and loss account as part of ‘Other operating income’ after adjusting for taxation.
US GAAP
• The net present value of these profits is not recognised. Acquisition costs and fees are deferred and amortised in
accordance with SFAS 97 ‘Accounting and reporting by insurance enterprises for certain long-duration
contracts and for realised gains and losses from the sale of investments’.
Share compensation schemes
UK GAAP
• Options granted under executive share option schemes are granted at market price and no compensation costs
are recognised under the ‘intrinsic value method’.
• Employees in save-as-you-earn schemes are granted shares at a 20 per cent discount to market price at the date
of grant. No compensation cost is recognised for such awards.
• The fair value of shares awarded under longer term and other restricted share award schemes 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.
US GAAP
• SFAS 123 ‘Accounting for Stock Based Compensation’ encourages a fair value method of accounting for stock-
based compensation plans. HSBC follows this fair value method. Under the fair value method, compensation
cost is measured at the date of grant based on the value of the award and is 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.
Costs of software for internal use
UK GAAP
• HSBC generally expenses costs of software developed for internal use. If it can be shown 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.
US GAAP
• The American Institute of Certified Public Accountants’ (‘AICPA’) Statement of Position 98-1 ‘Accounting for
the costs of computer software developed or obtained for internal use’ 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.
Website design costs are capitalised and website content development costs are expensed as they are incurred.
Goodwill
UK GAAP
• Goodwill arising on acquisitions of subsidiary undertakings, associates or joint ventures prior to 1998 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
327
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
reserves to be reinstated, but does not require it. In common with many other UK companies, HSBC elected not
to reinstate such goodwill on the grounds that it would not materially assist the understanding of readers of its
accounts who were already familiar with UK 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 subsidiaries, associates or joint ventures, any unamortised goodwill or goodwill
charged directly against reserves is included in HSBC’s share of the undertakings’ total net assets in the
calculation of the gain or loss on disposal.
• Where quoted securities are issued as part of the purchase consideration in an acquisition, the fair value of those
securities for the purpose of determining the cost of acquisition is the market price at the date of completion.
US GAAP
• Goodwill acquired up to 30 June 2001 was capitalised and amortised over its useful life but not more than 25
years. The amortisation of previously acquired goodwill ceased from 31 December 2001.
• SFAS 142 ‘Goodwill and Other Intangible Assets’ requires that goodwill should not be amortised but should be
tested for impairment annually at the reporting unit level by applying a fair-value-based test.
• The goodwill of a reporting unit should be tested for impairment between annual tests in response to events or
changes in circumstance which could result in an impairment.
• Where quoted securities are issued as part of the purchase consideration in an acquisition, the fair value of those
securities for the purpose of determining the cost of acquisition is the average market price of the securities for a
reasonable period before and after the date that the terms of the acquisition are agreed and announced.
Intangible assets
UK GAAP
• An intangible asset is recognised separately from goodwill where it is identifiable and controlled. It is
identifiable only if it can be disposed of or settled separately without disposing of the whole business. Control
requires legal rights or custody over the item.
• An intangible asset purchased as part of a business combination is capitalised at fair value based on its
replacement cost, which is normally its estimated market value.
US GAAP
• An intangible asset is recognised separately from goodwill when it arises from contractual or other legal rights
or if it is separable, i.e. it is capable of being separated or divided from the acquired entity and sold, transferred,
licensed, rented, or exchanged in combination with a related contract, asset or liability. The effect of this is that
certain intangible assets such as trademarks and customer relationships are recognised under US GAAP,
although such assets will not be recognised under UK GAAP.
•
Intangible assets are initially recognised at fair value. An intangible asset with a finite useful life is amortised
over the period for which it contributes to the future cash flows of the entity. An intangible asset with an
indefinite useful life is not amortised but is tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired.
328
Property
UK GAAP
• 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 their cost or revalued amounts. No depreciation
is charged on investment properties other than leaseholds with 20 years or less to expiry.
US GAAP
• 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.
Accruals accounted derivatives
UK GAAP
• Non-trading derivatives are those which are held for hedging purposes as part of HSBC’s risk management
strategy against cashflows, assets, liabilities, or positions 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, foreign exchange 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 risk of the associated instruments, and must
achieve a result that is consistent with defined risk management objectives. If these criteria are met, accrual
based accounting is applied, i.e. income or expense is recognised and accrued to the next settlement date in
accordance with the contractual terms of the agreement.
• Any gain or loss arising on the termination of a qualifying derivative is deferred and amortised to earnings over
the original life of the terminated contract. Where the underlying asset, liability or position is sold or terminated,
the qualifying derivative is immediately marked-to-market through the profit and loss account.
• Derivatives that do not qualify as hedges or synthetic alterations at inception are marked-to-market through the
profit and loss account, with gains and losses included within ‘Dealing profits’.
US GAAP
• All derivatives must be recognised as either assets or liabilities in the balance sheet and be measured at fair
value ( SFAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’).
• 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 exposure 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. Any resulting net gain or
loss represents the ineffective portion of the hedge.
329
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
– For a derivative designated as hedging exposure to variable cash flows of a recognised asset or liability, or
of a forecast 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 forecast transaction affects earnings. The ineffective portion is reported in earnings
immediately.
– 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.
–
In order to apply hedge accounting it is necessary to comply with documentation requirements and to
demonstrate the effectiveness of the hedge on an ongoing basis.
– 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.
Investment securities
UK GAAP
• 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. Premiums or discounts on dated investment securities
purchased at other than face value are amortised through the profit and loss account over the period from date of
purchase to date of maturity and are 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 currency 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’.
US GAAP
• 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 (SFAS 115 ‘Accounting for Certain Investments in Debt and
Equity Securities’).
• 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.
• A decline considered other than temporary in fair value below cost of an available-for-sale or held-to-maturity
security is treated as a realised loss and included in earnings. This lower fair value is then treated as the cost
basis for the security.
• Trading securities are measured at fair value with unrealised holding gains and losses included in earnings.
330
Foreign currency
UK GAAP
• 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 (SSAP 20 ‘Foreign currency
translation’).
US GAAP
• An entity’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 (SFAS 52 ‘Foreign Currency Translation’).
Own shares held
UK GAAP
• The adoption of UITF Abstracts 37 and 38 has required a change in the presentation of shares in HSBC Holdings
held by HSBC. HSBC Holdings shares are now deducted from shareholders’ funds (including those HSBC
Holdings shares held within ‘Long term assurance assets attributable to policyholders’). No profits or losses are
recognised on own shares held. Previously, own shares held were classified as an asset. The change in
accounting policy has been reflected by way of a prior period adjustment.
US GAAP
• AICPA Accounting Research Bulletin 43 ‘Restatement and Revision of Accounting Research Bulletins’
requires a reduction in shareholders’ equity for own shares held. HSBC shares held within ‘Long-term assurance
assets attributable to policyholders’ remain classified as an asset where the criteria for classification as ‘separate
accounts’ are met.
Dividends payable
UK GAAP
• Dividends declared after the period end are recorded in the period to which they relate.
US GAAP
• Dividends are recorded in the period in which they are declared.
Deferred taxation
UK GAAP
• Deferred tax is generally provided in the accounts for all timing differences subject to exceptions in FRS 19 and
the assessment of the recoverability of deferred tax assets.
• Fair value adjustments on acquisition are treated as if they were timing differences arising in the acquired
entity’s own accounts. Deferred tax is recognised on fair value adjustments where they give rise to deferral or
acceleration of taxable cash flows.
US GAAP
• 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 (SFAS 109 ‘Accounting for Income Taxes’).
331
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
• The deferred taxation impact of all temporary differences arising from fair value adjustments on acquisition is
recognised as part of the purchase accounting adjustment.
Sale and repurchase transactions (‘repos’) and reverse repos
UK GAAP
• 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’ or ‘Customer accounts’ and reverse repos are
included within ‘Loans and advances to banks’ or ‘Loans and advances to customers’.
US GAAP
• Repos and reverse repos transacted under agreements that give the transferee the right by contract or custom to
sell or repledge collateral give rise to the following adjustments and disclosures (SFAS 140 ‘Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities’):
– For repos, where the transferee has the right to sell or repledge the collateral, the transferor reports 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 does not
recognise the pledged asset but discloses the fair value of the collateral. If the transferee sells collateral
pledged to it, the proceeds from the sale and the transferee’s obligation to return the collateral are
recognised.
Loan origination
UK GAAP
• Fee and commission income is accounted for in the period when receivable, except when 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.
• Loan origination costs are generally expensed as incurred. As permitted by UK GAAP, HSBC applies a
restricted definition of the incremental, directly attributable origination expenses that are deferred and
subsequently amortised over the life of the loans.
US GAAP
• Certain loan fee income and direct loan origination costs are amortised to the profit and loss account over the
life of the loan as an adjustment to interest income (SFAS 91 ‘Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases’.)
Pension costs
UK GAAP
• 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.
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.
332
Securitisations
UK GAAP
• FRS 5 ‘Reporting the substance of transactions’ requires that the accounting for securitised receivables is
governed by whether the originator has access to the benefits of the securitised assets and exposure to the risks
inherent in those benefits and whether the originator has a liability to repay the proceeds of the note issue:
– The securitised assets should be derecognised in their entirety and a gain or loss on sale recorded where the
originator retains no significant benefits and no significant risks relating to those securitised assets.
– The securitised assets and the related finance should be consolidated under a linked presentation where the
originator retains significant benefits and significant risks relating to those securitised assets but where the
downside exposure is limited to a fixed monetary amount and certain other conditions are met.
– The securitised assets and the related finance should be consolidated on a gross basis where the originator
retains significant benefits and significant risks relating to those securitised assets and does not meet the
conditions required for linked presentation.
US GAAP
• SFAS 140 ‘Accounting for Transfers and Servicing of Finance Assets and Extinguishments of Liabilities’
requires that receivables that are sold to a special purpose entity and securitised can only be derecognised and a
gain or loss on sale recognised if the originator has surrendered control over those securitised assets.
• Control has been surrendered over transferred assets if and only if all of the following conditions are met:
– The transferred assets have been put presumptively beyond the reach of the transferor and its creditors, even
in bankruptcy or other receivership.
– Each holder of interests in the transferee (i.e. holder of issued notes) has the right to pledge or exchange
their beneficial interests, and no condition constrains this right and provides more than a trivial benefit to
the transferor.
– The transferor does not maintain effective control over the assets through either an agreement that obligates
the transferor to repurchase or to redeem them before their maturity or through the ability to unilaterally
cause the holder to return specific assets, other than through a clean-up call.
–
If these conditions are not met the securitised assets should continue to be consolidated.
• Where HSBC retains an interest in the securitised assets, such as a servicing right or the right to residual cash
flows from the special purpose entity, HSBC recognises this interest at fair value on sale of the assets.
• There are no provisions for linked presentation of securitised assets and the related finance.
Consolidation of Variable Interest Entities
UK GAAP
•
In accordance with FRS 5, entities that fall within the definition of quasi-subsidiaries are consolidated. A quasi-
subsidiary is defined as an entity that is directly or indirectly controlled by HSBC and gives rise to benefits that
are in substance no different from those that would arise were the vehicle a subsidiary. FRS 5 states that this
will arise where HSBC receives the benefits of the net assets of the entity and is exposed to the risks inherent in
those net assets.
US GAAP
• FASB Interpretation 46 ‘Consolidation of Variable Interest Entities’(‘FIN 46’) requires consolidation of
Variable Interest Entities (‘VIEs’) in which HSBC is the primary beneficiary and disclosures in respect of all
other VIEs in which it has a significant variable interest.
333
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
• A modified version of FIN 46 (‘FIN 46R’) addresses certain implementation issues that arose under FIN 46 and
changes some of the criteria used to determine whether HSBC is the primary beneficiary of an entity. HSBC has
applied FIN 46R to its assessment of certain entities where the impact of the modifications in FIN 46R is
known. HSBC is still assessing the impact of FIN 46R on other entities, and will adopt FIN 46R in 2004 for all
interests in VIEs for accounting periods ending after 15 March 2004.
• A VIE is an entity in which equity investors do not hold an investment with the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its activities. HSBC is the
primary beneficiary of a VIE if its variable interests absorb a majority of the entity’s expected losses. Variable
interests are contractual, ownership or other pecuniary interests in an entity that change with changes in the fair
value of an entity’s net assets exclusive of variable interests. If no party absorbs a majority of the entity’s
expected losses, HSBC consolidates the VIE if it receives a majority of the expected residual returns of the
entity.
• Under the transitional provisions of FIN 46R, HSBC is only required to consolidate VIEs where it is the primary
beneficiary if HSBC’s involvement in the VIE was created or acquired after 31 January 2003 and it had
previously applied FIN 46 to those entities. For VIEs created or acquired before this date, disclosure that HSBC
is the primary beneficiary is sufficient. HSBC will be required to consolidate all VIEs where it is the primary
beneficiary from 1 January 2004.
Restructuring provisions
UK GAAP
•
In accordance with FRS 12 ‘Provisions, contingent liabilities and contingent assets’, provisions are made for
any direct costs and net future operating losses arising from a business that management is committed to
restructure, sell or terminate, has a detailed formal plan to exit, and has raised a valid expectation of carrying out
that plan.
US GAAP
• SFAS 146 ‘Accounting for Costs Associated with Exit or Disposal Activities’, requires that the fair value of a
liability for a cost associated with an exit or disposal activity be recognised when the liability is incurred.
Accordingly, provisions are recognised upon the implementation of the restructuring plan.
Acceptances
UK GAAP
• Acceptances outstanding are not included in the consolidated balance sheet.
US GAAP
• Acceptances outstanding and matching customer liabilities are included in the consolidated balance sheet.
Profit and loss presentation
UK GAAP
• The following items are separately disclosed in the profit and loss account:
– Provisions for contingent liabilities and commitments.
– Amounts written off fixed asset investments.
– Gains on disposal of investments and tangible fixed assets.
334
US GAAP
• The above items are disclosed as follows:
– Provisions for contingent liabilities and commitments are classified as ‘Operating expenses’.
– Amounts written off fixed asset investments and gains on disposal of investments and tangible fixed assets
are classified as ‘Other operating expense’ and ‘Other operating income’ respectively.
– Gains on disposal of investments and tangible fixed assets are classified as ‘Other operating income’.
The following tables summarise the significant adjustments to consolidated net income and shareholders’ equity
which would result from the application of US GAAP:
Year ended 31 December
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 ........................................................
Own shares held ................................................................................
Foreign exchange gains on available-for-sale securities ...................
Loan origination ................................................................................
Securitisations ...................................................................................
Restructuring provisions....................................................................
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 ...............................................
Net income (US GAAP) ...................................................................
Per share amounts (US GAAP)
Basic earnings per ordinary share .....................................................
Diluted earnings per ordinary share ..................................................
Note
b
c
d
e
g
h
i
j
s
k
l
m
p
p
2003
US$m
8,774
(114)
–
(394)
266
(190)
1,500
13
62
(1,307)
(613)
42
(2,283)
217
683
96
43
26
–
223
223
187
7,231
US$
0.69
0.69
2002
US$m
6,239
(68)
–
(6)
(62)
(240)
845
66
76
15
221
–
(2,197)
–
–
–
(122)
(390)
(30)
475
445
78
4,900
US$
0.52
0.52
2001
US$m
4,992
(40)
4
(152)
(26)
(316)
(509)
264
49
(49)
280
–
312
–
–
–
–
–
188
(122)
66
36
4,911
US$
0.53
0.53
335
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 .............................................................................................................
Loan origination................................................................................................................
Securitisations...................................................................................................................
Restructuring provisions ...................................................................................................
Taxation : US GAAP .....................................................................................................
: on reconciling items ......................................................................................
Minority interest in reconciling items ..............................................................................
Shareholders’ equity (US GAAP) ....................................................................................
Note
b
c
e
g
h
i
k
s
m
2003
US$m
74,473
(575)
(1,532)
(3,122)
1,072
718
(1,949)
4,380
702
2,046
140
2,627
217
739
96
173
(144)
29
190
80,251
1 Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38
‘Accounting for ESOP trusts’, details of which are set out in Note 1.
Movement in shareholders’ equity (US GAAP)
Balance brought forward ..................................................................
Net income .......................................................................................
Dividends .........................................................................................
Stock based compensation ...............................................................
Shares issued in lieu in dividends .....................................................
Equity issued on acquisition of Household under US GAAP ...........
New share capital subscribed net of costs ........................................
Other ................................................................................................
Net change in net unrealised gains/(losses) on securities
available for sale, net of tax effect ...............................................
Net change in net unrealised gains on derivatives classified as
cash flow hedges, net of tax effect ...............................................
Minimum pension liability adjustment, net of tax effect ..................
Exchange and other movements .......................................................
Total Other Comprehensive Income1 ................................................
Balance carried forward ...................................................................
Note
d
a
c
2003
US$m
55,831
7,231
(6,974)
190
1,423
14,366
862
(79)
1,676
367
(1,127)
6,485
7,401
80,251
2002
US$m
48,444
4,900
(4,632)
240
1,023
–
337
17
2,253
86
(824)
3,987
5,502
55,831
20021
US$m
51,765
(406)
(875)
(2,522)
2,575
669
(2,273)
213
782
2,040
92
3,069
–
–
–
154
256
410
292
55,831
2001
US$m
48,072
4,911
(4,394)
316
866
–
112
–
(271)
52
–
(1,220)
(1,439)
48,444
1 Movements in shareholders’ equity has been reclassified to disclose movements in Other Comprehensive Income by major component.
336
The following table provides an estimated summarised balance sheet for HSBC, which incorporates the adjustments
arising from the application of US GAAP:
Assets
Cash and balances at central banks ...................................................................................................
Items in the course of collection from other banks ...........................................................................
Treasury bills and other eligible bills ................................................................................................
Hong Kong Government certificates of indebtedness .......................................................................
Loans and advances to banks ............................................................................................................
Loans and advances to customers .....................................................................................................
Debt securities and equity shares ......................................................................................................
Interests in associated undertakings and other participating interests ...............................................
Intangible and tangible fixed assets ..................................................................................................
Due from customers on acceptances .................................................................................................
Other assets (including prepayments and accrued income) ...............................................................
2003
US$m
7,661
6,628
20,391
10,987
117,173
505,152
220,579
1,973
47,133
5,411
68,935
Total assets .......................................................................................................................................
1,012,023
Liabilities
Hong Kong 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 ........................................................................................................................
– other provisions for liabilities and charges ................................................................................
Subordinated liabilities .....................................................................................................................
Minority interests .............................................................................................................................
Shareholders’ equity .........................................................................................................................
10,987
70,426
573,132
4,383
127,555
5,411
98,696
1,368
8,134
25,462
6,218
80,251
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
Total liabilities .................................................................................................................................
1,012,023
763,565
Net assets arising due to reverse repo transactions of US$23,220 million (2002: US$18,736 million) and US$17,777
million (2002: US$12,545 million) are included in ‘Loans and advances to banks’ and ‘Loans and advances to
customers’ respectively.
Net liabilities arising due to repo transactions of US$12,226 million (2002: US$8,271 million) and US$15,201
million (2002: US$13,126 million) are included in ‘Deposits by banks’ and ‘Customer accounts’ respectively.
Average repo liabilities during the year were US$25,883 million (2002: US$21,089 million). The maximum quarter-
end repo liability outstanding during the year was US$30,938 million (2002: US$21,468 million).
HSBC enters into repo and reverse repo transactions which are accounted for as secured borrowings. Under SFAS
140, securities pledged as collateral, where 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 2003, the impact on ‘Debt securities and equity shares’ and ‘Treasury bills and other eligible bills’
would be to reclassify securities amounting to US$22,292 million as encumbered (2002: US$20,061 million).
At 31 December 2003, collateral received under reverse repo transactions where HSBC had the right to sell or
repledge the security obtained amounted to US$45,319 million gross (2002: US$27,439 million). Approximately
US$26 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 (2002: approximately US$15 billion).
HSBC also enters into stock lending and borrowing transactions by which either cash or other securities may be
received in exchange for stock. At 31 December 2003, stock lending transactions where the securities lent were
subject to sale or repledge amounted to US$7,062 million (2002: US$5,050 million). At 31 December 2003, stock
borrowing transactions where the securities borrowed were subject to sale or repledge amounted to US$11,428
million (2002: US$4,643 million).
337
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(a) Acquisition of Household
In accordance with SFAS 141 ‘Business Combinations’, the following additional disclosures are required in
respect of the acquisition of Household.
The value ascribed to each HSBC ordinary share for US GAAP purposes was US$11.28, derived from the five-
day average (12 November 2002 to 18 November 2002) of the daily HSBC ADR price at the time the bid was
announced.
The total consideration paid for the acquisition of Household, calculated in accordance with US GAAP, was
US$15,761 million. As part of the consideration for the acquisition, HSBC allotted 1,273,297,057 new ordinary
shares of US$0.50.
Purchase price:
Value of HSBC shares issued ..........................................................................................................................
Fair value of outstanding Household share options .........................................................................................
Fair value of the equity component of Household 8.875 per cent Adjustable Conversion-Rate Equity
Security Units .............................................................................................................................................
Cash consideration paid by HSBC for Household cumulative preferred stock ................................................
Acquisition costs including stamp duty and stamp duty reserve tax ................................................................
US GAAP
US$m
14,366
114
21
1,120
140
15,761
HSBC’s financial statements include the results of Household’s operations commencing 29 March 2003. Under
US GAAP, the assets and liabilities at the date of acquisition and the total consideration paid are set out in the
following table:
At date of acquisition
Items in the course of collection from other banks .......................................................................................................
Loans and advances to banks .......................................................................................................................................
Loans and advances to customers ................................................................................................................................
Debt securities .............................................................................................................................................................
Equity shares ................................................................................................................................................................
Intangible assets ...........................................................................................................................................................
Tangible fixed assets ....................................................................................................................................................
Other asset categories ..................................................................................................................................................
Deposits by banks ........................................................................................................................................................
Customer accounts .......................................................................................................................................................
Debt securities in issue ................................................................................................................................................
Provisions for liabilities and charges ...........................................................................................................................
Subordinated liabilities ................................................................................................................................................
Other liability categories ..............................................................................................................................................
Net assets acquired ..............................................................................................................................................
Goodwill ..............................................................................................................................................................
Total consideration ..............................................................................................................................................
US GAAP
Fair value
US$m
840
431
82,165
3,635
697
3,003
556
9,579
(1,915)
(895)
(80,800)
(654)
(1,192)
(6,306)
9,144
6,617
15,761
The reduced amount of goodwill reported under US GAAP, compared with UK GAAP, on the acquisition of
Household principally reflects:
the recognition at acquisition of US$3,003 million of intangibles under US GAAP; under UK GAAP, only
US$50 million of intangibles were recognised separately from goodwill.
previously recognised gains on the sale of assets to securitisation vehicles under US GAAP are eliminated
for UK GAAP purposes and the securitised assets are recognised on balance sheet . Offsetting this is the
recognition of a deferred tax liability under US GAAP in respect of gains on sale of assets to securitisation
vehicles; under UK GAAP, such gains are not recognised and, accordingly, no corresponding deferred tax
liability is recognised.
•
•
338
The impact of these items is offset by a higher value placed on HSBC shares issued as part of the purchase
consideration under US GAAP. The HSBC share price fell between the time of announcement in November
2002 and completion of the acquisition on 28 March 2003.
The following table provides pro-forma information in respect of HSBC including Household, prepared on the
basis that Household was acquired at the beginning of each of the years disclosed:
Total operating income ....................................................
Profit attributable to shareholders ....................................
Basic earnings per ordinary share ....................................
Diluted earnings per ordinary share .................................
UK GAAP
2003
US$m
44,302
9,177
US$
0.86
0.85
2002
US$m
39,117
7,717
US$
0.73
0.72
US GAAP
2003
US$m
2002
US$m
7,701
US$
0.72
0.71
6,613
US$
0.62
0.62
The pro-forma profit attributable to shareholders for 2002 under both UK GAAP and US GAAP above reflect:
•
•
a post-tax charge of US$333 million associated with Household’s settlement reached on 11 October 2002
with a multi-state working group of state Attorneys General and regulatory agencies to effect a resolution of
alleged violations of US Federal and state consumer protection, consumer finance and banking laws and
regulations; and
a post-tax charge of US$240 million on the sale of the assets and deposits of Household Bank, f.s.b.
Under US GAAP, intangible assets with a total value of US$3,003 million were recognised on acquisition. Of
these intangible assets, US$715 million have an indefinite useful life and are not amortised but are tested for
impairment annually or more frequently if events or changes in circumstances indicate that the asset might be
impaired. The remaining intangible assets have finite useful lives generally ranging from 5 to 10 years over
which their value less any terminal value is amortised to the profit and loss account. The value of intangible
assets recognised under US GAAP is greater than that recognised under UK GAAP, reflecting the different
recognition criteria under US GAAP. The higher value of intangible assets recognised under US GAAP results
in a lower value of goodwill arising.
Intangible assets:
Weighted average
amortisation period
UK GAAP
months
US GAAP
months
UK GAAP
US$m
US GAAP
US$m
Intangible assets subject to amortisation
Purchased credit card relationships and related agreements .......
Retail Services merchant relationships .......................................
Other loan related relationships ..................................................
Technology, customer lists and other contracts ..........................
Intangible assets not subject to amortisation
Trade name .................................................................................
84
–
84
–
84
74
60
110
61
73
47
–
3
–
50
–
50
1,404
277
326
281
2,288
715
3,003
339
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
No goodwill on the acquisition of Household was deductible for tax purposes.
Amount of goodwill by reportable geographic customer group
North America
– Commercial banking ...........................................................................................................
– Consumer finance ...............................................................................................................
Europe
– Consumer finance ...............................................................................................................
Total amount of goodwill ........................................................................................................
(b) Shareholders’ interest in long-term assurance fund
UK GAAP
US$m
US GAAP
US$m
59
9,382
567
10,008
56
6,077
484
6,617
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 definition and amortisation of deferred acquisition costs and the
methodology for determining actuarial reserves vary between US and UK GAAP.
Net pre-tax income under US GAAP would have been US$394 million lower than under UK GAAP, as a result
of differences in accounting for the shareholder’s interest in the log term assurance fund. The reduction in
income is greater than in previous years, because of an increase in the net present value of in force policies in
the UK, due in part to a reduction in the risk discount rate, new business in Hong Kong (profits on new business
are recognised sooner under UK GAAP) and certain refinements to the models underlying the US GAAP
calculation.
(c) Pension and post-retirement costs
Pensions
For the purpose of the above reconciliations, the provisions of SFAS 87 ‘Employers’ Accounting for Pensions’
have been applied to HSBC’s main pension plans, which make up approximately 95 per cent of all HSBC’s
schemes by plan assets. For non-US schemes, HSBC has applied SFAS 87 ‘Employers’ Accounting for
Pensions’ with effect from 30 June 1992 as it was not feasible to apply it as at 1 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 CCF was recognised as a liability
under the purchase accounting adjustments of APB 16 ‘Business combinations’.
When 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 or the amount of
any unrecognised prior service cost.
At 31 December 2003, HSBC recognised an additional minimum pension liability of US$2,789 million (2002:
US$1,175 million) in respect of its unfunded accumulated benefit obligations. This liability is partially offset by
an intangible asset of US$14 million. (2002: US$16 million). The net impact of these items, after taking account
340
of relevant tax assets of US$824 million (2002: US$335 million), would be to reduce the Group’s shareholders’
equity under US GAAP by US$1,951 million (2002: US$824 million).
Estimated pension costs for these plans computed under SFAS 87 are as follows:
Components of net periodic benefit cost
Service cost .....................................................................................................
Interest cost .....................................................................................................
Expected return on plan assets ........................................................................
Amortisation of prior service cost ...................................................................
Amortisation of unrecognised net liability at 30 June 1992 .............................
Amortisation of recognised net actuarial loss/(gain) .......................................
Net periodic pension cost ................................................................................
2003
US$m
429
915
(992)
5
6
74
437
2002
US$m
438
862
(885)
4
6
14
439
2001
US$m
447
801
(862)
4
6
(1)
395
The US GAAP pension cost of US$437 million (2002: US$439 million; 2001 US$395 million) compares with
US$703 million for these plans under UK GAAP (2002: US$377 million; 2001: US$369 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 loss/(gain) ...............................................................................................................
Acquisition of subsidiary .............................................................................................................
Plan amendment ...........................................................................................................................
Benefits paid ................................................................................................................................
Exchange movements ...................................................................................................................
Projected benefit obligation as at 31 December ...........................................................................
Change in plan assets
Plan assets at fair value as at 1 January ........................................................................................
Actual return on plan assets .........................................................................................................
Acquisition of subsidiary .............................................................................................................
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 .......................................................................................................
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 ............................................................
2003
US$m
15,463
429
915
4
2,306
897
6
(714)
1,779
21,085
11,786
2,399
832
1,653
4
(714)
1,384
17,344
(3,741)
–
3,558
42
(141)
(2,789)
(2,930)
833
(974)
(141)
(141)
(2,789)
14
(206)
(3,122)
2002
US$m
14,054
438
862
2
(600)
–
1
(565)
1,271
15,463
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)
341
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Plan asset valuations are as at 31 December.
In 2003, plans with an aggregate accumulated benefit obligation of US$17,332 million
(2002: US$12,776 million) and assets with an aggregate fair value of US$13,739 (2002: US$9,743 million) had
an accumulated benefit obligation in excess of plan assets.
Plans with an aggregate projected benefit obligation of US$17,841 million (2002: US$14,752 million) and
assets with an aggregate fair value of US$13,739 million (2002: US$10,989 million) had a projected benefit
obligation in excess of plan assets.
Plan assets are invested primarily in equities, fixed interest securities and property. Included within plan assets
at 31 December 2003 are direct holdings of 760,690 shares in HSBC Holdings with a market value of US$12
million (2002: 689,485 shares; US$7 million).
The projected benefit obligations at 31 December 2003 and 2002 for HSBC’s main pension plans have been
calculated using the following financial assumptions on a weighted average basis:
Discount rate
Return on assets
Rate of pay increase
United Kingdom .................................................................................
Hong Kong .........................................................................................
Jersey .................................................................................................
Brazil .................................................................................................
United States ......................................................................................
France ................................................................................................
United Kingdom .................................................................................
Hong Kong .........................................................................................
Jersey .................................................................................................
Brazil ..................................................................................................
United States ......................................................................................
France .................................................................................................
United Kingdom .................................................................................
Hong Kong .........................................................................................
Jersey .................................................................................................
Brazil .................................................................................................
United States ......................................................................................
France ................................................................................................
2003
% per annum
2002
% per annum
5.5
5.5
5.5
11.3
6.25
5.25
7.1
6.0
6.8
11.3
8.4
5.4
3.0
4.5
4.25
5.11
3.75
3.5
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
In accordance with SFAS 132 (revised) ‘Employers’ Disclosures about Pensions and other Post-retirement
Benefits’, the following disclosures are required in respect of HSBC’s UK (domestic) pension schemes, namely
the HSBC Bank (UK) Pension Scheme and the HSBC International Staff Retirement Benefit Scheme:
Plan assets
Asset category
Equity shares ...............
Real estate ...................
Debt securities .............
Other ...........................
HSBC Bank (UK) Pension
Scheme
HSBC International Staff
Retirement Benefit Scheme
Expected
return on
assets
2004
%
8.5
7.0
5.0
4.0
Target
allocation
2004
%
56
10
33
1
Percentage of plan
assets at 31 December
2002
%
61.3
12.3
21.9
4.5
2003
%
56.2
9.1
27.6
7.1
Expected
return on
assets
2004
%
8.5
7.0
5.0
4.0
Target
allocation
2004
%
50
10
36
4
Percentage of plan
assets at 31 December
2002
%
57.7
–
35.5
6.8
2003
%
51.3
3.7
35.8
9.2
Total ............................
7.1
100
100.0
100.0
6.8
100
100.0
100.0
342
UK domestic plan objectives
Defined Benefit Scheme
The Trustee’s long-term investment objectives are to:
• Limit the risk of the assets failing to meet the liability of the Scheme over the long-term; and
• Maximise returns consistent with an acceptable level of risk so as to control the long-term costs of the
Defined Benefit Scheme.
The Trustee considers that the investment policy is consistent with meeting its overall long-term investment
objectives. In pursuit of its long-term objectives, the Trustee establishes an overall benchmark for the allocation
of the Defined Benefit Scheme assets between asset categories. In addition each permitted asset class has its
own benchmarks, such as stock market or property valuation indices and desired levels of out performance
where relevant. This is intended to be reviewed at least triennially within 18 months of the date at which the
actual valuation is made, or more frequently if circumstances require it. The process involves an extensive asset
and liability review.
The assumptions used to determine the projected benefit obligation of the UK domestic defined benefit plans at
31 December are as follows:
Discount rate .........................................................................
Rate of compensation increase ..............................................
Inflation .................................................................................
HSBC Bank (UK)
Pension Scheme
HSBC International Staff
Retirement Benefit Scheme
2003
%
5.5
3.0
2.5
2002
%
5.6
2.75
2.25
2003
%
5.5
4.25
2.5
2002
%
5.6
4.0
2.25
HSBC determines discount rates in consultation with its actuary, based upon the current average yield of high
quality (AA rated) debt instruments.
The accumulated benefit obligation in respect of the above UK domestic schemes was US$16,165 million
(2002: US$11,774 million) for the HSBC Bank (UK) Pension Scheme and US$709 million
(2002: US$611 million) for the HSBC International Staff Retirement Benefit Scheme.
The weighted average assumptions used in determining the net periodic cost for the year ended December 31
are as follows:
Discount rate .........................................................................
Rate of compensation increase ..............................................
Expected return on plan assets ..............................................
HSBC Bank (UK)
Pension Scheme
HSBC International Staff
Retirement Benefit Scheme
2003
%
5.6
2.75
7.3
2002
%
5.9
3.75
6.8
2003
%
5.6
4.0
6.9
2002
%
5.9
4.25
6.3
HSBC determines the expected return on plan assets, in consultation with its actuary based upon historical
market returns, adjusted for additional factors such as the current rate of inflation and interest rates.
For the fiscal year 2004, HSBC expects to contribute US$254 million for the HSBC Bank (UK) Pension
Scheme and US$24 million for the HSBC International Staff Retirement Benefit Scheme.
The measurement date for the UK domestic plans described above is 31 December 2003.
343
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Post-retirement benefits
The components of post-retirement expense for HSBC’s principal schemes, which make up approximately
70 per cent of all HSBC’s schemes by benefit obligation, are as follows:
Components of net periodic post-retirement benefit cost
Service cost ................................................................................................................................
Interest cost ................................................................................................................................
Amortisation of transition obligation ..........................................................................................
Net periodic post-retirement benefit cost ..................................................................................
2003
US$m
5
27
12
44
2002
US$m
2
19
12
33
For measurement purposes, the calculation assumes a 9.6 per cent annual rate of increase in the weighted
average per capita cost of covered medical benefits. The measurement date for the plans is 31 December.
Change in projected benefit obligation
Projected benefit obligation as at 1 January ...............................................................................
Service cost ................................................................................................................................
Interest cost ................................................................................................................................
Net actuarial (gain) .....................................................................................................................
Acquisition of subsidiary ...........................................................................................................
Benefits paid ..............................................................................................................................
Exchange and other movements .................................................................................................
Projected benefit obligation as at 31 December .........................................................................
Funded status of plan
Funded status at 31 December ...................................................................................................
Unrecognised net actuarial loss...................................................................................................
Unrecognised net transition obligation .......................................................................................
Accrued post-retirement benefit obligation.................................................................................
2003
US$m
2002
US$m
326
5
27
(5)
251
(27)
21
598
(598)
15
45
(538)
314
2
19
(20)
6
(16)
21
326
(326)
13
57
(256)
Assumed health care cost trend rates have an effect on the amounts reported for health care plans. A one
percentage point change in assumed health care cost trend rates would increase/(decrease) service and interest
costs and the post-retirement benefit obligation as follows:
One per cent
increase
US$m
One per cent
decrease
US$m
Effect on total of service and interest cost components ..............................................................
Effect on post-retirement benefit obligation ...............................................................................
2.1
37.9
(2.0)
(35.5)
In accordance with US GAAP, the accounting for the post-retirement benefit charge assumed a discount rate of
5.3 per cent (2002: 5.6 per cent) for UK benefits and 6.09 per cent (2002: 6.58 per cent) for US benefits, on a
weighted average basis. HSBC intends to contribute US$ 9.2 million to its principal UK post-retirement health
care scheme in 2004. Further details of the UK post-retirement health care expenses under UK GAAP are given
in Note 5.
In December 2003, the US Government enacted into law a new Medicare bill that provides prescription drug
coverage to Medicare-eligible retirees. In its present form, HSBC’s US retiree medical plans provide
prescription drugs to certain Medicare-eligible retirees. The results contained in these financial statements do
not anticipate any changes to HSBC’s retiree medical plans in light of the Medicare legislation. HSBC is
currently studying the impact of the new legislation and the resulting impact, if any, on its financial statements.
Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when
issued, may require HSBC to change previously reported information.
344
(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$190 million (2002:
US$240 million; 2001: US$316 million). The Executive Share Option Scheme, Group Share Option Plan,
Savings-Related Share Option Plan and Restricted Share Plan fall within the scope of SFAS 123. The
disclosures of options outstanding only relate to those granted from 1995 onwards. An 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. The aim of the plan is to align the interest of those employees assessed as higher
performing 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. 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.
2003
2002
2001
Outstanding at 1 January ............................
Exercised in the year ..................................
Forfeited in the year ...................................
Number
(000’s)
79,645
(18,205)
(1,827)
Outstanding at 31 December ......................
59,613
Weighted
average
exercise
price
£
6.68
6.50
7.07
6.73
Weighted
average
exercise
price
£
6.60
6.26
6.91
6.68
Weighted
average
exercise
price
£
6.56
5.34
6.53
6.60
Number
(000’s)
109,424
(3,236)
(3,478)
102,710
Number
(000’s)
102,710
(20,982)
(2,083)
79,645
The weighted average fair value of options as at the last date of grant during 2000 was US$5.26.
The number of options, weighted average exercise price and the weighted average remaining contractual life for
options outstanding at the balance sheet date, analysed by exercise price range, are as follows:
Exercise price range (£) .........................
2.17 – 6.00
6.01 – 7.87
2.17 – 6.00
6.01 – 7.87
2.17 – 6.00
6.01 – 7.87
2003
2002
2001
Number (000’s) ......................................
Weighted average exercise price (£) ......
Weighted average remaining
contractual life (years) .......................
Of which exercisable:
Number (000’s) ..................................
Weighted average exercise price (£) ..
Group Share Option Plan
1,882
4.12
2.66
1,882
4.12
57,731
6.81
5.61
57,731
6.81
3,094
4.01
3.59
3,094
4.01
76,551
6.79
6.59
47,344
6.38
4,116
3.94
4.55
4,116
3.94
98,594
6.71
7.52
3,170
6.28
The Group Share Option Plan is a long-term incentive plan available to certain HSBC employees that was
adopted by HSBC during 2000. The aim of the plan is to align the interest of those employees assessed as higher
performing 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. 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.
345
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
2003
2002
2001
Outstanding at 1 January .............................
Granted in the year ......................................
Exercised in the year ...................................
Forfeited in the year ....................................
Number
(000’s)
106,164
62,118
(2)
(4,283)
Outstanding at 31 December........................
163,997
Weighted
average
exercise
price
£
8.55
7.07
8.52
8.19
8.00
Weighted
average
exercise
price
£
8.72
8.40
–
8.62
8.55
Weighted
average
exercise
price
£
9.64
8.71
–
8.72
8.72
Number
(000’s)
455
51,357
–
(987)
50,825
Number
(000’s)
50,825
57,236
–
(1,897)
106,164
The weighted average fair value of options granted in the year as at the date of grant was US$3.13 (2002:
US$2.33; 2001: US$3.39).
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 set out below:
2003
2002
2001
Exercise price range (£) ........................
6.00 – 8.00
8.01 – 10.00
6.00 – 8.00
8.01 – 10.00
8.01 – 10.00
Number (000’s) .....................................
Weighted average exercise price (£) .....
Weighted average remaining
contractual life (years) ......................
Of which exercisable:
Number (000’s) ................................
Weighted average exercise price (£) .
56,980
6.91
9.33
–
–
107,017
8.57
7.66
396
9.64
469
7.46
9.66
–
–
105,695
8.55
8.83
–
–
50,825
8.72
9.30
–
–
Savings-Related Share Option Plans
The Savings-Related Share Option Plans 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 aim of the plan is to align the interests
of all employees to the creation of shareholder value. 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 (2002: 20 per cent; 2001: 20 per cent) discount to the market
value at the date of grant.
2003
2002
2001
Outstanding at 1 January ............................
Granted in the year .....................................
Exercised in the year ..................................
Forfeited in the year ...................................
Number
(000’s)
121,520
48,313
(14,630)
(31,887)
Outstanding at 31 December ......................
123,316
Weighted
average
exercise
price
£
5.97
5.35
5.13
6.29
5.75
Weighted
average
exercise
price
£
5.76
6.32
4.73
5.90
5.97
Weighted
average
exercise
price
£
5.25
6.75
3.14
5.82
5.76
Number
(000’s)
121,312
28,832
(12,601)
(7,093)
130,450
Number
(000’s)
130,450
19,828
(16,455)
(12,303)
121,520
The maximum term of options granted in the year is 51/2 years from the date of grant (2002 and
2001: 51/2 years).
The weighted average fair value of options granted in the year as at the date of grant was US$3.09 (2002:
US$3.58; 2001: US$3.68).
346
The number of options, weighted average exercise price, and the weighted average remaining contractual life
for options outstanding at the balance sheet date, analysed by exercise price range, are as follows:
Exercise price range (£) .......................
1.81 – 4.00
4.01 – 6.75
1.81 – 4.00
4.01 – 6.75
1.81 – 4.00
4.01 – 6.52
2003
2002
2001
Number (000’s) ....................................
Weighted average exercise price (£) ....
Weighted average remaining
contractual life (years) .....................
Of which exercisable:
Number (000’s) ................................
Weighted average exercise price (£)
Calculation of fair values
891
3.78
0.16
891
3.78
122,425
5.76
1.91
264
5.22
2,382
3.78
0.65
–
–
119,138
6.02
2.02
312
4.52
3,411
3.62
1.16
999
3.23
127,039
5.81
2.47
–
–
Fair values of share options, measured at the date of grant of the option, are calculated using a model that is
based on the underlying assumptions of 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 2003 are as follows:
Group Share
Option Plan
3 year Savings-
Related Share
Option Schemes
5 year Savings-
Related Share
Option Schemes
Risk-free interest rate (%) .......................................................
Expected life (years) ...............................................................
Expected volatility (%) ...........................................................
4.7
5
30
4.1
3
30
4.3
5
30
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.
2003
2002
2001
Weighted
average
exercise
price
142.50
142.50
–
142.50
Number
(000’s)
857
(1)
–
856
Weighted
average
exercise
price
142.50
142.50
–
142.50
Number
(000’s)
861
(4)
–
857
Weighted
average
exercise
price
142.50
–
142.50
142.50
Number
(000’s)
908
–
(47)
861
Outstanding at 1 January .............................
Exercised in the year ...................................
Forfeited in the year ....................................
Outstanding at 31 December .......................
The weighted average remaining contractual life for options outstanding at the balance sheet date was 8 years.
347
€
€
€
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Household
Options granted under Household’s own share option schemes prior to the announcement of the acquisition by
HSBC in November 2002 vested upon acquisition by HSBC. Options granted after the announcement of the
acquisition in November 2002 but prior to 28 March 2003, generally vest equally over 4 years and expire 10
years from the date of grant. Upon acquisition, Household share options previously granted were converted to
share options over HSBC ordinary shares of US$0.50 each at a rate of 2.675 HSBC share options (the same
ratio as the Exchange Offer for Household) for each Household share option.
Information with respect to share options granted under the former Household schemes is as follows:
Household share options outstanding at 28 March 2003 .......................................................
Conversion to HSBC share options.......................................................................................
Exercised in the year .............................................................................................................
Forfeited in the year ..............................................................................................................
Outstanding at end of year ....................................................................................................
Of which exercisable.............................................................................................................
2003
Number
(000’s)
19,180
51,306
(4,750)
(1,362)
45,194
39,743
Weighted
average
price
US$
37.20
13.90
5.00
16.49
14.76
15.32
The weighted average contractual life for options outstanding at the balance sheet date is disclosed in the table
below:
Range of exercise prices
$ 4.01 – $ 5.00 ...........................
$ 5.01 – $10.00 ...........................
$10.01 – $12.50 ...........................
$12.51 – $15.00 ...........................
$15.01 – $17.50 ...........................
$17.51 – $20.00 ...........................
$20.01 – $25.00 ...........................
Options outstanding
Options exercisable
Weighted
average
remaining life
years
Weighted
average
exercise price
US$
0.68
1.98
7.22
4.46
5.65
6.85
7.87
4.17
6.92
10.87
14.11
16.95
18.41
21.37
Number
(000’s)
255
4,943
10,166
9,565
6,234
6,460
7,571
45,194
Weighted
average
exercise price
US$
4.17
6.92
11.11
14.11
16.95
18.41
21.37
Number
(000’s)
255
4,943
4,715
9,565
6,234
6,460
7,571
39,743
348
Restricted Share Plan
Conditional awards under the Restricted Share Plan
Conditional awards under the Restricted Share Plan have been in operation since 1996. The aim of the plan is 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 1 January ..............................................................................
Additions during the year .............................................................................
Released in the year .....................................................................................
Forfeited in the year .....................................................................................
Outstanding at 31December .........................................................................
2003
Number
(000’s)
9,540
5,074
(945)
–
13,669
2002
Number
(000’s)
6,197
3,667
(261)
(63)
9,540
2001
Number
(000’s)
4,092
2,564
(210)
(249)
6,197
The weighted average purchase price for shares purchased by HSBC for conditional awards under the Restricted
Share Plan in 2003 was US$10.89 (2002: US$12.08; 2001: US$13.37).
The weighted average remaining vesting period as at 31 December 2003 was 2.82 years (2002: 2.98 years;
2001: 3.29 years).
The 2004 conditional awards made to Executive Directors and certain other senior employees from the
Restricted Share Plan in respect of 2003, will have an aggregate value at the date of award of US$31.6 million
(2003 awards in respect of 2002: US$18.4 million).
Other awards made under the Restricted Share Plan
Other awards are made under the Restricted Share Plan as part deferral of annual bonus. Awards are also made
for recruitment and retention purposes. The awards generally vest from one to three years from the date of
award.
Outstanding at 1 January ..............................................................................
Additions during the year .............................................................................
Released in the year .....................................................................................
Forfeited in the year .....................................................................................
Outstanding at 31 December ........................................................................
2003
Number
(000’s)
36,172
20,974
(13,993)
–
43,153
2002
Number
(000’s)
29,049
21,292
(12,262)
(1,907)
36,172
2001
Number
(000’s)
19,363
17,109
(5,389)
(2,034)
29,049
The weighted average purchase price for shares purchased by HSBC for other awards under the Restricted Share
Plan in 2003 was US$11.39 (2002: US$12.04; 2001: US$13.29).
The weighted average remaining vesting period as at 31 December 2003 was 1.23 years (2002: 1.41 years;
2001: 1.25 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 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
349
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 2003, the cost of goodwill acquired on subsidiary undertakings on a US GAAP basis was
US$33,581 million (2002: US$23,613 million; 2001: US$19,972 million) and accumulated amortisation of
goodwill was US$4,016 million (2002: US$3,630 million; 2001: US$3,305 million).
The main reason for the increase of US GAAP goodwill was due to the acquisition of Household. The US
GAAP fair value table on this acquisition is presented in Note 50(a).
The following table shows changes in the carrying value of goodwill on subsidiary undertakings during the year:
Europe Hong Kong
US$m
US$m
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America
US$m
At 1 January 2003 ......................................
Additions ...................................................
Exchange and other movements .................
At 31 December 2003 ................................
14,901
492
2,584
17,977
18
–
–
18
380
38
11
429
4,552
6,353
(220)
10,685
132
287
37
456
Total
US$m
19,983
7,170
2,412
29,565
The following table presents US GAAP reported net income for comparative periods reconciled to net income
adjusted as if the provisions of SFAS 142 had been applied to those previous periods:
Net income
Reported net income ....................................................................................
Add back: goodwill amortisation .................................................................
Adjusted net income ....................................................................................
Basic earnings per share
Reported basic earnings per share ................................................................
Add back: goodwill amortisation .................................................................
Adjusted basic earnings per share ................................................................
Diluted earnings per share
Reported diluted earnings per share .............................................................
Add back: goodwill amortisation .................................................................
Adjusted diluted earnings per share .............................................................
(f) Intangible assets
The following intangible assets were recognised under US GAAP:
2003
US$m
7,231
–
7,231
0.69
–
0.69
0.69
–
0.69
Balance brought forward at 1 January ........................................................................................
Additions ...................................................................................................................................
On acquisition of subsidiaries ....................................................................................................
Amortisation charge ...................................................................................................................
Provision for impairment ...........................................................................................................
Exchange and other movements .................................................................................................
Balance carried forward at 31 December ...................................................................................
2002
US$m
4,900
–
4,900
0.52
–
0.52
0.52
–
0.52
2003
US$m
620
419
3,158
(462)
(27)
(5)
3,703
2001
US$m
4,911
1,316
6,227
0.53
0.14
0.67
0.53
0.14
0.67
2002
US$m
343
187
223
(77)
(56)
–
620
350
Provision for impairment relates to the write-down of mortgage servicing rights, as a low interest rate
environment has encouraged consumers to refinance mortgages at a faster rate than initially expected.
Weighted
average
amortisation
period
Months
At 31 December 2003
Accumulated
amortisation
US$m
Cost
US$m
Carrying
value
US$m
Intangible assets subject to amortisation
Purchased credit card relationships and related
programmes .............................................................
Retail Services merchant relationship ..........................
Other loan related relationships ....................................
Mortgage servicing rights .............................................
Technology, customer lists and other contracts ............
Core deposit relationships ............................................
Other ............................................................................
Intangible assets not subject to amortisation
Trade name ...................................................................
80
60
115
60
71
240
60
87
1,516
277
326
684
289
207
22
3,321
870
4,191
(145)
(42)
(34)
(185)
(30)
(52)
–
(488)
–
(488)
The intangible asset amortisation expense for the next five years is estimated to be:
Amortisation charge ......
2004
US$m
491
2005
US$m
445
2006
US$m
414
2007
US$m
382
1,371
235
292
499
259
155
22
2,833
870
3,703
2008
US$m
274
Mortgage servicing rights are included in the UK GAAP balance sheet as ‘Other assets’ and related amortisation
and provisions for impairment are included as a reduction of other operating income. The remaining intangibles
not recognised under UK GAAP were acquired as part of business combinations and the US GAAP amortisation
charge is included in ‘Purchase accounting adjustments’ (see (h) below).
(g) 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$43 million was made in 2003 (2002: US$35 million; 2001: US$50
million) for impairment against the US GAAP capitalised amount of development costs. At 31 December 2003,
capitalised amounts in respect of hsbc.com, Inc., totalled US$150 million (2002: US$144 million; 2001: nil).
(h) Purchase accounting adjustments
The reconciling ‘Purchase accounting adjustments’ predominantly reflect:
•
•
•
the measurement of equity consideration at the date the terms of acquisition are agreed and announced
under US GAAP; under UK GAAP equity consideration is measured at the date of acquisition;
the recognition of a greater number of intangibles under US GAAP on acquisitions, and, consequently,
higher amortisation charge;
recognition of deferred tax on all fair value adjustment under US GAAP, and corresponding amortisation
post-acquisition;
351
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
•
•
non-recognition of residual interests in securitisation vehicles existing at acquisition under UK GAAP.
Instead, the assets and liabilities of the securitisation vehicles are recognised on the UK GAAP balance
sheet, and credit provisions are established against the loans and advances. This GAAP adjustment existing
at acquisition unwinds over the life of the securitisation vehicles; and
certain costs which under UK GAAP, relate to either post-acquisition management decisions or certain
decisions made prior to the acquisition are required to be expensed to the post acquisition profit and loss
account and cannot be capitalised as goodwill, or included within the fair value of the liabilities of the
acquired entity.
(i) 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. Internal derivative contracts are not recognised for hedge
accounting purposes under US GAAP.
Fair value hedges
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.
HSBC’s North American operating subsidiaries designate certain derivative financial instruments as qualifying
SFAS 133 fair value hedges of certain fixed rate assets and liabilities. Where the critical terms of the hedge
instrument are identical at the hedge inception date, the short-cut method of accounting is utilised for these
hedging relationships. As a result, no retrospective or prospective assessment of effectiveness is required and no
hedge ineffectiveness is recognised.
For a small number of fair value hedges of fixed rate liabilities, the short-cut method of accounting cannot be
utilised. Ineffectiveness of such fair value hedges recognised in US GAAP reported net income was a loss of
US$0.4 million (2002: nil; 2001: nil).
Additionally, since 2002, HSBC’s US mortgage bank has hedged fixed rate closed residential mortgage loans
held for sale with forward sale commitments. In order to satisfy the retrospective and prospective assessment of
effectiveness for SFAS 133, the cumulative dollar offset method is utilised. Ineffectiveness is recognised in the
income statement on a monthly basis. Ineffectiveness on these hedging activities recognised in US GAAP
reported net income was a gain of US$0.2 million (2002: gain of US$7.6 million; 2001: nil).
Cash flow hedges
There were no significant contracts at 1 January 2001 which had previously qualified as cash flow hedges under
US GAAP.
HSBC’s North American operating subsidiaries designate certain derivative financial instruments, including
interest rate swaps and future contracts, as qualifying FAS 133 cash flow hedges of the forecast repricing of
certain deposit liabilities, issues of debt and variable rate commercial loans. In order to initially qualify,
assessment of hedge effectiveness is demonstrated on a prospective basis utilising both statistical regression
analysis and the cumulative dollar offset method. In order to satisfy the retrospective assessment of
effectiveness for FAS 133, the cumulative dollar offset method is utilised and ineffectiveness is recognised in
the income statement on a monthly basis. The time value component of the derivative contracts is excluded from
the assessment of hedge effectiveness.
Ineffectiveness of cash flow hedging activities recognised in US GAAP reported net income was a gain of
US$3.6 million (2002: gain of US$12.7 million; 2001: gain of US$8.5 million). The adjustment to US GAAP
352
reported equity of such hedges at 31 December 2003 was to increase equity by US$409 million (2002: increase
in equity US$42 million).
Trading derivatives
All other UK GAAP hedging derivatives have been marked to market for US GAAP purposes with the gain or
loss recognised in net income for the period. This has given rise to the increase in US reported net income of
US$613 million (2002: US$221 million; 2001: US$280 million). The principal impact of applying SFAS 133 is
to reduce other assets by US$6,545 million (2002: US$3,114 million) and reduce other liabilities by US$7,491
million (2002: US$3,896 million). 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.
(j) 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 hedge designation requirements.
The result of this is that for 2003, US GAAP profits were reduced by US$2,283 million (2002: reduced by
US$2,197 million) compared to UK GAAP profits. However, this adjustment will reverse in future periods.
There is no difference in shareholders’ equity between UK GAAP and US GAAP as a result of this item.
The 2003 adjustment is similar to 2002, reflecting a weakening of the US dollar against the principal currencies
in which HSBC holds ‘available-for-sale’ securities. These principal currencies appreciated by a further 10 to 17
per cent during 2003, in addition to a similar increase during 2002.
(k) Investment securities
Under UK GAAP, debt securities and equity shares intended to be held on a continuing basis are classified as
investment securities and are included in the balance sheet at cost less provision for any permanent diminution
in value. Other participating interests are accounted for on the same basis. Where dated investment securities
have been purchased at a premium or discount, these premiums and discounts are amortised through the profit
and loss account over the period from the date of purchase to the date of maturity and included in ‘interest
income’. These securities are included in the balance sheet at cost adjusted for the amortisation of premium and
discounts arising on acquisition. Any gain 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 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
353
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 Republic New York Corporation at acquisition, which
were classified as held-to-maturity. All other debt and equity shares are categorised as trading securities.
The US GAAP 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 .............................................................
2003
2002
Book
value
US$m
86,887
146,934
4,512
Market
valuation
US$m
86,887
146,934
4,648
Book
value
US$m
76,424
120,468
4,648
Market
valuation
US$m
76,424
120,468
4,905
The US GAAP amortised cost of ‘available-for-sale’ investment securities subject to the provisions of SFAS
115 is US$144,807 million (2002: US$118,325 million).
During the year, excluding the effects of foreign exchange, US$376 million (2002: US$1,229 million; 2001:
US$442 million) of net unrealised gains on available-for-sale securities were included in Other Comprehensive
Income (‘OCI’). US$401 million (2002: US$393 million; 2001: US$442 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 2003, HSBC recorded net losses under US GAAP of US$24 million (2002: US$308 million; 2001
US$104 million) in respect of impairments of available-for-sale securities which were considered to be other
than temporary. These losses were treated as realised items and included in net income.
Trading assets
The following table provides an analysis of trading assets, which are valued at market value and the net
gains/(losses) resulting from trading activities:
2003
Market
valuation
US$m
Gains/
(losses)
US$m
2002
Market
valuation
US$m
7,079
1,969
4,284 4
24,684 2
2,476 2
38,906 3
7,489
86,887
115
12
(1)
127
1
(3)
43
294
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)
19
US Treasury and Government agencies .........................
UK Government ............................................................
Hong Kong Government ................................................
Other government ..........................................................
Asset-backed securities ..................................................
Corporate debt and other securities ................................
Equities ..........................................................................
354
Trading assets are marked to market and all gains 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$2,053 million in 2003 (2002: US$2,047 million):
Book
value
US$m
Market
Valuation
US$m
Gross
SFAS 115
adjustment
US$m
Tax and
minority
interests
US$m
Net
SFAS 115
adjustment
US$m
At 31 December 2003
Investment securities (excluding
investments with no readily
determinable market value) .........
Other participating interests ............
Brady bonds ....................................
Other debt securities and equity
shares acquired in exchange for
advances .....................................
Securities available-for-sale at
143,929
690
180
145,956
764
178
2,027
74
(2)
8
36
28
31 December 2003 .....................
144,807
Securities available-for-sale at
31 December 2002 ......................
118,325
146,934
120,468
Movement in the year ended
31 December 2003 .....................
2,127
2,143
(16)
(621)
(17)
1
(8)
(645)
(618)
(27)
1,406
57
(1)
20
1,482
1,525
(43)
The book value above includes securities denominated in foreign currencies which have been translated at
closing rates. Foreign exchange movements between historic rates and closing rates are reflected in Other
Comprehensive Income
Unrealised losses on investment securities
The following investment securities, that have unrealised losses at 31 December 2003, are not considered
‘Other-than-temporary’ impaired under US GAAP:
Period investment has been in an unrealised loss position
Less than one year
Fair value
US$m
Unrealised
losses
US$m
Greater than or equal to
one year
Fair value
US$m
Unrealised
losses
US$m
Total
Fair value
US$m
Unrealised
losses
US$m
US Treasury and
Government agencies .
UK Government .............
Hong Kong Government .
Other government ...........
Asset-backed securities ..
Corporate debt and
other securities ...........
Debt securities.................
Equity shares ...................
Total
6,841
551
4
5,366
655
15,718
29,135
474
29,609
(191)
(1)
–
(29)
(7)
(97)
(325)
–
(325)
387
–
–
461
629
2,475
3,952
90
4,042
(5)
–
–
(4)
(1)
(15)
(25)
(10)
(35)
7,228
551
4
5,827
1,284
18,193
33,087
564
33,651
(196)
(1)
–
(33)
(8)
(112)
(350)
(10)
(360)
Under US GAAP, 1,749 debt security investments and 55 investments in equity shares had unrealised losses at
31 December 2003.
Under US GAAP, HSBC recognises an ‘Other-than-temporary’ impairment in the income statement for any
investment security whose market value has been significantly below its carrying value for a period exceeding
355
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
six months. The only exception to this policy is in respect of debt securities where their decline in market value
is due solely to an increase in underlying rates of interest and where HSBC has the ability to hold these
securities until maturity. None of the securities disclosed in the table above are considered ‘Other-than-
temporarily’ impaired at 31 December 2003.
(l) 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
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 were no longer funding the ongoing business, were treated
as a separate operation with the US dollar as the unit of account. These liabilities were settled as they fell due
by the Group outside Argentina. As HSBC prepares its accounts in US dollars no further translation effect
arose.
Under US GAAP this accounting treatment was not possible and the US dollar liabilities were treated as part of
the Argentine operation which accounts in Argentine pesos. As a result, when the Argentine peso weakened the
US dollar denominated liabilities generated a substantial loss in Argentine pesos which was reflected in US
GAAP income. However, as HSBC accounts in US dollars and economically there was no change in the
amount of US dollars owing, an exactly offsetting gain was reflected in the US GAAP accounts in shareholders’
equity.
(m) Taxation
The components of the net deferred tax liability calculated under SFAS 109 ‘Accounting for Income Taxes’, are
as follows:
Deferred tax liabilities
Leasing transactions .....................................................................................................................
Capital allowances .......................................................................................................................
Provision for additional UK tax on overseas dividends ...............................................................
Reconciling items ........................................................................................................................
Other ............................................................................................................................................
Total deferred tax liabilities .........................................................................................................
Deferred tax assets
Provisions for bad and doubtful debts ..........................................................................................
Tax losses ....................................................................................................................................
Reconciling items ........................................................................................................................
Other ............................................................................................................................................
Total deferred tax assets before valuation allowance ...................................................................
Less: valuation allowance ............................................................................................................
Deferred tax assets less valuation allowance ................................................................................
Net deferred tax (asset) under SFAS 109 .....................................................................................
Included within ‘other assets’ under US GAAP ...........................................................................
Included within ‘deferred tax liabilities’ under US GAAP ...........................................................
2003
US$m
1,587
293 2
61
2,417 2
1,076
5,434
3,122
972 3
2,273
1,332 2
7,699
(964)
6,735
(1,301)
(2,669)
1,368
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
The valuation allowance against deferred tax assets principally relates to trading and capital losses carried
forward, which have not been recognised due to uncertainty over their utilisation. A valuation allowance is
356
established to reduce deferred tax assets if, based on available evidence, it is considered more likely than not
that any of the deferred tax assets will not be realised.
At 31 December 2003, HSBC has recognised deferred tax assets in respect of tax losses (net of valuation
allowances) totalling US$231 million (2002: US$179 million), of which, US$49 million (2002: US$63 million)
expire within two to five years and US$182 million (2002: US$116 million) expire in 5 years or more.
(n) Loans and advances
SFAS 114 ‘Accounting by creditors for impairment of a loan’ as amended by SFAS 118 ‘Accounting by
creditors for impairment of a loan – income recognition and disclosures’ is effective for accounting periods
beginning after 15 December 1994. SFAS 114 addresses accounting by creditors for impairment of a loan by
specifying how allowances for credit losses for certain loans should be determined. A loan is impaired when it is
probable that the creditor will be unable to collect all amounts in accordance with the contractual terms of the
loan agreement. Impairment is measured based on the present value of expected future cash flows discounted at
the loan’s effective rate or, as an expedient, at the fair value of the loan’s collateral. Leases, smaller-balance
homogeneous loans and debt securities are excluded from the scope of SFAS 114.
At 31 December 2003, 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 2003
was US$15,074 million (2002: US$10,520 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$8,810 million (2002: US$8,294
million). The impairment reserve in respect of these loans estimated in accordance with the provisions of
SFAS 114 was US$4,709 million (2002: US$4,868 million). During the year ended 31 December 2003,
impaired loans, including those excluded from SFAS 114, averaged US$12,215 million (2002:
US$9,153 million) and interest income recognised on these loans was US$230 million (2002: US$258 million;
2001: US$261 million).
(o) 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 these values and may be subject to certain
assumptions and limitations.
The fair values presented in the table on page 359 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 dates. 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
357
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 234 to 366.
Assets
Cash and balances at central banks
Items in the course of collection
Hong Kong Government certificates of indebtedness
Trading debt securities and equity shares
Treasury bills and other eligible bills
Other assets
Prepayments and accrued income
Off-balance-sheet trading instruments
Liabilities
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 Government currency notes in circulation
Short positions in treasury bills, debt securities and equity shares
Items in the course of transmission
Other liabilities
Accruals and deferred income
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:
(i) 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 conforming 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.
(ii) 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.
(iii) 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.
(iv) Debt securities in issue and subordinated liabilities
Fair value is estimated using quoted market prices at the balance sheet date.
358
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 .................................
2003
Carrying
value
US$m
622,325
130,922
5,304
690
643,558
127,555
25,462
4,604
Fair
value
US$m
624,969
132,594
6,217
764
643,611
128,359
26,889
4,600
2002
Carrying
value
US$m
447,840
107,900
4,207
651
548,371
34,965
18,371
4,431
Fair
value
US$m
449,968
109,897
4,757
747
548,302
35,297
19,613
4,420
The fair value of derivative financial instruments is the same as their carrying value under US GAAP.
(p) Earnings per share
Basic earnings per share under US GAAP, SFAS 128 ‘Earnings per share’, is calculated by dividing net income
of US$7,231 million (2002: US$4,900 million; 2001: US$4,911 million) by the weighted average number of
ordinary shares in issue in 2003 of 10,429 million (2002: 9,339 million; 2001: 9,237 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 2003 of 10,547 million (2002: 9,436 million; 2001: 9,336 million).
(q) Variable interest entities
Application of FIN 46
In January 2003, the FASB issued FIN 46. FIN 46R, a modified version of FIN 46, was issued in December
2003. FIN 46R addresses certain implementation issues that arose under FIN 46 and changes some of the
criteria used to determine whether HSBC is the primary beneficiary of an entity. HSBC has applied FIN 46R to
its assessment of certain entities where the impact of the modifications in FIN 46R is known. However, HSBC
is still assessing the impact of FIN 46R on other entities, and will fully adopt FIN 46R in 2004. FIN 46 requires
consolidation of VIEs in which HSBC is the primary beneficiary and disclosures in respect of all other VIEs in
which HSBC has a significant variable interest.
HSBC fully implemented FIN 46 or FIN 46R for VIEs created or acquired after 31 January 2003 but
implemented the transitional provisions of FIN 46 and FIN 46R for VIEs existing at that date. To comply with
the transitional provisions of FIN 46 and FIN 46R, HSBC has evaluated its structures existing at 31 December
2003 to determine whether it is reasonably likely that HSBC would be required to consolidate or disclose
information about each VIE’s nature, purpose, size and activities, together with HSBC’s maximum exposure to
loss. HSBC is also required to disclose the anticipated effect of full adoption of FIN 46R on its financial
statements.
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. HSBC also uses VIE structures in some instances to obtain funding for its operations, or
for investment purposes. The use by HSBC of a VIE structure in a business transaction is thus commercially
driven. Utilisation of a VIE occurs after careful consideration has been given to the most appropriate structure
359
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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
conduit activity, securitisation, public and private sector infrastructure related projects and funds, investment
funds, and capital funding transactions.
Under UK GAAP, HSBC consolidates entities in which it has a controlling financial interest. As UK GAAP
normally requires a risks and rewards approach to consolidation, HSBC’s interests in entities deemed to be VIEs
may result in differences in accounting and disclosure treatment under US GAAP.
VIEs existing on 31 January 2003 where HSBC is the primary beneficiary
Under US GAAP, HSBC will be required to consolidate VIEs existing at 31 January 2003, where it is the
primary beneficiary, with effect from 1 January 2004.
At 31 December 2003, the aggregate size of such VIEs was as follows:
Activity
Asset-backed commercial paper conduits .................................................................................................................
Securitisation vehicles ..............................................................................................................................................
Infrastructure projects and funds................................................................................................................................
Investment funds........................................................................................................................................................
Total
assets
US$m
7,307
123
1,252
34
8,716
The third party liabilities of these entities are supported by the collateral held by the issuing VIEs. The total
liabilities of these entities are not significantly different from their total assets.
Under UK GAAP, HSBC currently consolidates certain of the commercial paper conduits (with total assets and
liabilities of US$3,375 million at 31 December 2003) and the securitisation vehicles.
VIEs existing on 31 January 2003 where HSBC is not the primary beneficiary
At 31 December 2003, HSBC has significant involvement with the following types of VIEs where it is not the
primary beneficiary:
Activity
Asset-backed commercial paper conduits ...................................................................................
Securitisation vehicles ................................................................................................................
Infrastructure projects and funds .................................................................................................
Low income housing tax credit partnerships ...............................................................................
Guaranteed pension funds ...........................................................................................................
Capital funding vehicles .............................................................................................................
Government debt restructuring programs ....................................................................................
Other ...........................................................................................................................................
HSBC
maximum
exposure
to loss
US$m
25
820
991
158
–1
23
379
139
2,535
Size
US$m
253
3,748
4,443
1,336
2,381
4,694
2,656
408
19,919
1 Guaranteed pension funds require HSBC to contribute to a fund's assets if the fund under-performs the market return by a certain
percentage. HSBC, as pension fund administrator, is required to invest within certain guidelines and the likelihood of HSBC being
in a position where it is required to make up any such shortfall is considered remote. It is not possible to quantify meaningfully the
maximum loss for such products with any degree of certainty since any payout is dependent on the performance of other pension
funds in the market.
In addition to the above, HSBC also holds interests or is involved as a manager, trustee, or sponsor of
investment funds that are considered VIEs. In such funds, HSBC provides similar services and receives similar,
market-based remuneration as it does for investment funds that are not considered VIEs. HSBC maintains a
360
nominal equity stake in some of these funds, but the majority of the expected losses and expected residual
returns of these funds are absorbed or received by the funds’ other investors. In certain other instances, HSBC’s
involvement in the funds is limited to that of an equity investor with a minority stake that does not cause HSBC
to absorb or receive the majority of the funds’ expected losses or expected residual returns.
In respect of commercial paper conduits and securitisation vehicles, HSBC’s exposure to loss generally arises
through back-up liquidity facility commitments. In respect of infrastructure projects, HSBC’s exposure to loss
generally arises through on-balance sheet financing of these projects. In respect of investment funds, HSBC’s
exposure to loss primarily reflects ‘seed capital’ investments in these funds. In respect of low income housing
tax credit partnerships, HSBC’s exposure to loss arises from the amount it is committed to invest in the limited
partnerships. In respect of the capital funding vehicles, HSBC’s exposure to loss represents its equity investment
in the trust vehicles. In respect of government debt restructuring programs, HSBC’s exposure to loss represents
its net investment in the program.
Under UK GAAP, HSBC does not consolidate the above VIEs, except for the capital funding vehicles
(including trust preferred securities). Under US GAAP, HSBC will be required to deconsolidate these vehicles
with effect from 1 January 2004 which will result in non-equity minority interests being reclassified as
subordinated liabilities.
VIEs created or acquired after 31 January 2003
HSBC has fully applied the provisions of FIN 46 or FIN 46R for entities created or acquired after 31 January
2003, including all VIEs held by Household, as follows:
VIEs where HSBC is the primary beneficiary
Activity
Asset-backed commercial paper conduits ..................................................................................................................
Investment funds ........................................................................................................................................................
Total
assets
US$m
10
84
94
There was no significant impact on US GAAP net income for the year ended 31 December 2003 as a result of
consolidating the above VIEs. Under UK GAAP, HSBC does not consolidate the above VIEs. Investment funds
have been consolidated for US GAAP where it is known HSBC is the primary beneficiary.
VIEs where HSBC is not the primary beneficiary
Activity
Asset-backed commercial paper conduits ...................................................................................
Low income housing tax credit partnerships ...............................................................................
Capital funding vehicles ..............................................................................................................
Other ...........................................................................................................................................
HSBC’s
maximum
exposure
to loss
US$m
3,215
476
30
15
3,736
Size
US$m
3,225
643
5,269
700
9,837
HSBC’s involvement in investment funds created or acquired after 31 January 2003, is similar to its
involvement with other investment funds as noted above.
Under UK GAAP, HSBC does not consolidate the above VIEs, except for capital funding vehicles (including
trust preferred securities).
HSBC revised the structure of one existing commercial paper conduit, which continues not to be consolidated
under UK and US GAAP, as HSBC will not absorb the majority of expected losses for this entity.
361
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(r) Consolidated cash flow statement
HSBC prepares its cash flow statement in accordance with the UK Financial Reporting Standard 1 (Revised
1996) ‘Cash flow statements’. Its objectives and principles are similar to those set out in SFAS 95 ‘Statement of
cash flows’, as amended by SFAS 104 ‘Statement of cash flows – Net reporting of certain cash receipts and cash
payments and classification of cash flows from hedging transactions’.
FRS 1 (Revised) defines ‘Cash’ as ‘Cash and balances at central banks’ and ‘Advances to banks payable on
demand’. Under US GAAP, ‘Cash equivalents’ are defined as ‘Short-term highly liquid investments’ that are
both:
−
−
convertible to known amounts of cash; and
so near their maturity that they present insignificant risk of changes in value because of fluctuations in
interest rates.
The other principal differences between US and UK GAAP are in respect of classification. Under UK GAAP,
HSBC presents its cash flows by: (a) Operating activities; (b) Dividends received from associates; (c) Returns
on investments and servicing of finance; (d) Taxation; (e) Capital expenditure and financial investments; (f)
Acquisitions and disposals; (g) Equity dividends paid; and (h) Financing. Under US GAAP, only three
categories are required, (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
Operating activities
Classification under
SFAS 95/104
Operating activities
Operating activities
Financing activities
Financing activities
Investing activities
Investing 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 .............................
2003
US$m
7,661
6,628
25,289
(4,383)
35,195
2002
US$m
7,659
5,651
19,211
(4,634)
27,887
2001
US$m
6,185
5,775
16,039
(3,798)
24,201
362
Set out below is a summary combined statement of cash flows under US GAAP.
Cash flows from operating activities ............................................................
Cash flows from investing activities ............................................................
Cash flows from financing activities ............................................................
Effect of exchange rate changes on cash and cash equivalents .....................
Net movement in cash and cash equivalents under US GAAP .....................
Cash and cash equivalents at beginning of year ...........................................
Cash and cash equivalents at end of year .....................................................
Year ended 31 December
2003
US$m
17,791
(117,463)
104,920
2,060
7,308
27,887
35,195
2002
US$m
(1,757)
(24,575)
28,614
1,404
3,686
24,201
27,887
2001
US$m
14,324
(20,241)
3,995
(408)
(2,330)
26,531
24,201
The total interest paid by HSBC during the year was US$14,437 million (2002: US$13,761 million; 2001:
US$22,301 million).
(s) Securitisations
As a consequence of the acquisition of Household in March 2003, HSBC has increased its securitisation
activity. The following discussion relates only to Household’s securitisation activities. In other HSBC entities
such activities do not represent a significant part of HSBC’s business and retained interests in securitisations are
not significant.
HSBC has sold MasterCard and Visa, private label, personal non-credit card and auto finance loans in various
securitisation transactions during 2003. HSBC continues to service and receive servicing fees on the outstanding
balance of these securitised loans and retains rights to future cash flows arising from the loans after the investors
receive their contractual return. HSBC has also, in certain cases, retained other subordinated interests in these
securitisations. These transactions result in the recording of an interest-only strip receivable under US GAAP
which represents the value of the future residual cash flows from securitised loans. The investors and the
securitisation trusts have only limited recourse to HSBC assets for failure of debtors to pay. That recourse is
limited to HSBC’s rights to future cash flow and any subordinated interest retained. Servicing assets and
liabilities are not recognised in conjunction with securitisations since HSBC receives adequate compensation
relative to current market rates to service the loans sold.
Securitisation revenue includes income associated with the current and prior period securitisation of loans with
limited recourse structured as sales under US GAAP. Such income includes gains on sales, net of the estimate of
probable credit losses under the recourse provisions, servicing income and excess spread relating to those loans.
Net initial gains ......................................................................................................................................................
Net replenishment gains from revolving securitisations .........................................................................................
Servicing revenue and excess spread ......................................................................................................................
Total securitisation revenue ...................................................................................................................................
2003
US$m
135
412
461
1,008
Interest-only strip receivables, net of the related losses and excluding the mark-to-market adjustment recorded in
accumulated other comprehensive income decreased US$415 million in 2003.
363
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Net initial gains, which represent gross initial gains net of management’s estimate of probable credit losses
under the recourse provisions, and the key economic assumptions used in measuring the net initial gains from
securitisations were as follows:
Auto
Finance
MasterCard/
Visa
Net initial gains (US$millions) ...............................
Key economic assumptions1
Weighted average life (in years) .........................
Payment speed ....................................................
Expected credit losses (annual rate) ....................
Discount rate on cash flows ................................
Cost of funds ......................................................
40
2.1
35.4%
6.1%
10.0%
2.2%
13
0.4
3.3%
5.1%
9.0%
1.8%
Total
135
Private
Label
44
0.7
74.5%
5.7%
10.0%
1.8%
Personal
Non-Credit
Card
38
1.7
43.3%
12.0%
11.0%
2.1%
1 Weighted-average rates for securitisations entered into during 2003 for securitisations of loans with similar characteristics.
Certain revolving securitisation trusts, such as credit cards, are established at fixed levels and require frequent
sales of new loan balances into the trust to replace loans as they run-off. These replenishments totalled US$25.0
billion in 2003. Net gains (gross gains less estimated credit losses under the recourse provisions) related to these
replenishments were calculated using weighted-average assumptions consistent with those used for calculating
gains on initial securitisations and totalled US$412 million in 2003.
Cash flows received during 2003 from securitisation trusts were as follows:
Real Estate
Secured
US$m
Auto
Finance
US$m
MasterCard/
Visa
US$m
Proceeds from initial securitisations ............
Servicing fees received ................................
Other cash flow received on retained
interests1 ..................................................
–
2
8
1,158
86
50
350
149
635
Private
Label
US$m
1,050
65
193
Personal
Non-Credit
Card
US$m
2,810
100
Total
US$m
5,368
402
132
1,018
1 Other cash flows included all cash flows from interest-only strip receivables, excluding servicing fees.
364
At 31 December 2003, the sensitivity of the current fair value of the interest-only strip receivables to an
immediate 10 per cent and 20 per cent unfavourable change in assumptions are presented in the table below.
These sensitivities are based on assumptions used to value interest-only strip receivables at 31 December 2003.
Real Estate
Secured Auto Finance
MasterCard/
Visa
Private
Label
Personal
Non-Credit
Card
Carrying value (fair value) of interest- only
strip receivables (US$ millions)................
Weighted-average life (in years) ...................
5
0.7
157
1.9
301
0.6
146
0.7
345
1.6
Payment speed assumption (annual rate).......
21.7%
38.1%
80.5%
76.2%
44.2%
Impact on fair value of 10% adverse
change (US$ millions) ..........................
Impact on fair value of 20% adverse
change (US$ millions) ..........................
–
–
Expected credit losses (annual rate) ..............
1.8%
Impact on fair value of 10% adverse
change (US$ millions) ..........................
Impact on fair value of 20% adverse
change (US$ millions) ..........................
Discount rate on residual cash flows (annual
rate)...........................................................
Impact on fair value of 10% adverse
change (US$ millions) ..........................
Impact on fair value of 20% adverse
change (US$ millions) ..........................
–
(1)
–
–
Variable returns to investors (annual rate).....
1.3%
Impact on fair value of 10% adverse
change (US$ millions) ..........................
Impact on fair value of 20% adverse
change (US$ millions) ..........................
–
–
(31)
(59)
7.4%
(52)
(104)
(26)
(48)
5.4%
(28)
(56)
(12)
(22)
(26)
(51)
5.8%
10.1%
(18)
(36)
(66)
(131)
(10)
(19)
–
–
–
(3)
(6)
(1)
(1)
(4)
(8)
1.8%
2.7%
2.2%
(10)
(19)
(9)
(17)
(14)
(28)
13.0%
10.0%
9.0%
10.0%
11.0%
These sensitivities are hypothetical and should not be considered to be predictive of future performance. As the
figures indicate, the change in fair value based on a 10 per cent variation in assumptions cannot necessarily be
extrapolated because the relationship of the change in assumption to the change in fair value may not be linear.
Also, in this table, the effect of a variation in a particular assumption on the fair value of the residual cash flow
is calculated independently from any change in another assumption. In reality, changes in one factor may
contribute to changes in another (for example, increases in market interest rates may result in lower
prepayments) which might magnify or counteract the sensitivities. Furthermore, the estimated fair values as
disclosed should not be considered indicative of future earnings on these assets.
Static pool credit losses are calculated by summing actual and projected future credit losses and dividing them
by the original balance of each pool of asset. Due to the short term revolving nature of MasterCard and Visa,
and private label loan balances, the weighted-average percentage of static pool credit losses is not considered to
be materially different from the weighted-average charge-off assumptions used in determining the fair value of
interest-only strip receivables in the table above. At 31 December 2003, static pool credit losses for auto finance
loans securitised in 2003 were estimated to be 11.5 per cent.
365
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
51 Subsequent events
On 18 February 2004, HSBC Asia Holdings BV, a wholly-owned subsidiary of HSBC, acquired 100 per cent of the
issued share capital of The Bank of Bermuda Limited for a cash consideration of US$1.3 billion.
The acquisition will provide HSBC with a strong position in the local banking market in Bermuda. It will also add
significant scale and geographical spread to HSBC’s existing international fund administration, private banking,
trustee and payments and cash management businesses.
The fair value of the assets and liabilities acquired, and the goodwill arising on the acquisition, is in the process of
being determined and it is not practicable to estimate the future financial impact of the acquisition on HSBC.
52 Approval of accounts
These accounts were approved by the Board of Directors on 1 March 2004.
366
H S B C H O L D I N G S P L C
Taxation of Shares and Dividends
Taxation
The following is a summary, under current law, of
the principal UK tax considerations that are likely to
be material to the ownership and disposition of
shares. The summary does not purport to be a
comprehensive description of all the tax
considerations that may be relevant to a holder of
shares. In particular, the summary deals principally
with shareholders who are resident in the United
Kingdom for UK tax purposes and only with holders
who hold the shares as investments and who are the
beneficial owners of the shares, and does not address
the tax treatment of certain classes of holders such as
dealers in securities. Holders and prospective
purchasers should consult their own advisers
regarding the tax consequences of an investment in
shares in light of their particular circumstances,
including the effect of any national, state or local
laws.
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
by certain shareholders against any liability they 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.
Information on the taxation consequences of the
HSBC Holdings scrip dividends offered in lieu of the
2003 first and second interim dividends was set out
in the Secretary’s letters to shareholders of 1 April
2003, 3 September 2003 and 9 December 2003. 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 the dividends was the cash dividend
foregone.
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 depending 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 may also be
adjusted to take account of indexation allowance
and, in the case of individuals, taper relief. Except
for gains made by a company chargeable to UK
corporation tax, any such indexation allowance will
be calculated up to 5 April 1998 only.
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
367
H S B C H O L D I N G S P L C
Taxation of Shares and Dividends (continued)
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.
Taxation – US residents
The following is a summary, under current law, of
the principal UK tax and 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. A new income tax
treaty (the ‘new Treaty’) between the United
Kingdom and the United States entered into effect on
1 May 2003 with respect to dividends superseding
the previous tax treaty (the ‘old Treaty’). Following
entry into effect of the new Treaty, eligible US
368
holders are no longer entitled to claim a special
foreign tax credit in respect of dividends that was
available under the terms of the old Treaty, except
for a limited period of time during which such
holders may elect to apply the old 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 new Treaty
(and, therefore, will be an eligible US holder) if it is
(i) an individual resident of the United States, a US
corporation meeting ownership criteria specified in
the new Treaty or other entity meeting criteria
specified in the new Treaty; and (ii) not also resident
in the United Kingdom for UK tax purposes. Special
rules, including a limitation of benefits provision,
may apply. 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
A US holder must include cash dividends paid on the
shares or ADSs in ordinary income on the date that
such holder or the ADS depositary receive them,
translating dividends paid in UK pounds sterling into
US dollars using the exchange rate in effect on the
date of receipt. Qualified dividends paid before 2009
to individual US holders, may be subject to federal
tax at the 5 per cent or 15 per cent maximum tax rate
that applies to net capital gains. To qualify for the
5 per cent or 15 per cent maximum tax rate, the
dividends must have been paid by a qualified foreign
corporation and must be paid on shares that the
holder has held for more than 61 days during the
121-day period that begins 60 days before the ex-
dividend date. In addition, amongst other criteria,
dividends on any shares to the extent the holder is
obligated (under a short sale or otherwise) to make
related payments for positions in substantially
similar or related property are not qualified
dividends. A non-US corporation is a qualified
foreign corporation if it is eligible for the benefits of
a comprehensive income tax treaty with the United
States that the US Treasury Department has
determined is satisfactory for this purpose and
includes an exchange of information programme and
if the non-US corporation is not a foreign personal
holding company, a foreign investment company or a
passive foreign investment company during the tax
year in which the dividends are paid or in the
preceding tax year. For purposes of these provisions,
HSBC Holdings plc is a qualified foreign corporation
and dividends paid on its ordinary shares will be
qualified dividends if the holding period and other
criteria are met by the holder.
Taxation of dividends – tax credits under the
old Treaty
If a US holder qualified for benefits under the old
Treaty, such holder may be eligible, subject to
generally applicable limitations, to receive a special
US foreign tax credit equal to one-ninth of the
amount of certain cash dividends received on the
shares or ADSs, so long as such holder makes an
election to include in income, as an additional
notional dividend, an amount equal to the tax credit.
This foreign tax credit benefit is generally only
available with respect to dividends paid before
1 May 2003, unless a US holder elects to apply the
old Treaty in its entirety for an optional 12-month
extension period. US holders should consult their
own tax advisers regarding their potential eligibility
for this foreign tax credit benefit.
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 unless at the time of
the sale or other disposition the holder carries on a
trade, profession or vocation in the United Kingdom
through a branch or agency or permanent
establishment and the shares or ADSs are or have
been used, held or acquired for the purposes of such
trade, profession, vocation, branch or agency or
permanent establishment. 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 5 or 15 per cent.
Stamp duty and stamp duty reserve tax –
ADSs
If shares are transferred into a clearance service or
depository receipt arrangement (which will include a
transfer of shares to the Depository) 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. The
amount of stamp duty reserve tax payable on such a
transfer will be reduced by any stamp duty paid in
connection with the same transfer.
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 Depository to a
registered holder of an ADS upon cancellation of the
ADS, a fixed stamp duty of £5 per instrument of
transfer will be payable by the registered holder of
the ADR cancelled.
US backup withholding tax and information
reporting
Distributions made on shares and proceeds from the
sale of shares or ADSs that are paid within the
United States, or through certain 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.
369
H S B C H O L D I N G S P L C
Shareholder Information
Third Interim Dividend for 2003
Interim Dividends for 2004
The Directors have declared a third interim dividend
of US$0.24 per ordinary share (in lieu of a final
dividend) which, together with the first interim
dividend of US$0.24 and the second interim
dividend of US$0.12 already paid, will make a total
distribution for the year of US$0.60 per share, an
increase of 13 per cent on 2002. Information on the
scrip dividend scheme and currencies in which
shareholders may elect to have the cash dividend
paid will be sent to shareholders on or about
30 March 2004. The timetable for the dividend is:
Shares quoted ex-dividend in London,
Hong Kong and Bermuda; American
Depositary Shares (‘ADSs’) quoted
ex-dividend in New York.................
Record date for third interim dividend
for 2003 and closure of Hong Kong
Overseas Branch Register of
shareholders for one day ..................
Shares quoted ex-dividend in Paris......
Mailing of Annual Report and
Accounts and /or Annual Review,
Notice of Annual General Meeting
and dividend documentation ...........
Final date for receipt by registrars of
forms of election and revocations
of standing instructions for scrip
dividends .........................................
Exchange rate determined for
payment of dividends in sterling
and Hong Kong dollars ...................
Payment date: dividend warrants, new
share certificates or transaction
advices and notional tax vouchers
mailed and shares credited to stock
accounts in CREST .........................
2004
17 March
19 March
22 March
30 March
22 April
26 April
5 May
Annual General Meeting
The 2004 Annual General Meeting will be held at the
Barbican Hall, Barbican Centre, London EC2 on 28
May 2004 at 11 am.
Interim Results
The interim results for the six months to 30 June
2004 will be announced on Monday 2 August 2004.
370
As announced in 2003 the Board has adopted a
policy of paying quarterly dividends. Under this
policy it is intended to have a pattern of three equal
interim dividends with a variable fourth interim
dividend. It is envisaged that the first interim
dividend in respect of 2004 will be US$0.13 per
share. The proposed timetables for the dividends in
respect of 2004 are:
First interim dividend for 2004
Announcement ......................................
Shares quoted ex-dividend in London,
Hong Kong and Bermuda; ADSs
quoted ex-dividend in New York ......
Record date and closure of
Hong Kong Overseas Branch Register
of shareholders for one day...............
Shares quoted ex-dividend in Paris
Payment date .........................................
Second interim dividend for 2004
Announcement ......................................
Shares quoted ex-dividend in London,
Hong Kong and Bermuda; ADSs
quoted ex-dividend in New York ......
Record date and closure of
Hong Kong Overseas Branch Register
of shareholders for one day...............
Shares quoted ex-dividend in Paris .......
Payment date .........................................
Third interim dividend for 2004
2004
4 May
19 May
21 May
24 May
7 July
2 August
18 August
20 August
23 August
6 October
Announcement ......................................
ADSs quoted ex-dividend in
8 November
New York ........................................... 23 November
Shares quoted ex-dividend in London,
Hong Kong and Bermuda .................. 24 November
Record date and closure of
Hong Kong Overseas Branch Register
of shareholders for one day............... 26 November
Shares quoted ex-dividend in Paris........ 29 November
Payment date .........................................
Fourth interim dividend for 2004
Announcement .....................................
Shares quoted ex-dividend in London,
Hong Kong and Bermuda; ADSs
quoted ex-dividend in New York ......
Record date and closure of
Hong Kong Overseas Branch Register
of shareholders for one day...............
Shares quoted ex-dividend in Paris .......
Payment date ........................................
2005
20 January
28 February
16 March
18 March
21 March
4 May
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:
Principal
Register
Computershare Investor Services PLC
PO Box 1064, The Pavilions
Bridgwater Road
Bristol BS99 3FA
United Kingdom
Hong Kong Computershare Hong Kong Investor
Overseas
Branch
Register
Services Limited
Rooms 1901-1905, Hopewell Centre
183 Queen’s Road East, Hong Kong
Bermuda
Overseas
Branch
Register
Corporate Shareholder Services
The Bank of Bermuda Limited
6 Front Street
Hamilton HM11
Bermuda
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 7991 8041
+44 (0)20 7991 4663
Facsimile:
investorrelations@hsbc.com
E-mail:
Annual Report and Accounts 2003
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
Chinese translation
A Chinese translation of this Annual Report and
Accounts is available on request after 30 March 2004
from the Registrars:
Computershare Hong Kong Investor Services
Limited
Rooms 1901-1905, Hopewell Centre
183 Queen’s Road East
Hong Kong
Computershare Investor Services PLC
PO Box 1064, The Pavilions
Bridgwater Road
Bristol BS99 3FA
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.
371
H S B C H O L D I N G S P L C
Shareholder Information (continued)
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 the reports,
statements or information that HSBC Holdings files
with the Securities Exchange Commission at its
public reference room in Washington D.C., which is
located at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. These
documents will also be available at the
Commission’s regional offices located at The
Woolworth Building, 233 Broadway, New York,
New York 10279 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661.
Investors should call the Commission at 1-800-SEC-
0330 for further information on the operation of the
public reference rooms. Investors can request copies
of these documents upon payment of a duplicating
fee, by writing to the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. 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 2003, there were a total of
194,371 holders of record of HSBC Holdings
ordinary shares.
As at 31 December 2003, a total of 15,647,114
of the HSBC Holdings ordinary shares were
registered in the HSBC Holdings share register in the
name of 7,431 holders of record with addresses in
the United States. These shares represented 0.14 per
cent of the total HSBC Holdings ordinary shares in
issue.
As at 31 December 2003, there were 15,081
holders of record of ADSs holding approximately
104.53 million ADSs, representing approximately
522.65 million HSBC Holdings ordinary shares.
14,833 of these holders had addresses in the United
States, holding approximately 104.47 million ADSs,
representing 522.35 million HSBC Holdings
ordinary shares. As at 31 December 2003,
approximately 4.75 per cent of the HSBC Holdings
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 HSBC Holdings ordinary
shares and ADSs. These are based on mid-market
prices at close of business on the London Stock
Exchange, the Hong Kong Stock Exchange,
Euronext Paris and the New York Stock Exchange.
Share prices have not been given for the 75p
ordinary shares listed on the Hong Kong Stock
Exchange until 2 July 1999 since on many days, the
75p shares had little or no turnover in Hong Kong.
Past share price performance should not be
regarded as a guide to future performance.
372
High and low mid-market closing prices
US$0.50 shares1
Low
(pence)
631
643
608
682
632
High
(pence)
914
866
1092
1046
866
2003…..
2002 .....
2001 .....
2000 .....
1999 .....
London
75p shares
High
(pence)
Low
(pence)
Hong Kong
HK$10 shares US$0.50 shares1 HK$10 shares
High
(pence)
Low
(pence)
High
(HK$)
Low
(HK$)
High
(HK$)
122.5
97.5
121.5
117.5
109.0
Low
(HK$)
80.3
78.8
68.5
82.8
83.3
New York2
ADSs4
High
(US$)
78.8
64.4
79.7
76.6
71.4
Low
(US$)
51.1
50.3
44.8
54.3
53.8
Paris3
US$0.50 shares
Low
(euro)
9.3
10.2
9.5
14.2
High
(euro)
13.4
13.9
17.3
17.6
815
519
816
486
100.0
61.8
London
US$0.50 shares
High
(pence)
Low
(pence)
914
828
743
709
763
770
866
845
810
700
650
631
643
644
740
753
Hong Kong
US$0.50 shares
High
(HK$)
122.5
105.0
97.0
89.0
92.5
91.8
97.5
95.0
Low
(HK$)
104.0
91.8
80.3
80.3
78.8
80.3
87.0
84.8
New York
ADSs
High
(US$)
Low
(US$)
Paris
US$0.50 shares
High
(euro)
Low
(euro)
78.8
67.3
62.5
57.3
59.1
59.6
64.4
61.6
68.0
58.6
51.6
51.1
50.3
51.5
56.1
55.0
13.4
12.0
10.7
10.9
12.0
12.1
13.9
13.7
11.5
10.1
9.4
9.3
10.2
10.3
11.4
12.4
London
US$0.50 shares
High
(pence)
Low
(pence)
Hong Kong
US$0.50 shares
High
(HK$)
Low
(HK$)
New York
ADSs
High
(US$)
Low
(US$)
Paris
US$0.50 shares
High
(euro)
Low
(euro)
897
914
914
828
820
770
863
860
810
794
765
700
122.5
119.0
117.0
105.0
102.0
95.8
117.0
115.5
104.0
100.0
95.5
91.8
78.8
76.9
75.2
67.3
65.3
61.6
75.3
72.9
68.0
64.1
61.4
58.6
12.9
13.4
13.0
12.0
12.0
11.0
12.2
12.4
11.5
11.3
10.8
10.1
2003
4th Quarter ..................................
3rd Quarter..................................
2nd Quarter .................................
1st Quarter...................................
2002
4th Quarter ....................................
3rd Quarter ....................................
2nd Quarter....................................
1st Quarter.....................................
2003
December ....................................
November....................................
October........................................
September....................................
August .........................................
July..............................................
Notes
1 US$0.50 ordinary shares were issued on implementation of a share capital reorganisation in 1999.
2 Shares were not listed on the New York Stock Exchange prior to 16 July 1999.
3 Shares were not listed on the Paris Bourse (now Euronext Paris) prior to 28 July 2000.
4 In New York each ADS represents 5 underlying ordinary shares.
373
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
Memorandum and Articles
of Association
The discussion under the caption ‘Memorandum and
Articles of Association’ contained in HSBC
Holdings Annual Reports on Form 20-F for the years
ended 31 December 2000 and 2001 is incorporated
by reference herein.
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$10 ordinary shares were entitled to
equal rights, including the right to a dividend, and all
dividends were declared and paid with respect to
both classes of shares. The dividends declared, per
ordinary share, for each of the last five years were:
First
interim
Second
interim
Third
interim 1
0.240
0.134
1.863
20031
2002
2001
2000
1999
US$........
£.............
HK$.......
US$........
£.............
HK$ .......
US$........
£.............
HK$ .......
US$........
£.............
HK$ .......
US$........
£.............
HK$ .......
0.240
0.146
1.860
0.205
0.130
1.600
0.190
0.129
1.482
0.150
0.103
1.170
0.133
0.081
1.033
0.120
0.065
0.931
0.325
0.202
2.534
0.290
0.200
2.261
0.285
0.191
2.223
0.207
0.131
1.612
Total
0.600
0.345
4.654
0.530
0.332
4.134
0.480
0.329
3.743
0.435
0.294
3.393
0.340
0.212
2.645
1 The third interim dividend for 2003 of US$0.24 per share
has been translated into pounds sterling and Hong Kong
dollars at the closing rate on 31 December 2003. The
dividend will be paid on 5 May 2004.
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.
374
The HSBC Group
Structure of Principal Operating Companies
at January 2004
HSBC
Holdings plc
HSBC Bank
plc
HSBC North
America
Holdings Inc.
HSBC
Finance
(Netherlands)
HSBC
Investment
Bank
Holdings plc
HSBC
Insurance
Holdings
Limited
HSBC Latin
America
Holdings
(UK) Limited
Grupo
Financiero
HSBC, S.A. de
C.V.
(99.76%)
HSBC Life
(UK)
Limited
CCF S.A.
(99.99%)
HSBC Bank
A.S.
HSBC Asset
Finance
(UK)
Limited
HSBC
Trinkaus &
Burkhardt
KGaA
(73.47%)
HSBC
Republic
Holdings
(Luxembourg)
S.A.
HSBC USA
Inc.
HSBC
Securities
(USA) Inc.
Household
International,
Inc.
HSBC
Holdings BV
The
Cyprus
Popular Bank
Limited
(21.39%)
HSBC Asset
Management
(Europe)
Limited
HSBC
Insurance
Brokers
Limited
HSBC Bank
Brasil S.A. –
Banco
Multiplo
HSBC Latin
America BV
HSBC Mexico
S.A.
(99.74%)
Framlington
Group
Limited
(51%)
Erisa
(49.99%)
(97.37%)
(50%)
HSBC Bank
Canada
HSBC Bank
USA
Wells Fargo
HSBC Trade
Bank, N.A.
(20%)
Household
Finance
Corporation
HFC Bank
Limited
HSBC Asset
Management
(Taiwan)
Limited
(99.94%)
HSBC
Seguros
(Brasil) S.A.
(97.98%)
(10.45%)
HSBC
Argentina
Holdings S.A
(89.53%)
HSBC
Investment
Bank
Holdings
BV
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
Limited
HSBC Bank
Argentina S.A.
(99.97%)
HSBC La
Buenos Aires
Seguros SA
(99.36%)
HSBC
Chacabuco
Inversiones
S.A.
H
S
B
C
H
O
L
D
I
N
G
S
P
L
C
O
r
g
a
n
i
s
a
t
i
o
n
a
l
s
t
r
u
c
t
u
r
e
(50%)
(12.81%)
HSBC
Guyerzeller
Holdings BV
(86.74%)
(2.63%)
HSBC
Europe BV
(87.19%)
HSBC
Private
Banking
Holdings
(Suisse) SA
HSBC Bank
Malta p.l.c.
(70.03%)
(94.5%)
(5.5%)
HSBC
Private
Bank
(Guernsey)
Limited
HSBC
Republic
Bank (UK)
Limited
HSBC
Private
Bank (Suisse)
S.A.
(66.7%)
(8%)
HSBC
Guyerzeller
Bank AG
(93.51%)
(25.3%)
3
7
5
Hang Seng
Bank Limited
(62.14%)
(24.64%)
Barrowgate
Limited
(15.31%)
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
(59.9%)
(32.99%)
HSBC
Insurance
(Asia)
Limited
HSBC Life
(International)
Limited
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
Glossary
Glossary of Terms
Terms Used
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
376
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
H S B C H O L D I N G S P L C
Index
Acceptances (UK/US GAAP differences) 334
Accounting
developments (future) 121
policies (principal) 241
requirements in UK and Hong Kong 324
Accounts (approval) 366
Administrative expenses 248
Annual General Meeting 212, 370
Annual Report and Accounts 2003 233
Assets
analysis 300
by customer group 11
by geographical region 15, 64, (total and net)
317
deployment 55
other 283
Associates 271
Assurance fund (UK/US GAAP differences) 326,
340
Auditor 212
report 231
Available for sale securities 355
Bad and doubtful debts 49
credit risk management 136
net charge to profit and loss account 155
provisions 118, 138, 140, 150, 264
suspended and non-accrual interest 140
Balance sheet
average 123 – 130
consolidated 234 – 235
HSBC Holdings 236
Basis of preparation of accounts 239
Business highlights 15
Calendar (financial) 370
Capital
commitments 316
events 190
management and allocation 173
structure 176
Cash flow
analysis of cash 316
consolidated statement 238, 362
reconciliation to operating profit 314
Cautionary statement regarding forward-looking
statements 5
Certificates of deposit and other time deposits
(maturity analysis) 181
Commercial banking
business highlights 16, 19, 22, 25, 26
performance in Europe 69, 73
performance in Hong Kong 80, 83
performance in Rest of Asia Pacific 90, 92
performance in North America 101, 104
performance in South America 112, 113
product offering 12
Committees (board) 202
Communication with shareholders 208
Competitive environment 26
global factors 27
regional factors 27
Connected transactions 211
Constant currency 2
Consumer finance
performance in Europe 69
performance in North America 101
product offering 12, 24
Contents frontispiece
Contingent liabilities and commitments 308
Contractual obligations 183
Corporate governance 204
UK/New York Stock Exchange corporate
governance differences 205
Corporate, Investment Banking & Markets
business highlights 17, 20, 23, 25, 26
performance in Europe 70, 74
performance in Hong Kong 81, 83
performance in Rest of Asia Pacific 91, 92
performance in North America 102, 104
performance in South America 112, 114
product offering 13
Credit risk management 136 – 141, 261
Critical accounting policies 118 – 121
Customer groups 11, 68 – 75, 80 – 84, 90 – 93, 99
– 105, 111 – 114
Customer accounts 284
Dealings in HSBC Holdings plc shares 211
Debt securities 266
held in accrual books 56
in issue 284
Debt swaps
UK/US GAAP differences 326
Deferred taxation
UK/US GAAP differences 331, 356
Defined terms frontispiece
Deposits
average balances and average rates 179
by banks 283
Derivates (accruals accounted)
UK/US GAAP differences 329, 352
Directors
biographies 184
board of directors 200, 214
emoluments 223
interests 208
remuneration 214
responsibilities (statement of) 230
service contracts and terms of appointment 220
Disclosure controls 183
Dividend income 247
Dividends 258, 370 374
UK/US GAAP differences 331
Donations 212
Earnings per ordinary share 258, 359
Economic background
377
H S B C H O L D I N G S P L C
Index (continued)
Europe 68, 71
Hong Kong 80, 82
Rest of Asia Pacific 90, 91
North America 99, 103
South America 111, 113
Economic profit 57
Employees 10
remuneration policy 213
disabled 211
involvement 211
Enforceability of judgements made in the US 6
Enquiries (from shareholders) 371
Europe
business highlights 15
competitive environment 27
economic background 68, 71
profit/(loss) 66
regulation and supervision 34
Equity shares 270
Equities exposure 172
Exchange controls and other limitations affecting
security holders 6
Fees and commissions 44
Financial highlights 1
Financial instruments 301
fair value 357
Financing changes 315
Five-year comparison 3
Fixed assets
intangible 273
tangible 274
Foreign currency
denomination losses in Argentina 256, 356
UK/US GAAP differences 331
Funds under management 56
Gains on disposal of investments 52
Goodwill
impairment 119
UK/US GAAP differences 327, 349
Health and safety 208
Hong Kong
business highlights 18
competitive environment 28
currency notes in circulation 261
economic background 80, 82
profit/(loss) 79
regulation and supervision 31
HSBC Holdings plc
availability of information 372
balance sheet 236
history and development 7
profit 258
Income from dealing in financial instruments 247
Intangible assets
UK/US GAAP differences 328, 350
Interest rate exposures 171
378
Internal control 206
International Financial Reporting Standards
(transition) 122
Investments 277
Investment securities
UK/US GAAP differences 330, 353
Investor relations 371
Joint ventures 271
Lease commitments 316
UK/US GAAP differences 326
Legal proceedings 35, (litigation) 316
Liabilities
analysis 300
other 286
provisions 286
subordinated 288
Liquidity and funding management 166
Loans and advances
maturity and interest sensitivity 177
UK/US GAAP differences 332, 357
to banks 149, 358
to customers 142, 261, 358
Market risk management 168, 310
Memorandum and Articles of Association 374
Memorandum items 308
Minority interests 290
Net interest income 40
average balance sheet 123
analysis of changes 132
North America
business highlights 23
competitive environment 28
economic background 99, 103
profit/(loss) 97
regulation and supervision 32
Off-balance sheet arrangements 182
Other operating income 43
Operating expenses 47
Operational risk management 172
Organisational structure chart 375
Outlook 8
Own shares held
UK/US GAAP differences 331
Participating interests (other) 273
Pensions
for directors 224
UK/US GAAP differences 332, 340
Personal financial services
business highlights 15, 18, 22, 24, 26
performance in Europe 68, 72
performance in Hong Kong 80, 82
performance in Rest of Asia Pacific 90, 91
performance in North America 99, 103
performance in South America 111, 113
product offering 11
Principal activities and business review 189
Private Banking
business highlights 17, 20, 23, 25
performance in Europe 71. 74
performance in Hong Kong 81, 83
performance in Rest of Asia Pacific 91, 93
performance in North America 103, 105
performance in South America 112, 114
product offering 14
Profit/(loss) excluding goodwill amortisation
by customer group 11, 58 – 60, 76 – 78, 85 –
87, 94 – 96, 99 – 105, 111 – 114
Profit/(loss) on ordinary activities before tax
after including 256
by geographical region 15, 64
consolidated 233
UK/US GAAP differences 334
Property
description 35
UK/US GAAP differences 329
valuation of land and buildings 201
Purchase accounting
adjustments 351
Recognised gains and losses for year (statement of
total consolidated) 237
Regulation and supervision 30 – 34
Related party transactions 323
Remuneration Committee 213
Reserves 190, 295
Rest of Asia Pacific
business highlights 20
competitive environment 28
economic background 90, 91
profit/(loss) 89
Restructuring provisions
UK/US GAAP differences 334
Risk elements in loan portfolio 162
Risk
credit 136, 261
reputational, strategic and operational 207
Risk-weighted assets (by principal subsidiary) 176
Sale and repurchase transactions
UK/US GAAP differences 332
Securitisations UK/US GAAP differences 333
Segmental analysis 317
Senior management
biographies 186
remuneration 214
Share capital 292
notifiable interests 211
Share option plans
CCF and subsidiary plans 195
discretionary plans 193
for directors 225
for employees 191
Household and subsidiary plans 197
restricted share plan 216, 228
UK/US GAAP differences 327
Shareholders’ funds for year (reconciliation of
movements in consolidated) 237
Short-term borrowings (analysis) 182
Software costs
UK/US GAAP differences 327, 351
South America
business highlights 25
competitive environment 29
economic background 111, 113
profit/(loss) 110
Strategy 9
Structural currency exposure 170
Structural interest rate risk 171
Subsequent events 366
Supplier payment policy 211
Taxation 53, 257, 367, 368 (US residents)
Total shareholder return 9, 217
Trading market (nature of) 372
Treasury bills and other eligible bills 259
Unquoted and illiquid debt and equity securities
120
UK GAAP
differences from US GAAP 326 – 365
US GAAP
differences from UK GAAP 326 – 365
selected financial data 4
Value at risk 168
Variable interest entities
UK/US GAAP differences 333, 359
379
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 (0) 20 7991 8888
Facsimile: 44 (0) 20 7992 4880
Web: www.hsbc.com
STOCKBROKERS
Goldman Sachs
Peterborough Court
133 Fleet Street
London EC4A 2BB
United Kingdom
HSBC Bank plc
8 Canada Square
London E14 5HQ
United Kingdom
REGISTRARS
Principal Register
Computershare Investor Services PLC
PO Box 1064, The Pavilions
Bridgwater Road
Bristol BS99 3FA
United Kingdom
Telephone: 44 (0) 870 702 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 8555
Bermuda Overseas Branch Register
Corporate Shareholder Services
The Bank of Bermuda Limited
6 Front Street
Hamilton HM11
Bermuda
Telephone: 1 441 299 6737
ADR Depositary
The Bank of New York
101 Barclay Street
Floor 22W
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
380
© Copyright HSBC Holdings plc 2004
All rights reserved
No part of this publication may be reproduced, stored
in a retrieval system, or transmitted, in any form or
by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written
permission of HSBC Holdings plc.
Published by HSBC Holdings plc, London
Designed by Group Public Affairs, The Hongkong
and Shanghai Banking Corporation Limited,
Hong Kong
Printed by St Ives Westerham Press, Edenbridge,
United Kingdom, on Mega paper. Made in Germany,
the paper comprises 50% recycled and de-inked
fibres from pre- and post-consumer waste, and 50%
virgin fibre. Pulps used are totally chlorine-free.
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