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 ... 186
Financial Highlights ............................................... 1
Report of the Directors ...................................... 191
Five-Year Comparison ........................................... 3
Directors’ Remuneration Report ...................... 216
Cautionary Statement regarding
Statement of Directors’ Responsibilities in
Forward-Looking Statements............................ 5
relation to Financial Statements.................... 234
Information about the Enforceability of
Independent Auditors’ Report .......................... 235
Judgements made in the United States ............. 7
Exchange Controls and Other Limitations
affecting Equity Security Holders ..................... 7
Financial Statements .......................................... 237
Notes on the Financial Statements .................... 243
Description of Business .......................................... 8
Taxation of Shares and Dividends .................... 357
Governance, Regulation and Supervision........... 20
Shareholder Information ................................... 360
Description of Property........................................ 25
Organisational Structure ................................... 365
Legal Proceedings................................................. 25
Glossary............................................................... 366
Financial Review................................................... 26
Index .................................................................... 370
Other Information .............................................. 179
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 2004 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 2004 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 237 to 356, 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 322 and reconciled in Note 49 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 ........................................................................................................................................
At year-end
Shareholders’ funds ........................................................................................................................
Capital resources .............................................................................................................................
Customer accounts and deposits by banks ......................................................................................
Total assets .....................................................................................................................................
Risk-weighted assets .......................................................................................................................
Per ordinary share
Earnings excluding goodwill amortisation3 ....................................................................................
Basic earnings .................................................................................................................................
Diluted earnings ..............................................................................................................................
Dividends ........................................................................................................................................
Net asset value at year end ..............................................................................................................
Share information
US$0.50 ordinary shares in issue (million)......................................................................................
Market capitalisation (billion) .........................................................................................................
Closing market price per ordinary share:
– London .........................................................................................................................................
– Hong Kong ...................................................................................................................................
Closing market price per American Depositary Share (‘ADS’)4 ......................................................
Total shareholder return to 31 December 20045
– over 1 year6 ..................................................................................................................................
For the above footnotes, see ‘Footnotes to Financial Highlights’ on page 4.
2004
US$m
24,712
19,426
13,658
22,898
17,608
11,840
(7,301)
86,623
90,780
777,290
1,276,778
759,210
US$
1.25
1.09
1.07
0.66
7.75
2003
US$m
19,990
14,401
10,359
18,540
12,816
8,774
(6,532)
74,473
74,042
643,556
1,034,216
618,662
US$
0.99
0.84
0.83
0.60
6.79
At
31 December
2004
At
31 December
2003
11,172
US$190
£8.79
HK$133.00
US$85.14
10,960
US$172
£8.78
HK$122.50
US$78.82
HSBC
Benchmark
105
110
1
H S B C H O L D I N G S P L C
Financial Highlights (continued)
Capital and performance ratios (annualised)
Capital ratios
Tier 1 capital ...................................................................................................................................
Total capital ....................................................................................................................................
Performance ratios (excluding goodwill amortisation)
Return on average invested capital7 ................................................................................................
Return on average net tangible equity8,9 ..........................................................................................
Post-tax return on average tangible assets9 ......................................................................................
Post-tax return on average risk-weighted assets9 .............................................................................
Performance ratios (as reported)
Return on average shareholders’ funds ...........................................................................................
Post-tax return on average total assets ............................................................................................
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 Finance10 .....................................................................................................................
– other HSBC ..................................................................................................................................
Total provisions outstanding as a percentage of non-performing loans at year end:
– in aggregate ..................................................................................................................................
– Consumer Finance10 .....................................................................................................................
– other HSBC ..................................................................................................................................
Efficiency and revenue mix ratios
Cost:income ratio (excluding goodwill amortisation)11 ..................................................................
– constant currency basis ................................................................................................................
As a percentage of total operating income:
– net interest income .......................................................................................................................
– other operating income ................................................................................................................
– net fees and commissions ............................................................................................................
– dealing profits ..............................................................................................................................
Constant currency
2004
%
8.9
12.0
15.2
25.4
1.31
2.23
14.4
1.12
1.96
25.7
1.04
4.26
0.19
95.5
102.1
92.5
51.1
51.1
61.3
38.7
25.9
5.1
2003
%
8.9
12.0
13.7
24.7
1.21
2.07
13.0
1.01
1.78
30.5
1.25
5.21
0.38
91.0
110.5
82.1
51.3
51.8
62.3
37.7
25.3
5.3
Constant currency comparatives in respect of 2003 and 2002, used in the 2004 and 2003 commentaries respectively,
are computed by retranslating into US dollars:
•
•
the profit and loss accounts for 2003 and 2002 of non-US dollar branches, subsidiary undertakings, joint
ventures and associates at the average rates of exchange for 2004 and 2003 respectively; and
the balance sheets at 31 December 2003 and 2002 for non-US dollar branches, subsidiary undertakings, joint
ventures and associates at the rates of exchange ruling at 31 December 2004 and 2003 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.
Operating income and cost growth
Net interest income .......................................................
Fees and commissions (net) ..........................................
Dealing profits ..............................................................
Total operating income .................................................
Administrative expenses (excluding goodwill
amortisation) .............................................................
2004 compared with 2003
2003 compared with 2002
As
reported
%
Constant
currency
%
As
reported
%
Constant
currency
%
21
26
18
23
23
17
17
12
18
17
66
33
66
54
41
58
24
58
46
32
For the above footnotes, see ‘Footnotes to Financial Highlights’ on page 4.
2
Five-year comparison
At year-end
Share capital .............................................
Shareholders’ funds ..................................
Capital resources12 .....................................
Customer accounts ....................................
Undated subordinated loan capital ............
Dated subordinated loan capital ................
Loans and advances to customers13 ..........
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 share
Earnings excluding goodwill
amortisation3 .........................................
Basic earnings ...........................................
Diluted earnings ........................................
Dividends ..................................................
Net asset value at year end ........................
Share information
US$0.50 ordinary shares in
2004
US$m
5,587
86,623
90,780
693,751
3,686
22,800
669,831
1,276,778
31,024
19,563
22,898
(6,357)
17,608
11,840
(7,301)
US$
1.25
1.09
1.07
0.66
7.75
2003
US$m
5,481
74,473
74,042
573,130
3,617
17,580
528,977
1,034,216
25,598
15,474
18,540
(6,093)
12,816
8,774
(6,532)
US$
0.99
0.84
0.83
0.60
6.79
2002
US$m
4,741
51,765
57,430
495,438
3,540
14,831
352,344
758,605
15,460
11,135
10,787
(1,321)
9,650
6,239
(5,001)
US$
0.76
0.67
0.66
0.53
5.46
2001
US$m
4,678
45,688
50,854
449,991
3,479
12,001
308,649
695,545
14,725
11,163
10,484
(2,037)
8,000
4,992
(4,467)
US$
0.63
0.54
0.53
0.48
4.88
2000
US$m
4,634
45,631
50,964
427,069
3,546
12,676
289,837
673,503
13,723
10,850
10,486
(932)
9,775
6,457
(4,010)
US$
0.80
0.74
0.73
0.435
4.92
issue (millions) ......................................
11,172
10,960
9,481
9,355
9,268
Financial ratios
Dividend payout ratio14 .............................
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$1:€ .....................................
%
52.7
1.12
14.4
7.02
8.9
12.0
0.517
0.733
0.546
0.805
%
60.6
1.01
13.0
7.06
8.9
12.0
0.560
0.793
0.612
0.885
%
69.7
0.97
12.4
6.91
9.0
13.3
0.620
0.953
0.666
1.061
%
76.2
0.86
10.6
6.87
9.0
13.0
0.690
1.130
0.695
1.117
For the above footnotes, see ‘Footnotes to Financial Highlights’ on page 4.
%
54.4
1.31
15.8
6.64
9.0
13.3
0.670
1.076
0.660
1.084
3
H S B C H O L D I N G S P L C
Financial Highlights (continued)
Five-year comparison (continued)
Amounts in accordance with US GAAP
Income statement for the year
Net income available for ordinary
shareholders ..........................................
Other comprehensive income ....................
Dividends ..................................................
Balance sheet at 31 December
Total assets ...............................................
Shareholders’ funds ..................................
Per ordinary share
Basic earnings ...........................................
Diluted earnings ........................................
Dividends ..................................................
Net asset value at year end ........................
Footnotes to ‘Financial Highlights’
2004
US$m
12,506
983
(6,932)
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)
1,266,365
90,082
1,012,023
80,251
763,565
55,831
698,312
48,444
680,076
48,072
US$
1.15
1.13
0.63
8.06
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
1 Operating profit before provisions and excluding goodwill amortisation can be reconciled to the equivalent reported measure by
deducting goodwill amortisation of US$1,814 million (2003: US$1,450 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$1,818 million (2003: US$1,585 million).
3 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.
4 Each ADS represents five ordinary shares.
5 Total shareholder return (‘TSR’) is defined on page 220.
6 The current TSR peer group benchmark, which is designed to reflect the Group’s geographical profile and business mix, consists of
three elements weighted as follows:
(i)
50 per cent is applied to a peer group of nine banks weighted by market capitalisation. The nine banks are ABN AMRO Holding
N.V., Bank of America Corporation, Citigroup Inc., Deutsche Bank AG, JPMorgan Chase & Co., The Royal Bank of Scotland
Group plc, Banco Santander Central Hispano SA, Standard Chartered PLC and UBS AG;
(ii) 25 per cent is applied to the five largest banks from each of US, the UK, continental Europe and Asia, other than those included
in (i) above, weighted by market capitalisation;
(iii) 25 per cent is applied to the banking sector of the Morgan Stanley Capital International World Index (‘MCIWI’), excluding any
banks included in (i) and (ii) above, weighted by market capitalisation.
7 The definition of return on invested capital and a reconciliation to the equivalent GAAP measures are set out on page 43.
8 The return on average net tangible equity is defined as attributable profit excluding goodwill amortisation of US$13,658 million
(2003: US$10,359 million) divided by average shareholders’ funds after deduction of average purchased goodwill of
US$53.9 billion (2003: US$42.0 billion).
9 Average net tangible equity and average tangible assets are calculated by deducting average purchased goodwill net of cumulative
amortisation of US$28.2 billion (2003: US$25.4 billion). The calculation of average risk-weighted assets is the same for both the
reported basis and that excluding goodwill amortisation.
10 Comprises the consumer finance business of HSBC Finance Corporation (formerly Household International, Inc.) and the US
residential mortgages and credit card portfolios acquired by HSBC Bank USA, N.A. (‘HSBC Bank USA’) from HSBC Finance
Corporation and its correspondents since December 2003.
11 The cost:income ratio, excluding goodwill amortisation, is defined as operating expenses excluding goodwill amortisation of
US$1,814 million (2003: US$1,450 million) divided by operating income.
12 Capital resources are defined on page 174. A detailed computation for 2004 and 2003 is provided on page 177.
13 Net of suspended interest and provisions for bad and doubtful debts.
14 Dividends per share expressed as a percentage of earnings per share (excluding goodwill amortisation).
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;
illiquidity and downward price pressure in
national real estate markets, particularly
consumer-owned real estate markets;
–
–
–
–
the impact of lower than expected
investment returns on the burden of funding
private and public sector defined benefit
pensions;
the effect of unexpected changes in
actuarial assumptions on longevity which
would influence the funding of private and
public sector defined benefit pensions;
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 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.
•
transition to International Financial Reporting
Standards
–
the adoption of International Financial
Reporting Standards (‘IFRS’) from
1 January 2005 is the most significant
accounting development for HSBC. The
European Union (‘EU’) requires that listed
European companies prepare their 2005
financial statements in accordance with
EU-approved IFRS. HSBC’s 2005 interim
financial statements will, therefore, be
prepared in accordance with IFRS. The
European Union endorsement process for
IFRS is ongoing but the majority of
standards are now endorsed. HSBC has
substantially completed its transition to
IFRS. The process of refining systems and
processes in order to collect data on a fully
IFRS-compliant basis for 2005 reporting is
well advanced. On 9 December 2004,
HSBC filed with the US Securities and
Exchange Commission a summary of the
applicable significant differences between
UK GAAP and IFRS. This should be
referred to for details of the major expected
IFRS effects on HSBC Group, and is
available from http://www.hsbc.com/hsbc/
investor_centre/financial-results, although,
as work continues and standards develop
other effects may emerge. HSBC currently
intends to file 2004 comparative data and
the 2005 opening balance sheet on an IFRS
basis in the second quarter of 2005.
However, HSBC’s results for periods prior
to 2004 will not be restated and its results
for 2005 and subsequent years will not be
comparable to these prior periods.
•
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;
the success of HSBC in integrating the
recently acquired Losango Promotora de
Vendas Limitada, The Bank of Bermuda
Limited and Marks and Spencer Retail
Financial Services Holdings Limited; and
the success of HSBC in working with Bank
of Communications Limited to generate a
satisfactory return from HSBC’s 19.9 per
cent equity participation.
6
H S B C H O L D I N G S P L C
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 import or
export 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.
7
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$190 billion at
31 December 2004.
Headquartered in London, HSBC operates
through long-established businesses and has an
international network of over 9,800 offices in
77 countries and territories in five geographical
regions: Europe; Hong Kong; the rest of Asia-
Pacific, including the Middle East and Africa; North
America; and South America. Within these 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. Although part of
Personal Financial Services, the consumer finance
business originated by HSBC Finance Corporation is
treated as distinct and has accordingly been
separately identified. 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, HSBC
Finance Corporation is one of the largest consumer
finance companies in the US, and is substantially
funded in the wholesale market.
The establishment of HSBC and its hexagon
symbol as a uniform, consumer brand name 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, while also establishing a
presence in the major financial and trading centres in
Europe and America.
In the mid-1950s, The Hongkong and Shanghai
Banking Corporation embarked on a strategy of
pursuing profitable growth through acquisition as
well as organic development – a combination that
has remained a key feature of HSBC’s approach ever
since.
with its existing businesses with a view to
maximising the synergy between the various
components. Key to this integration process is the
blending of local and international expertise.
The most significant developments are
described below. Other acquisitions in 2004 are
discussed in the ‘Financial Review’ on
pages 26 to 178.
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 (‘HSBC
Bank Middle East’) 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.
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.
In 1981, The Hongkong and Shanghai Banking
Corporation incorporated its existing Canadian
operations. HSBC Bank Canada has since made
numerous acquisitions, expanding rapidly to become
the largest foreign-owned bank in Canada and the
seventh-largest overall at 31 December 2004.
From the early 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 the
HSBC Group and, in 1992, it 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.
In 1997, HSBC assumed selected assets,
liabilities and subsidiaries of Banco Bamerindus do
Brasil S.A., now HSBC Bank Brasil S.A.-Banco
Múltiplo (‘HSBC Bank Brazil’) following the
intervention of the Central Bank of Brazil, and in
Argentina completed the acquisition of Grupo
Roberts, now part of HSBC Bank Argentina S.A.
(‘HSBC Bank Argentina’).
As each acquisition has been made, HSBC has
focused on integrating its newly acquired operations
In December 1999, HSBC acquired Republic
New York Corporation, subsequently merged with
8
HSBC USA, Inc., and Safra Republic Holdings S.A.
In July 2004, HSBC Bank USA, Inc. merged with
HSBC Bank & Trust (Delaware) N.A. to form HSBC
Bank USA.
To expand its base in the eurozone, in October
2000 HSBC completed its acquisition of 99.99 per
cent of the issued share capital of Crédit Commercial
de France S.A., now CCF S.A. (‘CCF’), a major
French banking group.
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 Grupo Financiero HSBC,
S.A. de C.V. (‘HSBC Mexico’)), the fifth-largest
banking group in Mexico measured by assets and the
third by customer deposits.
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’). Ping An Insurance is
the second-largest life insurer and the third-largest
property and casualty insurer in mainland China. In
June 2004 Ping An Insurance listed its shares
through an initial public offering (‘IPO’) in Hong
Kong. HSBC invested a further US$168 million,
reducing its holding to 9.99 per cent.
In March 2003, HSBC acquired Household
International, Inc. which, in December 2004,
changed its name to HSBC Finance Corporation.
HSBC Finance Corporation offers HSBC national
coverage in the US for consumer lending, credit
cards and credit insurance through various
distribution channels.
Also in 2003, HSBC acquired assets in Brazil,
including all the shares of Banco Lloyds TSB S.A.-
Banco Múltiplo and a consumer finance company,
Losango Promotora de Vendas Limitada
(‘Losango’).
In February 2004, the acquisition of The Bank
of Bermuda Limited (‘Bank of Bermuda’) was
completed for US$1.2 billion, adding a strong
position in the local banking market in Bermuda and
significant scale and geographical spread to HSBC’s
existing international funds administration, private
banking, trust and payments and cash management
businesses.
In May 2004, Hang Seng Bank acquired 15.98
per cent of Industrial Bank Co. Limited (‘Industrial
Bank’) for US$208 million. With over 260 outlets in
mainland China, Industrial Bank is one of only 10
national joint-stock banks, and had total assets of
approximately US$23 billion at 31 December 2003.
In June 2004, HSBC acquired 14.62 per cent of
UTI Bank in India for US$68 million. With over 250
branches, UTI has the second largest retail banking
network amongst Indian private sector banks.
In August 2004, HSBC completed the largest
single equity investment in a mainland China bank
by a foreign bank when it acquired 19.9 per cent of
Bank of Communications Limited (‘Bank of
Communications’) for US$1,747 million. Bank of
Communications is mainland China’s fifth largest
bank, with assets of US$112 billion and
approximately 2,700 branches in 137 cities in
mainland China as at 31 December 2003.
In November 2004, HSBC completed the
acquisition of 100 per cent of Marks and Spencer
Retail Financial Services Holdings Limited, which
trades as Marks and Spencer Money (‘M&S
Money’) for US$1,044 million, M&S Money is one
of the UK’s top 10 credit card providers.
Outlook
In 2005, the Group expects consumer spending
growth to slow across much of the Western world,
bringing increased competition and pricing pressure
on available business. The slowdown in consumer
spending is expected to be reflected in a heightened
focus on efficiency and economies of scale in the
corporate sector, which may trigger increased merger
and acquisition activity, a trend already evident in
2005. The pressure to reinforce personal long-term
savings and tighten fiscal discipline, as government
responsibility for pension and healthcare
programmes is clarified, are likely to contribute to
slower consumer spending in the western world.
By contrast, in emerging markets such as Brazil,
Mexico, India and the Association of South East
Asian Nations (‘ASEAN’) countries, relatively
stable currencies and historically low interest rates
are expected to continue to promote consumer
activity, fuelling domestic growth and reducing
export dependence. Mainland China is expected to
continue to play an increasingly important role, not
only through its burgeoning exports, but also as a
major and growing market for commodity producing
countries and for those developed countries that are
supplying the technology, equipment and services to
support its economic expansion.
The Group is alive to the changing nature of the
global economy and the accelerating pace of change,
and monitors the impact on sentiment and consumer
spending of strong domestic property prices, which
in many markets are proving resilient to rising
interest rates. While such resilience is
understandable in the context of historically low
9
H S B C H O L D I N G S P L C
Description of Business (continued)
nominal interest rates and a generally
limited
appetite for alternative investment opportunities, in
the long run property prices reflect income growth
and, therefore, a correction in some markets cannot
be discounted.
Against this backdrop, HSBC expects to focus
on building its businesses where it has comparative
advantage. HSBC also expects its lending to
consumers around the world to continue to rise as a
proportion of total lending, partly reflecting
domestic growth trends and credit demand in
emerging markets, but also in response to the
introduction of its US consumer finance model, with
its emphasis on real estate secured lending and its
scale advantages in credit card lending, to new
geographical markets. In North America, HSBC
expects its business to grow as the US economy
demonstrates its flexibility and responds to the lower
value of the dollar.
Strategy
At the end of 2003, HSBC launched ‘Managing for
Growth’, a strategic plan that provides HSBC with a
blueprint for growth and development during the
next five years. The strategy is evolutionary, not
revolutionary. 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
consistent: 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 concentrate on growing earnings
over the long term at a rate which will place it
favourably when compared with its peer group. It
will also focus on investing in its delivery platforms,
its technology, its people and its brand to support the
future value of HSBC as reflected in its comparative
stock market rating and total shareholder return
(‘TSR’). HSBC remains committed to benchmarking
its performance by comparison with a peer group.
For full details of the benchmark, see footnote 6 in
the ‘Footnotes to Financial Highlights’ on page 4.
HSBC’s core values are integral to its strategy,
and communicating them to customers, shareholders
and employees is intrinsic to the plan. These values
comprise an emphasis on long-term, ethical client
relationships; high productivity through teamwork; a
confident and ambitious sense of excellence; being
10
international in outlook and character; prudence;
creativity and customer focused marketing.
The plan also reaffirms HSBC’s recognition of
its corporate social responsibility (‘CSR’). HSBC
has always aspired to the highest standards of
conduct, recognises its wider obligations to society
and believes there is a strong link between CSR and
long-term success. 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 emphasis on CSR and for increased
external communication of the Group’s CSR policies
and performance, particularly on education and the
environment, which will remain 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. HSBC believes that by organising its
internal and external reporting around customer
groups, it reinforces to all its employees the Group’s
customer focus.
The acquisition of HSBC Finance Corporation
in 2003, and subsequent skills sharing and
technology transfer, have highlighted the importance
within Personal Financial Services of a distinct
customer group, Consumer Finance, to augment
HSBC’s existing activities. HSBC’s other customer
groups are Commercial Banking; Corporate,
Investment Banking and Markets; 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 do make such a
contribution will be rewarded accordingly.
Operational 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: drive growth in key
markets and through appropriate channels to
make HSBC the strongest global player in
personal financial services;
• Consumer Finance: extend the reach of this
business to existing customers through a wider
product range and penetrate new markets;
• Commercial Banking: make the most of HSBC’s
international customer base through effective
relationship management and improved product
offerings in all the Group’s markets;
• Corporate, Investment Banking and Markets:
accelerate growth by enhancing capital markets
and advisory capabilities focused on client
service in defined sectors where HSBC has
critical relevance and strength;
• Private Banking: serve the Group’s highest
value personal clients around the world;
• People: 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 2004, HSBC’s customers were
served by 253,000 employees (including part-time
employees) worldwide, compared with 232,000 at
31 December 2003 and 192,000 at 31 December
2002. The main centres of employment are the UK
with 56,000 employees, the US 43,000, Brazil
28,000, Hong Kong 26,000, Mexico 20,000 and
France 14,000. HSBC negotiates with recognised
unions, and estimates that approximately 40 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. As a result of
well-developed communications and consultation
programmes, 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 focuses on
attracting, developing and motivating the very best
individuals, particularly graduates, and on
encouraging talent internally. Emphasis is placed on
performance management; differentiated rewards;
succession planning; diversity; and learning and
development, with priority accorded to enhancing
sales and relationship management skills. HSBC
continues to endeavour to ensure that employees’
engagement with the business is maximised as this is
beneficial to shareholders, employees and customers
alike.
HSBC’s diverse workforce represents a
significant competitive advantage. The broad
cultural mix and increasing cross-border mobility of
its employees enables HSBC to resource operations
with individuals who have detailed knowledge of
local markets and of HSBC globally. This
strengthens international networks and facilitates the
sharing of best practices. In addition, a continuing
focus on policies that encourage an inclusive
working environment and the availability of career
opportunities for all is critical to HSBC being an
employer of choice. HSBC seeks to maintain an
employee profile that reflects its customer base.
HSBC operates in a highly competitive and
international business environment. Through its
network of international operations, it has the
advantage of being able to respond to the availability
of talented employees wherever they are, in order to
enhance customer service and improve productivity.
As education levels improve globally and as
investments in technology and telecommunications
facilitate access at competitive cost to hitherto
untapped resources, the balance of employment will
change and global resource centres of excellence
will emerge. Job losses may arise in some countries,
but HSBC has a good record of communicating
openly and sensitively in these circumstances, and of
reassigning employees and minimising compulsory
redundancies wherever possible.
HSBC seeks to promote and recruit the most
able people and attaches great importance to
cultivating its own talent. Resources have been set
aside to ensure a supply of talented individuals to
meet business succession needs, with support
provided for these employees in the form of career
enhancement and personal development
programmes. In addition, HSBC recognises that
there are lessons to be learned from other successful
businesses, and will recruit from non-banking
industries where appropriate.
11
H S B C H O L D I N G S P L C
Description of Business (continued)
Customer Groups
Profit before tax by customer group
(reported basis)
Year ended 31 December 2004
6,000
5,000
4,000
3,000
2,000
1,000
0
5,020
4,837
3,895
3,148
384
324
US$ million
Personal Financial Services
Consumer Finance
Commercial Banking
Corporate, Investment Banking and Markets
Private Banking
Other
Total assets1 by customer group
Year ended 31 December 2004
Corporate, Investment
Banking and Markets
%
46.1
Personal Financial Services 21.7
Consumer Finance
Commercial Banking
Private Banking
Other
12.9
12.7
4.5
2.1
1 Excludes Hong Kong Government certificates of
indebtedness.
Personal Financial Services
Personal Financial Services provides some 41 million
individual and self-employed customers with a wide
range of banking and related financial services. The
precise nature of the products and services provided is,
to some extent, driven by local regulations, market
practices, and the market positioning of HSBC’s local
business. Typically, products provided include current
and savings accounts, mortgages and secured and
unsecured personal loans, credit cards, and local
payments services.
Personal Financial Services customers prefer to
conduct their financial business at times convenient to
them, using a range of delivery channels. The
availability of a number of such channels, including
traditional and automated branches and service centres,
self-service terminals, call centres and internet
capabilities, facilitates the exercise of choice
increasingly effectively.
Delivering the right products and service
12
propositions for particular target markets is a
fundamental requirement in any retail service business,
and market research and customer analysis is key to
developing an in-depth understanding of significant
customer segments and their needs. This understanding
of the customer ensures that Customer Relationship
Management (‘CRM’) systems are effectively used to
identify and fulfil sales opportunities, and to manage
the sales process.
HSBC Premier is a premium banking proposition
for HSBC’s more valuable retail customers. HSBC
Premier provides personalised relationship
management, 24-hour priority telephone access, global
travel assistance and cheque encashment facilities.
There are now over one million HSBC Premier
customers, who can use more than 250 specially
designated Premier branches and centres in 33
countries and territories, either when visiting, or on a
more permanent basis if they require a banking
relationship in more than one country.
Insurance and investment products play an
important need in meeting the requirements of
customers. 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 both as a
broker and an underwriter, and sees continuing
opportunities to deliver insurance products to its
personal customer base. HSBC also makes available
a wide range of investment products through its
branch networks. Third party funds and proprietary
funds are available, and include traditional ‘long
only’ equity and bond funds, structured funds that
provide capital security as well as an opportunity for
enhanced return, and ‘fund of funds’ products which
offer customers the ability to diversify their
investment across a range of best in class fund
managers selected through a rigorous and objective
selection process. 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 customer
group.
Consumer Finance
Within Personal Financial Services, HSBC Finance
Corporation’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
purchases and support major affiliate credit card
programmes. At 31 December 2004 HSBC Finance
Corporation had over 57 million customers with total
gross advances of US$141.9 billion. Consumer
Finance products are offered through the following
businesses of HSBC Finance Corporation:
The 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 46
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.
Consumer lending also offers a near-prime mortgage
product which was first introduced in 2003 to
broaden the range of customers to which its products
are relevant.
The mortgage services business purchases first
and second lien residential mortgage loans, including
open-end home equity loans, from a network of over
200 unaffiliated third party lenders
(‘correspondents’) in the US. Purchases are
primarily of pools of loans (‘bulk acquisitions’), but
also include 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. HSBC Finance Corporation,
through its subsidiary, Decision One Mortgage
Company, also offers mortgage loans referred by
mortgage brokers.
The 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
outstanding, with over 70 merchant relationships and
15.5 million active customer accounts.
In addition to originating and refinancing motor
vehicle loans, HSBC Finance Corporation’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
5,200 motor dealers.
The credit card services business is the
sixth largest issuer of MasterCard®1 and Visa®1
credit cards in the US, and also includes affiliation
cards such as the GM Card® and the AFL-CIO
Union Plus®2 credit card. Also, credit cards issued in
the name of 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 HSBC Finance Corporation to customers in the
US, the UK and Canada who are typically not well
served by traditional sources.
The taxpayer financial services 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.
HSBC Finance Corporation’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 electronic goods, through its
retail finance operations. In Canada, similar products
are offered, and deposits are taken, through HSBC
Finance Corporation’s trust operations there.
Commercial Banking
HSBC is one of the world’s leading banks in the
provision of financial services and products to small,
medium-sized and middle market businesses, with
over two million customers including sole
proprietors, partnerships, clubs and associations,
incorporated businesses and publicly quoted
companies.
At 31 December 2004, HSBC had total
commercial customer account balances of
US$137.8 billion and total commercial customer
loans and advances, net of suspended interest and
provisions for bad and doubtful debts, of
US$129.9 billion.
Commercial Banking places particular emphasis
on multi-disciplinary and geographical collaboration
in meeting its commercial customers’ needs, thereby
1 Visa is a registered trademark of VISA USA, Inc.and
MasterCard is a registered trademark of MasterCard
International, Incorporated.
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 Organizations (‘AFL-CIO’).
13
H S B C H O L D I N G S P L C
Description of Business (continued)
differentiating, broadening and enhancing its
offering. The range of products includes:
Payments and cash management: HSBC is a
leading provider of payments, collections, liquidity
management and account services worldwide,
enabling commercial 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.
Treasury and capital markets: Commercial
Banking customers have long been volume users of
the Group’s foreign exchange capabilities. These are
now being supplemented with more sophisticated
currency and interest rate options.
Investment banking: A small number of
Commercial Banking customers need occasional
investment banking advisory support. Co-operation
with Corporate, Investment Banking and Markets
ensures that in most key markets such requirements
can be serviced internally.
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,
14
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 its 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
trading for institutional, corporate and private
clients and asset management services,
including global investment advisory and fund
management services; and
distribution of capital markets instruments,
including debt, equity and structured products,
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.
Corporate and Institutional Banking: This
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:
capital raising, both publicly and privately,
including debt and equity capital, structured
finance and syndicated finance;
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.
Group Investment Businesses: These comprise
asset management products and services for
institutional investors, intermediaries and individual
investors and their advisers.
Private Banking
HSBC is one of the world’s leading international
private banking groups with total client funds under
management of US$178 billion at 31 December
2004. 2004 was the first year in which the name
‘HSBC Private Bank’ was used for worldwide
marketing of 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 six major advisory centres in Hong Kong,
Singapore, Geneva, New York, Paris and London,
Private Banking seeks to select the most suitable
investments for clients’ needs and investment
strategies.
Global wealth solutions: These comprise
inheritance 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. Specialist advisers are
available to deliver products and services that 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.
Private Banking services are also provided by
HSBC Guyerzeller and HSBC Trinkaus &
Burkhardt.
Geographical Regions
Profit before tax split by geographical region
(reported basis)
Year ended 31 December 2004
6,000
5,000
4,000
3,000
2,000
1,000
0
5,225
4,744
5,419
1,805
US$ million
415
Europe
Rest of Asia-Pacific
South America
Hong Kong
North America
15
H S B C H O L D I N G S P L C
Description of Business (continued)
Total assets1 split by geographical region
As at 31 December 2004
Europe
Hong Kong
Rest of Asia-Pacific
North America
South America
%
42.6
17.2
9.5
29.3
1.4
1 Excludes Hong Kong Government certificates of
indebtedness.
Additional information regarding business
developments in 2004, as well as comparative
information relating to developments in 2003, may
be found in the ‘Financial Review’ on pages
26 to 178.
Europe
HSBC’s principal banking operations in Europe are
HSBC Bank, CCF and HSBC Private Bank (Suisse).
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 Turkey
and Malta. HSBC’s strategy is to build long-term
relationships, attracting customers through value-for-
money products and high-quality service.
Hong Kong
HSBC’s principal banking subsidiaries in Hong
Kong are The Hongkong and Shanghai Banking
Corporation and Hang Seng Bank. 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 63 per cent by value of banknotes in
circulation in 2004.
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 12 major
cities, comprising ten branches, three sub-branches
and two representative offices. Hang Seng Bank
offers personal and commercial banking services and
operates five branches, two sub-branches, and two
representative offices in seven cities in mainland
China.
16
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 and Taiwan.
HSBC’s presence in the Middle East is led by HSBC
Bank Middle East, the largest foreign-owned bank in
the region; in Australia by HSBC Bank Australia
Limited; and in Malaysia by HSBC Bank Malaysia,
which has the second largest presence of any
foreign-owned bank in the country.
North America
HSBC’s North American business covers the United
States, Canada, Mexico, Bermuda and Panama.
Operations are primarily conducted in the US
through HSBC Bank USA in New York State and
HSBC Finance Corporation, based outside Chicago.
HSBC’s Canadian and Mexican operations are run
through HSBC Bank Canada and HSBC Mexico,
respectively.
South America
HSBC’s operations in South America principally
comprise HSBC Bank Brazil and HSBC Bank
Argentina. HSBC operates the tenth largest
insurance business in Brazil, and offers consumer
finance products there through its subsidiary,
Losango. 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 in Argentina.
Competitive environment
HSBC faces strong competition in all the markets it
serves. It competes with other financial institutions,
including commercial banks; consumer finance
companies; savings and loan associations; credit
unions; retailers; brokerage firms; and investment
companies. In investment banking, HSBC faces
competition from both investment banks and the
investment banking operations of other commercial
banks.
Global factors
Consolidation in the banking industry:
Consolidation of banks and financial services
companies has been a continuing trend over many
years. This trend, at both local and international
levels, has created a larger number of banks,
financial services companies and mono-line
providers capable of competing directly with HSBC
across a wide range of services.
Limited market growth: In HSBC’s largest
markets, the UK, the US and Hong Kong, there is
generally limited capacity for market growth in the
provision of basic banking services. However, there
is potential for growth in the provision of a wider
array of financial services to both existing and new
customers, and for expansion into new market and
customer segments, particularly in the field of
consumer finance.
Advances in technology: As the internet and
related technologies has continued to mature, the
delivery of financial services and banking products
through both remote and automated delivery
channels has introduced both new competitive
challenges and opportunities for HSBC. While
specialist providers and non-financial organisations
can deliver a growing range of services across a
wide variety of electronic channels, mainstream
banks are also competing fiercely for the growing
number of customers who now prefer to use this
medium. As these technologies mature, brand
differentiation becomes more difficult and costly.
HSBC continues to offer customers access to its full
range of services in the manner they most prefer.
Internet, interactive TV, mobile phone, WAP and
telephone banking all complement the more
traditional branch network.
Regional factors
Europe
UK
While overall market growth has remained relatively
limited the continuing demand for consumer credit
in the past few years has intensified competition
among the established players and attracted a
number of new entrants, particularly from non
financial services providers. Competition from
mono-line providers of both consumer lending and
savings products has grown in recent years often
through the use of attractive pricing to capture
market share.
Consolidation in the market for credit and
charge cards has increased in recent years as retailers
look to outsource their finance company operations
to established players rather than running them in-
house. This has led to a greater concentration of the
industry in the hands of a relatively small number of
providers and attracted the attention of the Office of
Fair Trading (‘OFT’).
In March the OFT referred the supply of store
card services to the Competition Commission
following a study of the £4.8 billion industry. The
study concluded that there were features of the
sector, both in the supply of store card credit to
consumers and in the supply of store card services,
that appeared to prevent, restrict or distort
competition.
The Competition Commission, which published
its initial statement of issues in September, is
expected to provide provisional findings in the first
quarter of 2005 and publish its final report by early
July.
In November, the OFT issued a statement of
objections against the agreement between
Mastercard’s UK members, which includes HSBC
Bank, on the multilateral interchange fees charged
on credit and charge card transactions in the UK.
The statement alleged that parties to the agreement
have infringed competition law and invites
representations from members before the OFT
makes a final decision.
In mid December the Department of Trade and
Industry announced a new Consumer Credit Bill
which seeks to create a clearer and more competitive
market for credit by bringing in new rules to give
consumers better protection and more rights.
France
The French government reformed the pension
system in France in order to reduce the state’s long-
term pension obligations. Retirement ages were
increased and pension entitlements lowered. The
changes are being introduced over a number of years
to allow people to adapt to the new system. To
encourage people to save for their retirement, the
government has introduced both individual and
collective pension plans with tax advantages for
scheme members. With clarification of the rules at
the start of 2005, these plans are now being marketed
by financial institutions in France. HSBC will earn
commissions on the sales of the pension plans and
earn management fees from managing the funds.
The government also created Fonds de Reserve
pour les Retraites, a pension body for state
employees, and sought tenders for management of
€16bn of funds. HSBC Asset Management Europe
SA won two of the tenders to manage €1.2 billion of
assets for a small caps fund and a bonds fund.
Caixa Bank won its case at the European Court
of Justice against the French government on the law
forbidding banks from paying interest on current
accounts. As a result, the law will be withdrawn in
2005, allowing French banks to pay interest on these
accounts. Major banks are examining the
implications of the ruling.
The European Commission is investigating GIE
17
H S B C H O L D I N G S P L C
Description of Business (continued)
Cartes Bancaire, the partnership operating the credit
card system in France, and nine participating banks.
Although a member of the GIE, CCF is not currently
under investigation.
Following a French government review of
banking charges, banks adopted a new code of
practice whereby they both stopped charging for the
closure of accounts and became generally more
transparent in the pricing of their services. CCF
already notifies customers of its tariffs and the
introduction of this code is expected to have little
effect.
Hong Kong
The Hong Kong economy in 2004 continued the
strong growth seen in the second half of 2003, driven
by regional trade flows, and the strength of the US
economic recovery.
This resulted in falling unemployment and
bankruptcies, and rising property prices, contributing
to an increase in private consumption.
Other than in the trade sector, however, demand
for credit remained muted, with individuals and
enterprises slow to increase borrowings, reflecting
nervousness about the sustainability of the economic
recovery.
Interest rates in the economy remained low, as
with loan demand subdued, the market was unable to
absorb external funds.
Against this backdrop, there was fierce
competition in traditional core banking products,
particularly in the mortgage market, further
depressing margins and prices.
To address these pressures, banks have sought to
diversify revenue streams, and there has been
significant growth in the development of wealth
management and insurance products.
The introduction of a commercial credit
reference agency in November 2004, is expected to
further intensify competition for quality customers
and assets.
Hong Kong banks continue to maintain a regular
dialogue with Chinese financial institutions as the
financial sector continues to liberalise ahead of WTO
in 2006. It is expected that this will be a continued
source of growth in 2005.
Rest of Asia-Pacific (including the Middle
East)
The competitive environment in the Rest of Asia
Pacific varies greatly across the region. Depending
18
on the maturity of the markets, level of regulation
and number of financial services providers, HSBC
competes with a range of local banks, non-bank
financial services companies, and the branches of
foreign entities. An emerging trend in recent years
has been the growth of pan-regional players, as the
larger banks in several countries have expanded
through acquisition and organic growth beyond their
local markets. These emerging regional banks
provide a new level of competition for HSBC as they
build critical mass. Competition, therefore, remains
intense throughout the region in all the customer
groups served by HSBC. However, in many
countries the increasing sophistication of the
relatively young population continues to provide
HSBC with further opportunities for growth.
North America
In the US, continuing mergers and acquisitions in the
banking, insurance and securities industries are
bringing consolidation and a blending of services.
Consolidation of the banking sector remained an
issue throughout 2004, with a greater focus on
national networks and retail branch banking. HSBC
Bank USA also faced vigorous competition from a
large number of non-bank suppliers of financial
services, which 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.
HSBC Finance Corporation competes with a
wide array of banks, thrifts, insurance companies,
credit unions, mortgage lenders and brokers and
other providers of consumer credit for consumers
who generally do not conform to US banking
industry requirements. It competes by expanding its
customer base through portfolio acquisitions or
alliance and co-branding opportunities, by offering a
variety of consumer loan products and by
maintaining a strong service orientation.
In Canada, the 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 a range of comparable
products and services. While merger activity among
the largest banks in Canada remains a possibility,
major financial institutions continue to look
elsewhere for growth.
Consolidation of the banking industry in Mexico
has been a significant feature in recent years with
over 76 per cent of banking assets and 79 per cent of
deposits owned by the subsidiaries of five major
foreign banks. However, with a population of
approximately 100 million, the majority of whom do
not use the banking system, Mexico offers
substantial growth opportunities in the retail sector
in the medium to long term. HSBC, with its
extensive branch network and growing young
customer base, is well positioned to take full
advantage of this economic and competitive
environment.
South America
The Brazilian banking industry remains dominated
by a combination of large state-owned banks,
privately-owned local banks, and subsidiaries of
foreign institutions, including HSBC. The top ten
banking groups account for around two thirds of
total financial system assets.
Although 2004 saw little consolidation among
the larger players, the year was characterised by
continued positioning for growth in the consumer
finance market. Lending to individuals grew by a
third in 2004, and demand is expected to remain
strong over the medium term, supported by a more
buoyant economy. With a population of 183 million,
and over 45 per cent of the economically active
population estimated to be ‘unbanked’, banks are
looking to increase their capacity to reach non-
traditional segments, particularly through
partnerships with retailers. HSBC Bank Brazil is at
the forefront of this trend. There was strong
competition among banks to agree alignments with
retail stores, particularly those with their own
in-house financing arrangements. HSBC experienced
success in this area concluding an agreement with
Panashop, a major electronic and white goods
supplier.
Competition increased in this sector with
competitors developing new, individually branded
consumer finance propositions. Following the
successful integration of Losango, HSBC Bank
Brazil continued to expand and develop its leading
position in the store and personal loan market
through the acquisition of the Valeu and
CrediMatone franchises.
Following the collapse of a medium sized
Brazilian commercial bank, there was a flight to
quality and smaller banks experienced increasing
difficulties in funding their asset growth. There was
a spate of alliances involving small banks, and
HSBC boosted its presence in the payroll loan
market through a partnership with Banco Schahin,
announced in December 2004. Whilst the
environment is expected to remain competitive,
HSBC’s extensive network of branches and partner
stores, and continuous investment in branding and
service quality, will ensure that the Group is able to
benefit from growth in the demand for financial
services.
In Argentina, international financial groups
provide the greatest competition in core banking
services and insurance, with most of the major banks
in significant foreign ownership. HSBC, with its
branch network, sales force and substantial local
insurance business, is one of the few companies
capable of providing a comprehensive range of
financial services to its clients.
Since the crisis in 2001, Argentina’s banking
industry has consolidated with some institutions,
generally smaller banks, leaving the country and a
number of the larger foreign-owned financial
institutions re-capitalising their local operations. As
confidence has begun to return, the financial sector
has seen growth in loans to the private sector and
deposits. The insurance industry has also recovered,
with a significant increase in premiums that has
helped the industry to become profitable for the first
time in a number of years.
HSBC continues to monitor progress being
made with the economic and political reforms
necessary to build confidence in Argentina, and
evaluates carefully the opportunities and risks within
the financial services industry there.
19
H S B C H O L D I N G S P L C
Governance, Regulation and Supervision
Governance
With the listings of its ordinary shares in London,
Hong Kong, New York, Paris and Bermuda, HSBC
Holdings complies with the relevant requirements
for listing and trading on each of these exchanges. In
the UK, these are the Listing Rules of the Financial
Services Authority; in Hong Kong, The Rules
Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited; in the US, where
the shares are traded in the form of ADS’s, HSBC
Holdings’ shares are registered with the US
Securities and Exchange Commission and it is
subject to the reporting and other requirements of the
US Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and
the New York Stock Exchange’s Listed Company
Manual, in each case as applied to foreign private
issuers. In France and Bermuda HSBC Holdings is
subject to the listing rules of Euronext, Paris and the
Bermuda Stock Exchange applicable to companies
with secondary listings.
A statement of HSBC’s compliance with the
code 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
Limited is set out in the Report of the Directors.
Regulation and Supervision
HSBC’s operations throughout the world are
regulated and supervised by approximately 467
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$500 million in 2004. These authorities impose a
variety of requirements and controls covering, inter
alia, capital adequacy, depositor protection, market
liquidity, governance standards, customer protection
(for example, fair lending practices, product design,
and marketing and documentation standards), and
social responsibility obligations (for example, anti-
money laundering and anti-terrorist financing
measures). 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
20
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 Financial Services Authority (‘FSA’)
supervises HSBC on a consolidated basis. In
addition, each operating bank, finance company or
insurance operation 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.
In June 2004, the Basel Committee on Banking
Supervision issued a new capital adequacy
framework to replace the Basel Accord of 1988 in
the form of a final Accord (commonly known as
‘Basel II’). Details of how this will affect HSBC are
set out on page 175.
United Kingdom regulation and supervision
UK banking and financial services 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 financial services institutions and
regulates all HSBC’s businesses in the UK which
require authorisation under FSMA. This ranges from
retail life and pensions business to custody, branch
share dealing, and treasury and capital markets
activity. In addition, from 31 October 2004 and
14 January 2005 respectively, mortgage business and
general insurance business became regulated
activities. HSBC Bank is HSBC’s principal
authorised institution in the UK.
FSA rules establish the minimum criteria for
authorisation for banks and financial services
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. 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 176 to 177. 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 financial
services 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 may
periodically obtain independent reports, usually from
the auditors of the authorised institution, as to the
adequacy of internal control procedures and systems
as well as procedures and systems governing records
and accounting. The FSA meets regularly with
HSBC’s senior executives to discuss HSBC’s
adherence to the FSA’s prudential guidelines. They
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, including succession
planning.
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$3,900) of a claim plus 90 per cent
of any further amount up to £33,000 (US$63,800)
(the maximum amount payable being £31,700
(US$61,300)). Payments under the scheme in respect
of investment business compensation are limited to
100 per cent of the first £30,000 (US$58,000) of a
claim plus 90 per cent of any further amount up to
£20,000 (US$38,700) (the maximum amount
payable being £48,000 (US$92,800)).
The EU reached final agreement on 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 ‘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 Banking
Ordinance gives power to the Chief Executive of
Hong Kong to give directions to the Monetary
Authority and the Financial Secretary with respect to
the exercise of their respective functions under the
Banking Ordinance.
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 power 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, if they may
otherwise threaten the interests of depositors or
potential depositors, or if they have contravened any
conditions specified by the Monetary Authority.
21
H S B C H O L D I N G S P L C
Governance, Regulation and Supervision (continued)
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
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 Office of the Comptroller of Currency (‘OCC’)
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
22
Company Act of 1956 (the ‘BHCA’) as a result of its
ownership of HSBC Bank USA. HSBC Bank USA is
a nationally-chartered commercial bank and a
member of the Federal Reserve System. HSBC Bank
USA is the surviving institution of the 1 July 2004
merger of HSBC Bank USA and HSBC Bank &
Trust (Delaware) N.A. HSBC also owns Household
Bank (SB), N.A. (‘Household Bank’), a nationally
chartered ‘credit card bank’ which is also a member
of the Federal Reserve System. Both HSBC Bank
USA and Household Bank are subject to regulation,
supervision and examination by the OCC. The
deposits of HSBC Bank USA and Household Bank
are insured by the FDIC and both banks are subject
to relevant FDIC regulation. On 1 January 2004,
HSBC formed a new company to hold all of its
North American operations, including these two
banks. This company, called HSBC North America
Holdings Inc. (‘HNAH’) is also a ‘bank holding
company’ under the BHCA, by virtue of its
ownership and control of HSBC Bank USA.
The BHCA and the International Banking Act of
1978 (‘IBA’) impose certain limits and requirements
on the US activities and investments of HSBC,
HNAH, and certain companies in which they hold
direct or indirect investments. HSBC is also a
‘qualifying foreign banking organisation’ under
Federal Reserve Board regulations, and as such, may
engage within 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, 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 US in activities other than banking and certain
activities closely related to banking. On that date
HSBC became a financial holding company (‘FHC’)
under the Gramm-Leach-Bliley Act (‘GLBA’)
amendments to the BHCA, enabling it to offer a
more complete line of financial products and
services. Upon its formation, HNSH also registered
as an FHC. HSBC and HNAH’s ability to engage in
expanded financial activities as FHCs depend upon
HSBC and HNAH 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 such
institutions have achieved at least a satisfactory
record in meeting community credit needs during
their most recent examinations pursuant to the
Community Reinvestment Act. These requirements
also apply to Wells Fargo HSBC Trade Bank, N.A.,
in which HSBC and HNAH have a 20 per cent
voting interest in equity capital and a 40 per cent
economic interest. Each of these depository
institutions 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
depository institutions under its control. If such
deficiencies are not corrected, the Federal Reserve
Board may require an FHC to divest its control of
any subsidiary depository institution or to desist
from certain financial activities in the US.
HSBC and HNAH are 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 US is 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
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 Deposit Insurance Corporation
Improvement Act of 1991 provides for extensive
regulation of depository institutions (such as HSBC
Bank USA, Household Bank and Wells Fargo HSBC
Trade Bank, N.A.), including requiring federal
banking regulators to take ‘prompt corrective action’
with respect to FDIC-insured banks that do not meet
minimum capital requirements.
HSBC Bank USA, Household Bank and Wells
Fargo HSBC Trade Bank, N.A., 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.
At 31 December 2004, HSBC Bank USA,
Household Bank and Wells Fargo HSBC Trade
Bank, N.A. 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 certain authority to a bureau of the US
Treasury Department known as the Financial Crimes
Enforcement Network (‘FinCEN’).
Many of the 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 the then HSBC Bank USA and
Household Bank under the Bank Secrecy Act (which
was amended in certain respects by the Patriot Act)
and applicable regulations. These include
requirements to adopt and implement an anti-money
laundering programme, 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 the then 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 implemented certain improvements in its
compliance, reporting, and review systems and
procedures to comply with this agreement. When
HSBC Bank USA merged with HSBC Bank & Trust
(Delaware) N.A. on 1 July 2004, the OCC made the
merger conditional on HSBC Bank USA’s continuing
compliance with the requirements of the written
agreement.
HSBC’s US consumer finance operations are
also subject to extensive regulation in the US, and to
laws relating to consumer protection; (both in
general, and in respect of so-called ‘subprime’
lending operations, which have been subject to
23
H S B C H O L D I N G S P L C
Governance, Regulation and Supervision (continued)
enhanced regulatory scrutiny); 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
finance branch lending offices are generally licensed
in those jurisdictions in which they operate. Such
licences 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 finance 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
which 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.
24
H S B C H O L D I N G S P L C
Description of Property
At 31 December 2004, HSBC had some 9,500
operational properties worldwide, of which
approximately 3,200 were located in Europe, 600 in
Hong Kong and the rest of Asia Pacific, 3,800 in
North America (including 1,600 in Mexico) and
1,700 in Brazil. Additionally, properties with a net
book value of US$1,163 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 24 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 out of its
normal business operations. None of the above
proceedings is regarded as material litigation.
25
H S B C H O L D I N G S P L C
Financial Review
Summary
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 ...................................
Amounts written off fixed asset investments . ................................................
Operating profit ...........................................................................................
Share of operating profit/(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 ...........................................................................................
Profit attributable to shareholders .............................................................
Profit before tax excluding goodwill amortisation .........................................
Profit attributable to shareholders excluding goodwill amortisation ..............
Year ended 31 December
2004
US$m
31,024
19,563
50,587
(25,875)
(1,814)
22,898
(6,357)
(27)
–
16,514
5
287
770
32
17,608
(4,507)
13,101
(1,261)
11,840
19,426
13,658
2003
US$m
25,598
15,474
41,072
(21,082)
(1,450)
18,540
(6,093)
(44)
(106)
12,297
(116)
221
451
(37)
12,816
(3,120)
9,696
(922)
8,774
14,401
10,359
2002
US$m
15,460
11,135
26,595
(14,954)
(854)
10,787
(1,321)
(107)
(324)
9,035
(28)
135
532
(24)
9,650
(2,534)
7,116
(877)
6,239
10,513
7,102
Year ended 31 December 2004 compared
with year ended 31 December 2003
‘HSBC Finance’ is defined for this purpose as HSBC
Finance Corporation’s consumer finance, insurance
and commercial banking operations together with the
US residential mortgages and private label credit
cards acquired by HSBC Bank USA from HSBC
Finance Corporation and its correspondents since
December 2003. Where the word ‘underlying’ is
used, disclosures are adjusted for the additional
quarter’s contribution from HSBC Finance by
deducting HSBC Finance’s results for the first
quarter of 2004, and for all other significant
acquisitions affecting the comparison of 2004 with
2003 in respect of which the most significant was the
Bank of Bermuda, acquired in February 2004.
HSBC made a profit on ordinary activities
before tax of US$17,608 million, a rise of
US$4,792 million, or 37 per cent, on 2003. Of this
increase, US$987 million was attributable to an
additional quarter’s profit of HSBC Finance in 2004.
In the ten months since becoming part of the Group,
Bank of Bermuda contributed US$90 million.
Excluding goodwill amortisation, HSBC Finance
26
contributed US$1,113 million, and Bank of Bermuda
US$118 million to the US$5,025 million, or
35 per cent, rise in profit before tax to
US$19,426 million. Of the growth, 4 per cent related
to currency movements. On a constant currency
basis, underlying growth was 21 per cent, driven by
broadly based revenue growth and improved credit
conditions which enabled a lower level of new
provisions for bad and doubtful debts in both the
personal and corporate sectors. Productivity also
improved, notwithstanding the planned growth in
costs to build broader capabilities within the
Corporate, Investment Banking and Markets
business. Goodwill amortisation (excluding that in
respect of associates) increased by US$364 million
to US$1,814 million in 2004, reflecting the
additional quarter’s charge in respect of HSBC
Finance, the significant acquisitions in 2004 and
currency movements.
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 HSBC Finance
Corporation, 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
HSBC Finance Corporation.
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. HSBC Finance and HSBC Mexico accounted
for over 70 per cent of this increase. HSBC Finance
contributed US$1,827 million in its first nine
months, while HSBC Mexico contributed
US$441 million in its first full year.
The shape of the Group’s profit and loss account
Excluding goodwill amortisation, HSBC
changed as a result of the HSBC Finance
Corporation acquisition, reflecting the nature of its
business model. HSBC Finance 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, HSBC
Finance’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 HSBC
Finance’s pre-provision profitability is absorbed in
bad and doubtful debt charges than is normally the
case in the rest of HSBC.
Net interest income
Finance 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$1,585 million in 2003, reflecting acquisitions,
currency movements and the write down of goodwill
attributed to a fund management company
previously acquired as part of the CCF acquisition.
By geographical region
Europe.....................................................
Hong Kong..............................................
Rest of Asia-Pacific ................................
North America ........................................
South America ........................................
Net interest income .................................
2004
US$m
9,062
3,639
2,055
14,913
1,355
31,024
%
29.2
11.7
6.6
48.1
4.4
100.0
Year ended 31 December
2003
US$m
%
7,540
3,901
1,740
11,777
640
25,598
29.5
15.2
6.8
46.0
2.5
100.0
2002
US$m
6,343
4,133
1,607
2,732
645
%
41.0
26.7
10.4
17.7
4.2
15,460
100.0
Net interest income ........................................................................................
Average interest-earning assets ......................................................................
Gross interest yield (per cent)1 .......................................................................
Net interest spread (per cent)2 ........................................................................
Net interest margin (per cent)3 .......................................................................
Year ended 31 December
2004
US$m
31,024
964,305
5.21
3.01
3.22
2003
US$m
25,598
778,415
5.13
3.06
3.29
2002
US$m
15,460
608,749
4.70
2.27
2.54
1 Gross interest yield is the average interest rate earned on average interest-earning assets (AIEA).
2 Net interest spread is the difference between the average interest rate earned on average interest-earning assets and the average
interest rate paid on average interest-bearing funds.
3 Net interest margin is net interest income expressed as a percentage of average interest-earning assets.
27
H S B C H O L D I N G S P L C
Financial Review (continued)
Year ended 31 December 2004 compared
with year ended 31 December 2003
Net interest income was US$5,426 million, or 21 per
cent higher than 2003, at US$31,024 million.
US$2,745 million of this increase was attributable to
an additional quarter of HSBC Finance compared
with 2003, while Bank of Bermuda contributed
US$154 million in the ten months since acquisition.
On an underlying basis and in terms of constant
currency, net interest income increased by 5 per cent,
as the impact of strong growth in interest-earning
assets was partly offset by continuing margin
compression in major markets and lower returns on
treasury assets.
In Europe, net interest income was
US$1,522 million, or 20 per cent, higher than in
2003, with US$158 million of the increase coming
from an additional quarter of HFC Bank in the UK
and US$35 million from the acquisition of
M&S Money in November 2004. On an underlying
basis and expressed in constant currency, net interest
income increased by 6 per cent, reflecting strong
growth in mortgages and consumer lending (funded
by corresponding growth in lower-costing deposits
and current accounts), particularly in the UK. This
was partly offset by competitive pricing pressure,
particularly in UK mortgages, and the redeployment
of liquidity at lower yields as assets matured.
In North America, net interest income increased
by US$3,136 million, with HSBC Finance
contributing US$2,587 million of the increase. On an
underlying basis, the rise was US$393 million, or
3 per cent, primarily from a strong performance in
Mexico, which benefited from growth in low cost
deposits. In the US, an increase in mortgage lending
flowed through to net interest income, though the
benefit was partly offset by competitive pressure on
pricing, a change in asset mix towards lower
yielding but higher quality assets, and the effect of
funding costs on larger trading positions.
In Hong Kong, net interest income declined by
7 per cent, largely due to spread compression on the
value of deposits and pressure on lending margins,
particularly in mortgages. Foreign funds investing in
the buoyant stock market, and inflows from investors
anticipating an upward realignment of the currency
as US dollar weakened, boosted liquidity in the
market, depressing Hong Kong dollar interest rates
and reducing spreads on deposits. Net interest
income was further reduced by competitive pressure
on mortgage yields and corporate spreads, a fall in
average mortgage balances and the run-off of higher
yielding treasury assets with less attractive
reinvestment opportunities, given the flat Hong
28
Kong dollar yield curve. These adverse
developments were partly offset by a 10 per cent rise
in average interest-earning assets, and continued
growth in customer deposits.
In the Rest of Asia-Pacific, net interest income
increased by 18 per cent. In constant currency terms,
the rise was 15 per cent, driven by growth in
mortgages, consumer lending and international trade
across the region, offset partly by competitive
pressure on pricing.
In South America, net interest income rose
sharply, reflecting the full-year benefit of acquiring
Losango in December 2003 and the effect of falls in
Brazilian interest rates in the latter part of 2003 and
early 2004, which translated into lower funding costs
on large fixed rate positions and widening spreads on
deposits. The effect was accentuated by strong
growth in both personal and commercial lending in
Brazil. Argentina similarly benefited from growth in
consumer lending as the economy grew and the
outcome of the external debt restructuring became
increasingly apparent.
Overall, average interest-earning assets
increased by US$185.9 billion, or 24 per cent,
compared with 2003. At constant exchange rates,
underlying average interest-earning assets increased
by 13 per cent. This growth was driven principally
by higher mortgage balances and personal lending in
the US, the UK, and across Asia-Pacific.
HSBC’s net interest margin was 3.22 per cent in
2004, compared with 3.29 per cent in 2003.
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, HSBC Finance
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 effect was
expected to continue in 2004 unless interest rates
rose 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 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, by which the lending
mix was improved 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, HSBC Finance
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 HSBC Finance Corporation 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.
29
H S B C H O L D I N G S P L C
Financial Review (continued)
Other operating income
By geographical region
Europe ....................................................
Hong Kong .............................................
Rest of Asia-Pacific ...............................
North America .......................................
South America .......................................
2004
US$m
9,385
3,156
1,749
5,164
739
%
46.4
15.6
8.7
25.6
3.7
Year ended 31 December
2003
US$m
%
7,555
2,331
1,350
3,982
678
47.4
14.7
8.5
25.1
4.3
2002
US$m
6,272
1,917
1,174
1,502
596
%
54.8
16.7
10.2
13.1
5.2
20,193
100.0
15,896
100.0
11,461
100.0
Intra-HSBC elimination .........................
Other operating income ..........................
(630)
19,563
(422)
15,474
(326)
11,135
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 .........................................
Income from life assurance and annuities .......................................................
Rental income ................................................................................................
Other ..............................................................................................................
Year ended 31 December
2004
US$m
601
13,093
1,806
727
49
(16)
2,566
632
564
235
644
189
1,039
3,303
2003
US$m
222
10,394
1,239
330
251
358
2,178
553
473
206
440
159
849
2,680
2002
US$m
278
7,824
1,167
47
75
24
1,313
490
313
182
85
160
490
1,720
Total other operating income .........................................................................
19,563
15,474
11,135
Analysis of fees and commissions receivable and payable
Year ended 31 December
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 ..............................................................................
30
2004
US$m
2,779
1,179
353
3,782
692
234
1,177
80
204
958
564
190
1,498
500
193
1,494
15,877
(2,784)
13,093
2003
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
Year ended 31 December 2004 compared
with year ended 31 December 2003
cardholder spending, and credit card fee income rose
by 13 per cent.
Other operating income of US$19,563 million, was
US$4,089 million, or 26 per cent, higher than in
2003. Of this increase, US$836 million was
attributable to an additional quarter from HSBC
Finance while Bank of Bermuda contributed
US$325 million. On an underlying basis, and at
constant exchange rates, growth in other operating
income was 12 per cent, driven principally by strong
growth in fee and commission income across all
operations.
Net fees and commissions rose by
US$2,699 million, or 26 per cent, with the additional
quarter of HSBC Finance and acquisitions
accounting for US$1,003 million of this increase. On
a constant currency basis, the underlying increase of
10 per cent was underpinned by lending fees from
strong growth in consumer lending in the UK and
the US, sales of investment products in Asia and a
general upturn in funds management income.
In Europe, fee income increased by
US$1,103 million, or 21 per cent, of which
US$107 million came from an extra quarter’s result
from HFC Bank and the acquisitions of Bank of
Bermuda and M&S Money. At constant currencies,
fee income rose by 8 per cent driven by strong
growth in funds under management in Private
Banking, and by the strength of both mortgage and
consumer lending, particularly in the UK where
growth in loan fees and cards income was
augmented by sales of credit protection products.
The increase in loan fee income also reflected strong
demand for commercial lending products in the UK.
Excluding the US$617 million contribution
from an additional quarter of HSBC Finance and
US$126 million from Bank Bermuda, fees and
commissions in North America increased by
US$324 million, or 4 per cent. On a comparable
basis, HSBC Finance saw strong growth in fees from
loan sales and sales of credit protection policies. In
Mexico, strong growth in the Afore pension funds
business complemented higher fee income from
credit cards, deposit services and international
remittances.
In Hong Kong, fee income rose strongly as a
rise in stock market activity sparked demand for
investment products. Unit trust, custody and broking
income all benefited from strong customer demand,
while strong growth in funds under management was
reflected in a sharp rise in discretionary mandate
fees. An improvement in consumer confidence in the
second half of the year flowed through to a rise in
HSBC’s operations in the Rest of Asia-Pacific
similarly benefited from an upturn in regional
financial markets, with strong sales of investment
products reflected in growth in fees from funds
under management and global custody. Further
growth came from an expansion of HSBC’s credit
card base in the region, where cards in issue grew by
929,000 or 25 per cent and from strong growth in
trade related income, particularly in the Middle East,
where the benefit of higher oil prices boosted local
economies. Overall, fee income rose by 26 per cent
at constant currencies.
In South America, net fees and commissions
were 42 per cent higher than in 2003. The bulk of the
increase came in Brazil, which benefited both from
the integration of Losango, and strong organic
growth in consumer and commercial lending.
Dealing profits of US$2,566 million were
US$388 million, or 18 per cent, higher than in 2003
with US$49 million of the increase coming from
acquisitions. Strong growth in foreign exchange and
interest rate derivatives trading offset lower income
from debt securities, while dealing losses on equity
swaps trading were offset by the related dividend
income. Customer flows were strongly ahead of
2003, driven largely by the expansion of business
capabilities during the year. This was reflected in
increases in both foreign exchange trading and
derivatives income, particularly in Europe and Hong
Kong, while retail sales of structured products
further boosted income in Hong Kong and
Singapore. However, fixed income revenues fell,
particularly in the UK, Brazil, Mexico and the US, as
movements in credit spreads adversely affected debt
trading income.
Other operating income benefited from an
expansion of HSBC’s insurance business in the UK
and Hong Kong and growth in the asset finance
business in the UK.
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, HSBC Finance 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.
31
H S B C H O L D I N G S P L C
Financial Review (continued)
The acquisitions of HSBC Finance Corporation
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 (HSBC Finance). Fees from credit cards now
constitute close to 24 per cent of total fees receivable
compared with 13 per cent in 2002.
Fee and commission income, excluding HSBC
Finance 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
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 HSBC Finance 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 generating US$103 million. Within dealing
profits, there was strong growth in fixed income
earnings, predominantly in Europe and Hong Kong,
as a result of favourable credit spreads and strong
investor demand for yield enhancement products.
Foreign exchange revenues increased in both Europe
and North America, with volatility in the major
currencies driving sales of hedging products and
sales activity generally. In Hong Kong, a greater
focus on tailored solutions generated a significant
increase in corporate sales during the year.
Other operating income further benefited from
expansion of the insurance businesses in Argentina
and Hong Kong and growth in the rail leasing
business in the UK.
32
%
51.6
14.0
10.0
17.5
6.9
100.0
76.2
–
3.9
17.1
2.8
100.0
2002
US$m
8,609
1,824
3,331
13,764
1,189
1
854
15,808
%
56.2
Operating expenses
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 ........................
2004
US$m
11,570
2,524
2,080
8,887
1,444
26,505
(630)
25,875
947
9
68
761
29
1,814
27,689
%
43.8
9.5
7.8
33.5
5.4
100.0
52.2
0.5
3.7
42.0
1.6
100.0
Year ended 31 December
2003
US$m
%
9,529
2,212
1,741
6,947
1,075
21,504
(422)
21,082
758
3
35
643
11
1,450
22,532
44.3
10.3
8.1
32.3
5.0
100.0
52.3
0.2
2.4
44.3
0.8
100.0
2002
US$m
7,878
2,139
1,528
2,675
1,060
15,280
(326)
14,954
651
–
33
146
24
854
15,808
By expense category
Staff costs ......................................................................................................
Premises and equipment (excluding depreciation) .........................................
Other administrative expenses .......................................................................
Administrative expenses ................................................................................
Depreciation and amortisation
– tangible fixed assets ....................................................................................
– intangible assets ..........................................................................................
– goodwill ......................................................................................................
Total operating expenses ................................................................................
Cost:income ratio (excluding goodwill amortisation) ....................................
Staff numbers (full-time equivalent)
Europe ...........................................................................................................
Hong Kong ....................................................................................................
Rest of Asia-Pacific ......................................................................................
North America ..............................................................................................
South America ..............................................................................................
2004
US$m
14,492
2,726
6,965
24,183
1,664
28
1,814
27,689
%
51.1
2004
74,861
25,552
41,031
69,781
32,108
Total staff numbers .......................................................................................
243,333
Year ended 31 December
2003
US$m
12,111
2,331
5,243
19,685
1,382
15
1,450
22,532
%
51.3
Year ended 31 December
2003
2002
73,943
23,636
31,827
65,021
28,292
222,719
72,260
23,786
28,630
34,207
25,522
184,405
Year ended 31 December 2004 compared
with year ended 31 December 2003
Operating expenses increased by US$5,157 million,
or 23 per cent, with an additional quarter’s costs in
HSBC Finance accounting for US$1,302 million and
acquisitions US$745 million of the increase.
Excluding these acquisitions and expressed in terms
of constant currency, operating expenses, excluding
goodwill amortisation, were 8 per cent higher than in
2003. Staff costs, which, on the same basis, rose by
7 per cent, accounted for less than half of the
increase, and largely reflected restructuring and
expansion costs in Corporate Investment Banking
and Markets, higher performance-related bonuses,
and growth in staff numbers in support of rising
business volumes. Higher advertising and marketing
costs to stimulate product sales, and expenditure on
IT infrastructure, largely accounted for the
US$1,020 million, or 11 per cent, increase in non-
staff costs. HSBC’s cost:income ratio excluding
goodwill amortisation fell to 51.1 per cent in 2004
from 51.3 per cent in 2003, reflecting the inclusion
33
H S B C H O L D I N G S P L C
Financial Review (continued)
of an additional quarter’s result of HSBC Finance
Corporation. Excluding this effect, the cost:income
ratio increased to 52.5 per cent.
In Europe, costs excluding goodwill
amortisation increased by US$2,041 million
compared with 2003, of which the additional
quarter’s costs in HSBC Finance and acquisitions
accounted for US$270 million. On an underlying
basis and at constant exchange rates, expenses were
US$766 million, or 7 per cent, higher than in 2003.
Higher marketing and IT infrastructure costs added
US$169 million while staff costs rose by
US$245 million, reflecting restructuring and
incentive compensation within Corporate Investment
Banking and Markets, higher performance-related
remuneration and staff pay increments.
Operating expenses in Hong Kong, excluding
goodwill amortisation, rose by US$312 million,
14 per cent higher than in 2003, with US$56 million
of the increase attributable to acquisitions. On an
underlying basis staff costs rose by 9 per cent,
largely due to higher performance-related bonuses,
reflecting improved results in a number of
businesses, and increased headcount in support of
business expansion across a number of business
segments. Marketing expenses also rose, particularly
in Personal Financial Services, in contrast to the
significant cut back in 2003 following the outbreak
of SARS.
In the Rest of Asia-Pacific, costs excluding
goodwill amortisation increased by US$339 million,
or 19 per cent, compared with 2003, with
acquisitions accounting for US$10 million of the
increase. At constant exchange rates, the increase
was 15 per cent, as staff were recruited to support
business expansion in most business segments across
the region and additional marketing costs were
incurred to support business growth. Incentive-based
staff costs also rose in line with improved business
performance. The continued migration of processing
activities from other regions to the Group Service
Centres meant additional staff and IT infrastructure
costs were incurred.
In North America, operating expenses,
excluding goodwill amortisation, increased by
US$1,940 million, or 28 per cent, with acquisitions
and an additional quarter’s costs from HSBC
Finance contributing US$1,301 million of the
increase. The underlying rise of 9 per cent largely
reflected a significant expansion in Corporate
Investment Banking and Markets in the US, where
some 300 staff were added during the year and staff
and incentive-based compensation saw significant
increases. Investment was also made in a number of
34
related technology projects. Staff were recruited for
the branch networks in both Mexico and the US to
support business growth, and marketing costs rose
by US$93 million in support of a number of personal
banking and consumer finance products.
In South America, operating expenses,
excluding goodwill amortisation, rose by
US$369 million, or 34 per cent. US$189 million of
this increase related to acquisitions in 2004, and the
underlying rise in cost at constant currencies was
12 per cent. Staff costs increased by 2 per cent, with
higher levels of performance-related bonuses,
particularly in Corporate, Investment Banking and
Markets and higher social taxes. Transactional taxes
in Brazil increased sharply and additional
processing, communications and outsourcing costs
were incurred to support business growth.
Year ended 31 December 2003 compared
with year ended 31 December 2002
Growth in operating expenses of US$6,724 million,
or 43 per cent, principally reflected the acquisitions
of HSBC Finance Corporation, US$3,787 million,
and HSBC Mexico, US$964 million. Excluding the
effect 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
HSBC Finance, the cost:income ratio was 57.3 per
cent.
In 2003, HSBC’s Group Service Centre in
Malaysia became operational. Overall, the Group
Service Centres now employ in excess of 8,000
employees worldwide.
In Europe, costs excluding goodwill
amortisation increased by US$1,651 million
compared with 2002, of which HSBC Finance
contributed US$299 million. At constant exchange
rates and excluding HSBC Finance 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
continued its policy of migrating back office
processing functions to the Group Service Centres.
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
Bad and doubtful debts
US$284 million, or 11 per cent, in 2003 excluding
HSBC Finance 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 the integration of HSBC
Finance, a US$28 million increase over the previous
year. In addition, costs rose from the first full year’s
inclusion of HSBC’s high net worth personal tax
advisory business. These increases were partly offset
by the benefits obtained from discontinuing certain
of HSBC’s government and agency securities
arbitrage operations in the US, and from business
disposals.
In South America, operating expenses,
excluding goodwill amortisation, were broadly in
line with 2002. At constant exchange rates and
excluding goodwill amortisation, costs were 6 per
cent higher than in 2002. The rise in Brazil was due
to higher staff costs, driven by increases in labour
claims, together with higher marketing costs and
increased transaction taxes on higher operating
income as the personal lending portfolio was
expanded. In addition, the Group’s newly acquired
businesses in Brazil added to cost growth. Costs in
Argentina were down on 2002, mainly because of
lower severance costs.
By geographical region
Europe .....................................................
Hong Kong ..............................................
Rest of Asia-Pacific .................................
North America .........................................
South America .........................................
– normal ..................................................
– additional1 ............................................
2004
US$m
1,025
(223)
100
5,186
269
–
%
16.1
(3.5)
1.6
81.6
4.2
–
Year ended 31 December
2003
US$m
%
874
400
85
4,676
58
–
14.3
6.6
1.4
76.7
1.0
–
Total charge for bad and doubtful debts...
6,357
100.0
6,093
100.0
1 Additional general provisions against Argentine exposures.
2002
US$m
569
246
89
300
313
(196)
1,321
%
43.1
18.6
6.7
22.7
23.7
(14.8)
100.0
35
H S B C H O L D I N G S P L C
Financial Review (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 ...................................................
Year ended 31 December
2004
US$m
8,989
(1,284)
(912)
6,793
–
(436)
(436)
6,357
13,259
12,669
2003
US$m
7,777
(953)
(610)
6,214
–
(121)
(121)
6,093
15,050
13,691
2002
US$m
2,678
(826)
(180)
1,672
(196)
(155)
(351)
1,321
10,523
9,117
Year ended 31 December 2004 compared
with year ended 31 December 2003
At 31 December 2004, 78 per cent of customer
lending was located in Europe and North America,
with 12 per cent in Hong Kong. Personal lending
accounted for 57 per cent of the customer loan
portfolio, a marginal increase on the position at
31 December 2003.
Excluding the effect of foreign exchange
translation, over 70 per cent of loan growth in 2004,
excluding the financial sector, was generated in
personal lending, with particularly strong growth in
mortgages and consumer lending.
Over 100 per cent of the net charge for bad and
doubtful debts in 2004 related to lending to the
personal sector, including consumer finance,
compared with 90 per cent in 2003. Similarly, some
95 per cent of the charge related to lending in the US
and Europe, compared with 88 per cent in 2003.
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 homogeneous portfolios of assets and
individually identified customer loans. The majority
of specific provisions are determined on a portfolio
basis employing statistical calculations using roll
rate methodology to determine specific provisions
for bad and doubtful debts. There were no significant
changes to the procedures used by HSBC in
determining the various components of the charge
for specific bad and doubtful debts during the year.
The charge for specific provisions in 2004 was
US$6,793 million compared with US$6,214 million
in 2003, an increase of US$579 million. With the
additional quarter’s charge from HSBC Finance and
the acquisitions during the year together adding
US$1,433 million to the overall charge, the
36
underlying movement at constant currencies was a
decrease of US$979 million. New specific
provisions increased by US$1,212 million, reflecting
the additional quarter’s charge for HSBC Finance of
US$1,367 million and the US$205 million effect of
acquisitions during the year. Excluding these and at
constant currencies, new specific provisions fell by
US$537 million, or 7 per cent, compared with 2003
with lower new provisions in Hong Kong and the US
combined with higher releases and recoveries in
Europe, North America and South America.
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 account of historical
loss experience, the estimated period between a loss
occurring and that loss being identified, and use their
judgement to decide whether current economic
conditions are likely to produce credit default rates
and loss severity in line with historical precedent.
There was a net general provision release of
US$436 million in 2004, US$315 million greater
than the net release of US$121 million in 2003.
Releases increased in all geographical regions except
South America. This reflected improved underlying
economic conditions, driving lower loss
expectations, and progress made with refinancing
and restructuring problem credits.
The aggregate customer bad and doubtful debt
provisions at 31 December 2004 of US$12.7 billion
represented 1.98 per cent of gross customer advances
(net of suspended interest, reverse repos and
settlement accounts) compared with 2.65 per cent at
31 December 2003. As in 2003, HSBC’s cross-
border exposures did not necessitate significant
provisions.
Non-performing loans (net of suspended
interest) were US$13.3 billion at 31 December 2004.
At constant exchange rates, there was a decrease in
the level of non-performing loans (net of suspended
interest) in 2004 compared with 2003, with falls in
all geographical regions. Hong Kong and North
America experienced a substantial fall in the level of
loans categorised as non-performing.
Year ended 31 December 2003 compared
with year ended 31 December 2002
The acquisition of HSBC Finance Corporation
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 HSBC Finance
Corporation, 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
88 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 a
level that management deems adequate to absorb
actual and inherent losses in the Group’s loan
portfolio from homogeneous portfolios of assets and
individually identified customer loans. Following the
acquisition of HSBC Finance Corporation, the
majority of specific provisions were determined on a
portfolio basis. In addition, the acquisition of HSBC
Finance Corporation resulted in a significant
increase in the extent to which HSBC employed
statistical calculations using roll rate methodology to
determine specific provisions for bad and doubtful
debts. Other than this, there were 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 HSBC Finance Corporation
(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 to decide 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 HSBC Finance 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’s 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$5 billion relating to HSBC Finance’s
loan book. Excluding HSBC Finance, and at
constant exchange rates, there was a decrease in the
level of non-performing loans (net of suspended
interest) in 2003 compared with 2002, mainly as a
result of the write-off of loans from the legacy
portfolio acquired on the acquisition of HSBC
Mexico.
37
H S B C H O L D I N G S P L C
Financial Review (continued)
Gains on disposal of investments
Gains on disposal of:
– debt securities ............................................................................................
– equity investments .....................................................................................
– other participating interests ........................................................................
– associates ...................................................................................................
– subsidiaries ................................................................................................
– other ...........................................................................................................
Year ended 31 December
2004
US$m
2003
US$m
187
300
–
117
22
144
770
161
233
1
1
37
18
451
2002
US$m
170
226
69
47
16
4
532
Year ended 31 December 2004 compared
with year ended 31 December 2003
Year ended 31 December 2003 compared
with year ended 31 December 2002
During the year, HSBC made 15 business
acquisitions and completed 13 business disposals.
HSBC’s profit on disposal of investments was
US$770 million, US$319 million higher than in
2003. The gain on disposal of associates included a
gain on the exchange of HSBC’s interest in World
Finance International Limited for a 7 per cent
interest in Bergesen Worldwide.
The substantial increase in other disposals
comprises the sale of venture capital investments in
France and the US and the disposal of an investment
in NYCE Corporation in the US. Realised gains on
the sale of debt and equity investment securities
during the year were 24 per cent higher than in 2003.
During 2003, HSBC made 26 business acquisitions
and completed 14 business disposals.
HSBC’s profit on disposal of investments was
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 year 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.
38
Taxation
Current taxation
UK corporation tax charge ............................................................................
Overseas taxation .........................................................................................
Joint ventures ................................................................................................
Associates .....................................................................................................
Deferred taxation
Origination and reversal of timing differences ..............................................
Effect of increased tax rate on opening asset ................................................
Adjustment in respect of prior periods ..........................................................
Total charge for taxation ...............................................................................
Effective tax rate ..........................................................................................
Standard UK corporation tax rate .................................................................
Analysis of overall tax charge
Taxation at UK corporation tax rate of 30 per cent
(2003 and 2002: 30 per cent) ....................................................................
Effect of differently taxed overseas profits in principal locations .................
Tax free gains ...............................................................................................
Goodwill amortisation not tax deductible .....................................................
Acquisition accounting adjustments not tax effected ....................................
Prior period adjustments ...............................................................................
Tax deduction on innovative Tier 1 capital ...................................................
Low income housing credits .........................................................................
Other items ...................................................................................................
Overall tax charge..........................................................................................
Year ended 31 December
2004
US$m
716
2,856
3
42
3,617
981
(15)
(76)
890
4,507
%
25.6
30.0
2003
US$m
547
2,590
1
19
3,157
(5)
(7)
(25)
(37)
3,120
%
24.3
30.0
Year ended 31 December
2004
US$m
5,282
(347)
(64)
579
(253)
(229)
(192)
(95)
(174)
4,507
2003
US$m
3,845
(366)
(17)
476
(331)
(230)
(117)
(72)
(68)
3,120
2002
US$m
684
1,217
(6)
17
1,912
615
–
7
622
2,534
%
26.3
30.0
2002
US$m
2,895
(472)
(19)
261
–
(90)
(99)
–
58
2,534
Year ended 31 December 2004 compared
with year ended 31 December 2003
tax purposes and therefore increases the effective tax
rate.
HSBC Holdings and its subsidiary undertakings in
the UK provided for UK corporation tax at 30 per
cent, the rate for the calendar year 2004 (2003:
30 per cent).
HSBC’s effective tax rate of 25.6 per cent in
2004 was lower than the corporation tax rate of
30 per cent. The main factors which reduced the rate
were: the geographical mix of profits and, in
particular, the lower rate of tax on profits generated
in Hong Kong; fair value accounting adjustments,
which under UK GAAP affect pre-tax profits but are
ignored for tax purposes; the tax-deductibility of the
cost of servicing the Group’s innovative Tier 1
capital, which under UK GAAP is shown as a
minority interest; and prior period adjustments,
which by definition are unrelated to earnings in the
current year. These were partially offset by the effect
of goodwill amortisation, which is also ignored for
Overseas tax included Hong Kong profits tax of
US$539 million (2003: US$483 million) provided at
a rate of 17.5 per cent (2003: 17.5 per cent) on the
profits assessable in Hong Kong. Other overseas
taxation was provided for in the countries of
operation at the appropriate rates.
Profits arising in North America represented a
higher percentage of HSBC’s profits in 2004 than in
2003, largely because of the effect of an additional
quarter’s results of HSBC Finance Corporation. 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 HSBC Finance Corporation
and HSBC Mexico resulted in net credits to the
profit and loss account with no corresponding tax
charge. A more detailed explanation of the
39
H S B C H O L D I N G S P L C
Financial Review (continued)
acquisition accounting adjustments is disclosed in
Note 7 of the ‘Notes on the Financial Statements’.
Certain prior period adjustments arose in 2004
which reduced HSBC’s overall tax charge. These
related 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 at a lower cost than had originally
been estimated in establishing provisions.
Goodwill amortisation was higher than in the
previous year, mainly due to an additional three
months charge for HSBC Finance Corporation.
At 31 December 2004, there were potential
future tax benefits of US$973 million (2003:
US$963 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 have not
been recognised because realisation of the benefits is
not considered more likely than not.
Year ended 31 December 2003 compared
with year ended 31 December 2002
HSBC Holdings and its subsidiary undertakings in
the UK 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
and 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 HSBC Finance Corporation. 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 HSBC Finance Corporation
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 on the Financial Statements’ in
the 2003 Annual Report and Accounts.
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.
Goodwill amortisation was higher than in the
previous year, mainly due to the acquisition of
HSBC Finance Corporation.
At 31 December 2003, there were potential
future tax benefits of US$963 million (2002:
US$885 million). The potential benefits are in
respect of trading losses, allowable expenditure
charged to the profit and loss account but not yet
allowable for tax, and capital losses which had not
been recognised because realisation of the benefits
was not considered more likely than not.
40
Asset deployment
Loans and advances to customers ...............................................................
Loans and advances to banks ......................................................................
Debt securities ............................................................................................
Treasury bills and other eligible bills ..........................................................
Equity shares ...............................................................................................
Goodwill and intangible assets ....................................................................
Other ...........................................................................................................
At 31 December
2004
US$m
669,831
142,712
240,999
30,284
19,319
29,382
132,373
%
52.9
11.3
19.1
2.4
1.5
2.3
10.5
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
1,264,900
100.0
1,023,229
100.0
Hong Kong Government certificates of indebtedness .................................
11,878
Loans and advances to customers include:
– reverse repos ...........................................................................................
– settlement accounts .................................................................................
Loans and advances to banks include:
– reverse repos ...........................................................................................
– settlement accounts .................................................................................
1,276,778
29,346
13,834
36,543
6,086
10,987
1,034,216
17,777
8,594
23,220
7,039
Year ended 31 December 2004 compared
with year ended 31 December 2003
HSBC’s total assets (excluding Hong Kong
Government certificates of indebtedness) at
31 December 2004 were US$1,264.9 billion, an
increase of US$241.7 billion or 24 per cent since
31 December 2003. At constant exchange rates, total
assets grew by US$203.8 billion or 19 per cent.
At 31 December 2004, HSBC’s balance sheet
remained highly liquid, reflecting strong growth in
customer deposits. The proportion of assets deployed
in customer advances rose to 53 per cent. Customer
advances increased by 27 per cent, marginally higher
than the growth in total assets, driven essentially by
lending to finance consumer spending and strong
growth in mortgage financing, reflecting the buoyant
housing markets in the US, the UK and parts of
Asia-Pacific. Growth in corporate lending was
concentrated in the Commercial Banking customer
group, while increased financial lending largely
reflected expansion of the euro government bond
trading portfolios in France.
At constant exchange rates, gross loans and
advances to customers (excluding loans to the
financial sector) were US$101.4 billion higher than
at the end of December 2003. US$50.5 billion of this
increase related to mortgages, with strong growth in
the US and the UK. At constant exchange rates,
other personal lending increased by US$22.9 billion
or 17 per cent compared with December 2003,
mainly as a result of strong growth in credit card and
other unsecured personal lending in all of HSBC’s
markets, particularly in the UK. Underlying
commercial and corporate lending, excluding
lending to governments, grew by 14 per cent, with
notable growth in Hong Kong and in the Rest of
Asia-Pacific on the back of higher trade volumes.
In Europe, growth in assets was driven by
increased mortgage and consumer lending in the UK
and demand from private banking clients for secured
funding to finance investment activity. Lending to
small and middle market companies also increased,
although lending to major corporate customers
remained subdued.
In Hong Kong, lending to commercial
customers improved as Hong Kong’s economy
recovered from the impact of SARS and trade flows
with mainland China increased. Competition in the
mortgage market remained intense and the portfolio
declined slightly. Surplus funds from increased
customer deposits were deployed in investment
securities to enhance HSBC’s yields.
In the Rest of Asia-Pacific, the increase in assets
was driven by higher mortgage, consumer lending
and strong regional trade flows.
The rise in assets in North America was driven
substantially by strong growth in mortgage lending
and demand for consumer credit.
In South America, growth was concentrated in
consumer lending in Brazil, which also benefited
from an expansion in lending to the Brazilian retail
sector.
41
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. In order to concentrate on external
factors rather than measurement bases, HSBC
emphasises the trend in economic profit within
business units rather than absolute amounts. In light
of the current levels of world interest rates, and
taking into account the Group’s geographical and
customer group diversity, HSBC believes that its
true cost of capital on a consolidated basis is
approximately 10 per cent. HSBC plans to continue
using this cost until the end of the current five year
strategic plan, which expires at the end of 2008, in
order to ensure consistency and comparability. The
cost of capital under the previous strategic plan,
which expired at the end of 2003, was 12.5 per cent.
On this basis, economic profit increased by
US$3,773 million compared with 2003, reflecting
both the lower cost of capital rate and improved
profitability.
H S B C H O L D I N G S P L C
Financial Review (continued)
At 31 December 2004, assets held by HSBC as
custodian amounted to US$2,819 billion. Custody is
the safekeeping and administration of securities and
financial instruments on behalf of others, and the
inclusion of Bank of Bermuda was responsible for
much of the increase.
Debt securities and equity shares
Debt securities held on an accruals basis in the
investment book at 31 December 2004 showed an
aggregate unrecognised gain, net of off-balance
sheet hedges, of US$1,005 million compared with an
unrecognised gain of US$1,160 million at
31 December 2003. Equity shares included
US$4,709 million held on investment account,
compared with US$5,390 million at 31 December
2003, on which there was an unrecognised gain of
US$879 million, compared with US$827 million at
31 December 2003.
Funds under management
Funds under management of US$476 billion were
US$57 billion, or 14 per cent, higher than at 30 June
2004 and US$90 billion, or 23 per cent, higher than
at the end of 2003. The inclusion of US$22 billion of
funds relating to Bank of Bermuda, and continued
strong funds inflows from both the asset
management and private banking businesses, were
responsible for the increase. The weakening of the
US dollar benefited the translation of sterling and
euro-denominated funds, and contributed to the
positive market performance. At 31 December 2004,
HSBC’s asset management business, including
affiliates, reported funds under management of
US$224 billion, and the private banking business
reported funds under management of
US$178 billion.
Funds under management
At 1 January .....................................
Net new money ................................
– Bank of Bermuda ...........................
– Other .............................................
Value change ...................................
Exchange and other ..........................
At 31 December ...............................
2004
US$bn
2003
US$bn
386
64
22
42
19
7
476
306
42
–
42
25
13
386
42
Average shareholders’ funds before dividends...................................................
Add: dividends declared but not paid ...............................................................
Average shareholders’ funds .............................................................................
Add: cumulative goodwill written off and amortised .......................................
Less: property revaluation reserves ...................................................................
Average invested capital2 ..................................................................................
Profit after tax ...................................................................................................
Add: goodwill amortisation ..............................................................................
depreciation charged on property revaluations ........................................
Less: equity minority interest ...........................................................................
preference dividends ...............................................................................
Return on invested capital3 ................................................................................
Benchmark cost of capital .................................................................................
Economic profit/spread .....................................................................................
Year ended 31 December
2004
US$m
80,220
1,888
82,108
9,873
(2,013)
89,968
13,101
1,818
46
(586)
(675)
13,704
(8,997)
4,707
%1
14.6
2.0
–
(0.7)
(0.7)
15.2
(10.0)
5.2
2003
US$m
67,585
1,773
69,358
8,172
(1,824)
75,706
9,696
1,585
38
(487)
(435)
10,397
%1
12.8
2.1
–
(0.6)
(0.6)
13.7
(9,463)
(12.5)
934
1.2
1 Expressed as a percentage of average invested capital.
2 Average invested capital is measured as shareholders’ funds after adding back goodwill amortised and goodwill previously written-off
directly to reserves and after deducting property revaluation reserves. This measure reflects capital initially invested and subsequent
profit (excluding goodwill amortisation).
3 Return on invested capital is based on attributable profit excluding goodwill amortisation adjusted for depreciation attributable to
revaluation surpluses.
43
H S B C H O L D I N G S P L C
Financial Review (continued)
Analysis by Customer Group and by Geographical Region
By Customer Group:
Profit/(loss) excluding goodwill amortisation
Personal
Financial
Services
US$m
Consumer
Finance4
US$m
Total
Personal
Financial
Services
US$m
Total
Year ended 31 December 2004
Corporate,
Investment
Banking &
Markets
US$m
Commercial
Banking
US$m
Private
Banking
US$m
Net interest income .........
10,290
11,176
21,466
Dividend income ..............
Net fees and commissions
Dealing profits .................
Other income ....................
Other operating income ....
8
4,568
192
1,011
5,779
9
1,893
–
1,004
2,906
17
6,461
192
2,015
8,685
Operating income ...........
16,069
14,082
30,151
4,884
6
2,742
142
656
3,546
8,430
3,821
565
2,802
1,929
873
6,169
9,990
718
5
962
257
17
1,241
1,959
Inter-
segment
elimination
US$m
–
–
–
–
(2,378)
(2,378)
(2,378)
Other6
US$m
135
8
126
46
2,120
2,300
2,435
Total
US$m
31,024
601
13,093
2,566
3,303
19,563
50,587
(9,601)
(4,997)
(14,598)
(4,107)
(5,649)
(1,325)
(2,574)
2,378
(25,875)
6,468
9,085
15,553
4,323
4,341
634
(139)
(1,155)
(5,457)
(6,612)
(227)
473
(80)
(2)
–
–
(80)
(2)
10
(1)
5,231
3,628
8,859
4,105
–
75
71
–
–
39
–
75
110
–
57
7
(38)
(11)
4,765
5
96
330
5,377
3,667
9,044
4,169
5,196
%
27.7
59.7
%
18.9
35.5
%
46.6
48.4
%
21.5
48.7
%
26.7
56.5
9
4
(2)
645
–
–
48
693
%
3.6
67.6
US$m
US$m
US$m
US$m
US$m
US$m
–
77
16
(46)
–
63
307
324
%
1.6
105.7
US$m
–
–
–
–
–
–
–
–
–
24,712
(6,357)
(27)
–
18,328
5
291
802
19,426
%
100.0
51.1
US$m
233,829
274,995
319,081
137,100
163,420
552
370,929
438,415
319,633
129,939
160,299
137,847
142,160
582,975
177,936
24,463
56,466
57,780
2,340
26,745
555
669,831
1,264,900
693,751
128,001
234,867
79,927
115,668
519
–
519
875
1
876
271
3
274
359
–
359
309
–
309
–
–
–
1,814
4
1,818
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)/
written back on
fixed asset investments
Operating profit/(loss)1 ..
Share of operating profit
in joint ventures ..........
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
data7
Loans and advances to
customers (net) ...........
Total assets8 .....................
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 excluded:
1 from (1) above .................
2 from (2) above .................
3 from (3) above .................
356
1
357
For other footnotes, see page 59.
44
Personal
Financial
Services
US$m
Consumer
Finance5
US$m
8,654
6
3,623
133
834
4,596
8,289
12
1,219
–
674
1,905
Total
Personal
Financial
Services
US$m
16,943
18
4,842
133
1,508
6,501
Total
Net interest
income/(expense) .......
Dividend income ..............
Net fees and commissions
Dealing profits/(losses) ....
Other income9 ...................
Other operating income9....
Operating income9...........
13,250
10,194
23,444
Year ended 31 December 2003
Corporate,
Investment
Banking &
Markets
US$m
Commercial
Banking
US$m
Private
Banking
US$m
4,196
3
2,256
118
587
2,964
7,160
3,899
161
2,315
1,764
805
5,045
8,944
574
3
822
209
50
1,084
1,658
Inter-
segment
elimination
US$m
–
–
–
–
(1,208)
(1,208)
(1,208)
Other6
US$m
(14)
37
159
(46)
938
1,088
1,074
Total
US$m
25,598
222
10,394
2,178
2,680
15,474
41,072
(8,232)
(3,397)
(11,629)
(3,768)
(4,373)
(1,149)
(1,371)
1,208
(21,082)
5,018
6,797
11,815
3,392
4,571
509
(297)
doubtful debts .............
(1,058)
(4,575)
(5,633)
(274)
(297)
Provisions for contingent
liabilities and
commitments ...............
Amounts (written off)/
written back on
fixed asset investments
(19)
(18)
–
–
(19)
(18)
14
–
(53)
(91)
Operating profit/(loss)1 ..
3,923
2,222
6,145
3,132
4,130
(2)
(2)
(3)
502
–
–
61
563
%
3.9
69.3
113
16
6
(162)
–
74
92
4
%
–
127.7
US$m
–
–
–
–
–
–
–
–
–
19,990
(6,093)
(44)
(106)
13,747
19
221
414
14,401
%
100.0
51.3
US$m
11
47
27
–
–
3
11
47
30
–
20
6
8
80
225
4,008
2,225
6,233
3,158
4,443
%
27.8
62.1
%
15.5
33.3
%
43.3
49.6
%
21.9
52.6
%
30.9
48.9
US$m
US$m
US$m
US$m
US$m
US$m
173,613
206,694
290,540
116,409
145,383
232
290,022
352,077
290,772
103,495
128,086
111,515
115,092
462,995
119,335
18,109
54,510
50,951
2,259
25,561
557
528,977
1,023,229
573,130
Operating expenses
excluding goodwill
amortisation1,9..............
Operating profit/(loss)
before provisions1 .....
Provisions for bad and
Share of operating profit
in joint ventures2 .........
Share of operating profit
in associates2 ...............
Gains on disposal of
investments and
tangible fixed assets ....
Profit on ordinary
activities before tax3 ..
Share of HSBC’s pre-tax
profits3 ........................
Cost:income ratio1 ............
Selected balance sheet
data7
Loans and advances to
customers (net) ...........
Total assets8,9 ...................
Customer accounts ...........
The following assets and
liabilities were
significant to customer
groups as noted:
Loans and advances to
banks (net) ..................
Debt securities, treasury
bills and other eligible
bills .............................
Deposits by banks ............
Debt securities in issue......
Goodwill amortisation excluded:
1 from (1) above .............
2 from (2) above .............
3 from (3) above .............
249
1
250
For other footnotes, see page 59.
101,277
186,139
65,882
110,905
379
–
379
628
1
629
263
–
263
272
135
407
282
–
282
5
(1)
4
1,450
135
1,585
45
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation (continued)
Year ended 31 December 2002
Total
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Net interest income/(expense) ...............................
7,429
3,835
3,700
Dividend income .....................................................
Net fees and commissions .......................................
Dealing profits ........................................................
Other income9 ..........................................................
Other operating income9...........................................
6
2,979
50
773
3,808
Operating income9..................................................
11,237
6
1,934
107
459
2,506
6,341
230
2,164
1,008
609
4,011
7,711
Operating expenses excluding goodwill
amortisation1,9 ....................................................
(6,958)
(3,149)
(3,898)
Operating profit/(loss) before provisions1.............
4,279
3,192
3,813
Provisions for bad and doubtful debts .....................
Provisions for contingent liabilities and
commitments .....................................................
Amounts (written off)/written back on fixed asset
investments ........................................................
(857)
(269)
(184)
(42)
(2)
19
3
Operating profit/(loss)1 ..........................................
3,378
2,945
Share of operating profit/(loss) in joint ventures2 ....
Share of operating profit/(loss) in associates ............
Gains on disposal of investments and tangible
fixed assets ........................................................
(23)
17
19
3
15
51
Profit/(loss) on ordinary activities before tax3 ......
3,391
3,014
Share of HSBC’s pre-tax profits3 .............................
Cost:income ratio1....................................................
%
32.3
61.9
%
28.7
49.7
12
(109)
3,532
2
45
317
3,896
%
37.1
50.6
Private
Banking
US$m
549
2
623
137
102
864
1,413
(987)
426
(5)
(21)
(22)
378
(1)
(10)
46
413
%
3.8
69.9
Inter-
segment
elimination
US$m
Total
US$m
–
15,460
–
–
–
(1,148)
(1,148)
(1,148)
278
7,824
1,313
1,720
11,135
26,595
Other6
US$m
(53)
34
124
11
925
1,094
1,041
(1,110)
1,148
(14,954)
(69)
(6)
(75)
(194)
(344)
–
68
75
(201)
%
(1.9)
106.6
–
–
–
–
–
–
–
–
–
11,641
(1,321)
(107)
(324)
9,889
(19)
135
508
10,513
%
100.0
56.2
US$m
352,344
749,160
495,438
US$m
US$m
US$m
US$m
US$m
143,696
171,478
257,880
90,562
113,520
92,884
101,770
394,540
95,351
14,115
48,346
49,012
2,201
21,276
311
80,870
162,583
48,895
236
8
244
186
–
186
168
–
168
264
–
264
–
1
1
854
9
863
Selected balance sheet data7
Loans and advances to customers (net) ...................
Total assets8,9 ...........................................................
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 excluded:
1 from (1) above ....................................................
2 from (2) above ....................................................
3 from (3) above ....................................................
For other footnotes, see page 59.
46
Personal Financial Services
Profit excluding goodwill amortisation
Business highlights
Year ended 31 December
2004
US$m
2003
US$m
2002
US$m
Net interest income ............
10,290
Dividend income ..................
Net fees and commissions ....
Dealing profits .....................
Other income9 ......................
Other operating income9 ......
8
4,568
192
1,011
5,779
8,654
6
3,623
133
834
4,596
7,429
6
2,979
50
773
3,808
Operating income9 .............
16,069
13,250
11,237
Operating expenses excluding
goodwill amortisation1,9 ...
Operating profit before
provisions1 .......................
Provisions for bad and
(9,601)
(8,232)
(6,958)
6,468
5,018
4,279
•
doubtful debts ..................
(1,155)
(1,058)
(857)
Provisions for contingent
liabilities and commitments
Amounts written off fixed
asset investments .............
(80)
(2)
(19)
(18)
(42)
•
(2)
Operating profit1 ................
5,231
3,923
3,378
Share of operating profit/(loss)
in joint ventures ...............
Share of operating profit
in associates2.....................
Gains on disposal of
investments and tangible
fixed assets ......................
Profit on ordinary activities
before tax3 .......................
By geographical region:
Europe ..................................
Hong Kong ...........................
Rest of Asia-Pacific .............
North America .....................
South America .....................
Profit on ordinary activities
before tax3........................
Share of HSBC’s pre-tax
profits3 .............................
Cost:income ratio1 ................
Selected balance sheet data7
Loans and advances to
customers (net) ................
Total assets8,9 ........................
Customer accounts ...............
Goodwill amortisation:
1 excluded from (1) above ...
2 excluded from (2) above ...
3 excluded from (3) above ...
For other footnotes, see page 59.
–
75
71
11
47
27
(23)
17
19
5,377
4,008
3,391
1,719
2,097
350
1,164
47
1,267
1,740
158
870
(27)
987
1,705
127
605
(33)
5,377
4,008
3,391
%
27.7
59.7
%
27.8
62.1
%
32.3
61.9
US$m
US$m
US$m
233,829
274,995
319,081
173,613
206,694
290,540
143,696
171,478
257,880
356
1
357
249
1
250
186
–
186
General
• Pre-tax profit before goodwill amortisation grew by
34 per cent to US$5,377 million. At constant
exchange rates and excluding acquisitions, profits
increased by 27 per cent.
• The one millionth HSBC Premier customer was
recruited in May, and by the end of 2004, HSBC had
recruited over 1.1 million Premier customers, an
increase of 28 per cent compared with the end of
2003. HSBC Premier was launched in Mexico,
Bermuda, Greece and Malta during the year.
In September 2004, HSBC was voted ‘Global Bank
of the Year’ by The Banker magazine for an
unprecedented third consecutive year.
In November 2004, HSBC was named ‘Best
Consumer Bank’ in Global Finance magazine’s
listing of the World’s Best Banks 2004.
•
In December 2004, HSBC was named the
‘International Retail Bank of the Year 2004’ in the
Retail Banker International magazine’s annual
award.
Europe
•
In December 2004, the three millionth personal
internet banking customer was recruited in the UK.
• At First Direct, 39 per cent of HSBC’s customers
actively used its online banking service and more
than 70 per cent of inbound contacts from its
customers were over the internet in 2004.
• Logons to the CCF.fr website in France almost
doubled to 11 million in 2004 and over one million
transactions were carried out through the site, an
increase of 30 per cent over 2003.
• During the Autoroutes Paris Rhin Rhone
privatisation, CCF organised the first ever on-line
sale of shares to personal customers in France.
•
In the UK, HSBC’s mortgage products remained
highly rated, receiving the ‘Best National Bank’
award over two, five and 10 years from What
Mortgage magazine in March 2004. In July 2004,
Mortgage Magazine named HSBC as ‘Best First
Time Buyer Lender’. HSBC ranked first in the
‘Moneyfacts Top 35 Lenders Survey’ for the amount
of interest charged over the 12 months ended
31 December 2004 (£100,000 mortgage at the
47
H S B C H O L D I N G S P L C
Financial Review (continued)
lender’s standard variable rate). First Direct was
awarded ‘Best Internet Lender’ by Mortgage
Advisor and Home Buyer magazine for its
Offset mortgage.
• Following the acquisition of M&S Money and
the successful joint management with the John
Lewis Partnership of the John Lewis, Peter
Jones and Waitrose store card, HSBC became
one of the UK’s top credit card issuers. The
M&S Money transaction brought an additional
3.5 million customers.
Hong Kong
• New products, including a range of structured
treasury products, capital-guaranteed funds,
open-ended funds and certificates of deposit
were launched to broaden the range of
investment options in Hong Kong. Sales of unit
trusts and structured investment products
reached record levels. HSBC also recorded
growth of 40 per cent in new regular premium
life insurance sales, driven by the success of
flexible products tailored to customers’ specific
needs, such as the Target Protection Plus
product.
• HSBC maintained its position as the largest
credit card issuer in Hong Kong. An attractive
rewards programme, customer acquisition, and
successful cross-sales to both existing and new
customers, helped grow the number of cards in
circulation in Hong Kong by 14 per cent and
cardholder spending by 32 per cent.
•
In 2004, renminbi financial services were
launched in Hong Kong, offering a
comprehensive range of deposits, currency
exchange and remittance services.
Rest of Asia-Pacific
• There are now over 5 million personal
customers across the Rest of Asia-Pacific.
• HSBC is the leading international unit trust
agent in Malaysia. Unit trust sales increased by
22 per cent in 2004.
Islamic Banking was launched during the year
in UAE, globally branded as HSBC Amanah.
HSBC currently offers customers Amanah
current accounts, personal finance, vehicle
finance and funds. The HSBC Amanah Global
Equity Index Fund was also launched. This is
the first index tracker fund to invest in the 100
largest Shariah-compliant companies by market
capitalisation. Shariah compliant mortgages,
•
48
term deposits and savings accounts will be
launched in 2005.
•
In March 2004, India launched “Smart Home”
mortgages. The product offers a reduction of
interest paid when extra funds are deposited into
the Smart Home account and the flexibility to
redraw the extra funds paid. Balances of
mortgages increased by 112 per cent year on
year.
North America
• Free current account services were successfully
launched in the US, which has attracted over
110,000 new customers and added some
US$200 million in deposits in the first nine
months.
• Customer deposits and insurance revenues grew
strongly in Mexico, in conjunction with the
launch of HSBC Premier. Despite an
increasingly competitive marketplace, market
share in deposits rose by 60 basis points to
14.4 per cent, leveraging the bank’s extensive
branch and ATM network.
• On 10 June 2004, HSBC Bank USA
successfully launched its first major integrated
marketing initiative towards the Hispanic
market called ‘¿Quieres un Mejor Banco?’. In
addition to building awareness of the bank in the
Spanish community, new customer growth
increased market penetration by 11 per cent.
This campaign attracted over 39,000 new
account openings.
• The rollout of HSBC Finance Corporation’s
proprietary credit card system, WHIRL, will
enable HSBC to accelerate the growth in card
volumes in a number of countries. Operations in
Mexico and the US completed the migration to
WHIRL in 2004: the UK transferred in early
2005 and a number of operations in Asia will
follow over the next two years.
South America
• The integration of the Losango business
acquired at the end of 2003 progressed well.
Good progress was made in delivering
anticipated operational synergies and HSBC
took a market-leading approach by sharing
branches with the Losango franchise. Losango
benefited from the acquisition of two additional
consumer portfolios, Valeu Promotora de
Vendes, in Rio de Janeiro and CrediMatone
S.A. in the South of Brazil, increasing the total
number of sales outlets by 114 to 288.
Consumer Finance
Profit excluding goodwill amortisation
Business highlights
Year ended
31 December
20044
US$m
20035
US$m
Net interest income .................................
11,176
Dividend income .......................................
Net fees and commissions .........................
Other income ............................................
Other operating income .............................
9
1,893
1,004
2,906
8,289
12
1,219
674
1,905
Operating income ....................................
14,082
10,194
Operating expenses excluding goodwill
amortisation1 .........................................
(4,997)
(3,397)
Operating profit before provisions1 .......
9,085
6,797
Provisions for bad and doubtful debts .......
(5,457)
(4,575)
Operating profit1 .....................................
3,628
2,222
•
Gains on disposal of investments and
tangible fixed assets ..............................
39
•
3
Profit on ordinary activities
before tax1 ............................................
3,667
2,225
By geographical region:
Europe .......................................................
North America ..........................................
Profit on ordinary activities
91
3,576
157
2,068
before tax1 ............................................
3,667
2,225
• Consumer Finance reported a pre-tax profit, before
goodwill amortisation, of US$3,667 million, of
which US$1,126 million was an additional quarters’
contribution. Excluding this, and at constrant
exchange rates, pre-tax profit grew by 13 per cent to
US$2,541 million.
In September 2004, HSBC extended its brand across
a number of its Consumer Finance businesses in the
US. In early 2005, the rebranding efforts will
continue with the rebranding of HSBC Finance
Corporation’s vehicle finance and credit cards
businesses. The branch based Consumer Finance
business will retain the HFC and Beneficial brands,
accompanied by the endorsement signature,
‘Member HSBC Group’.
In December 2004, Household International, Inc.
merged with its wholly owned subsidiary and
changed its name to HSBC Finance Corporation. The
name change was a continuation of the rebranding of
the Household businesses to the HSBC brand. These
actions were taken to establish a single brand in
North America to create a stronger platform to
advance growth across all HSBC business lines.
Share of HSBC’s pre-tax profits1 ..............
Cost:income ratio1 .....................................
Selected balance sheet data7
Loans and advances to customers (net) .....
Total assets8 ...............................................
Debt securities in issue ..............................
%
18.9
35.5
%
15.5
33.3
US$m
US$m
137,100
163,420
115,668
116,409
145,383
110,905
Goodwill amortisation:
1 excluded from (1) above ........................
519
379
For other footnotes, see page 59.
• Strong improvement was seen in credit quality,
driven by the economic upturn, improved origination
quality, growth in the relative proportion of secured
receivables, improved collection activity, and the
effect on product mix of HSBC Finance
Corporation’s move into prime and near-prime
markets. Improvements were seen across most
products and in a number of key indicators. The rate
of improvement began to slow in the second half of
the year reflecting the maturing of the portfolio, less
robust employment growth and rising energy prices.
• Loans and advances to customers grew by 18 per
cent to US$137.1 billion, mainly driven by strong
organic loan growth in mortgages and vehicle
finance.
• Expansion into prime and near-prime markets in the
US contributed to strong growth in customer loan
balances, particularly in the mortgage business.
Residential mortgage balances increased from
US$46.1 billion at the end of 2003 to
US$60.8 billion by the end of 2004.
49
H S B C H O L D I N G S P L C
Financial Review (continued)
•
•
In October 2004, Household Mortgage Services
was rebranded HSBC Mortgage Services. The
launch of a new marketing campaign, new
product line and an increase in sales staff
resulted in a record number of account
acquisitions. Nearly 50 per cent of all mortgage
applications were processed on-line in 2004.
Greater efficiency was achieved in collections
and servicing of mortgages.
In December 2004, HSBC Bank USA received
regulatory approval to purchase HSBC Finance
Corporation’s domestic private label portfolio
totalling US$15.6 billion, the transfer was
completed on 29 December 2004. HSBC
Finance Corporation will continue to maintain
the customer account relationships for the assets
transferred.
• During 2004, retail services in the US launched
new financing programmes with high-profile
manufacturers and retailers. These include
American Suzuki Corporation, Liz Claiborne
and Helzberg Diamonds. In addition, HSBC
Business Solutions, the business-to-business
financial arm of retail services, became the
commercial financing partner for Komatsu, Mac
Tools and Northern Tool & Equipment Co.
• America’s largest labour union, AFL-CIO, and
card services, agreed to extend the term of their
successful affinity card programme. Card
services also added new affinity groups to its
partnership programme and rolled out the
Cards-in-Branches scheme to HFC and
Beneficial branches throughout the US. More
than 5.9 million value-added service product
memberships are now held by cardholders and
HSBC Finance Corporation has expanded into
the prime segment of the credit card market
under the HSBC brand.
• Projected operating synergies were achieved
through the integration of HSBC and HBSC
Finance Corporation. The merger of the
technology services teams of both HSBC and
HSBC Finance Corporation in North America
was completed; all HSBC’s global credit card
technology is now co-ordinated from North
America. HSBC Finance Corporation’s use of
HSBC’s Group Service Centres was expanded,
with over 1,800 employees in the centres now
supporting the Consumer Finance business.
Purchasing activities in North America were
also consolidated, and 45 major vendor
relationships renegotiated, with annual savings
in excess of US$67 million, US$26 million of
such savings directly resulting from the
integration of HSBC and HSBC Finance
Corporation.
• At the end of 2003, the motor vehicle finance
businesses of HSBC Finance Corporation and
HSBC Bank USA were combined and their
product offerings were merged onto a single
platform. In January 2004, a new prime
financing programme was launched through
HSBC Bank USA. Organic growth of
US$1.4 billion in motor vehicle finance loans
was primarily achieved through the company’s
network of 5,200 motor dealers, extensive
alliance relationships, and direct sales channels.
50
Commercial Banking
Profit excluding goodwill amortisation
Business highlights
Year ended 31 December
2004
US$m
2003
US$m
2002
US$m
Net interest income ............
Dividend income ..................
Net fees and commissions ....
Dealing profits .....................
Other income9 ......................
Other operating income9 ......
Operating income9 .............
Operating expenses excluding
goodwill amortisation1,9 ...
Operating profit before
provisions1 .......................
Provisions for bad and
4,884
6
2,742
142
656
3,546
8,430
4,196
3
2,256
118
587
2,964
7,160
3,835
6
1,934
107
459
2,506
6,341
(4,107)
(3,768)
(3,149)
4,323
3,392
3,192
doubtful debts ..................
(227)
(274)
(269)
Provisions for contingent
liabilities and commitments
Amounts (written off)/written
back on fixed asset
investments ......................
10
(1)
14
–
19
3
Operating profit1 ................
4,105
3,132
2,945
Share of operating profit in
joint ventures ...................
Share of operating profit in
associates2.........................
Gains on disposal of
investments and tangible
fixed assets ......................
Profit on ordinary activities
before tax3 .......................
By geographical region:
Europe ..................................
Hong Kong ...........................
Rest of Asia-Pacific .............
North America .....................
South America .....................
Profit on ordinary activities
before tax3........................
Share of HSBC’s pre-tax
profits3 .............................
Cost:income ratio1 ................
Selected balance sheet data7
Loans and advances to
customers (net) ................
Total assets8,9 ........................
Customer accounts ...............
Goodwill amortisation:
1 excluded from (1) above ...
2 excluded from (2) above ...
3 excluded from (3) above ...
For other footnotes, see page 59.
–
57
7
–
20
6
3
15
51
4,169
3,158
3,014
1,749
914
496
845
165
1,303
711
450
595
99
1,344
733
423
435
79
4,169
3,158
3,014
%
21.5
48.7
%
21.9
52.6
%
28.7
49.7
US$m
US$m
US$m
129,939
160,299
137,847
103,495
128,086
111,515
90,562
113,520
92,884
271
3
274
263
–
263
168
–
168
General
•
Pre-tax profit before goodwill amortisation was 32
per cent higher than last year. At constant exchange
rates and excluding acquisitions, profits increased by
24 per cent because of good revenue growth and
improving credit quality.
• Customer numbers rose by 6 per cent to 2.3 million,
while loans and advances to customers increased by
26 per cent and customer accounts by 24 per cent.
•
•
•
Sales activity expanded across the segment. Global
relationship management was launched in 2004 for
well-established relationship with customers with
international business dealings. Inward referral
champions were appointed in 35 countries to
maximise cross border-referral business.
Segmentation of the customer base continued in
2004, with the successful approach adopted in UK
corporate banking being repeated in other countries
for top tier customers. An increase in the number of
commercial centres and a change in the focus of
their activities, and new packaged products,
benefited Smaller and Medium Enterprises (‘SME’).
Internet Banking customer numbers increased by 43
per cent. The internet represents a rapidly growing
revenue source, generating over US$50 million from
transactions, fees and e-sales in 2004. Global e-
development resources were rationalised in 2004 to
extract cost synergies from utilising common IT
platforms.
• HSBCnet, the Group’s new ‘e’ banking platform for
corporate and mid-market customers, was introduced
and now has customers in 30 countries in Asia
Pacific, Europe, North America and the Middle East.
Services include a range of transaction banking and
treasury products.
• Major initiatives commenced in the second half of
2004, aimed at significantly increasing the sale of
business insurance and commercial wealth
management products to relevant customers in a
number of selected countries.
•
In November, HSBC retained the title of ‘Best
Clearing Bank for Small Businesses’ awarded by the
Forum of Private Business in the UK. It is the fourth
consecutive time that HSBC has won the title, which
is awarded every two years.
51
H S B C H O L D I N G S P L C
Financial Review (continued)
• Finance Asia and Global Finance named HSBC
‘Best Trade Finance Bank’ in Asia and in Hong
Kong for the eighth and fourth successive years
respectively. HSBC was also named ‘Best
Foreign Commercial Bank’ in China, India,
Indonesia and Malaysia.
Europe
•
•
In the UK, the segmentation of customers was
refined. 21 corporate banking centres were
launched to service top tier customers, a further
209 commercial centres were established to
address the banking needs of larger SMEs,
while for the rest of the SME market a dedicated
outbound contact unit was created.
2004 was a record year for commercial
acquisitions, which, coupled with the best
customer retention of any UK high street bank,
resulted in HSBC reporting a net gain in
commercial customers. Over 100,000 start-up
business accounts were opened, and HSBC now
has a 20 per cent market share.
• New products were launched, including
business wealth planning, an award-winning
flexible commercial mortgage, and HSBCnet.
•
In France, an exercise was undertaken to
segment HSBC’s customer base, creating
dedicated regional teams to manage major
commercial banking relationships. Some
significant early successes in transactional and
investment banking mandates and cross border
referrals were achieved.
Hong Kong
• Five business banking centres were established
in 2004, serving small commercial customers.
Located in key business areas, they offer a one-
stop service for account opening, trade services
and insurance sales.
• HSBC launched the first ever Hong Kong
marketing campaign aimed at SME start-up
businesses. The start-up segment has
experienced sustained growth and new account
openings in 2004 increased by 49 per cent.
2004 was a record year for new facilities put in
place for Hong Kong and Taiwanese customers
in mainland China, which more than doubled on
2003. A first-of-its-kind, co-ordinated
advertising campaign in Hong Kong, mainland
China and Taiwan was launched in October to
further awareness of HSBC’s Greater China
capabilities and to promote the Group across the
region. The full effect of the campaign is
•
52
expected to contribute positively to performance
in 2005.
Rest of Asia-Pacific
• HSBC Middle East launched HSBCnet across
6 countries in the region. Express Cash Service,
an offering designed to assist corporate
customers with the transportation of large
volumes of cash, was launched in the UAE and
Qatar.
•
Islamic business in Commercial Banking
experienced strong growth in Malaysia, with
customer advances more than doubling and
accounting for approximately 80% of the HSBC
Bank Malaysia’s Islamic-based customer
advances.
North America
• Business Smart was launched in the US in
September. Business Smart is the first product
from a major financial institution in New York
City to offer commercial customers free
checking accounts. 11,000 accounts were
opened in the three months following the
launch.
• The commercial real estate business on the US
West coast successfully expanded beyond Los
Angeles and San Francisco to other areas in
California, including San Diego.
•
In Mexico, a new product for small businesses,
Estímulo, was launched. The product offers an
integrated package of financial services,
targeting a sector which is currently under-
served by banks.
South America
•
In Brazil, HSBC Seguros launched two new
insurance products targeted at small and micro-
sized enterprises. EmpresaSegura is a property
insurance product and VidaProtegida
Empresarial is a group life and personal
accident policy.
• Cross-selling to commercial customers of
Losango boosted loan growth in Brazil. Thirty-
six per cent of this customer base purchased
HSBC products, with more than 5,000 new
accounts opened in 2004.
Corporate, Investment Banking and Markets
Profit excluding goodwill amortisation
Business highlights
12
(109)
3,532
2
45
Year ended 31 December
2004
US$m
2003
US$m
2002
US$m
Net interest income ............
Dividend income ..................
Net fees and commissions ....
Dealing profits .....................
Other income9 ......................
Other operating income9 ......
Operating income9 .............
Operating expenses excluding
goodwill amortisation1,9 ...
Operating profit before
provisions1 .......................
Provisions for bad and
3,821
565
2,802
1,929
873
6,169
9,990
3,899
161
2,315
1,764
805
5,045
8,944
3,700
230
2,164
1,008
609
4,011
7,711
(5,649)
(4,373)
(3,898)
4,341
4,571
3,813
doubtful debts ..................
473
(297)
(184)
Provisions for contingent
liabilities and commitments
Amounts written off fixed
asset investments .............
(38)
(11)
(53)
(91)
Operating profit1 ................
4,765
4,130
Share of operating profit in
joint ventures2 ..................
Share of operating profit in
associates .........................
Gains on disposal of
investments and tangible
fixed assets ......................
Profit on ordinary activities
before tax3 .......................
By geographical region:
Europe ..................................
Hong Kong ...........................
Rest of Asia-Pacific .............
North America .....................
South America .....................
Profit on ordinary activities
before tax3 .......................
Share of HSBC’s pre-tax
profits3 .............................
Cost:income ratio1 ................
Selected balance sheet data7
Loans and advances to:
– customers (net) ..................
– banks (net) ........................
Total assets8,9 ........................
Customer accounts ...............
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 59.
5
96
8
80
330
225
317
5,196
4,443
3,896
1,772
1,584
940
750
150
1,623
1,275
732
837
(24)
1,438
1,226
706
494
32
5,196
4,443
3,896
%
26.7
56.5
%
30.9
48.9
%
37.1
50.6
US$m
US$m
US$m
142,160
128,001
582,975
177,936
115,092
101,277
462,995
119,335
101,770
80,870
394,540
95,351
234,867
79,927
186,139
65,882
162,583
48,895
359
–
359
272
135
407
236
8
244
• Pre-tax profits, before amortisation of goodwill,
increased by 17 per cent, to US$5,196 million. At
constant exchange rates and excluding acquisitions,
profits rose by 11 per cent. Operating income was
3 per cent higher, reflecting strong growth in foreign
exchange and derivatives revenues together with
increased fee income from transaction banking
services. Operating expenses, excluding goodwill
amortisation, grew by 16 per cent as we invested in
the people and infrastructure necessary to upgrade
our client proposition. A total net release of
provisions for bad and doubtful debts compared
favourably with a net charge in 2003.
In 2004, substantial progress was made in realigning
Corporate, Investment Banking and Markets’
businesses, in improving links between client
relationship management, product specialists and
HSBC’s geographical network, and in establishing
multi-disciplinary, global client service teams. Some
2,000 people, including over 100 senior managers,
were recruited in a planned restructuring designed to
attract the best staff at all levels. At the same time,
some 1,500 people departed.
In Global Markets, HSBC maintained strong
business momentum. Significant revenue gains were
made in the areas of foreign exchange, with the
rollout of the eFX platform, and derivatives, by
developing risk management solutions for clients.
These gains reflected the investment made in these
areas in the previous year. In 2004, the business
continued to invest for growth by strengthening
infrastructure and systems, upgrading staff
capabilities and improving product and customer
delivery.
•
•
• HSBC’s share of the international bond issuance
market rose to 4.9 per cent from 4.4 per cent in 2003,
raising in excess of US$114 billion, a direct result of
the substantial investment in bond origination,
trading and sales since 2002.
• The restructuring of Global Investment Banking
involved the recruitment of an additional 215 staff.
HSBC played a leading role in several notable
advisory and financing transactions including LNM
Holdings’ US$17.0 billion reverse merger with Ispat
International to form Mittal Steel; Saudi Arabian Oil
Company’s acquisition of a stake in Showa Shell
Sekiyu K.K. (Japan) from the Royal Dutch/Shell
Group; and Neptune Orient Lines’ US$1.7 billion
take-over by Temasek Holding.
53
H S B C H O L D I N G S P L C
Financial Review (continued)
• HSBC acted as the sole financial advisor to
Total SA in the take-over bid launched by its
subsidiary, Sanofi-Synthélabo, for Aventis, to
create the world’s 3rd largest pharmaceutical
group.
• HSBC continued to make progress in Europe
and the Americas, arranging major financing for
clients, including a US$11.8 billion multi-
tranche financing for Network Rail.
• HSBC debt finance successfully completed a
US$2.4 billion syndicated facility for Telefonos
de Mexico S.A. de C.V. (Telmex) and acted as a
joint lead and bookrunner on a US$1.75 billion
bond issue for Petroleos Mexicanos (PEMEX), a
pioneering transaction which opened the Asian
and retail markets for Latin American credit.
HSBC Chile, in conjunction with New York
debt capital markets, acted as a joint book-
runner in a US$500 million bond issue for
Codelco, achieving sub-sovereign pricing and
placements with HSBC’s Asian investors.
• HSBC acted as advisor on a number of
significant transactions in equity capital
markets, including Ping An Insurance
Company’s US$1.8 billion initial public
offering. HSBC also participated in the Hong
Kong Government’s US$2.6 billion global bond
offering. The French state’s US$1.5 billion issue
of equity in Autoroutes Paris-Rhin-Rhone was
the second privatisation of France’s motorway
networks for which HSBC acted as a joint book-
runner and advisor.
• HSBC acted as sole bookrunner on Emirates
Airlines’ debut US$500 million seven-year
Eurobond issue, and was named Best Debt
House in the United Arab Emirates in the
Euromoney Awards for Excellence.
• Within Corporate and Institutional Banking, the
corporate loan market remained very
competitive during 2004, with many clients
taking advantage of low margins and bank
demand for assets to refinance on preferential
terms.
•
In the improving economic climate, HSBC
achieved substantial recoveries against impaired
loans, helped by extensive restructuring and
refinancing activity worldwide.
54
• Following a significant development in 2004,
HSBCnet provides a single point of entry to a
range of sophisticated products and services
tailored for corporate, institutional, and mid-
market enterprise clients. The service is actively
used by HSBC clients in more than 110
countries globally. Functionality includes
award-winning economic research, treasury and
capital markets cash management, cross-border
payments, investment management and foreign
exchange tools, in a format that can be
personalised to meet clients’ individual needs.
• Global research was developed to encompass
Corporate, Institutional Banking and Markets’
research across all product areas.
•
In Global Transaction Banking, the successful
integration of Bank of Bermuda contributed to
an increase in profitability. In Asia, the
payments and cash management product suite
was significantly enhanced with the launch of
‘Integrated payables and integrated receivables’
via HSBCnet.
• HSBC trade services benefited from increased
customer flows. HSBC developed a distinct
business line for Supply Chain, experiencing
significant early success with a major retailer.
•
•
In securities services, the successful integration
of Bank of Bermuda’s alternative funds
services, resulted in several new business
opportunities. In addition, HSBC agreed a seven
year deal with Gartmore to provide back office
operations.
In Group Investment Businesses, assets under
management increased by 9 per cent to
US$224.2 billion and included US$11.1 billion
of net new client investments. Major successes
included the distribution of specialist emerging
market mutual funds through HSBC and third-
party financial product distributors in Europe
and Asia, strong growth in money market
investments from corporates in Europe and
North America, and flows into an alternative
bond investment product marketed to
institutions and private banks worldwide.
Private Banking
Profit excluding goodwill amortisation
Business highlights
Year ended 31 December
2004
US$m
2003
US$m
2002
US$m
718
5
962
257
17
1,241
1,959
574
3
822
209
50
1,084
1,658
549
2
623
137
102
864
1,413
(1,325)
(1,149)
(987)
634
509
426
General
• Pre-tax profit excluding goodwill amortisation grew
by 23 per cent compared with last year. At constant
exchange rates and excluding acquisitions, profits
increased by 21 per cent, supported by strong growth
in funds under management.
• At constant exchange rates and excluding the effect
of the transfer of a corporate trust business to
Corporate, Investment Banking and Markets in Hong
Kong, funds under management increased by 24 per
cent to US$178.2 billion, including US$13.1 billion
of net new money, and US$17.1 billion of funds in
Bank of Bermuda.
(5)
• The acquisition of Bank of Bermuda brought
Net interest income ............
Dividend income ..................
Net fees and commissions ....
Dealing profits .....................
Other income .......................
Other operating income ........
Operating income ...............
Operating expenses excluding
goodwill amortisation1 .....
Operating profit before
provisions1 .......................
Provisions for bad and
doubtful debts ..................
Provisions for contingent
liabilities and commitments
Amounts written off fixed
asset investments .............
Operating profit1 ................
Share of operating loss in joint
ventures2 ..........................
Share of operating loss in
associates2.........................
Gains on disposal of
investments and tangible
fixed assets ......................
Profit on ordinary activities
before tax3 .......................
By geographical region:
Europe ..................................
Hong Kong ...........................
Rest of Asia-Pacific .............
North America .....................
South America .....................
Profit on ordinary activities
before tax3........................
Share of HSBC’s pre-tax
profits3 .............................
Cost:income ratio1 ................
9
4
(2)
645
–
–
48
693
432
135
59
66
1
693
%
3.6
67.6
(2)
(2)
(3)
502
–
–
(21)
(22)
378
(1)
(10)
61
46
563
413
339
127
36
63
(2)
563
%
3.9
69.3
236
107
25
57
(12)
413
%
3.8
69.9
Selected balance sheet data7
Loans and advances to
customers (net) ................
Total assets8 ..........................
Customer accounts ...............
Goodwill amortisation:
1 excluded from (1) above ...
2 excluded from (2) above ...
3 excluded from (3) above ...
For other footnotes, see page 59.
US$m
US$m
US$m
24,463
56,466
57,780
18,109
54,510
50,951
14,115
48,346
49,012
309
–
309
282
–
282
264
–
264
considerable product and service strength to existing
trust capabilities, and HSBC now ranks among the
largest international private trust banks in the world.
• HSBC grew its onshore Private Banking operations,
with the addition of Bank of Bermuda’s onshore
Bermudan business, and the launch of onshore
private banking in Mexico in November, and
Malaysia in May. Operations in Europe, Asia, and
North America were strengthened through front
office recruitment during the year.
• The HSBC Private Bank brand was launched
globally, supported by a major marketing campaign,
bringing a single identity to HSBC’s core operation.
Integration of the four French private banks was
completed, and Bank of Bermuda’s private client
businesses in Hong Kong, Luxembourg and Jersey
were fully integrated.
• HSBC won a number of awards in the Euromoney
second annual private banking survey, including ‘1st
private bank for trust services globally’, and ‘1st for
Islamic banking in Switzerland, the UK, and
Western Europe’.
• Work was undertaken to strengthen links between
Private Banking and the wider Group. A structure
was put in place to facilitate global links and cross-
selling activities with HSBC’s Commercial Banking
businesses. A cross-referral process was established
with Personal Financial Services and, for certain
products, with Corporate, Investment Banking and
Markets.
55
H S B C H O L D I N G S P L C
Financial Review (continued)
• Client interest in equity investment
opportunities increased as markets continued
their late-2003 recovery, and HSBC benefited
from this through the launch of new products.
Several new funds were introduced during the
year, including a global Islamic fund.
Banks in Switzerland by net profit,
shareholders’ equity and balance sheet.
•
Internet transaction banking for clients was
launched in the UK’s private banking website in
December.
• HSBC also continued to develop alternative
North America
investment products. Total client investment in
hedge funds reached US$23 billion, following
the launch of several new funds, reflecting
growth of 40 per cent.
• The Strategic Investment Solutions product was
launched in the Americas and Channel Islands
in March and May respectively, following its
success in Geneva and Asia. Global assets under
management invested in this product grew by
US$0.7 billion to US$1.0 billion.
• The lending book grew strongly, as clients
sought to leverage their investments in the low
interest environments in North America, Europe
and Asia. In the UK, lending book growth was
buoyed by strong growth in mortgages.
Europe
• HSBC’s French mutual funds portfolio won four
awards for its performance in La Tribune and
Standard & Poor’s ‘Victoires des Sicav 2004’.
• HSBC was ranked the largest foreign bank in
Switzerland by the Association of Foreign
• The alignment of HSBC’s international and
domestic private banking segments continued,
bringing operational cost savings and a more
coherent infrastructure. The integration of
Wealth and Tax Advisory Services (‘WTAS’),
acquired in the second half of 2002, and Bank of
Bermuda, acquired in February 2004, including
the cross-referral of clients, continued to make
progress.
• Private Banking and Corporate, Investment
Banking and Markets structured products
activities were integrated to share expertise and
ensure a common approach.
Asia
•
In Asia, HSBC won awards from Euromoney as
‘1st for Family Office Services in Asia’, ‘1st for
Inheritance and Succession Planning in Asia’,
‘1st for Trust Services in Asia’, ‘1st in Hong
Kong offshore’ and ‘1st in China Offshore’.
56
Other6
Profit excluding goodwill amortisation
Business highlights
Net interest income/(expense)
Dividend income ..................
Net fees and commissions ....
Dealing profits/(losses) ........
Other income9 ......................
Other operating income9 ......
Operating income9 .............
Operating expenses excluding
goodwill amortisation1,9 ...
Operating loss before
provisions1 .......................
Provisions for bad and
doubtful debts ..................
Provisions for contingent
liabilities and commitments
Amounts (written off)/written
back on fixed asset
investments ......................
Operating loss1 ...................
Share of operating profit in
associates2.........................
Gains on disposal of
investments and tangible
fixed assets ......................
Profit /(loss) on ordinary
activities before tax3 .......
By geographical region:
Europe ..................................
Hong Kong ...........................
Rest of Asia-Pacific .............
North America .....................
South America .....................
Profit /(loss) on ordinary
activities before tax3........
Share of HSBC’s pre-tax
profits3 .............................
Cost:income ratio1 ................
Year ended 31 December
2004
US$m
2003
US$m
2002
US$m
135
8
126
46
2,120
2,300
2,435
(14)
37
159
(46)
938
1,088
1,074
(53)
34
124
11
925
1,094
1,041
• The Group Service Centres are included in ‘Other’.
The creation of the North American technology
company brought approximately US$970 million of
costs within this category, all of which were
recharged. Expansion and greater utilisation of the
Group Service Centres outside the US saw their costs
rise from US$97 million to US$171 million. As
almost all their activity is recharged to HSBC users,
their income also increased from US$93 million to
US$173 million.
(2,574)
(1,371)
(1,110)
• Significant releases of provisions for bad and
doubtful debts in Argentina during 2003 were not
repeated in 2004. Net releases of provisions for
contingent liabilities and commitments increased to
US$77 million, largely due to the release of
provisions raised in respect of pesification in
Argentina.
• Gains from disposals in Hong Kong arose from
disposals of an associated company, long-term
investments and a residential property. In addition,
there were gains from the disposal of an insurance
company in Europe, and profits from sales of
government securities in Argentina.
(139)
(297)
(69)
–
77
16
(46)
63
307
324
409
23
32
(221)
81
324
%
1.6
105.7
113
16
(6)
(75)
6
(162)
(194)
(344)
74
92
4
173
(123)
50
(176)
80
4
%
68
75
(201)
155
(61)
12
(207)
(100)
(201)
%
–
127.7
(1.9)
106.6
Selected balance sheet data7
Loans and advances to
customers (net) ................
Total assets8,9 ........................
Customer accounts ...............
Goodwill amortisation:
1 excluded from (1) above ...
2 excluded from (2) above ...
3 excluded from (3) above ...
For other footnotes, see page 59.
US$m
US$m
US$m
2,340
26,745
555
2,259
25,561
557
2,201
21,276
311
–
–
–
5
(1)
4
–
1
1
57
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 that follows, operating income and operating expenses include intra-
HSBC items of US$630 million (2003: US$422 million; 2002: US$326 million).
Profit on ordinary activities before tax
Europe ..................................................
Hong Kong ...........................................
Rest of Asia-Pacific .............................
North America .....................................
South America .....................................
2004
US$m
5,225
4,744
1,805
5,419
415
%
29.6
26.9
10.3
30.8
2.4
Year ended 31 December
2003
US$m
%
3,969
3,728
1,391
3,613
115
30.9
29.1
10.9
28.2
0.9
Total .....................................................
17,608
100.0
12,816
100.0
Profit on ordinary activities before tax excluding goodwill amortisation
Europe ..................................................
Hong Kong ...........................................
Rest of Asia-Pacific .............................
North America .....................................
South America .....................................
2004
US$m
6,172
4,753
1,877
6,180
444
%
31.7
24.5
9.7
31.8
2.3
Year ended 31 December
2003
US$m
%
4,862
3,730
1,426
4,257
126
33.7
25.9
9.9
29.6
0.9
2002
US$m
3,500
3,710
1,260
1,238
(58)
9,650
2002
US$m
4,160
3,710
1,293
1,384
(34)
%
36.3
38.4
13.1
12.8
(0.6)
100.0
%
39.5
35.3
12.3
13.2
(0.3)
Total .....................................................
19,426
100.0
14,401
100.0
10,513
100.0
Total assets
Europe .......................................................................................................
Hong Kong8 ...............................................................................................
Rest of Asia-Pacific ..................................................................................
North America ..........................................................................................
South America ..........................................................................................
At 31 December
2004
US$m
539,116
217,406
120,504
370,477
17,397
%
42.6
17.2
9.5
29.3
1.4
2003
US$m
425,312
197,487
98,081
289,800
12,549
%
41.6
19.3
9.6
28.3
1.2
Total8 ........................................................................................................
1,264,900
100.0
1,023,229
100.0
For above footnotes, see page 59.
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.
58
Footnotes to ‘Analysis by customer group and by geographical region’
1,2,3 Goodwill amortisation excluded from profit/(loss) is disclosed in the tables on pages 44 to 58.
4 Comprises HSBC Finance Corporation’s consumer finance business and the US residential mortgages and credit card portfolios
acquired by HSBC Bank USA from HSBC Finance Corporation and its correspondents since December 2003.
5 Comprises HSBC Finance Corporation’s consumer finance activities since the date of acquisition and the US residential
mortgages acquired by HSBC Bank USA from HSBC Finance Corporation in December 2003.
6
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$453 million in 2004 (2003: US$382 million). ‘Other’ also includes
the activities of Group Service Centres and Shared Service Organisations (see footnote 9 below).
7
Third party only.
8 Excluding Hong Kong Government certificates of indebtedness.
9 As a result of growth in use of Group Service Centres and Shared Service Organisations, the activities of these centres have been
included in the ‘Other’ customer group. Comparatives for the years ended 31 December 2003 and 31 December 2002 are now
reported under ‘Other’ where these activities were formerly reported across customer groups.
59
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 ............................................................................................
France4 ...........................................................................................................
Other ..............................................................................................................
Consumer Finance2 ......................................................................................
United Kingdom ............................................................................................
Other ..............................................................................................................
Total Personal Financial Services ...............................................................
United Kingdom ............................................................................................
France4 ...........................................................................................................
Other ..............................................................................................................
Commercial Banking ..................................................................................
United Kingdom ............................................................................................
France4 ...........................................................................................................
Other ..............................................................................................................
Corporate, Investment Banking and Markets3 ..........................................
United Kingdom ............................................................................................
France4 ...........................................................................................................
Other ..............................................................................................................
Private Banking ............................................................................................
United Kingdom ............................................................................................
France4 ...........................................................................................................
Switzerland ....................................................................................................
Other ..............................................................................................................
Other3 ............................................................................................................
United Kingdom ............................................................................................
France4 ...........................................................................................................
Other ..............................................................................................................
Total1,3
United Kingdom ............................................................................................
France4 ...........................................................................................................
Switzerland ....................................................................................................
Other ..............................................................................................................
1 Goodwill amortisation excluded:
– arising on subsidiaries ............................................................................
– arising on associates and joint ventures .................................................
– total .........................................................................................................
2004
US$m
1,719
1,387
230
102
91
100
(9)
1,810
1,487
230
93
1,749
1,337
274
138
1,772
1,112
327
333
432
141
(21)
260
52
409
487
(121)
43
6,172
4,564
689
260
659
947
–
947
2003
US$m
1,267
1,050
165
52
157
157
–
1,424
1,207
165
52
1,303
939
257
107
1,623
1,147
129
347
339
73
21
197
48
173
259
(108)
22
4,862
3,625
464
197
576
758
135
893
2002
US$m
987
826
139
22
–
–
–
987
826
139
22
1,344
929
325
90
1,438
1,100
165
173
236
88
8
100
40
155
287
(241)
109
4,160
3,230
396
100
434
651
9
660
2 Comprises HSBC Finance Corporation’s consumer finance business since the date of acquisition.
3 Intra-group charges previously netted between countries are reported gross in 2004. Figures for 2003 and 2002 have been restated on a
comparable basis.
4 France principally comprises CCF’s domestic operations and the Paris branch of HSBC Bank.
60
Profit before tax
Europe
Net interest income ......................................................................................
Dividend income ............................................................................................
Net fees and commissions ..............................................................................
Dealing profits ...............................................................................................
Other income .................................................................................................
Other operating income ..................................................................................
2004
US$m
9,062
545
6,295
953
1,592
9,385
Total operating income ................................................................................
18,447
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/(loss) in joint venture .............................................
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 assets ....................................................................................................
Deposits by banks ..........................................................................................
Customer accounts .........................................................................................
1 Third party only.
(6,583)
(1,235)
(2,743)
(1,009)
(11,570)
(947)
(12,517)
5,930
(1,025)
(12)
(20)
4,873
5
54
293
5,225
%
31.7
29.6
62.7
74,861
US$m
274,160
55,859
112,894
539,116
55,204
292,913
Year ended 31 December
2003
US$m
7,540
150
5,192
960
1,253
7,555
15,095
(5,576)
(1,058)
(2,068)
(827)
(9,529)
(758)
(10,287)
4,808
(874)
(33)
(64)
3,837
(127)
47
212
3,969
%
33.7
30.9
63.1
73,943
US$m
210,605
51,783
82,656
425,312
47,500
242,724
2002
US$m
6,343
211
4,528
508
1,025
6,272
12,615
(4,425)
(966)
(1,763)
(724)
(7,878)
(651)
(8,529)
4,086
(569)
(15)
(267)
3,235
(26)
3
288
3,500
%
39.5
36.3
62.4
72,260
US$m
164,701
39,373
71,446
341,569
34,559
197,362
61
H S B C H O L D I N G S P L C
Financial Review (continued)
Year ended 31 December 2004 compared
with year ended 31 December 2003
bond yields fell during 2004 for 10-year bunds from
4.3 per cent to 3.7 per cent.
The UK economy expanded by 3.0 per cent during
2004, although after a strong first half, growth
decelerated from the third quarter across most
sectors. The rate of growth in consumer spending
also slowed during the year. Growing uncertainty
surrounding the outlook for house prices contributed
to a slowdown in housing transactions in the second
half of the year and an associated easing in domestic
appetite for further credit. However, HSBC expects
an increase in real income growth compared with
2003 and stability in levels of employment to
continue to provide support for resilient consumer
spending in the coming months. In the UK industrial
sector, companies were generally cautious about
their employment and investment intentions, with
some nervousness over the state of the global and
domestic recovery and the outlook for oil prices.
Although confidence within the industrial sector
appeared to be growing, the official data showed that
manufacturing activity continued to contract, lagging
the global recovery.
The eurozone recovery, which got underway in
the middle of 2003, continued in the first half of
2004. However, the year-on-year growth rate began
to fall in the latter six months of the year from an
expected peak of 2.1 per cent in the second quarter
to 1.8 per cent in the third quarter. Exports were
strong, particularly in the first half of 2004, with
year-on-year growth of 7.6 per cent in the second
quarter, but export growth slowed in the second half
when there was little evidence of benefits feeding
through into consumer spending and fixed
investment. Companies were reluctant to take on
extra workers and, in Germany, concerns about the
economic reform process seemed to encourage
higher household savings. Companies also appeared
reluctant to invest, possibly because of the debt
build-up in the late 1990s. Eurozone inflation moved
back above the European Central Bank’s (‘ECB’)
2 per cent target in the spring, reaching 2.5 per cent
by May and remaining above 2 per cent in the
remainder of the year. However, the headline
inflation rate was boosted by higher oil prices, health
charges and tobacco duties. Excluding these factors,
underlying inflation was little changed at around
1.6 per cent.
The ECB kept its key interest rate constant at
2 per cent throughout the year. On a trade-weighted
basis, the euro fell back in February and March but
rose sharply in the autumn, and by December had
moved above its January 2004 peak. Also in
December, the euro reached record highs against the
US dollar since its introduction in 1999. Eurozone
62
European operations reported a pre-tax profit of
US$5,225 million, compared with US$3,969 million
in 2003. Excluding goodwill amortisation, pre-tax
profit was US$6,172 million and represented around
32 per cent of HSBC’s total profit on this basis. The
effect of the weakening US dollar was significant in
2004 and the adjustment to prior year figures to
provide a like for like basis of comparison added
approximately 11 per cent to both reported revenues
and costs.
At constant exchange rates, the growth in pre-
tax profit before goodwill amortisation was 15 per
cent, all of which came from existing businesses.
The commentary that follows is based on constant
exchange rates.
Personal Financial Services reported a pre-tax
profit, before goodwill amortisation, of
US$1,719 million, an increase of 22 per cent
compared with 2003. Revenue growth was
encouraging, and this, combined with disciplined
cost control, increased pre-provision profitability by
37 per cent over 2003. Total operating income grew
by 15 per cent compared with cost growth of 5 per
cent, of which M&S Money added 1 per cent.
The cost:income ratio excluding goodwill,
improved by 6.0 percentage points to 62.8 per cent.
The UK was the principal driver of increased
profitability. Strong growth in UK consumer lending
and mortgages was achieved, from brand-led
awareness, marketing campaigns and competitive
pricing. The same factors also contributed to
increased earnings on savings and deposit accounts,
and HSBC increased its current account base by
6.5 per cent.
Net interest income increased by
US$506 million, of which US$35 million was
attributable to M&S Money. Personal unsecured
lending revenues grew strongly on the back of
marketing and price initiatives, and an increase in
the average loan size, contributed to growth of
22 per cent in UK personal loans. Market share
increased by 66 basis points to 6.92 per cent. The
credit cards business continued to expand, due partly
to the continued strength of consumer expenditure
and to the success of a series of promotional
campaigns, pricing initiatives and improved sales.
Average card balances grew by 19 per cent to
US$5.5 billion, contributing US$17 million to the
growth in net interest income.
UK average mortgage balances increased by
20 per cent, to US$50.4 billion and gross new
lending by 23 per cent to US$24.7 billion as HSBC
increased its market share in the buoyant housing
market. A number of new products were introduced,
including two fixed rate mortgage offers in the first
half of the year, contributing to sales of over
US$3.5 billion. Mortgage pricing remained
competitive and HSBC deferred passing several of
the Bank of England’s base rate rises on to its
customers during the year. As a consequence,
spreads narrowed, offsetting the benefit to net
interest income of the growth in mortgage balances
although the effect of this was mitigated by an
increase in related fee income.
The expansion of HSBC’s Premier banking
service in the UK increased the number of customers
using this service by 29 per cent. A combination of
marketing and pricing initiatives, together with
enhanced relationship management, contributed to
significant growth in Premier savings accounts, and
overall UK savings balances grew by 7 per cent to
US$41.8 billion. First Direct launched a new on-line
e-Savings Account for new and existing customers.
Income improvement through growth in savings
balances was further enhanced by widening spreads
as interest rates rose.
Continued strong recruitment of new customers
supported growth in UK current account balances of
12 per cent to US$20.1 billion. However, the benefit
of higher balances was partly offset by a 14 basis
point reduction in spreads.
Consumer lending revenues in Turkey grew by
55 per cent following the success of a number of
initiatives taken to enhance customer relationship
systems and distribution channels in the branch
network. Effective marketing initiatives and
advertising campaigns contributed to strong
recruitment of new customers. Card balances grew
by US$0.3 billion and the number of cards in force
increased by 33 per cent to 1.7 million.
In France, net interest income grew by 6 per
cent. CCF continued its record of strong growth in
sight deposits in each year since acquisition, with
these deposits growing by just under 10 per cent in
2004, and special regulated savings accounts by a
further 9 per cent. Driven by strong sales activity,
CCF achieved accelerated growth in personal loans
and mortgage sales during 2004, with mortgage
loans in particular rising by close to 15 per cent.
Other operating income rose by 15 per cent, of
which M&S Money added 1 per cent. The strong
growth in UK personal lending, mortgages and credit
cards was reflected in an increase in fee income, and
boosted sales of credit protection products by 9 per
cent. Similarly, the increased lending activity in
Turkey contributed to growth in related fee income.
In France, fee income from sales of life protection
and assurance products grew by 11 per cent, driven
by increased customer lending. Brokerage fees
benefited from an increase in privatisation and
flotation activity, while sales of investment
protection products benefited from a series of
marketing campaigns.
Operating expenses, excluding goodwill
amortisation, increased by 5 per cent. In the UK,
operating expenses included US$39 million in
respect of the period during which M&S Money was
in the Group, and US$89 million of restructuring
costs in 2004, compared with US$63 million in
2003. Excluding M&S Money and restructuring
costs, operating expenses in the UK were broadly
flat. An increase in IT costs reflected development of
HSBC Finance Corporation’s WHIRL credit card
system for application in the UK, and expenditure on
installing HSBC’s universal banking system, HUB,
in France. Marketing expenditure increased to
support product promotions and expand TV brand
advertising. In the UK, ongoing initiatives to
simplify product offerings and management
structures, along with a greater customer use of
direct banking channels and the Group’s Service
Centres, led to a reduction in staff numbers.
M&S Money added US$61 million to the bad
debt charge of US$615 million. The rise in the
charge for bad and doubtful debts of US$256 million
in the UK unsecured personal lending portfolio was
effected by growth in account balances of
US$3,370 million, higher levels of UK personal
bankruptcies, following legislative changes in 2004,
and weakening credit quality as interest rates rose.
As part of its commitment to responsible lending
practices, HSBC already uses industry-wide positive
customer data in some of its UK portfolios and will
implement positive data sharing across the remaining
UK portfolios from April 2005. This will improve
HSBC’s assessment of customer finances.
The rise in contingent liability provisions
primarily reflects an updated assessment of the likely
compensation due to UK customers for shortfalls on
certain mortgage endowment policies and
investment products.
Consumer Finance in Europe contributed a
pre-tax profit, before goodwill amortisation, of
US$91 million in 2004. Profit was 64 per cent lower
than for the comparable period in the previous year,
mainly because of an increase in operating expenses,
as staff were recruited to support an expansion of
telemarketing, and the cost of developing business in
the John Lewis Partnership joint venture. The charge
63
H S B C H O L D I N G S P L C
Financial Review (continued)
for bad debts also increased sharply, reflecting
growth in lending balances and a deterioration in
credit quality, particularly in the second half of the
year, driven by a rise in delinquencies and personal
bankruptcies, notably in the credit cards business.
Commercial Banking reported pre-tax profits,
before goodwill amortisation, of US$1,749 million,
an increase of 21 per cent over 2003, driven mainly
by strong revenue growth in the UK. Transfer of
business from Corporate Banking in Germany to this
segment contributed 2 per cent of the growth. In
aggregate, revenue grew by 10 per cent and costs by
2 per cent, a marked improvement in productivity
which reduced the cost:income ratio by over
4 percentage points. The performance in the UK was
even stronger where the cost:income ratio improved
by 7 percentage points.
Net interest income increased by 8 per cent as
new customer acquisition and a growth in demand
for credit increased loans and deposits during the
year. In the UK, liability growth contributed
US$82 million to net interest income. This, in part,
reflected the continued popularity of the business
money manager product, where deposit balances
grew by 16 per cent. Spreads achieved on customer
deposits were moderated as customers migrated to
this account from current accounts. In order to offset
this effect, a number of successful promotions were
launched, which increased current account customer
numbers in the UK by 8 per cent in 2004. A rise in
customer recommendations also contributed to the
increase.
HSBC attracted over 100,000 new customers in
2004 and now holds just under 20 per cent of start-
up business accounts in the UK. In addition to the
rise in customer numbers, average current account
balances increased by 17 per cent.
The UK saw renewed demand for lending
products in 2004. Commercial lending grew by
22 per cent to US$21.9 billion, reflecting an
increased share of a growing market, although
competitive pressure led to narrower spreads as new
business margins tightened. As the UK economy
improved and customer confidence returned, the
commercial mortgage product was updated and
relaunched, and HSBC’s return to a market segment
it had hitherto downplayed led to an increase in
commercial mortgages of 46 per cent. In aggregate,
growth in UK commercial lending added
US$50 million to the overall increase in net interest
income.
In France, net interest income fell by 4 per cent,
reflecting reduced demand for credit and a resulting
decrease in lending balances. In Turkey, net interest
64
income fell by 12 per cent, as a result of lower
earnings on free funds, partly offset by liability
growth.
Other operating income grew by 12 per cent to
US$2,062 million. In the UK, increased lending
activity, together with some targeted price increases
delivered a US$28 million, or 42 per cent, increase
in loan fee income. Credit card fee income increased
by 26 per cent as a result of a rise in transaction
volumes, reflecting higher consumer spending in the
UK, a reduction in the interchange rate and
recruitment of new merchant customers. Revised fee
structures and improved collection processes
contributed to a 14 per cent increase in overdraft fees
in the UK. A change in strategic focus to concentrate
on growing the commercial wealth management
business led to the recruitment of a number of
independent financial advisors. These advisors,
together with an increase in marketing activity,
contributed to an 18 per cent increase in income
from wealth management products to
US$138 million.
Operating expenses, excluding goodwill
amortisation, increased by 2 per cent. Outside the
UK processing and administrative costs rose in line
with increased business volumes, and system
development costs rose in France, again attributable
to the introduction of HUB. Lower costs in the UK
reflected headcount reductions in support functions,
despite US$55 million of redundancy expenses
incurred as part of continuing efficiency
improvements. In 2003, redundancy costs were
US$21million. UK operating expenses, excluding
redundancy costs, decreased by 3 per cent.
The charge for bad and doubtful debts,
US$305 million, rose by 35 per cent, compared with
the modest charge in 2003. Underlying credit quality
in the UK was stable and movements in provisions
across other European countries were minimal.
Contingent liability releases of US$34 million
mainly reflected a reduction in provisions against
legal claims in France.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$1,772 million, was broadly in line
with 2003. Bank of Bermuda contributed
US$17 million to the pre-tax profits. The transfer of
certain corporate customers to Commercial Banking
referred to above reduced pre-tax profits by 2 per
cent.
A 29 per cent decrease in operating profit before
provisions was driven by a modest fall in revenues
coupled with a significant increase in costs as part of
the planned programme to upgrade critical
infrastructure and staff skills.
Net interest income was 16 per cent lower than
in 2003, in part reflecting the costs of funding a
higher level of equity swaps, the trading impact and
dividend benefit from which is reported in other
operating income. Global Markets earnings declined
as higher yielding assets ran off and were replaced
by investments at lower prevailing money market
rates. Market concerns over future interest rate
increases, oil prices at record highs, and the Iraq
crisis all drove down demand for credit. A reduction
in the level of customer activity led to a fall in
corporate and institutional account balances. In
Turkey, significant reductions in local interest rates
resulted in lower income streams from net free
funds.
Other operating income rose by 6 per cent to
US$3,210 million of which 2 per cent arose in Bank
of Bermuda's European operations. Adjusting for the
Bank of Bermuda acquisition, operating income
increased by US$76 million or 4 per cent. In the UK,
a US$414 million rise in dividends from equity
swaps activity reflected an increase in volumes and
size of trades, primarily driven by the growth in the
equity swaps market. This gain was partly offset by a
related decrease in dealing profits and higher fees
payable of US$354 million and funding costs of
US$38 million, reported under net interest income.
Fixed income revenues fell, mainly from lower
volatility in credit spreads and a reduced level of
corporate debt issuance. Foreign exchange and
derivatives revenue increased due to higher customer
volumes across a wider range of products, with
supplementary gains from the continued weakening
of the US dollar. Improved performance in structured
derivatives reflected the successful investment in
additional execution capabilities, while Global
Markets in Turkey experienced a boost in revenues
from foreign exchange gains and securities trading
following its integration with HSBC’s other dealing
rooms in Europe. In Germany, higher fees and
commissions were generated from investment
banking advisory business and improved volumes on
derivatives.
Costs increased by 18 per cent, of which 3 per
cent represented Bank of Bermuda. The remaining
costs reflected the restructuring of the business, with
extensive expenditure on systems and people to
improve client coverage. Overall, these
developments saw the departure of 856 staff and the
recruitment of 1,051 during the course of the year,
improving levels of proficiency and customer
delivery. Key appointments included global sector
heads for certain industry teams based in the UK and
additional senior hires in investment banking
advisory, while staff were also recruited to support
the expansion of the cash equities, options,
structured products and derivatives businesses. The
planned development of global research continued,
with the recruitment of people across a variety of
sectors and products. The restructuring of regional
research franchises into a globally managed
business, encompassing all research across all
product areas, was completed. Non-staff costs also
increased, reflecting the continued investment in
technology, including US$19 million for the
development of HSBCnet. HSBC Securities Services
incurred additional costs to develop insourcing
capabilities for third party processing.
The net release of provisions for bad and
doubtful debts, compared with a net charge in 2003,
reflected the benefit of a number of recoveries and
releases of certain provisions resulting from
successful refinancing during the year. Corporate
lending weakness in the power generation sector,
which adversely affected 2003, was not repeated.
The recoveries included sizeable amounts for a
single name in the industrial sector in France.
Gains on investment disposals were
US$210 million, reflecting the disposal of HSBC’s
interest in a number of private equity investments in
the UK and France.
Private Banking contributed a pre-tax profit,
before goodwill amortisation, of US$432 million, an
increase of 26 per cent compared with 2003.
Growth of 19 per cent in net interest income was
driven by a 27 per cent increase in lending balances,
predominantly in the UK and Switzerland, where
clients leveraged their wealth by borrowing on a
secured basis in the low interest environment to
reinvest in higher-yielding securities or in alternative
investments. Income also benefited from a shift in
the profile of investment securities to higher-yielding
HSBC Finance Corporation paper.
Net fees and commissions increased by 11 per
cent to US$658 million. Performance fees included a
US$24 million increase in fees from the Hermitage
Fund, one of the world’s leading public equity funds
dedicated to Russia in which HSBC Private Bank
has been invested from its inception. In the UK,
commission income in HSBC’s residential property
advisory business grew strongly, supported by the
generally buoyant housing market, and increased
client referrals.
Funds under management grew by 13 per cent
to US$107.8 billion, as clients moved cash liquidity
to higher-yielding investment products in the low
65
H S B C H O L D I N G S P L C
Financial Review (continued)
interest rate environment, and rising equity markets
increased the value of the extant book. Net new
money invested was US$8.6 billion. A number of
new funds were launched in 2004, including several
hedge funds, and the Household European
Commercial Paper and Floating Rate Notes
programmes attracted over US$2.5 billion of client
investments. Higher transaction and portfolio fees, in
line with this growth, were partly offset by weaker
income in France, where transaction volumes and
funds under management both fell during the year.
Operating expenses, before goodwill
amortisation, increased by 5 per cent, reflecting front
office recruitment, the acquisition of Bank of
Bermuda, and higher performance-related
remuneration. In France, lower costs reflected the
merger of HSBC’s four private banks in 2003.
A US$33 million net provision for bad debts in
France, arising from a small number of specific
accounts, was offset by net releases in the UK and
Switzerland, following a review of historic loss
trends and current economic conditions, which led to
release of general provisions.
Profits on disposal in 2004 included a gain on
sale of a former head office building following the
restructuring of HSBC’s four private banks in
France. In 2003 there was a gain on a long-term
private placement transaction.
Included in Other are interest earnings on cash
held and interest costs of debt issued by HSBC
Holdings, and the effect of corporate items not
allocated to customer groups, including gains on the
sale of an insurance company and releases of
centrally managed litigation provisions.
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, was expected to dampen household
activity in the forthcoming months. Elsewhere, there
were a few encouraging signs that industrial activity
in particular and corporate confidence in general was
starting to improve from a low base. Stronger global
demand, if maintained, was expected to provide a
boost to the corporate sector.
66
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 moved higher, rising by
about 80 basis points between June and the end of
December, as the bond market anticipated economic
recovery.
In 2003, personal credit expansion in the UK
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
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 in 2002. 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 Bank, 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 in 2002.
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.
Net interest income increased by 10 per cent,
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
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 Bank A.S. in 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 HSBC
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 HSBC
Finance Corporation 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
HSBC Finance Corporation acquisition, contributed
US$157 million to pre-tax profit, before goodwill
amortisation, in its first nine months of ownership.
Integration with the HSBC Group was running on
schedule.
67
H S B C H O L D I N G S P L C
Financial Review (continued)
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.
Overall, deposit balances in the UK grew by
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
68
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 Service Centres’ 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.
At US$204 million, the overall charge for bad
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 HSBC Finance
Corporation’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$61 million, principally reflecting a gain on a
long-term private placement transaction.
69
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group
Europe
Net interest income ..........
Dividend income/(expense)
Net fees and commissions .
Dealing profits ..................
Other income .....................
Other operating income .....
Operating income ............
Operating expenses
excluding goodwill
amortisation1 .................
Operating profit before
provisions1 ...................
Provisions for bad and
Share of operating profit in
joint ventures2 ..............
Share of operating profit in
associates2 ....................
Gains on disposal of
investments and tangible
fixed assets ...................
Profit on ordinary
activities before tax3 ....
Share of HSBC’s pre-tax
profits3 ..........................
Cost:income ratio1 .............
Selected balance sheet data5
Loans and advances to
customers (net) .............
Total assets .......................
Customer accounts ............
The following assets and
liabilities were significant
to the customer groups
noted:
Loans and advances to
banks (net) ....................
Debt securities, treasury bills
and other eligible bills ..
Deposits by banks .............
Debt securities in issue ......
Goodwill amortisation
excluded:
Personal
Financial
Services
US$m
Consumer
Finance4
US$m
3,934
2
2,282
44
172
2,500
6,434
635
–
65
–
239
304
939
Total
Personal
Financial
Services
US$m
4,569
2
2,347
44
411
2,804
7,373
Year ended 31 December 2004
Corporate,
Investment
Banking &
Markets
US$m
Commercial
Banking
US$m
Private
Banking
US$m
Inter-
segment
elimination
US$m
Other
US$m
2,353
5
1,681
28
348
2,062
4,415
1,402
544
1,293
734
639
3,210
4,612
421
5
658
104
11
778
317
(11)
316
43
350
698
1,199
1,015
–
–
–
–
(167)
(167)
(167)
Total
US$m
9,062
545
6,295
953
1,592
9,385
18,447
(4,038)
(527)
(4,565)
(2,404)
(3,236)
(814)
(718)
167
(11,570)
2,396
412
2,808
2,011
1,376
385
297
doubtful debts ...............
(615)
(321)
(936)
(305)
215
Provisions for contingent
liabilities and
commitments ................
Amounts written off fixed
asset investments ..........
(68)
(2)
Operating profit1 .............
1,711
–
–
91
–
–
–
91
%
0.5
56.1
(68)
(2)
34
(1)
(37)
(9)
1,802
1,739
1,545
–
7
1
–
8
2
5
12
210
1,810
1,749
1,772
%
9.3
61.9
%
9.0
54.5
%
9.1
70.2
–
7
1
1,719
%
8.8
62.8
2
4
(2)
389
–
–
43
432
%
2.2
67.9
(1)
55
(6)
345
–
27
37
409
%
2.1
70.7
–
–
–
–
–
–
–
–
–
6,877
(1,025)
(12)
(20)
5,820
5
54
293
6,172
%
31.7
62.7
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
108,245
128,691
121,700
10,557
12,787
46
118,802
141,478
121,746
67,234
84,039
57,844
72,446
271,772
78,183
15,676
39,604
35,140
2
2,223
–
274,160
539,116
292,913
47,775
100,901
53,130
1,939
245
1 from (1) above ..............
–
2 from (2) above ..............
3 from (3) above ..............
245
4 Comprises HSBC Finance Corporation’s consumer finance business.
5 Third party only.
201
–
201
44
–
44
188
–
188
236
–
236
278
–
278
–
–
–
947
–
947
70
Personal
Financial
Services
US$m
Consumer
Finance
US$m
4
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
1,961
1,509
4
1,838
37
278
2,157
5,677
2
1,335
16
294
1,647
3,608
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
Inter-
segment
elimination
US$m
Other
US$m
216
4
259
(26)
371
608
824
–
–
–
–
(239)
(239)
(239)
Total
US$m
7,540
150
5,192
960
1,253
7,555
15,095
Dividend income ...............
Net fees and commissions .
Dealing profits/(losses) .....
Other income .....................
Other operating income .....
Operating income ............
Operating expenses
excluding goodwill
amortisation1 ................
Operating profit before
provisions1 ...................
Provisions for bad and
Provisions for contingent
liabilities and
commitments ................
Amounts written off fixed
asset investments ..........
Operating profit1 .............
Share of operating profit in
joint ventures2 ..............
Share of operating profit
in associates .................
Gains/(losses) on disposal
of investments and
tangible fixed assets .....
Profit on ordinary
activities before tax3 ...
Share of HSBC’s pre-tax
profits3 ..........................
Cost:income ratio1 .............
Selected balance sheet data5
Loans and advances to
customers (net) .............
Total assets .......................
Customer accounts ............
The following assets and
liabilities were significant
to the customer groups
noted:
Loans and advances to banks
(net) ..............................
Debt securities, treasury bills
and other eligible bills ..
Deposits by banks .............
Debt securities in issue ......
Goodwill amortisation
excluded:
doubtful debts ...............
(267)
(180)
(447)
(204)
(218)
(3,471)
(299)
(3,770)
(2,113)
(2,471)
(709)
(705)
239
(9,529)
1,570
337
1,907
1,495
1,758
287
119
(4)
(2)
(3)
(29)
(1)
–
–
(29)
(1)
10
–
(52)
(42)
1,273
157
1,430
1,301
1,446
278
–
3
(9)
1,267
%
8.8
68.9
–
–
–
157
%
1.1
47.0
–
3
–
3
8
13
(9)
(1)
156
1,424
1,303
1,623
%
9.9
66.4
%
9.0
58.6
%
11.3
58.4
–
–
61
339
%
2.4
71.2
(1)
40
(18)
140
–
28
5
173
%
1.1
85.6
US$m
US$m
US$m
US$m
US$m
US$m
US$m
–
–
–
–
–
–
–
–
–
5,566
(874)
(33)
(64)
4,595
8
47
212
4,862
%
33.7
63.1
US$m
76,439
92,890
102,192
8,452
10,526
231
84,891
103,416
102,423
52,947
67,107
45,558
61,085
209,885
63,556
11,681
40,964
31,187
1
3,940
–
210,605
425,312
242,724
43,699
67,692
44,261
3,232
192
1 from (1) above ..............
135
2 from (2) above ..............
3 from (3) above ..............
327
4 Comprises HSBC Finance Corporation’s consumer finance business since the date of acquisition.
5 Third party only.
146
–
146
123
–
123
160
–
160
23
–
23
257
–
257
3
–
3
758
135
893
71
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group (continued)
Europe
Year ended 31 December 2002
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination
US$m
Other
US$m
Net interest income .......................................
2,541
1,800
1,444
Dividend income .............................................
Net fees and commissions ...............................
Dealing profits ................................................
Other income ..................................................
Other operating income ...................................
Operating income ..........................................
3
1,570
31
163
1,767
4,308
4
1,128
18
303
1,453
3,253
202
1,137
385
508
2,232
3,676
Operating expenses excluding goodwill
amortisation1 ...............................................
(3,076)
(1,759)
(2,197)
Operating profit before provisions1 .............
1,232
1,494
1,479
300
2
471
63
16
552
852
(618)
234
7
(21)
(22)
198
–
(10)
48
236
%
2.2
72.5
258
–
222
11
316
549
807
(509)
298
(4)
21
(175)
140
–
14
1
155
%
1.4
63.1
Total
US$m
6,343
211
4,528
508
1,025
6,272
12,615
–
–
–
–
(281)
(281)
(281)
281
(7,878)
–
–
–
–
–
–
–
–
–
4,737
(569)
(15)
(267)
3,886
(17)
3
288
4,160
%
39.5
62.4
US$m
164,701
341,569
197,362
(215)
(204)
(153)
(23)
(1)
993
(22)
(1)
17
987
%
9.4
71.4
11
3
(3)
(72)
1,304
1,251
3
(3)
40
1,344
%
12.8
54.1
2
3
182
1,438
%
13.7
59.8
US$m
US$m
US$m
US$m
US$m
58,421
72,817
84,486
43,104
56,934
35,614
54,099
172,665
45,818
9,077
35,920
31,444
–
3,233
–
31,402
53,897
31,741
169
8
177
112
–
112
133
–
133
238
–
238
(1)
1
–
651
9
660
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 associates ................................................
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
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 excluded:
1 from (1) above ............................................
2 from (2) above ............................................
3 from (3) above ............................................
4 Third party only.
72
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 back on/(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) ....................................
Year ended 31 December
2004
US$m
2,097
914
1,584
135
23
4,753
9
–
9
2003
US$m
1,740
711
1,275
127
(123)
3,730
3
(1)
2
Year ended 31 December
2004
US$m
3,639
19
1,726
630
781
3,156
6,795
(1,415)
(256)
(653)
(200)
(2,524)
(9)
(2,533)
4,262
223
(3)
26
4,508
8
228
4,744
%
24.5
26.9
37.1
2003
US$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
2002
US$m
1,705
733
1,226
107
(61)
3,710
–
–
–
2002
US$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
Period-end staff numbers (full-time equivalent) .............................................
25,552
23,636
23,786
73
H S B C H O L D I N G S P L C
Financial Review (continued)
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 ...................................................................................................
Deposits by banks ..........................................................................................
Customer accounts .........................................................................................
1 Third party only.
2 Excluding Hong Kong Government certificates of indebtedness.
Year ended 31 December
2004
US$m
78,888
45,300
69,464
217,406
4,325
178,368
2003
US$m
73,988
38,640
66,158
197,487
4,777
164,024
2002
US$m
69,948
33,359
60,083
180,433
2,379
148,904
Year ended 31 December 2004 compared
with year ended 31 December 2003
resulted in a significant narrowing in the budget
deficit in 2004.
The Hong Kong economy expanded rapidly in 2004.
Despite rising US interest rates and mainland
China’s cooling-off measures, Hong Kong continued
to benefit from robust re-export trade with mainland
China. The positive outlook for Hong Kong, together
with the re-emergence of inflation, helped sustain a
recovery in local confidence which began in late
2003. Hong Kong’s domestic demand also grew
steadily, supported by reviving asset prices and
falling unemployment. The continued inflow of
liquidity suppressed local interest rates, which in
turn encouraged a flow of local funds into asset
markets. Rising property prices stimulated private
consumption and alleviated past concerns over
negative equity in residential mortgages. The
unemployment rate fell from 7.3 per cent to 6.5 per
cent, with strong growth in the trade and retail
sectors helping to sustain consumer spending,
though the rate of job creation slowed in the second
half of the year as China’s cooling-off measures took
effect on the trade sector. Investment revived in the
robust tourism industry, which continued to benefit
from the liberalisation of regulations governing visits
by residents of mainland China.
In the second half of 2004, inflation re-emerged
in Hong Kong after a nearly six year-long period of
deflation. Stimulated by a weak US dollar,
recovering property prices and rising local
confidence, prices rose from a year ago when the
economy was suffering from the effect of the severe
acute respiratory syndrome (‘SARS’) epidemic.
Significant inflows of liquidity from foreign
investors left the Hong Kong market flush with
surplus funds. This caused Hong Kong dollar and
US dollar interest rates to diverge, with the already
cash-rich local economy slow to absorb external
funds. Moreover, demand for credit remained muted,
other than in the trade sector, with individuals and
enterprises slow to increase borrowings, reflecting
nervousness regarding the sustainability of the
recovery. The improving economy helped to ease
concerns over Hong Kong’s fiscal position as it
74
HSBC’s operations in Hong Kong reported a
pre-tax profit of US$4,744 million, an increase of
US$1,016 million, or 27 per cent, over 2003.
Excluding goodwill amortisation, pre-tax profit also
grew by 27 per cent to US$4,753 million,
representing 24 per cent of HSBC’s total profit on
this basis.
Personal Financial Services in Hong Kong
reported a pre-tax profit, before goodwill
amortisation, of US$2,097 million, 21 per cent
higher than in 2003. This improvement was largely
driven by strong growth in other operating income,
within which fee and commission income was 27 per
cent higher. This, together with a significant
reduction in the net bad debt charge, more than
offset an 8 per cent reduction in net interest income.
During 2004, the Hong Kong banking sector
was characterised by high levels of surplus liquidity
as foreign funds entered Hong Kong to invest in the
buoyant stock market, and there were inflows from
investors anticipating an upward realignment of the
currency as the US dollar weakened. This excess
liquidity depressed Hong Kong dollar interest rates
and so reduced spreads on deposits, as banks were
unable to pass on the full effect of the reduction in
rates to depositors. The lower Hong Kong dollar
interest rates contributed to the overall reduction in
net interest income of US$186 million. Net interest
income was further reduced by the continued
pressure on yields in the mortgage business, where
market competition remained intense. Average
mortgage balances fell by 2 per cent compared with
last year due to a reduction in balances under the
Government Home Ownership Scheme (‘GHOS’),
which remained suspended during the year. With
plenty of low cost funding in the market, and fierce
competition for quality mortgage business, the
average yield on the mortgage portfolio, excluding
GHOS loans, fell by 25 basis points to 202 basis
points below HSBC’s best lending rate.
HSBC maintained its position as the largest
credit card issuer in Hong Kong. An attractive
rewards programme, successful cross-sales to both
existing and new customers, and customer
acquisition, helped grow the number of cards in
circulation by 14 per cent to 3.5 million. Cardholder
spending increased by 32 per cent compared with
2003, reflecting the successful promotion of credit
card internet bill payment services, and promotional
campaigns launched in conjunction with retail
merchants. Average credit card balances grew by
11 per cent against a backdrop of an overall
reduction in outstanding balances in the market. Fee
income from credit cards rose by 12 per cent
compared with 2003.
Other operating income increased by 24 per cent
to US$1,466 million, largely driven by the continued
strong performance from the insurance and
investment businesses.
During the year, strong emphasis was placed on
growing the insurance business. A series of
promotional campaigns was launched, and the
number of financial planning managers was
increased by 24 per cent to 742. The insurance
product range was also enhanced as new products
designed to meet customers’ needs were introduced.
In 2004, HSBC recorded growth of 40 per cent in
new regular premium life sales, driven by the
success of flexible products tailored to customers’
specific needs, such as the Target Protection Plus
product. Income from the insurance business,
including the Mandatory Provident Fund also grew
by 31 per cent to US$441 million.
Income from sales of unit trusts and structured
products grew by 43 per cent to US$183 million,
reflecting the successful deployment of customer
relationship management systems, an increase in the
number of HSBC Premier relationship managers,
and a rise in stock market activity. New products,
including a range of structured treasury products,
capital-guaranteed funds, open-ended funds and
certificates of deposit, were launched to broaden the
range of investment options. Overall, sales of unit
trusts and structured products grew by
US$609 million, or 9 per cent, compared with 2003.
Higher fee income also came from stockbroking
and custody services, which grew by 49 per cent to
US$185 million, reflecting increased levels of stock
market activity and IPO-related services. Sixty eight
per cent of all securities transactions were processed
on-line in 2004, 5 percentage points higher than in
2003.
Performance-related staff costs increased in line with
sales of investment and insurance products and the
general improvement in profits. Excluding the
impact of incentive payments, staff costs fell by
5 per cent, reflecting greater operational efficiencies
and higher utilisation of the Group Service Centres.
The various income growth initiatives also involved
higher marketing costs, particularly for credit cards,
insurance and investment products.
Credit conditions improved markedly as the
economy recovered, with falling unemployment,
lower bankruptcies, higher residential property
prices and stronger GDP growth. The charge for bad
and doubtful debts fell by US$312 million to
US$54 million. New specific provisions declined by
over 74 per cent to US$95 million, as provisions for
credit card, mortgage and unsecured personal
lending portfolios all fell. There was also a
US$41 million release of general provisions
following a review of historical loss experience and
the improved market environment, in particular a
reduction in mortgage loans with negative equity.
Pre-tax profits, before goodwill amortisation, in
Commercial Banking rose by 29 per cent to
US$914 million, driven by a 14 per cent rise in
operating income and significant releases and
recoveries in provisions.
Operating income benefited from the success of
a series of initiatives designed to enhance the service
offered to middle market customers. The
introduction of a greater number of experienced
relationship managers to service key accounts
contributed significantly to income growth, while a
number of dedicated business development
relationship managers were appointed to focus on
new customers, leading to a 3 per cent increase in
customer numbers. Small and medium-sized
enterprises (‘SME’s) benefited from the opening of
five new business banking centres offering a
comprehensive range of bespoke services, while an
SME start-up marketing campaign, launched in
October, promoted these services with specific
reference to the BusinessVantage all-in-one account.
These initiatives, together with call centre expansion,
contributed to an increase in income arising from
SME business.
Net interest income increased by 13 per cent as
strong growth in both lending balances and customer
deposits reflected the impact of the relationship
managers and business banking centres. Spreads on
deposits narrowed during the year in the continued
low interest rate environment.
Operating expenses, excluding goodwill
amortisation, were 4 per cent higher than in 2003.
Other operating income rose by 16 per cent to
US$525 million due largely to a significant rise in
75
H S B C H O L D I N G S P L C
Financial Review (continued)
trade finance activity and trade-related income.
Economic expansion in mainland China, the
consumer spending recovery in the US and an
increase in commodity prices contributed to strong
regional trade flows. Business activity with mainland
China benefited from the secondment of key
relationship managers to HSBC offices there, and a
regional advertising campaign demonstrating
HSBC’s ability to offer integrated solutions across
Greater China.
Increased lending to middle market customers,
together with the launch of several new lending
products for SMEs and related marketing campaigns,
boosted credit facility fee income. Continued
investment in sales resources and training, marketing
and incentive campaigns led to higher insurance
income. The introduction of income protection, unit
trust and structured investment products to HSBC’s
range of commercial wealth management products
also contributed to the increase in non-funds income,
resulting in a 20 per cent rise in investment and
protection income.
Operating expenses, before goodwill
amortisation, were 7 per cent higher than in 2003.
The increase reflected growth in headcount, higher
recruitment-related costs, and training costs.
Marketing spend also rose in support of business
development initiatives with mainland China, and to
increase sales to existing customers and raise
insurance income. Further costs arose from the
launch of a number of efficiency initiatives,
including a new Customer Relationship Management
System, which is expected to lead to both improved
sales and cost savings. As part of an ongoing
process, credit support and trade services processes
were migrated to the Group Service Centre in
Shanghai.
The net release for bad and doubtful debts
increased by US$87 million. There were specific
provision releases reflecting the improved economic
environment and stronger property market, and a
release of general provisions following a review of
the impact of the improved economic conditions and
historical loan loss experience.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$1,584 million, 24 per cent higher
than in 2003, driven by strong growth in dealing
profits, a significant increase in fees and
commissions and a net release of provisions for bad
and doubtful debts. In January, management
responsibility for a corporate trust business was
transferred from Private Banking, contributing
US$18 million to pre-tax profits. While comparative
76
numbers have not been restated, the comments that
follow exclude the impact of this business transfer
unless stated.
Net interest income was 14 per cent lower than
in 2003, reflecting continued pressure on corporate
spreads and lower treasury income resulting from the
run-off of higher yielding assets, coupled with
limited reinvestment opportunities against a flat
Hong Kong dollar yield curve. This shortfall in
revenue was partly mitigated by growth in corporate
loan balances and higher deposit balances, driven by
the roll-out of an upgraded payments and cash
management product set.
Other operating income grew by 67 per cent, of
which 9 per cent came from the inclusion of Bank of
Bermuda’s operations in Hong Kong. Underlying
growth reflected a significant increase in fees and
commissions and dealing income. Foreign exchange
profits increased, benefiting from strong customer
flows and growing cross-sales opportunities to
corporate clients. These gains were further amplified
by the non-recurrence of losses resulting from a
strengthening Hong Kong dollar in the latter part of
2003. Derivatives trading reported higher profits as
Global Markets provided structured investment
solutions to support the growth in the sale of wealth
management products to personal and commercial
customers. A combination of successful positioning
and improved customer flows also contributed to
profitability as clients sought to lock in funding
requirements at historically low rates. Fee income
increased from structured solutions and yield
enhancement products, and sales of securities and
unit trusts. Structured finance also generated an
increased contribution compared with 2003. Equity
capital markets benefited from an active IPO market,
while private equity revenues were boosted by an
improvement in management fees, as the launch of a
US$700 million regional fund was completed. In
asset management, higher sales of investment
products and strong growth in funds under
management generated increases in distribution
revenues and advisory fees, as customers pursued
higher returns in a low interest rate environment.
Operating expenses, excluding goodwill
amortisation, increased by 36 per cent, of which
10 per cent arose in Bank of Bermuda. Staff costs
were 18 per cent higher, driven by the recruitment of
additional staff, and higher performance-related
incentives in line with strong Global Markets results.
In Global Markets, staff were recruited to support the
increased product range, while in Global Investment
Banking, further expenditure was incurred in
recruiting corporate finance executives and a number
of senior relationship managers to extend coverage
along industry sector lines. Business expansion and
new front office initiatives in Global Markets
resulted in the recruitment of an additional 45
people. Other general cost increases reflected higher
technology expenditure, including a US$10 million
charge for the development of HSBCnet and, a rise
in travel and communication spending, all driven by
business expansion and increased sophistication of
the product range.
There was a net recovery of bad and doubtful
debts, particularly from the property, industrial and
telecommunications sectors, following a number of
successful restructurings and refinancings, reflecting
an improved economic environment in Hong Kong
and across the region.
Private Banking contributed a pre-tax profit,
before goodwill amortisation, of US$135 million, an
increase of 6 per cent compared with 2003. A trust
business was reclassified as Rest of Asia Pacific
during the year, and Corporate, Investment Banking
and Markets took over management responsibility
for the corporate trust business from Private
Banking. These transfers reduced growth in profit
before tax by 17 per cent.
Excluding the corporate trust transfer mentioned
above, funds under management increased by 19 per
cent. Growth benefited from the introduction of new
products, expansion of the client base, and continued
strong growth in Strategic Investment Solutions,
which was launched in July 2003 and contributed to
a US$2.9 billion inflow in net new funds. The
recruitment of front office staff, and a general
improvement in market conditions, also contributed
to growth in funds under management.
Total revenue was 5 per cent higher than last
year. Underlying growth of US$57 million, including
US$10 million from the Bank of Bermuda, was
largely offset by the changes noted above.
Recovering equity markets, coupled with historically
low interest rates, encouraged a marked increase in
client investment activity. Fees and commissions
benefited from a higher volume of equity
transactions, unit trust sales, and portfolio
management fees on increased funds under
discretionary management. Higher client volumes
also boosted dealing income from foreign exchange,
options, and structured products. Revenue from sales
of structured products increased by nearly 70 per
cent compared with 2003, while commissions on
sales of unit trusts rose by over 90 per cent, and from
funds under discretionary management by over
120 per cent.
Operating expenses, excluding goodwill
amortisation, increased by 8 per cent, including 6 per
cent growth attributable to Bank of Bermuda and a
25 per cent decrease resulting from the changes
noted above. Underlying growth of 27 per cent
mainly reflected the recruitment of 49 front office
staff. Performance-related remuneration increased as
a result of the strong growth in revenue, while a rise
in marketing expenditure reflected the new brand
advertising campaign.
A US$4 million net release of bad debts
reflected a release of general provisions, following a
review of historical loss trends and current economic
conditions.
Gains on the exchange of an investment in
World Finance International Limited, an associated
company, for a 7 per cent stake in Bergesen
Worldwide, contributed to an improved performance
in Other. Gains on equity sales and profits on the
disposal of a residential property also contributed to
the increase.
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. Of this
growth, just under 4 per cent arose from acquisitions
during the period.
77
H S B C H O L D I N G S P L C
Financial Review (continued)
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
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
78
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 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.
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.
Corporate, Investment Banking and Markets
HSBC’s Private Banking activities in Hong
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.
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
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$9 million
or 8 per cent, reflecting a rise in headcount to
support increased client activity and the migration of
regional support from Singapore to Hong Kong
during the year. There was also higher performance-
related remuneration in line with increased profits.
79
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group
Year ended 31 December 2004
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
2,017
2
799
46
619
1,466
3,483
679
1
374
35
115
525
1,204
998
2
530
447
106
1,085
2,083
85
–
75
101
(1)
175
260
Inter-
segment
elimination
US$m
–
–
–
–
(470)
(470)
(470)
Other
US$m
(140)
14
(52)
1
412
375
235
Total
US$m
3,639
19
1,726
630
781
3,156
6,795
(1,336)
(399)
(668)
(128)
(463)
470
(2,524)
debts ..........................................
(54)
Provisions for contingent
liabilities and commitments ........
Amounts written back on fixed
asset investments .......................
–
–
2,147
805
109
–
–
1,415
132
(228)
164
–
–
4
–
–
–
(3)
26
Operating profit/(loss)1 ................
2,093
914
1,579
136
(205)
4
–
2,097
%
10.8
38.4
–
–
914
%
4.7
33.1
–
5
1,584
%
8.2
32.1
–
(1)
135
%
0.7
49.2
US$m
US$m
US$m
US$m
33,704
37,986
114,303
17,889
23,579
35,226
22,440
130,300
19,236
2,954
7,733
9,264
4
224
23
%
0.1
197.0
US$m
1,901
17,808
339
–
–
–
–
–
–
–
–
4,271
223
(3)
26
4,517
8
228
4,753
%
24.5
37.1
US$m
78,888
217,406
178,368
Hong Kong
Net interest income/(expense) ......
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
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 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 ..........................
42,515
58,902
4,205
2
–
2
6
–
6
–
–
–
9
–
9
Goodwill amortisation excluded:
1 from (1) above ...........................
2 from (2) above ...........................
3 from (3) above ...........................
4 Third party only.
5 Excluding Hong Kong Government certificates of indebtedness.
(1)
–
(1)
2
–
2
80
Operating profit/(loss)1 ................
1,733
707
1,267
128
(190)
Year ended 31 December 2003
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
Inter-
segment
elimination
US$m
–
–
–
–
(395)
(395)
(395)
Other
US$m
(145)
25
(31)
(29)
313
278
133
Total
US$m
3,901
31
1,383
321
596
2,331
6,232
Personal
Financial
Services
US$m
Commercial
Banking
US$m
2,203
2
630
40
510
1,182
3,385
(1,286)
(372)
(491)
(118)
(340)
395
(2,212)
2,099
684
1,314
130
(207)
(366)
–
–
22
1
–
(52)
–
5
(2)
–
–
(2)
(7)
26
5
2
1,740
%
12.1
38.0
–
4
711
%
5.0
35.2
1
7
1,275
%
8.9
27.2
–
(1)
127
%
0.9
47.6
11
56
(123)
%
(1.0)
255.6
US$m
US$m
US$m
US$m
US$m
33,494
36,410
111,145
12,760
17,783
31,490
23,441
120,890
13,286
2,357
7,555
7,862
1,936
14,849
241
Hong Kong
Net interest income/(expense) ......
Dividend income ............................
Net fees and commissions ..............
Dealing profits ...............................
Other income .................................
Other operating income ..................
Operating income1 .......................
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 ................................
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 excluded:
1 from (1) above ...........................
2 from (2) above ...........................
3 from (3) above ...........................
4 Third party only.
5 Excluding Hong Kong Government certificates of indebtedness.
2
–
2
–
–
–
34,165
57,831
4,665
1
–
1
–
–
–
–
(1)
(1)
–
–
–
–
–
–
–
–
4,020
(400)
(6)
31
3,645
17
68
3,730
%
25.9
35.5
US$m
73,988
197,487
164,024
3
(1)
2
81
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group (continued)
Year ended 31 December 2002
Operating profit/(loss)1 ................
1,699
729
1,220
107
Hong Kong
Net interest income/(expense) ......
Dividend income ............................
Net fees and commissions ..............
Dealing profits ...............................
Other income .................................
Other operating income ..................
Operating income .........................
Operating expenses excluding
goodwill amortisation1 ...............
Operating profit/(loss) before
provisions1 .................................
Provisions for bad and doubtful
debts ..........................................
Provisions for contingent liabilities
and commitments .......................
Amounts written off fixed asset
investments ................................
Share of operating profit in
associates2 ..................................
Gains on disposal of investments
and tangible fixed assets ............
Profit/(loss) on ordinary activities
before tax3.................................
Share of HSBC’s pre-tax profits3 ...
Cost:income ratio1 ..........................
Selected balance sheet data4
Loans and advances to
customers (net) ..........................
Total assets5 ....................................
Customer accounts .........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to banks (net) .
Debt securities, treasury bills and
other eligible bills ......................
Deposits by banks ..........................
Personal
Financial
Services
US$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
2,364
3
543
45
457
1,048
3,412
(1,351)
(371)
(469)
(109)
(298)
459
(2,139)
2,061
674
1,156
107
(87)
(362)
–
–
54
1
–
68
–
(4)
–
–
–
3
3
1,705
%
16.2
39.6
–
4
733
%
6.9
35.5
–
6
1,226
%
11.7
28.9
–
–
107
%
1.0
50.5
(6)
(15)
(6)
(114)
8
45
(61)
%
(0.5)
141.2
US$m
US$m
US$m
US$m
US$m
34,447
36,369
103,413
10,797
15,097
27,019
20,703
108,063
11,154
1,917
7,346
7,142
2,084
13,558
176
–
–
–
–
–
–
–
–
3,911
(246)
(14)
(10)
3,641
11
58
3,710
%
35.3
35.4
US$m
69,948
180,433
148,904
29,284
53,689
2,170
–
–
–
–
–
–
–
–
–
–
–
–
Goodwill amortisation excluded:
1 from (1) above ...........................
2 from (2) above ...........................
3 from (3) above ...........................
4 Third party only.
5 Excluding Hong Kong Government certificates of indebtedness.
–
–
–
–
–
–
82
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 ..............................................................................................................
Year ended 31 December
2004
US$m
350
496
940
59
32
2003
US$m
158
450
732
36
50
2002
US$m
127
423
706
25
12
Total1 .............................................................................................................
1,877
1,426
1,293
1 Goodwill amortisation excluded:
– arising on subsidiaries ............................................................................
– arising on associates and joint ventures .................................................
– total .........................................................................................................
68
4
72
35
–
35
Year ended 31 December
2004
US$m
2003
US$m
Australia and New Zealand ............................................................................
Brunei ............................................................................................................
India ...............................................................................................................
Indonesia ........................................................................................................
Japan ..............................................................................................................
Mainland China .............................................................................................
Malaysia ........................................................................................................
Middle East (excluding Saudi Arabia) ...........................................................
Philippines .....................................................................................................
Saudi Arabia ..................................................................................................
Singapore .......................................................................................................
South Korea ...................................................................................................
Taiwan ...........................................................................................................
Thailand .........................................................................................................
Other ..............................................................................................................
86
33
180
79
50
44
216
295
29
175
274
88
108
59
161
96
28
94
75
39
42
149
236
16
133
198
69
80
54
117
33
–
33
2002
US$m
34
34
85
73
44
50
129
225
32
103
223
60
80
39
82
1,877
1,426
1,293
83
H S B C H O L D I N G S P L C
Financial Review (continued)
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 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 assets ....................................................................................................
Deposits by banks ..........................................................................................
Customer accounts .........................................................................................
1 Third party only.
Year ended 31 December
2004
US$m
2,055
3
1,057
494
195
1,749
3,804
(1,104)
(183)
(689)
(104)
(2,080)
(68)
(2,148)
1,656
(100)
–
–
1,556
232
17
1,805
%
9.7
10.3
54.7
41,031
US$m
60,599
14,780
30,312
120,504
8,046
78,613
2003
US$m
1,740
4
805
421
120
1,350
3,090
(952)
(164)
(527)
(98)
(1,741)
(35)
(1,776)
1,314
(85)
(1)
(2)
1,226
149
16
1,391
%
9.9
10.9
56.3
31,827
US$m
47,952
12,944
25,980
98,081
6,967
65,441
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
Year ended 31 December 2004 compared
with year ended 31 December 2003
Driven primarily by external demand, growth in
Asia-Pacific was strong in the first half of 2004 and
the positive export performance, in turn, provided
the necessary income growth to support consumption
demand. However, the surging growth seen in most
Asian economies appeared to peak in the middle of
2004 and slow, primarily for two reasons. The first
was the erosion of purchasing power from the high
level of oil prices, and the second was the start of a
policy-induced slowdown in mainland China’s
investment demand, designed to slow China’s
domestic economy. HSBC estimates that, excluding
Japan, Asian economies grew by 7.1 per cent
throughout 2004, with growth of 8.3 per cent in the
first half down to 6 per cent in the second half of the
year. The slowdown is expected to persist in 2005.
The mainland China economy dominated
economic activity in Asia in 2004, with concerns
over whether the authorities would be able to slow
growth in a manageable fashion from the
unsustainably high levels of 2003 and first half of
2004, and continued speculation regarding a possible
84
revaluation of the renminbi. Evidence to date
suggests that the Chinese economy is likely to
achieve a soft landing with the investment slowdown
being cushioned by strong exports and rising
consumption. However, Asian exports to China are
being affected by this re-balancing of growth. The
Chinese authorities have resisted revaluation
speculation and indicated that the status quo will
remain in the foreseeable future.
Elsewhere, capital flows put Asian currencies
under pressure to appreciate in value. In some
countries, policy measures were reasonably
successful in resisting the pressure, with the result
that floating Asian currencies, while gaining on the
US dollar, lost ground to the yen and the euro.
Inflationary pressures remained modest and Asian
central banks did not need to fully match increases in
US interest rates during the year. Indeed, the Bank of
Korea cut rates by 25 basis points at both its August
and November meetings.
Energy producing economies in the Middle
East continued to benefit from high global oil prices,
and the region's current account surplus in 2004 is
expected to easily exceed the 2003 surplus of
US$52 billion. In the context of relatively low
inflation, the Middle East’s strong balance of
payments position should ensure that domestic
interest rates remain relatively low, which in turn
should continue to stimulate domestic demand.
Altogether, this means that the GDP growth rate in
2004 in the Middle East should be close to 2003’s
5.4 per cent. The level of public debt relative to GDP
remains high in the region compared with other
emerging markets, but HSBC considers it unlikely
that there will be financing problems there.
HSBC’s operations in the rest of the Asia-
Pacific region contributed US$1,805 million to
HSBC’s pre-tax profit, an increase of
US$414 million compared with 2003. Excluding
goodwill amortisation, pre-tax profit was
US$1,877 million, and represented 10 per cent of
HSBC’s total profit on this basis. At constant
exchange rates, pre-tax profit before goodwill
amortisation increased by 29 per cent over the same
period in 2003. Three per cent of this growth arose
from acquisitions during the period. The comments
which follow are based on constant exchange rates.
In Personal Financial Services pre-tax profit,
before goodwill amortisation, of US$350 million
increased by 117 per cent compared with prior year.
Net interest income grew by 22 per cent,
reflecting strong asset growth in a number of
countries across the region, particularly in the
Middle East, Australia, Korea, India, Singapore,
Malaysia and Taiwan.
Mortgage balances increased by 29 per cent to
US$13.6 billion, following strong sales drives and a
series of promotional campaigns in a number of
countries. Lower pricing to achieve this growth led
to lower yields. The cards business continued to
expand and a number of new products were
introduced. Acquisition strategies, including a wide
variety of promotional campaigns and the launch of
an enhanced rewards programme in 12 countries
across the region, led to a 25 per cent increase in
cards in circulation. At the end of 2004, HSBC’s
card base in the region exceeded 4.6 million, with
particularly strong growth in India, Malaysia,
Singapore, the Philippines and the Middle East.
Utilisation of this expanded card base contributed to
a 21 per cent increase in average credit card balances
compared with 2003.
Other operating income grew by 27 per cent to
US$403 million, driven by sales of investment
products across the region. Commissions from sales
of unit trusts and funds under management were
particularly strong in Taiwan, Korea, India, and
Malaysia, where HSBC Bank Malaysia is the leading
international institutional unit trust agent. Brokerage
and custody fees increased by 143 per cent with
particularly strong growth in Australia reflecting
increased marketing, buoyant stock market activity
and higher stock prices.
HSBC continued to grow its insurance business
across the region and income grew by 86 per cent as
the number of policies in force increased by 25 per
cent. Fee income also benefited from the strong
growth in the credit card base, increased account
service fees and growth in sales of structured
products.
Operating expenses, excluding goodwill
amortisation, of US$947 million increased by
15 per cent, mainly from a 24 per cent increase in
other administrative expenses. Significant emphasis
was placed on promoting brand awareness in
mainland China to generate additional business and
to reinforce HSBC’s position as the leading
international bank in mainland China. The launch of
a number of credit card and mortgage advertising
campaigns also fed through to a rise in marketing
costs. Investment in systems development across the
region was reflected in higher technology costs. In
2004 magnetic stripe cards and ATM cards were
replaced by chip based cards in Malaysia.
Elsewhere in Asia, progress was made in upgrading
point-of-sale terminals and ATM’s to enhance fraud
protection and prepare for the eventual pan-regional
85
H S B C H O L D I N G S P L C
Financial Review (continued)
implementation of chip cards. Other general
expenses, including professional fees and
communications costs, increased to support
business expansion. Within the region HSBC
expanded the scale and range of services offered by
the Group Service Centres and additional staff were
recruited to support increased workflow. As new
business and cross-sales across the region grew
HSBC increased investment in sales support.
At US$117 million, the overall charge for bad
and doubtful debts was 21 per cent lower than in
2003. There was a release of general provision in
Malaysia which reflected the improvement in
economic outlook, and higher releases and
recoveries of specific provisions in several countries
across the region. New specific provisions raised
were 9 per cent higher than in 2003, notably in the
Middle East, Indonesia and Australia, reflecting
lending growth.
Commercial Banking reported pre-tax profits,
before goodwill amortisation, of US$496 million for
2004, 9 per cent ahead of 2003. A turnaround in
provisions, from a credit of US$52 million to a
charge of US$16 million, was more than offset by
additional income arising from growth in
international trade. Pre-provision profit before tax
increased by US$81 million, or 21 per cent. The
results also included, for the first time, a contribution
of US$24 million from the group’s 19.9 per cent
stake in Bank of Communications.
Net interest income increased by 11 per cent,
compared with 2003, reflecting growth in the Middle
East, mainland China, Australia, New Zealand and
Singapore. The Middle East benefited from the
expansion of international trade, increased lending to
infrastructure projects, which took off on the back of
strong oil prices, and growth in current accounts. In
mainland China, HSBC benefited from increased
cross-referrals from Hong Kong, while a Taiwan
team seconded to mainland China helped to capture
substantial business from Taiwanese customers
investing there.
The expansion of trade business was also
reflected in other operating income, which grew by
18 per cent to US$347 million. Growth was
particularly strong in the Middle East, which also
benefited from increased fees associated with higher
lending, and in mainland China and Malaysia, where
dealing profits from foreign currency transactions
and trade services fees were both higher.
Operating expenses, before amortisation of
goodwill, were 6 per cent higher than last year.
Additional relationship managers, business
development and sales staff, credit analysts and
86
support staff were recruited in the latter part of 2004
in order to benefit from anticipated business
opportunities in 2005 arising from strong regional
economies. The continued migration of back office
work from Singapore, Australia, New Zealand and
Taiwan to the Global Service Centres contributed to
cost savings.
Provisions for bad and doubtful debts were
US$16 million, reversing a net release in 2003. New
provisions increased in mainland China, largely on a
single account and in the Middle East, reflecting
growth in lending. There were lower net recoveries
in Malaysia, while net recoveries and releases
increased in Indonesia and Singapore.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$940 million, an increase of 26 per
cent compared with 2003.
Net interest income of US$592 million grew by
7 per cent, in part reflecting strong Global Markets
performance from increased treasury earnings in
India and higher holdings of debt securities in China.
Corporate and Institutional Banking benefited from a
55 per cent increase in customer advances in
mainland China and a 58 per cent increase in the
Middle East. These gains were partly offset by a
decline in treasury interest income in Singapore as
higher yielding assets matured, and a reduction in
interest income in Japan from lower holdings of debt
securities.
Fees and commissions grew by 24 per cent to
US$421 million including a 3 per cent increase
resulting from Bank of Bermuda. Corporate and
Institutional Banking fee income rose in India,
Singapore, Taiwan and Japan, as client demand grew
for more sophisticated capital markets and related
risk management products. Performance in these
countries was improved further as an expansion in
business capabilities increased investment banking
advisory revenues and boosted Global Transaction
Banking volumes. In the Middle East, increases in
private equity revenues and corporate finance and
advisory fees reflected the expansion of the private
equity business and an enhancement of HSBC’s
advisory function. In Malaysia, higher fees were
attributable to an increase in global custody and
transactional fees and an improvement in debt
origination and loan syndication activity. The
realignment of Corporate and Institutional Banking
business with Global Markets capabilities enabled
debt finance advisory to double the number of bond
and syndicated loan transactions, following effective
marketing initiatives and the identification of capital
market opportunities.
The custody and clearing business benefited
from renewed capital inflows, generating higher fees
in India, Taiwan and Korea, while improved
revenues in institutional funds services reflected the
expansion of HSBC’s capabilities into Indonesia,
Korea, India and Saudi Arabia.
Foreign exchange, derivatives and securities
trading income streams were all supported by
favourable market opportunities in the region. A
10 per cent increase in dealing income was driven by
sales of tailored structured products in Singapore, in
part reflecting cross-sales to HSBC’s personal,
commercial and corporate customers. In India,
higher foreign exchange gains resulted from
successful positioning and growing corporate
volumes, against a backdrop of an appreciating
Indian rupee. The falling interest rate environment in
Korea created proprietary trading and cross-currency
arbitrage opportunities while interest rate volatility
contributed to strong performance in Global Markets
Malaysia. In the Middle East, generally volatile
market conditions prompted a higher level of
hedging activity and an improvement in the volume
of customer transactions.
Excluding the impact of Bank of Bermuda,
operating expenses, excluding goodwill
amortisation, increased by 8 per cent, driven
primarily by higher performance-related incentives
in the Middle East, Korea, Singapore and mainland
China. In India, a 20 per cent rise in staff costs,
reflecting higher incentives was more than offset by
a reduction in restructuring costs compared with
2003. In Singapore, mainland China and the Middle
East, an additional 68 people were recruited to
upgrade their corporate and support teams, adding to
staff costs.
There was a higher net release for bad and
doubtful debts reflecting the benign credit
environment across the region, largely due to
releases and recoveries in the chemical and property
sectors.
Private Banking reported a pre-tax profit,
before goodwill amortisation, of US$59 million, an
increase of 59 per cent compared with 2003, which
reflected the expansion of Private Banking activities
in the region, and strong growth in fee income and
dealing profits in more positive market conditions.
16 per cent of the growth arose from the transfer of a
trust business from Hong Kong during 2004.
A 24 per cent increase in net interest income
was primarily due to the deployment of liquidity into
longer-dated assets, which benefited from the
differential between long and short-term interest
rates. Customer loans grew in Singapore and Japan,
as clients leveraged their wealth to re-invest in
higher yielding assets. Deposits grew by over
US$1.2 billion in Singapore, as new clients
deposited cash for investment.
Funds under management grew by 18 per cent,
with the introduction of new clients and products
contributing to an inflow of US$0.5 billion in net
new funds.
Other operating income increased by 85 per
cent, of which 30 per cent arose from the trust
business transfer referred to above. Elsewhere,
increased activity in the equity markets and the
successful launch of new products boosted fees and
commissions. Higher volumes of equity transactions,
sales of unit trusts, and portfolio fees on higher funds
under discretionary management were all reflected in
the rise in fees and commissions income. Dealing
income rose by 21 per cent, as a result of higher
client transaction volumes in foreign exchange,
options, and structured products.
Operating expenses, excluding goodwill
amortisation, increased by 55 per cent, of which
18 per cent was the trust business transfer referred to
above. Higher staff costs reflected the recruitment of
32 additional front office staff in Singapore.
Performance-related remuneration increased as a
result of the strong growth in profitability, while
marketing expenditure increased to support the brand
at a time of strong wealth creation across Asia.
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 mainland
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.
87
H S B C H O L D I N G S P L C
Financial Review (continued)
The commentaries that follow are based on
Net interest income was in line with 2002. There
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 20 per cent to
US$314 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
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$804 million were 16 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.
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.
88
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 10 per cent to
US$286 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 3 per cent to
US$324 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$521 million, increased by 2 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.
HSBC’s Private Banking activities in the rest
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
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$47 million, primarily to support business
growth.
89
H S B C H O L D I N G S P L C
Financial Review (continued)
Profit/(loss) excluding goodwill amortisation by customer group
Year ended 31 December 2004
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination
US$m
Other
US$m
946
–
300
44
59
403
472
–
266
59
22
347
819
592
–
421
343
24
788
42
–
41
46
2
89
1,380
131
3
3
29
2
160
194
197
–
–
–
–
(72)
(72)
(72)
Total
US$m
2,055
3
1,057
494
195
1,749
3,804
(947)
(352)
(596)
(73)
(184)
72
(2,080)
Operating income .........................
1,349
–
–
–
–
–
–
–
1,724
(100)
–
1,624
236
17
1,877
%
9.7
54.7
US$m
60,599
120,504
78,613
402
(117)
–
285
64
1
350
%
1.8
70.2
467
(16)
(4)
447
49
–
496
%
2.6
43.0
784
32
17
833
100
7
940
%
4.8
43.2
58
1
–
59
–
–
59
%
0.3
55.7
13
–
(13)
–
23
9
32
%
0.2
93.4
US$m
US$m
US$m
US$m
US$m
1,960
4,547
5,543
96
5,209
106
22,819
25,468
28,961
16,446
18,847
15,381
8
1
9
1
3
4
19,278
66,433
28,622
12,118
26,372
7,156
59
–
59
–
–
–
–
–
–
68
4
72
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 expenses excluding
goodwill amortisation1 ...............
Operating profit before
provisions1 ................................
Provisions for bad and doubtful
debts ..........................................
Provisions for contingent liabilities
and commitments .......................
Operating profit1 ..........................
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 excluded:
1 from (1) above ...........................
2 from (2) above ...........................
3 from (3) above ...........................
4 Third party only.
90
Rest of Asia-Pacific (including
the Middle East)
Net interest income/(expense) ......
Dividend income ............................
Net fees and commissions ..............
Dealing profits ...............................
Other income5 ................................
Other operating income5 ................
Operating income5 .......................
1,068
Year ended 31 December 2003
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
754
–
239
35
40
314
419
–
220
46
20
286
705
541
–
324
301
16
641
1,182
33
–
10
38
-
48
81
Inter-
segment
elimination
US$m
–
–
–
–
(58)
(58)
(58)
Other
US$m
(7)
4
12
1
102
119
112
Total
US$m
1,740
4
805
421
120
1,350
3,090
Operating expenses excluding
goodwill amortisation1,5 .............
Operating profit before
provisions1 ................................
Provisions for bad and doubtful
debts ..........................................
Provisions for contingent liabilities
and commitments .......................
Amounts written off fixed asset
investments ................................
Operating profit1 ..........................
Share of operating profit in
associates2 ..................................
Gains on disposal of investments
and tangible fixed assets ............
Profit on ordinary activities
before tax3 .................................
Share of HSBC’s pre-tax profits3 ...
Cost:income ratio1 ..........................
Selected balance sheet data4
Loans and advances to
customers (net) ..........................
Total assets5 ...................................
Customer accounts .........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to banks (net) .
Debt securities, treasury bills and
other eligible bills ......................
Deposits by banks ..........................
(804)
(324)
(521)
(47)
(103)
58
(1,741)
264
381
661
(145)
–
–
119
39
–
158
%
1.1
75.3
52
(1)
–
432
17
1
450
%
3.1
46.0
5
(1)
(1)
664
65
3
732
%
5.1
44.1
34
2
–
–
36
–
–
36
%
0.2
58.0
9
1
1
(1)
10
28
12
50
%
0.4
92.0
US$m
US$m
US$m
US$m
US$m
17,848
20,101
26,592
13,383
14,395
13,006
15,129
56,492
22,146
1,481
2,813
3,693
111
4,280
4
–
–
–
–
–
–
–
–
1,349
(85)
(1)
(2)
1,261
149
16
1,426
%
9.9
56.3
US$m
47,952
98,081
65,441
10,452
23,279
6,405
Goodwill amortisation excluded:
1 from (1) above ...........................
2 from (2) above ...........................
3 from (3) above ...........................
4 Third party only.
5 Restated to include the activities of the Group Service Centres and Shared Services Organisations in ‘Other’ where these activities were
28
–
28
5
–
5
–
–
–
1
–
1
1
–
1
35
–
35
formerly reported across customer groups.
91
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
Rest of Asia-Pacific (including
the Middle East)
Net interest income/(expense) ......
Dividend income ............................
Net fees and commissions ..............
Dealing profits/(losses) ..................
Other income5 ................................
Other operating income5 ................
Operating income5 .......................
Operating expenses excluding
goodwill amortisation1,5 .............
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
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 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
Private
Banking
US$m
633
–
211
27
16
254
887
417
–
213
37
5
255
672
561
–
293
278
17
588
1,149
35
–
6
24
–
30
65
(668)
(305)
(477)
(37)
219
(104)
–
–
115
13
(1)
127
%
1.2
75.3
367
31
5
–
403
18
2
423
%
4.1
45.4
672
(18)
13
(2)
665
42
(1)
706
%
6.7
41.5
28
(3)
–
–
25
–
–
25
%
0.2
56.9
US$m
US$m
US$m
US$m
11,812
13,453
22,613
10,795
11,619
11,600
12,963
46,378
16,506
1,392
2,336
3,413
9,249
19,094
4,830
Inter-
segment
elimination
US$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
Other
US$m
(39)
3
1
(2)
83
85
46
(79)
(33)
5
–
–
(28)
40
–
12
%
0.1
171.7
US$m
116
2,849
40
Goodwill amortisation excluded:
1 from (1) above ...........................
2 from (2) above ...........................
3 from (3) above ...........................
4 Third party only.
5 Restated to include the activities of the Group Service Centres and Shared Services Organisations in ‘Other’ where these activities were
29
–
29
1
–
1
–
–
–
3
–
3
–
–
–
33
–
33
formerly reported across customer groups.
92
North America
Profit/(loss) before tax excluding goodwill amortisation
Year ended 31 December
Personal Financial Services .........................................................................
USA ...............................................................................................................
Canada ...........................................................................................................
Mexico ...........................................................................................................
Other ..............................................................................................................
Consumer Finance2 ......................................................................................
USA ...............................................................................................................
Canada ...........................................................................................................
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 ...............................................................................................................
Other ..............................................................................................................
Other .............................................................................................................
USA ...............................................................................................................
Canada ...........................................................................................................
Other ..............................................................................................................
Total1 .............................................................................................................
USA ...............................................................................................................
Canada ...........................................................................................................
Mexico ...........................................................................................................
Other ..............................................................................................................
1 Goodwill amortisation excluded:
– arising on subsidiaries ............................................................................
– arising on associates and joint ventures .................................................
– total .........................................................................................................
2004
US$m
1,164
523
54
552
35
3,576
3,479
97
4,740
4,002
151
552
35
845
414
238
140
53
750
512
135
85
18
66
63
3
(221)
(229)
–
8
6,180
4,762
524
777
117
761
–
761
2003
US$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
2002
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 HSBC Finance Corporation’s consumer finance business and the US residential mortgages and credit card receivables
acquired by HSBC Bank USA from HSBC Finance Corporation and its correspondents since December 2003.
93
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 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/(loss) in joint ventures ............................................
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 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.
Year ended 31 December
2004
US$m
14,913
32
3,535
439
1,158
5,164
20,077
(4,730)
(878)
(2,961)
(318)
(8,887)
(761)
(9,648)
10,429
(5,186)
(42)
–
5,201
–
(8)
226
5,419
%
31.8
30.8
44.3
69,781
US$m
249,251
24,176
54,871
370,477
15,284
132,900
2003
US$m
11,777
34
2,676
340
932
3,982
15,759
(3,723)
(745)
(2,241)
(238)
(6,947)
(643)
(7,590)
8,169
(4,676)
3
(9)
3,487
11
6
109
3,613
%
29.6
28.2
44.1
65,021
US$m
191,450
11,884
49,168
289,800
10,354
93,996
2002
US$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
Year ended 31 December 2004 compared
with year ended 31 December 2003
The expansion of the US economy was robust in
early 2004, with GDP growth of 4.5 per cent in the
first quarter. The labour market improved
significantly in the spring, with nearly 1 million jobs
added between March and May, though in the
second half of the year, output growth moderated
and payroll gains slowed. This was partly due to
substantially higher energy prices, which also
contributed to an increase in inflation in the first half
of 2004. However, by the end of the year the Federal
Reserve’s favoured inflation measure, the PCE
(personal consumption expenditure) deflator, was
well contained at about 1.5 per cent. The Federal
Reserve raised its Fed Funds rate from 1 per cent to
2.25 per cent between June and December. After
reaching a peak of 4.87 per cent in June, 10-year
bond yields declined through most of the third
quarter and drifted only slightly higher in the fourth,
ending the year at just 4.2 per cent. Equity markets
were lacklustre for most of the year prior to a rally in
November and December, by the end of which the
94
S&P500 was up about 9 per cent from the beginning
of the year. Over approximately the same period, the
value of the US dollar fell, reaching US$1.36 to the
euro by the end of December.
In Canada, annualised GDP growth slowed to
2.7 per cent in the first quarter of 2004 from 3.3 per
cent in the final quarter of 2003, largely because of a
fall in stockbuilding. Consumer spending and
investment growth began the year strongly.
However, the Bank of Canada (‘BoC’) cut interest
rates three times in the first half of 2004 in response
to low inflation and currency appreciation. With the
global economy recovering and Canadian GDP
growth having rebounded to 3.9 per cent in the
second quarter, the BoC started to reverse its policy,
raising rates by 25 basis points in both September
and October. Growth remained robust in the second
half of the year with consumer spending
accelerating. Import growth was significant, partly
reflecting a very large build-up of inventory in the
third quarter, much of it related to the auto sector.
Although inflation picked up a little, the BoC kept
rates on hold in November and December, because
of concerns about the impact of a stronger Canadian
dollar. This left the overnight rate at 2.5 per cent,
still below the rate at which it started the year.
Mexico’s macro-economic fundamentals
remained strong in 2004, with year-on-year GDP
growth of 4.4 per cent in line with that of the US. At
year-end, the fiscal accounts were showing relatively
low deficits helped by the windfall of high oil prices.
Driven by oil receipts and an unprecedented level of
workers´ remittances, the current account deficit
shrank to a figure below the level of reinvested
earnings from existing foreign direct investment.
Inflation increased from 4.0 per cent at the end of
2003 to 5.2 per cent in 2004, as a result of increases
in external energy and food prices, but remained
manageable. HSBC anticipates that inflation will be
reduced in 2005 due to a restrictive monetary policy,
and that moderate to strong GDP growth will
continue with a mildly appreciating currency.
On 1 July 2004, HSBC Bank USA, Inc.
consolidated its banking operations under a single
national charter, following approval from the Office
of Comptroller of Currency. This enabled the newly
formed HSBC Bank USA to serve its customers
more efficiently and effectively across the US and
provide an expanded range of products. It also put
HSBC Bank USA on the same footing as other major
US banks.
HSBC’s operations in North America reported a
pre-tax profit of US$5,419 million, compared with
US$3,613 million in 2003. Excluding goodwill
amortisation, pre-tax profit was US$6,180 million,
compared with US$4,257 million in 2003, and
represented 32 per cent of HSBC’s total pre-tax
profit on this basis.
Within these figures HSBC Finance reported a
pre-tax profit, before goodwill amortisation, of
US$3,576 million in 2004, an increase of
US$1,524 million, of which US$1,084 million was
an additional quarter’s contribution. Profit was
21 per cent higher than for the comparable period in
the prior year.
Bank of Bermuda, acquired in February 2004,
contributed US$73 million to pre-tax profit, before
goodwill amortisation, in the North American
segment.
At constant exchange rates, and on an
underlying basis, HSBC’s pre-tax profit, before
goodwill amortisation, was 17 per cent higher than
in 2003.
The detailed customer group commentary that
follows is based on constant exchange rates.
Excluding Consumer Finance, Personal
Financial Services generated a pre-tax profit, before
goodwill amortisation, of US$1,164 million, 35 per
cent higher than in 2003. Approximately 22 per cent
of this growth arose from the acquisition of Bank of
Bermuda and certain insurance interests in Mexico.
Growth in net interest income was 19 per cent.
This was driven mainly by a 34 per cent increase in
Mexico, where growth in low cost deposits and
consumer loans, and higher interest income from the
insurance business, contributed to the rise.
Acquisitions in Mexico accounted for 17 per cent of
the overall improvement. HSBC attracted 359,000
net new deposit customers in Mexico during the
year, and this contributed to the US$1.6 billion rise
in average deposit balances. Despite an increasingly
competitive marketplace, market share in deposits
rose to 14.4 per cent, driven by the bank’s extensive
branch and ATM network. Consumer loan growth
was robust in the second half of the year, particularly
in pre-approved payroll loans offered through the
ATM network, and residential mortgages.
Net interest income in the US grew by 10 per
cent, reflecting a US$10.9 billion, or 58 per cent,
increase in average residential mortgage balances
and the widening of spreads on savings and deposits,
as interest rates rose. Sales of residential mortgages
remained strong following an expansion of the sales
force and the development of the correspondent
network, competitive pricing and increased
marketing. In 2004, customers generally favoured
variable rate products over fixed. Several new
95
H S B C H O L D I N G S P L C
Financial Review (continued)
products, including a range of adjustable rate
mortgages, were launched during the year
contributing to an overall increase in gross new
lending of 3 per cent to US$32.6 billion. The income
benefit of this growth, however, was partly offset by
pressure on spreads. Competitive pricing in a
contracting market forced a general downward trend
in mortgage yields in 2004 compared with the levels
seen in 2003.
Other operating income rose by US$164 million
or 20 per cent to US$979 million, of which
US$82 million came from acquisitions. Growth was
largely attributable to the strong performance in
Mexico, where expansion of the pension funds
business, acquired in the last quarter of 2003,
complemented higher fee income from credit cards,
deposit-related services and international
remittances. Sales of pension and bancassurance
products grew strongly, attracting some 270,000 new
customers, following an expansion of the sales force.
An enhanced customer relationship management
system and the employment of WHIRL helped the
number of credit cards in circulation in Mexico to
rise by 29 per cent to 568,000. Fee income from
credit cards rose by 20 per cent compared with 2003.
Operations in Canada benefited from a rise in retail
broking volumes, as market activity revived. In the
US, a revised fee structure and improved collection
processes produced a 9 per cent increase in fee
income from cards and deposit-related services.
The US mortgage banking business contributed
a pre-tax profit of US$270 million, in line with 2003,
despite a fall in other operating income. Lower
origination and sales-related income in the secondary
market was only partly offset by a reduction in net
servicing expenses. There was a net loss of
US$4 million from sale of mortgage loans in 2004
compared with a net gain of US$117 million in
2003. This was mainly driven by lower gains on
sales of mortgages, as narrower spreads combined
with a fall in the volume of loans originated for sale.
As interest rates increased in 2004 from the
historically low levels experienced in 2003,
prepayments of residential mortgages, mostly in the
form of loan refinancing, reduced significantly and
residential mortgages originated for sale declined by
64 per cent compared with 2003, despite an overall
increase in mortgage lending. Loan refinancing
activity represented 50 per cent of the total loan
originations, compared with 74 per cent in 2003.
Pricing also fell from the unusually high levels seen
in 2003 and, as a result, HSBC earned lower returns
on loans sold.
The net cost of servicing mortgages fell,
improved primarily as a result of lower amortisation
96
expenses on mortgage servicing rights (‘MSR’) and
increased income associated with the derivatives
used to offset the changes in the economic value of
the MSRs. The reduction in amortisation expenses
was also partly affected by lower MSR balances in
2004. The cost reduction was partly offset by higher
temporary impairment reserves.
Operating expenses, excluding goodwill
amortisation, were 16 per cent higher than in 2003.
This was due mainly to a 15 per cent increase in
costs in Mexico, where the expansion of the pension
funds business and the inclusion of the insurance
business acquired in the last quarter of 2003
contributed to generally higher salaries and
performance-related bonuses. Staff numbers
increased in the Mexican branch network to support
growth in business volumes, improve customer
service, and support the rollout of HSBC Premier.
The introduction of the WHIRL credit card system in
Mexico and the US, at a cost of US$23 million, was
completed by the end of October. In the US,
expansion in the mortgage sales force and higher
performance-related bonuses led to higher staff
costs, while the launch of advertising campaigns for
mortgages and deposits added to marketing costs.
Additional staff were recruited in the branch network
to support business expansion and to improve
customer service. Costs in Canada increased by 4 per
cent, principally due to higher performance-related
staff costs in the brokerage business and
restructuring expenses arising from the integration of
Intesa Bank Canada, acquired in May.
The net bad debts charge fell by 29 per cent to
US$99 million. Recoveries of amounts previously
written-off in Mexico more than offset the
US$11 million increase in new specific provisions in
the US, predominantly for the credit cards portfolio
within HSBC Bank USA. There was also a
US$28 million release of general provisions in
Mexico following a review of historical loss
experience, reflecting a general improvement in the
credit quality of consumer loan portfolios, and the
improved market environment.
Consumer Finance contributed a pre-tax profit,
before goodwill amortisation, of US$3,576 million
in 2004, an increase of US$1,508 million of which
US$1,097 million was an additional quarter’s
contribution. On an underlying basis, pre-tax profit,
before goodwill amortisation, grew by 20 per cent to
US$2,479 million.
The integration of HSBC Finance Corporation
into HSBC continued to deliver funding benefits in
line with those anticipated. Since December 2003,
HSBC Finance Corporation has sold US$3.7 billion
of residential mortgages and US$15.6 billion of its
domestic private label assets to HSBC Bank USA,
the latter in December 2004. Under various service
level agreements, HSBC Finance Corporation will
continue to maintain the related customer account
relationships for the assets transferred. By the end of
2004, HSBC had provided a total of US$35.6 billion
in direct and client funding to HSBC Finance
Corporation, and cash savings realised in 2004 were
in excess of US$400 million.
Following receipt of regulatory approval for the
sale of the private label portfolio, and prior to the
sale, HSBC Finance Corporation adopted charge-off
and account management policies in accordance with
the Uniform Retail Credit Classification and Account
Management Policy issued by the Federal Financial
Institutions Examination Council (‘FFIEC policies’),
for its domestic private label, MasterCard and Visa
credit card portfolios. The main effect of this was on
the private label credit card portfolio, where the
FFIEC policies resulted in accounts being charged-
off earlier. Certain pools of accounts were already
following FFIEC policies, and so their adoption
improved conformity across all relevant portfolios.
The FFIEC account management practices change
the delinquency and roll rates applicable to these
portfolios, and resulted in a one-off charge to pre-tax
profit, before goodwill amortisation, of
US$154 million, which is expected to be offset by
future funding benefits in the region of
US$47 million per annum.
Net interest income of US$10,541 million was
US$2,690 million higher than in 2003, although on
an underlying basis adjusting for the additional
quarter in 2004, it was only marginally higher.
Average customer loan balances increased by 11 per
cent to US$120.6 billion. Lower funding costs gave
HSBC Finance Corporation the opportunity to
expand its prime and near-prime customer base,
particularly in the mortgage business. Average
mortgage balances grew by 23 per cent to
US$54.1 billion. Some US$3.9 billion of gross new
lending balances were originated from a single
correspondent relationship, while balances of
US$1.6 billion were originated following the launch
in 2003 of the ‘Secured Plus’ mortgage product.
Organic growth of 16 per cent to US$9.6 billion
in vehicle finance loans was primarily achieved
through a network of 5,200 motor dealers, extensive
alliance relationships and direct sales channels.
Loans in the MasterCard and Visa credit card
portfolios grew by 3 per cent to US$18 billion,
driven largely by growth in the sub-prime portfolio.
Spreads widened reflecting the change in product
mix towards the sub-prime market. The private label
business also achieved growth in average loan
balances, 5 per cent higher than in 2003, through
new and existing merchant agreements.
The benefit of strong growth in loan balances
was reduced significantly by lower yields. A greater
than normal run-off of older, higher-yielding loans,
product expansion into near-prime customer
segments, and competitive pricing pressures from
excess capacity, particularly in the mortgage market,
contributed to an overall decline in loan yields. The
decline was only partly offset by increased pricing of
variable-rate products in line with interest rate
movements, and continued growth in sub-prime
credit cards. Also, the adoption of the FFIEC
policies reduced net interest income by
US$57 million.
Other operating income rose by
US$895 million, or 52 per cent, to
US$2,602 million, largely reflecting the additional
quarter’s income. On an underlying basis, and
excluding the effect of adopting the FFIEC policies,
the increase was 10 per cent, predominantly
reflecting strong growth in fee income from credit
cards, and increased revenue from sales of value
added products.
Operating expenses, excluding goodwill
amortisation, of US$4,470 million were 44 per cent
higher than in 2003. On an underlying basis,
operating expenses, excluding goodwill
amortisation, increased by 10 per cent to
US$3,422 million due mainly to increased staff costs
and higher IT and marketing expenditure. Additional
staff were recruited in the branch network and in the
mortgage services business to support growth in
volumes and to improve customer service. Increased
business volumes also led to higher performance-
related bonuses and higher IT costs. Marketing costs
increased, largely due to changes in contractual
obligations associated with the General Motors co-
branded credit card portfolio, but were partly offset
by lower account origination costs. Marketing
expenses were also incurred in support of income
growth initiatives in the sub-prime market. In
September 2004, HSBC rebranded a number of its
Consumer Finance businesses at a cost of
US$8 million.
The charge for bad and doubtful debts rose by
17 per cent to US$5,136 million. On an underlying
basis and excluding the effect of adopting the FFIEC
policies, the charge fell by 12 per cent. This reflected
a marked improvement in credit quality, driven by
the economic upturn, improved origination, growth
in the proportion of secured lending, improved
97
H S B C H O L D I N G S P L C
Financial Review (continued)
collections, and the move into prime and near-prime
markets. Improvements in delinquency were seen
across most products and in a number of key
indicators, including early stage delinquency, charge-
offs and year-on-year bankruptcy filings. The rate of
improvement declined in the second half of the year
reflecting seasonality, a slowdown in employment
growth and rising energy prices.
Commercial Banking reported pre-tax profits,
before amortisation of goodwill, of US$845 million
for 2004, an improvement of 41 per cent over 2003.
Net interest income increased by 8 per cent, of
which 3 per cent was attributable to the acquisition
of Bank of Bermuda. Adjusting for the loss of net
interest income following the disposal of the US
equipment-leasing portfolio last year, underlying
growth was 7 per cent.
In the US, the recruitment of 50 additional
relationship managers, focusing on the SME market,
contributed to a 12 per cent rise in lending balances
and a 17 per cent increase in commercial deposits.
Improved economic conditions and stronger
consumer confidence also led to increased demand
for credit, but spreads suffered in the competitive
marketplace. Commercial real estate lending
increased by 11 per cent, largely as a result of
expansion into the US West Coast and Miami.
In Canada, net interest income increased by
16 per cent. Growth in lending reflected stronger
demand for credit in the low interest rate
environment, improved market conditions and
additional income following the integration of Intesa
Bank. In Mexico, competitors displaying a greater
appetite for risk enabled HSBC to selectively reduce
loan balances. This, together with the effect of lower
interest rates on deposit spreads and a restructuring
of prices, which emphasised fees at the expense of
margin, led to an 11 per cent reduction in Mexican
net interest income.
Other operating income was US$13 million or
3 per cent higher than in 2003. Excluding the
disposal of the US factoring and equipment leasing
businesses, which in 2003 contributed other
operating income of US$109 million, the underlying
growth was 25 per cent. The impact of acquisitions
during 2004 was not material.
In Mexico, fees and commissions grew by
US$10 million or 11 per cent. Fees earned from
payments and cash management and electronic
banking both increased. The Mexican authorities
changed the tax regulations to require all companies
to make tax payments via electronic banking
channels from January 2004. HSBC seized the
98
opportunities presented by this change to increase
both the number of clients using electronic banking,
and the number of transactions and income per
client. Earnings from new trade services products
and increased loan fees (from the price restructuring)
also contributed.
Operating expenses declined by 6 per cent
compared with 2003 as a result of the disposal of the
factoring and equipment leasing businesses in the
US. Adjusting for this, there was a 3 per cent rise in
expenses reflecting additional costs from the
restructuring and integration of Intesa Bank, the
inclusion of Bank of Bermuda, and the effect of
increased transaction volumes and business flows
between Mexico and the US.
The charge for bad and doubtful debts fell by 90
per cent to US$13 million, reflecting an improved
economic environment and falling corporate default
rates. In 2003, the charge included US$33 million in
the US factoring and leasing businesses which were
sold during that year.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$750 million, 11 per cent lower than
in 2003.
Net interest income was 11 per cent lower than
in 2003, notwithstanding the first contribution from
Bank of Bermuda, which added US$31 million, or 4
per cent to the total. In part this reflected the cost of
funding trading strategies where the offsetting
income arises within dealing revenues. The return on
investments held for liquidity fell and the yield on
loans dropped as re-financing reached record levels
following the reductions in interest rates in the latter
part of 2003 and early 2004. The lower interest rates
resulted in large early redemptions of mortgage-
backed securities. Reinvestment opportunities,
however, failed to match the yields given up on these
redemptions. In Canada, a combination of interest
rate cuts in the early part of 2004 and lower
corporate loan balances reduced net interest income.
However, in Mexico, investment portfolios profited
from having locked into higher long-term interest
rate structures.
Other operating income improved by 15 per
cent, of which 7 per cent was attributable to Bank of
Bermuda, which improved its market share in funds
administration following its acquisition. A 23 per
cent increase in fees and commissions in the US was
driven by increased underwriting fees from debt
issues and syndication, coupled with higher deal
execution revenues. Increased revenues from
customers reflected improved client coverage. The
growing use of electronic trading by clients resulted
in increased commissions from futures transactions,
while structured finance and HSBC Amanah
benefited from higher transaction fees and new
deals. In Global Transaction Banking, higher
payment and cash management revenues reflected an
increase in volumes. Dealing profits benefited from a
reduced level of losses in respect of mortgage
hedging activities transacted on behalf of other
HSBC customer groups. These transactions resulted
in an offsetting reduction in other income. Although
credit spread volatility was relatively low,
movements in individual corporate spreads,
primarily in the industrials sector, adversely affected
corporate bond trading revenues. Global Markets
continued to benefit from the previous year’s
expansion of derivatives capabilities and higher
profits from improved marketing and delivery of
structured solutions. Proprietary trading revenues
increased, mainly through profits on long futures
positions and foreign exchange gains which arose
from successful positioning against the weakening
US dollar. Foreign exchange also benefited from a
higher volume of customer transactions.
In Mexico, earnings from debt trading fell as
interest rates rose during the year, while in Canada,
higher fees from securities sales and corporate
finance reflected improved market sentiment in local
equity markets. Foreign exchange income in Canada
grew by 10 per cent in response to the continued
volatility of the Canadian and US dollars.
Operating expenses, before goodwill
amortisation, of US$1,014 million rose by 31 per
cent, of which 12 per cent related to costs in Bank of
Bermuda. In New York, the significant expansion of
the Corporate Investment Banking and Markets’
business resulted in an increase of some 300 in
headcount and a corresponding rise in salary costs.
Incentive compensation also rose, largely due to the
costs of recruiting and retaining the high quality staff
needed to deliver the business strategy. Key hires
within the expanded complement included the
establishment of a mergers and acquisitions and
advisory group, and product teams to develop asset-
backed and mortgage-backed securitisation and
trading. Non-staff costs grew correspondingly and
included investment in technology to support the
new business streams and the related control
environment.
A net release of provisions for bad and doubtful
debts reflected a significant improvement in credit
quality as corporate restructuring and refinancing
was facilitated by the better economic conditions.
This resulted in releases and recoveries across a
number of sectors.
Private Banking contributed a pre-tax profit,
before goodwill amortisation, of US$66 million, an
increase of 6 per cent on the result achieved in 2003.
Good progress was made in the integration of Bank
of Bermuda’s Private Client Services business,
which added an onshore banking capability in
Bermuda, and complementary offshore and trust
products and services to HSBC’s North American
operations. In aggregate, Bank of Bermuda’s North
American Private Banking operations added
US$2 million to pre-tax profits, before goodwill
amortisation, in 2004.
Net interest income increased by 37 per cent,
due largely to balance sheet growth. Strong growth
in customer loans, which were 50 per cent higher
than in 2003, reflected the success of the insurance
premium financing business, an expanded customer
base, and growth in secured borrowing by clients to
invest in higher-yielding assets or funds. The larger
customer base resulted from an expansion of Private
Banking’s geographical presence, and cross-referrals
generated through the alignment of Private
Banking’s operations with other customer groups.
This contributed to an increase in average customer
deposits.
Other operating income was 4 per cent below
that achieved in 2003 but was 23 per cent lower
excluding the Bank of Bermuda. The fall in other
operating income was mainly driven by client
anticipation of interest rate rises, which reduced
demand for interest-rate-linked structured products,
and sales of fixed interest bonds. WTAS increased
revenue despite subdued demand for tax planning
services. As a consequence of restrictions placed on
the personal tax practices in the major accounting
firms engaged in providing audit services, WTAS
increased both its customer base and the number of
fee-generating staff. Cross-referrals also grew.
Operating expenses, before goodwill
amortisation and excluding Bank of Bermuda, were
broadly flat compared with 2003. Savings were
generated from the continuing alignment of
international and domestic client servicing units and
from operational efficiencies in WTAS.
The gain on disposal of investments and
tangible fixed assets reflected the sale of seed capital
holdings.
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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
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
appeared set to continue, restraining export growth.
On 28 March 2003, HSBC completed its
acquisition of HSBC Finance Corporation for a
consideration of US$14.8 billion, expanding
significantly its existing North American business.
The addition of HSBC Finance Corporation’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 total Group.
The results of HSBC Finance Corporation’s
consumer finance business 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 HSBC Finance Corporation 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 HSBC Finance Corporation 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 HSBC Finance Corporation and, to
a lesser extent, HSBC Mexico.
The commentaries that follow are based on
The Mexican economy continued to lag behind
constant exchange rates.
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. This notwithstanding, a solid macro-
economic foundation had been established and was
expected to be maintained.
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
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.
100
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.
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 HSBC Finance Corporation,
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.
101
H S B C H O L D I N G S P L C
Financial Review (continued)
Consumer Finance contributed
US$2,068 million to pre-tax profit, before goodwill
amortisation, in the nine months since HSBC
Finance Corporation became a member of HSBC.
The integration of HSBC Finance Corporation into
HSBC delivered anticipated benefits in improved
funding costs, and technology and administrative
cost savings. Significant progress has been made in
exporting HSBC Finance Corporation’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. HSBC Finance Corporation’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 HSBC
Finance Corporation in the nine months in which
HSBC Finance Corporation 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, HSBC Finance Corporation’s funding
costs on new issues have, in fact, fallen as the credit
spreads sought by the market decreased, reflecting
the improvement in HSBC Finance Corporation’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
102
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 growth in receivables, 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
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 HSBC Finance Corporation’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.
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
103
H S B C H O L D I N G S P L C
Financial Review (continued)
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$48 million increase in
operating expenses, before goodwill amortisation.
Cost savings from the alignment of international and
domestic client servicing units offset higher staff and
restructuring costs. Excluding this operating
expenses were essentially flat year-on-year.
104
Profit/(loss) excluding goodwill amortisation by customer group
Personal
Financial
Services
US$m
Consumer
Finance4
US$m
Total
Personal
Financial
Services
US$m
North America
Net interest
Year ended 31 December 2004
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Commercial
Banking
US$m
income/(expense) .........
2,498
10,541
13,039
1,146
Dividend income ...............
Net fees and commissions .
Dealing profits ..................
Other income .....................
Other operating income .....
4
829
54
92
979
9
1,828
–
765
2,602
13
2,657
54
857
3,581
–
302
15
159
476
664
19
492
364
82
957
Operating income ............
3,477
13,143
16,620
1,622
1,621
166
–
176
6
4
186
352
Inter-
segment
elimination
US$m
Total
US$m
–
14,913
–
–
–
(1,011)
(1,011)
(1,011)
32
3,535
439
1,158
5,164
20,077
Other
US$m
(102)
–
(92)
–
1,067
975
873
(2,270)
(4,470)
(6,740)
(749)
(1,014)
(294)
(1,101)
1,011
(8,887)
Operating expenses
excluding goodwill
amortisation1 .................
Operating profit/(loss)
before provisions1 .......
Provisions for bad and
Share of operating
profit/(loss)
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 ......
Goodwill amortisation
excluded:
1,207
8,673
9,880
873
doubtful debts ...............
(99)
(5,136)
(5,235)
(13)
Provisions for contingent
liabilities and
commitments ................
(13)
–
(13)
Operating profit/(loss)1 ...
1,095
3,537
4,632
607
60
(8)
659
(16)
107
750
%
3.9
62.6
58
2
–
60
–
6
66
%
0.3
83.5
(228)
–
(1)
(229)
8
–
(221)
%
(1.1)
126.1
(20)
840
–
5
845
%
4.3
46.2
–
–
–
–
–
–
–
11,190
(5,186)
(42)
5,962
(8)
226
6,180
%
31.8
44.3
US$m
–
69
–
39
–
108
1,164
3,576
4,740
%
6.0
65.3
%
18.4
34.0
%
24.4
40.6
US$m
US$m
US$m
US$m
US$m
US$m
US$m
65,850
77,054
50,659
126,543
150,633
506
192,393
227,687
51,165
26,844
31,426
27,167
26,142
106,785
46,745
3,871
4,548
7,822
1
31
1
249,251
370,477
132,900
23,814
45,688
14,887
113,729
1 from (1) above ..............
2 from (2) above ..............
3 from (3) above ..............
4 Comprises HSBC Finance Corporation’s consumer finance business and the US residential mortgages and credit card portfolios acquired by HSBC Bank
600
–
600
125
–
125
475
–
475
79
–
79
25
–
25
57
–
57
–
–
–
761
–
761
USA from HSBC Finance Corporation and its correspondents since December 2003.
5 Third party only.
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 (continued)
Personal
Financial
Services
US$m
Consumer
Finance4
US$m
Total
Personal
Financial
Services
US$m
North America
Net interest
Year ended 31 December 2003
Corporate,
Investment
Banking &
Markets
US$m
Commercial
Banking
US$m
Private
Banking
US$m
income/(expense) .........
2,116
7,851
9,967
1,046
Dividend income ...............
Net fees and commissions ..
Dealing profits ..................
Other income .....................
Other operating income .....
–
720
19
86
825
Operating income ............
2,941
12
1,170
–
525
1,707
9,558
12
1,890
19
611
2,532
–
292
18
152
462
12,499
1,508
1,571
743
20
351
301
156
828
121
1
155
2
36
194
315
Inter-
segment
elimination
US$m
Other
US$m
Total
US$m
(100)
–
11,777
1
(12)
–
33
22
(78)
–
–
–
(56)
(56)
(56)
34
2,676
340
932
3,982
15,759
doubtful debts ...............
(142)
(4,395)
(4,537)
(133)
Operating expenses
excluding goodwill
amortisation1 .................
Operating profit/(loss)
before provisions1 .......
Provisions for bad and
Provisions for contingent
liabilities and
commitments ................
Amounts written off fixed
asset investments ..........
Operating profit/(loss)1 ...
Share of operating profit
in joint ventures ............
Share of operating profit
in associates2 .................
Gains on disposal of
investments and
tangible fixed assets ......
Profit/(loss) on ordinary
activities before tax3 ....
Share of HSBC’s pre-tax
profits3 ..........................
Cost:income ratio1 .............
Selected balance sheet data5
Loans and advances to
customers (net) .............
Total assets .......................
Customer accounts ............
The following assets and
liabilities were also
significant to the customer
groups noted:
Loans and advances to
banks (net) ....................
Debt securities, treasury
bills and other eligible
bills ..............................
Deposits by banks .............
Debt securities in issue.......
Goodwill amortisation
excluded:
(1,965)
(3,098)
(5,063)
(786)
(777)
(254)
(123)
56
(6,947)
976
6,460
7,436
722
794
61
(201)
–
–
–
–
–
–
4
–
(6)
–
(9)
1
–
–
(1)
(1)
–
834
2,065
2,899
593
779
62
(203)
11
–
25
870
%
6.0
66.8
–
–
3
11
–
28
2,068
2,938
%
14.4
32.4
%
20.4
40.5
–
–
2
595
%
4.1
52.1
–
–
58
837
%
5.8
49.5
–
–
1
63
%
0.4
80.6
–
7
20
(176)
%
(1.1)
(157.7)
US$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$m
43,608
53,082
48,576
107,957
134,857
1
151,565
187,939
48,577
23,553
27,444
20,032
13,758
70,223
17,239
2,574
3,108
8,148
–
1,086
–
191,450
289,800
93,996
11,577
36,026
9,958
107,673
1 from (1) above ..............
2 from (2) above ..............
3 from (3) above ..............
4 Comprises HSBC Finance Corporation’s consumer finance business and the US residential mortgages acquired by HSBC Bank USA from HSBC Finance
100
–
100
473
1
474
356
–
356
117
1
118
45
–
45
25
–
25
–
–
–
643
1
644
Corporation and its correspondents in December 2003.
5 Third party only.
106
Year ended 31 December 2002
North America
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Net interest income/(expense) ......
1,352
Dividend income ............................
Net fees and commissions ..............
Dealing profits/(losses) ..................
Other income .................................
Other operating income ..................
–
437
(63)
126
500
844
–
222
18
61
301
539
24
268
204
61
557
Operating income .........................
1,852
1,145
1,096
Private
Banking
US$m
117
–
61
9
78
148
265
Inter-
segment
elimination
US$m
–
–
–
–
(22)
(22)
(22)
Other
US$m
(120)
–
(4)
(7)
29
18
(102)
Total
US$m
2,732
24
984
161
333
1,502
4,234
(1,172)
(567)
(649)
(206)
(103)
22
(2,675)
Operating profit/(loss)1 ................
604
430
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 ................................
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 excluded:
1 from (1) above ...........................
2 from (2) above ...........................
3 from (3) above ...........................
4 Third party only.
680
578
447
(76)
(150)
–
–
2
–
(1)
2
–
605
%
5.8
63.3
–
–
5
435
%
4.1
49.5
(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
12,604
63,161
19,396
1,701
2,707
6,969
(205)
(6)
(1)
–
(212)
–
6
(1)
(207)
%
(1.9)
(101.0)
US$m
1
221
53
9,948
34,926
9,545
34
–
34
55
–
55
32
–
32
25
–
25
–
–
–
–
–
–
–
–
–
–
–
–
1,559
(300)
3
(9)
1,253
(2)
8
125
1,384
%
13.2
63.2
US$m
77,589
142,032
90,137
146
–
146
107
H S B C H O L D I N G S P L C
Financial Review (continued)
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 .............................................................................................................
Other ..............................................................................................................
Other .............................................................................................................
Brazil .............................................................................................................
Argentina .......................................................................................................
Other ..............................................................................................................
Total1 .............................................................................................................
Brazil .............................................................................................................
Argentina .......................................................................................................
Other ..............................................................................................................
1 Goodwill amortisation arising on subsidiaries excluded ...........................
Year ended 31 December
2004
US$m
2003
US$m
2002
US$m
47
51
(4)
–
165
113
51
1
150
134
8
8
1
1
–
81
(18)
101
(2)
444
281
156
7
29
(27)
(31)
3
1
99
65
34
–
(24)
49
(72)
(1)
(2)
(1)
(1)
80
1
83
(4)
126
83
48
(5)
11
(33)
11
(45)
1
79
54
27
(2)
32
125
(101)
8
(12)
(1)
(11)
(100)
(62)
(91)
53
(34)
127
(210)
49
24
108
Profit/(loss) before tax
Year ended 31 December
South America
Net interest income ......................................................................................
Dividend income ............................................................................................
Net fees and commissions ..............................................................................
Dealing profits ...............................................................................................
Other income .................................................................................................
Other operating income ..................................................................................
2004
US$m
1,355
2
480
50
207
739
Total operating income ................................................................................
2,094
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 ...................................
Loss from foreign currency redenomination in Argentina ..............................
Amounts written off fixed asset investments .................................................
Operating profit/(loss) .................................................................................
Share of operating profit in associated undertakings ......................................
Gains 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) ....................................
(660)
(174)
(549)
(61)
(1,444)
(29)
(1,473)
621
(269)
30
–
(6)
376
1
38
415
%
2.3
2.4
69.0
2003
US$m
640
3
338
136
201
678
1,318
(584)
(124)
(327)
(40)
(1,075)
(11)
(1,086)
232
(58)
2
(9)
(62)
105
1
9
115
%
0.9
0.9
81.6
2002
US$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
Period-end staff numbers (full-time equivalent) .............................................
32,108
28,292
25,522
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$m
6,933
2,597
3,742
17,397
680
10,957
US$m
4,982
1,922
2,151
12,549
828
6,945
US$m
3,028
1,665
1,450
8,491
661
4,863
Year ended 31 December 2004 compared
with year ended 31 December 2003
Reaping the rewards of measures taken in 2003 and
helped by a buoyant external environment, Brazil
enjoyed an outstanding economic performance in
2004. Annualised GDP growth topped 4 per cent in
each of the first three quarters of 2004 and, for the
year as a whole, HSBC expects growth to exceed 5
per cent, driven by external demand. The 2004 trade
surplus reached US$34 billion and the current
account surplus US$12 billion. Employment and real
wages both expanded in 2004. Faster than
anticipated growth and some unexpected
consequences of tax changes pushed fiscal revenues
to record highs allowing the public sector to produce
a consolidated primary surplus in excess of 4 per
109
H S B C H O L D I N G S P L C
Financial Review (continued)
cent of GDP in 2004. This, together with the growth
in the economy and an appreciating currency,
reduced the ratio of debt to GDP, ushering in a
virtuous circle of declining risk spreads, growing
confidence and a return of investment. This was
despite the rekindling of inflationary pressures from
rising commodity prices early in 2004, adjustments
in administered prices and a very rapidly narrowing
output gap. Core inflation remained in excess of 7
per cent throughout the year, and the Central Bank
raised interest rates and tightened monetary policy in
an attempt to avert higher inflation in 2005. The
combined effect of the global slowdown and local
policy restrictions is slowing the Brazilian economy.
Nevertheless, the short-term outlook remains
encouragingly positive.
In Argentina, the recovery from the crisis of
2001 continued in 2004, helped by the favourable
external environment and the absence of effective
pressure to improve the exchange offer on defaulted
debt. Year-on-year GDP growth was 8.8 per cent.
Employment in the formal economy in October was
up by 6.8 per cent on the year before, continuing the
trend of the past two years. By the end of 2004, the
stock market index had surpassed the levels last
achieved in August 2001, and stood almost 12 per
cent above the minimum reached in September 2002,
when the economy began its current expansionary
phase. Inflation appeared to be under control and the
government, buoyed by revenues from exports, was
able to post large fiscal surpluses, with a primary
surplus in excess of 5 per cent of GDP. By contrast,
the progress on debt restructuring was slow. Though
the rate of investment returned to the pre-crisis level
of 20 per cent of GDP – arguably, too low to sustain
growth in excess of 3 to 4 per cent per annum – it is
likely that the re-investment cycle will falter without
a workable solution to the debt crisis. To that extent,
the outlook for Argentina remains uncertain.
HSBC’s operations in South America reported a
pre-tax profit of US$415 million, substantially ahead
of the US$115 million achieved in 2003. Excluding
goodwill amortisation, pre-tax profit was
US$444 million compared with US$126 million in
2003, and represented 2 per cent of HSBC’s total
pre-tax profit on this basis. The 2004 results include
the first full year’s contribution from the Brazilian
consumer finance company, Losango, acquired in
December 2003, along with contributions from
CreditMatone S.A., acquired in November 2004, and
Valeu Promotora de Vendas, the consumer finance
operations of Indusval Multistock Group, acquired in
August 2004. Together, these three businesses
contributed US$72 million to pre tax profits before
goodwill amortisation, representing 23 per cent of
110
the growth. There were no significant exchange rate
impacts in 2004.
The commentary that follows is based on
constant exchange rates.
Personal Financial Services’ pre-tax profit,
before goodwill amortisation, of US$47 million
predominantly reflected the Losango consumer
finance business acquired in December 2003, which
contributed US$72 million. It was pleasing to note
that, in its first full year in HSBC, Losango’s full-
year profitability doubled compared with 2003.
Excluding Losango at constant exchange rates, the
pre-tax loss before goodwill amortisation improved
by 50 per cent on the previous year.
The integration of Losango progressed
extremely well. There was strong growth across the
product portfolios during the period, notably in store
loans and personal lending products. Good progress
was made in delivering anticipated operational
synergies. Plans to embed Losango branches within
the HSBC Brazil network are well advanced. In the
second half of the year, Losango benefited from the
acquisition of the two consumer finance portfolios
noted above.
Excluding the impact of the acquired businesses,
net interest income grew by 15 per cent, reflecting
good asset growth in Brazil, partly offset by reduced
spreads on credit cards in Argentina.
Auto finance loans in Brazil grew by 69 per
cent, reflecting the success of a number of initiatives
taken to enhance the distribution channels in the
branch network, and effective marketing promotions
and incentive campaigns. Market share increased
from 3.1 per cent to 4.1 per cent. The income benefit
arising from the increase in balances was only partly
offset by narrower spreads.
Competitive pricing was used to grow the cards
business to take advantage of strong growth in
consumer spending: this generated an 11 per cent
increase in balances. Growth in demand deposits was
augmented by a widening of spreads. However, the
benefit was partly offset by narrower spreads on
savings accounts, where rates are set by the Brazilian
Government, and on time deposits.
Other operating income rose by 32 per cent, of
which 17 per cent came from Losango and its
consumer lending acquisitions. The remaining 15 per
cent arose principally from growth in fee income in
Brazil driven by increased lending activity and
higher revenues from the life insurance business in
Argentina.
Excluding Losango, credit-related fee income
grew by 44 per cent in Brazil, as a result of growth
in customer lending and the introduction of a new
pricing structure. Greater use of a new automated
collection service and revised fee charging led to a
19 per cent increase in account service fees. Strong
growth in the cards business, where cards in
circulation rose by 30 per cent, generated a
significant increase in fee income of 27 per cent.
Higher consumer lending also contributed to an
overall increase in brokerage fees from insurance
operations.
Operating expenses, excluding goodwill
amortisation, increased by 38 per cent, of which
25 per cent was attributable to Losango and its
acquisitions. Marketing expenditure increased by
58 per cent as HSBC sought to build and reinforce
brand awareness in Brazil. Transactional taxes
increased by 26 per cent in line with operating
income growth. Prices also increased on the renewal
of a number of service contracts. Costs in Argentina
were 21 per cent higher, largely from increased staff
costs, notably pensions and labour claims, together
with higher marketing expenditure and regulatory
fees.
The provision for bad and doubtful debts
increased by 88 per cent or US$126 million, of
which US$107 million or 75 per cent arose in
Losango. The remaining increase was driven by the
growth in unsecured lending in Brazil. Credit quality
in both Brazil and Argentina was relatively stable
throughout 2004 as unemployment and inflation
rates declined and domestic economic growth
strengthened.
Commercial Banking reported pre-tax profits,
before goodwill amortisation, of US$165 million, an
increase of 62 per cent over 2003, due largely to
higher net interest income in Brazil.
Net interest income of US$234 million was
US$59 million or 34 per cent higher than in 2003. In
Brazil, overdraft balances increased by 44 per cent
as a result of strong growth in the demand for credit
and the introduction of a new pricing structure for
SME customers. This led to a 22 per cent increase in
income despite a marginal fall in spreads and this,
together with strong growth in Giro fácil, a
combined loan and overdraft product, contributed
US$26 million of additional income. Total
commercial lending balances increased by 58 per
cent to US$1.4 billion and, following product
development expenditure in 2003, lending backed by
discounted receivables increased by 81 per cent.
Spreads on deposit balances benefited from a
reduction in the compulsory deposit rate and lower
rural loans, while deposit balances increased by
29 per cent, contributing further to the increase in net
interest income. In Argentina, net interest income
declined as the low interest rate environment led to
reduced spreads on deposits.
Other operating income increased by 14 per cent
to US$136 million. In Brazil, the growth in lending
balances resulted in higher arrangement fee income,
while current account fees rose by 15 per cent
following the introduction of the new SME pricing
structure. Income in Argentina was in line with 2003.
Operating expenses of US$203 million were
12 per cent higher than in 2003. In Brazil, growth in
staff numbers in support of business expansion and
increased transactional tax costs contributed to a
17 per cent rise in costs. Marketing expenses also
increased reflecting the SME initiatives taken during
the year. In Argentina, cost control initiatives
resulted in a 7 per cent reduction in operating
expenses.
Provisions for bad and doubtful debts were
82 per cent lower than in 2003. Recoveries and
releases in Argentina reflected the improved
economic conditions. These were partly offset by
higher specific provisions raised in Brazil, in line
with growth in the small business portfolio.
Corporate, Investment Banking and Markets
reported pre-tax profit, before amortisation of
goodwill, of US$150 million, compared with a small
loss in 2003.
Net interest income of US$165 million
contrasted with a net interest expense in 2003. In
Brazil, sharp falls in interest rates in the latter part of
2003 and into early 2004 resulted in lower funding
costs, which enabled Global Markets to benefit from
large fixed rate positions taken in anticipation of
interest rate reductions. Argentina also benefited
from a significant decline in interest rates, as a lower
interest expense reflected the reduced cost of
funding non-performing loans.
The more stable political and interest rate
environment led to lower volatility in the value of
the Brazilian real and interest rates, resulting in
fewer opportunities for arbitrage. As a consequence,
other operating income declined, mainly through
reduced dealing profits in Brazil.
Operating expenses, excluding goodwill
amortisation, increased as transactional taxes rose in
line with improved revenues in Brazil. In addition,
bonuses increased in line with significantly higher
profits.
111
H S B C H O L D I N G S P L C
Financial Review (continued)
There was a small net release for bad and
doubtful debts compared with a net charge in 2003,
mainly due to lower provisions in the consumer
brands sector and higher releases in the energy and
utilities sector in Brazil.
Amounts written-off fixed assets fell, mainly
due to lower provisions for certain Argentine
government bonds which rose in value as the timing
and nature of the external debt exchange offer were
clarified.
Private Banking reported a pre-tax profit,
before goodwill amortisation, of US$1 million,
compared with a small loss of US$2 million in 2003.
An increase in net interest income was driven by
higher time deposits in Brazil, while operating
expenses, excluding goodwill amortisation, reduced
following a reorganisation of the business.
Other includes the ongoing impact of the
pesification in Argentina. In 2004, higher earnings
from compensation bonds, lower litigation
provisions and increased gains on the sale of
government securities were largely offset by lower
general provision releases.
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.
112
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,
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
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.
113
H S B C H O L D I N G S P L C
Financial Review (continued)
Within the Other customer group, there was a
US$113 million release of the special general
provision raised in respect of Argentina. This release
followed a period of improved market conditions
and collections within the lending portfolios.
Provisions for contingent liabilities and
commitments reflected court decisions (amparos)
relating to formally frozen US dollar denominated
customer deposits required to be settled at the
prevailing market rate.
114
895
–
358
4
69
431
1
–
47
–
–
47
%
0.2
76.2
Profit/(loss) excluding goodwill amortisation by customer group
Year ended 31 December 2004
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination
US$m
Other
US$m
South America
Net interest income ......................
Dividend income ............................
Net fees and commissions ..............
Dealing profits ...............................
Other income .................................
Other operating income ..................
Operating income .........................
1,326
234
–
119
5
12
136
370
165
–
66
41
22
129
294
4
–
12
–
1
13
17
57
2
(75)
–
131
58
115
–
–
–
–
(28)
(28)
(28)
Operating expenses excluding
goodwill amortisation1 ...............
Operating profit before
(1,010)
(203)
(135)
(16)
(108)
28
(1,444)
provisions1 ................................
316
167
Provisions for bad and doubtful
debts ..........................................
(270)
Provisions for contingent
liabilities and commitments ........
Amounts written off fixed asset
investments ................................
Operating profit1 ..........................
Share of operating profit in
associates2 ..................................
Gains on disposal of investments
and tangible fixed assets ............
Profit on ordinary activities
before tax3 ................................
Share of HSBC’s pre-tax profits3 ...
Cost:income ratio1 ..........................
Selected balance sheet data4
Loans and advances to
customers (net) ..........................
Total assets ....................................
Customer accounts .........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to banks (net) .
Debt securities, treasury bills and
other eligible bills ......................
Deposits by banks ..........................
Goodwill amortisation excluded:
1 from (1) above ...........................
2 from (2) above ...........................
3 from (3) above ...........................
4 Third party only.
(2)
–
–
165
–
–
165
%
0.8
54.9
159
2
(10)
(2)
149
–
1
150
%
0.8
45.9
1
–
–
–
1
–
–
1
7
1
39
(4)
43
1
37
81
%
–
94.1
%
0.5
93.9
2
34
11
340
1,474
109
US$m
US$m
US$m
US$m
US$m
3,211
5,796
3,458
1,526
2,408
2,229
23
–
23
1
–
1
1,854
7,685
5,150
1,779
3,004
549
5
–
5
Total
US$m
1,355
2
480
50
207
739
2,094
–
–
–
–
–
–
–
–
650
(269)
30
(6)
405
1
38
444
%
2.3
69.0
US$m
6,933
17,397
10,957
–
–
–
–
–
–
29
–
29
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 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
499
–
245
2
69
316
815
168
–
94
7
14
115
283
(51)
–
54
118
36
208
157
2
–
14
1
1
16
18
22
3
(69)
8
119
61
83
–
–
–
–
(38)
(38)
(38)
Total
US$m
640
3
338
136
201
678
1,318
(706)
(173)
(113)
(21)
(100)
38
(1,075)
109
110
44
(3)
(17)
(138)
(11)
10
(17)
(36)
–
9
(27)
%
(0.2)
86.6
–
–
99
–
–
99
%
0.7
61.1
(26)
–
(44)
(26)
1
1
(24)
%
(0.2)
72.0
US$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
1
–
–
(2)
–
–
(2)
%
0.0
116.7
US$m
16
70
61
116
(17)
(1)
81
–
(1)
80
%
0.6
120.5
US$m
211
1,406
312
–
–
–
–
–
–
–
–
243
(58)
(7)
(62)
116
1
9
126
%
0.9
81.6
US$m
4,982
12,549
6,945
–
–
–
1
–
1
11
–
11
South America
Net interest income/(expense) ......
Dividend income ............................
Net fees and commissions ..............
Dealing profits ...............................
Other income .................................
Other operating income ..................
Operating income .........................
Operating expenses excluding
goodwill amortisation1................
Operating profit/(loss)
before provisions1 .....................
Provisions for bad and doubtful
debts ..........................................
Provisions for contingent liabilities
and commitments .......................
Amounts written off fixed asset
investments ................................
Operating profit/(loss)1 ................
Share of operating profit in
associates2 ..................................
Gains/(losses) on disposal of
investments and tangible fixed
assets ..........................................
Profit/(loss) on ordinary activities
before tax3 .................................
Share of HSBC’s pre-tax profits3 ....
Cost:income ratio1 ..........................
Selected balance sheet data4
Loans and advances to
customers (net) ..........................
Total assets ....................................
Customer accounts .........................
The following assets and liabilities
were also significant to Corporate,
Investment Banking and Markets:
Loans and advances to banks (net) .
Debt securities, treasury bills and
other eligible bills ......................
Deposits by banks ..........................
Goodwill amortisation excluded:
1 from (1) above ...........................
2 from (2) above ...........................
3 from (3) above ...........................
4 Third party only.
116
Year ended 31 December 2002
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination
US$m
Other
US$m
539
–
218
10
11
239
778
126
–
87
9
4
100
226
(5)
1
67
120
(18)
170
165
6
–
12
(3)
–
9
15
(21)
14
(60)
11
135
100
79
–
–
–
–
(22)
(22)
(22)
Total
US$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
59
(15)
–
(22)
22
10
32
%
0.3
64.2
(2)
(7)
–
–
(9)
(42)
5
(80)
(13)
(130)
(3)
30
(12)
%
(0.1)
113.3
(100)
%
(1.0)
153.2
US$m
US$m
US$m
US$m
US$m
1,094
2,062
1,366
505
704
934
1,401
4,273
2,477
28
37
44
–
1,415
42
–
–
–
–
–
–
–
181
(117)
(99)
(36)
(71)
37
(34)
%
(0.3)
85.4
US$m
3,028
8,491
4,863
987
977
609
4
18
–
1
1
24
South America
Net interest income/(expense) ......
Dividend income ............................
Net fees and commissions ..............
Dealing profits/(losses) ..................
Other income/(expenses) ................
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 ................
Gains/(losses) on disposal of
investments and tangible fixed
assets ..........................................
Profit/(loss) on ordinary activities
before tax1 .................................
Share of HSBC’s pre-tax profits1 ...
Cost:income ratio1 ..........................
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 excluded:
1 from (1) above ...........................
2 Third party only.
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 243 to 356.
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 49 in the ‘Notes on the Financial
Statements’ on pages 322 to 356.
The accounting policies that are deemed critical
to HSBC’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(c) in the ‘Notes on the Financial Statements’
on pages 244 to 246.
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
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.
118
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 portfolio basis is applied to overdue
accounts in HSBC Finance Corporation’s consumer
portfolios and to the following portfolios in the rest
of HSBC:
•
•
•
low value, homogeneous small business
accounts in certain jurisdictions;
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:
•
•
•
•
•
•
•
•
•
the Group’s aggregate exposure to the customer
(including contingent liabilities);
the viability of the customer’s business model
and capability to trade successfully out of
financial difficulties and generate sufficient cash
flow to service 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;
the ability of the borrower to obtain and make
payments in the relevant foreign currency if
loans are not in local currency; and,
• where available, the secondary market price for
the debt.
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 HSBC Finance Corporation, 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
homogeneous 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 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 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(f) in the ‘Notes on the Financial
Statements’ on page 247.
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
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.
119
H S B C H O L D I N G S P L C
Financial Review (continued)
First, the cost of capital assigned to an
individual IGU and used to discount its future cash
flows 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 cash flow valuations of IGUs.
These valuations are sensitive to the cash flows in
the initial periods for which detailed forecasts are
available, and to assumptions regarding the long-
term sustainable growth rates of cash flows
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 cash flow
forecasts necessarily reflect management’s view of
future business prospects.
Where management’s judgement is that the
expected cash flows 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 securities and derivatives
HSBC’s accounting policy for these instruments is
described in Note 2 (d) and Note 2 (l) in the ‘Notes
on the Financial Statements’ on pages 246 and 248.
HSBC carries debt and equity securities and
derivatives held for trading purposes at fair or ‘mark-
to-market’ value. The mark-to-market of a financial
instrument is defined as the amount at which the
instrument could be exchanged in a current
transaction between willing parties, other than in a
forced or liquidation sale. 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 impairment takes into
account the fair value of the relevant security. Non-
trading derivatives (which are primarily interest rate
swaps) are accounted for on an accruals basis.
Changes in the value of securities and derivatives
held for trading purposes are reflected in ‘Dealing
profits’ and hence directly impact HSBC’s profit on
ordinary activities. Any impairment in the value of
debt and equity securities not held for trading
purposes is reported in ‘Amounts written of fixed
120
asset investments’ and hence reduces HSBC’s profit
on ordinary activities.
The majority of the Group’s financial
instruments held for trading purposes are valued
based on quoted market prices. Where quoted market
prices are not available, the fair value reflects
management’s assessment of the value of these
financial instruments. This assessment may look to a
valuation of comparable instruments for which an
independent price can be established or use a
discounted cash flow model (particularly for debt
securities and derivatives) or model the valuation of
complex instruments based on a components
approach where independent pricing is available for
the underlying components, including interest rate
yield curves, option volatilities and currency rates.
The main factors which management considers
when applying a cash flow model are:
•
•
the likelihood and expected timing of future
cash flows on the instrument. These cash flows
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 instruments management takes into
account the maturity, structure and rating of the
instrument to which the position held is being
compared.
When valuing instruments on a model basis
using the fair value of underlying components,
management additionally considers the need for
adjustments to take account of counterparty
creditworthiness, model uncertainty and the future
costs of servicing the portfolio. These adjustments
are based on defined policies which are applied
consistently across the Group.
For derivatives where market observable data
are not available, the initial increase in fair value
indicated by the valuation model, but based on
unobservable inputs, is not recognised immediately
in the profit and loss account. This amount is held
back and recognised over the life of the transaction
in a systematic manner where appropriate, or
released to the profit and loss account when the
inputs become observable, or, when the transaction
matures or is closed out.
For securities carried at amortised cost
impairment 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.
The table below summarises HSBC’s trading
portfolios by valuation methodology at 31 December
2004:
Fair value based on:
Quoted market prices ....................................................
Internal models with significant observable
market parameters .....................................................
Internal models with significant unobservable
market parameters .....................................................
Total ..............................................................................
Trading assets
Trading liabilities
Securities
purchased
%
Derivatives
%
Securities
sold
%
Derivatives
%
81.0
18.0
1.0
100.0
6.0
93.0
1.0
100.0
81.0
19.0
–
100.0
6.0
94.0
–
100.0
For a discussion of market risk management, see
Market Risk Management on pages 167 to 172.
including those relating to the use of the ‘fair value
option’ for financial liabilities.
UK GAAP compared with US GAAP
Net income
US GAAP ....................
UK GAAP ....................
Shareholders’ equity
US GAAP ....................
UK GAAP ....................
2004
US$m
12,506
11,840
2003
US$m
7,231
8,774
2002
US$m
4,900
6,239
90,082
86,623
80,251
74,473
55,831
51,765
Differences in net income and shareholders’ equity
are explained in Note 49 of the ‘Notes on the
Financial Statements on pages 322 to 356.
Future accounting developments
Transition to International Financial Reporting
Standards
The adoption of International Financial Reporting
Standards (‘IFRS’) from 1 January 2005 is the most
significant accounting development for HSBC.
The European Union (‘EU’) requires that listed
European companies prepare their 2005 financial
statements in accordance with EU-endorsed IFRS.
HSBC’s 2005 interim financial statements will,
therefore, be prepared in accordance with IFRS. The
European Union endorsement process for IFRS is
ongoing but the majority of standards are now
endorsed including IAS 32 ‘Financial Instruments:
Disclosure and Presentation’ and most of IAS 39
‘Financial Instruments: Recognition and
Measurement’ with the exception of the deletion of a
limited number of words and paragraphs in IAS 39
HSBC has substantially completed its transition
to IFRS. The process of refining systems and
processes in order to collect data on a fully IFRS-
compliant basis for 2005 reporting is well advanced.
On 9 December 2004, HSBC filed with the US
Securities and Exchange Commission a summary of
the applicable significant differences between UK
GAAP and IFRS. This should be referred to for
details of the major IFRS effects on HSBC Group,
and is available from http://www.hsbc.com/hsbc/
investor_centre/financial-results.
IFRS will also impact HSBC Holdings’
individual accounts. Investments in subsidiary
undertakings will be carried at cost rather than net
asset value, including attributable goodwill, adjusted
for shares held by subsidiaries in HSBC Holdings.
Under IFRS, in addition to the balance sheet, HSBC
Holdings will publish an income statement and other
primary financial statements.
HSBC currently intends to file 2004
comparative data and the 2005 opening balance
sheet on an IFRS basis in the second quarter of 2005.
FRS 27 ‘Life Assurance’ was issued by the UK
Accounting Standards Board (‘ASB’) in December
2004. This standard is effective under UK GAAP for
2005 reporting and thus should not ostensibly be
applicable to companies adopting IFRS for 2005.
However, FRS 27 adds to the requirements of IFRS
4 ‘Insurance contracts’ with regard to further
requirements in relation to measurement of realistic
liabilities and disclosure of capital position. HSBC
continues to assess the likely impact of this
accounting standard.
121
H S B C H O L D I N G S P L C
Financial Review (continued)
US GAAP
The Financial Accounting Standards Board
(‘FASB’) (US GAAP) has issued the following
accounting standards, which become fully effective
in future financial statements.
In December 2003, the American Institute of
Certified Public Accountants (‘AICPA’) released
Statement of Position 03-3, ‘Accounting for Certain
Loans or Debt Securities Acquired in a Transfer’
(‘SOP 03-3’). SOP 03-3 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 are attributable to
credit quality. SOP 03-3 is effective for loans
acquired in fiscal years beginning after 15 December
2004. Adoption is not expected to have a material
impact on the US GAAP information in HSBC’s
financial statements.
In March 2004, the FASB reached a consensus
on Emergent Issues Task Force (‘EITF’) 03-1, ‘The
Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments’. EITF 03-1
provides guidance for determining when an
investment is impaired and whether the impairment
is other than temporary. EITF 03-1 also incorporates
into its consensus the required disclosures about
unrealised losses on investments announced by the
EITF in late 2003 and adds new disclosure
requirements relating to cost-method investments.
The new disclosure requirements are effective for
annual reporting periods ending after June 15, 2004
and the new impairment accounting guidance was to
become effective for reporting periods beginning
after June 15, 2004. In September 2004, the FASB
delayed the effective date of EITF 03-1 for
measurement and recognition of impairment losses
until implementation guidance is issued. In
December 2004, the FASB decided to reconsider in
its entirety all guidance on disclosing, measuring and
recognising other-than-temporary impairments of
debt and equity securities and requires companies to
continue to comply with existing accounting
literature. Until the new guidance is finalised, the
impact on HSBC’s financial position and results of
operations cannot be determined.
SFAS 123 (revised 2004) ‘Share-Based
Payment’ (‘SFAS 123R’) was issued in December
2004 to replace SFAS 123 ‘Accounting for Stock
Based Compensation’ (‘SFAS 123’). SFAS 123R
requires a fair value method of accounting for stock-
based compensation plans. 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. HSBC had
already elected to follow the fair value method
encouraged by SFAS 123. Where annual bonuses are
awarded in restricted shares, and the employee must
remain with HSBC for a fixed period in order to
receive the shares, HSBC has, to date, interpreted the
service period as being the year to which the bonus
relates. HSBC has fully expensed the share award in
that year under US GAAP, consistent with the UK
GAAP treatment. Under SFAS 123R, the service
period is presumed to be the vesting period, i.e. the
period the employee must remain with HSBC.
Accordingly, for awards granted after the effective
date of SFAS 123R, the expense of such awards will
be spread forward over the vesting period. HSBC
will adopt SFAS 123R from 1 July 2005.
The effect of adopting this new accounting
treatment will be that 2005 bonuses paid in restricted
shares will be excluded from staff costs for 2005 and
instead will be expensed over the vesting period with
a corresponding increase in net income. The amount
of these awards is dependent on 2005 performance.
2004 bonuses that will be paid in restricted shares
were approximately US$130 million.
122
Average balance sheet and net
interest income
Average balances and the related interest are shown
for the domestic operations of HSBC’s principal
commercial banks by geographic region with all
other commercial banking and investment banking
balances and transactions included in ‘Other
operations’. Additional information on the basis of
preparation is set out in the notes on page 130.
Other operations ..........................................
11,201
131,006
3,637
Assets
Short-term funds and loans to banks
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank .....................
HSBC Private Banking
Holdings (Suisse) ........
CCF ..................................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ..................
The Hongkong and
Shanghai Banking
Corporation ..................
HSBC Bank Malaysia .......
HSBC Bank Middle East ..
North America HSBC Bank USA .............
HSBC Bank Canada .........
HSBC Markets Inc ...........
HSBC Mexico1 .................
South America Brazilian operations...........
HSBC Bank Argentina .....
Loans and advances to customers
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ......................
HSBC Private Banking
Holdings (Suisse) ........
CCF ..................................
HSBC Finance
Corporation1 ..................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ..................
The Hongkong and
Shanghai Banking
Corporation ..................
HSBC Bank Malaysia .......
HSBC Bank Middle East ..
North America HSBC Bank USA .............
HSBC Finance
Corporation1 ..................
HSBC Bank Canada .........
HSBC Markets Inc ...........
HSBC Mexico1 .................
South America Brazilian operations...........
HSBC Bank Argentina .....
Average
balance
US$m
2004
Interest
income Yield
%
US$m
Year ended 31 December
2003
Interest
income Yield
%
US$m
Average
balance
US$m
Average
balance
US$m
2002
Interest
income Yield
%
US$m
24,308
672
2.76
22,534
657
2.92
16,691
595
3.56
2,644
26,008
8,259
89
960
219
3.37
3.69
2.65
3,394
17,519
10,172
75
573
212
2.21
3.27
2.08
5,500
12,650
15,205
144
647
409
2.62
5.11
2.69
28,172
538
1.91
20,735
517
2.49
17,776
496
2.79
9,180
1,348
1,619
2,323
2,162
7,807
3,771
1,954
250
198
36
29
56
45
91
227
237
3
237
2.16
2.67
1.79
2.41
2.08
1.17
6.02
12.13
1.20
2.12
2.78
6,893
693
1,925
1,808
1,711
2,535
4,199
1,237
231
7,206
138
17
29
35
31
20
214
242
2
159
102,792
2,921
2.00
2.45
1.51
1.94
1.81
0.79
5.10
19.56
0.87
2.21
2.84
6,686
547
1,857
2,248
1,291
3,756
421
1,065
164
8,577
187
15
39
63
26
48
32
177
14
328
94,434
3,220
2.80
2.74
2.10
2.80
2.01
1.28
7.60
16.62
8.54
3.82
3.41
168,175
9,298
5.53
130,178
6,739
5.18
105,456
5,865
5.56
4,700
42,149
115
1,892
2.45
4.49
3,385
37,456
79
1,897
2.33
5.06
2,881
29,111
81
1,657
2.81
5.69
9,310
1,055
11.33
5,934
31,234
882
2.82
29,138
671
938
11.31
–
–
–
3.22
28,820
1,083
3.76
41,906
1,406
3.36
41,517
1,517
3.65
39,040
1,713
4.39
37,068
4,937
7,421
61,659
114,461
22,603
9,170
8,095
4,758
905
1,838
279
418
2,936
13,146
1,099
126
878
1,569
101
864
4.96
5.65
5.63
4.76
11.49
4.86
1.37
10.85
32.98
11.16
4.24
6.44
28,594
4,567
5,725
45,727
81,973
18,791
3,515
9,103
2,930
792
20,284
1,457
266
352
2,256
9,631
982
24
862
1,044
103
627
469,609
29,445
5.10
5.82
6.15
4.93
11.75
5.23
0.68
9.47
35.63
13.01
3.09
6.27
22,898
4,237
5,243
44,130
–
15,631
8,975
913
2,542
889
16,118
1,284
251
366
2,419
–
835
115
102
821
261
671
326,884
17,524
588,951
37,902
Other operations ..........................................
20,400
1 Yields annualised on the basis of the period of ownership in the year of acquisition.
5.61
5.92
6.98
5.48
–
5.34
1.28
11.17
32.30
29.36
4.16
5.36
123
H S B C H O L D I N G S P L C
Financial Review (continued)
Assets (continued)
Trading securities
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ......................
CCF ..................................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ...................
The Hongkong and
Shanghai Banking
Corporation ...................
HSBC Bank Malaysia ......
North America HSBC Bank USA .............
HSBC Bank Canada .........
HSBC Markets Inc ............
HSBC Mexico1 ..................
South America Brazilian operations ..........
HSBC Bank Argentina ......
Average
balance
US$m
2004
Interest
income Yield
%
US$m
Year ended 31 December
2003
Interest
income Yield
%
US$m
Average
balance
US$m
Average
balance
US$m
2002
Interest
income Yield
%
US$m
23,093
13,662
336
846
365
11
3.66
2.67
3.27
24,758
7,043
536
945
236
15
3.82
3.35
2.80
25,104
10,435
569
1,084
235
18
4.32
2.25
3.16
11,209
298
2.66
11,351
334
2.94
11,915
432
3.63
2,487
145
5,447
1,177
11,543
2,957
842
19
101
5
115
25
421
173
129
1
511
4.06
3.45
2.11
2.12
3.65
5.85
15.32
5.26
4.99
3.61
2,823
377
4,236
774
8,837
4,303
–
7
124
11
102
17
303
261
4.39
2.92
2.41
2.20
3.43
6.07
–
1
–
14.29
4,115
138
69,160
2,487
3.35
3.60
2,452
309
4,294
755
16,768
346
34
2
1,818
112
9
140
18
752
27
–
–
84
74,801
2,911
4.57
2.91
3.26
2.38
4.48
7.80
–
–
4.62
3.89
28,572
1,145
4.01
16,449
659
4.01
13,071
623
4.77
10,828
6,957
55
20,356
303
239
1
479
2.80
3.44
1.82
2.35
14,298
3,365
231
16,458
397
210
2
460
2.78
6.24
0.87
2.79
14,454
2,052
–
503
141
–
3.48
6.87
–
10,629
375
3.53
33,798
779
2.30
31,774
829
2.61
29,945
955
3.19
537
40
27
884
87
65
1
395
301
12
196
3.38
3.46
2.45
4.85
2.09
2.31
5.56
10.33
21.81
7.32
2.01
3.45
13,906
1,101
873
18,753
3,370
2,681
17
2,041
1,323
120
8,056
487
37
24
894
59
75
1
254
250
13
345
134,816
4,996
3.50
3.36
2.75
4.77
1.75
2.80
5.88
12.44
18.90
10.83
4.28
3.71
10,534
981
760
17,795
–
2,440
17
175
1,470
185
7,117
448
34
30
927
–
78
1
14
314
34
323
111,625
4,800
4.25
3.47
3.95
5.21
–
3.20
5.88
8.00
21.36
18.38
4.54
4.30
Other operations ..........................................
10,239
83,156
3,001
Investment securities
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ......................
HSBC Private Banking
Holdings (Suisse) ..........
CCF ..................................
HSBC Finance
Corporation1 ..................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ...................
The Hongkong and
Shanghai Banking
Corporation ...................
HSBC Bank Malaysia .......
HSBC Bank Middle East ..
15,902
1,156
1,104
North America HSBC Bank USA .............
18,213
HSBC Finance
Corporation1 ..................
HSBC Bank Canada .........
HSBC Markets Inc ............
HSBC Mexico1 ..................
South America Brazilian operations ..........
HSBC Bank Argentina ......
Other operations ..........................................
4,153
2,814
18
3,822
1,380
164
9,748
159,040
5,491
1 Yields annualised on the basis of the period of ownership in the year of acquisition.
124
Assets (continued)
Other interest-earning assets
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank .......................
HSBC Private Banking
Holdings (Suisse) ........
CCF ..................................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ..................
The Hongkong and
Shanghai Banking
Corporation ..................
HSBC Bank Malaysia .......
HSBC Bank Middle East ..
North America HSBC Bank USA .............
HSBC Finance
Corporation1 ..................
HSBC Bank Canada .........
HSBC Markets Inc ...........
HSBC Mexico1 .................
South America Brazilian operations ..........
HSBC Bank Argentina .....
Average
balance
US$m
2004
Interest
income Yield
%
US$m
Year ended 31 December
2003
Interest
income Yield
%
US$m
Average
balance
US$m
Average
balance
US$m
2002
Interest
income Yield
%
US$m
8,522
7,611
7,534
701
351
4.12
6,190
173
2.79
10,384
198
1.91
146
63
10
1.92
0.84
1.43
5,420
3,276
1,097
102
34
25
1.88
1.04
2.28
3,964
2,701
1,158
119
56
33
3.00
2.07
2.85
16,927
316
1.87
12,680
264
2.08
9,128
238
2.61
5,697
153
200
784
651
234
683
336
284
30
117
1
11
26
63
8
12
5
36
–
2.05
0.65
5.50
3.32
9.68
3.42
1.76
1.49
12.68
–
4,511
22
491
371
484
170
159
74
162
44
81
1
9
17
23
10
4
3
27
2
1.80
4.55
1.83
4.58
4.75
5.88
2.52
4.05
16.67
4.55
4,349
25
744
320
–
1
64
–
196
53
87
1
17
24
2.00
4.00
2.28
7.50
–
–
1 100.00
3.13
2
–
–
24
6
12.24
11.32
Other operations ..........................................
(48,195)
(993)
(33,113)
(656)
(32,082)
(666)
2,152
172
7.99
2,038
119
5.84
1,005
140
13.93
Total interest-earning assets
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ......................
HSBC Private Banking
Holdings (Suisse) .........
CCF ..................................
HSBC Finance
Corporation1 ..................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ..................
The Hongkong and
Shanghai Banking
Corporation ..................
HSBC Bank Malaysia .......
HSBC Bank Middle East ..
252,670
12,312
4.87
200,109
9,173
4.58
170,706
8,365
4.90
25,783
96,310
653
3,519
2.53
3.65
26,497
68,659
653
2,950
2.46
4.30
26,799
56,949
847
2,736
3.16
4.80
9,365
1,056
11.28
6,165
673
10.92
–
–
–
60,886
1,601
2.63
57,401
1,650
2.87
56,381
1,918
3.40
132,012
3,337
2.53
118,057
3,461
2.93
107,804
3,834
3.56
North America HSBC Bank USA .............
88,426
HSBC Finance
Corporation1 ..................
HSBC Bank Canada .........
HSBC Markets Inc ...........
HSBC Mexico1 .................
South America Brazilian operations ..........
HSBC Bank Argentina .....
Other operations ..........................................
119,265
28,990
29,221
18,981
9,218
1,368
3,393
70,334
7,739
10,344
2,791
361
485
4,017
13,296
1,242
651
1,678
2,272
117
3.97
4.66
4.69
4.54
11.15
4.28
2.23
8.84
24.65
8.55
815
24.02
56,727
6,760
9,014
70,895
85,827
24,127
15,063
19,720
5,652
1,194
6,548
2,287
332
414
3,304
9,713
1,115
352
1,594
1,563
121
613
4.03
4.91
4.59
4.66
11.32
4.62
2.34
8.08
27.65
10.13
9.36
5.13
46,919
6,099
8,604
68,787
–
20,118
29,580
1,855
5,307
1,293
1,548
2,118
310
452
3,573
–
958
918
175
4.51
5.08
5.25
5.19
–
4.76
3.10
9.43
1,336
315
25.17
24.36
740
47.80
608,749
28,595
4.70
Summary
964,305
50,203
5.21
778,415
39,968
Total interest-earning assets ........................
Provisions for bad and doubtful debts .........
Non-interest earning assets .........................
964,305
(12,992)
218,143
50,203
5.21
39,968
5.13
778,415
(12,816)
192,251
28,595
4.70
608,749
(7,809)
132,227
Total assets and interest income .................. 1,169,456
50,203
4.29
957,850
39,968
4.17
733,167
28,595
3.90
1 Yields annualised on the basis of the period of ownership in the year of acquisition.
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
Rest of Asia-
Pacific
HSBC Bank ......................
HSBC Private Banking
Holdings (Suisse) ..........
CCF ..................................
HSBC Finance
Corporation ..................
Hang Seng Bank ................
The Hongkong and
Shanghai Banking
Corporation ...................
The Hongkong and
Shanghai Banking
Corporation ...................
HSBC Bank Malaysia .......
HSBC Bank Middle East ..
North America HSBC Bank USA .............
HSBC Finance
Corporation ...................
HSBC Bank Canada .........
HSBC Markets Inc ............
HSBC Mexico ...................
South America Brazilian operations ..........
HSBC Bank Argentina ......
Other operations (including consolidation
adjustments) ............................................
2004
%
27.5
2.4
10.5
1.0
5.6
15.9
6.9
0.7
1.0
9.4
11.6
2.6
3.5
1.8
1.0
0.1
(1.5)
100.0
Year ended 31 December
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
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
100.0
126
Other operations ..........................................
6,201
128
76,829
1,541
Liabilities and shareholders’ funds
Deposits by banks1
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ......................
HSBC Private Banking
Holdings (Suisse) ..........
CCF ..................................
HSBC Finance
Corporation2 ..................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ..................
The Hongkong and
Shanghai Banking
Corporation ..................
HSBC Bank Malaysia .......
HSBC Bank Middle East ..
North America HSBC Bank USA .............
HSBC Bank Canada .........
HSBC Markets Inc ...........
HSBC Mexico2 .................
South America Brazilian operations ..........
HSBC Bank Argentina .....
Customer accounts1
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ......................
HSBC Private Banking
Holdings (Suisse) .........
CCF ..................................
HSBC Finance
Corporation2 ..................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ..................
The Hongkong and
Shanghai Banking
Corporation ..................
HSBC Bank Malaysia .......
HSBC Bank Middle East ..
North America HSBC Bank USA .............
HSBC Bank Canada .........
HSBC Markets Inc ...........
HSBC Mexico2 .................
South America Brazilian operations ..........
HSBC Bank Argentina .....
Average
balance
US$m
2004
Interest
expense
US$m
Cost
%
Year ended 31 December
2003
Interest
expense
US$m
Average
balance
US$m
Cost
%
Average
balance
US$m
2002
Interest
expense
US$m
Cost
%
27,687
415
1.50
19,898
404
2.03
18,259
376
2.06
1,446
22,161
243
685
27
525
2
14
1.87
2.37
0.82
2.04
1,865
12,594
734
161
28
398
31
2
1.50
3.16
4.22
1.24
1,976
13,456
–
83
60
596
–
1
3.04
4.43
–
1.20
3,139
39
1.24
2,358
28
1.19
2,066
35
1.69
3,505
98
1,104
3,833
392
4,367
914
914
140
95
2
23
74
8
76
48
57
8
2.71
2.04
2.08
1.93
2.04
1.74
5.25
6.24
5.71
2.06
2.01
2,599
121
764
3,915
501
2,191
1,039
527
176
5,346
81
3
16
39
11
22
59
93
14
80
54,789
1,309
3.12
2.48
2.09
1.00
2.20
1.00
5.68
17.65
7.95
1.50
2.39
2,683
113
531
4,216
679
3,190
213
693
164
103
3
15
46
26
44
11
79
69
4,772
122
53,094
1,586
3.84
2.65
2.82
1.09
3.83
1.38
5.16
11.40
42.07
2.56
2.99
170,262
4,010
2.36
134,421
2,741
2.04
106,301
2,551
2.40
17,339
22,072
87
50,948
377
575
2
291
2.17
2.61
2.30
0.57
19,238
17,435
412
49,492
401
606
28
289
2.08
3.48
6.80
0.58
20,476
11,841
–
549
593
–
2.68
5.01
–
48,074
448
0.93
92,586
392
0.42
86,836
379
0.44
82,535
616
0.75
42,625
5,744
5,978
52,813
18,192
11,544
11,157
5,786
898
891
151
60
680
351
165
377
842
27
741
2.09
2.63
1.00
1.29
1.93
1.43
3.38
14.55
3.01
1.68
1.80
35,933
4,796
5,863
44,986
15,775
4,915
11,542
3,888
778
29,130
719
142
61
553
326
52
408
755
57
510
465,440
8,027
2.00
2.96
1.04
1.23
2.07
1.06
3.53
19.42
7.33
1.75
1.72
29,965
4,347
6,176
45,438
13,708
6,972
1,032
3,066
757
25,917
705
131
106
860
257
112
51
491
217
653
406,605
8,340
2.35
3.01
1.72
1.89
1.87
1.61
4.94
16.01
28.67
2.52
2.05
Other operations ..........................................
44,054
552,085
9,932
1 Further analysis is given on pages 180 and 181.
2 Costs annualised on the basis of the period of ownership in the year of acquisition.
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
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ......................
CCF ..................................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ...................
The Hongkong and
Shanghai Banking
Corporation ...................
HSBC Bank Malaysia .......
North America HSBC Bank USA .............
HSBC Finance
Corporation2 ..................
HSBC Bank Canada .........
HSBC Mexico2 .................
South America Brazilian operations ..........
HSBC Bank Argentina ......
Average
balance
US$m
2004
Interest
expense
US$m
12,427
9,885
1,266
424
214
30
Cost
%
3.41
2.16
2.37
Year ended 31 December
2003
Interest
expense
US$m
Average
balance
US$m
Cost
%
Average
balance
US$m
2002
Interest
expense
US$m
5,417
5,739
1,399
151
162
36
2.79
2.82
2.57
2,088
4,856
2,150
83
201
65
Cost
%
3.98
4.14
3.02
9,565
357
3.73
8,257
321
3.89
5,331
258
4.84
4,489
261
1,755
11,441
4,028
3,566
102
–
183
8
26
188
89
134
15
–
106
4.08
3.07
1.48
1.64
2.21
3.76
14.71
–
5.22
2.92
3,163
263
1,604
5,522
3,132
4,052
63
–
1,479
121
8
26
60
84
169
12
–
59
40,090
1,209
3.83
3.04
1.62
1.09
2.68
4.17
19.05
–
3.99
3.02
1,659
148
2,286
–
2,168
318
53
105
763
69
7
62
–
56
22
14
7
16
21,925
860
4.16
4.73
2.71
–
2.58
6.92
26.42
6.67
2.10
3.92
Other operations ..........................................
2,029
60,814
1,774
Loan capital
Europe
HSBC Bank .......................
CCF ..................................
HSBC Finance
Corporation2 ..................
10,523
6,365
579
219
5.50
3.44
8,790
5,686
466
187
5.30
3.29
7,053
3,941
3,485
161
4.62
2,230
111
4.98
–
463
164
–
6.56
4.16
–
Hong Kong
The Hongkong and
Rest of Asia-
Pacific
Shanghai Banking
Corporation ...................
The Hongkong and
Shanghai Banking
Corporation ...................
North America HSBC Bank USA .............
713
9,370
HSBC Finance
Corporation2 ..................
HSBC Bank Canada .........
HSBC Mexico2 .................
101,269
1,967
–
South America Brazilian operations ..........
HSBC Bank Argentina ......
Other operations ..........................................
258
95
104
1,632
80
4.90
1,796
80
4.45
1,786
83
4.65
42
350
2,751
76
–
5.89
3.74
2.72
3.86
–
49
7
18.99
7.37
270
3,284
71,346
1,288
188
205
353
(22) (21.15)
9,324
17
178
1,779
66
13
46
30
133
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
12
214
–
65
2
44
62
7,148
167
25,098
1,276
7.95
6.30
–
6.41
10.53
16.24
19.44
2.34
5.08
1 Further analysis is given on page 182.
2 Costs annualised on the basis of the period of ownership in the year of acquisition.
135,781
4,292
3.16
104,760
3,106
128
Liabilities and shareholders’ funds
(continued)
Other interest bearing liabilities
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ......................
HSBC Private Banking
Holdings (Suisse) ........
CCF ..................................
HSBC Finance
Corporation1 ..................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ..................
The Hongkong and
Shanghai Banking
Corporation ..................
HSBC Bank Malaysia .......
HSBC Bank Middle East ..
North America HSBC Bank USA .............
HSBC Finance
Corporation1 ..................
HSBC Bank Canada .........
HSBC Markets Inc ...........
HSBC Mexico1 .................
South America Brazilian operations ..........
HSBC Bank Argentina .....
Average
balance
US$m
2004
Interest
expense
US$m
Cost
%
Year ended 31 December
2003
Interest
expense
US$m
Average
balance
US$m
Cost
%
Average
balance
US$m
2002
Interest
expense
US$m
Cost
%
24,557
736
3.00
21,502
213
0.99
21,006
253
1.20
2,505
20,118
4,337
1,161
38
602
260
22
1.52
2.99
5.99
1.89
1,509
12,994
1,359
639
26
327
65
15
1.72
2.52
4.78
2.35
1,645
10,725
–
684
37
154
–
19
2.25
1.44
–
2.78
10,495
170
1.62
8,178
136
1.66
7,753
179
2.31
13,175
195
407
12,618
263
937
12,652
195
566
320
227
2
13
324
25
20
460
15
47
4
1.72
1.03
3.19
2.57
9.51
2.13
3.64
7.69
8.30
1.25
10,732
246
335
10,317
2,077
691
7,680
–
296
346
202
3
9
240
7
16
276
–
48
16
1.88
1.22
2.69
2.33
0.34
2.32
3.59
–
16.22
4.62
8,744
51
179
9,545
–
415
19,141
–
467
299
195
1
6
280
–
15
832
–
2.23
1.96
3.35
2.93
–
3.61
4.35
–
79
(5)
16.92
(1.67)
Other operations ..........................................
(58,260)
(1,325)
(49,719)
(880)
(47,127)
(972)
46,241
1,640
3.55
29,182
719
2.46
33,527
1,073
3.20
Total interest bearing liabilities
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ......................
HSBC Private Banking
Holdings (Suisse) ........
CCF ..................................
HSBC Finance
Corporation1 ..................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ..................
The Hongkong and
Shanghai Banking
Corporation ..................
HSBC Bank Malaysia .......
HSBC Bank Middle East ..
North America HSBC Bank USA .............
HSBC Finance
Corporation1 ..................
HSBC Bank Canada .........
HSBC Markets Inc ...........
HSBC Mexico1 .................
South America Brazilian operations ..........
HSBC Bank Argentina .....
245,456
6,164
2.51
190,028
3,975
2.09
154,707
3,726
2.41
21,290
80,601
8,152
54,060
442
2,135
425
357
2.08
2.65
5.21
0.66
22,612
54,448
4,735
51,691
455
1,680
235
342
2.01
3.09
4.96
0.66
24,097
44,819
646
1,708
2.68
3.81
–
–
–
50,991
533
1.05
117,417
1,038
0.88
107,425
944
0.88
99,471
1,171
1.18
64,507
6,298
7,489
80,389
112,973
25,516
28,563
15,832
7,626
1,453
1,438
163
96
1,454
2,964
544
701
574
1,010
46
2.23
2.59
1.28
1.81
2.62
2.13
2.45
3.63
13.24
3.17
52,697
5,426
6,962
64,106
78,945
21,387
14,786
16,821
4,979
1,653
2.16
2.88
1.24
1.62
2.34
2.35
2.37
3.86
19.16
7.08
1,140
156
86
1,036
1,846
503
350
649
954
117
(98)
43,202
4,659
6,886
64,881
–
17,984
29,303
1,582
4,550
1,644
1,084
142
127
1,462
–
419
988
86
707
350
2.51
3.05
1.84
2.25
–
2.33
3.37
5.44
15.54
21.29
(8,527)
(14)
Other operations...........................................
(5,872)
(372)
(4,440)
Summary
871,750
19,179
2.20
694,261
14,370
2.07
540,249
13,135
2.43
Total interest-bearing liabilities ..................
Non interest-bearing current accounts .........
Shareholders’ funds & other non interest-
871,750
56,141
bearing liabilities ....................................
241,565
19,179
2.20
694,261
44,233
219,356
14,370
2.07
540,249
40,220
152,698
13,135
2.43
Total liabilities & interest expense .............. 1,169,456
19,179
1.64
957,850
14,370
1.50
733,167
13,135
1.79
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)
Net interest margin
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank .......................
HSBC Private Banking
Holdings (Suisse) .........
CCF ..................................
HSBC Finance
Corporation1 ..................
Hang Seng Bank ...............
The Hongkong and
Shanghai Banking
Corporation ...................
The Hongkong and
Shanghai Banking
Corporation ...................
HSBC Bank Malaysia .......
HSBC Bank Middle East ...
North America HSBC Bank USA ............
HSBC Finance
Corporation1 ..................
HSBC Bank Canada .........
HSBC Markets Inc ............
HSBC Mexico1 ..................
South America Brazilian operations ..........
HSBC Bank Argentina ......
Other operations2 .........................................
2004
%
2.43
0.82
1.44
6.74
2.04
1.74
1.92
2.56
3.76
2.90
8.66
2.41
(0.17)
5.82
13.69
5.19
2.20
3.22
Year ended 31 December
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
1.96
3.29
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)
1.86
2.54
1 Net interest margins annualised on the basis of the period of ownership in the year of acquisition.
2 Excludes eliminations (see note (iii)).
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.
130
Analysis of changes in net interest income
The following table allocates changes in net interest
income between volume and rate for 2004 compared
with 2003, and for 2003 compared with 2002.
Changes due to a combination of volume and rate are
allocated to rate.
Interest income
Short-term funds and loans to banks
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ................................
HSBC Private Banking Holdings
(Suisse) ..................................
CCF ............................................
Hang Seng Bank .........................
The Hongkong and Shanghai
Banking Corporation ..............
The Hongkong and Shanghai
Banking Corporation ..............
HSBC Bank Malaysia..................
HSBC Bank Middle East ............
North America HSBC Bank USA .......................
HSBC Bank Canada ...................
HSBC Markets Inc .....................
HSBC Mexico ............................
South America Brazilian operations ....................
HSBC Bank Argentina ...............
Other operations ....................................................
Loans and advances to customers
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ................................
HSBC Private Banking Holdings
(Suisse) ...................................
CCF ............................................
HSBC Finance Corporation ........
Hang Seng Bank .........................
The Hongkong and Shanghai
Banking Corporation ................
The Hongkong and Shanghai
Banking Corporation ................
HSBC Bank Malaysia..................
HSBC Bank Middle East ............
North America HSBC Bank USA .......................
HSBC Finance Corporation ........
HSBC Bank Canada ...................
HSBC Markets Inc .....................
HSBC Mexico ............................
South America Brazilian operations ....................
HSBC Bank Argentina ..............
Other operations ....................................................
2004 compared with 2003
Increase/(decrease)
2004 Volume
Rate
US$m US$m US$m
2003 compared with 2002
Increase/(decrease)
2003 Volume
US$m
US$m
Rate
US$m
672
89
960
219
538
198
36
29
56
45
91
227
237
3
237
3,637
52
(37)
(17)
278
(40)
31
109
47
185
(164)
46
16
(5)
10
8
42
(22)
140
–
88
802
14
3
5
11
6
29
35
(145)
1
(10)
(86)
657
75
573
212
517
138
17
29
35
31
20
214
242
2
159
2,921
208
(146)
(55)
249
(135)
(14)
(323)
(62)
83
(62)
6
4
1
(12)
8
(16)
287
29
6
(52)
285
(55)
(2)
(11)
(16)
(3)
(12)
(105)
36
(18)
(117)
(584)
9,298
1,967
592
6,739
1,375
(501)
115
1,892
1,055
882
1,406
1,838
279
418
2,936
13,146
1,099
126
878
1,569
101
864
31
238
382
67
14
432
22
104
786
3,817
199
39
(95)
651
15
4
37,902
7,483
5
(243)
2
(123)
(125)
(51)
(9)
(38)
(106)
(302)
(82)
63
111
(126)
(17)
233
974
79
1,897
671
938
1,517
1,457
266
352
2,256
9,631
982
24
862
1,044
103
627
14
475
671
12
109
320
20
34
88
9,631
169
(70)
915
125
(28)
173
(16)
(235)
–
(157)
(305)
(147)
(5)
(48)
(251)
–
(22)
(21)
(155)
98
(130)
(217)
2002
US$m
595
144
647
409
496
187
15
39
63
26
48
32
177
14
328
3,220
5,865
81
1,657
–
1,083
1,713
1,284
251
366
2,419
–
835
115
102
821
261
671
29,445
13,240
(1,319)
17,524
131
2004 compared with 2003
Increase/(decrease)
2004 Volume
Rate
US$m US$m US$m
2003 compared with 2002
Increase/(decrease)
2003 Volume
US$m
US$m
Rate
US$m
846
365
11
298
101
5
115
25
421
173
129
1
511
3,001
1,145
303
239
1
479
779
537
40
27
884
87
65
1
395
301
12
196
(64)
222
(6)
(4)
(15)
(7)
29
9
93
(82)
–
2
205
503
486
(96)
224
(2)
109
53
70
2
6
(26)
14
4
–
222
11
5
72
5,491
898
(35)
(93)
2
(32)
(8)
1
(16)
(1)
25
(6)
129
(2)
168
11
–
2
(195)
1
(90)
(103)
(20)
1
(3)
16
14
(14)
–
(81)
40
(6)
(221)
(403)
945
236
15
334
124
11
102
17
303
261
–
1
(15)
(76)
(1)
(20)
17
2
(2)
–
(355)
309
–
–
(124)
77
(2)
(78)
(5)
–
(36)
(1)
(94)
(75)
–
1
138
106
(52)
659
397
210
2
460
829
487
37
24
894
59
75
1
254
250
13
345
4,996
161
(125)
(5)
90
2
206
(101)
(21)
–
(121)
58
(184)
(104)
(1)
(10)
(83)
–
(11)
–
91
(33)
(9)
(21)
143
4
4
50
59
8
–
149
(31)
(12)
43
903
2002
US$m
1,084
235
18
432
112
9
140
18
752
27
–
–
84
623
503
141
–
375
955
448
34
30
927
–
78
1
14
314
34
323
2,487
(219)
(205)
2,911
(707)
4,800
H S B C H O L D I N G S P L C
Financial Review (continued)
Interest income (continued)
Trading securities
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ................................
CCF ............................................
Hang Seng Bank .........................
The Hongkong and Shanghai
Banking Corporation ..............
The Hongkong and Shanghai
Banking Corporation ..............
HSBC Bank Malaysia .................
North America HSBC Bank USA. .......................
HSBC Bank Canada ...................
HSBC Markets Inc ......................
HSBC Mexico .............................
South America Brazilian operations ....................
HSBC Bank Argentina ................
Other operations ....................................................
Investment securities
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ................................
HSBC Private Banking Holdings
(Suisse) ...................................
CCF ............................................
HSBC Finance Corporation ........
Hang Seng Bank .........................
The Hongkong and Shanghai
Banking Corporation ..............
The Hongkong and Shanghai
Banking Corporation ..............
HSBC Bank Malaysia .................
HSBC Bank Middle East ............
North America HSBC Bank USA .......................
HSBC Finance Corporation ........
HSBC Bank Canada ...................
HSBC Markets Inc ......................
HSBC Mexico .............................
South America Brazilian operations ....................
HSBC Bank Argentina ................
Other operations ....................................................
132
Interest expense
Deposits by banks
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ................................
HSBC Private Banking Holdings
(Suisse) ...................................
CCF ............................................
HSBC Finance Corporation ........
Hang Seng Bank .........................
The Hongkong and Shanghai
Banking Corporation ..............
The Hongkong and Shanghai
Banking Corporation ..............
HSBC Bank Malaysia .................
HSBC Bank Middle East ............
North America HSBC USA Inc. .........................
HSBC Bank Canada ...................
HSBC Markets Inc .....................
HSBC Mexico ............................
South America Brazilian operations ....................
HSBC Bank Argentina ...............
Other operations ....................................................
Customer accounts
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ................................
HSBC Private Banking Holdings
(Suisse) ...................................
CCF ............................................
HSBC Finance Corporation ........
Hang Seng Bank .........................
The Hongkong and Shanghai
Banking Corporation ..............
The Hongkong and Shanghai
Banking Corporation ..............
HSBC Bank Malaysia .................
HSBC Bank Middle East ............
North America HSBC USA Inc. ..........................
HSBC Bank Canada ...................
HSBC Markets Inc .....................
HSBC Mexico ............................
South America Brazilian operations ....................
HSBC Bank Argentina ...............
Other operations ....................................................
2004 compared with 2003
Increase/(decrease)
2004 Volume
Rate
US$m US$m US$m
2003 compared with 2002
Increase/(decrease)
2003 Volume
US$m
US$m
Rate
US$m
415
27
525
2
14
39
95
2
23
74
8
76
48
57
8
128
1,541
158
(147)
(6)
302
(21)
5
(175)
(8)
7
9
28
(1)
7
(1)
(2)
22
(7)
68
(3)
13
5
2
(14)
–
–
36
(1)
32
(4)
(104)
(3)
35
404
28
398
31
2
28
81
3
16
39
11
22
59
93
14
80
527
(295)
1,309
19
(3)
(38)
31
1
5
(3)
–
7
(3)
(7)
(14)
43
(19)
5
15
57
9
(29)
(160)
–
–
(12)
(19)
–
(6)
(4)
(8)
(8)
5
33
(60)
(57)
(334)
2002
US$m
376
60
596
–
1
35
103
3
15
46
26
44
11
79
69
122
1,586
4,010
731
538
2,741
633
(443)
2,551
377
575
2
291
392
891
151
60
680
351
165
377
842
27
741
(40)
161
(22)
9
25
134
28
1
96
50
70
(14)
369
9
261
9,932
1,494
16
(192)
(4)
(7)
(12)
38
(19)
(2)
31
(25)
43
(17)
(282)
(39)
(30)
411
401
606
28
289
379
719
142
61
553
326
52
408
755
57
510
(33)
280
28
13
32
140
14
(5)
(9)
39
(33)
519
132
6
81
(115)
(267)
–
(172)
(269)
(126)
(3)
(40)
(298)
30
(27)
(162)
132
(166)
(224)
549
593
–
448
616
705
131
106
860
257
112
51
491
217
653
8,027
1,202
(1,515)
8,340
133
H S B C H O L D I N G S P L C
Financial Review (continued)
Interest expense (continued)
CDs and other money market instruments
Europe
Hong Kong
Rest of Asia-
Pacific
HSBC Bank ................................
CCF ............................................
Hang Seng Bank .........................
The Hongkong and Shanghai
Banking Corporation ..............
The Hongkong and Shanghai
Banking Corporation ..............
HSBC Bank Malaysia .................
North America HSBC USA Inc ...........................
HSBC Finance Corporation ........
HSBC Bank Canada ...................
HSBC Mexico .............................
South America Brazilian operations ....................
HSBC Bank Argentina ................
Other operations ....................................................
Loan capital
Europe
HSBC Bank ................................
CCF ............................................
HSBC Finance Corporation ........
Hong Kong
The Hongkong and Shanghai
Banking Corporation ..............
Rest of Asia-
Pacific
The Hongkong and Shanghai
Banking Corporation ..............
North America HSBC USA Inc ...........................
HSBC Finance Corporation ........
HSBC Bank Canada ...................
HSBC Mexico .............................
South America Brazilian operations ....................
HSBC Bank Argentina ................
2004 compared with 2003
Increase/(decrease)
2004 Volume
Rate
US$m US$m US$m
2003 compared with 2002
Increase/(decrease)
2003 Volume
US$m
US$m
Rate
US$m
2002
US$m
424
214
30
357
183
8
26
188
89
134
15
–
106
1,774
579
219
161
80
42
350
2,751
76
–
49
7
195
117
(3)
51
51
–
2
64
24
(20)
7
–
22
625
92
22
62
78
(65)
(3)
(15)
11
–
(2)
64
(19)
(15)
(4)
–
25
(60)
21
10
(12)
(7)
7
28
330
746
35
(13)
12
(22)
(3)
(158)
226
(25)
–
(9)
(1)
(23)
266
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
(207)
(111)
(50)
–
(3)
(4)
(29)
–
(17)
(7)
13
(39)
(85)
83
201
65
258
69
7
62
–
56
22
14
7
16
860
463
164
–
83
12
214
–
65
2
44
62
167
3,106
2,199
(369)
1,276
Other operations ....................................................
(22)
(132)
4,292
920
134
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 country and
cross-border risk), liquidity risk, market risk,
reputational risk and operational risk. Market risk
includes foreign exchange, interest rate and equity
price risks.
HSBC’s risk management policies are 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, conservative and constructive culture of
control, lie at the heart of HSBC’s management of
risk.
The Group Management Board, under authority
delegated by the Board of Directors, formulates high
level Group 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 worldwide. 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
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 approach.
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 standards, regularly
update them and disseminate them 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 originated by HSBC’s operating
companies in excess of designated limits, prior
to the facilities being committed to customers.
Operating companies may not confirm credit
approval without this concurrence. Renewals
and reviews of commercial non-bank facilities
over designated levels are subject to the same
process.
• Controlling exposures to banks and other
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 globally 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 case-by-case.
• Controlling exposures to selected industries.
Group Credit and Risk controls HSBC’s
exposure to the shipping and aviation sectors,
and closely monitors exposures to other
industries such as telecommunications,
automobiles, insurance and real estate. Where
necessary, restrictions are imposed on new
135
H S B C H O L D I N G S P L C
Financial Review (continued)
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. Historically,
HSBC’s grading framework involved 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. A
more sophisticated grading framework, based on
default probability and loss estimates and
comprising up to 22 categories, is being
progressively implemented across the HSBC
Group and is already operative in several major
business units. This new approach will
increasingly allow a more granular analysis of
risk trends. 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. Although
automated grading processes are increasingly in
use for the larger facilities, ultimate
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.
• Reviewing the performance 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, the Risk Management Meeting, the
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, automobiles,
insurance, aviation and shipping, as well as
ad hoc reviews;
136
−
−
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 credit assets. A systems-based credit
application process for bank lending is
operational in all jurisdictions and a common
electronic corporate credit application system is
deployed in all of the Group’s major businesses.
• Providing advice and guidance to HSBC’s
operating companies in order to promote best
practice throughout the Group on credit-related
matters such as:
−
−
−
regulatory developments;
implementing environmental and social
responsibility policies;
scoring and portfolio provisioning;
− new products;
−
−
training courses; and
credit-related reporting.
• Acting on behalf of HSBC Holdings as the
primary interface for credit-related issues with
external parties including the Bank of England,
the UK FSA, rating agencies, corporate analysts,
trade associations and counterparts in the
world’s major banks and non-bank financial
institutions.
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 Risk
Officer (or Chief Credit Officer) who reports to the
local Chief Executive Officer on credit-related
issues. All Chief Credit/Risk Officers have a
functional reporting line to the Group General
Manager, Group Credit and Risk.
Each operating company is responsible for the
quality and performance of its credit portfolios and
for monitoring and controlling all credit risks in its
portfolios, including those subject to central
approval by Group Credit and Risk. This includes
managing its own risk concentrations by market
sector, geography and product. 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
thereby maximising recoveries for HSBC.
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
homogeneous 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’s policy that each operating company
make provision for bad and doubtful debts promptly
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
facilities to those borrowers and portfolio segments
classified below satisfactory grades. Amendments to
facility grades, where necessary, are required to be
undertaken promptly. Management also regularly
evaluates 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 to historical trends and
assessing the impact of current economic conditions.
Two types of provision are in place: specific and
general. These are discussed below.
Specific provisions
Specific provisions represent the quantification of
actual and inherent losses from homogeneous
portfolios of assets and individually identified
accounts. In addition, specific provisions for the
sovereign risk inherent in cross-border credit
exposures are established for certain countries.
Specific provisions are deducted from loans and
advances in the balance sheet.
Portfolios
Where homogeneous groups of assets are reviewed
on a portfolio basis, for example 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. 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 that they remain
appropriate.
• When the portfolio size is less than
US$20 million or when information is
insufficient or not sufficiently reliable for a roll
rate methodology to be adopted, the Group uses a
formulaic method which allocates progressively
higher loss rates in line with the period of time
through which a customer’s loan is overdue.
The Group intends to extend the use of the roll
rate methodologies to all homogeneous portfolios of
assets (for calculating specific provisions) as
information becomes available.
The portfolio approach is applied to accounts in
the following portfolios:
•
•
•
low value, homogeneous small business
accounts in certain jurisdictions;
residential mortgages less than 90 days overdue;
and
credit cards and other unsecured consumer
lending products.
137
H S B C H O L D I N G S P L C
Financial Review (continued)
These portfolio provisions are generally
reassessed monthly and charges for new provisions,
or releases of existing provisions, are calculated for
each separately identified portfolio.
Individually assessed accounts
Specific provisions on individually assessed
accounts are determined by an evaluation of the
exposures case-by-case. This procedure is applied to
all accounts that do not qualify for, or are not subject
to, a portfolio-based approach outlined above. 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 capability to trade successfully out of
financial difficulties and generate sufficient cash
flow to service 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;
the ability of the borrower to obtain and make
payments in the relevant foreign currency if
loans are not in local currency; and,
• where available, the secondary market price for
the debt.
Group policy requires a review of the level of
specific provisions on individual facilities above
materiality thresholds at least half-yearly, or more
regularly where individual circumstances require.
This will normally include a review of collateral held
(including re-confirmation 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
138
insolvency and specific market sectors are used. 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 the stability of the country
and its government, potential threats to security and
the quality and independence of the legal system.
Provisions are applied to all qualifying
exposures within these countries unless these
exposures:
•
•
•
are performing, trade-related and of less than
one year’s maturity;
are mitigated by acceptable security cover which
is, other than in exceptional cases, 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.
is legally sound; or
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 losses over a five-
year period.
In certain circumstances, economic conditions
are such that historical loss experience provides
insufficient evidence of the inherent loss in a given
portfolio. In 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 is
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
collectibility of principal or interest, or when
contractual payments of principal or interest are
90 days overdue. When a loan is designated as non-
performing, interest 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,
homogeneous 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 of set-off
•
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 first to the
repayment of outstanding indebtedness, with any
surplus used to recover specific provisions and then
suspended interest.
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 HSBC Finance, this period is
generally extended to 300 days overdue (270 days
for real estate secured products). There are no cases
where the charge-off period exceeds 360 days except
for the UK where certain consumer finance accounts
are still deemed collectible beyond this point. 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
means that HSBC’s reported levels of credit risk
elements and associated provisions are likely to be
higher than those of comparable US banks.
Restructuring of loans
Restructuring activity is designed to manage
customer relationships, maximise collection
opportunities and avoid foreclosure or repossession,
if possible. Following restructuring, an overdue
consumer account will normally be reset to current
status. Restructuring policies and practices are based
on indicators or criteria which, in the judgement of
local management, evidence the probability that
payment will continue. 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, the use of roll
rate methodologies for the calculation of provisions
results in the increased default propensity being
reflected in provisions.
139
H S B C H O L D I N G S P L C
Financial Review (continued)
Restructuring activity is used most commonly
Assets acquired
within consumer finance portfolios. The largest
concentration is domiciled in the US in HSBC
Finance Corporation. The majority of restructured
accounts relate to secured lending.
In addition to restructuring, HSBC’s consumer
lending businesses, principally HSBC Finance
Corporation’s, 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 re-designated
as delinquent.
At 31 December 2004, the total value of
accounts which have been either restructured or
subject to other account management techniques in
HSBC Finance was US$15 billion, representing 12
per cent of the HSBC Finance loan book, compared
with US$18 billion or some 15 per cent at 31
December 2003.
Gross loans and advances to customers
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$101.4 billion or 20
per cent, during 2004. On the same basis, personal
lending comprised 63 per cent of HSBC’s loan
portfolio and over 72 per cent of the growth in loans
in 2004 related to personal and consumer lending.
Overall, including the finance sector and
settlement accounts, personal lending represented 57
per cent of total advances to customers at
31 December 2004.
Personal
Residential mortgages ...................................................
Hong Kong Government Home Ownership Scheme .....
Other personal ...............................................................
Total personal ...............................................................
Corporate and commercial
Commercial, industrial and international trade .............
Commercial real estate ..................................................
Other property-related ...................................................
Government ..................................................................
Other commercial1 ........................................................
2003
US$m
165,464
6,290
134,145
305,899
85,668
35,088
17,140
9,590
44,030
Total corporate and commercial ....................................
191,516
Financial
Non-bank financial institutions .....................................
Settlement accounts ......................................................
Total financial ...............................................................
37,091
8,594
45,685
Total gross loans and advances to customers ................
543,100
Constant
currency
effect
US$m
5,634
(8)
2,935
8,561
4,686
1,596
584
223
2,325
9,414
1,878
267
2,145
20,120
Under-
lying
change
US$m
51,367
(880)
22,926
73,413
10,987
6,699
2,924
400
6,955
27,965
13,271
4,973
18,244
119,622
2004
US$m
222,465
5,402
160,006
387,873
101,341
43,383
20,648
10,213
53,310
228,895
52,240
13,834
66,074
682,842
1 Other commercial includes advances in respect of agriculture, transport, energy and utilities.
140
The commentary below is on a constant currency
basis.
Residential mortgages increased by 28 per cent
to US$227.9 billion and comprised 33 per cent of
total gross loans to customers at 31 December 2004.
Growth was particularly strong in North America
where residential mortgages rose by 44 per cent to
US$112.9 billion. A combination of low
unemployment and low interest rates encouraged
both growth in new lending and the refinancing of
existing mortgages. HSBC Finance also introduced a
number of new products and activated a new
correspondent relationship in the first half of the
year. Residential mortgages in Europe increased by
26 per cent, predominantly in the UK, reflecting the
success of a number of marketing initiatives,
competitive pricing and continued buoyancy in the
housing market. Mortgage balances in Hong Kong
were marginally lower than in 2003 as a 14 per cent
fall in GHOS, which remained suspended during the
year, offset a small rise in non-scheme mortgages. In
the rest of Asia-Pacific, residential mortgages grew
by US$2.0 billion, or 16 per cent, with particularly
strong growth in China, the Middle East, India,
South Korea, Taiwan and Singapore.
Other personal lending, which represented 23
per cent of total gross loans to customers at
31 December 2004, increased by 17 per cent to
US$160.0 billion. Excluding the impact of the
acquisition of M&S Money in the UK in November
2004, the increase was 13 per cent. In Europe,
excluding this acquisition, other personal lending
grew by 18 per cent as consumer expenditure
remained strong, particularly in the UK, while
lending to European Private Banking clients rose by
22 per cent as customers took advantage of low
interest rates to finance higher returning securities.
Hong Kong and the rest of Asia-Pacific also
benefited from improved consumer sentiment and
other personal lending in Hong Kong increased by
23 per cent. In the rest of Asia-Pacific, an expansion
of consumer credit and growth in the credit cards
base contributed to a 25 per cent increase in other
personal lending while the US benefited from strong
growth in both the cards base and balances, and an
expansion of auto finance lending.
Loans and advances to the large corporate sector
remained subdued but commercial lending in Hong
Kong and in the rest of Asia-Pacific expanded as
regional trade volumes grew. International trade
balances in Hong Kong increased by 26 per cent to
US$7.8 billion, as economic expansion in mainland
China, and buoyant consumer spending in the US
encouraged business expansion. Inter-regional trade
volumes also grew across the rest of Asia-Pacific and
trade finance lending in the region increased by 30
per cent with particularly strong growth in the
Middle East, where oil producing countries benefited
from high global oil prices, Singapore, Korea and
Japan.
The following tables analyse loans by industry
sector and by the location of the principal operations
of the lending subsidiary or, in the case of the
operations of The Hongkong and Shanghai Banking
Corporation, HSBC Bank, HSBC Bank Middle East
and HSBC Bank USA, by the location of the lending
branch.
141
H S B C H O L D I N G S P L C
Financial Review (continued)
Customer loans and advances by industry sector
At 31 December 2004
Europe
US$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
%
70,552
24,040
14,799
112,866
208
222,465
–
57,920
128,472
54,438
18,827
6,750
3,663
31,626
115,304
30,809
4,491
35,300
5,402
9,104
38,546
14,138
10,391
5,959
615
7,294
38,397
1,932
596
2,528
–
9,075
23,874
19,178
4,232
3,349
1,432
7,023
35,214
2,297
305
2,602
–
80,463
193,329
11,599
9,798
4,518
3,868
6,448
36,231
17,090
8,431
25,521
–
3,444
3,652
1,988
135
72
635
919
3,749
112
11
123
5,402
160,006
387,873
101,341
43,383
20,648
10,213
53,310
228,895
52,240
13,834
66,074
32.6
0.8
23.4
56.8
14.8
6.4
3.0
1.5
7.8
33.5
7.7
2.0
9.7
279,076
79,471
61,690
255,081
7,524
682,842
100.0
40.9%
6,065
11.6%
773
9.0%
1,180
37.4%
4,583
1.1%
658
100.0%
13,259
2.2%
1.0%
1.9%
1.8%
8.7%
1.9%
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 loans3,4...............
Non-performing loans as a
percentage of gross loans and
advances to customers3,4 ..........
Specific provisions outstanding
against loans and advances .....
4,036
331
791
4,420
522
10,100
Specific provisions outstanding
as a percentage of non-
performing loans3,4...................
66.5%
42.8%
67.0%
96.4%
79.3%
76.2%
1 Other commercial includes advances in respect of agriculture, transport, energy and utilities.
2 Included within this total is credit card lending of US$56,222 million.
3 Net of suspended interest.
4 Included in North America are non-performing loans of US$3,782 million and specific provisions of US$3,443 million in HSBC
Finance; excluding HSBC Finance, specific provisions outstanding as a percentage of non-performing loans was 54.6 per cent.
Included in gross loans and advances to customers are the following numbers in respect of HSBC Finance, 92
per cent of which relate to North America:
Residential mortgages .....................................................................................................................
Motor vehicle finance .....................................................................................................................
MasterCard/Visa credit cards ..........................................................................................................
Private label cards ...........................................................................................................................
Other unsecured personal lending ...................................................................................................
Corporate and commercial lending .................................................................................................
2004
US$m
60,829
10,237
22,225
15,891
32,677
44
2003
US$m
46,057
8,868
21,207
15,413
30,130
101
Total ................................................................................................................................................
141,903
121,776
142
At 31 December 2003
Europe
US$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
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.................
5,701
1,671
1,538
39.7%
13.8%
9.1%
36.4%
5,4444
1.0%
100.0%
696
15,050
Non-performing loans as a
percentage of gross loans and
advances to customers3 ............
Specific provisions outstanding
2.6%
2.2%
3.1%
2.8%
12.4%
2.8%
against loans and advances .....
3,554
629
981
5,1844
530
10,878
Specific provisions outstanding
as a percentage of non-
performing loans3.....................
62.3%
37.6%
63.8%
95.2%4
76.1%
72.3%
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$4,448 million in HSBC Finance; excluding HSBC
Finance, specific provisions outstanding as a percentage of non-performing loans was 69.2 per cent.
143
H S B C H O L D I N G S P L C
Financial Review (continued)
Customer loans and advances by industry sector (continued)
At 31 December 2002
Europe
US$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
%
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$9,950 million.
3 Net of suspended interest.
144
At 31 December 2001
Europe
US$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
%
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$8,289 million.
3 Net of suspended interest.
145
H S B C H O L D I N G S P L C
Financial Review (continued)
Customer loans and advances by industry sector (continued)
At 31 December 2000
Europe
US$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
%
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$7,604 million.
3 Net of suspended interest.
146
Customer loans and advances by principal area within rest of Asia-Pacific and South America
At 31 December 2004
Residential
mortgages
US$m
Other
personal
US$m
Property-
related
US$m
Commercial,
international
trade and
other
US$m
Loans and advances to customers
(gross)
Australia and New Zealand ....................
India .......................................................
Indonesia ................................................
Japan ......................................................
Mainland China .....................................
Malaysia ................................................
Middle East ............................................
Singapore ...............................................
South Korea ...........................................
Taiwan ...................................................
Thailand .................................................
Other ......................................................
5,871
778
12
12
256
2,029
129
2,139
1,834
1,509
28
202
Total of rest of Asia-Pacific ...................
14,799
Argentina ...............................................
Brazil .....................................................
Other ......................................................
Total of South America ..........................
37
170
1
208
635
371
166
106
10
670
1,976
3,027
189
762
178
985
9,075
69
3,374
1
3,444
2,580
56
9
689
794
407
1,414
1,263
6
–
75
288
7,581
21
158
28
207
3,761
1,440
769
3,532
3,329
2,611
6,326
2,259
1,559
805
1,135
2,709
30,235
1,061
2,433
171
3,665
At 31 December 2003
Residential
mortgages
US$m
Other
personal
US$m
Property-
related
US$m
Commercial,
international
trade and
other
US$m
Loans and advances to customers
(gross)
Australia and New Zealand ....................
India .......................................................
Indonesia ................................................
Japan ......................................................
Mainland China .....................................
Malaysia ................................................
Middle East ............................................
Singapore ...............................................
South Korea ...........................................
Taiwan ...................................................
Thailand .................................................
Other ......................................................
5,436
424
13
13
78
1,837
61
1,521
1,430
1,073
32
183
Total of rest of Asia-Pacific ...................
12,101
Argentina ................................................
Brazil ......................................................
Other ......................................................
Total of South America ..........................
47
176
1
224
497
305
135
75
6
518
1,660
2,420
81
506
129
803
7,135
62
2,313
1
2,376
1,835
10
20
613
614
311
923
1,142
–
–
82
196
5,746
16
122
9
147
3,460
1,329
670
2,731
1,887
2,591
4,726
2,219
847
852
743
2,237
24,292
975
1,715
168
2,858
Total
US$m
12,847
2,645
956
4,339
4,389
5,717
9,845
8,688
3,588
3,076
1,416
4,184
61,690
1,188
6,135
201
7,524
Total
US$m
11,228
2,068
838
3,432
2,585
5,257
7,370
7,302
2,358
2,431
986
3,419
49,274
1,100
4,326
179
5,605
147
H S B C H O L D I N G S P L C
Financial Review (continued)
Analysis of loans and advances to banks by geographical region
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
North
America
US$m
South
America
US$m
55,876
45,300
14,783
24,176
2,597
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
31 December 2004 .....................................
Suspended interest .....................................
Total ...........................................................
31 December 2003 .....................................
Suspended interest .....................................
Total ...........................................................
31 December 2002 .....................................
Suspended interest .....................................
Total ...........................................................
31 December 2001 .....................................
Suspended interest .....................................
Total ...........................................................
31 December 2000 .....................................
Suspended interest .....................................
Total ...........................................................
Provisions against total loans and advances
Year ended 31 December 2004
Specific
US$m
General
US$m
At 1 January 2004 .............................................................................................
Amounts written off ..........................................................................................
Recoveries of advances written off in previous years .......................................
Charge/(credit) to profit and loss account .........................................................
Acquisition of subsidiaries ................................................................................
Exchange and other movements ........................................................................
At 31 December 2004 .......................................................................................
– HSBC Finance .............................................................................................
– Rest of HSBC ..............................................................................................
Provisions against loans and advances to customers
Total provisions to gross lending1
Specific provisions ....................................
General provisions
Additional general provisions held
against Argentine risk ...........................
Other .........................................................
Total provisions ........................................
2004
%
1.58
–
0.40
1.98
2003
%
2.11
–
0.54
2.65
1 Net of suspended interest, reverse repo transactions and settlement accounts.
10,902
(8,896)
912
6,793
219
187
10,117
3,672
6,445
2002
%
1.94
0.04
0.70
2.68
2,813
–
–
(436)
37
155
2,569
616
1,953
2001
%
1.90
0.21
0.71
2.82
148
Gross
loans and
advances
to banks
US$m
Provisions
for bad
and
doubtful
debts
US$m
142,732
(3)
142,729
117,200
(3)
117,197
95,521
(2)
95,519
104,665
(2)
104,663
126,064
(2)
126,062
(17)
(24)
(23)
(22)
(30)
Total
US$m
13,715
(8,896)
912
6,357
256
342
12,686
4,288
8,398
2000
%
2.17
–
0.75
2.92
The following tables show details of the movements
in HSBC’s provisions for bad and doubtful debts by
location of lending office for each of the past five
years. A discussion of the material movements in the
charge for provisions by region follows these tables.
Year ended 31 December 2004
Europe
US$m
Provisions at 1 January .......................................
4,435
Amounts written off:
Commercial, industrial and international trade
Real estate .......................................................
Non-bank financial institutions ........................
Other commercial ............................................
Residential mortgages .....................................
Other personal .................................................
(298)
(30)
(14)
(211)
(10)
(768)
Total amounts written off ................................
(1,331)
Recoveries of amounts written off in previous
years:
Commercial, industrial and international trade
Real estate .......................................................
Non-bank financial institutions ........................
Other commercial ............................................
Residential mortgages .....................................
Other personal .................................................
27
3
3
6
1
97
Total recoveries ...............................................
137
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 ....................................................................
(7)
181
21
19
(1)
(68)
4
1,037
(161)
1,025
547
4,813
14
4,036
763
4,813
%
1.45
0.27
1.72
Hong
Kong
US$m
1,055
(35)
(55)
(2)
(33)
(52)
(161)
(338)
10
–
–
3
12
21
46
–
(56)
(15)
(3)
–
(29)
(12)
116
(224)
(223)
(7)
533
–
331
202
533
%
0.42
0.25
0.67
Rest of
Asia-
Pacific
US$m
1,181
North
America
US$m
South
America
US$m
6,461
583
(165)
(17)
(1)
(42)
(8)
(179)
(412)
4
10
–
9
1
41
65
(1)
49
(29)
(1)
–
(18)
4
144
(48)
100
15
949
3
791
155
949
%
1.28
0.25
1.53
(72)
(3)
(3)
(206)
(493)
(5,640)
(6,417)
73
4
–
34
18
455
584
–
(44)
(1)
–
1
(37)
485
4,783
(1)
5,186
(1)
5,813
–
4,420
1,393
5,813
%
1.73
0.55
2.28
(65)
(3)
–
(24)
(3)
(303)
(398)
4
–
–
30
–
46
80
(2)
47
1
–
–
(38)
4
259
(2)
269
44
578
–
522
56
578
%
6.94
0.74
7.68
Total
US$m
13,715
(635)
(108)
(20)
(516)
(566)
(7,051)
(8,896)
118
17
3
82
32
660
912
(10)
177
(23)
15
–
(190)
485
6,339
(436)
6,357
598
12,686
17
10,100
2,569
12,686
%
1.48
0.38
1.86
1 See table below ‘Net charge to the profit and loss account for bad and doubtful debts’.
2 General provisions are allocated to geographical segments based on the location of the office booking the provision. Consequently, the
general provision booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in the Rest of
Asia-Pacific, as well as those booked in Hong Kong.
149
H S B C H O L D I N G S P L C
Financial Review (continued)
Provisions at 1 January .......................................
Amounts written off:
Commercial, industrial and international trade
Real estate .......................................................
Non-bank financial institutions ........................
Governments ...................................................
Other commercial ............................................
Residential mortgages .....................................
Other personal .................................................
Total amounts written off ................................
Recoveries of amounts written off in previous
years:
Commercial, industrial and international trade
Real estate .......................................................
Non-bank financial institutions ........................
Governments ...................................................
Other commercial ............................................
Residential mortgages .....................................
Other personal .................................................
Europe
US$m
3,668
(338)
(31)
(3)
(1)
(54)
(4)
(471)
(902)
25
3
2
–
49
1
62
Total recoveries ...............................................
142
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 ............
(6)
286
15
(1)
–
216
–
482
(118)
874
653
Hong
Kong
US$m
1,143
(71)
(12)
(13)
–
(65)
(121)
(302)
(584)
16
–
–
–
4
6
16
42
–
(3)
(18)
1
–
78
102
271
(31)
400
54
Year ended 31 December 2003
Rest of
Asia-
Pacific
US$m
1,496
North
America
US$m
2,356
South
America
US$m
477
(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)
(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
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
Provisions at 31 December ..................................
4,435
1,055
1,181
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 ....................................................................
20
3,554
861
4,435
%
1.65
0.40
2.05
–
629
426
4
981
196
1,055
1,181
%
0.84
0.57
1.41
%
1.99
0.40
2.39
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 HSBC Finance Corporation, 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
South
America
US$m
723
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 ............
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$m
1,952
–
(255)
(88)
(2)
–
(116)
(7)
(132)
(600)
4
2
1
–
14
–
31
52
–
38
(11)
(29)
–
(22)
11
93
9
89
3
Europe
US$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
Provisions at 31 December ..................................
3,668
1,143
1,496
–
(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
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 ....................................................................
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
1,482
874
2,356
%
1.85
1.09
2.94
Total
US$m
8,183
(1)
(595)
(150)
(31)
(1)
(352)
(130)
(851)
(1)
(28)
(4)
(2)
–
(22)
(10)
(96)
(163)
(2,111)
2
–
–
–
–
–
8
28
14
1
–
33
8
96
10
180
–
30
2
11
4
177
10
96
(213)
117
(520)
477
–
341
136
477
%
9.73
3.88
13.61
(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
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$1,704 million.
3 General provisions are allocated to geographical segments based on the location of the office booking the provision. Consequently, the
general provision booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in the Rest of
Asia-Pacific, as well as those booked in Hong Kong.
151
Year ended 31 December 2001
Rest of
Asia-
Pacific
US$m
2,091
North
America
US$m
South
America
US$m
739
540
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 .............
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)
Provisions at 31 December ..................................
3,067
1,408
1,952
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 ....................................................................
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$600 million of additional provisions held against Argentine loans.
152
Year ended 31 December 2000
Rest of
Asia-
Pacific
US$m
2,686
North
America
US$m
South
America
US$m
864
430
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 ............
Europe
US$m
2,153
(9)
(154)
(27)
(2)
(37)
(68)
(5)
(181)
(483)
–
4
7
3
3
4
1
32
54
2
87
(9)
1
(19)
(3)
1
245
43
348
953
Hong
Kong
US$m
1,887
–
(202)
(9)
(8)
–
(68)
(82)
(73)
(442)
–
3
–
–
–
4
1
8
16
–
81
40
–
–
(30)
101
55
1
248
93
–
(191)
(58)
(3)
–
(149)
(5)
(88)
(494)
–
3
2
2
–
23
–
19
49
–
107
19
(3)
–
(18)
5
63
(188)
(15)
(135)
Provisions at 31 December...................................
3,025
1,802
2,091
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 ....................................................................
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
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
–
(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
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)
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:
Specific provisions:
New provisions ...................................................
HSBC Finance ...............................................
Rest of HSBC .................................................
Release of provisions no longer required ............
HSBC Finance ...............................................
Rest of HSBC .................................................
Recoveries of amounts previously written off .....
HSBC Finance ...............................................
Rest of HSBC .................................................
General provisions:
HSBC Finance ....................................................
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 2004
Non-performing loans .........................................
HSBC Finance ...............................................
Rest of HSBC .................................................
Provisions ...........................................................
HSBC Finance ...............................................
Rest of HSBC .................................................
Europe
US$m
Hong
Kong
US$m
Year ended 31 December 2004
Rest of
Asia-
Pacific
US$m
North
America
US$m
South
America
US$m
2,049
382
1,667
(726)
–
(726)
(137)
(49)
(88)
1,186
(13)
(148)
(161)
1,025
(7)
1,032
245
–
245
(198)
–
(198)
(46)
–
(46)
1
–
(224)
(224)
(223)
–
(223)
418
–
418
(205)
–
(205)
(65)
–
(65)
148
–
(48)
(48)
100
(1)
101
5,877
5,549
328
(106)
–
(106)
(584)
(428)
(156)
400
–
400
(49)
–
(49)
(80)
–
(80)
5,187
271
6,793
16
(17)
(1)
5,186
–
5,186
–
(2)
(2)
269
(2)
271
3
(439)
(436)
6,357
(10)
6,367
0.37%
(0.28%)
0.16%
2.03%
3.60%
0.93%
US$m
US$m
US$m
US$m
US$m
US$m
6,065
419
5,646
4,799
207
4,592
773
–
773
533
–
533
1,180
–
1,180
946
–
946
4,583
3,782
801
5,813
4,081
1,732
658
–
658
578
–
578
The total bad and doubtful debt charge for HSBC Finance includes charges for:
Year ended 31 December 2004
Residential mortgages .......................................................................................
Credit cards .......................................................................................................
Other personal lending ......................................................................................
Year ended 31 December 2003
Residential mortgages .......................................................................................
Credit cards .......................................................................................................
Other personal lending ......................................................................................
Europe
US$m
North
America
US$m
1
66
253
–
59
122
518
2,459
2,160
423
1,740
2,231
154
Total
US$m
8,989
5,931
3,058
(1,284)
–
(1,284)
(912)
(477)
(435)
13,259
4,201
9,058
12,669
4,288
8,381
Total
US$m
519
2,525
2,413
423
1,799
2,353
4,540
182
6,214
Specific provisions:
New provisions ...................................................
HSBC Finance1 ..............................................
Rest of HSBC .................................................
Release of provisions no longer required ............
HSBC Finance1 ..............................................
Rest of HSBC .................................................
Recoveries of amounts previously written off .....
HSBC Finance1 ..............................................
Rest of HSBC .................................................
General provisions:
HSBC Finance1 ...................................................
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 .........................................
HSBC Finance ...............................................
Rest of HSBC .................................................
Provisions ...........................................................
HSBC Finance ...............................................
Rest of HSBC .................................................
1 Since the date of acquisition.
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 ...........................................................
Europe
US$m
Hong Kong
US$m
Year ended 31 December 2003
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America
US$m
1,485
193
1,292
(351)
–
(351)
(142)
(25)
(117)
992
13
(131)
(118)
874
(6)
880
0.41%
US$m
5,701
326
5,375
4,415
154
4,261
655
–
655
(182)
–
(182)
(42)
–
(42)
431
–
(31)
(31)
400
–
400
0.53%
US$m
1,671
–
1,671
1,055
–
1,055
412
–
412
(269)
–
(269)
(74)
–
(74)
69
–
16
16
85
3
82
0.17%
US$m
1,538
–
1,538
1,177
–
1,177
4,962
4,580
382
(87)
(4)
(83)
(335)
(282)
(53)
263
–
263
(64)
–
(64)
(17)
–
(17)
100
36
136
4,676
–
4,676
2.36%
US$m
5,444
4,380
1,064
6,461
5,047
1,414
–
(124)
(124)
58
–
58
1.03%
US$m
696
–
696
583
–
583
Europe
US$m
Hong Kong
US$m
Year ended 31 December 2002
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America
US$m
963
(271)
(58)
634
–
(65)
(65)
569
569
0.34%
US$m
4,495
3,645
528
(160)
(25)
343
–
(97)
(97)
246
246
0.35%
US$m
1,724
1,143
400
(268)
(52)
80
–
9
9
89
89
0.23%
US$m
2,055
1,496
399
(79)
(35)
285
–
15
15
300
300
0.38%
US$m
1,773
2,356
388
(48)
(10)
330
(196)
(17)
(213)
117
117
3.27%
US$m
476
477
Total
US$m
7,777
4,773
3,004
(953)
(4)
(949)
(610)
(307)
(303)
113
(234)
(121)
6,093
(3)
6,096
1.12%
US$m
15,050
4,706
10,344
13,691
5,201
8,490
Total
US$m
2,678
(826)
(180)
1,672
(196)
(155)
(351)
1,321
1,321
0.36%
US$m
10,523
9,117
155
H S B C H O L D I N G S P L C
Financial Review (continued)
Net charge to the profit and loss account for 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 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 ...........................................................
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 ...........................................................
Europe
US$m
Hong Kong
US$m
Year ended 31 December 2001
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America
US$m
802
(260)
(65)
477
–
(36)
(36)
441
441
0.32%
US$m
3,682
3,045
449
(212)
(31)
206
–
(9)
(9)
197
197
0.29%
US$m
2,028
1,408
577
(268)
(138)
171
–
1
1
172
172
0.52%
US$m
2,723
1,952
392
(42)
(43)
307
–
(7)
(7)
300
300
346
(35)
(8)
303
600
24
624
927
927
0.41%
US$m
672
723
17.80%
US$m
544
1,033
Europe
US$m
Hong Kong
US$m
Year ended 31 December 2000
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America
US$m
609
(248)
(56)
305
–
43
43
348
346
454
(192)
(15)
247
–
1
1
248
248
0.26%
US$m
3,376
2,995
0.37%
US$m
2,521
1,802
543
(321)
(49)
173
(174)
(14)
(188)
(15)
(15)
–
US$m
3,081
2,091
395
(72)
(31)
292
–
(135)
(135)
157
157
232
(28)
(9)
195
–
(1)
(1)
194
194
0.25%
US$m
684
739
3.04%
US$m
710
540
Total
US$m
2,566
(817)
(285)
1,464
600
(27)
573
2,037
2,037
0.64%
US$m
9,649
8,161
Total
US$m
2,233
(861)
(160)
1,212
(174)
(106)
(280)
932
930
0.31%
US$m
10,372
8,167
156
Year ended 31 December 2004 compared
with year ended 31 December 2003
This commentary discusses the movements in the
numbers reported on pages 142 to 156. In cases
where exchange rate changes have contributed
significantly to the movements, the exchange rate
effect is quantified and the underlying movements
are explained in terms of constant currency.
The increase in the level of new specific
provisions was principally driven by:
• New specific provisions in North America,
which were US$915 million, or 18 per cent,
higher than in 2003, reflected the impact of an
additional quarter’s charge for HSBC Finance of
US$1,269 million. This was partly offset by a
US$323 million reduction in the level of new
specific provisions in HSBC Finance in the last
nine months of the year compared with the
equivalent period in 2003, despite a
US$202 million increase resulting from the
adoption of FFIEC provisioning policies in
December 2004. The majority of HSBC
Finance’s customer loans are in the consumer
finance sector and are geographically well-
spread across the United States, and the decline
in new provisions in 2004 reflected the
continued improvement in economic conditions,
an expansion of near prime lending and the
positive impact of tightened underwriting. By
31 December 2004, HSBC Finance’s two-
month-and-over consumer delinquency ratio had
improved to 4.4 per cent from 5.8 per cent in
2003. The improvement in the US economy was
reflected in a fall in new specific provisions for
commercial loans in HSBC Bank USA although
this was partly offset by a rise in the level of
new provisions for personal loans, in line with
the growth in the portfolio. Portfolio growth
also contributed to a rise in new specific
provisions in both Mexico and Canada.
•
In Europe, new specific provisions were
US$564 million, or 38 per cent, higher than in
2003, of which US$140 million or 9 per cent
reflected the effects of foreign currency
translation. Excluding the currency effect,
US$98 million of the increase related to the
impact of an additional quarter’s charge for
HSBC Finance’s UK consumer finance business
and US$61 million was in respect of Marks and
Spencer Financial Services, which was acquired
in November 2004. Underlying growth in
provisions reflected the effect of an increase in
unsecured personal lending, where higher levels
of personal indebtedness and rising delinquency
rates, and higher levels of personal
bankruptcies, caused a rise in new specific
provisions for unsecured personal lending. As a
proportion of lending to the UK personal and
consumer finance customer bases, credit costs
represented 0.60 per cent and 3.09 per cent of
lending respectively, compared with 0.42
per cent and 2.56 per cent in 2003. In the
corporate and commercial portfolios, new
specific provisions were raised against a small
number of accounts in the commercial and
industrial sectors although these were offset by a
fall in new specific provisions required in the
energy and utilities sectors compared with the
levels seen in 2003. In France there were higher
provisions, raised principally against the
personal, financial and industrial sectors.
• The US$137 million rise in new specific
•
provisions in South America came largely from
the full year impact of the Losango consumer
finance business, acquired in December 2003,
and from organic growth in the personal lending
portfolios in Brazil as the economy grew.
Argentina experienced a lower level of new
specific provisions in 2004 than in 2003.
In Hong Kong, new specific provisions were
US$410 million lower than in 2003. In an
environment of falling unemployment, stronger
GDP growth and reduced levels of bankruptcies,
new specific provisions against unsecured
personal lending fell by 51 per cent. The
mortgage book benefited from rising property
prices and the continued improvement in the
economy, and new specific provisions were
79 per cent lower than in 2003. A lower level of
new specific provisions was also experienced in
the commercial portfolios and the relatively
benign credit conditions during the year were
particularly reflected in lower provisions in the
electronic/electrical and international trade
sectors. In 2003, the charge included a
significant provision against one borrower in the
corporate telecommunications sector.
• New specific provisions in the rest of Asia-
Pacific increased by US$6 million. At constant
exchange rates, new specific provisions were
broadly in line with 2003. There was a modest
rise in new provisions against the personal
sector in a number of countries across the region
in line with the growth in personal lending.
•
In aggregate, specific provision releases and
recoveries increased by US$633 million, or
40 per cent, compared with 2003. HSBC
Finance contributed US$167 million of the
increase due to the inclusion of an additional
157
H S B C H O L D I N G S P L C
Financial Review (continued)
quarter, improved collections and the sales of
charged-off accounts. In Europe, excluding
HSBC Finance, releases and recoveries were
US$344 million higher, of which US$51 million
arose from currency translation effects. At
constant currencies, the increase reflected
releases of provisions in the energy, utilities and
petroleum sectors in the UK and manufacturing
and transport equipment sectors in France, while
recoveries benefited from the sale in the
secondary market of loans to a borrower in the
engineering sector. In North America, excluding
HSBC Finance, releases and recoveries
increased by US$126 million. The improvement
reflected an ongoing workout programme to
reduce the legacy bad debt portfolio in Mexico,
higher repayments of previously non-
performing loans in the US and the sale of
impaired loans in the US secondary market. In
Hong Kong, the benign credit environment and
rising house prices contributed to a rise in
releases and recoveries for residential
mortgages. This offset a general fall in the levels
of releases and recoveries in the Hong Kong
commercial sector that was also evident across
the Rest of Asia-Pacific. The sharp increase in
releases and recoveries in South America largely
reflected the inclusion of the Losango consumer
lending business and organic growth in Brazil,
together with successful collections activities in
Argentina.
• The general provision release of
US$436 million in 2004 compared with a
release of US$121 million in 2003. In Hong
Kong, the net release of US$224 million
reflected a reduction in the estimated latent loan
losses at 31 December 2004. Estimates of latent
losses reflect the historical experience of the rate
at which such losses occur and are based on the
structure of the credit portfolio and the
economic and credit conditions prevailing at the
balance sheet date. A similar situation was seen
in Malaysia, Singapore and Indonesia where
stable economic conditions were reflected in an
improvement in credit quality and reduction in
latent loan losses. As a result, the net charge for
the Rest of Asia-Pacific in 2003 became a net
release in 2004. In North America, the small
general provision release compared with a
charge of US$136 million in 2003 and reflected
an improvement in the economic outlook and
delinquency roll-rate trends in HSBC Finance
Corp, and a smaller charge in Mexico. In
Europe, the increase in general provisions
required from the growth in lending balances
was offset by the impact of the improvement in
158
both historical loss experience and credit
conditions in general. The substantial general
provision release in South America in 2003
reflecting improved collections and an
improvement in the general quality of the loan
book in Argentina was not repeated in 2004.
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 HSBC
Finance Corporation, which reported
US$4,580 million of new provisions. The
majority of HSBC Finance’s customer loans are
in the consumer finance sector and are
geographically well-spread across the United
States. During the period since its acquisition,
HSBC Finance Corporation’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, HSBC
Finance’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 HSBC Finance Corporation’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
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. HSBC
Finance Corp. contributed US$311 million of the
increase due to collections and sales of written-off
accounts. In Europe, excluding HSBC Finance
Corporation’s UK consumer finance business,
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 HSBC
Finance and US$78 million in HSBC Mexico,
reflecting growth in lending. In Europe, excluding
HSBC Finance Corporation’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.
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
%
0.82
(0.35)
0.47
0.41
0.48
0.76
(0.25)
0.51
0.45
0.39
0.62
(0.21)
0.41
0.37
0.25
0.32
(0.32)
–
(0.29)
0.38
0.89
(0.30)
0.59
0.54
0.73
0.75
(0.26)
0.49
0.35
0.72
0.77
(0.50)
0.27
0.19
0.64
0.96
(0.80)
0.16
0.20
0.86
1.13
(0.90)
0.23
0.25
1.55
2.59
(0.30)
2.29
2.28
2.57
2.91
(0.25)
2.66
2.74
2.93
0.51
(0.15)
0.36
0.38
0.41
6.49
(2.09)
4.40
4.40
5.16
6.09
(1.88)
4.21
1.34
3.94
9.97
(1.48)
8.49
3.01
3.91
Total
%
1.46
(0.36)
1.10
1.04
1.30
1.60
(0.32)
1.28
1.25
1.40
0.78
(0.29)
0.49
0.38
0.56
The unsecured element of the portfolio
consisted of credit and charge card advances,
personal loans, car finance facilities and other
varieties of instalment finance. At 31 December
2004, the combined portfolios totalled
US$160 billion, or 41 per cent of total lending to the
personal sector, compared with US$134 billion, or
44 per cent, at 31 December 2003. Growth in these
portfolios reflected continued growth in consumer
spending within the main economies in which HSBC
operates.
Geographically, total lending to personal
customers was dominated by the diverse and mature
portfolios in the US (US$173 billion), the UK
(US$107 billion), and Hong Kong (US$38 billion).
Collectively, these books accounted for 82 per cent
of total lending to the personal sector, unchanged
from the position at 31 December 2003.
Account management within HSBC’s personal
lending portfolios in both Personal Financial
Services and Consumer Finance is supported by
sophisticated statistical techniques, which are
enhanced by the availability of credit reference data
in key local markets. The expansion of an
increasingly analytical approach to the management
of these portfolios across the Group remains an
ongoing objective.
Year ended 31 December 2004
New provisions ...................................................
Releases and recoveries .......................................
Net charge for specific provisions .......................
Total provisions charged .....................................
Amount written off net of recoveries ..................
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 ..................
Areas of special interest
Group advances to personal customers
The charge for bad and doubtful debts in 2004 was
dominated by the charge relating to the personal
sector, this figure representing more than 100
per cent of the Group total after taking account of the
Group’s commercial lending activities. Within this
total, losses on residential mortgages remained
modest.
Lending to personal customers has increased
substantially in recent years as a result of both
organic growth and acquisitions, most notably
HSBC Finance Corporation in March 2003. At
31 December 2004, HSBC’s lending to the personal
sector amounted to US$388 billion, or 57 per cent of
total gross advances to customers, compared with
US$306 billion at 31 December 2003. The main
attributes of this portfolio and the economic
influences affecting it are outlined below.
Secured residential mortgages accounted for
US$228 billion or 59 per cent of total lending to the
personal sector compared with US$172 billion, or
56 per cent, at 31 December 2003. The main areas of
growth in 2004 were the US and the UK, which
together accounted for US$54 billion of the increase.
160
In view of the high levels of personal
indebtedness in many of the world’s leading
economies, guidelines for the restructuring of
customer facilities in the event of financial difficulty
have been reinforced.
In the US, the strength of the housing market
continued unabated, driven mainly by affordability.
Low interest rates, lower transaction costs and
increased availability of credit all fuelled the rise in
demand. However, recent rises in interest rates are
likely to affect growth adversely and add pressure to
some borrowers, particularly in certain overpriced
locations. The portfolios, however, remain
geographically diverse and are secured largely by
senior lien positions.
Although increased mortgage borrowing has
contributed to the record level of consumer debt,
levels have largely stabilised and are expected to
decline gradually, as incomes rise sufficiently to pay
down debt, notwithstanding higher interest rates.
Against this background, delinquency rates fell
across the majority of portfolios during 2004 and
trends in lending quality showed an improvement.
Personal lending in the UK also continued to
grow strongly, particularly in the mortgage market.
This secured portfolio, representing 55 per cent of
total lending to personal customers in the UK,
continued to suffer negligible delinquency and
losses. The unsecured portfolio also continued to
expand both through organic growth and with the
acquisition of Marks and Spencer Financial Services,
which added US$5.3 billion to the portfolio in
November 2004. Underwriting criteria were
regularly reviewed to ensure that they remained
appropriate in prevailing market conditions, which
have seen a steady rise in personal bankruptcies and
delinquencies over the course of the year.
With consumer spending rising in Hong Kong
and the levels of bankruptcies and unemployment
both falling, the improvement in the personal
portfolios, which first became evident during the
second half of 2003, continued throughout 2004.
With ongoing property price increases a feature of
2004, the most notable trend was the continued
reduction in the level of negative equity on mortgage
balances, which is now at modest levels.
Across the other geographical regions the
position remained relatively stable, although HSBC
continued to monitor carefully those portfolios that
have the greatest potential for future economic
stress. Delinquency and loss trends differed across
jurisdictions, reflecting these varied conditions.
Risk elements in the loan portfolio
The following disclosure of credit risk elements
reflects US accounting practice and classifications:
•
•
•
loans accounted for on a non-accrual basis;
accruing loans contractually past due 90 days or
more as to interest or principal; and
troubled debt restructurings not included in the
above.
In accordance with UK accounting practice, a
number of operating companies suspend interest
rather than ceasing to accrue. This additional
category is also reported below, as are assets
acquired in exchange for advances.
Non-performing loans and advances1
Banks ........................................
Customers
– HSBC Finance .......................
– Other HSBC............................
At 31 December
2004
US$m
25
4,201
9,058
13,259
2003
US$m
24
4,706
10,344
15,050
Total non-performing loans
and advances...........................
13,284
15,074
Total provisions cover as a
percentage of non-performing
loans and advances .................
1 Net of suspended interest.
95.5%
91.0%
Non-performing customer loans1 and related
specific provisions outstanding by geographical
segment
2004
2003
Non-
performing
loans
US$m
Specific
provisions
US$m
Non-
performing
loans
US$m
Specific
provisions
US$m
Europe ......
Hong
Kong ......
Rest of
Asia-
Pacific ....
North
6,065
4,036
5,701
3,554
773
331
1,671
629
1,180
791
1,538
981
America .
4,583
4,420
5,444
5,184
South
America
658
522
696
530
13,259
10,100
15,050
10,878
1 Net of suspended interest.
Total non-performing loans to customers decreased
by US$1,791 million during the year. At
31 December 2004, non-performing loans
represented 1.9 per cent of total lending compared
161
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
restructurings may be discontinued after the first
year if the debt is performing in accordance with the
new terms.
Troubled debt restructurings decreased
significantly in Europe where a number of corporate
exposures were regularised, in Hong Kong where
balances were repaid on certain restructured
borrowings, and in South America.
Accruing loans past due 90 days or more
Accruing loans past due 90 days decreased as the
overall credit environment improved, particularly in
Hong Kong and the US. HSBC Finance’s business
benefited from a continued improvement in
delinquency and default trends as the US economy
recovered. In common with other card issuers,
including other parts of HSBC, HSBC Finance
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 judged to be irrecoverable.
Potential problem loans
Credit risk elements also cover potential problem
loans. These are loans where information about
borrowers’ possible credit problems causes
management serious doubts about the borrowers’
ability to comply with the loan repayment terms.
There are no potential problem loans other than
those identified in the table of risk elements set out
below.
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)
with 2.8 per cent at 31 December 2003. At constant
exchange rates, non-performing loans decreased by
US$2.3 billion, or 15 per cent. Improved economic
conditions in most geographical regions were the
main driver for the fall in non-performing loans.
Across Europe, at constant exchange rates, non-
performing loans declined marginally with
underlying credit quality in the UK and France
remaining stable. In the UK, releases and recoveries
in the corporate sector, primarily as a result of the
restructuring of a number of non-performing loans,
were partly offset by a rise in delinquencies across
most unsecured personal loan products, in line with
the broader target markets now being served.
In Hong Kong, non-performing loans decreased
by US$0.9 billion, or 54 per cent, during 2004 due to
the improved economic climate and rising real estate
prices. These factors enabled certain corporate
customers to increase repayments through the
disposal of assets or improved debt servicing.
In the rest of Asia-Pacific, non-performing loans
fell by US$0.4 billion, or 23 per cent, during the
year, as a general improvement in the economic
environment across the region was reflected in a rise
in recoveries and releases of provisions.
The level of non-performing loans in North
America decreased by US$0.9 billion, in line with
the continued improvement in economic conditions;
HSBC Finance’s business particularly benefited
from a continued improvement in delinquencies and
default trends. In Mexico, there were further write-
offs of US$285 million during 2004 in the
commercial and consumer loan books, as
management continued to reduce the acquired
workout portfolio.
South America experienced a modest reduction
in non-performing loans in 2004 arising mainly in
Argentina as credit quality improved in line with a
general upturn in the local economy.
Troubled debt restructurings
US GAAP requires separate disclosure of any loans
where terms have been modified to grant
162
2004
US$m
2003
US$m
At 31 December
2002
US$m
2001
US$m
2000
US$m
Loans accounted for on a non-accrual
basis
Europe .......................................................
HSBC Finance ......................................
Other .....................................................
Hong Kong ................................................
Rest of Asia-Pacific ..................................
North America ..........................................
HSBC Finance ......................................
Other .....................................................
South America ..........................................
Total ..........................................................
Loans on which interest has been
accrued but suspended
Europe .......................................................
Hong Kong ................................................
Rest of Asia-Pacific ..................................
North America ..........................................
South America ..........................................
Total ..........................................................
Assets acquired in exchange for advances
Europe .......................................................
Hong Kong ................................................
Rest of Asia-Pacific ..................................
North America ..........................................
HSBC Finance ......................................
Other .....................................................
Total ..........................................................
3,498
419
3,079
116
156
3,856
3,138
718
589
8,215
2,555
580
1,016
19
68
4,238
27
75
21
708
644
64
831
3,138
326
2,812
166
168
4,618
3,683
935
601
8,691
2,542
1,504
1,351
33
95
5,525
32
2
30
794
697
97
858
2,393
–
2,393
247
294
1,624
–
1,624
293
4,851
2,086
1,460
1,714
48
183
5,491
26
17
54
101
–
101
198
2,052
–
2,052
213
195
593
–
593
429
3,482
1,553
1,795
2,497
67
115
6,027
84
19
32
14
–
14
149
1,985
–
1,985
236
429
627
–
627
550
3,827
1,389
2,259
2,627
39
160
6,474
25
26
24
19
–
19
94
Total non-performing loans ......................
13,284
15,074
10,540
9,658
10,395
Troubled debt restructurings
Europe .......................................................
HSBC Finance ......................................
Other .....................................................
Hong Kong ................................................
Rest of Asia-Pacific ..................................
North America ..........................................
HSBC Finance ......................................
Other .....................................................
South America ..........................................
Total ..........................................................
Accruing loans contractually past due 90
days or more as to principal or interest
Europe .......................................................
Hong Kong ................................................
Rest of Asia-Pacific ..................................
North America ..........................................
HSBC Finance ......................................
Other .....................................................
South America ..........................................
Total ..........................................................
Total risk elements
Europe .......................................................
HSBC Finance ......................................
Other .....................................................
Hong Kong ................................................
Rest of Asia-Pacific ..................................
North America ..........................................
HSBC Finance ......................................
Other .....................................................
South America ..........................................
Total ..........................................................
Provisions for bad and doubtful debts as a
percentage of total risk elements ..........
34
–
34
436
56
144
2
142
693
1,363
68
67
56
871
607
264
–
1,062
6,182
419
5,763
1,274
1,305
5,598
4,391
1,207
1,350
15,709
80.8%
159
–
159
571
68
210
2
208
837
1,845
34
205
45
1,252
1,215
37
2
1,538
5,905
326
5,579
2,448
1,662
6,907
5,597
1,310
1,535
18,457
41
–
41
396
89
4
–
4
669
1,199
16
193
33
42
–
42
7
291
4,562
–
4,562
2,313
2,184
1,819
–
1,819
1,152
12,030
–
–
–
381
131
3
–
3
144
659
15
98
38
52
–
52
47
250
3,704
–
3,704
2,506
2,893
729
–
729
735
10,567
–
–
–
395
231
7
–
7
142
775
11
76
66
64
–
64
82
299
3,410
–
3,410
2,992
3,377
756
–
756
934
11,469
74.3%
76.0%
77.4%
71.5%
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
Interest income that would have been recognised
under the original terms of the non-accrual,
suspended interest and restructured loans amounted
to approximately US$300 million in 2004 compared
with US$380 million in 2003 and US$406 million in
2002. Interest income of approximately
US$184 million from such loans was recorded in
2004, compared with US$230 million in 2003 and
US$258 million in 2002.
Country distribution of outstandings and
cross-border exposures
HSBC controls the risks associated with cross-border
lending, essentially the risk of foreign currency
required for payments not being available to local
residents, through a central process of internal
country limits which are determined by taking into
account both economic and political risks. Exposure
to individual countries and cross-border exposure in
aggregate is kept under continuous review.
The following tables analyse the aggregate of
in-country foreign currency and cross-border
outstandings by type of borrower to countries which
individually represent in excess of 1 per cent of
At 31 December 2004
United Kingdom ...........................................................
United States .................................................................
Germany .......................................................................
France ...........................................................................
Italy ...............................................................................
The Netherlands ............................................................
Hong Kong ....................................................................
At 31 December 2003
United Kingdom ............................................................
Germany ........................................................................
United States..................................................................
France ............................................................................
The Netherlands.............................................................
Hong Kong.....................................................................
Canada ...........................................................................
Italy................................................................................
At 31 December 2002
United States .................................................................
Germany .......................................................................
France ...........................................................................
The Netherlands ............................................................
Hong Kong ....................................................................
Canada ..........................................................................
Japan .............................................................................
Italy ...............................................................................
Australia .......................................................................
164
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, eligible collateral held or residence of
the head office where the borrower is a branch. In
accordance with the Bank of England Country
Exposure Report (Form CE) 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. Comparative figures for 2003 and
2002 were calculated under the requirements of the
Bank of England’s Form C1, which was replaced by
Form CE from 31 December 2004 reporting. The
requirements of Form CE differ from those of Form
C1 in a number of ways, none of which materially
affects the exposures reported below. For 2003,
outstandings to counterparties in the UK were
collected on a comparable basis to that required for
Form C1 for the first time. For 2002, 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.
Government
and official
institutions
US$bn
Banks
US$bn
Other
US$bn
Total
US$bn
19.7
9.2
17.8
11.1
5.7
9.1
1.6
14.2
16.0
5.5
9.5
9.0
1.1
6.0
4.4
5.6
16.9
5.8
7.5
0.9
4.8
4.0
4.7
5.8
3.8
13.3
10.4
3.7
9.7
2.2
1.1
3.1
8.0
8.4
2.3
0.6
0.7
3.2
5.2
9.6
2.4
1.7
0.4
0.7
2.9
4.1
2.2
0.5
24.5
14.0
4.0
4.6
2.1
4.2
10.3
20.4
3.7
12.3
5.5
4.6
10.0
1.8
0.8
9.7
2.7
5.0
4.0
9.1
2.4
1.0
1.1
1.6
48.0
36.5
32.2
19.4
17.5
15.5
13.0
37.7
27.7
26.2
17.3
14.2
11.8
11.0
10.4
24.9
22.0
12.5
11.9
10.7
10.1
9.1
8.0
7.9
At 31 December 2004, HSBC had in-country
foreign currency and cross-border outstandings to
counterparties in Australia and Canada 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$12.7 billion; Canada: US$11.8 billion.
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.
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.
165
H S B C H O L D I N G S P L C
Financial Review (continued)
Liquidity and funding management
HSBC maintains a diversified and stable funding
base of core retail and corporate customer deposits
as well as portfolios of highly liquid assets. The
objective of HSBC’s liquidity and funding
management is to ensure that all foreseeable funding
commitments and deposit withdrawals can be met
when due.
The management of liquidity and funding is
primarily carried out locally in the operating
companies of HSBC in accordance with practice and
limits set by the Group Management Board. These
limits vary by local financial unit to take account of
the depth and liquidity of the market in which the
entity operates. It is HSBC’s general policy that each
banking entity should be self-sufficient with regard
to funding its own operations. Exceptions are
permitted to facilitate the efficient funding of certain
short-term treasury requirements and start-up
operations or branches which do not have access to
local deposit markets, all of which are funded under
strict internal and regulatory guidelines and limits
from HSBC’s largest banking operations. These
internal and regulatory limits and guidelines serve to
place formal limitations on the transfer of resources
between HSBC entities and are necessary to reflect
the broad range of currencies, markets and time
zones within which HSBC 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.
The Group’s liquidity and funding management
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
166
stress conditions and describe actions to be
taken in the event of difficulties arising from
systemic or other crises while minimising
adverse long-term implications for the business.
Primary sources of funding
Current accounts and savings deposits payable on
demand or at short notice form a significant part of
HSBC’s funding. HSBC places considerable
importance on the stability of these deposits.
Stability depends upon maintaining depositor
confidence in HSBC’s capital strength and liquidity,
and on competitive and transparent deposit-pricing
strategies. HSBC actively supports this confidence
by consistently reinforcing HSBC’s brand values of
trust and solidity across the Group’s geographically
diverse retail banking network.
HSBC accesses professional markets in order to
provide funding for non-banking subsidiaries that do
not accept deposits, to maintain a presence in local
money markets and to optimise the funding of asset
maturities not naturally matched by core deposit
funding. In aggregate, HSBC’s banking entities are
liquidity providers to the inter-bank market, placing
significantly more funds with other banks than they
borrow.
The main operating subsidiary that does not
accept deposits is HSBC Finance Corporation, which
funds itself principally through taking term funding
in the professional markets and through the
securitisation of assets. At 31 December 2004,
US$112 billion of HSBC Finance Corporation’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 becoming a member of the
HSBC Group, HSBC Finance Corporation’s access
to funding has improved in respect of both the
breadth of available sources and the pricing thereof.
Of total liabilities of US$1,277 billion at
31 December 2004, funding from customers
amounted to US$694 billion, of which
US$671 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 short-term
deposit balances remain stable as inflows and
outflows broadly match.
Other liabilities, including deposits by banks
and securities in issue, are set forth in the table on
page 167.
Assets available to meet these liabilities, and to
cover outstanding commitments to lend
(US$568 billion), included cash, central bank
balances, items in the course of collection and
treasury and other bills (US$47 billion); loans to
banks (US$143 billion, including US$138 billion
repayable within one year); and loans to customers
(US$670 billion, including US$271 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$242 billion. Of these assets, some US$57 billion
of debt securities and treasury and other bills have
been pledged to secure liabilities.
HSBC would meet unexpected net cash
outflows by selling securities and accessing
additional funding sources such as interbank markets
or securitisations.
Although not utilised in the management of
HSBC’s liquidity, the consolidated figures shown in
the following table provide a useful insight into the
structure of the Group’s overall funding position.
Debt securities in issue, customer accounts and
deposits by banks
At 31 December
2004
US$m
99,441
109,152
78,087
5,452
2003
US$m
63,810
89,752
64,678
5,748
397,151
323,250
Debt securities funding due in:
– less than one year .................
– one year or over ...................
Deposits by banks repayable:
– in less than one year .............
– one year or over ...................
Customer accounts repayable:
– on demand ............................
– with agreed maturity dates
but less than one year ......
273,455
234,778
– with agreed maturity dates
one year or over ..............
23,145
15,102
Total ........................................
985,883
797,118
Debt securities .........................
Deposits by banks ...................
Customer accounts ..................
%
21.2
8.4
70.4
%
19.3
8.8
71.9
Total ........................................
100.0
100.0
HSBC Holdings
HSBC Holdings’ primary sources of cash are interest
and capital receipts from its subsidiaries, which it
deploys in short-term bank deposits or liquidity
funds. HSBC Holdings’ primary uses of cash are
investments in subsidiaries, interest payments to debt
holders and dividend payments to shareholders. On
an ongoing basis, HSBC Holdings replenishes its
liquid resources through the receipt of interest on,
and repayment of, intra-group loans, from dividends,
and from interest earned on its own liquid funds. The
ability of its 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. Together with its accumulated liquid
assets, HSBC Holdings believes that planned
dividends and interest from subsidiaries will enable
it to meet anticipated cash obligations. Also, in
normal circumstances, HSBC Holdings has full
access to capital markets on normal terms.
At 31 December 2004, the short-term liabilities
of HSBC Holdings totalled US$5.3 billion, including
US$1.2 billion in respect of the proposed third
interim dividend for 2004 and US$3.0 billion in
respect of the proposed fourth interim dividend for
2004. 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$12.4 billion, consisting mainly of cash at bank
and money market deposits of US$7.3 billion and
other amounts (including dividends) due from HSBC
undertakings of US$5.1 billion, exceeded short-term
liabilities.
Market risk management
The objective of HSBC’s market risk management is
to manage and control market risk exposures in order
to optimise return on risk while maintaining a market
profile consistent with the Group’s status as a
premier provider of financial products and services.
Market risk is the risk that movements in market
rates, including foreign exchange rates, interest rates,
credit spreads and equity and commodity prices will
reduce HSBC’s income or the value of its portfolios.
HSBC separates exposures to market risk into
either trading or non-trading portfolios. Trading
portfolios include those positions arising from
market-making and proprietary position-taking.
Non-trading portfolios primarily arise from the
management of the commercial banking assets and
liabilities.
The management of market risk is principally
167
H S B C H O L D I N G S P L C
Financial Review (continued)
undertaken in Global Markets using risk limits
approved by the Group Management Board. Limits
are set for each portfolio, product and risk type, with
market liquidity being a principal factor in
determining the level of limits set. Traded Markets
Development and Risk, an independent unit within
Corporate, Investment Banking and Markets,
develops the Group’s market risk management
policies and measurement techniques. Each major
operating entity has an independent Market Risk
Control function which is responsible for measuring
market risk exposures in accordance with the
policies defined by Traded Markets Development
and Risk, and monitoring and reporting these
exposures against the prescribed limits on a daily
basis.
Each operating entity is required to assess the
market risks which arise on each product in its
business and to transfer these risks to either its local
Global Markets unit for management, or to separate
books managed under the auspices of the local Asset
and Liability Management Committee (‘ALCO’).
The aim is to ensure that all market risks are
consolidated within operations which have the
necessary skills, tools, management and governance
to professionally manage such risks.
Fair value and price verification control
Where certain financial instruments are carried on
the Group’s balance sheet at their mark-to-market
values, the mark-to-market valuation and the related
price verification processes are subject to careful
governance across the Group. Financial instruments
which are accounted for on a fair value basis include
assets held in the trading portfolio, obligations
related to securities sold short and derivative
financial instruments (excluding non-trading
derivatives accounted for on an accruals basis).
The determination of mark-to-market values is
therefore a significant element in the reporting of the
Group’s Global Markets activities.
The responsibility for the determination of
accounting policies and procedures governing
valuation and validation ultimately rests with the
Group Finance and the Corporate, Investment
Banking and Markets Finance functions, which
report to the Group Finance Director. All significant
valuation policies, and any changes thereto, must be
approved by senior finance management. HSBC’s
governance of financial reporting requires 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
168
financial statements, and for ensuring that the
Group’s policies and relevant accounting standards
are adhered to. Both senior management and the
Group Audit Committee assess the resourcing and
expertise of Finance functions within the Group on a
regular basis to ensure that the Group’s financial
control and price verification processes are properly
staffed to support the required control infrastructure.
Trading
Market risk in trading portfolios is monitored and
controlled at both portfolio and position levels using
a complementary set of techniques, such as value at
risk and present value of a basis point (‘PVBP’),
together with stress and sensitivity testing and
concentration limits. These techniques quantify the
impact on capital of defined market movements.
Other controls include restricting individual
operations to trading within a list of permissible
instruments authorised for each site by Traded
Markets Development and Risk, and enforcing
rigorous new product approval procedures. In
particular, trading in the more complex derivative
products is concentrated in offices with appropriate
levels of product expertise and robust control
systems.
Trading value at risk (‘VAR’)
One of the principal tools used by HSBC to monitor
and limit market risk exposure in its trading
portfolios is 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 (for HSBC, 99 per cent). HSBC
calculates VAR daily. During the year, HSBC
refined its basis of calculating VAR from one
predominantly based on variance / co-variance to
one predominantly based on historical simulation.
This latter calculation was introduced because it
better captures the non-linear characteristics of
certain market risk positions. Historical simulation
uses scenarios derived from historical market rates,
and takes account of the relationships between
different markets and rates, for example, interest
rates and foreign exchange rates. Movements in
market prices are calculated by reference to market
data from the last two years.
Although a valuable guide to risk, VAR should
always be viewed in the context of its limitations.
For example:
•
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 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, by
definition, does not take into account losses that
might occur beyond this level of confidence;
• VAR is calculated on the basis of exposures
outstanding at the close of business and
therefore does not necessarily reflect intra-day
exposures.
HSBC recognises these limitations by
augmenting its VAR limits with other position and
sensitivity limit structures. Additionally, HSBC
applies a wide range of stress testing, both on
individual portfolios and on the Group’s
consolidated positions. HSBC’s stress-testing regime
provides senior management with an assessment of
the impact of identified extreme events on the
market risk exposures of HSBC.
Daily distribution of market risk revenues in 2004
Number of days
70
54
4 1
2 5
80
70
60
50
40
30
20
10
0
19
17
12
10
8
2
0
-8
-4
0
4
8
12
(cid:1)(cid:1)(cid:1)(cid:1) Profit and loss frequency
16
20
Revenues (US$m)
24
28
2
0
0
1
32
36
40
44
48
52
Daily distribution of market risk revenues in 2003
Number of days
80
70
60
50
40
30
20
10
0
0 1
-90 -85 -80
66
49
45
32
7
24
16
0 0 0
2
1 2
5
1
5
1 1
0 0
-40 -35 -30 -25 -20 -15 -10 -5
10 15 20 25 30 35 40 45 50 55 60
0
5
Revenues (US$m)
1 0
85 90
Trading VAR for HSBC is summarised in
(cid:1) Profit and loss frequency
Note 39(a) in the ‘Notes on the Financial
Statements’ on page 308.
The daily revenue earned from market risk-
related treasury activities includes accrual book net
interest income and funding related to dealing
positions. The histogram below illustrates the
frequency of daily revenue arising from such market
risk-related activities.
The average daily revenue earned from market
risk-related treasury activities in 2004 was
US$18.3 million, compared with US$17.1 million
for 2003. The standard deviation of these daily
revenues was US$8.0 million compared with
US$12.5 million for 2003. The standard deviation
measures the variation of daily revenues about the
mean value of those revenues.
An analysis of the frequency distribution of
daily revenue shows that there were two days with
negative revenues during 2004 compared with 12
days in 2003. The most frequent result was a daily
revenue of between US$16 million and
US$20 million with 70 occurrences.
Non-trading
The principal objective of market risk management
of non-trading portfolios is to optimise net interest
income.
Market risk in non-trading portfolios arises
principally from mismatches between the future
yield on assets and their funding cost as a result of
interest rate changes. Analysis of this risk is
complicated by having to make assumptions on
optionality in certain product areas, for example,
mortgage prepayments, and from behavioural
assumptions regarding the economic duration of
liabilities which are contractually repayable on
demand, for example, current accounts. This
prospective change in future net interest income
from non-trading portfolios will be reflected in the
current realisable value of these positions should
they be sold or closed prior to maturity. In order to
manage this risk optimally, market risk in non-
trading portfolios is transferred to Global Markets or
to separate books managed under the auspices of the
local ALCO.
The transfer of market risk to trading books
managed by Global Markets or ALCO is usually
achieved by a series of internal deals between the
business units and these trading books. When the
169
H S B C H O L D I N G S P L C
Financial Review (continued)
behavioural characteristics of a product differ from
its contractual characteristics, the behavioural
characteristics are assessed to determine the true
underlying interest rate risk. Local ALCOs regularly
monitor all such behavioural assumptions and
interest rate risk positions, to ensure they comply
with interest rate risk limits established by the Group
Management Board.
As noted above, in certain cases, the non-linear
characteristics of products cannot be adequately
captured by the risk transfer process. For example,
both the flow from customer deposit accounts to
more attractive investment products and the precise
repayment levels of mortgages will vary at different
interest rate levels. In such circumstances simulation
modelling is used to identify the impact of varying
scenarios on valuations and net interest income.
Once market risk has been consolidated in
Global Markets or ALCO-managed books, the net
exposure is typically managed through the use of
interest rate swaps within agreed limits.
In the US, market risk arising within HSBC’s
residential mortgage business is primarily managed
by a specialist function within the mortgage business
under guidelines established by HSBC Bank USA’s
ALCO. A range of risk management tools is applied
to hedge the sensitivity arising from movements in
interest rates. A key element of risk management
within the US mortgage business is dealing with the
sensitivity of Mortgage Servicing Rights (‘MSRs’)
to market risks. MSRs represent the economic value
of the right to perform specified residential mortgage
servicing activities. They are sensitive to interest
rates movements, which change the prepayment
speed of the underlying mortgages and therefore the
value of the MSRs. HSBC uses a combination of
interest-rate-sensitive derivative financial
instruments and debt securities to help protect the
economic value of MSRs. An accounting asymmetry
can arise in this area because the derivative
instruments used to hedge the economic exposure
arising from MSRs are marked to market, but the
MSRs themselves are measured for accounting
purposes at the lower of cost or market value. It is,
therefore, possible for an economically hedged
position not to be shown as such in the accounts,
when the hedge shows a loss but the MSR cannot be
revalued above cost to reflect an associated profit.
HSBC’s policy is to hedge the economic risk.
VAR limits are set to control the exposure to
MSRs and MSR hedges. The VAR on MSRs and
MSR hedges at 31 December 2004 was
US$10 million.
170
Market risk also arises in the Group’s insurance
businesses within their portfolios of investments and
policyholder liabilities. The principal market risks
are interest rate risk and equity risk which primarily
arise where guaranteed investment return policies
have been issued. The insurance businesses have a
dedicated head office market risk function which
oversees management of this risk.
Market risk also arises within the Group’s
defined benefit pension schemes to the extent that
the obligations of the schemes are not fully matched
by assets with determinable cash flows. This risk
principally derives from the pension schemes
holding equities against their future pension
obligations. The risk is that market movements in
equity prices could result in assets which are
insufficient over time to cover the level of projected
liabilities. Management and trustees, who act on
behalf of the pension scheme beneficiaries, assess
the level of this risk using reports prepared by
independent external actuaries.
The present value of the Group’s defined benefit
pension schemes liabilities was US$25.8 billion at
31 December 2004 compared with US$21.7 billion
at 31 December 2003. Assets of the defined benefit
schemes at 31 December 2004 comprised equity
investments 53.3 per cent, debt securities 29.1 per
cent and other (including property) 17.6 per cent.
Net interest income
Future net interest income is affected by movements
in interest rates. A principal part of the Group’s
management of market risk in non-trading portfolios
is to monitor the sensitivity of projected net interest
income at varying interest rate scenarios (simulation
modelling). HSBC aims, through its management of
market risk in non-trading portfolios, to mitigate the
impact of prospective interest rate movements which
could reduce future net interest income, whilst
balancing the cost of such hedging activities on the
current net revenue stream.
For simulation modelling, businesses use a
combination of scenarios relevant to local businesses
and local markets as well as standard scenarios
required to be used across the Group. The Group
standard scenarios are consolidated to illustrate the
combined pro-forma impact on Group consolidated
portfolio valuations and net interest income.
The table below sets out the impact on future net
interest income of an immediate hypothetical 100
basis points parallel fall or rise in all yield curves
worldwide on 1 January 2005. Assuming no
management actions, a 100 basis points parallel fall
in all yield curves would increase planned net
interest income for the 12 months to 31 December
2005 by US$495 million while a hypothetical 100
basis points parallel rise in all yield curves would
decrease planned net interest income by
US$908 million.
Instead of assuming that all interest rates move
together, HSBC groups its interest rate exposures
into currency blocs whose interest rates are
considered likely to move together. The sensitivity
of projected net interest income for 2005, on this
basis, is described as follows:
US dollar
bloc
US$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
Change in 2005 projected net
interest income
+ 100 basis points shift in yield
curves .....................................
– 100 basis points shift in yield
curves .....................................
Change in 2004 projected net
interest income
+ 100 basis points shift in yield
curves .....................................
– 100 basis points shift in yield
curves .....................................
(789)
643
98
74
(108)
(300)
(511)
157
92
(115)
(150)
(689)
(4)
(37)
(1)
(2)
(13)
15
(21)
(26)
(274)
(908)
282
495
(228)
212
(819)
(463)
The interest rate sensitivities set out in the table
above are illustrative only and are based on a single
simplified scenario. The figures represent the effect
of the pro forma movements in net interest income
based on the projected yield curve scenarios and the
Group’s current interest rate risk profile. This effect,
however, does not incorporate actions that could be
taken by Global Markets or in the business units to
mitigate the impact of this interest rate risk. In
reality, Global Markets would seek to proactively
change the interest rate risk profile to minimise
losses and optimise net revenues. The projections
above also assume that rates of all maturities move
by the same amount and, therefore, do not reflect the
potential impact on net interest income of some rates
changing while others remain unchanged. The
projections also make other simplifying assumptions,
including that all positions run to maturity.
The Group’s exposure to changes in its net
interest income arising from movements in interest
rates falls into three areas: core deposit franchises,
HSBC Finance Corporation and Global Markets.
• Core deposit franchises: these are exposed to
changes in the value of the deposits raised and
spreads against wholesale funds; in a low
interest rate environment, such as at present, the
value of core deposits increases as interest rates
rise and decreases as interest rates fall. This risk
is, however, asymmetrical as there is limited
room to lower deposit pricing in the event of
interest rate reductions in a low interest rate
environment. Although interest rates have risen
over the year, this risk is still particularly acute
in the case of Hong Kong dollar deposits.
• HSBC Finance Corporation’s net interest
income sensitivity is such that it benefits in a
falling rate environment and its interest margins
decline in a rising rate environment. This arises
from having substantially fixed rate real estate
secured lending funded to an extent with
interest rate-sensitive short-term liabilities.
This feature is important from a Group
perspective because it provides a natural offset
to the effect of interest rate reductions on the
core deposit franchises.
• Global Markets: the residual interest rate risk is
managed within Global Markets. This reflects
the Group’s policy of transferring all interest
rate risk, other than structural risk, to Global
Markets to be managed within defined limits
and with flexibility as to the instruments used.
The best way of illustrating the active
management of this interest rate risk is to highlight
the major drivers of the changes shown in the
projected effect of interest rate moves in the above
table.
•
In Hong Kong, the rise in interest rates over the
year increases the room to lower deposit pricing
in the event of falling interest rates. In addition,
Global Markets are positioned to increase
revenue should rates fall. These two factors
have materially reduced the Group’s exposure to
falling rates.
171
H S B C H O L D I N G S P L C
Financial Review (continued)
• Similarly, in the US dollar bloc, the rise in
interest rates over the year increases the room to
lower deposit pricing in the event of falling
interest rates and Global Markets have been able
to position themselves to increase revenue if
rates fall. In addition, cash balances at the
holding company reduced as the Group acquired
businesses, principally Bank of Bermuda, M&S
Money and the investment in Bank of
Communications, increasing the negative impact
of rising interest rates.
• Global Markets increased its exposure to euro
assets, contributing to the increased sensitivity
to both rising and falling rates.
It can be seen from the above that projecting the
movement in net interest income from prospective
changes in interest rates is a complex interaction of
structural and managed exposures. In a rising rate
environment, the most critical exposures are those
managed within Global Markets.
Structural foreign exchange exposures
Structural foreign exchange exposures represent net
investments in subsidiaries, branches or associated
undertakings, the functional currencies of which are
currencies other than US dollars.
Revaluation gains and losses on structural
exposures are recorded in the statement of total
consolidated recognised gains and losses. The main
operating (or functional) currencies in which
HSBC’s business is transacted are the US dollar, the
Hong Kong dollar, sterling, the euro, the Mexican
peso, the Brazilian real, and the Chinese renminbi.
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
the US dollar and all the non-US dollar functional
currencies of underlying subsidiaries.
HSBC hedges structural foreign currency
exposures only in limited circumstances. HSBC’s
structural foreign currency exposures are managed
with the primary objective of ensuring, where
practical, that HSBC’s consolidated tier 1 ratio and
the tier 1 ratios of individual banking subsidiaries are
protected from the effect of changes in exchange
rates. This is usually achieved by ensuring that, for
each subsidiary bank, the ratio of structural
exposures in a given currency to risk-weighted assets
denominated in that currency is broadly equal to the
tier 1 ratio of the subsidiary in question.
172
Selective hedges were in place during 2004.
Hedging is undertaken using forward foreign
exchange contracts or by financing with borrowings
in the same currencies as the functional currencies
involved. There was no material effect from foreign
currency exchange rate movements on HSBC’s tier 1
capital ratio during the period.
Management of insurance and financial risk
HSBC’s insurance underwriting operations, inter
alia, issue contracts that accept the transfer of
insurance risk, or accept financial risk, or both. This
section summarises these risks and the way that
HSBC manages them.
Insurance risk
The principal risk that HSBC faces under the
insurance risk transfer contracts that it underwrites is
that the eventual claims and benefit payments,
together with the costs of managing the business and
claims handling, exceed the aggregate amount of
premia received and investment income earned
thereon, pending settlement of claims. HSBC
controls this risk by modelling outcomes using
statistical techniques and by holding a diversified
portfolio of relatively homogeneous contracts which
is considered unlikely to be significantly different
from the expected outcome.
HSBC manages the risk of unexpectedly large
underwriting losses through its underwriting
strategy, reinsurance arrangements and claims
handling.
In conjunction with Group Credit and Risk, the
central management of HSBC’s insurance operations
places reinsurance contracts with the world’s larger
reinsurance companies. HSBC assesses the financial
strength and creditworthiness of all reinsurers by
reviewing publicly available financial information
such as credit grades provided by rating agencies.
HSBC also takes into account details of recent
payment history and the status of any ongoing
negotiations between HSBC’s insurance operations
and these third parties. Individual operating units
maintain records of the payment history of contract
holders with whom they conduct regular business.
Financial risk
HSBC’s insurance operations are also exposed to
financial risk in circumstances when the proceeds
from financial assets are not sufficient to fund the
obligations arising from insurance and investment
contracts.
The framework for the management of these
risks seeks to integrate the financial risks associated
with HSBC’s insurance operations with similar risks
arising from other financial assets and liabilities not
directly associated with insurance and investment
liabilities.
Investment credit risk is the risk that financial
loss arises from the failure of an issuer of an
investment product or a counterparty to an
investment transaction to meet its obligations. Local
management of HSBC’s operating insurance
companies are responsible for the quality and
performance of their respective investment
portfolios. Investment guidelines are set at a Group
level and refined by local ALCOs which review, on
a quarterly basis, investment management
performance and compliance with the guidelines.
Assessments of the creditworthiness of issuers and
counterparties are based primarily upon rating
agency and other publicly available information
together with investment concentrations. Investment
credit exposures are aggregated and reported to
HSBC’s Group Credit and Risk function on a
quarterly basis.
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 has codified its operational risk
management process by issuing a high level
standard. 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 and the
Risk Management Meeting.
• 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 required to assess and plan
the implementation of the standard’s requirements.
HSBC maintains and tests contingency facilities
to support operations in the event of disasters.
Additional reviews and tests were conducted
following the terrorist incidents of 11 September
2001 and, more recently, the two bomb blasts which
damaged two of HSBC’s buildings in Istanbul, to
incorporate lessons learned in the operational
recovery from those circumstances.
Reputational risk management
The reputation of HSBC is paramount to its success.
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 whom it provides
financial services, conduct themselves.
Reputational risks are considered and assessed
by the Board, the Group Management Board, the
Risk Management Meeting, subsidiary company
boards, board committees and/or senior management
during the formulation of policy and the
establishment of standards. Standards on all major
173
H S B C H O L D I N G S P L C
Financial Review (continued)
aspects of business are set for HSBC and for
individual subsidiaries, businesses and functions.
These are communicated through manuals and
statements of policy, and promulgated through
internal communications and training. The policies
set out operational procedures in all areas of
reputational risk, including treating customers fairly,
conflicts of interest, money laundering deterrence,
environmental impact, anti-corruption measures and
employee relations.
Management in all operating entities is required
to establish a strong internal control structure to
minimise the risk of operational and financial failure,
and to ensure that a full appraisal of reputational
implications is made before strategic decisions are
taken. The Group internal audit function monitors
compliance with policies and standards.
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 EU’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
and off-balance sheet transactions. Under the EU’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,
174
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 qualifying
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 own shares
held are deducted in arriving at tier 1 capital. 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 October 2004, the FSA published a consultation
paper CP04/17 ‘Implications of a changing
accounting framework’. This paper sets out the
FSA’s proposed approach to assessing banks’ capital
adequacy after implementation of IFRS. In the
absence of the FSA’s final rules on capital adequacy
reporting under IFRS, which may be different from
the proposals set out in CP04/17, HSBC will follow
its proposals with effect from 1 January 2005.
Under the consultation paper, there will be
changes to the measurement of banks’ capital
adequacy in a number of ways, the most significant
of which for HSBC are set out below.
• The capital treatment for collective impairment
provisions will be the same as previously for
general provisions, i.e. they will be included in
tier 2 capital. This is expected to have a positive
impact on HSBC’s total capital ratio.
• Transitional impacts of IFRS implementation,
such as the capitalisation of software costs, are
likely to have a positive impact on shareholders’
funds. This is expected to result in increases in
the tier 1 and total capital ratios. Under IFRS,
dividends will not be recognised on the balance
sheet until they are declared. This will give rise
to an increase in shareholders’ funds at the year-
end which will reverse out when the dividend is
declared. Banks will take the benefit of this
increase to their regulatory capital until the
dividend is declared, in line with the accounting
treatment.
The remainder of the proposals in CP04/17 will
have a smaller impact on HSBC. They include the
reversal of the recognition of the assets and liabilities
of defined benefit pension schemes. Instead, banks
will deduct from capital their best estimate of the
funds that will need to be paid into the schemes in
addition to normal contributions over the next five
years.
In June 2004, the Basel Committee on Banking
Supervision (‘the Basel Committee’) issued a new
capital adequacy framework to replace the Basel
Accord of 1988 in the form of a final Accord
(commonly known as ‘Basel II’). The new capital
framework 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 quantification of
the exposure to a counterparty and the percentage
loss suffered if the counterparty defaults. 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.
In Europe, Basel II will be given effect by
applying the ‘re-casting technique’ (Interinstitutional
Agreement 2002/C 77/01) enabling substantive
amendments to existing legislation without a self-
standing amending directive. The proposal for re-
casting of the Banking Consolidation Directive and
the Capital Adequacy Directive was published in
July 2004. It largely incorporates the requirements
set out in Basel II, but there are also a number of
differences. This proposal will now be subject to a
formal EU co-decision legislative process involving
the Council of Ministers and the European
Parliament, during which further changes may be
made.
In January 2005, the FSA published a
consultation paper CP05/3 ‘Strengthening capital
standards’. This paper sets out the FSA’s proposed
approach to implementing the requirements of the
recast EU directives. The FSA proposes that the new
requirements will be applied from 1 January 2007,
except that under pillar 1 firms may elect to continue
to apply the existing capital adequacy framework
until 1 January 2008.
HSBC continues to participate actively in the
industry consultations surrounding the development
and implementation of Basel II and the re-cast EU
directives and fully supports a more risk-sensitive
regulatory capital framework than the 1988 Basel
Accord. The implementation of Basel II across
HSBC’s geographically diverse businesses operating
in a large number of different regulatory
environments represents a significant challenge, and
a major programme of projects is in progress.
Basel II allows extensive scope for interpretation by
regulators and the range of such variation and the
interaction of HSBC’s home and host regulators,
which is still being developed, will be key factors. In
view of this, it is still too early to assess what the
impact of Basel II on HSBC’s capital ratios will be.
One example of the uncertainty in interpretation by
regulators is that the US banking agencies are likely
to propose that, in the United States, certain
institutions continue to be subject to the 1988 Basel
Accord while others be subject to the ‘advanced’ risk
and capital methodologies of Basel II. In this latter
context, the Federal Reserve Board has determined
that HNAH, HSBC’s highest level US bank holding
175
H S B C H O L D I N G S P L C
Financial Review (continued)
company in the US, which holds all HSBC’s US
operating subsidiaries and HSBC Canada, will be
expected to qualify for, and comply with, the Federal
Reserve Board’s ‘advanced’ risk and capital
methodologies of Basel II. These guidelines are still
in development and may not be finalised before the
second quarter of 2006.
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 HSBC Finance Corporation, its ratings
targets. Capital generated in excess of planned
requirements is paid up to HSBC Holdings, normally
Source and application of tier 1 capital
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
capital 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.
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 ........................................................................................................
Other (including exchange movements) ..........................................................................................
Closing tier 1 capital .......................................................................................................................
Movement in risk-weighted assets
Opening risk-weighted assets ..........................................................................................................
Movements .....................................................................................................................................
Closing risk-weighted assets ...........................................................................................................
2004
US$m
54,863
11,840
1,818
(7,301)
2,607
(3,088)
–
581
1,983
3,956
67,259
618,662
140,548
759,210
2003
US$m
38,949
8,774
1,585
(6,532)
1,423
(13,650)
12,768
1,482
4,263
5,801
54,863
430,551
188,111
618,662
176
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 held ..........................................................................................................................
Total qualifying tier 1 capital ..........................................................................................................
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 .............................................................................................................................
Total capital ....................................................................................................................................
Risk-weighted assets
Banking book ..................................................................................................................................
Trading book ...................................................................................................................................
Total ................................................................................................................................................
Capital ratios:
Total capital ....................................................................................................................................
Tier 1 capital ...................................................................................................................................
2004
US$m
86,623
4,253
10,077
(2,660)
(31,190)
156
67,259
2,660
2,624
3,670
21,373
519
30,846
(6,361)
(799)
(165)
90,780
705,302
53,908
759,210
%
12.0
8.9
2003
US$m
74,473
3,711
8,094
(1,615)
(29,920)
120
54,863
1,615
2,868
3,608
15,795
523
24,409
(4,101)
(911)
(218)
74,042
577,430
41,232
618,662
%
12.0
8.9
The above figures were computed in accordance
with the EU Banking Consolidation Directive.
Tier 1 capital increased by US$12.4 billion.
Retained profits (excluding goodwill amortisation)
contributed US$6.4 billion. Shares issued in lieu of
dividends and innovative tier 1 securities issued
contributed US$2.6 billion and US$2.0 billion,
respectively. Exchange movements on reserves and
other movements also added US$1.4 billion to tier 1
capital.
The increase of US$6.4 billion in tier 2 capital
mainly reflects the proceeds of capital issues, net of
redemption and regulatory amortisation.
Total risk-weighted assets increased by
US$141 billion. This increase was driven by
significant growth in loans and advances to
customers in North America, the UK and Hong
Kong. In constant currency, risk-weighted asset
growth was 17 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.
177
H S B C H O L D I N G S P L C
Financial Review (continued)
Risk-weighted assets
Hang Seng Bank .............................................................................................................................
The Hongkong and Shanghai Banking Corporation and other subsidiaries .....................................
The Hongkong and Shanghai Banking Corporation ........................................................................
HSBC Private Banking Holdings (Suisse) ......................................................................................
CCF ................................................................................................................................................
HSBC Bank and other subsidiaries .................................................................................................
HSBC Bank ....................................................................................................................................
HSBC Finance Corporation ............................................................................................................
HSBC Bank Canada ........................................................................................................................
HSBC Bank USA and other subsidiaries ........................................................................................
HSBC North America Holdings Inc. ...............................................................................................
HSBC Mexico .................................................................................................................................
HSBC Bank Middle East ................................................................................................................
HSBC Bank Malaysia .....................................................................................................................
HSBC’s South American operations ...............................................................................................
Bank of Bermuda ............................................................................................................................
HSBC Holdings sub-group .............................................................................................................
Other ...............................................................................................................................................
Total ................................................................................................................................................
2004
US$m
37,918
119,595
157,513
19,815
54,569
220,824
295,208
110,744
26,127
108,577
245,448
8,750
10,088
5,472
9,743
4,107
1,380
21,501
759,210
2003
US$m
34,972
103,557
138,529
22,245
47,741
167,754
237,740
113,186
20,852
63,234
197,272
7,059
7,379
4,979
6,994
–
2,495
16,215
618,662
178
H S B C H O L D I N G S P L C
Other information
Loan maturity and interest sensitivity analysis
At 31 December 2004, the geographical analysis of loan maturity and interest sensitivity by loan type on a
contractual repayment basis was as follows. All amounts are net of suspended interest.
Maturity of 1 year or less
Loans and advances to banks ..............................
Commercial loans to customers
Commercial, industrial and international trade
Real estate and other property related .............
Non-bank financial institutions .......................
Governments ..................................................
Other commercial ...........................................
Hong Kong Government Home Ownership
Scheme ...........................................................
Residential mortgages and other personal loans ..
Hong
Kong
US$m
Rest
of Asia-
Pacific
US$m
Europe
US$m
North
America
US$m
South
America
US$m
Total
US$m
54,303 45,261
14,074
22,077
2,572
138,287
29,028 10,600
9,675 4,766
26,615 1,328
986 83
22,699 2,431
15,421
3,381
1,930
789
4,518
6,568
5,002
15,993
1,638
13,205
1,610
170
98
98
747
63,227
22,994
45,964
3,594
43,600
89,003 19,208
26,039
42,406
2,723
179,379
– 652
27,587 10,332
–
7,684
–
43,006
–
2,778
652
91,387
Loans and advances to customers .......................
116,590 30,192
33,723
85,412
5,501
271,418
Total loans maturing in one year or less ..............
170,893 75,453
47,797
107,489
8,073
409,705
Maturity after 1 year but within 5 years
Loans and advances to banks ..............................
1,087 39
380
83
25
1,614
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 ..
16,123 3,146
9,686 8,907
2,064 544
629 531
6,344 3,537
3,249
3,324
352
510
1,922
3,927
6,002
841
2,065
1,168
358
34
12
508
173
26,803
27,953
3,813
4,243
13,144
34,846 16,665
9,357
14,003
1,085
75,956
– 1,869
35,874 7,629
–
6,554
–
44,221
–
797
1,869
95,075
Loans and advances to customers .......................
70,720 26,163
15,911
58,224
1,882
172,900
Total loans maturing after 1 year but within
5 years ............................................................
71,807 26,202
16,291
58,307
1,907
174,514
Interest rate sensitivity of loans and advances to
banks and commercial loans to customers:
Fixed interest rate ...........................................
Variable interest rate .......................................
Total ....................................................................
Maturity after 5 years
Loans and advances to banks ...............................
Commercial loans to customers
Commercial, industrial and international trade
Real estate and other property related .............
Non-bank financial institutions .......................
Governments ..................................................
Other commercial ...........................................
Hong Kong Government Home Ownership
Scheme ............................................................
Residential mortgages and other personal loans...
7,783 148
28,150 16,556
2,875
6,862
3,802
10,284
627
483
15,235
62,335
35,933 16,704
9,737
14,086
1,110
77,570
483
–
329
2,016
–
2,828
9,242 366
6,200 2,674
2,127 58
2,048 1
7,057 1,911
421
856
15
132
874
1,098
3,310
255
165
501
14
2
1
29
4
11,141
13,042
2,456
2,375
10,347
26,674 5,010
2,298
5,329
50
39,361
– 2,882
64,975 15,174
–
9,613
–
106,099
–
78
2,882
195,939
Loans and advances to customers ........................
91,649 23,066
11,911
111,428
128
238,182
Total loans maturing after 5 years........................
92,132 23,066
12,240
113,444
128
241,010
Interest rate sensitivity of loans and advances to
banks and commercial loans to customers
Fixed interest rate ............................................
Variable interest rate........................................
7,517 175
19,640 4,835
988
1,639
1,869
5,476
20
30
10,569
31,620
Total.....................................................................
27,157 5,010
2,627
7,345
50
42,189
179
H S B C H O L D I N G S P L C
Other information (continued)
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.
2004
Average
balance
US$m
Average
rate
%
Year ended 31 December
2003
Average
balance
US$m
Average
rate
%
2002
Average
balance
US$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 ...................................................................
14,746
9,237
22,746
22,884
69,613
1,723
2,484
1,016
416
5,639
1,641
1,013
4,410
1,146
8,210
1,943
3,098
2,810
4,480
Total ....................................................................
12,331
South America
Demand and other – non-interest bearing ...........
Demand – interest bearing ..................................
Time ...................................................................
Other ...................................................................
13
148
238
703
Total ....................................................................
1,102
Total
Demand and other – non-interest bearing ...........
Demand – interest bearing ..................................
Time ...................................................................
Other ...................................................................
Total ....................................................................
20,066
15,980
31,220
29,629
96,895
–
1.5
2.7
2.5
–
1.2
1.6
1.7
–
2.3
3.1
2.7
–
1.4
3.7
1.8
–
6.8
6.3
5.7
–
1.5
2.9
2.4
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
10,280
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
180
2004
Average
balance
US$m
Average
rate
%
Year ended 31 December
2003
Average
balance
US$m
Average
rate
%
2002
Average
balance
US$m
Average
rate
%
Customer accounts
Europe
Demand and other – non-interest bearing ..
Demand – interest bearing .........................
Savings ......................................................
Time .........................................................
Other ..........................................................
Total ..........................................................
Hong Kong
Demand and other – non-interest bearing ..
Demand – interest bearing .........................
Savings ......................................................
Time ..........................................................
Other ..........................................................
37,396
128,382
37,846
48,314
15,167
267,105
13,523
94,637
46,817
12,015
106
Total ..........................................................
167,098
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 ..........................................................
8,592
24,480
27,171
7,597
2,866
70,706
21,409
16,394
52,485
13,856
16,988
Total ..........................................................
121,132
South America
Demand and other – non-interest bearing ..
Demand – interest bearing .........................
Savings ......................................................
Time ..........................................................
Other ..........................................................
Total ..........................................................
Total
Demand and other – non-interest bearing ..
Demand – interest bearing .........................
Savings ......................................................
Time ..........................................................
Other ..........................................................
Total ..........................................................
CDs and other money market instruments
Europe .......................................................
Hong Kong ................................................
Rest of Asia-Pacific ...................................
North America ...........................................
South America ...........................................
Total ..........................................................
1,428
308
5,976
269
411
8,392
82,348
264,201
170,295
82,051
35,538
634,433
22,359
10,830
6,733
20,790
102
60,814
–
2.0
2.5
3.1
2.2
–
0.1
1.0
1.6
4.7
–
1.2
2.9
2.1
1.2
–
1.0
1.3
2.4
2.7
–
1.6
13.5
0.4
16.3
–
1.2
2.2
2.6
2.5
2.9
3.5
4.4
2.1
14.7
2.9
30,667
101,189
33,876
41,010
9,696
216,438
8,829
74,818
58,646
10,101
379
152,773
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
68,519
206,345
170,773
64,025
24,297
533,959
11,156
9,656
4,906
14,309
63
40,090
–
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
181
H S B C H O L D I N G S P L C
Other information (continued)
Certificates of deposit and other time deposits
At 31 December 2004, 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 ....................................................
20,645
20,769
49,633
91,047
228
1,061
10,164
11,453
5,405
4,065
7,094
Total ..............................................................
16,564
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 ..............................................................
3,754
2,383
11,707
17,844
–
113
151
264
30,032
28,391
78,749
137,172
3,722
4,279
2,995
10,996
495
17
477
989
1,042
228
1,020
2,290
40
215
2,871
3,126
–
53
6
59
5,299
4,792
7,369
17,460
200
609
1,305
2,114
1,505
2
262
1,769
273
442
95
810
13
164
149
326
–
48
2
50
1,991
1,265
1,813
5,069
1
1,805
3,863
5,669
9,293
28
1,998
11,319
48
72
712
832
–
228
4,717
4,945
–
27
1
28
9,342
2,160
11,291
22,793
Total
US$m
24,568
27,462
57,796
109,826
11,521
1,108
12,901
25,530
6,768
4,807
8,921
20,496
3,807
2,990
19,444
26,241
–
241
160
401
46,664
36,608
99,222
182,494
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$100,000 and over or the equivalent in other currencies.
182
Short-term borrowings
HSBC includes short-term borrowings within customer accounts, deposits by banks and debt securities in issue and does
not show short-term borrowings separately on the balance sheet. Short-term borrowings are defined by the SEC as
Federal funds purchased and securities sold under agreements to repurchase, commercial paper and other short-term
borrowings. HSBC’s only significant short-term borrowings are securities sold under agreements to repurchase and
certain debt securities in issue. Additional information on these is provided in the tables below.
Securities sold under agreements to repurchase
Outstanding at 31 December .........................................................................
Average amount outstanding during the year ................................................
Maximum quarter-end balance outstanding during the year ..........................
Weighted average interest rate during the year .............................................
Weighted average interest rate at the year-end ..............................................
Short term bonds
Outstanding at 31 December .........................................................................
Average amount outstanding during the year ................................................
Maximum quarter-end balance outstanding during the year ..........................
Weighted average interest rate during the year .............................................
Weighted average interest rate at the year-end ..............................................
2004
US$m
43,726
46,229
53,188
2.7%
2.9%
2004
US$m
34,987
28,758
34,987
2.9%
2.5%
Year ended 31 December
2003
US$m
27,427
25,883
30,938
2.0%
1.9%
Year ended 31 December
2003
US$m
29,979
17,445
29,979
2.5%
2.5%
2002
US$m
21,397
21,089
21,468
4.0%
3.9%
2002
US$m
2,775
3,093
4,422
4.3%
4.7%
183
H S B C H O L D I N G S P L C
Other information (continued)
Off-balance sheet arrangements
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 38(a) of the ‘Notes on the Financial Statements’ on page 306 describes various types of guarantees and
discloses the maximum potential future payments under such arrangements. Credit risk associated with all forms of
guarantees is assessed in the same manner as for on-balance sheet credit advances and, where necessary, provisions
for assessed impairment are included in ‘provisions for contingent liabilities and commitments’.
(ii) Commitments to lend
Undrawn credit lines are disclosed in Note 38(a) of the ‘Notes on Financial Statements’ on page 306. The majority
by value of undrawn credit lines arises from ‘open to buy’ lines on personal credit cards, whereby cheques are issued
to potential customers offering them a pre-approved loan, advised overdraft limits, and mortgage offers awaiting
customer acceptance. HSBC generally has the right to change or terminate any conditions of a personal customer’s
overdraft, credit card or other credit line upon notification to the customer. In respect of corporate commitments to
lend, in most contracts HSBC’s position will be protected through restrictions on access to funding in the event of
material adverse change.
(iii) Credit derivatives
HSBC uses credit derivatives through the dealing operations of certain Group companies, acting as a principal
counterparty to a broad range of users, structuring deals to produce risk management products for its customers, or
making markets in certain products. Risk is typically controlled through entering into an offsetting credit derivative
contract with another counterparty. HSBC also manages its own exposure to industry segments and individual
counterparties using credit derivatives. For a more detailed description of credit derivatives and information
regarding their carrying amounts in 2004 and 2003, refer to Note 37(a) of the ‘Notes on Financial Statements’ on
page 299.
(iv) Special purpose and variable interest entities
HSBC predominantly uses special purpose entities (‘SPEs’), or variable interest entities (‘VIEs’), to securitise loans
and advances it has originated where this 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. 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 typically provides part of the liquidity facilities to the entities, together with secondary credit
enhancement.
HSBC also has relationships with SPEs which offer management of investment funds, provide finance to public and
private sector infrastructure projects, and facilitate capital funding through the issue of preference shares via
partnerships.
All SPEs used by HSBC are authorised centrally to ensure appropriate purpose and governance, and the activities of
SPEs administered by HSBC are closely monitored by senior management. The use of SPEs is not a significant part
of HSBC’s activities and HSBC is not reliant on the use of SPEs for any material part of its business operations. For
a further discussion of HSBC’s involvement with VIEs and the accounting treatments under UK and US GAAP see
Note 49(p) of the ‘Notes on the Financial Statements’ on page 351.
184
Contractual obligations
The table below provides details of HSBC’s material contractual obligations as at 31 December 2004.
Long-term debt obligations ...................................................
Capital (finance) lease obligations ........................................
Operating lease obligations ...................................................
Purchase obligations .............................................................
Short positions in debt securities ...........................................
Total ......................................................................................
Payments due by period
Less than
1 year
US$m
1–5 years
US$m
100,190
25
638
717
39,882
141,452
88,294
40
1,450
495
–
90,279
More than
5 years
US$m
42,909
630
1,099
–
–
44,638
Total
US$m
231,393
695
3,187
1,212
39,882
276,369
185
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 63. An executive Director since 1990; Group
Chief Executive from 1993 to 1998. Joined HSBC in
1961; a non-executive Director of The Hongkong and
Shanghai Banking Corporation Limited, having been
an executive Director from 1988 to 1992. A Director of
HSBC Bank plc from 1993 to 1997 and Chairman
from 1998 to 2004. A non-executive director of Ford
Motor Company and of Vodafone Group Plc.
* The Baroness Dunn, DBE, Deputy Chairman and
senior non-executive Director
Age 64. An 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. A former non-executive
Director of Marconi p.l.c. and a 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 66. Former Chairman of Corus Group plc. A non-
executive Director since 1998 and a non-executive
Deputy Chairman since 2001. Chairman of the Group
Audit Committee and of the Nomination Committee. A
member of the Court of the Bank of England. A non-
executive Director of Macsteel Global BV.
S K Green, Group Chief Executive
Age 56. An executive Director since 1998. Executive
Director, Corporate, Investment Banking and Markets
from 1998 to 2003. Joined HSBC in 1982. Group
Treasurer from 1992 to 1998. Chairman of HSBC
Bank plc, HSBC Bank Middle East Limited and HSBC
Private Banking Holdings (Suisse) S.A. A Director of
The Bank of Bermuda Limited, CCF S.A., The
Hongkong and Shanghai Banking Corporation
Limited, Grupo Financiero HSBC, S.A. de C.V.,
HSBC North America Holdings Inc. and HSBC
Trinkaus & Burkhardt KGaA.
A W Jebson, Group Chief Operating Officer
Age 55. An executive Director since 2000. Group IT
Director from 2000 to 2003. Group General Manager,
Information Technology from 1996 to 2000. Joined
HSBC in 1978. A Director of HSBC Finance
Corporation.
186
W F Aldinger, Chairman and Chief Executive
Officer, HSBC North America Holdings Inc.
Age 57. An executive Director since 2003. Joined
HSBC Finance Corporation in 1994. Chairman and
Chief Executive Officer of HSBC Finance
Corporation. Chairman, President and Chief Executive
Officer of HSBC North America Inc. Chairman of
HSBC Bank USA, N.A. and HSBC USA Inc. A non-
executive 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. Former Vice
Chairman of Wells Fargo Bank.
† The Rt Hon the Lord Butler of Brockwell,
KG, GCB, CVO
Age 67. Master, University College, Oxford. A non-
executive Director since 1998. Chairman of the
Corporate Social Responsibility Committee, a member
of the Nomination Committee and Chairman of the
HSBC Education Trust. A non-executive Director of
Imperial Chemical Industries plc. Chaired the UK
Government Review of Intelligence on Weapons of
Mass Destruction. 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 53. Executive Chairman of chinadotcom
corporation and Chairman of its subsidiary,
hongkong.com Corporation. A non-executive Director
since 1998. A member of the Group Audit Committee.
Non-executive Chairman of HSBC Private Equity
(Asia) Limited, and a non-executive Director of The
Hongkong and Shanghai Banking Corporation Limited
since 1997. Non-executive Chairman of MTR
Corporation Limited and a non-executive Director of
Convenience Retail Asia Limited, Inchcape plc, VTech
Holdings Limited and The Wharf (Holdings) Limited.
† J D Coombe
Age 59. Executive Director and Chief Financial
Officer of GlaxoSmithKline plc, from which he will
retire on 31 March 2005. Appointed a non-executive
Director with effect from 1 March 2005 and a member
of the Group Audit Committee with effect from 1 July
2005. A non-executive Director of the Supervisory
Board of Siemens AG and appointed a non-executive
Director of GUS plc with effect from 1 April 2005. A
member of The Code Committee of the Panel on
Takeovers and Mergers. A former Chairman of The
Hundred Group of Finance Directors and a former
member of the Accounting Standards Board.
D G Eldon, Chairman, The Hongkong and Shanghai
Banking Corporation Limited
Age 59. An executive Director since 1999. Joined
HSBC in 1968. Appointed an executive Director of The
Hongkong and Shanghai Banking Corporation Limited
in 1994, Chief Executive Officer in 1996 and Chairman
in 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 43. Finance Director of Pearson plc. A non-
executive Director since 1 March 2004. A member of
the Group Audit Committee. Former Executive Vice
President, Strategy and Group Control of Imperial
Chemical Industries plc.
D J Flint, Group Finance Director
Age 49. Joined HSBC as an executive Director in
1995. Director of HSBC Bank Malaysia Berhad. A
non-executive Director of BP p.l.c. Chairman of the
Financial Reporting Council’s review of the Turnbull
Guidance on Internal Control. Served on the
Accounting Standards Board and the Standards
Advisory Council of the International Accounting
Standards Board from 2001 to 2004. A former partner
in KPMG.
† W K L Fung, OBE
Age 56. Group Managing Director of Li & Fung
Limited. A non-executive Director since 1998. A
member of the Remuneration Committee and of the
Corporate Social Responsibility Committee. A non-
executive Director of The Hongkong and Shanghai
Banking Corporation Limited since 1995. Former
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.
M F Geoghegan, CBE, Chief Executive, HSBC
Bank plc
Age 51. An executive Director since 1 March 2004.
Joined HSBC in 1973. Appointed a Director and Chief
Executive of HSBC Bank plc in January 2004. A
Director of CCF S.A. and HSBC Private Banking
Holdings (Suisse) S.A. President of HSBC Bank Brasil
S.A. - 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 and Chairman of Young Enterprise.
† S Hintze
Age 60. Former Chief Operating Officer of Barilla
S.P.A. A non-executive Director since 2001. A
member of the Corporate Social Responsibility
Committee and of the Remuneration Committee. A
non-executive Director of Premier Foods plc and the
Society of Genealogists, a registered charity. A 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 former
non-executive Director of Safeway plc.
† J W J Hughes-Hallett
Age 55. Chairman of John Swire & Sons Limited.
Appointed a non-executive Director with effect from 1
March 2005. A non-executive Director of The
Hongkong and Shanghai Banking Corporation Limited
from 1999 to 2004. A non-executive Director and
formerly Chairman of Cathay Pacific Airways Limited
and Swire Pacific Limited.
† Sir John Kemp-Welch
Age 68. Former Joint Senior Partner of Cazenove &
Co and former Chairman of the London Stock
Exchange. A non-executive Director since 2000. A
member of the Remuneration Committee and of the
Group Audit Committee. A Deputy Chairman of the
Financial Reporting Council and a member of the
Panel on Takeovers and Mergers from 1994 to 2000.
† Sir Mark Moody-Stuart, KCMG
Age 64. Chairman of Anglo American plc. A non-
executive Director since 2001. 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 non-executive Director of Accenture
Limited, a Governor of Nuffield Hospitals, President
of the Liverpool School of Tropical Medicine and
Chairman of the Global Business Coalition on
HIV/AIDS.
† S W Newton
Age 63. 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. Founder of
Newton Investment Management, from which he
retired in 2002.
187
H S B C H O L D I N G S P L C
Board of Directors and Senior Management (continued)
* H Sohmen, OBE
Group Managing Directors
Age 65. Chairman and President of World-Wide
Shipping Group Limited and Chairman of Bergesen
d.y. 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 59. Chair of Canadian Broadcasting Corporation.
A non-executive Director since 2002. A member of the
Corporate Social Responsibility Committee. Appointed
a non-executive Director of HSBC North America
Holdings Inc. with effect from 1 March 2005. A former
non-executive Director of HSBC Bank Canada, HSBC
Bank USA, N.A. and HSBC USA Inc. A non-executive
Director of Fairmont Hotels and Resorts from 2001 to
February 2005. Chair of Vancouver Board of Trade
from 2001 to 2002.
† Sir Brian Williamson, CBE
Age 60. Chairman of Electra Investment Trust plc and
Resolution Life Group Limited. A non-executive
Director since 2002. A member of the Nomination
Committee. A member of the Supervisory Board of
Euronext NV. Senior adviser to Fleming Family and
Partners. Former Chairman of London International
Financial Futures and Options Exchange and Gerrard
Group plc. A former non-executive Director of the
Financial Services Authority and of the Court of The
Bank of Ireland.
* Non-executive Director
† Independent non-executive Director
Adviser to the Board
D J Shaw
Age 58. An Adviser to the Board since 1998. Solicitor.
A partner in Norton Rose from 1973 to 1998. A
Director of The Bank of Bermuda Limited and HSBC
Private Banking Holdings (Suisse) S.A.
Secretary
R G Barber
Age 54. 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.
188
C-H Filippi
Age 52. 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
CCF S.A. 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 45. A Group Managing Director since
1 March 2004. Co-Head Corporate, Investment
Banking and Markets since 2003. Joined HSBC in
1980. Appointed a Group General Manager in 2000.
Head of Treasury and Capital Markets in Asia-Pacific
from 1996 to 2002 and Head of Global Markets from
2002 to 2003.
Y A Nasr
Age 50. A Group Managing Director since
1 March 2004. President, HSBC Bank Brasil S.A. -
Banco Múltiplo since 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 48. A Group Managing Director since 1 March
2004. Co-Head Corporate, Investment Banking and
Markets since 2003. Joined HSBC in 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 2003.
Group General Managers
R J Arena
Age 56. Group General Manager, Global e-business.
Joined HSBC in 1999. Appointed a Group General
Manager in 2000.
C C R Bannister
Age 46. Chief Executive Officer, Group Private
Banking. Joined HSBC in 1994. Appointed a Group
General Manager in 2001.
R E T Bennett
D H Hodgkinson
Age 53. Group General Manager, Legal and
Compliance. Joined HSBC in 1979. Appointed a
Group General Manager in 1998.
N S K Booker
Age 46. Group General Manager and Chief Executive
Officer, India. Joined HSBC in 1981. Appointed a
Group General Manager in January 2004.
G P S Calvert, OBE
Age 52. Group General Manager and Managing
Director, The Saudi British Bank. Joined HSBC in
1974. Appointed a Group General Manager in June
2004.
Age 54. Group General Manager, Chief Executive
Officer and Deputy Chairman, HSBC Bank Middle
East Limited. Joined HSBC in 1969. Appointed a
Group General Manager in 2003.
A P Hope
Age 58. Group General Manager, Insurance. Joined
HSBC in 1971. Appointed a Group General Manager
in 1996.
D D J John
Age 54. Chief Operating Officer and Director, HSBC
Bank plc. Joined HSBC Bank plc in 1971. Appointed a
Group General Manager in 2000.
Z J Cama
M J W King
Age 57. Deputy Chairman and Chief Executive
Officer, HSBC Bank Malaysia Berhad. Joined HSBC
in 1968. Appointed a Group General Manager in 2001.
Age 48. Group General Manager, Internal Audit.
Joined HSBC in 1986. Appointed a Group General
Manager in 2002.
V H C Cheng, OBE
R C F Or
Age 56. Executive Director and Chairman designate,
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.
A A Flockhart
Age 53. Group General Manager, Chief Executive
Officer and Chairman, Grupo Financiero HSBC, S.A.
de C.V. and HSBC México, S.A. Joined HSBC in
1971. Appointed a Group General Manager in 2002.
M J G Glynn
Age 53. Group General Manager, President and Chief
Executive Officer, HSBC Bank USA, N.A. Joined
HSBC in 1982. Appointed a Group General Manager
in 2001.
K M Harvey
Age 44. Group General Manager and Group Chief
Information Officer. Joined HSBC Finance
Corporation in 1989. Appointed a Group General
Manager in August 2004.
Age 55. Executive Director, The Hongkong and
Shanghai Banking Corporation Limited. Joined HSBC
in 1972. Appointed a Group General Manager in 2000.
K Patel
Age 56. 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.
R C Picot
Age 47. Group Chief Accounting Officer. Joined
HSBC in 1993. Appointed a Group General Manager
in 2003.
J C S Rankin
Age 63. Group General Manager, Human Resources.
Joined HSBC in 1960. Appointed a Group General
Manager in 1990.
B Robertson
Age 50. Group General Manager, Credit and Risk.
Joined HSBC in 1975. Appointed a Group General
Manager in 2003.
189
H S B C H O L D I N G S P L C
Board of Directors and Senior Management (continued)
M R P Smith, OBE
Age 48. President and 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 46. 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 55. Group General Manager, Marketing. Joined
HSBC in 2001. Appointed a Group General Manager
in 2001.
P A Thurston
Age 51. Group General Manager, Personal Financial
Services, Asia-Pacific. Joined HSBC in 1975.
Appointed a Group General Manager in 2003.
190
H S B C H O L D I N G S P L C
Report of the Directors
Results for 2004
HSBC reported operating profit before provisions of
US$22,898 million. Profit attributable to
shareholders of HSBC Holdings was
US$11,840 million, a 14.4 per cent return on
shareholders’ funds. The retained profit transferred
to reserves was US$4,539 million.
First, second and third interim dividends, each
of US$0.13 per ordinary share, were paid on 7 July
2004, 6 October 2004 and 20 January 2005
respectively. The Directors have declared a fourth
interim dividend of US$0.27 per ordinary share in
lieu of a final dividend, making a total distribution
for the year of US$7,301 million. The fourth interim
dividend will be payable on 4 May 2005 in cash in
United States dollars, or in sterling or Hong Kong
dollars at exchange rates to be determined on
25 April 2005, with a scrip dividend alternative. The
reserves available for distribution before accounting
for the third and fourth interim dividends of
US$1,444 million and US$2,996 million
respectively are US$10,927 million.
Further information about the results is given in
the consolidated profit and loss account on page 237.
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 9,800 offices in
77 countries and territories in Europe; the Asia-
Pacific region, the Americas, the Middle East and
Africa and serves over 110 million customers. Taken
together, the five largest customers of HSBC do not
account for more than one per cent of HSBC’s
income.
In February 2004, The Bank of Bermuda
Limited was acquired for US$1,224 million.
In April 2004, 15.98 per cent of Industrial Bank
Co. Limited was acquired by Hang Seng Bank
Limited for US$209 million.
In May 2004, 100 per cent of Intesa Bank
Canada was acquired for US$88 million.
In June 2004, 14.62 per cent of UTI Bank
Limited was acquired for US$68 million.
In August 2004, 19.9 per cent of Bank of
Communications Limited was acquired for
US$1,747 million.
In November 2004, 100 per cent of Marks and
Spencer Retail Financial Services Holdings Limited
was acquired for US$1,044 million.
A review of the development of the business of
HSBC undertakings during the year and an
indication of likely future developments are given in
the 'Description of Business' on pages 8 to 19.
Capital and reserves
The following events in relation to the HSBC
Holdings ordinary shares of US$0.50 each occurred
during the year:
Scrip dividends
1.
35,092,117 ordinary shares were issued at par
on 20 January 2004 to shareholders who elected
to receive new shares in lieu of the 2003 second
interim dividend. The market value per share
used to calculate shareholders’ entitlements to
new shares was US$15.1987, being the United
States dollar equivalent of £8.838.
2. 22,984,421 ordinary shares were issued at par
on 5 May 2004 to shareholders who elected to
receive new shares in lieu of the 2003 third
interim dividend. The market value per share
used to calculate shareholders’ entitlements to
new shares was US$15.0552, being the United
States dollar equivalent of £8.16.
3. 52,287,747 ordinary shares were issued at par
on 7 July 2004 to shareholders who elected to
receive new shares in lieu of the 2004 first
interim dividend. The market value per share
used to calculate shareholders’ entitlements to
new shares was US$14.293 being the United
States dollar equivalent of £7.926.
4. 49,677,957 ordinary shares were issued at par
on 6 October 2004 to shareholders who elected
to receive new shares in lieu of the 2004 second
interim dividend. The market value per share
used to calculate shareholders’ entitlements to
new shares was US$15.0141 being the United
States dollar equivalent of £8.307.
All-Employee share plans
5.
28,472,134 ordinary shares were issued at prices
ranging from £5.2212 to £6.7536 per share in
connection with the exercise of options under
the HSBC Holdings savings-related share option
plans. Options over 7,675,359 ordinary shares
lapsed.
6. The HSBC Qualifying Employee Share
Ownership Trust (‘the QUEST’) was established
in 1999 to satisfy options exercised by UK
191
H S B C H O L D I N G S P L C
Report of the Directors (continued)
participants of the HSBC Holdings Savings-
Related Share Option Plan. At 1 January 2004,
the QUEST held 514,293 ordinary shares.
During 2004, HSBC QUEST Trustee (UK)
Limited, the corporate trustee of the QUEST,
transferred 1,592,371 ordinary shares from the
QUEST to employees who exercised options
under the HSBC Holdings Savings-Related
Share Option Plan and subscribed for 1,079,099
ordinary shares at market values ranging from
£7.84 to £9.38 using subscription moneys
received from those employees. At 31
December 2004, the QUEST held 1,021
ordinary shares.
7.
4,216,456 ordinary shares were issued at €9.679
per share in connection with a Plan d’Epargne
Entreprise for the benefit of non-UK resident
employees of CCF and its subsidiaries.
8. Options over 11,154,679 ordinary shares were
awarded at nil consideration on 21 April 2004
and options over 13,885,457 ordinary shares
were awarded at nil consideration on 10 May
2004 to over 46,000 HSBC employees resident
in more than 56 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 2004 at a price of £6.472
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
9.
14,905,692 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 812,836 ordinary shares
lapsed.
10. 1,460,399 ordinary shares were issued at prices
ranging from £6.91 to £8.712 per share in
connection with the exercise of options under
the HSBC Holdings Group Share Option Plan.
Options over 5,548,707 ordinary shares lapsed.
11. Options over 63,341,879 ordinary shares were
awarded at nil consideration on 30 April 2004
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 £8.283 per share, the market
value of the ordinary shares on the date of
award.
192
12. Options over 340,160 ordinary shares were
awarded at nil consideration on 27 August 2004
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 £8.65 per share, the market
value of the ordinary shares on the date of
award.
HSBC Finance Corporation
13. 1,590,319 ordinary shares were issued at
US$9.60 in connection with the early settlement
of HSBC Finance Corporation 8.875%
Adjustable Conversion-Rate Equity Security
Units.
14. 293,254 ordinary shares were issued at prices
ranging from US$14.11 to US$17.28 in
connection with the exercise of options under
HSBC Finance Corporation share plans that
have been converted into options over HSBC
Holdings ordinary shares.
Authority to allot shares
15. At the Annual General Meeting in 2004
shareholders renewed the authority for the
Directors to allot new shares. The authority was
to allot up to 2,199,800,000 ordinary shares,
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.
Other than as described in paragraphs 1. to 14.
above, the Directors did not allot any shares
during 2004.
Authority to repurchase shares
16. At the Annual General Meeting in 2004
shareholders renewed the authority for the
Company to make market repurchases of up to
1,099,900,000 ordinary shares. The Directors
have not exercised this authority.
Employee share option plans
In order to align the interests of staff with those of
shareholders, share options are awarded to
employees under all-employee share plans and
discretionary share incentive plans. The following
are particulars of outstanding employee share
options, including those held by employees working
under employment contracts that are regarded as
“continuous contracts” for the purposes of the Hong
Kong Employment Ordinance. The options were
granted at nil consideration. 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. Under the authority granted by
shareholders at the Annual General Meeting in 2000,
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 7.6 per cent of HSBC
Holdings’ issued ordinary share capital on
28 February 2005). 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 (approximately 560,000,000 HSBC
Holdings ordinary shares on 28 February 2005).
Under the HSBC Holdings savings-related share
option plans, HSBC Holdings Group Share Option
Plan, HSBC Holdings Executive Share Option
Scheme and the HSBC Holdings Restricted Share
Plan 2000 there were options outstanding over
374,369,127 HSBC Holdings ordinary shares at
31 December 2004. Particulars of options over
HSBC Holdings shares held by Directors of HSBC
Holdings are set out on pages 229 to 233 of the
Directors’ Remuneration Report. Following a
comprehensive review of share-based remuneration
arrangements in 2004, resolutions relating to
employee share plans will be submitted to the
forthcoming Annual General Meeting.
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.
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 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 or after normal
retirement age, 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.
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.
HSBC Holdings Savings-Related Share Option Plan
HSBC Holdings ordinary shares of US$0.50
Date of
award
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
21 Apr 2004
21 Apr 2004
Exercise
price (£)
Exercisable
from1
Exercisable
until2
Options at
1 January
2004
Options
awarded
during year3
Options
exercised
during year4
Options
lapsed
during year
Options at
31 December
2004
5.2212
5.3980
6.0299
6.7536
6.7536
6.3224
6.3224
5.3496
5.3496
6.4720
6.4720
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 2007
1 Aug 2009
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 2008
31 Jan 2010
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
–
–
–
–
–
–
–
–
–
–
–
4,556,417
6,534,250
139,268
10,251,424
448,670
1,724,173
103,513
50,624
48,693
101,884
56,157
2,162
411
46,897
147,716
629,718
78,155
339,842
216,124
374,479
1,076,787
968,910
299,055
206,641
–
199,542
10,085,436
68,525
3,728,076
1,474,971
4,212,972
7,878,002
13,049,424
4,255,200
6,327,198
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 closing price per share on 20 April 2004, the day before the options were awarded, was £8.29.
4 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.37.
193
H S B C H O L D I N G S P L C
Report of the Directors (continued)
HSBC Holdings Savings-Related Share Option Plan: Overseas Section
HSBC Holdings ordinary shares of US$0.50
Date of
award
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
21 Apr 2004
21 Apr 2004
10 May 2004
10 May 2004
Exercise
price (£)
Exercisable
from1
Exercisable
until2
Options at
1 January
2004
Options
awarded
during year
Options
exercised
during year3
Options
lapsed
during year
Options at
31 December
2004
5.2212
5.3980
6.0299
6.7536
6.7536
6.3224
6.3224
5.3496
5.3496
5.3496
5.3496
6.4720
6.4720
6.4720
6.4720
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
1 Aug 2007
1 Aug 2009
1 Aug 2007
1 Aug 2009
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
31 Jan 2008
31 Jan 2010
31 Jan 2008
31 Jan 2010
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
49,5244
14,4884
10,550,5505
3,334,9075
39,315
10,673,901
273,551
5,091,195
9,233
19,040
3,949
–
–
67,416
9,744
–
–
3,358
605
38,919
98,247
661,486
307,840
108,759
310,873
69,419
–
–
980,573
224,861
–
–
428,360
61,698
–
170,388
15,687,141
374,043
1,341,245
3,063,749
1,151,329
10,459
10,488
16,384,589
6,265,693
49,524
14,488
10,118,832
3,272,604
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 £8.11.
4 The closing price per share on 20 April 2004, the day before the options were awarded, was £8.29.
5 The closing price per share on 9 May 2004, the day before the options were awarded, was £8.12.
HSBC Holdings Savings-Related Share Option Scheme: USA Section
HSBC Holdings ordinary shares of US$0.50
Date of
award
Exercise
price (£)
Exercisable
from1
Exercisable
until2
Options at
1 January
2004
Options
exercised
during year3
Options
lapsed
during year
Options at
31 December
2004
10 Aug 1999
6.3078
1 Jul 2004
31 Dec 2004
1,477,642
949,150
–
528,492
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 £8.33.
No options were granted during the period.
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
194
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 of the sale or transfer 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.
HSBC Holdings Executive Share Option Scheme
HSBC Holdings ordinary shares of US$0.50
Date of
award
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
from1
Exercisable
until2
2.8376
2.1727
3.3334
5.0160
7.7984
6.2767
6.3754
7.4210
7.8710
7.4600
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
8 Mar 2004
7 Mar 2005
1 Apr 2006
24 Mar 2007
12 Aug 2007
16 Mar 2008
29 Mar 2009
10 Aug 2009
31 Aug 2009
3 Apr 2010
Options at
1 January
2004
Options
exercised
during year3
Options
lapsed
during year
Options at
31 December
2004
82,479
234,000
602,019
1,046,174
14,625
1,954,924
32,420,672
193,800
4,000
23,142,646
82,479
133,500
236,349
255,263
–
499,281
8,802,829
43,642
–
4,852,349
–
–
15,000
9,000
–
37,500
299,478
7,500
–
444,358
–
100,500
350,670
781,911
14,625
1,418,143
23,318,365
142,658
4,000
17,845,939
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 £8.61.
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
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
30 Apr 2004
27 Aug 2004
Exercise
price (£)
Exercisable
from1
Exercisable
until2
9.6420
8.7120
8.2280
8.4050
7.4550
6.9100
8.1300
9.1350
8.2830
8.6500
4 Oct 2003
23 Apr 2004
30 Aug 2004
7 May 2005
30 Aug 2005
2 May 2006
29 Aug 2006
3 Nov 2006
30 Apr 2007
27 Aug 2007
4 Oct 2010
23 Apr 2011
30 Aug 2011
7 May 2012
30 Aug 2012
2 May 2013
29 Aug 2013
3 Nov 2013
30 Apr 2014
27 Aug 2014
Options at
1 January
2004
396,235
47,272,814
356,980
54,343,874
452,350
56,527,650
577,270
4,069,800
–
–
Options
awarded
during
year
Options
exercised
during
year3
Options
lapsed
during
year
Options at
31 December
2004
–
–
–
–
–
–
–
–
63,341,8794
340,1605
–
1,284,499
25,650
71,850
–
78,400
–
–
–
–
6,883
1,182,858
14,100
1,658,549
7,725
1,647,400
8,200
–
1,022,692
300
389,352
44,805,457
317,230
52,613,475
444,625
54,801,850
569,070
4,069,800
62,319,187
339,860
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 £9.05.
4 The closing price per share on 29 April 2004, the day before the options were awarded, was £8.18.
5 The closing price per share on 26 August 2004, the day before the options were awarded, was £8.61.
CCF and subsidiary company plans
When it was acquired in 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 and its subsidiaries.
195
H S B C H O L D I N G S P L C
Report of the Directors (continued)
CCF
shares of €5
Date of
award
23 Jun 1994
22 Jun 1995
9 May 1996
7 May 1997
29 Apr 1998
7 Apr 1999
12 Apr 2000
Exercise
price (€)
32.78
34.00
35.52
37.05
73.50
81.71
142.50
Exercisable
from
23 Jun 1996
22 Jun 1997
9 May 1998
7 Jun 2000
7 Jun 2000
7 Jun 2000
1 Jan 2002
Exercisable
until
23 Jun 2004
22 Jun 2005
9 May 2006
7 May 2007
29 Apr 2008
7 Apr 2009
12 Apr 2010
Options at
1 January
2004
Options
exercised
during year1
Options
lapsed
during year
Options at
31 December
20041
10,800
53,130
89,500
282,630
535,400
788,200
856,000
10,000
1,130
25,000
67,070
147,102
199,778
2,000
800
–
–
–
–
–
–
–
52,000
64,500
215,560
388,298
588,422
854,000
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 2004, The HSBC Holdings Employee
Benefit Trust 2001 (No. 1) held 26,787,515 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
21 Jun 1999
7 Jun 2000
Exercise
price (€)
100.31
105.94
Exercisable
from
Exercisable
until
21 Jun 2004
7 Jun 2005
21 Dec 2004
7 Dec 2005
Options at
1 January
2004
10,000
10,000
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2004
10,000
–
–
–
–
10,000
Banque de Baecque Beau
shares of no par value
Date of
award
Exercise
price (€)
Exercisable
from
Exercisable
until
Options at
1 January
2004
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2004
22 Dec 2000
61.66
22 Dec 2003
22 Dec 2005
11,500
–
–
11,500
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
2004
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2004
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
Banque Dupuy de Parseval
shares of €20
Date of
award
1 Jul 1999
3 Apr 2000
8 Jun 2000
Exercise
price (€)
34.76
36.36
39.48
Exercisable
from
1 Jul 2004
3 Apr 2005
8 Jun 2005
Exercisable
until
1 Oct 2004
3 Jul 2005
8 Sep 2005
Options at
1 January
2004
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2004
5,000
5,000
5,000
5,000
–
–
–
–
–
–
5,000
5,000
196
Crédit Commercial du Sud Ouest
shares of €15.25
Date of
award
9 Sep 1999
7 Jun 2000
Exercise
price (€)
95.89
102.29
Exercisable
from
9 Sep 2004
7 Jun 2005
Exercisable
until
9 Mar 2005
7 Dec 2005
Options at
1 January
2004
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2004
7,500
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
2004
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
20041
272,250
149,460
258,525
448,500
229,950
101,750
–
–
–
–
–
–
4,500
117,000
4,500
170,500
149,460
254,025
331,500
225,450
1 Following exercise of the options, the 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 2004, The CCF Employee
Benefit Trust 2001 held 2,294,066 HSBC Holdings ordinary shares which may be exchanged for HSBC Private Bank France shares
arising from the exercise of these options.
Netvalor
shares of €415
Date of
award
22 Dec 1999
19 Dec 2000
Exercise
price (€)
Exercisable
from
Exercisable
until
Options at
1 January
2004
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2004
415
415
22 Dec 2004
19 Dec 2005
22 Dec 2006
19 Dec 2007
2,410
3,340
–
–
–
70
2,410
3,270
Sinopia Asset Management
shares of €0.50
Date of
award
22 Mar 1999
15 Oct 1999
18 Feb 2000
Exercise
price (€)
Exercisable
from
Exercisable
until
Options at
1 January
2004
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
20041
21.85
18.80
18.66
22 Mar 2004
15 Oct 2004
18 Feb 2005
22 Sep 2004
15 Apr 2005
18 Aug 2005
79,000
45,000
97,500
79,000
15,000
–
–
–
2,000
–
30,000
95,500
1 Following 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 2004, The CCF Employee Benefit Trust 2001 held 281,814 HSBC
Holdings ordinary shares which may be exchanged for Sinopia 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
2004
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2004
19.97
33.54
47.81
25 Nov 2003
22 Nov 2004
12 Jul 2005
25 May 2004
22 May 2005
12 Jan 2006
27,000
26,200
25,400
27,000
25,400
2,200
–
800
800
–
–
22,400
197
H S B C H O L D I N G S P L C
Report of the Directors (continued)
HSBC Finance Corporation and subsidiary
company plans
Following the acquisition of HSBC Finance
Corporation in 2003, all outstanding options and
equity-based awards over HSBC Finance
Corporation 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 HSBC Finance Corporation (2.675
HSBC Holdings ordinary shares for each HSBC
Finance Corporation 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 HSBC Finance Corporation common
shares granted before 14 November 2002, being the
date the transaction was announced, 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.
At 31 December 2004, the HSBC (Household)
Employee Benefit Trust 2003 held 5,645,439 HSBC
Holdings ordinary shares and 2,200,000 American
Depositary Shares (‘ADSs’), each of which
represents five HSBC Holdings ordinary shares,
which may be used to satisfy the exercise of
employee share options.
HSBC Finance Corporation
1984 Long-Term Executive Incentive Compensation Plan
HSBC Holdings ordinary shares of US$0.50
Date of
award
1 Feb 1994
7 Feb 1995
10 May 1995
17 Jul 1995
13 Nov 1995
Exercise
price (US$)
Exercisable
from
Exercisable
until
4.16
5.09
5.91
6.42
7.43
1 Feb 1995
7 Feb 1996
10 May 1996
17 Jul 1996
13 Nov 1996
1 Feb 2004
7 Feb 2005
10 May 2005
17 Jul 2005
13 Nov 2005
Options at
1 January
2004
135,627
1,532,234
48,150
40,125
2,056,007
Options
exercised
during year1
Options
lapsed
during year
Options at
31 December
2004
135,627
1,384,092
48,150
40,125
1,772,876
–
–
–
–
–
–
148,142
–
–
283,131
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.63.
HSBC Finance Corporation
1996 Long-Term Executive Incentive Compensation Plan
HSBC Holdings ordinary shares of US$0.50
Date of
award
11 Nov 1996
14 May 1997
10 Nov 1997
15 Jun 1998
1 Jul 1998
9 Nov 1998
17 May 1999
3 Jun 1999
31 Aug 1999
8 Nov 1999
30 Jun 2000
8 Feb 2000
13 Nov 2000
12 Nov 2001
20 Nov 2002
Exercise
price (US$)
Exercisable
from
Exercisable
until
Options at
1 January
2004
Options
exercised
during year1
Options
lapsed
during year
Options at
31 December
2004
11.43
11.29
14.60
17.08
19.21
13.71
16.99
16.32
13.96
16.96
15.70
13.26
18.40
21.37
10.66
11 Nov 1997
14 May 1998
10 Nov 1998
15 Jun 1999
1 Jul 1999
9 Nov 1999
17 May 2000
3 Jun 2000
31 Aug 2000
8 Nov 2000
30 Jun 2001
8 Feb 2001
13 Nov 2001
12 Nov 2002
20 Nov 20032
11 Nov 2006
14 May 2007
10 Nov 2007
15 Jun 2008
1 Jul 2008
9 Nov 2008
17 May 2009
3 Jun 2009
31 Aug 2009
8 Nov 2009
30 Jun 2010
8 Feb 2010
13 Nov 2010
12 Nov 2011
20 Nov 2012
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
1,580,925
–
208,650
–
–
232,725
–
–
–
–
–
–
–
–
174,139
–
–
–
–
–
–
–
–
–
–
–
–
–
–
30,094
1,006,469
200,630
4,016,020
802,500
80,250
4,695,629
334,375
200,625
345,077
4,869,841
26,846
66,875
6,379,208
7,571,322
7,111,494
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.85.
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.
198
HSBC Finance Corporation
1996 Long-Term Executive Incentive Compensation Plan1
HSBC Holdings ordinary shares of US$0.50
Date of
award
15 Nov 2002
20 Nov 2002
2 Dec 2002
16 Dec 2002
20 Dec 2002
2 Jan 2003
15 Jan 2003
3 Feb 2003
14 Feb 2003
3 Mar 2003
Exercise
price (US$)
Exercisable
from2
Exercisable
until2
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
1 January
2004
7,222
1,961,448
10,701
35,846
180,564
1,338
33,438
11,241
267,768
2,676
Rights
exercised
during year3
Rights
lapsed
during year
Rights at
31 December
2004
–
84,317
–
–
10,700
–
–
1,057
80,250
–
–
88,047
–
–
5,350
–
2,006
549
–
1,338
7,222
1,789,084
10,701
35,846
164,514
1,338
31,432
9,635
187,518
1,338
1 Awards of Restricted Stock Rights which represent a right to receive shares if the employee remains in the employment of HSBC Finance
Corporation 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 £8.57.
HSBC Finance Corporation
Deferred Fee Plan for Directors
Prior to 28 March 2003, HSBC Finance Corporation
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 HSBC Finance
Corporation the rights to receive HSBC Finance
Corporation common shares under the plan were
HSBC Holdings ordinary shares of US$0.50
converted into rights to receive HSBC Holdings
ordinary shares. No further awards will be granted
under this plan. A summary of the rights to receive
HSBC Holdings ordinary shares under this plan is
set out below. Full details are available on
www.hsbc.com by selecting ‘Investor Relations’,
then ‘Share plans’ or can be obtained upon request
from the Group Company Secretary, 8 Canada
Square, London E14 5HQ.
Dates of deferral
Range of
prices (US$)
Deferral period
Rights at
1 January
2004
Rights
exercised
during year1
Rights
lapsed
during year2
Rights at
31 December
2004
1 Oct 1995 – 15 Jan 2003
5.42 – 25.40
1 Jan 2000 – 31 Dec 2021
188,406
2,106
186,300
–
1 The weighted average closing price of the shares immediately before the dates on which shares were delivered was £8.57.
2 In May 2004, the rights of participants to receive new HSBC Holdings ordinary shares under the Deferred Fee Plan for Directors were
transferred to the HSBC-North America Directors’ Non-Qualified Deferred Compensation Plan. Under this new plan the rights to
receive HSBC Holdings ordinary shares must be met through a grantor trust which has acquired, through market purchase, sufficient
ADSs to satisfy all the outstanding obligations to deliver HSBC Holdings ordinary shares. All rights to receive HSBC Holdings ordinary
shares under the new plan will be met solely from the HSBC Holdings ordinary shares held by the grantor trust. No further rights to
receive HSBC Holdings ordinary shares will be granted and no new HSBC Holdings ordinary shares will be issued under this plan.
HSBC Finance Corporation
Deferred Phantom Stock Plan for Directors
In 1995, the HSBC Finance Corporation Directors’
Retirement Income Plan was discontinued and the
present value of each director’s accrued benefit was
exchanged for a deferred right to receive HSBC
Finance Corporation common shares. Following the
acquisition of HSBC Finance Corporation the rights
to receive HSBC Finance Corporation common
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 Relations’,
then ‘Share plans’ or can be obtained upon request
from the Group Company Secretary, 8 Canada
Square, London E14 5HQ.
199
H S B C H O L D I N G S P L C
Report of the Directors (continued)
HSBC Holdings ordinary shares of US$0.50
Dates of deferral
Range of
prices (US$)
Deferral period
30 Jan 1996 – 15 Jan 2003
7.75 – 25.40
1 Jan 2000 – 31 Dec 2020
Rights at
1 January
2004
102,468
Rights
exercised
during year1
Rights
lapsed
during year2
Rights at
31 December
2004
722
101,746
–
1 The weighted average closing price of the shares immediately before the dates on which shares were delivered was £8.45.
2 In May 2004, the rights of participants to receive new HSBC Holdings ordinary shares under the Deferred Phantom Stock Plan for
Directors were transferred to the HSBC-North America Directors’ Non-Qualified Deferred Compensation Plan. Under this new plan the
rights to receive HSBC Holdings shares must be met through a grantor trust which has acquired, through market purchase, sufficient
ADSs to satisfy all the outstanding obligations to deliver HSBC Holdings ordinary shares. All rights to receive HSBC Holdings ordinary
shares under the new plan will be met solely from the HSBC shares held by the grantor trust. No further rights to receive HSBC
Holdings ordinary shares will be granted and no new HSBC Holdings ordinary shares will be issued under this plan.
HSBC Finance Corporation
Non-Qualified Deferred Compensation Plan for Restricted Stock Rights
HSBC Holdings ordinary shares of US$0.50
Date of
award
Exercise
price (US$)
Exercisable
from
Exercisable
until
Options at
1 January
2004
Options
exercised
during year1
Options
lapsed
during year
Options at
31 December
2004
10 May 2000
nil
10 May 2002
10 May 2005
294,329
113,204
–
181,125
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.28.
HSBC Finance Corporation
Non-Qualified Deferred Compensation Plan for Stock Option Exercises
HSBC Holdings ordinary shares of US$0.50
Date of
award
Exercise
price (US$)
Exercisable
from
Exercisable
until
Options at
1 January
2004
Options
exercised
during year
Options
lapsed
during year
Options at
31 December
2004
2 Feb 1991
2.48
2 Feb 1992
15 Jul 2005
20,819
–
–
20,819
Beneficial Corporation
1990 Non-Qualified Stock Option Plan
HSBC Holdings ordinary shares of US$0.50
Date of
award
15 Nov 1994
15 Nov 1995
20 Nov 1996
13 Dec 1996
14 Nov 1997
19 Nov 1997
1 Dec 1997
Exercise
price (US$)
Exercisable
from
Exercisable
until
Options at
1 January
2004
Options
exercised
during year1
Options
lapsed
during year
Options at
31 December
2004
4.56
6.00
7.86
7.54
9.20
9.39
9.68
15 Nov 1995
15 Nov 1996
20 Nov 1997
13 Dec 1997
14 Nov 1998
19 Nov 1998
1 Dec 1998
15 Nov 2004
15 Nov 2005
20 Nov 2006
13 Dec 2006
14 Nov 2007
19 Nov 2007
1 Dec 2007
103,682
215,727
313,162
65,624
131,248
429,135
65,624
103,682
38,127
23,458
–
–
23,861
–
–
–
–
–
–
–
–
–
177,600
289,704
65,624
131,248
405,274
65,624
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.57.
Beneficial Corporation
BenShares Equity Participation Plan
HSBC Holdings ordinary shares of US$0.50
Date of
award
31 Jan 1997
15 Nov 1997
Exercise
price (US$)
Exercisable
from
Exercisable
until
9.87
11.04
31 Jan 1998
15 Nov 1998
31 Jan 2007
15 Nov 2007
Options at
1 January
2004
46,243
62,264
Options
exercised
during year1
Options
lapsed
during year
Options at
31 December
2004
4,926
6,568
–
–
41,317
55,696
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.62.
200
Renaissance Holdings, Inc.
Amended and Restated 1997 Incentive Plan
HSBC Holdings ordinary shares of US$0.50
Date of
award
31 Oct 1997
1 Jan 1998
1 Oct 1998
1 Jan 1999
Exercise
price (US$)
Exercisable
from
Exercisable
until
Options at
1 January
2004
Options
exercised
during year1
Options
lapsed
during year
Options at
31 December
2004
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
3,224
2,810
5,024
–
1,800
1,204
–
–
–
–
–
4,739
1,424
1,606
5,024
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.84.
Bank of Bermuda plans
Following the acquisition of Bank of Bermuda on 18
February 2004, all outstanding options over Bank of
Bermuda shares were converted into rights to receive
HSBC Holdings ordinary shares based on the
consideration of US$40 for each Bank of Bermuda
share and the average closing price of HSBC
Holdings ordinary shares, derived from the London
Stock Exchange Daily Official List, for the five
business days preceding the closing date of the
Bank of Bermuda
Executive Share Option Plan 1997
HSBC Holdings ordinary shares of US$0.50
acquisition. No further options will be granted under
any of these plans.
All outstanding options over Bank of Bermuda
shares vested on completion of the acquisition. At 31
December 2004, the HSBC (Bank of Bermuda)
Employee Benefit Trust 2004 held 3,255,273 HSBC
Holdings ordinary shares which may be used to
satisfy the exercise of these options.
Date of
award
12 Jun 1997
22 Dec 1997
1 Jul 1998
23 Jul 1998
23 Feb 1999
26 Jul 1999
3 Aug 1999
4 Feb 2000
7 Apr 2000
29 May 2000
1 Jun 2000
31 Jul 2000
19 Sep 2000
11 Jan 2001
Exercise
price (US$)
Exercisable
from
Exercisable
until
Options at
18 February
2004
Options
exercised
during period1
Options
lapsed
during period
Options at
31 December
2004
3.86
6.33
9.61
8.58
7.40
6.66
7.10
7.21
7.37
7.21
7.04
10.11
11.31
14.27
12 Jun 1998
22 Dec 1998
1 Jul 1999
23 Jul 1999
23 Feb 2000
26 Jul 2000
3 Aug 2000
4 Feb 2001
7 Apr 2001
29 May 2001
1 Jun 2001
31 Jul 2001
19 Sep 2001
11 Jan 2002
12 Jun 2007
22 Dec 2007
1 Jul 2008
23 Jul 2008
23 Feb 2009
26 Jul 2009
3 Aug 2009
4 Feb 2010
7 Apr 2010
29 May 2010
1 Jun 2010
31 Jul 2010
19 Sep 2010
11 Jan 2011
245,196
33,906
67,813
139,019
24,998
159,363
9,331
88,777
385
15,411
61,649
166,454
40,458
161,829
245,196
33,906
–
139,019
6,534
159,363
–
19,266
–
–
–
–
–
–
–
–
–
–
–
–
–
1,586
–
–
–
–
–
–
–
–
67,813
–
18,464
–
9,331
67,925
385
15,411
61,649
166,454
40,458
161,829
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.85.
201
H S B C H O L D I N G S P L C
Report of the Directors (continued)
Bank of Bermuda
Share Option Plan 2000
HSBC Holdings ordinary shares of US$0.50
Date of
award
Exercise
price (US$)
Exercisable
from
Exercisable
until
Options at
18 February
2004
Options
exercised
during period1
Options
lapsed
during period
Options at
31 December
2004
11 Jan 2001
6 Feb 2001
29 Mar 2001
16 Apr 2001
6 Jun 2001
16 Jul 2001
28 Aug 2001
26 Sep 2001
16 Jan 2002
30 Jan 2002
5 Feb 2002
5 Feb 2002
10 Jul 2002
9 Sep 2002
16 Dec 2002
4 Feb 2003
1 Apr 2003
21 Apr 2003
14.27
16.41
15.39
15.57
18.35
16.87
15.39
12.79
16.11
15.60
16.09
16.41
15.84
12.34
11.27
10.69
11.97
11.85
11 Jan 2002
6 Feb 2002
29 Mar 2002
16 Apr 2002
6 Jun 2002
16 Jul 2002
28 Aug 2002
26 Sep 2002
16 Jan 2003
30 Jan 2003
5 Feb 2003
5 Feb 2003
10 Jul 2003
9 Sep 2003
16 Dec 2003
4 Feb 2004
1 Apr 2004
21 Apr 2004
11 Jan 2011
6 Feb 2011
29 Mar 2011
16 Apr 2011
6 Jun 2011
16 Jul 2011
28 Aug 2011
26 Sep 2011
16 Jan 2012
30 Jan 2012
5 Feb 2012
5 Feb 2012
10 Jul 2012
9 Sep 2012
16 Dec 2012
4 Feb 2013
1 Apr 2013
21 Apr 2013
161,829
1,111,908
540
539
8,091
245,610
13,486
468,611
3,678
1,226
1,483,066
1,383
12,260
61,299
6,130
387,068
28,541
48,853
–
33,733
–
–
–
20,979
–
6,741
–
–
54,204
–
–
–
–
25,786
–
–
–
10,569
–
–
–
–
–
2,219
–
–
7,711
–
–
–
–
1,415
–
–
161,829
1,067,606
540
539
8,091
224,631
13,486
459,651
3,678
1,226
1,421,151
1,383
12,260
61,299
6,130
359,867
28,541
48,853
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.90.
Bank of Bermuda
Directors’ Share Option Plan
HSBC Holdings ordinary shares of US$0.50
Date of
award
22 Sep 1999
20 Sep 2000
28 Mar 2001
3 Apr 2002
30 Apr 2003
Exercise
price (US$)
Exercisable
from
Exercisable
until
Options at
18 February
2004
Options
exercised
during period
Options
lapsed
during period
Options at
31 December
2004
8.02
11.31
15.76
16.01
12.23
22 Sep 2000
20 Sep 2001
28 Mar 2002
3 Apr 2003
30 Apr 2004
22 Sep 2009
20 Sep 2010
28 Mar 2011
3 Apr 2012
30 Apr 2013
7,706
9,440
18,205
34,328
9,808
–
–
–
–
–
–
–
–
–
–
7,706
9,440
18,205
34,328
9,808
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 2004 in accordance with
HSBC’s policy of annual valuation. As a result of
this revaluation, the net book value of land and
buildings has increased by US$1,246 million.
Further details are included in Note 24 of the
‘Notes on the Financial Statements’ on page 275.
Corporate Governance Report
The information set out on pages 186 to 234 and
information incorporated by reference constitutes the
Corporate Governance Report of HSBC Holdings.
202
Board of Directors
The objectives of the management structures within
HSBC, headed by the Board of Directors of HSBC
Holdings and led by the Group Chairman, are to
deliver sustainable value to shareholders.
Implementation of the strategy set by the Board is
delegated to the Group Management Board under the
leadership of the Group Chief Executive.
The Board sets the strategy for HSBC through
the five-year strategic plan and approves the annual
operating plans presented by management for the
achievement of the strategic objectives. The annual
operating plans ensure the efficient disposition of
HSBC’s resources for the achievement of these
objectives. The Board delegates the management and
day to day running of HSBC to the Group
Management Board but retains to itself approval of
certain matters including 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 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.
HSBC Holdings has a unitary Board of
Directors. The authority of each Director is exercised
in Board Meetings where the Board acts collectively
as a unit. At 1 March 2005 the Board will comprise
seven executive and 15 non-executive Directors. The
roles of Group Chairman and Group Chief Executive
are separated and held by experienced executive
Directors. The division of responsibilities between
the Group Chairman and the Group Chief Executive
is clearly established, set out in writing and agreed
by the Board. Before assuming the role of Group
Chairman in 1998 Sir John Bond had been the Group
Chief Executive for five years. The Group
Chairman’s knowledge of HSBC’s complex and
widespread geographical business from his previous
service as Group Chief Executive has been a
considerable benefit to HSBC.
Executive Directors are employees who carry
out executive functions in HSBC in addition to their
duties as Directors. Non-executive Directors are not
HSBC employees and do not participate in the daily
business management of HSBC. Non-executive
Directors constructively challenge and help develop
proposals on strategy, scrutinise the performance of
management in meeting agreed goals and objectives
and monitor the reporting of performance. The roles
of non-executive Directors as members of Board
committees are set out below. It is estimated that
non-executive Directors spend 24 days per annum on
HSBC business after an induction phase, with
Committee members devoting significant additional
time. The names and brief biographical particulars of
the Directors are listed on pages 186 to 188.
The Board considers all of the non-executive
directors to be independent in character and
judgement. Baroness Dunn and H Sohmen have
served on the Board for more than nine years,
however, and in that respect only, do not meet the
usual criteria for independence set out in the UK
Combined Code on corporate governance. The
Board has therefore determined Lord Butler, R K F
Ch’ien, J D Coombe, R A Fairhead, W K L Fung,
S Hintze, J W J Hughes-Hallett, Sir John Kemp-
Welch, Sir Brian Moffat, Sir Mark Moody-Stuart, S
W Newton, C S Taylor and Sir Brian Williamson to
be 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. In accordance with the
Rules Governing the Listing of Securities on The
Stock Exchange of Hong Kong Limited each non-
executive Director determined by the Board to be
independent has provided confirmation of his or her
independence to HSBC Holdings.
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, R A Fairhead, D J Flint, W K L
Fung, M F Geoghegan, 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 and Sir Brian Williamson.
C F W de Croisset retired as a Director on 27
February 2004 and W R P Dalton and Lord Marshall
retired as Directors on 28 May 2004. R A Fairhead
and M F Geoghegan were appointed Directors with
effect from 1 March 2004.
J D Coombe and J W J Hughes-Hallett have
been appointed Directors with effect from 1 March
2005. Having been appointed since the Annual
General Meeting in 2004, they will retire at the
forthcoming Annual General Meeting and offer
themselves for re-election.
W F Aldinger is to retire as a Director on 29
April 2005.
Sir John Bond, R K F Ch’ien, Baroness Dunn, D
G Eldon, D J Flint, Sir Brian Moffat, S W Newton
and H Sohmen will retire by rotation at the
forthcoming Annual General Meeting. With the
exception of D G Eldon, who is to retire, they will
offer themselves for re-election.
The Board has undertaken an evaluation of its
performance and that of its committees. This
evaluation covered board structure; dynamics;
capabilities and processes; corporate governance;
strategic clarity and alignment; and the performance
of individual Directors. In undertaking this review
the Group Chairman held structured meetings with
each Director using a similar framework to that
employed by MWM Consulting, who prepared an
independent performance evaluation of the Board
and its committees in January 2004. The report on
the evaluation of the Board and its committees has
been reviewed by the Board and has been used by
203
H S B C H O L D I N G S P L C
Report of the Directors (continued)
the non-executive Directors, led by Sir Brian Moffat,
in their evaluation of the performance of the Group
Chairman. The Group Audit Committee, the
Remuneration Committee, the Nomination
Committee and the Corporate Social Responsibility
Committee have also each undertaken a review of
their terms of reference and their own effectiveness
during 2004.
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 to 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
2004. W F Aldinger, Sir John Bond, Lord Butler,
Baroness Dunn, D G Eldon, D J Flint, W K L Fung,
S K Green, S Hintze, A W Jebson, Sir John Kemp-
Welch, Sir Brian Moffat, S W Newton, C S Taylor
and Sir Brian Williamson attended all of the Board
meetings. R K F Ch’ien, Sir Mark Moody-Stuart and
H Sohmen attended six of the Board meetings. C F
W de Croisset attended the two Board meetings held
before his retirement. W R P Dalton attended all four
Board meetings held before his retirement and Lord
Marshall attended three of the four meetings held
before his retirement. R A Fairhead attended four,
and M F Geoghegan attended all, of the five Board
meetings held following their appointment.
During 2004 the non-executive Directors and
the Group Chairman met twice to discuss Board
performance and succession planning, and the non-
executives met once without the Group Chairman to
discuss his performance.
In addition to the meetings of the principal
committees referred to below, 12 other 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. In April 2004 the Board held
an informal meeting with representatives of
institutional shareholders to discuss corporate
governance matters. An Investor Day, attended by
executive and non-executive Directors, was held in
September 2004 to articulate HSBC’s Managing for
Growth strategy.
meetings with institutional investors and report to
the Board on those meetings.
All Directors attended the 2004 Annual General
Meeting. At the Annual General Meeting
shareholders may ask questions and are invited to
meet with Directors after the conclusion of the
Meeting.
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, since January 2005, as a
non-executive Director of Vodafone Group plc.
During 2004, he ceased to be a member of the Court
of the Bank of England.
Full, formal and tailored induction programmes
are arranged for newly appointed Directors and
opportunities to update and develop skills and
knowledge are provided to all 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 during the Meeting itself.
The Board of HSBC Holdings has adopted a
code of conduct for transactions in Group securities
by Directors and their connected persons that
complies with The Model Code in the Listing Rules
of the Financial Services Authority and, except as
noted below, with The Model Code for Securities
Transactions by Directors of Listed Issuers (‘Hong
Kong Model Code’) set out in the Rules Governing
the Listing of Securities on The Stock Exchange of
Hong Kong Limited. The Stock Exchange of Hong
Kong has granted certain waivers from strict
compliance with the Hong Kong Model Code,
largely to take into account accepted practices in the
UK, particularly in respect of employee share plans.
Following a specific enquiry, each Director has
confirmed he or she has complied with the code of
conduct for transactions in Group securities
throughout the year.
None of the Directors had, during the year or at
The Group Chairman, Group Chief Executive
the end of the year, a material interest, directly or
and the Group Finance Director hold regular
204
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 meets regularly and
operates as a general management committee under
the direct authority of the Board. The members of
the Group Management Board are S K Green
(Chairman), Sir John Bond, W F Aldinger, 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, Y A Nasr and J J Studzinski,
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.
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 throughout 2004 were Sir Brian Moffat
(Chairman), R K F Ch’ien and Sir John Kemp-
Welch. R A Fairhead was appointed a member of the
Committee with effect from 1 March 2004 and
J D Coombe has been appointed a member of the
Committee with effect from 1 July 2005. All
members of the Committee are independent non-
executive Directors.
The Board has determined that Sir Brian Moffat,
R A Fairhead and, with effect from 1 July 2005,
J D Coombe may be regarded as audit committee
financial experts for the purposes of section 407 of
the Sarbanes Oxley Act and as having recent and
relevant financial experience.
Since 2004 appointments to the Committee have
been made for periods of 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.
There were seven meetings of the Group Audit
Committee during 2004. Sir John Kemp-Welch and
Sir Brian Moffat attended all of the meetings and
R K F Ch’ien attended five. R A Fairhead attended
each of the five meetings held following her
appointment.
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 ‘Investor Relations’,
then ‘Corporate Governance’, 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. The Committee receives
frequent comprehensive reports from each of the
Head of Group Compliance, the Group General
Manager Legal and Compliance, the Group General
Manager Internal Audit and the Head of Group
Security and receives periodic presentations from
other functional heads and line management.
The Committee monitors the integrity of the
financial statements of HSBC Holdings, reviewing
significant financial reporting judgements contained
in them. During 2004 the Committee reviewed the
HSBC Holdings 2003 Results Announcement, the
Annual Report and Accounts 2003, the Annual
Review 2003, Interim Results 2004 Announcement
and the Interim Report 2004 before they were
submitted to the Board.
205
H S B C H O L D I N G S P L C
Report of the Directors (continued)
During 2004 the Committee received
presentations on the implications of the introduction
of International Financial Reporting Standards and
the plans for implementing the standards within
HSBC in 2005.
In undertaking its annual review of its own
effectiveness the Committee discussed with the
external auditor the effectiveness of the internal
audit function. The Committee also receives
summaries of periodic peer reviews of the internal
audit functions around HSBC.
The Committee undertakes an annual review of
the effectiveness of HSBC’s system of internal
control, as set out on page 209.
The Committee reports on its activities at each
Board meeting and, twice annually, produces a
written summary of its activities.
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. The Committee receives regular reports
regarding the nature, investigation and resolution of
material complaints and concerns from the Head of
Group Compliance.
The Committee reviews and monitors the
external auditor's independence and objectivity and
the effectiveness of the audit process, taking into
consideration relevant professional and regulatory
requirements. The Committee receives reports from
the external auditor on their own policies and
procedures regarding independence and quality
control and oversees the appropriate rotation of audit
partners with the external auditor.
The Group Audit Committee has adopted
policies for the pre-approval of specific services that
may be provided by the principal auditor, KPMG
Audit Plc and its affiliates (‘KPMG’), since 2003.
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
auditor whilst also ensuring that the auditor
maintains 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, or
influences the choice of, KPMG. In two instances in
2004, services provided by KPMG were
inadvertently not pre-approved individually or
206
entered into pursuant to the pre-approval policies but
were subsequently approved by the Group Audit
Committee after the services had been rendered.
Total fees billed for such services were US$15,000,
which represents less than 0.01 per cent of the total
non-audit fees billed by KPMG during 2004. All
other services entered into with KPMG during 2004
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 used as an input into management decision
making. They fall into the following four categories:
Audit services
In addition to the statutory audit appointments,
which 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 and 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
HSBC customers and private equity investments.
All services provided by KPMG relating to the
implementation of section 404 of the Sarbanes-
Oxley Act were specifically pre-approved by the
Group Audit Committee.
The remuneration paid to KPMG for each of the
last three years is disclosed in Note 5(d) on page 258
of the ‘Notes on the Financial Statements’.
The Committee has recommended to the Board
that KPMG Audit Plc be reappointed as Auditor at
the forthcoming Annual General Meeting.
Remuneration Committee
The role of the Remuneration Committee and its
membership are set out in the Directors’
Remuneration Report on page 216.
Nomination Committee
The Nomination Committee is responsible for
leading the process for Board appointments and for
identifying and nominating, for approval of the
Board, candidates for appointment to the Board.
Before recommending an appointment to the Board
the Committee evaluates the balance of skills,
knowledge and experience on the Board and, in the
light of this identifies the role and capabilities
required for a particular appointment. Candidates are
considered on merit against these criteria. Care is
taken to ensure that appointees have enough time to
devote to HSBC. 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 throughout 2004 were Sir
Brian Moffat (Chairman), Lord Butler and Baroness
Dunn. Sir Brian Williamson was appointed a
Member of the Committee on 1 October 2004.
There were two Nomination Committee
meetings during 2004, each of which was attended
by Sir Brian Moffat, Lord Butler and Baroness
Dunn. There have been no meetings of the
Committee since Sir Brian Williamson was
appointed a member.
Following each meeting the Committee reports
to the Board on its activities.
The terms of reference of the Committee are
available on www.hsbc.com by selecting ‘Investor
Relations’, then ‘Corporate Governance’, then
‘Board Committees’.
The appointments of R A Fairhead, J D Coombe
and J W J Hughes-Hallett as non-executive Directors
and M F Geoghegan as an executive Director were
made on the advice and recommendation of the
Nomination Committee. An external consultancy
was used in connection with the appointments of
R A Fairhead, J D Coombe and J W J Hughes-
Hallett.
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 chairman of such
committee 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.
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 Nomination Committee regularly reviews
the structure, size and composition (including the
skills, knowledge and experience) required of the
Board and makes recommendations to the Board as
appropriate. 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 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 ‘Investor Relations’,
207
H S B C H O L D I N G S P L C
Report of the Directors (continued)
then ‘Corporate Governance’ then ‘Board
Committees’. The members of the Committee
throughout 2004 were Lord Butler (Chairman), W K
L Fung, S Hintze, C S Taylor, each of whom is an
independent non-executive Director, and G V I
Davis and Lord May, who are non-Director members
of the Committee. Baroness Brigstocke was a non-
Director member of the Committee until her
untimely death in April 2004. E M Diggory was
appointed as a non-Director member of the
Committee on 26 November 2004.
There were four meetings of the Corporate
Social Responsibility Committee during 2004.
Following each meeting the Committee reports back
to the Board on its activities.
Further information is available in HSBC’s
Corporate Social Responsibility Report 2004,
available in April 2005.
Corporate Governance Codes
HSBC is committed to high standards of corporate
governance. HSBC Holdings complied throughout
the year with the code 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 Limited.
Appendix 14 to the Rules Governing the Listing
of Securities on The Stock Exchange of Hong Kong
Limited was substantially revised during 2004. The
new provisions of Appendix 14 will apply for
subsequent reporting periods.
Differences in HSBC Holdings/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 subject to 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
208
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 code
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 above, HSBC Holdings complied
throughout 2004 with the code 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 three of the four members, including
the Committee chairman, are independent non-
executive Directors. 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 2004, HSBC Holdings’ non-executive
Directors met twice 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 203 to 204) and it provides
extensive information regarding Directors’
compensation in the Directors’ Remuneration Report
(on pages 216 to 233). The terms of reference of
HSBC Holdings’ Audit, Nomination and
Remuneration Committees are available on
www.hsbc.com by selecting ‘Investor Relations’ then
‘Corporate Governance’ 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/codeofethics. If the Board
amends or waives the provisions of the Code of
Ethics, details of the amendment or waiver will
appear at the same website address. During 2004
HSBC Holdings made no amendments to its Code of
Ethics and granted no waivers from its provisions.
The Group Business Principles and Values is
available on www.hsbc.com/businessprinciplesand
values.
Under NYSE listing rules applicable to US
companies, independent directors must comprise a
majority of the board of directors. Currently, over
half of HSBC Holdings’ Directors are independent.
Under the Combined Code the HSBC Holdings
Board determines whether a director is independent
in character and judgement and whether there are
relationships or circumstances which are likely to
affect, or could appear to affect, the director’s
judgement. Under the NYSE rules a director cannot
qualify as independent unless the board affirmatively
determines that the director has no material
relationship with the listed company; in addition the
NYSE rules prescribe a list of circumstances in
which a director cannot be independent. 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 promptly to 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.
From July 2005 HSBC Holdings will be
required to submit annual and interim written
affirmations of compliance with applicable NYSE
corporate governance standards, similar to the
affirmations required of NYSE listed US companies.
Internal control
The Directors are responsible for internal control in
HSBC and for reviewing its effectiveness.
Procedures have been designed for safeguarding
assets against unauthorised use or disposition; for
maintaining proper accounting records; and for the
reliability of financial information used within the
business or for publication. Such procedures are
designed to manage rather than eliminate the risk of
failure to achieve business objectives and can only
provide reasonable and not absolute assurance
against material errors, losses or fraud. The
procedures also enable HSBC Holdings to discharge
its obligations under the Handbook of Rules and
Guidance issued by the Financial Services Authority,
HSBC’s lead regulator.
The key procedures that the Directors have
established are designed to provide effective internal
control within HSBC and accord with the Internal
Control Guidance for Directors on the Combined
Code issued by the Institute of Chartered
Accountants in England and Wales. Such procedures
have been in place throughout the year and up to 28
February 2005, the date of approval of the Annual
Report and Accounts 2004. In the case of companies
acquired during the year, including Bank of
Bermuda and Marks and Spencer Retail Financial
Services Holdings Limited, the internal controls in
place are being reviewed against HSBC’s
benchmarks and integrated into HSBC’s systems.
209
H S B C H O L D I N G S P L C
Report of the Directors (continued)
HSBC’s key internal control procedures include
• Responsibilities for financial performance
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.
• Customer groups, global product groups, key
support functions and certain discrete
geographies prepare strategic plans periodically
within the framework of the Group Strategic
Plan. Operating plans are required to be
prepared and adopted by all HSBC members
annually, setting out the key business initiatives
and the likely financial effects of those
initiatives.
• 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.
210
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-based 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
annually of reviews of the internal control
framework applied at Group Head Office and major
operating subsidiary level 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 and operational risks
HSBC regularly updates its policies and procedures
for safeguarding against reputational and operational
risks. This is an evolutionary process which 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 and for individual
subsidiary companies, businesses and functions.
These policies, which form an integral part of the
internal control systems, are communicated through
manuals and statements of policy and are
promulgated through internal communications and
training. 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.
HSBC provides information in its Corporate
Social Responsibility Report and website
(www.hsbc.com/csr) on the extent to which it has
complied with its risk management policies. Aspects
covered include: how HSBC is implementing and
applying the Equator Principles to manage the
environmental and social risks in project finance;
employee diversity; environmental management and
health and safety. HSBC is using the guidelines of
the Global Reporting Initiative in producing its 2004
report.
HSBC’s internal risk management procedures
are supported by third party scrutiny and assurance.
A commentary by The Corporate Citizenship
Company in the Corporate Social Responsibility
Report and website includes both assurance and
forward-looking recommendations on HSBC’s SEE
reporting. HSBC also provides external assurance
through its participation in the Dow Jones
Sustainability Index and Business in the
Community’s Environment Index (HSBC’s feedback
reports from which are included on our website) and
FTSE4Good. Further details are contained in
HSBC’s Corporate Social Responsibility Report
2004, available in April 2005.
Health and safety
The maintenance of appropriate health and safety
standards throughout HSBC remains a key
responsibility of all managers and HSBC is
committed to actively managing all health and safety
risks associated with its business. HSBC’s objectives
are to identify, remove, reduce or control material
risks of fires and of accidents or injuries to
employees and visitors.
Health and Safety Policies, Group standards and
procedures are set by Group Fire and Safety and are
implemented by Health, Safety and Fire Co-
ordinators based in each country in which HSBC
operates.
HSBC faces a range of threats from terrorists
and criminals across the world. In particular, over
recent years 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 in
2003 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 ensured
211
H S B C H O L D I N G S P L C
Report of the Directors (continued)
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 and the Interim Report
which are sent to shareholders and on
www.hsbc.com. There is regular dialogue with
institutional investors and enquiries from individuals
HSBC Holdings ordinary shares of US$0.50
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, all beneficial unless
otherwise stated, in the shares and loan capital of
HSBC and its associated corporations:
At 31 December 2004
Beneficial
owner
Child
under 18
or spouse
At
1 January
2004
1,378,974
404,602
45,860
154,362
47,094
51,928
328,000
−4
198,758
2,037
57,794
212,785
385,096
47,796
135,761
–
52,318
328,000
37,795
182,616
2,037
83,628
–
3,604
–
–
942
1,953
–
–
15,688
–
–
5,000
–
411,800
10,746
60,000
–
5,840
5,000
2,941,440
10,000
5,000
5,170
–
9,500
840
–
1,252,274
–
W F Aldinger ….
Sir John Bond ....
R K F Ch’ien .....
Baroness Dunn ..
D G Eldon .........
D J Flint ............
W K L Fung ......
M F Geoghegan .
S K Green ..........
S Hintze .............
A W Jebson .......
Sir John Kemp-
Welch . ............
Sir Brian Moffat
Sir Mark Moody-
Stuart ..............
S W Newton ......
H Sohmen .........
C S Taylor .........
Sir Brian
Trustee
15,1253
–
–
–
–
27,000
–
–
–
–
–
31,8003
–
5,0003
–
–
–
Jointly
with
another
person
–
62,831
–
–
98,904
–
–
–
45,355
–
–
–
11,157
–
–
–
–
–
Equity
derivatives1
Total
interests2
Percentage
of ordinary
shares
in issue
Other
–
–
–
28,6503
–
–
–
–
–
–
–
–
–
–
–
2,017,8735
–
1,363,849
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
500
1,591,759
451,531
47,796
164,411
99,846
81,271
328,000
37,795
243,659
2,037
83,628
96,800
11,157
10,840
5,170
3,270,147
10,000
0.01
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.03
0.00
0.00
Williamson .....
15,222
15,865
–
–
–
–
15,865
1 Under the Securities and Futures Ordinance of Hong Kong, interests in listed ADSs are categorised as equity derivatives.
2 Details of executive Directors’ other interests in HSBC Holdings ordinary shares of US$0.50 arising from share option plans and the
Restricted Share Plan are set out in the Directors’ Remuneration Report on pages 229 to 233.
3 Non-beneficial.
4 Interests at 1 March 2004 – date of appointment.
5 Interests held by private investment companies.
212
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 Securities, which he held
throughout the year.
D G Eldon has an interest as beneficial owner in
300 Hang Seng Bank 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 which he held throughout
the year. During the year, his spouse ceased to have
an interest in US$3,000,000 of HSBC Bank plc
Senior Subordinated Floating Rate Notes 2009.
As Directors of CCF, S K Green and
M F Geoghegan each have an interest as beneficial
owner in one share of €5 in that company, which
Mr Green held throughout the year and
Mr Geoghegan acquired during 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.
As Directors of HSBC Private Banking
Holdings (Suisse), S K Green and M F Geoghegan
each have an interest as beneficial owner in one
share of CHF1,000, which Mr Green held
throughout the year and Mr Geoghegan acquired
during the year. The Directors have waived their
HSBC Holdings ordinary shares of US$0.50
rights to receive dividends on these shares and have
undertaken to transfer these shares to HSBC on
ceasing to be Directors of HSBC Private Banking
Holdings (Suisse).
At 31 December 2004, the aggregate interests of
the executive Directors in HSBC Holdings ordinary
shares of US$0.50 (each of which represents less
than 0.005 per cent of the shares in issue, unless
otherwise stated) under the Securities and Futures
Ordinance of Hong Kong, including interests arising
through share option plans, the Restricted Share Plan
and, in the case of W F Aldinger, through an
employee benefit trust as detailed in the Directors'
Remuneration Report on pages 216 to 233, are:
W F Aldinger – 16,324,412 (0.15 per cent of shares
in issue); Sir John Bond – 1,194,046 (0.01 per cent
of shares in issue); D G Eldon – 441,417; D J Flint –
511,862; M F Geoghegan – 300,775; S K Green –
771,599 (0.01 per cent of shares in issue); and
A W Jebson – 533,659.
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 or
associated 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 year.
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
Child
under 18
or spouse
Jointly with
another person
Beneficiary
of a trust
W F Aldinger ................................................................
Sir John Bond ...............................................................
R K F Ch’ien .................................................................
Baroness Dunn...............................................................
D G Eldon .....................................................................
D J Flint ........................................................................
M F Geoghegan ............................................................
S K Green .....................................................................
A W Jebson ...................................................................
Sir Brian Moffat ............................................................
S W Newton ..................................................................
Sir Brian Williamson ....................................................
–
652
3655
1,0385
–
4276
2895
337
6405
–
395
1215
–
253
–
–
75
143
–
1205
–
–
–
–
–
–
–
–
7565
–
–
–
–
855
–
–
8,0311
6,4484
–
–
2,6101
3,2731
2,0071
4,0131
3,4411
–
–
–
1 Scrip dividend on awards held under the Restricted Share Plan.
2 Comprises the automatic reinvestment of dividend income by an Individual Savings Account and Personal Equity Plan manager (32
shares), the acquisition of shares in the HSBC Holdings UK Share Ownership Plan through regular monthly contributions (28 shares)
and the automatic reinvestment of dividend income on shares held in the plan (5 shares).
213
H S B C H O L D I N G S P L C
Report of the Directors (continued)
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 the Restricted Share Plan (5,658 shares) and on shares held in a Trust (790 shares).
5 Scrip dividend.
6 Comprises scrip dividend on shares held as beneficial owner (360 shares), the acquisition of shares in the HSBC Holdings UK Share
Ownership Plan through regular monthly contributions (28 shares), the automatic reinvestment of dividend income on shares held in the
plan (5 shares) and the automatic reinvestment of a cash dividend by an Individual Savings Account and Personal Equity Plan manager
(34 shares).
7 Comprises the acquisition of shares in the HSBC Holdings UK Share Ownership Plan through normal monthly contributions (28 shares)
and the automatic reinvestment of dividend income on shares held in the plan (5 shares).
There have been no other changes in Directors’
interests from 31 December 2004 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 2004, Directors and Senior
Management held, in aggregate, beneficial interests
in 24,333,045 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 plans as appropriate.
About half of all HSBC employees now
participate in one or more of HSBC’s employee
share plans.
Employment of disabled persons
HSBC Holdings continues to be committed to
providing equal opportunities to employees. The
employment of disabled persons is included in this
commitment and the recruitment, training, career
development and promotion of disabled persons is
based on the aptitudes and abilities of the
individual. Should employees become disabled
during employment, every effort is made to
continue their employment and, if necessary,
appropriate training is provided.
214
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; and
the internet at www.dti.gov.uk/publications.
It is HSBC Holdings’ practice to organise
payment to its suppliers through a central accounts
function operated by its subsidiary undertaking,
HSBC Bank. Included in the balance with HSBC
Bank is the amount due to trade creditors which, at
31 December 2004, represented 16 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 13 June 2002 that it had an interest on
11 June 2002 in 284,604,788 HSBC Holdings
ordinary shares, representing 3.01 per cent of the
ordinary shares in issue at that date.
Credit Suisse First Boston notified HSBC
Holdings on 8 February 2005 that it had an interest
on 1 February 2005 in 482,122,209 HSBC Holdings
ordinary shares, representing 4.31 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.
In compliance with the Rules Governing the
Listing of Securities on The Stock Exchange of
Hong Kong Limited at least 25 per cent of the total
issued share capital of HSBC Holdings has been
held by the public at all times during 2004 and up
to the date of this Report.
Dealings in HSBC Holdings shares
Except for the dealings as intermediaries by HSBC
Bank, HSBC CCF Financial Products (France)
SNC and The Hongkong and Shanghai Banking
Corporation, which are members of a European
Economic Area exchange in market-making and
other dealing activities, neither HSBC Holdings nor
any subsidiary undertaking has bought, sold or
redeemed any securities of HSBC Holdings during
the year ended 31 December 2004.
Donations
During the year, HSBC made charitable donations
totalling US$69.2 million. Of this amount,
US$21.1 million was given for charitable purposes
in the United Kingdom.
No political donations were made during the
year.
At the Annual General Meeting in 2003
shareholders gave authority for HSBC Holdings
and HSBC Bank 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 27 May 2005 at 11.00 am.
An informal meeting of shareholders will be
held at Level 28, 1 Queen’s Road Central, Hong
Kong on Tuesday 24 May 2005 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
2005 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 Group Audit Committee to
determine its remuneration will be submitted to the
forthcoming Annual General Meeting.
On behalf of the Board
R G Barber, Secretary
28 February 2005
215
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. 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 and has in place appropriate policies
and procedures to monitor the size of the potential
remuneration awards. The members of the
Remuneration Committee throughout 2004 were Sir
Mark Moody-Stuart (Chairman), W K L Fung and
Sir John Kemp-Welch. S Hintze was appointed a
member of the Committee on 30 January 2004.
There were seven meetings of the Remuneration
Committee during 2004. Sir Mark Moody-Stuart and
Sir John Kemp-Welch attended all of these meetings,
W K L Fung attended five meetings and S Hintze
attended five of the six meetings following her
appointment. Following each meeting the Committee
reports back to the Board on its activities. The terms
of reference of the Committee are available on
www.hsbc.com by selecting ‘Investor Relations’,
then ‘Corporate Governance’, then ‘Board
Committees’.
Towers Perrin, a firm of specialist human
resources consultants, has been appointed by the
Committee to provide independent advice on
executive remuneration issues. As a global firm,
Towers Perrin also provides 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, Human Resources,
J C S Rankin, and the Senior Executive, Group
Reward Management, P M Wood.
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.
216
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
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 the total remuneration package
(salary, bonus, long-term incentive awards and
other benefits) is competitive in relation to
comparable 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, differentiated
by performance;
through awards of shares (and in limited
circumstances, share options) to recognise high
performance and retain key talent; 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
constituent businesses and the individual
concerned. During 2004 variable bonus plans
were reviewed to give greater emphasis to
revenue growth whilst retaining a strong link to
expense control; other key measures taken into
account in determining individual bonus levels
include customer relationships; full utilisation of
professional skills; adherence to HSBC’s ethical
standards, internal controls and procedures.
Bonus ranges are reviewed in the context of
prevailing market practice; and
• 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.
Accordingly, employees are encouraged to
participate in the success they help to create,
through participating in the HSBC Holdings
savings-related share option plans and in local
share ownership and profit sharing
arrangements.
During 2004, a comprehensive review of share-
based remuneration arrangements was conducted.
This review was undertaken in light of changing
business needs, taking into account HSBC’s
expansion in certain markets and an evolving
external environment.
Approval for The HSBC Share Plan will be
sought at the forthcoming Annual General Meeting.
The proposed arrangements for the most senior
executives of HSBC are described under ‘Long-term
incentive plan’ on page 219. Shareholders and their
representatives were consulted and the proposed
arrangements reflect feedback that has been
received.
Below the senior executive level and in the
context of an employee’s total remuneration
package, the practice of awarding share options at all
levels within HSBC has been reconsidered. In future
and commencing with awards to be made in 2005,
restricted shares will be granted to a substantially
smaller number of executives than those who
previously received share options, with awards
focused on those individuals who bring key talents
and high levels of performance to the Group. These
awards will normally vest after three years, subject
to the individual remaining in employment. Awards
of share options will only be granted in limited
circumstances. For those who will normally no
longer be eligible to receive awards of shares or
share options, variable bonus arrangements have
been reviewed and enhanced, as appropriate, taking
account of local markets. Such changes may include
an element of deferral.
To encourage greater participation in the HSBC
Holdings Savings-Related Share Option Plan:
(International), two amendments to existing
arrangements will be proposed for approval at the
forthcoming Annual General Meeting. The first is
the introduction of the facility to save in US dollars,
Hong Kong dollars and euros as well as in pounds
sterling. The maximum savings limit of £250 per
month will continue to apply but be converted to the
other currencies on a consistent and appropriate date.
The second proposal is to offer individuals the
choice of options over one year in addition to the
existing three and five year terms. This change will
carry tax advantages in certain jurisdictions.
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 10 of the ‘Notes on
the Financial Statements’ on page 261. The effect on
basic earnings per share of exercising all outstanding
share options would be to dilute it by 0.6 per cent.
At the Annual General Meeting in 2000,
shareholders approved a limit of 848,847,000
ordinary shares (approximately 10 per cent of the
ordinary shares then in issue), which may be issued
or become issuable under all employee share plans in
any ten year period. Within this limit, not more than
5 per cent of the ordinary shares in issue from time
to time (approximately 560,000,000 ordinary shares
at 28 February 2005) may be put under option under
the HSBC Holdings Group Share Option Plan and
the HSBC Holdings Restricted Share Plan 2000. In
the ten year period to 31 December 2004, less than
650 million ordinary shares had been issued or could
become issuable under all employee share plans and
less than 350 million ordinary shares had been issued
or could become issuable under discretionary
employee share plans, including the HSBC Holdings
Group Share Option Plan and the HSBC Holdings
Restricted Share Plan 2000. At the forthcoming
Annual General Meeting, revised limits on the
number of shares that may be issued or become
issuable under employee share plans will be
proposed to reflect the increase in share capital since
2000.
Directors and Senior Management
HSBC’s operations are substantial, diverse and
international; for example, over 73 per cent of profit
before tax is derived from outside the United
Kingdom.
With effect from 1 March 2005 the HSBC
Holdings’ Board will comprise 15 non-executive
Directors and seven executive Directors. With
businesses in 77 countries and territories, HSBC
aims to attract Directors with a variety of experience,
both in its key areas of activity and internationally.
The Board currently includes nationals of five
different countries. The seven executive Directors,
four Group Managing Directors and 23 Group
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H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
General Managers have in total more than 793 years
of service with HSBC.
•
•
long-term incentives; and
pension.
Directors’ fees
Directors’ fees are regularly reviewed and compared
with other large international companies. The current
fee, which was approved by shareholders in 2004, is
£55,000 per annum. With effect from 1 January 2005
Sir John Bond, D J Flint, M F Geoghegan, S K
Green and A W Jebson waived their rights to receive
a Director’s fee from HSBC Holdings: an
appropriate adjustment has been made to their basic
salaries which, when taken with the consequent
impact on bonuses, long-term incentive awards and
pension benefits, will deliver a similar value to the
fee that has been waived. W F Aldinger and
D G Eldon had previously elected to waive any fees
payable by HSBC Holdings.
In addition, non-executive Directors receive the
following fees:
Chairman, Audit Committee
Member, Audit Committee
£40,000 p.a.
£15,000 p.a.
During 2004, seven Audit Committee meetings were held. A
Director’s commitment to each meeting, including preparatory
reading and review, can be 15 hours or more.
Chairman, Remuneration Committee
Member, Remuneration Committee
£20,000 p.a.
£15,000 p.a.
During 2004, seven meetings of the Remuneration Committee
were held.
Chairman, Nomination Committee
Member, Nomination Committee
£20,000 p.a.
£15,000 p.a.
During 2004, two meetings of the Nomination Committee were
held.
Chairman, Corporate Social
Responsibility Committee
Member, Corporate Social
Responsibility Committee
£20,000 p.a.
£15,000 p.a.
During 2004, four meetings of the Corporate Social
Responsibility Committee were held.
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.
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;
•
•
218
To ensure that the executive Directors’
remuneration packages are competitive having
regard to the broad international nature of the Group,
each year the Remuneration Committee considers
market data on senior executive remuneration
arrangements within primarily:
• European banks with significant domestic and/or
global operations/influences; these banks
include Barclays PLC, Standard Chartered PLC,
The Royal Bank of Scotland Group plc,
ABN AMRO Holding N.V., Banco Bilbao
Vizcaya Argentaria, S.A., Banco Santander
Central Hispano, S.A., BNP PARIBAS S.A.,
Commerzbank AG and Deutsche Bank AG; and
•
other global UK-based organisations with
significant exposure to US markets and
competitors, including BP p.l.c., Diageo plc,
GlaxoSmithKline plc, Unilever PLC, Vodafone
Group plc.
The level of awards available to the executive
Directors under the annual cash bonus scheme and as
Performance Shares 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 30 per cent of total direct pay and
the remaining 70 per cent split 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 on
14 November 2002 at the time of the acquisition of
HSBC Finance Corporation (‘the 2002 employment
agreement’).
It was noted by the Committee that the three-
year term, and certain other terms, of the 2002
employment agreement represented an exception to
HSBC’s normal policy for executive Directors’
service contracts, but that the background and
reasons for this were explained in detail at the time
of the acquisition and that the terms of the 2002
employment agreement were consistent with practice
in the United States.
Since 31 December 2004, the Remuneration
Committee has reviewed the financial and other
terms proposed in connection with W F Aldinger’s
retirement on 29 April 2005 which are reflected in
the amendment agreement dated 26 February 2005
between HSBC Finance Corporation and Mr
Aldinger, details of which are summarised below.
The Committee, having reviewed the relevant factors
and circumstances, considered that these financial
and other terms were appropriate and in order and in
the best interests of the Group.
Each component of executive Directors’
remuneration is explained in detail below.
Salary
The Committee reviews salary levels for executive
Directors each year in the same context as other
employees. With reference 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.
Base salaries with effect from January 2005 will
be:
W F Aldinger ..............................................
Sir John Bond .............................................
D G Eldon ...................................................
D J Flint ......................................................
M F Geoghegan ..........................................
S K Green ...................................................
A W Jebson .................................................
US$1,000,000
£1,276,300
US$425,503
£500,000
£632,500
£770,000
£535,000
Excluding the effect of adjustments to salaries
following the waivers by Sir John Bond, D J Flint,
M F Geoghegan, S K Green and A W Jebson of their
HSBC Holdings Director’s fee, this represents an
average increase from 2004 of 5.02 per cent.
As an International Manager, D G Eldon’s
current base salary, shown above, is calculated on a
net basis.
Annual cash bonus
Cash bonuses for executive Directors 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 result in discretionary cash bonuses of
up to 250 per cent of basic salary for executive
Directors.
Long-term incentive plan
Long-term incentive plans are designed to reward
the delivery of sustained financial growth of HSBC.
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 predetermined
performance criteria.
The Remuneration Committee has generally
provided, on a discretionary basis and reflective of
individual performance, 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 part of a comprehensive review of share-
based remuneration, the Remuneration Committee
considered whether the continued use of
Performance Shares was appropriate. The
Committee considered several other types of
arrangement but concluded that Performance Shares
remain the most appropriate vehicle for HSBC’s
executive Directors and Senior Management.
However, the Committee recognised that there were
a number of aspects to the current plan that could be
improved to ensure the plan encouraged and
rewarded growth and outperformance.
Accordingly, the adoption of The HSBC Share
Plan, to replace the HSBC Holdings Restricted Share
Plan 2000 and the HSBC Holdings Group Share
Option Plan, will be proposed at the forthcoming
Annual General Meeting. For executive Directors
and members of Senior Management The HSBC
Share Plan will:
•
•
introduce absolute growth in earnings per share
as a performance measure in addition to relative
Total Shareholder Return; and
require higher levels of performance for full
vesting of the conditional awards.
The effect of these proposals is that the vesting
of Performance Share awards will be more
challenging and highly geared to performance than
under the previous arrangements. To maintain the
same approximate expected value (which takes into
account factors such as the probability of vesting and
risk of forfeiture for early departure) of Performance
Share awards under The HSBC Share Plan as
previously made under the HSBC Holdings
Restricted Share Plan 2000, the face value of
conditional awards under The HSBC Share Plan will
be greater (as shown under ‘2005 Awards’ below)
than those previously made under the HSBC
219
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Holdings Restricted Share Plan 2000. It is proposed
that awards under The HSBC Share Plan will be up
to a maximum of seven times salary. Whilst having
flexibility to make awards at this level in certain
exceptional circumstances, the Remuneration
Committee does not intend seven times salary to be
the normal level of award. The average face value of
the awards proposed for executive Directors is just
over three times base salary; proposed individual
awards are set out in the table below. Awards
proposed for 2005 for Group Managing Directors
and Group General Managers will generally be
below two times salary.
Further details of the performance conditions
and vesting arrangements for The HSBC Share Plan
are set out below. A summary of the arrangements
relevant to previous awards of Performance Shares
under The HSBC Holdings Restricted Share Plan
2000 is also given. Subject to approval at the
forthcoming Annual General Meeting, all future
awards of Performance Shares, including the 2005
awards, will be made under The HSBC Share Plan.
2005 Awards
The Remuneration Committee is proposing that the
conditional awards shown in the table below should
be made to executive Directors in 2005. The table
shows the face value of the full conditional awards
and their approximate expected value.
Sir John Bond ..........................
D J Flint ...................................
M F Geoghegan .......................
S K Green ................................
A W Jebson ..............................
Face
Value
£000
4,000
1,500
2,000
2,500
1,415
Total .........................................
11,415
Expected
Value
£000
1,760
660
880
1,100
622
5,022
As set out above, the higher face value of these
awards than in previous years is balanced by the
significantly more challenging vesting schedule of
The HSBC Share Plan where maximum value will
only be released to the individual if Group
performance is at a very high level.
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.
Under the terms of the 2002 employment
agreement entered into at the time of the acquisition
of HSBC Finance Corporation, W F Aldinger is
entitled to receive an award of US$5.5 million which
was to be used to purchase Restricted Shares in
220
HSBC Holdings. However, as referred to below, Mr
Aldinger is to retire on 29 April 2005 and it has been
agreed that this award will not be made.
C F W de Croisset and W R P Dalton, who
retired during 2004, did not receive a long-term
incentive award in 2004.
D G Eldon, who is to retire at the forthcoming
Annual General Meeting, will not receive a long-
term incentive award in 2005.
Performance conditions
Subject to approval of The HSBC Share Plan at the
forthcoming Annual General Meeting, awards of
Performance Shares, commencing in 2005, will be
divided into two equal parts to be subject to separate
performance conditions measured over a three-year
performance period:
•
•
‘The Total Shareholder Return (TSR) award’:
one half of the award will be subject to a
relative TSR measure. 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; and
‘The earnings per share (‘EPS’) award’: the
other half of the award will be based upon the
absolute growth in EPS achieved by HSBC
Holdings over the three-year performance
period.
The TSR element of the award will be based on
HSBC’s ranking against a comparator group of 28
major banks. The comparator group will generally
comprise the largest banks in the world measured in
terms of market capitalisation, having regard to the
geographic spread and the nature of the activities of
each bank. The Remuneration Committee will use
this criteria in selecting any replacements to the
comparator group that may be necessary during the
performance period, for example because a bank
ceases to exist or to be quoted or if its relevance to
HSBC as a comparator significantly diminishes.
The comparator group at 28 February 2005
comprises ABN AMRO Holding N.V., Banco Bilbao
Vizcaya Argentaria S.A, Banco Santander Central
Hispano S.A., Bank of America Corporation, The
Bank of New York Company, Inc., Barclays PLC,
BNP PARIBAS S.A., Citigroup Inc., Credit Agricole
S.A., Credit Suisse Group, Deutsche Bank AG,
HBOS plc, JPMorgan Chase & Co., Lloyds TSB
Group plc, Mitsubishi Tokyo Financial Group, Inc.,
Mizuho Financial Group, Inc., Morgan Stanley,
National Australia Bank Limited, Royal Bank of
Canada, The Royal Bank of Scotland Group plc,
Société Générale, Standard Chartered PLC, UBS
AG, UniCredit S.p.A., US Bancorp, Wachovia
Corporation, Wells Fargo & Company and Westpac
Banking Corporation.
The extent to which awards will vest will be
determined by reference to HSBC Holdings’ TSR
measured against the comparator TSR. The
calculation of the share price component within
HSBC Holdings’ TSR will be the average market
price over the 20 trading days commencing on the
day when the annual results are announced, which in
2005 is 28 February. The starting point will be,
therefore, the average over the period 28 February to
29 March inclusive. TSR for comparator group
constituents will be calculated on the same basis.
For TSR performance in line with the bank
ranked 14th, only 30 per cent of the conditional
award will vest; if HSBC’s performance is in line
with or above the bank ranked 7th in the ranked list
all of the TSR award shares will vest.
Vesting between the 14th and 7th ranked banks
will be based on HSBC’s position against the ranked
list. In simple terms, the percentage vesting will rise
in 10 per cent increments for each position that
HSBC achieves higher than the 14th bank in the
ranked list until full vesting is achieved for TSR
performance equal to or greater than the 7th bank in
the ranked list. Where HSBC’s performance falls
between these incremental steps, account will be
taken of how far above or below the next ranked
bank HSBC’s TSR performance is positioned.
For example, if HSBC’s TSR falls half way
between the bank ranked 12th (where, a release of 50
per cent of the award would occur) and the bank
ranked 13th (where a release of 40 per cent of the
award would occur), then the actual award released
would be 45 per cent, i.e. half way between 40
per cent and 50 per cent.
For the EPS element of the award, the base
measure shall be EPS for the financial year
preceding that in which the award is made (‘the base
year’). Absolute growth in EPS will then be
compared with the base year over three consecutive
financial years commencing with the year in which
the award is made. The EPS growth element will be
the absolute level of EPS achieved during the three-
year performance period. For this purpose, EPS
means the profit attributable to the shareholders
(expressed in US dollars), excluding goodwill
amortisation, divided by the weighted average
number of ordinary shares in issue and held outside
the Group during the year in question. In the event
that the 2004 published EPS is restated to adjust for
accounting standards changes during the
performance period, the restated published EPS will
be used for the EPS performance condition for
awards made in 2005 under The HSBC Share Plan.
The percentage of the conditional award vesting
will depend upon the absolute growth in EPS
achieved over the three years (‘the performance
period’). 30 per cent of the conditional shares will
vest if the incremental EPS over the performance
period is 24 per cent or more of EPS in the base year.
The percentage of shares vesting will rise on a
straight line proportionate basis to 100 per cent if
HSBC’s incremental EPS over the performance
period is 52 per cent or more of EPS in the base year.
No element of the ‘TSR award’ will vest if
HSBC’s performance is below that of the bank
ranked 14th in the ranked list and no element of the
‘EPS award’ will vest if HSBC’s incremental EPS
over the performance period is less than 24 per cent
of EPS achieved in the base year.
To the extent that the performance conditions
have not been met at the third anniversary, the shares
will be forfeited.
In addition, 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.
4.
5.
revenue growth;
revenue mix;
cost efficiency;
credit performance as measured by risk-adjusted
revenues; and
cash return on cash invested, dividend
performance and total shareholder return.
Following the three-year performance period,
awards of Performance Shares under The HSBC
Share Plan will be tested and vesting will take place
shortly afterwards.
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.
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Directors’ Remuneration Report (continued)
Awards will vest immediately in cases of death.
In the event of redundancy, retirement on grounds of
injury or ill health, early retirement, normal
retirement and where a participant ceases to be
employed by HSBC due to a company ceasing to be
part of HSBC, awards will normally vest at the end
of the vesting period on a time-apportioned basis to
the extent that performance conditions have been
satisfied. Awards will normally be forfeited if the
participant is dismissed or resigns from HSBC. In all
of these circumstances the Committee retains
discretion to ensure fair and reasonable treatment.
Arrangements from 1999-2004
From 1999 to 2004, the vesting of awards was linked
to the attainment of predetermined TSR targets over
a three-year period from date of grant as set out
below.
The TSR performance condition for awards of
Performance Shares remained the same from 1999 to
2003. For awards made in 2004, changes were made
to the peer group and re-testing provisions were
eliminated such that awards will lapse if the
performance condition is not satisfied after the initial
three-year performance period.
A benchmark for HSBC Holdings’ TSR,
weighted by market capitalisation, was established
which takes account of the TSR performance of:
1.
a peer group of nine banks weighted by market
capitalisation which were 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 AG, JPMorgan Chase & Co.,
Lloyds TSB Group plc, Mitsubishi Tokyo
Financial Group Inc., Oversea-Chinese Banking
Corporation Limited and Standard Chartered
PLC. To be more relevant to HSBC in terms of
size and international scope, this peer group was
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 Group plc, Banco Santander
Central Hispano S.A. and UBS AG;
2.
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
222
3.
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, a single TSR benchmark
for market comparison was determined.
The extent to which each award will vest will be
determined by reference to HSBC Holdings’ TSR
measured against the TSR benchmark. For each
award the calculation of the share price component
within HSBC Holdings’ TSR was the average market
price over the 20 trading days commencing on the
day when the annual results were announced. TSR
for the benchmark constituents was based on their
published share prices on the 20th trading day after
the annual results were announced.
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 (base salary
and bonus in respect of the previous performance
year), 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.
For awards made in 2004, if the upper quartile
performance target is achieved then, as before, 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.
In addition to these performance conditions,
none of the outstanding awards will vest unless the
Remuneration Committee is satisfied that, during the
performance period, HSBC has achieved a sustained
improvement in performance. The Remuneration
Committee retains discretion to recommend early
release of shares awarded in certain circumstances,
for example, redundancy and ill health.
The Performance Shares awarded in 2000
passed their three-year TSR performance condition
in March 2003 and will vest on the fifth anniversary
of the award, 10 March 2005.
Total Shareholder Return
The graphs below show HSBC Holdings’ TSR
performance against the benchmark TSR (graph 1),
the Financial Times-Stock Exchange (‘FTSE’) 100
Index (graph 2), the Morgan Stanley Capital
International (‘MSCI’) World Index (graph 3) and
MSCI Financials Index (graph 4) over the three-year
period to March 2004. These measures have been
chosen as they are the main published indices against
which HSBC monitors its performance.
Graph 1: HSBC TSR and Benchmark TSR
140%
130%
120%
110%
100%
90%
80%
70%
M ar 2001
M ar 2002
M ar 2003
M ar 2004
HSBC TSR
TSR Benchmark
Graph 2: HSBC TSR and FTSE 100 Index
150%
140%
130%
120%
110%
100%
90%
80%
70%
60%
50%
Mar 2001
Mar 2002
Mar 2003
Mar 2004
HSBC TSR
FTSE 100
Graph 3: HSBC TSR and MSCI World Index
150%
140%
130%
120%
110%
100%
90%
80%
70%
60%
50%
Mar 2001
Mar 2002
Mar 2003
Mar 2004
HSBC TSR
MSCI World Index
Graph 4: HSBC TSR and MSCI Financials Index
140%
130%
120%
110%
100%
90%
80%
70%
60%
Mar 2001
Mar 2002
Mar 2003
Mar 2004
HSBC TSR
MSCI Financials
Pursuant to the Directors’ Remuneration Report
Regulations 2002, graph 5 below shows HSBC
Holdings’ TSR performance against a broad equity
market index, the Financial Times-Stock Exchange
(‘FTSE’) 100 Index, for the five-year period ended
31 December 2004.
Graph 5: HS BC TS R and FTS E 100 In de x
150 %
14 0 %
13 0 %
12 0 %
110 %
10 0 %
9 0 %
8 0 %
70 %
6 0 %
50 %
Dec 19 9 9
Dec 2 0 0 0
Dec 2 0 0 1
Dec 2 0 0 2
Dec 2 0 0 3
Dec 2 0 0 4
HS B C TS R
F TS E 100
Source: Datastream
Pensions
The pension entitlements earned by the executive
Directors during the year are set out on pages 228
and 229.
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
223
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
no provisions for compensation upon early
termination of executive Directors’ service
contracts save for W F Aldinger, details of which
are set out below.
As referred to above, Mr Aldinger entered into
a new employment agreement with HSBC Finance
Corporation on 14 November 2002 for a term of
three years, such term to commence on the
effective date of the acquisition of HSBC Finance
Corporation by HSBC. Full details of the
agreement were set out in the Discloseable
Transaction Circular relating to the acquisition of
HSBC Finance Corporation sent to shareholders on
26 February 2003 in advance of the Extraordinary
General Meeting to approve the acquisition. The
effective date of the acquisition, and
commencement date of the 2002 employment
agreement, was 28 March 2003. The terms of the
2002 employment agreement, were amended by an
agreement (‘amendment agreement’) entered into
between HSBC Finance Corporation and Mr
Aldinger, as referred to below.
During the term of the 2002 employment
agreement Mr Aldinger is entitled to be paid an
annual base salary equal to his annual base salary
as at the date of the merger agreement between
HSBC Finance Corporation 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 of the acquisition, 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 on terms that these
Restricted Shares will vest in three equal
instalments on each of the first three anniversaries
of the effective date, as set out on page 232. After
each of the first and second anniversaries of the
effective date, subject to the approval of the Trustee
of the HSBC Holdings Restricted Share Plan 2000,
Mr Aldinger is entitled to 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 was to retain the services of
Mr Aldinger through the initial integration of
HSBC Finance Corporation. HSBC considered it
essential that the experience, knowledge and skills
of Mr Aldinger be retained for the benefit of HSBC
shareholders.
Under the 2002 employment agreement, if
Mr Aldinger’s employment is terminated by him
during its term for ‘good reason’, or by HSBC
224
Finance Corporation for reasons other than ‘cause’
or disability, he is 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 12; 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 HSBC Finance
Corporation’s cost; and his retirement benefits (as
set out on page 228) in a lump sum.
Following discussion with Mr Aldinger, it has
been agreed that Mr Aldinger will retire as
Chairman and Chief Executive of HSBC Finance
Corporation and HSBC North America Holdings
Inc on 29 April 2005 and will retire as a director of
HSBC Holdings on the same date and resign from
his directorships and other appointments with
Group companies. As indicated above, the original
purpose of the 2002 employment agreement was to
retain the services of Mr Aldinger before the initial
integration of HSBC Finance Corporation with the
Group’s other North American businesses. The
discussions with Mr Aldinger about his retirement
before the expiry of the three-year term took into
account that the integration process has now been
completed successfully and faster than expected.
Under the amendment agreement, Mr Aldinger
will be entitled to receive, on termination of the
2002 employment agreement on 29 April 2005, the
same terms and benefits (summarised above) as if
his employment had been terminated by him for
‘good reason’ or by HSBC Finance Corporation for
reasons other than ‘cause’ or disability, except that
he will not be entitled to receive the 2005 restricted
share award (or cash equivalent) with a value to at
least US$5.5 million that he would have been
entitled to receive on or before 28 April 2005. Mr
Aldinger will, however, receive a payment of
US$4.6 million in lieu of salary and bonus in
respect of the remainder of the three-year period.
The amendment agreement also provides that the
‘non-competition’ provision in the 2002
employment agreement for a period of one year
after termination of his employment, and certain
other restrictions, will continue to apply. Under this
provision he may not become associated with
certain competitive entities that are actively
engaged in the consumer lending business
(including mortgage and credit card lending).
Sir John Bond, who is to stand for re-election
at the forthcoming Annual General Meeting, is
employed on a rolling contract dated 14 July 1994
which requires 12 months’ notice to be given by
either party.
W R P Dalton, who retired as a Director on
28 May 2004, was employed on a rolling contract
dated 5 January 1998 that required 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 G Eldon will
retire as a Director at the conclusion of the
forthcoming Annual General Meeting.
D J Flint, who is to stand for re-election at the
forthcoming Annual General Meeting, is employed
on a rolling contract dated 29 September 1995
which requires 12 months’ notice to be given by the
Company and nine months’ notice to be given by
Mr Flint.
M F Geoghegan is employed on a rolling
contract dated 25 May 2004 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 2006, Baroness Dunn, Sir John Kemp-
Welch, S W Newton, H Sohmen, C S Taylor and
Sir Brian Williamson; 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; and
(assuming re-election at the 2005 Annual General
Meeting) in 2008, J D Coombe and J W J Hughes-
Hallett.
Other directorships
Executive Directors, if so authorised by either the
Nomination Committee or the Board, may accept
appointments as non-executive Directors of
suitable companies which are not part of HSBC.
Approval will not be given for executive Directors
to accept a non-executive directorship of more than
one FTSE 100 company. When considering a non-
executive appointment, the Nomination Committee
or Board will take into account the expected time
commitment of such appointment. The time
commitment for executive Directors’ external
appointments will be reviewed as part of the annual
Board review. Any remuneration receivable in
respect of an external 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 2004 the fees received were
US$82,500 in cash and US$77,500 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
2004 the fee received from Illinois Tool Works, Inc.
was US$67,000 in the form of deferred stock and
the fee received from AT&T Corp. was US$84,500
in cash and US$7,785 in cash instead of dividend
due on 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.
225
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 2004.
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
976
90
34,038
820
–
–
35,924
65,803
Their emoluments are within the following
bands:
£4,600,001 – £4,700,000 ............................
£5,200,001 – £5,300,000 ............................
£7,300,001 – £7,400,000 ............................
£13,500,001 – £13,600,000 ........................
Number of
Employees
1
2
1
1
The basic salaries of Group Managing
Directors and Group General Managers are within
the following bands:
Number of
Group Managing
Directors and Group
General Managers
£150,001 – £250,000 ........................
£250,001 – £350,000 ........................
£350,001 – £450,000 ........................
£450,001 – £550,000 ........................
6
17
4
1
The aggregate remuneration of Directors and
Senior Management for the year ended 31
December 2004 was US$118,290,000.
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 2004 was US$6,261,000.
At 31 December 2004, executive Directors and
Senior Management held, in aggregate, options to
subscribe for 11,398,184 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 2005 and 2014 at prices ranging from
£3.3334 to £8.2830.
226
Audited Information
Directors’ emoluments
The emoluments of the Directors of HSBC Holdings for 2004 were as follows:
Salary and
other
remuneration
£000
Fees
£000
Benefits
in kind1
£000
Bonuses
£000
–2
55
9
23
31
55
46
55
55
90
18611
70
58
11712
85
85
23
115
75
55
3913
9514
59
559
1,183
71
246
395
6038
486
695
521
–
–
–
–
–
–
–
–
–
–
–
–
–
–
79
5
–
–
435
8
14
7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,1843
2,4064
2,1165
3264
4564
5004
–10
1,0004
4504
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
2004
£000
2,822
3,649
2,196
595
1,317
1,166
546
1,757
1,026
90
186
70
58
117
85
85
23
115
75
55
39
95
59
Total
2003
£000
2,157
2,147
1,334
631
1,180
1,057
–
1,237
958
45
159
35
–
65
35
55
35
50
50
35
25
64
35
Executive Directors
W F Aldinger ..............................
Sir John Bond .............................
C F W de Croisset5 ......................
W R P Dalton6 .............................
D G Eldon7 ..................................
D J Flint ......................................
M F Geoghegan9 .........................
S K Green ...................................
AW Jebson ..................................
Non-executive Directors
Lord Butler .................................
R K F Ch’ien ...............................
Baroness Dunn ............................
R A Fairhead9 ..............................
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 ............................................
Total (US$000) ...........................
1,481
2,713
4,759
8,717
548
1,004
9,438
17,288
16,226
29,722
12,27215
20,052
1 Benefits in kind for executive Directors include provision of company car, medical insurance, other insurance cover and travel
assistance.
2 W F Aldinger has elected to waive any fees payable to him by HSBC Holdings (2004: £55,000; 2003: £23,300).
3 Under the terms of his employment contract dated 14 November 2002, W F Aldinger is entitled to a bonus of US$4,000,000 in respect
of 2004, which will be paid in 2005.
4 These discretionary bonuses are in respect of 2004 and will be paid in 2005.
5 Retired as a Director on 27 February 2004. He had a contract of employment dated 7 January 1980 that was in force before he joined
the Board of CCF. The contract had no set term but provided 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. In consideration of Mr de Croisset's early retirement from the Group and in light of French legal
requirements, a review of market practice was undertaken and a one-off payment of €2,633,742 was made to Mr de Croisset, which was
considered to be appropriate in all the circumstances.
6 Retired as a Director on 28 May 2004.
7 The emoluments of D G Eldon include a fee from The Hongkong and Shanghai Banking Corporation and housing and other expatriate
benefits in kind that are normal within the location in which he is employed. Mr Eldon has elected to waive any fees payable to him by
HSBC Holdings (2004: £55,000; 2003: £35,000).
8 Includes an executive allowance of £137,100 (2003: £96,863) paid to fund personal pension arrangements.
9 Appointed a Director on 1 March 2004.
10 In return for the prior waiver of bonus, the employer contribution into the pension scheme has been increased by the amount of
£1,200,000 (2003: nil) which would otherwise have been paid.
11 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.
12 Includes fee as a non-executive Director of The Hongkong and Shanghai Banking Corporation.
13 Fees as a non-executive Director and member of the Audit Committee of The Hongkong and Shanghai Banking Corporation. H Sohmen
has elected to waive any fees payable to him by HSBC Holdings (2004: £55,000; 2003: £35,000).
14 Includes fees as a non-executive Director of HSBC Bank USA and HSBC USA Inc.
15 Includes the emoluments of a Director who retired in 2003.
227
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
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 two
exceptions (see paragraphs below on W F Aldinger
and D J Flint), the current executive Directors are
members of defined benefit pension schemes, having
joined HSBC at a time when these were the norm.
Before commencement of the 2002 employment
agreement on 28 March 2003, W F Aldinger
participated in HSBC Finance Corporation’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 the 2002
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 (these benefits will be payable in a lump
sum following Mr Aldinger’s retirement on
29 April 2005, referred to above). No further benefits
have accrued under these arrangements since 28
March 2003.
Since commencement of the 2002 employment
agreement on 28 March 2003, Mr Aldinger has
continued to participate in the HSBC Finance
Corporation Tax Reduction Investment Plan
(‘TRIP’), which is a ‘qualified’ funded deferred
profit-sharing and savings plan for eligible
employees. Employer contributions of US$10,250
were made to this plan on behalf of Mr Aldinger in
2004 (2003: Nil). On 1 January 2005 the plan name
was changed to HSBC-North America (U.S.) Tax
Reduction Investment Plan (TRIP). Mr Aldinger also
participated in Supplemental TRIP (a ‘non-qualified’
plan), which is an unfunded arrangement under
which additional employer provision of US$289,749
has been made for 2004 (2003: US$41,539).
The pension arrangements for Sir John Bond,
S K Green and A W Jebson to contractual retirement
age of 60 are provided under the HSBC Bank (UK)
Pension Scheme. The pensions accrue at a rate of
228
one-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 was 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. In 2004, CCF paid €213,003 to Mr de Croisset
under this arrangement.
The pension arrangements for W R P Dalton to
contractual retirement age of 60 were 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. On taking up his
appointment in the UK, he joined the HSBC
Holdings Overseas (No.1) Pension Plan on a defined
contribution basis, with an employer contribution in
respect of 2004 of £129,000 (2003: £1,379,000
inclusive of a bonus waiver of £1,250,000).
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 2004 of
£86,013 (2003: £81,943). 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 and
M F Geoghegan are provided under the HSBC
International Staff Retirement Benefits Scheme. The
pensions accrue at a rate of one twenty-seventh of
pensionable salary per year of pensionable service.
In addition, Mr Geoghegan has joined the
HSBC Asia Holdings Pension Plan, on a defined
contribution basis, with an employer contribution in
respect of 2004 of £1,200,000, arising entirely from
a bonus sacrifice. There were no other employer
contributions made to this plan.
Audited Information
Accrued
annual
pension at
31 December
2004
£000
Increase in
accrued
pension
during
2004
£000
Increase in
accrued
pension during
2004,
excluding
any increase
for inflation
£000
Transfer
value
of accrued
pension at
1 January
2004
£0001
Transfer
value
of accrued
pension at
31 December
2004
£0001
Increase of
transfer value
of accrued
pension (less
personal
contributions)
in 2004
£0001
Transfer value
(less personal
contributions)
at
31 December
2004 relating
to increase
in accrued
pensions
during 2004,
excluding any
increase for
inflation
£0001
Sir John Bond2 ....
C F W de Croisset3
W R P Dalton4 .....
D G Eldon5 ..........
M F Geoghegan7 ..
S K Green ...........
A W Jebson .........
481
193
13
278
185
288
182
57
128
3
27
34
110
41
44
128
(3)
18
29
105
37
7,924
860
4,258
5,045
3,652
2,367
1,769
9,230
2,623
4,562
5,275
4,042
4,401
2,612
1,306
1,763
304
3286
6208
2,034
843
840
1,747
226
2156
3768
1,599
529
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 2004, is shown above.
3 Retired as a Director on 27 February 2004.
4 W R P Dalton retired from HSBC with effect from 31 May 2004 with a gross pension of £277,000 per annum. Mr Dalton elected to
commute part of this pension for a lump sum payment of £4,256,000, leaving a residual pension of £13,000 per annum. As a result the
pension in payment at 31 December 2004 is lower than the accrued pension at 1 January 2004. The increase in accrued pension during
2004 reflects the gross pension before commutation. The transfer value of benefits at 31 December 2004 reflects both the pension in
payment and the commutation lump sum, increased with interest.
5 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 2004, is shown above.
6 D G Eldon made personal contributions towards his pension of £15,445 in respect of 2004.
7 Appointed as a Director on 1 March 2004.
8 M F Geoghegan made personal contributions towards his pension of £14,182 in respect of 2004.
In addition to the unfunded pension payments as
from 1 March 2004 to C F W de Croisset referred to
above, the following unfunded pension payments, in
respect of which provision has been made, were
made during 2004 to four former Directors of HSBC
Holdings:
B H Asher .......................
R Delbridge ......................
Sir Brian Pearse ................
Sir William Purves ...........
2004
£
85,443
122,891
51,246
90,453
350,033
2003
£
83,277
119,777
49,947
88,158
341,159
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 2004, 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. Under the Securities
and Futures Ordinance of Hong Kong the options are
categorised as unlisted physically settled equity
derivatives.
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
2004 was £8.79. The highest and lowest market
values during the year were £9.535 and £7.84.
Market value is the mid-market price derived from
the London Stock Exchange Daily Official List on
the relevant date.
229
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Audited Information
Options
held at
1 January
2004
Options
awarded
during
year
Options
exercised
during
year
Sir John Bond ........
2,798
C F W de Croisset3.
206,000
206,000
206,000
W R P Dalton6 .......
2,7982
D J Flint .................
M F Geoghegan ....
S K Green ..............
A W Jebson............
27,000
2,617
1,2482,9
5599
5732,9
3,070
1,4342
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27,0008
–
1,24810
–
57310
–
1,43411
Options
held at 31
December
2004
2,7982
206,0004
206,0004
206,0005
2,7987
–
2,6172
–
5592
–
3,0702
Exercise
price (£)
Date of
award
Exercisable
from1
Exercisable
until
6.0299 10 Apr 2000
1 Aug 2005
31 Jan 2006
8.7120 23 Apr 2001 23 Apr 2004 23 Apr 2011
7 May 2012
8.4050
1 May 2013
6.9100
7 May 2005
2 May 2006
7 May 2002
2 May 2003
6.0299 10 Apr 2000
1 Aug 2005
31 Jan 2006
3.3334
6.3224
1 Apr 1996
2 May 2002
1 Apr 1999
1 Aug 2007
1 Apr 2006
31 Jan 2008
5.3980
1 Apr 1999
6.0299 10 Apr 2000
6.7536 11 Apr 2001
1 Aug 2004
1 Aug 2005
1 Aug 2004
31 Jan 2005
31 Jan 2006
31 Jan 2005
5.3496 23 Apr 2003
1 Aug 2008
31 Jan 2009
–
6.7536 11 Apr 2001
1 Aug 2004
31 Jan 2005
1 May be advanced to an earlier date in certain circumstances, e.g. retirement.
2 Options awarded under the HSBC Holdings Savings-Related Share Option Plan.
3 Retired as a Director on 27 February 2004.
4 Options held under the HSBC Holdings Group Share Option Plan at date of retirement as a Director (27 February 2004). In
accordance with the transitional arrangements agreed with CCF in 2000 the awards were not subject to performance conditions.
5 Options held under the HSBC Holdings Group Share Option Plan at date of retirement as a Director (27 February 2004). In
accordance with the transitional arrangements agreed with CCF in 2000, vesting of 50 per cent of the award is subject to the
performance tests set out in the section headed ‘Arrangements from 1999-2004’ on pages 222 to 223.
6 Retired as a Director on 28 May 2004.
7 Options held at date of retirement as a Director (28 May 2004). On 11 November 2004, in accordance with the rules of the Plan, the
option was exercised in respect of 2,070 ordinary shares and options over 728 shares lapsed. At the date of exercise the market value
per share was £9.38.
8 At the date of exercise, 4 March 2004, the market value per share was £ 8.515. 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.
9 Interests at date of appointment as a Director (1 March 2004).
10 At the date of exercise, 16 August 2004, the market value per share was £8.265.
11 At the date of exercise, 2 August 2004, the market value per share was £8.335.
At 27 February 2004, the date he retired as a
Director, 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. Save as
indicated in the following table no options over CCF
shares were awarded to or exercised by Mr de
Croisset during 2004.
230
Audited Information
CCF
shares of €5
Options held
at 1 January
2004
10,000
30,000
30,000
30,000
30,000
28,000
28,000
Exercise price
per share (€)
Options held
at 27 February
2004
32.78
34.00
35.52
37.05
73.50
81.71
142.50
10,0001
30,000
30,000
30,000
30,000
28,000
28,000
Equivalent
HSBC Holdings
ordinary shares
at 27 February
2004
130,000
390,000
390,000
390,000
390,000
364,000
364,000
Date
of award
23 Jun 1994
22 Jun 1995
9 May 1996
7 May 1997
29 Apr 1998
7 Apr 1999
12 Apr 2000
Exercisable
from
23 Jun 1996
22 Jun 1997
9 May 1998
7 Jun 2000
7 Jun 2000
7 Jun 2000
1 Jan 2002
Exercisable
until
23 Jun 2004
22 Jun 2005
9 May 2006
7 May 2007
29 Apr 2008
7 Apr 2009
12 Apr 2010
1 Options exercised on 24 March 2004. At the date of exercise the market value per HSBC Holdings ordinary share was £8.21.
At 31 December 2004, W F Aldinger held options to
acquire HSBC Holdings ordinary shares as set out in
the table below. These options arise from options he
held over shares of Household International (now
HSBC Finance Corporation) before its acquisition,
which were converted into options over HSBC
Holdings ordinary shares in the same ratio as the
offer for HSBC Finance Corporation (2.675 HSBC
HSBC Holdings ordinary shares of US$0.50
Holdings ordinary shares for each HSBC Finance
Corporation common share) and the exercise prices
per share adjusted accordingly. The HSBC Finance
Corporation options were granted at nil
consideration.
No options over HSBC Holdings ordinary
shares were awarded to Mr Aldinger during 2004.
Options held
at 1 January
2004
971,025
1,003,125
1,203,750
1,337,500
1,230,500
1,605,000
2,140,000
2,140,000
Exercise price
per share (US$)
Options
exercised
during year
Options held
at 31 December
2004
7.43
11.43
14.60
13.72
16.96
18.40
21.37
10.66
971,0251
1,003,1252
–
–
–
–
–
–
–
–
1,203,750
1,337,500
1,230,500
1,605,000
2,140,000
2,140,000
Date of
award
13 Nov 1995
11 Nov 1996
10 Nov 1997
9 Nov 1998
8 Nov 1999
13 Nov 2000
12 Nov 2001
20 Nov 2002
Exercisable
from
13 Nov 1996
11 Nov 1997
10 Nov 1998
9 Nov 1999
8 Nov 2000
13 Nov 2001
12 Nov 2002
20 Nov 20033
Exercisable
until
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 At the date of exercise, 2 September 2004, the market value per share was £8.755.
2 At the date of exercise, 7 December 2004, the market value per share was £8.855.
3 535,000 options are exercisable on each of the first, second, third and fourth anniversaries of the date of award. May be advanced,
under the terms of the HSBC Finance Corporation stock option plan, to an earlier date in certain circumstances e.g. retirement.
1,070,000 options remaining unvested will therefore vest on Mr Aldinger’s retirement on 29 April 2005. Based on the market price of
HSBC Holdings shares on 24 February 2005 and after deduction of the option subscription price these options have a value of
approximately £3,512,000.
As a beneficiary of an employee benefit trust
W F Aldinger has an interest in the HSBC Holdings
ordinary shares held by the trust which may be used
to satisfy exercises of his share options. Under the
Securities and Futures Ordinance of Hong Kong, the
interest is categorised as a ‘beneficiary of a trust’. At
31 December 2004, the trust held 1,525,850 HSBC
Holdings ordinary shares and 500,000 ADSs.
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.
231
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Audited Information
Restricted Share Plan
HSBC Holdings ordinary shares of US$0.50
Awards
held at
1 January
2004
Awards made
during the
year
Monetary
value of
awards made
during
the year
£000
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 .......
960,662
–
71,386
89,621
83,988
125,767
167,843
–
41,643
40,738
47,994
79,432
114,438
41,643
40,738
47,994
7,072
52,955
9,806
76,292
13,329
–
41,643
36,663
59,992
79,432
114,438
–
35,97511
32,84611
36,28011
40,03011
53,82711
–
41,643
40,738
83,988
99,290
114,438
–
35,693
32,589
71,990
92,671
114,438
–
–
372,5874
–
–
–
–
–
244,4457
–
–
–
–
–
–
–
–
–
–
–
–
–
87,3027
–
–
–
–
–
121,0587
–
–
–
–
–
90,7947
–
–
–
–
–
166,4557
–
–
–
–
–
121,0587
–
3,068
–
–
–
–
–
2,100
–
–
–
–
–
–
–
–
–
–
–
–
–
750
–
–
–
–
–
1,040
–
–
–
–
–
780
–
–
–
–
–
1,430
–
–
–
–
–
1,040
Awards
vested
during
the year1
319,5212
–
71,9486
–
–
–
–
–
41,9696
41,7148
49,1458
–
–
41,9696
–
–
7,24010
–
–
–
–
–
41,9696
–
–
–
–
–
35,9746
–
–
–
–
–
41,9696
–
–
–
–
–
35,9746
–
–
–
–
–
Monetary
value of
awards
vested
during
the year
£000
Awards
held at
31 December
20041
Year in
which
awards
may vest
Date of
award
2,585
–
670,821
379,232
15 Apr 2003
10 May 2004
2005 to 20063
2005 to 20075
613
–
–
–
–
–
357
342
403
–
–
357
–
–
58
–
–
–
–
–
357
–
–
–
–
–
306
–
–
–
–
–
357
–
–
–
–
–
306
–
–
–
–
–
–
93,405
87,535
131,077
174,929
252,771
–
–
–
81,3359
117,1809
–
42,458
50,021
–
55,191
10,220
79,513
13,892
90,276
–
38,211
62,525
82,786
119,270
125,182
–
33,965
37,515
41,393
55,661
93,887
–
42,458
87,535
103,482
119,270
172,125
–
33,965
75,030
96,584
119,270
125,182
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
4 Mar 2004
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
4 Mar 1999
10 Mar 2000
12 Mar 2001
30 Apr 2001
8 Mar 2002
15 May 2002
5 Mar 2003
12 May 2003
4 Mar 2004
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
4 Mar 2004
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
4 Mar 2004
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
4 Mar 2004
4 Mar 1999
10 Mar 2000
12 Mar 2001
8 Mar 2002
5 Mar 2003
4 Mar 2004
2004
2005
2006
2007
2008
2009
2004
2005
2006
2007
2008
2004
2005
2006
2004
2007
2005
2008
2006
2009
2004
2005
2006
2007
2008
2009
2004
2005
2006
2007
2008
2009
2004
2005
2006
2007
2008
2009
2004
2005
2006
2007
2008
2009
Unless otherwise indicated, vesting of these shares is subject to the performance tests set out in the section headed ‘Arrangements from
1999-2004’ on pages 222 to 223.
232
Audited information
1 Includes additional shares arising from scrip dividends.
2 At the date of vesting, 31 March 2004, the market value per share was £8.09. At the date of award, 15 April 2003, the market value
per share was £6.81.
3 Under the terms of this award the shares will vest in three 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. Pursuant to the amendment agreement referred to above the 337,976
shares (having a value of approximately £2,994,000 based on the market price on 24 February 2005) not vested at retirement will
vest on Mr Aldinger’s retirement on 29 April 2005.
4 At the date of the award, 10 May 2004, the market value per share was £7.94. The shares acquired by the Trustee of the Plan were
purchased at an average price of £8.235.
5 Under the terms of this award the shares will vest in three instalments on each of 31 March 2005, 2006 and 2007 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. Pursuant to the amendment agreement referred to above the 254,755
shares (having a value of approximately £2,257,000 based on the market price on 24 February 2005) not vested at retirement will
vest on Mr Aldinger’s retirement on 29 April 2005.
6 The performance tests described in the 'Report of the Directors' in the Annual Report and Accounts 1998 and set out in the section
headed ‘Arrangements from 1999-2004’ on pages 222 to 223 have been met and the shares have vested. At the date of vesting,
4 March 2004, the market value per share was £8.515. The market value per share (adjusted for the share capital reorganisation
implemented on 2 July 1999) at the date of the award, 4 March 1999, was £5.92.
7 At the date of the award, 4 March 2004, the market value per share was £8.515. The shares acquired by the Trustee of the Plan were
purchased at an average price of £8.5909.
8 Retired as a Director on 28 May 2004. The awards held at the date of retirement that had passed the performance tests set out in the
section headed ‘Arrangements from 1999-2004’ on pages 222 to 223 (the awards made in 2000 and 2001) were released to Mr
Dalton on 30 June 2004. At 30 June 2004 the market value per share was £8.20. The market values per share at the dates of the
awards, 10 March 2000 and 12 March 2001, were £7.09 and £8.62 respectively.
9 Interests at date of retirement as a Director (28 May 2004).
10 50 per cent of D G Eldon’s discretionary bonus in respect of 2000, 2001 and 2002 respectively was awarded in Restricted Shares
with a three-year restricted period.
11 Interests at date of appointment (1 March 2004).
On behalf of the Board
28 February 2005
Sir Mark Moody-Stuart, Chairman of Remuneration Committee
233
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 235 and 236, 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 237 to 356, 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
28 February 2005
234
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 237 to 356. 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 auditor’s 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 234, 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 corporate governance statement on pages 208 to 209 reflects HSBC Holdings’
compliance with the nine provisions of the 2003 Financial Reporting Council 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.
235
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 2004 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 and Registered Auditor
28 February 2005
236
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 2004
Notes
2004
US$m
2003
US$m
2002
US$m
Interest receivable
– interest receivable and similar income arising from
debt securities ...............................................................................
– other interest receivable and similar income ................................
Interest payable ................................................................................
Net interest income ........................................................................
Dividend income ..............................................................................
Fees and commissions receivable .....................................................
Fees and commissions payable ........................................................
Dealing profits .................................................................................
Other operating income ....................................................................
Operating income............................................................................
Administrative expenses ..................................................................
Depreciation and amortisation
– tangible fixed assets......................................................................
– intangible assets............................................................................
– goodwill........................................................................................
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/(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 ...............................................
3
4
6
5,6
24
23
23
16
31
6
7
Dividends .........................................................................................
9
Retained profit for the year............................................................
Basic earnings per ordinary share ....................................................
Diluted earnings per ordinary share .................................................
Dividends per ordinary share ...........................................................
10
10
9
Movements in reserves are set out in Note 35.
The accompanying notes are an integral part of the Consolidated Financial Statements.
All results are from continuing operations.
7,845
42,358
(19,179)
31,024
601
15,877
(2,784)
2,566
3,303
50,587
(24,183)
(1,664)
(28)
(1,814)
22,898
(6,357)
(27)
–
16,514
5
287
770
32
17,608
(4,507)
13,101
(586)
(675)
11,840
(7,301)
4,539
US$
1.09
1.07
0.66
6,947
33,021
(14,370)
25,598
222
12,560
(2,166)
2,178
2,680
41,072
(19,685)
(1,382)
(15)
(1,450)
18,540
(6,093)
(44)
(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
7,253
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)
(107)
(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
237
H S B C H O L D I N G S P L C
Financial Statements (continued)
Consolidated balance sheet at 31 December 2004
Notes
2004
US$m
2003
US$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 ......................................................................................
11
12
14
15
18
19
20
21
22
23
24
26
9,872
6,352
30,284
11,878
142,712
669,831
240,999
19,319
110
(98)
12
3,440
881
29,382
18,829
73,498
19,489
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
Total assets ........................................................................................................................
1,276,778
1,034,216
238
Notes
2004
US$m
2003
US$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 .....................................................................................................
Other reserves ...................................................................................................................
Revaluation reserves .........................................................................................................
Profit and loss account ......................................................................................................
Shareholders’ funds ...........................................................................................................
12
27
28
29
30
31
32
33
34
35
35
35
35
11,878
83,539
693,751
5,301
208,593
123,315
16,500
2,066
5,532
3,686
22,800
2,476
10,718
5,587
4,881
21,457
2,660
52,038
86,623
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
21,543
1,615
41,428
74,473
Total liabilities ..................................................................................................................
1,276,778
1,034,216
MEMORANDUM ITEMS
Contingent liabilities .........................................................................................................
– acceptances and endorsements .......................................................................................
– guarantees and assets pledged as collateral security .......................................................
– other contingent liabilities ..............................................................................................
38
7,214
64,921
57
72,192
5,412
54,439
29
59,880
Commitments ....................................................................................................................
38
567,696
428,764
Sir John Bond, Group Chairman
The accompanying notes are an integral part of the Consolidated Financial Statements.
239
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 2004
FIXED ASSETS
Tangible assets ..................................................................................................................
Investments
– shares in HSBC undertakings ........................................................................................
– loans to HSBC undertakings ..........................................................................................
– debt securities of HSBC undertakings ...........................................................................
– other investments other than loans .................................................................................
CURRENT ASSETS
Debtors
– money market deposits with HSBC undertakings...........................................................
– other amounts owed by HSBC undertakings ..................................................................
– amounts owed by HSBC undertakings (falling due after more than 1 year)....................
– other debtors ...................................................................................................................
Cash at bank and in hand
– balances with HSBC undertakings .................................................................................
CREDITORS: amounts falling due within 1 year
Amounts owed to HSBC undertakings...............................................................................
Other creditors ...................................................................................................................
Dividends 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
Notes
24
25
9
32
Deferred taxation ...............................................................................................................
31
NET ASSETS ..................................................................................................................
CAPITAL AND RESERVES
Called up share capital ......................................................................................................
Share premium account .....................................................................................................
Revaluation reserve ...........................................................................................................
Reserve in respect of obligations under subsidiary share options ......................................
Profit and loss account ......................................................................................................
34
35
35
35
35
2004
US$m
2
94,885
4,712
1,885
581
102,065
7,036
5,131
1,680
100
13,947
246
14,193
(858)
(191)
(4,205)
(5,254)
8,939
111,004
(9,669)
(8,143)
(6,494)
(75)
86,623
5,587
4,881
68,963
399
6,793
86,623
2003
US$m
2
79,326
3,788
1,175
537
84,828
6,995
2,526
2,412
95
12,028
901
12,929
(700)
(261)
(3,936)
(4,897)
8,032
92,860
(5,970)
(6,845)
(5,479)
(93)
74,473
5,481
4,406
57,041
485
7,060
74,473
Sir John Bond, Group Chairman
The accompanying notes are an integral part of the Consolidated Financial Statements.
240
Statement of total consolidated recognised gains and losses for the year ended 31 December 2004
Profit for the financial year attributable to shareholders .................................
Unrealised surplus/(deficit) on revaluation of investment properties:
Subsidiaries ................................................................................................
Associates ..................................................................................................
Unrealised surplus/(deficit) on revaluation of land and buildings
(excluding investment properties):
Subsidiaries ................................................................................................
Exchange and other movements .....................................................................
Total recognised gains and losses for the year ...............................................
2004
US$m
11,840
52
12
1,093
3,404
16,401
2003
US$m
8,774
(28)
(10)
(292)
5,318
13,762
2002
US$m
6,239
(22)
(1)
(297)
3,781
9,700
Reconciliation of movements in consolidated shareholders’ funds for the year ended 31 December
2004
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 purposes1 ............
Total net change in shareholders’ funds arising from own shares
adjustments ................................................................................................
Reserve in respect of obligations under CCF share options ...........................
Net reserve in respect of obligations under the Bank of Bermuda share
options .......................................................................................................
New share capital issued in connection with the acquisition
of HSBC Finance Corporation ...................................................................
Reserve in respect of obligations under HSBC Finance Corporation
share options ..............................................................................................
Reserve in respect of the equity component of HSBC Finance
Corporation 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 ....................................................................
Shareholders’ funds at 31 December ..............................................................
2004
US$m
11,840
(7,301)
4,539
4,561
581
(345)
159
36
98
(52)
(81)
15
–
(19)
(1)
2,607
12,150
74,473
86,623
2003
US$m
8,774
(6,532)
2,242
4,988
862
(301)
162
19
(138)
(258)
(41)
–
13,405
84
3
1,423
22,708
51,765
74,473
2002
US$m
6,239
(5,001)
1,238
3,461
337
(5)
45
19
–
59
(41)
–
–
–
–
1,023
6,077
45,688
51,765
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 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 2004, total purchases and sales for market making purposes (including those related to short
positions) each amounted to about US$5.9 billion.
241
H S B C H O L D I N G S P L C
Financial Statements (continued)
Consolidated cash flow statement for the year ended 31 December 2004
Net cash inflow from operating activities .........................................
40
Notes
Dividends received from associated undertakings ............................
Returns on investments and servicing of finance
Interest paid on finance leases and similar hire purchase contracts
Interest paid on subordinated loan capital .....................................
Dividends paid to minority interests
– equity ..........................................................................................
– non-equity ..................................................................................
Net cash outflow from returns on investments and servicing of
finance .........................................................................................
Taxation paid ...................................................................................
Capital expenditure and financial investments
Purchase of investment securities ..................................................
Proceeds from sale and maturities of investment securities ...........
Purchase of tangible fixed assets ...................................................
Proceeds from sale of tangible fixed assets ...................................
Purchase of intangible assets .........................................................
Net cash outflow from capital expenditure and financial
2004
US$m
37,209
127
(45)
(915)
(664)
(548)
(2,172)
(3,797)
(330,917)
315,437
(2,830)
371
(108)
2003
US$m
22,675
108
(37)
(882)
(514)
(392)
(1,825)
(2,631)
(218,196)
206,099
(1,981)
346
(87)
2002
US$m
16,426
114
(29)
(870)
(480)
(357)
(1,736)
(1,371)
(130,166)
122,495
(1,723)
328
–
investments .................................................................................
(18,047)
(13,819)
(9,066)
25
Acquisitions and disposals
Net cash (outflow)/inflow from acquisition of and increase in
stake in subsidiary undertakings .................................................
Net cash inflow from disposal of subsidiary undertakings .............
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 ...................................................
Net cash inflow from financing ......................................................
Increase in cash ..............................................................................
41
42
The accompanying notes are an integral part of the Consolidated Financial Statements.
(2,431)
27
(2,301)
204
(4,501)
(4,425)
4,394
581
98
(345)
159
1,480
–
6,021
(1,740)
6,254
10,648
(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
242
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.
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 and with the SORP
‘Accounting issues in the asset finance and leasing industry’ issued by the Finance & Leasing Association.
The SORP issued by the Association of British Insurers ‘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, places a
value on its long-term assurance businesses using 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 securities and derivatives. 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 48. 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 49. 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.
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 (c) 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.
243
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(b) Interest on debt issuance
Premiums and discounts on the issue of debt and fair value adjustments to debt arising on acquisitions are
amortised to interest payable so as to give a consistent rate over the life of the debt. Where debt is callable,
either by HSBC or the holder, the premium or discount is amortised over the period to the earliest call date.
(c) 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 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;
the ability of the borrower to obtain and make payments in the relevant foreign currency if loans are not in
local currency; and
–
–
–
–
–
–
–
–
–
244
– where available, the secondary market price for the debt.
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 performing, trade related and of less than one year’s maturity;
are mitigated by acceptable security cover which is, other than in exceptional cases, 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 collectibility of
principal or interest or when contractual payments of principal or interest are 90 days overdue. When a loan is
designated as non-performing, interest 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, homogeneous 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 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 those 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
245
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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.
(d) 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
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’.
(e) 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.
246
(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.
(f) 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.
(g) Tangible fixed assets
(i) Land and buildings are stated at valuation or cost less depreciation calculated to write off the assets over
their estimated useful lives as follows:
–
–
–
freehold land and land held on leases with more than 50 years to expiry are not depreciated;
land held on leases with 50 years or less to expiry is depreciated over the unexpired terms of the leases;
and
buildings and improvements thereto are depreciated on cost or valuation at the greater of 2 per 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.
(h) 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.
247
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(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.
(i) 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.
(j) 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.
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.
(k) 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.
(l) 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.
248
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. If market observable data are not available, the initial
increase in fair value indicated by the valuation model, but based on unobservable inputs, is not recognised
immediately in the profit and loss account. This amount is held back and recognised over the life of the
transaction where appropriate, or released to the profit and loss account when the inputs become observable, or,
when the transaction matures or is closed out. 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
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.
(m) 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 external actuaries, and 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.
249
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Long-term assurance assets excluding own shares held (see note 26) and liabilities attributable to policyholders
are recognised in HSBC’s accounts in ‘Other assets’ and ‘Other liabilities’.
(n) Share awards
No costs are recognised for options granted under share option schemes at market price at the date of grant or,
for save-as-you-earn schemes, at the approved discount to such market price.
Shares awarded to employees in respect of annual bonuses are charged to the profit and loss account in the
relevant performance year. Shares awarded to employees in respect of joining incentives are charged to the profit
and loss account over any minimum contract period.
The intrinsic value of shares conditionally awarded under restricted share award schemes is charged to
compensation cost over the period in respect of which performance conditions apply. The compensation cost is
adjusted in line with any adjustment to the awards due to lapses or application of the performance conditions.
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
2004
US$m
588
13
601
2003
US$m
213
9
222
2004
Dividend
and net
interest
income
US$m
34
(95)
305
375
619
Total
US$m
1,840
632
354
359
3,185
2003
Dividend
and net
interest
income
US$m
31
16
460
198
705
Dealing
profits
US$m
1,239
330
251
358
2,178
Total
US$m
1,270
346
711
556
2,883
2002
Dividend
and net
interest
income
US$m
43
(7)
259
186
481
Dealing
profits
US$m
1,167
47
75
24
1,313
Dealing
profits
US$m
1,806
727
49
Foreign exchange ..........
Interest rate derivatives ..
Debt securities ...............
Equities and other
trading .......................
(16)
2,566
5 Administrative expenses
(a)
2004
US$m
12,606
970
916
14,492
2,726
6,965
24,183
2003
US$m
10,434
809
868
12,111
2,331
5,243
19,685
Staff costs
– wages and salaries .............................................................................
– social security costs ...........................................................................
– retirement benefits (Note 5(b) below) ................................................
Premises and equipment (excluding depreciation) .................................
Other administrative expenses ...............................................................
250
2002
US$m
274
4
278
Total
US$m
1,210
40
334
210
1,794
2002
US$m
7,367
630
612
8,609
1,824
3,331
13,764
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 ......................................................................................
2004
80,930
25,070
37,211
70,041
31,475
2003
80,541
23,871
30,247
58,964
25,663
2002
76,924
24,452
27,584
22,262
26,253
244,727
219,286
177,475
(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. 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 168 pension schemes throughout the world, covering 85 per cent of HSBC’s
employees, with a total pension cost of US$810 million (2003: US$814 million, 2002: US$558 million), of
which US$389 million (2003: US$443 million, 2002: US$316 million) relates to overseas schemes. Of the
overseas schemes, US$119 million (2003: US$146 million, 2002: US$43 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.
The majority of the extant schemes are funded defined benefit schemes, which cover 50 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$620 million (2003: US$649 million, 2002:
US$406 million) which is assessed in accordance with the advice of qualified actuaries. The schemes are
reviewed at least on a triennial basis or in accordance with local practice and regulations. The actuarial
assumptions used to calculate the projected benefit obligations of HSBC’s pension schemes vary according
to the economic conditions of the countries in which they are situated.
Included in the above figures is the pension cost relating to the HSBC Bank (UK) Pension Scheme. This
comprises:
Regular cost ......................................................................................................................................................
Amortisation of deficit ......................................................................................................................................
Total cost for the year........................................................................................................................................
2004
US$m
223
86
309
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
251
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 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 2004 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$942 million. On an
ongoing basis, the actuarial value of the scheme’s assets represented 115 per cent of the benefits accrued to
members, after allowing for expected future increases in salaries, and the resulting surplus amounted to
US$121 million. On a wind-up basis, the actuarial value of the scheme’s assets represents 128 per cent of
the members’ vested benefits, based on current salaries, and the resulting surplus amounted to
US$206 million. The actuarial method used was the projected unit credit method and the main assumptions
used in this valuation were a discount rate of 4.0 per cent per annum and long-term salary increases of 3.0
per cent per annum (with short-term deviation from 2005 to 2008). HSBC has decided to continue ongoing
contributions to the scheme at the rate of 14.4 per cent of pensionable salaries until completion of the next
valuation, due as at 31 December 2005.
In the United States, the HSBC Bank USA Pension Plan (the ‘US principal scheme’) covers employees of
HSBC Bank USA and certain other employees of HSBC. The latest valuation of the US principal scheme
was made at 1 January 2004 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$1,222 million. The
actuarial value of the assets represented 122 per cent of the benefits accrued to members, after allowing for
expected future increases in earnings, and the resulting surplus amounted to US$191 million. The method
employed for this valuation was the projected unit credit method and the main assumptions used were a
discount rate of 8.0 per cent per annum and average salary increases of 5.0 per cent per annum. HSBC has
decided not to pay contributions to the scheme until completion of the next valuation, due as at
31 December 2005.
Also in the United States, the HSBC Finance Corporation Retirement Income Plan, which covers employees
of the HSBC Finance Corporation and certain other employees of HSBC, comprises a funded defined
benefit scheme (the ‘HSBC Finance Corporation principal scheme’) which is closed and a cash balance plan
which was established on 1 January 2000. HSBC has decided not to pay contributions to the scheme until
completion of the next valuation, due as at 31 December 2005.
The last reported actuarial valuation was made as at 1 July 2004. At that date, the market value of the HSBC
Finance Corporation principal scheme’s assets was US$956 million, representing 129 per cent of the
benefits accrued to members, after allowing for future increases in earnings. The resulting surplus amounted
to US$213 million. The method employed for this valuation was the projected unit credit method and the
main assumptions used were a discount rate of 8.0 per cent per annum and average salary increases of 3.75
per cent per annum.
Effective close of business on 31 December 2004, the HSBC Bank USA Pension Plan and the HSBC
Finance Corporation Retirement Income Plan merged, to form the HSBC North America (U.S.) Retirement
Income Plan, with all new employees participating in the cash balance plan.
The HSBC Bank (UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefits
Scheme, the HSBC Bank USA Pension Plan and the HSBC Finance Corporation Retirement Income Plan
cover 40 per cent (2003: 41 per cent, 2002: 37 per cent) of HSBC’s employees.
The pension cost for defined contribution schemes, which cover 34 per cent (2003: 34 per cent, 2002: 38
per cent) of HSBC’s employees, was US$190 million (2003: US$165 million, 2002: US$152 million).
252
(ii) FRS 17 Retirement Benefits
At 31 December 2004 the assumptions used to calculate scheme liabilities for HSBC’s main defined benefit
pension schemes under FRS 17 are:
Discount
rate
%
5.3
4.0
6.0
5.3
10.75
11.75
4.5
3.25-6.0
Inflation
assumption
%
2.7
n/a
2.5
2.7
5.0
5.0
2.0
1.5-2.5
Rate of increase
for pensions in
payment and
deferred
pension
%
2.7
n/a
n/a
2.7
5.0
5.0
2.0
0-1.5
Rate of pay
increase
%
3.2
5.0
3.75
4.45
6.50
5.0
3.5
2.25-3.0
United Kingdom ...........................................
Hong Kong ...................................................
United States ................................................
Jersey ............................................................
Mexico ..........................................................
Brazil ............................................................
France ...........................................................
Other ............................................................
The variation in discount rates between countries reflects the impact of local economic conditions.
At 31 December 2003 the assumptions used to calculate scheme liabilities for HSBC’s main defined benefit
pension schemes under FRS 17 were:
Rate of increase
for pensions in
payment and
deferred
pension
%
2.5
n/a
n/a
2.5
5.0
5.0
2.0
0-1.5
Inflation
assumption
%
2.5
n/a
2.5
2.5
5.0
5.0
2.0
1.5-2.0
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
United Kingdom ...........................................
Hong Kong ...................................................
United States ................................................
Jersey ............................................................
Mexico .........................................................
Brazil ............................................................
France ...........................................................
Other ............................................................
At 31 December 2002 the assumptions used to calculate scheme liabilities for HSBC’s main defined benefit
pension schemes under FRS 17 were:
Rate of increase
for pensions in
payment and
deferred
pension
%
2.25
n/a
n/a
2.25
5.0
5.0
2.0
0-1.5
Inflation
assumption
%
2.25
n/a
2.5
2.25
5.0
5.0
2.0
1.5-2.0
Discount
rate
%
5.6
5.5
6.75
5.6
10.78
10.25
5.5
3.75-6.75
United Kingdom ...........................................
Hong Kong ...................................................
United States ................................................
Jersey ............................................................
Mexico .........................................................
Brazil ............................................................
France ...........................................................
Other ............................................................
Rate of pay
Increase
%
2.75
4.5
3.75
4.0
7.62
6.05
3.5
2.5-3.0
253
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
The assets in the defined benefit schemes and the expected rates of returns are:
At 31 December 2004
HSBC Bank (UK) Pension
Scheme
Other schemes
Expected rate
of return
%
8.1
4.7
6.5
3.6
Expected rate
of return
%
9.5
5.5
6.5
4.5
Value
US$m
8,728
4,108
1,536
750
15,122
(19,501)
(4,379)
1,314
(3,065)
Value
US$m
2,639
2,037
68
1,058
5,802
(6,362)
(560)1
128
(432)
433
1
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 ...............................................
1 Of the deficit in other schemes, US$887 million related to schemes in deficit and US$327 million related to schemes in
surplus. Of the schemes in deficit, US$622 million related to unfunded pension schemes in respect of which a provision, net
of deferred tax, of US$433 million has been made. In relation to main schemes, there was a surplus of US$121 million in
the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, a surplus of US$131 million in the HSBC Bank USA
Pension Plan, and a deficit of US$19 million in the HSBC Finance Corporation Retirement Income Plan.
HSBC Bank (UK) Pension Scheme
Other schemes
At 31 December 2003
Expected rate
of return
%
8.5
5.0
7.0
4.0
Expected rate
of return
%
9.3
5.6
7.0
3.1
Value
US$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
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................................................
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, a surplus of US$112 million in the HSBC Bank USA
Pension Plan, and a surplus of US$71 million in the HSBC Finance Corporation Retirement Income Plan.
The net pension liability would have a consequent effect on reserves if recognised.
The defined benefit section of the HSBC Bank (UK) Pension Scheme, the HSBC Group Hong Kong Local
Staff Retirement Benefit Scheme and the HSBC Finance Corporation Retirement Income Plan are closed to
new entrants. For these schemes the current service cost will increase under the projected unit credit method
as the members of the scheme approach retirement.
254
HSBC Bank (UK) Pension Scheme
Other schemes
At 31 December 2002
Expected rate
of return
%
8.5
5.0
7.0
3.75
Expected rate
of return
%
10.75
6.3
–
3.1
Value
US$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)
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 .......................
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$79 million in the HSBC Bank USA
Pension Plan.
The following amounts would be reflected in the profit and loss account and statement of total consolidated
recognised gains and losses, if FRS 17 were implemented in full.
Year ended 31 December
2004
2003
HSBC
Bank (UK)
Pension
Scheme
US$m
Other
schemes
US$m
HSBC
Bank (UK)
Pension
Scheme
US$m
Other
schemes
US$m
Amount that would be charged to operating
profit
Current service cost ...........................................
Past service cost ................................................
(Gains) on any settlements or curtailments .......
Total operating charge .......................................
Amount that would be credited to other
finance income
Expected return on pension scheme assets ........
Interest on pension scheme liabilities ................
Net return ..........................................................
Amount that would be recognised in the
statement of total consolidated recognised
gains and losses
Actual return less expected return on pension
scheme assets .................................................
Experience gains and losses arising on the
scheme liabilities............................................
Changes in assumptions underlying the
present value of the scheme liabilities ...........
Actuarial (loss)/gain ..........................................
377
–
–
377
927
(901)
26
498
1981
(1,323)
(627)
253
16
(9)
260
381
(324)
57
68
(37)
(293)
(262)
277
–
–
277
728
(675)
53
987
(195)
(1,978)
(1,186)
215
28
–
243
304
(277)
27
442
19
(184)
277
255
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Year ended 31 December
2004
2003
HSBC
Bank (UK)
Pension
Scheme
US$m
Other
schemes
US$m
HSBC
Bank (UK)
Pension
Scheme
US$m
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 (loss)/gain ..........................................
Acquisition of subsidiary undertaking ...............
Exchange and other movements ........................
(3,372)
(377)
289
26
(627)
–
(318)
Deficit in the pension schemes at 31 December
(4,379)
(252)
(260)
224
57
(262)
(12)
(55)
(560)
(2,826)
(277)
1,189
53
(1,186)
–
(325)
(3,372)
Other
schemes
US$m
(719)
(243)
548
27
277
(106)
(36)
(252)
1 Includes US$193 million increase in pension liability relating to termination benefits attributable to members of the HSBC
Bank (UK) Pension Scheme. If FRS 17 were implemented this amount would be recognised in the profit and loss account,
but not as part of pension costs. A further amount of US$63 million attributable to members scheduled to cease employment
in 2005 is not included in the liability for this scheme as at 31 December 2004.
2004
HSBC
Bank (UK)
Pension
Scheme
US$m
Year ended 31 December
2003
HSBC
Bank (UK)
Pension
Scheme
US$m
Other
schemes
US$m
Other
schemes
US$m
2002
HSBC
Bank (UK)
Pension
Scheme
US$m
Other
schemes
US$m
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:
– amount .......................................
– percentage of the present value
of the scheme liabilities ..............
498
3%
198
1%
(627)
(3%)
68
1%
(37)
(1%)
(262)
(4%)
987
8%
(195)
(1%)
442
8%
(1,825)
(20%)
(510)
(15%)
19
(18)
0.4%
(0.1%)
(1,186)
(7%)
277
5%
(1,441)
(12%)
95
2%
(356)
(9%)
Most of the employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme. HSBC
Holdings is unable to identify the share of the underlying assets and liabilities of this scheme which are
attributable to its employees and is therefore accounting for the scheme as if it were a defined contribution
scheme.
(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, France and Brazil. The charge relating to these schemes is
US$106 million for the year (2003: US$54 million, 2002: US$54 million). The schemes are unfunded,
except for the scheme in Mexico which had assets of US$79 million at 31 December 2004 (2003:
US$68 million; 2002: US$13 million) comprising US$61 million in equities (2003: nil; 2002:
US$2 million), US$18 million in bonds (2003: US$52 million; 2002: US$6 million) and US$nil in cash
(2003: US$16 million; 2002: US$5 million). The latest full actuarial valuations of the liability were carried
256
out at dates between 31 December 1999 and 31 December 2004 by independent qualified actuaries and have
been updated to 31 December 2004 as necessary. These latest actuarial reviews (in accordance with FRS 17)
estimated the present value of the accumulated post-retirement benefit obligation at US$1,013 million
(2003: US$850 million, 2002: US$491 million), of which US$726 million (2003: US$656 million, 2002:
US$366 million) has been provided and US$79 million (2003: US$68 million; 2002: US$13 million) is held
in assets in the funded scheme in Mexico. Of the year-end obligation, US$36 million arose on the
acquisition of Bank of Bermuda. 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 2004 were price inflation of 2.7 per cent
per annum (2003: 2.5 per cent, 2002: 2.5 per cent), health-care claims cost escalation of 7.7 per cent per
annum (2003: 7.5 per cent, 2002: 7.5 per cent) and a discount rate of 5.3 per cent per annum (2003: 5.3 per
cent, 2002: 5.6 per cent). For the US schemes, the main financial assumptions used at 31 December 2004
were price inflation of 2.5 per cent per annum (2003: 2.5 per cent, 2002: 2.5 per cent), health-care claims
cost escalation of 9 per cent per annum (2003: 12.9 per cent, 2002: 7 per cent) and a discount rate of 6 per
cent (2003: 6.25 per cent, 2002: 6.75 per cent).
Under FRS 17, the deferred tax asset related to the unprovided liability of US$208 million (2003:
US$126 million, 2002: US$112 million) would be US$75 million (2003: US$46 million, 2002:
US$38 million). The movement in the FRS 17 liability is as follows:
Deficit at 1 January ........................................................................................................
Current service cost ........................................................................................................
Contributions .................................................................................................................
Interest cost on liabilities ................................................................................................
Expected return on scheme assets ..................................................................................
Experience gains and losses arising on liabilities ...........................................................
Change in assumptions underlying the present value of scheme liabilities .....................
Actual return less expected return on scheme assets ......................................................
Acquisition of subsidiary undertaking ...........................................................................
Exchange and other movements .....................................................................................
Deficit at 31 December ...................................................................................................
Amounts provided in the balance sheet for unfunded liabilities......................................
Unprovided liability at 31 December .............................................................................
Related deferred tax asset ...............................................................................................
Net unprovided liability at 31 December .......................................................................
Year ended 31 December
2004
US$m
2003
US$m
(782)
(18)
52
(61)
6
3
(58)
(4)
(36)
(36)
(934)
726
(208)
75
(133)
(478)
(11)
81
(49)
1
32
(67)
(3)
(251)
(37)
(782)
656
(126)
46
(80)
(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 ..............................................................
Bonuses .................................................................................................
Gains on the exercise of share options ...................................................
Vesting of Restricted Share Plan awards ...............................................
2004
US$000
2,713
9,721
17,288
29,722
14,078
9,598
2003
US$000
1,525
8,712
9,856
20,093
17,602
1,728
2002
US$000
1,338
7,605
5,636
14,579
514
–
In addition, there were payments under retirement benefit agreements with former Directors of US$906,000
(2003: US$557,000). The provision as at 31 December 2004 in respect of unfunded pension obligations to
former Directors amounted to US$17,016,000 (2003: US$7,273,000).
During the year, aggregate contributions to pension schemes in respect of Directors were US$4,423,122 (2003:
US$3,337,433), including US$2,198,072 (2003: US$2,042,469) arising from a Director’s waiver of bonus.
257
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 original cost and 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 ‘Directors’ Remuneration Report’ on pages 216 to 233.
(d) Auditors’ remuneration
Auditors’ remuneration in relation to statutory audit amounted to US$41.7 million (2003: US$31.7 million,
2002: US$24.8 million). The following remuneration was paid by HSBC companies to HSBC’s principal
auditor, KPMG Audit Plc and its affiliated firms (‘KPMG’):
Audit services
– Statutory audit ...................................................................................
– Audit-related regulatory reporting ....................................................
Total audit services ................................................................................
Further assurance services .....................................................................
Tax services ...........................................................................................
Other services
– Financial information technology ......................................................
– Other services ....................................................................................
Total other services ................................................................................
Total fees paid to KPMG .......................................................................
2004
US$m
2003
US$m
2002
US$m
39.6
9.3
48.9
7.0
6.2
–
3.4
3.4
65.5
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
Of fees paid to auditors for non-audit work, US$0.4 million were capitalised (2003: US$2.1 million, 2002:
US$0.4 million).
Included in ‘Further assurance services’ above are fees paid to KPMG in respect of work relating to the
implementation of Sarbanes-Oxley Act Section 404 of US$4.1 million. Other accounting firms have been paid a
total of US$6.6 million for work on this project to date.
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 and tax advice.
– 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$16 million (2003: US$12 million) by
parties other than HSBC but where HSBC is connected with the contracting party. These fees arise principally in
respect of services such as the audits of mutual funds managed by HSBC and reviews of the financial position of
corporate borrowers where HSBC is a lender.
258
6
Profit on ordinary activities before tax
Profit on ordinary activities before tax is stated after:
Income
Aggregate rentals receivable under
– finance leases and hire purchase contracts .................................................
– operating leases ..........................................................................................
Income from listed investments .....................................................................
Profits less losses on debt securities and equities dealing ..............................
Gains on disposal of investment securities ....................................................
Charges
Charges incurred with respect to subordinated liabilities ..............................
Finance charges in respect of finance leases and similar hire purchase
contracts ....................................................................................................
Hire of plant and machinery ..........................................................................
Rentals payable on premises held under operating leases ..............................
2004
US$m
4,560
632
5,073
87
528
1,052
42
160
847
2003
US$m
3,279
553
4,276
294
396
958
38
110
773
Gains on the disposal of investments and tangible fixed assets attracted a tax charge of US$160 million (2003:
US$84 million, 2002: US$86 million). Of the after-tax amount, US$28 million (2003: US$23 million, 2002:
US$23 million) is attributable to minority interests.
7 Tax on profit on ordinary activities
The charge for taxation comprises:
Current taxation
United Kingdom corporation tax charge – current year .................................
United Kingdom corporation tax charge – adjustment in respect of
prior years ..................................................................................................
Relief for overseas taxation ............................................................................
Overseas taxation – current year ....................................................................
Overseas taxation – adjustment in respect of prior years ...............................
Joint ventures .................................................................................................
Associates ......................................................................................................
Deferred taxation
Origination and reversal of timing differences ...............................................
Effect of change in tax rate on opening asset .................................................
Adjustment in respect of previous periods .....................................................
Total charge for taxation ................................................................................
HSBC Holdings and subsidiaries tax charge .................................................
Joint ventures tax charge ................................................................................
Associates tax charge .....................................................................................
2004
US$m
1,570
(132)
(722)
716
2,877
(21)
3
42
3,617
981
(15)
(76)
890
4,507
4,462
3
42
4,507
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
2,502
490
4,361
19
405
862
36
81
548
2002
US$m
1,096
(68)
(344)1
684
1,246
(29)
(6)
17
1,912
615
–
7
622
2,534
2,523
(6)
17
2,534
HSBC Holdings and its subsidiary undertakings in the United Kingdom provide for UK corporation tax at 30 per
cent (2003 and 2002: 30 per cent). Overseas tax includes Hong Kong profits tax of US$539 million (2003:
US$483 million, 2002: US$408 million). Subsidiary undertakings in Hong Kong provide for Hong Kong profits tax
at the rate of 17.5 per cent (2003: 17.5 per cent, 2002: 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.
259
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Analysis of overall tax charge
Taxation at UK corporate tax rate of 30 per cent
(2003 and 2002: 30 per cent) .....................................................................
Effect of overseas profits in principal locations taxed at different rates1 .......
Tax free gains .................................................................................................
Goodwill amortisation not tax deductible .....................................................
Acquisition accounting adjustments not tax effected2 ....................................
Adjustments in respect of prior period liabilities ...........................................
Tax deduction on innovative tier 1 capital .....................................................
Low income housing credits3 .........................................................................
Other items .....................................................................................................
Overall tax charge ..........................................................................................
Timing differences deferring tax payable/(charging tax
previously deferred)
Accelerated capital allowances .......................................................................
Timing differences on lease income ...............................................................
Provision for bad and doubtful debts .............................................................
Relief for losses brought forward ...................................................................
Provision for Princeton Note settlement .........................................................
Other short-term timing differences ...............................................................
Deferred tax charge/(credit) ...........................................................................
2004
US$m
5,282
(347)
(64)
579
(253)
(229)
(192)
(95)
(174)
4,507
(2)
(212)
(392)
(116)
–
(168)
(890)
2003
US$m
3,845
(366)
(17)
476
(331)
(230)
(117)
(72)
(68)
3,120
(1)
(187)
356
52
–
(183)
37
2002
US$m
2,895
(472)
(19)
261
–
(90)
(99)
–
58
2,534
23
(90)
(29)
(125)
(221)
(180)
(622)
Current tax charge ..........................................................................................
3,617
3,157
1,912
1 Overseas profits taxed at different rates to that which applies in the UK contributed to a reduction in the effective tax rate of 2.0 per
cent (2003: 2.9 per cent). The reduction in the effective tax rate was less in 2004 than in 2003 because of the greater proportion of
Group profits arising in the US, where they are subject to a higher rate of tax than in the UK, in 2004.
2 In 2003 and 2004 significant acquisition adjustments arose in respect of certain assets and liabilities which were revalued to their fair
value on the purchase of HSBC Finance Corporation 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. However, there is no adjustment to the related tax basis of the assets and liabilities. The
amortisation resulted in a credit to the profit and loss account of US$728 million (2003: US$957 million) and as there is no tax
associated with this adjustment to net income, this reduces the effective tax rate for the year.
3 Low income housing tax credits available in the United States which are designed to encourage the provision of rental housing
targeted at low income households.
8
Profit of HSBC Holdings
Profit on ordinary activities before tax ...........................................................
Tax credit on profit on ordinary activities ......................................................
Profit for the financial year attributable to shareholders ................................
2004
US$m
4,401
117
4,518
2003
US$m
6,097
116
6,213
2002
US$m
5,185
82
5,267
Profit on ordinary activities before tax includes dividend income from subsidiary undertakings for the years ended
31 December as follows:
Bank ...............................................................................................................
Non-bank .......................................................................................................
2004
US$m
2,700
2,277
2003
US$m
2,409
3,933
2002
US$m
1,715
3,745
260
9 Dividends
First interim .................................................
Second interim .............................................
Third interim ................................................
Fourth interim ..............................................
2004
US$ per
share
0.130
0.130
0.130
0.270
0.660
US$m
1,425
1,436
1,444
2,996
7,301
2003
US$ 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
Of the first, second and third interim dividends for 2004, US$747 million, US$746 million and US$255 million
respectively (2003: US$979 million, 2002: US$166 million) were settled by the issue of shares. Of the second and
third interim dividends for 2003, US$533 million and US$346 million respectively (2002: US$444 million, 2001:
US$857 million) were settled by the issue of shares in 2004.
10 Earnings per ordinary share
Basic earnings per ordinary share was calculated by dividing the earnings of US$11,840 million (2003:
US$8,774 million, 2002: US$6,239 million) by the weighted average number of ordinary shares, excluding own
shares held, outstanding in 2004 of 10,907 million (2003: 10,421 million, 2002: 9,339 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 2004 of 11,054 million
(2003: 10,539 million, 2002: 9,436 million).
The effect of dilutive share options on the weighted average number of ordinary shares in issue is as follows:
Average number of shares in issue .................................................................
Savings-related Share Option Plan .................................................................
Executive Share Option Scheme ....................................................................
Group Share Option Plan ...............................................................................
Restricted Share Plan .....................................................................................
CCF share options ..........................................................................................
HSBC Finance Corporation share options .....................................................
Average number of shares in issue assuming dilution ...................................
Number of shares (millions)
2004
10,907
38
12
13
63
13
8
11,054
2003
10,421
30
8
4
56
14
6
10,539
2002
9,339
30
11
–
38
18
–
9,436
Of the total number of employee share options existing at 31 December 2004, 70 million were antidilutive (2003:
130 million, 2002: nil).
11 Treasury bills and other eligible bills
Treasury bills and similar securities ...............................................................
Other eligible bills .........................................................................................
2004
US$m
29,194
1,090
30,284
2003
US$m
19,193
1,198
20,391
2002
US$m
16,759
1,382
18,141
Of the total treasury bills and other eligible bills, US$25,666 million (2003: US$15,799 million, 2002:
US$12,902 million) are non-trading book investment securities. These are mainly short-term in maturity and are
analysed below.
261
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
At 1 January 2004 ...............................................................................................................................................................
Additions .............................................................................................................................................................................
Disposals and amounts repaid .............................................................................................................................................
Amortisation of discounts and premiums ............................................................................................................................
Exchange and other movements ..........................................................................................................................................
At 31 December 2004 .........................................................................................................................................................
Cost and
book value
US$m
15,799
78,751
(70,221)
317
1,020
25,666
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 ................................................................
2004
US$m
5,514
7,099
2,778
8,756
1,519
25,666
2003
US$m
4,624
955
2,450
6,891
879
15,799
2002
US$m
2,888
740
2,898
5,344
1,032
12,902
The following tables provide an analysis of gross unrealised gains and losses on treasury bills and other eligible bills:
Carrying
value
US$m
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
Market
valuation
US$m
31 December 2004
US Treasury and Government agencies .......................
UK Government ...........................................................
Hong Kong Government ..............................................
Other governments .......................................................
Corporate debt and other securities ..............................
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 ..............................
5,514
7,099
2,778
8,756
1,519
25,666
4,624
955
2,450
6,891
879
15,799
2,888
740
2,898
5,344
1,032
12,902
1
1
3
15
–
20
2
–
2
10
–
14
3
–
2
8
–
13
(4)
–
–
(13)
(3)
(20)
–
–
–
(5)
–
(5)
–
–
–
(1)
–
(1)
5,511
7,100
2,781
8,758
1,516
25,666
4,626
955
2,452
6,896
879
15,808
2,891
740
2,900
5,351
1,032
12,914
The amounts shown under ‘other governments’ in the above table includes securities with a book and market value
of US$1,122 million (2003: book and market value US$711 million) issued by the Government of Japan.
262
The maturities of available-for-sale treasury bills and other eligible bills at 31 December 2004 are analysed as
follows:
1 year or less ...................................................................................................................................
5 years or less but over 1 year .........................................................................................................
10 years or less but over 5 years ......................................................................................................
Carrying
value
US$m
25,018
593
55
25,666
Market
valuation
US$m
25,009
596
61
25,666
The following table provides an analysis of contractual maturities and weighted average yields of available-for-sale
treasury bills and other eligible bills as at 31 December 2004.
US Treasury and Government agencies ....................................
UK Government ........................................................................
Hong Kong Government ...........................................................
Other governments ....................................................................
Corporate debt and other securities ...........................................
Within
one year
Amount Yield
%
US$m
2.0
4.2
0.6
2.5
1.2
5,502
6,852
2,778
8,386
1,500
25,018
After one year
but within
five years
Amount Yield
%
US$m
After five years
but within
ten years
Amount Yield
%
US$m
5.6
4.9
–
4.6
2.2
12
247
–
315
19
593
–
–
–
4.2
–
–
–
–
55
–
55
12 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.
13 Credit risk management
HSBC’s credit risk management process is discussed in the ‘Financial Review’ in the section headed ‘Credit risk
management’ on pages 135 to 137, ending with the sentence ‘Internal audit will discuss with management …
assigned to the facilities concerned’.
14 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 16) ......................................................................
2004
US$m
34,842
95,386
8,059
1,614
2,828
(17)
2003
US$m
25,289
77,188
10,879
1,454
2,387
(24)
142,712
117,173
Amounts include:
Due from associates
– unsubordinated .........................................................................................................................
164
21
263
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
15 Loans and advances to 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 16) ...................................................
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 ...........................................................................................................................
2004
US$m
70,452
124,893
76,073
172,900
238,182
(12,669)
669,831
218
18,463
71
38
931
2003
US$m
60,331
94,001
63,648
142,814
181,874
(13,691)
528,977
202
26,640
65
35
464
Loans and advances to customers included US$793 million (2003: US$824 million) of repossessed real estate and
other assets.
Securitisation transactions
Loans and advances to customers include balances that have been securitised. Certain of these balances meet the
requirements for linked presentation under FRS 5 ‘Reporting the substance of transactions’.
The non-recourse finance has been netted against customer loans as follows:
Customer loans ................................................................................................................................
Non-recourse finance ......................................................................................................................
Funding provided by HSBC ............................................................................................................
Clover Funding Securitisation
2004
US$m
1,456
(1,251)
205
2003
US$m
2,555
(2,291)
264
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. 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$2,010 million (2003: US$2,541
million) floating rate notes (‘FRNs’). Clover Funding No.2 plc is in scheduled accumulation and has collected
US$702 million (2003: US$395 million) to repay its outstanding Notes in April 2005. 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$1,102 million (2003: US$1,882 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.
264
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$58 million (2003: US$73 million) of subordinated FRNs that are repayable after payments in
respect of senior FRNs. HSBC has made subordinated loans of US$37 million (2003: US$46 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$8 million (2003: US$7 million) which comprised US$114 million (2003:
US$108 million) of interest receivable by Clover Funding less US$106 million (2003: US$101 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, 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.
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 2004 non-returnable proceeds of US$149 million (2003: 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 2004, the special purpose companies acquired no qualifying personal loans from HFC Bank
under these arrangements (2003, in the period since the acquisition of HFC Bank by HSBC: US$94 million). The
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 2004, HFC Bank recognised net income of US$9 million (2003, in the period since the acquisition of HFC Bank
by HSBC: US$33 million) from these personal loan securitisations.
265
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
16 Provisions for bad and doubtful debts
Provisions against advances
At 1 January 2004 ......................................................
Amounts written off .....................................................
Recoveries of advances written off ...............................
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 2004 .................................................
Included in:
Loans and advances to banks (Note 14) ...................
Loans and advances to customers (Note 15) ............
At 1 January 2003 ........................................................
Amounts written off .....................................................
Recoveries of advances written off ..............................
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 14) ...................
Loans and advances to customers (Note 15) ............
At 1 January 2002 ........................................................
Amounts written off .....................................................
Recoveries of advances written off ..............................
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 ...................................
Loans and advances to customers ............................
Specific
US$m
10,902
(8,896)
912
6,793
–
–
219
187
10,117
6,629
(7,456)
610
6,214
–
–
4,269
636
10,902
5,522
(2,111)
180
1,672
–
–
1,278
88
6,629
General
US$m
2,813
–
–
(436)
–
–
37
155
2,569
2,511
–
–
(121)
–
–
500
(77)
2,813
2,661
–
–
(351)
–
–
426
(225)
2,511
Suspended
interest
US$m
610
(246)
–
–
184
(131)
17
(6)
428
566
(147)
–
–
240
(182)
–
133
610
861
(327)
–
–
426
(214)
–
(180)
566
Total
US$m
13,715
(8,896)
912
6,357
–
–
256
342
12,686
17
12,669
12,686
9,140
(7,456)
610
6,093
–
–
4,769
559
13,715
24
13,691
13,715
8,183
(2,111)
180
1,321
–
–
1,704
(137)
9,140
23
9,117
9,140
The total of customer advances, net of suspended interest, on which interest is being placed in suspense, is as
follows:
Gross ...............................................................................................................
Net of specific provisions................................................................................
2004
US$m
4,229
1,823
2003
US$m
5,513
2,673
2002
US$m
5,485
2,780
266
17 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 ...........................................
–
57,920
Total personal ...........................................
128,472
Commercial, industrial and international
trade ......................................................
Commercial real estate ..............................
Other property related ...............................
Government ..............................................
Other commercial1 .....................................
54,438
18,827
6,750
3,663
31,626
Total corporate and commercial ................
115,304
Non-bank financial institutions .................
Settlement accounts ..................................
Total financial ...........................................
30,809
4,491
35,300
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
North
America
US$m
South
America
US$m
Total
US$m
70,552
24,040
14,799
112,866
208
222,465
5,402
9,104
38,546
14,138
10,391
5,959
615
7,294
38,397
1,932
596
2,528
–
9,075
–
80,463
23,874
193,329
19,178
4,232
3,349
1,432
7,023
35,214
2,297
305
2,602
11,599
9,798
4,518
3,868
6,448
36,231
17,090
8,431
25,521
–
3,444
3,652
1,988
135
72
635
919
3,749
112
11
123
5,402
160,006
387,873
101,341
43,383
20,648
10,213
53,310
228,895
52,240
13,834
66,074
At 31 December 2004 ..............................
279,076
79,471
61,690
255,081
7,524
682,842
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 ...........................................
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
–
75,173
19,236
152,927
14,892
3,149
2,597
1,450
5,735
27,823
2,027
188
2,215
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
1 Other commercial includes advances in respect of agriculture, transport, energy and utilities.
The geographical information shown above has been classified by the location of the principal operations of the
subsidiary undertaking, or in the case of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank
plc, HSBC Bank Middle East Limited and HSBC Bank USA, N.A., by location of the branch responsible for
advancing the funds.
267
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
18 Debt securities
2004
Book
value
US$m
Market
valuation
US$m
2003
Book
value
US$m
Market
valuation
US$m
2002
Book
value
US$m
Market
valuation
US$m
Issued by public bodies
Investment securities:
Government securities and US
Government agencies ............................
Other public sector securities ................
Other securities:
Government securities and US
Government agencies ............................
Other public sector securities ................
Issued by other bodies
Investment securities:
Bank and building society certificates
of deposit ..........................................
Other debt securities .............................
Other securities:
Bank and building society certificates
of deposit ..........................................
Other debt securities .............................
56,885
7,591
64,476
8,283
77,736
86,019
56,410
7,338
63,748
43,642
1,440
108,830
8,279
77,178
85,457
9,016
37,696
132,169
Total ........................................................
240,999
Due within 1 year .....................................
Due 1 year and over .................................
Amounts include:
Subordinated debt securities .................
Unamortised net premium on
investment securities .............................
Listing of securities
Investment securities
78,754
162,245
240,999
730
573
– listed on a recognised UK exchange ..
– listed in Hong Kong ..........................
– listed elsewhere .................................
– unlisted ..............................................
21,635
2,216
53,513
71,841
22,247
2,328
53,869
72,051
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
149,205
150,495
130,916
132,594
107,925
109,897
Other securities
– listed on a recognised UK exchange ..
– listed in Hong Kong ..........................
– listed elsewhere .................................
– unlisted ..............................................
12,760
2,302
49,843
26,889
240,999
9,442
2,503
39,850
23,011
205,722
9,158
2,397
29,434
26,816
175,730
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$150,210 million (2003: US$132,076 million, 2002: US$109,204 million).
268
At 1 January 2004 ..........................................................................................
Additions .......................................................................................................
Acquisition of subsidiaries .............................................................................
Disposals and amounts repaid ........................................................................
Provisions released..........................................................................................
Amortisation of discounts and premiums .......................................................
Exchange and other movements .....................................................................
At 31 December 2004 ...................................................................................
Cost
US$m
131,037
247,778
5,731
(239,877)
–
(99)
4,756
149,326
The book value of investment securities, analysed by type of borrower, is as follows:
Available-for-sale
US Treasury and Government agencies .........................................................
UK Government .............................................................................................
Hong Kong 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 .................................................................
Investment securities
Provisions
US$m
Book value
US$m
(121)
–
–
(26)
20
–
6
(121)
2003
US$m
19,215
554
1,124
26,685
7,200
71,626
130,916
247,778
5,731
(239,903)
20
(99)
4,762
149,205
2002
US$m
18,574
1,064
1,042
18,067
3,697
60,852
145,324
126,404
103,296
3,040
465
376
3,881
3,637
573
302
4,512
3,918
673
38
4,629
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 2004
US Treasury and Government agencies ........................
UK Government ............................................................
Hong Kong Government ...............................................
Other governments ........................................................
Asset-backed securities .................................................
Corporate debt and other securities ...............................
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
Carrying
value
US$m
18,999
4,411
2,464
27,496
13,296
78,658
145,324
1,633
19,215
554
1,124
26,685
7,200
71,626
126,404
224
–
65
427
131
1,007
1,854
(145)
(2)
–
(227)
(6)
(124)
(504)
(155)
(1)
–
(34)
(9)
(113)
(312)
2004
US$m
18,999
4,411
2,464
27,496
13,296
78,658
116
–
82
532
28
875
Market
valuation
US$m
18,970
4,409
2,546
27,801
13,318
79,409
146,453
19,284
553
1,189
27,078
7,322
72,520
127,946
269
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
At 31 December 2002
US Treasury and Government agencies .......................
UK Government ...........................................................
Hong Kong Government ..............................................
Other governments .......................................................
Asset-backed securities ................................................
Corporate debt and other securities ..............................
Carrying
value
US$m
18,574
1,064
1,042
18,067
3,697
60,852
103,296
Available-for-sale
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
445
4
70
370
25
1,146
2,060
(7)
–
(2)
(228)
(7)
(121)
(365)
Market
valuation
US$m
19,012
1,068
1,110
18,209
3,715
61,877
104,991
The amounts shown under other governments in the above table include securities with a book value of
US$2,653 million (2003: US$5,847 million) and a market value of US$2,657 million (2003: US$5,853 million)
issued by the Government of Japan.
Carrying
value
US$m
Held-to-maturity
Gross
unrealised
gains
US$m
Gross
unrealised
losses
US$m
Market
valuation
US$m
At 31 December 2004
US Treasury and Government agencies .......................
Obligations of US state and political sub-divisions ......
Corporate debt and other securities ..............................
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 ..............................
3,040
465
376
3,881
3,637
573
302
4,512
3,918
673
38
4,629
132
37
6
175
121
–
57
178
234
44
1
279
The maturities of investment securities at 31 December 2004 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 ..................................................................................................................................
(13)
–
(1)
(14)
(40)
–
(2)
(42)
(1)
(1)
–
(2)
Book
value
US$m
43,627
64,435
11,137
26,125
145,324
276
139
255
3,211
3,881
3,159
502
381
4,042
3,718
573
357
4,648
4,151
716
39
4,906
Market
valuation
US$m
43,712
64,849
11,572
26,320
146,453
277
145
275
3,345
4,042
270
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
The following table provides an analysis of contractual maturities and weighted average yields of investment debt
securities as at 31 December 2004:
Within one year
Amount
US$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
Goverment 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 ...........
4,284
–
401
9,515
69
29,358
43,627
2.50
–
2.74
3.03
1.45
2.91
122
1.66
6.85
2.49
9
145
276
1,724
4,411
1,722
13,901
937
41,740
64,435
90
49
–
139
3.11
4.40
3.19
4.66
1.81
3.37
7.14
6.26
–
1,114
–
341
3,738
1,860
4,084
11,137
4.48
–
4.99
4.33
0.91
4.98
11,877
–
–
342
10,430
3,476
26,125
4.10
–
–
5.85
0.57
2.19
169
6.53
2,659
6.34
5.55
–
86
–
255
321
231
3,211
5.31
5.93
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 2004 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$240,064 million (2003:
US$153,910 million, 2002: US$77,105 million). Gross realised gains of US$215 million (2003: US$182 million,
2002: US$247 million) and gross realised losses of US$28 million (2003: US$21 million, 2002: US$77 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 2004 was US$247,778 million
(2003: US$164,817 million, 2002: US$85,837 million).
19 Equity shares
2004
2003
2002
Carrying
value
US$m
Market
valuation
US$m
Carrying
value
US$m
Market
valuation
US$m
Carrying
value
US$m
Market
valuation
US$m
Investment securities:
– listed on a recognised UK exchange .
– listed in Hong Kong ..........................
– listed elsewhere .................................
– unlisted .............................................
Other securities:
– listed on a recognised UK exchange .
– listed in Hong Kong ..........................
– listed elsewhere .................................
– unlisted .............................................
65
379
1,757
4,016
6,217
35
86
1,493
3,095
4,709
645
129
12,914
922
19,319
54
207
1,805
3,522
5,588
44
238
1,531
3,577
5,390
129
20
7,303
37
12,879
14
241
1,163
2,866
4,284
670
9
2,576
125
7,664
23
400
1,207
3,127
4,757
271
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Where securities are carried at market value, and the market value is higher than cost, the difference between cost
and market value is not disclosed as it cannot be determined without unreasonable expense.
At 1 January 2004 ..........................................................................................
Additions ........................................................................................................
Acquisition of subsidiaries .............................................................................
Disposals ........................................................................................................
Provisions released .........................................................................................
Provisions written off .....................................................................................
Exchange and other movements .....................................................................
At 31 December 2004 ...................................................................................
Investment securities
Provisions
US$m
Book value
US$m
(348)
–
–
26
72
19
50
(181)
5,390
4,388
39
(4,682)
72
–
(498)
4,709
Cost
US$m
5,738
4,388
39
(4,708)
–
(19)
(548)
4,890
The following table provides an analysis of gross unrealised gains and losses as at 31 December for the past three
years:
31 December 2004 ......................................................
31 December 2003 .......................................................
31 December 2002 .......................................................
Carrying
value
US$m
4,709
5,390
4,284
Gross
unrealised
gains
US$m
891
858
603
Gross
unrealised
losses
US$m
(12)
(31)
(130)
Market
valuation
US$m
5,588
6,217
4,757
Equity investment securities include interests in money market mutual funds primarily held by HSBC Finance
Corporation for liquidity management. Proceeds from the sale of investment securities were US$5,008 million (2003:
US$6,117 million; 2002: US$1,980 million). Gross realised gains of US$365 million (2003: US$281 million; 2002:
US$215 million) and gross realised losses of US$65 million (2003: US$43 million; 2002: US$9 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 2004 was US$4,388 million (2003:
US$5,692 million; 2002: US$1,748 million).
20 Interests in joint ventures
At 1 January 2004 .............................................................................................................................................................
Retained profits and losses ................................................................................................................................................
At 31 December 2004 ......................................................................................................................................................
(a)
Shares in non-banks ......................................................................................................................
2004
US$m
12
2004
US$m
10
2
12
2003
US$m
10
All shares are unlisted.
(b) HSBC’s joint venture at 31 December 2004 is:
Country of
incorporation
Framlington Group Limited ..................................
England
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.
272
Although HSBC owns more than 50 per cent of the equity capital of Framlington Group Limited, the agreement
with the other 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$44 million (2003: US$36 million).
21 Interests in associates
At 1 January 2004 ................................................................................................................................................................
Additions .............................................................................................................................................................................
Amortisation of goodwill .....................................................................................................................................................
Disposals ..............................................................................................................................................................................
Retained profits and losses (Note 35) ...................................................................................................................................
Exchange and other movements ...........................................................................................................................................
At 31 December 2004 .........................................................................................................................................................
2004
US$m
1,263
2,117
(4)
(98)
122
40
3,440
Included within additions is US$566 million of goodwill which has been determined on a provisional basis. There is
no goodwill included in the interests in associates at 31 December 2003.
(a)
Shares in banks ........................................................................................................................
Other ........................................................................................................................................
Listed shares (all listed outside the United Kingdom and Hong Kong) ....................................
Unlisted shares .........................................................................................................................
2004
US$m
2,879
561
3,440
681
2,759
3,440
(b) The principal associates of HSBC are:
Financial
statements
made up to
Country of
incorporation
Principal
activity
HSBC’s
interest in
equity capital
2003
US$m
777
486
1,263
367
896
1,263
Issued
equity
capital
Banking
19.9%
RMB39,070m
Bank of Communications
Limited ...........................
30.09.04
Industrial Bank Company
Limited ...........................
The Saudi British Bank .......
The Cyprus Popular Bank
Limited2...........................
British Arab Commercial
Bank Limited ..................
Erisa ...................................
Wells Fargo HSBC Trade
Bank, N.A ......................
AEA Investors LP................
30.09.04
31.12.04
31.12.04
31.12.04
31.12.04
31.12.04
31.12.04
People’s
Republic of
China
People’s
Republic of
China
Saudi Arabia
Banking
Banking
Cyprus
Banking
England
France
Banking
Insurance
United States
United States
Trade finance
Private equity
investment fund
Property
investment
Barrowgate Limited ............
31.12.04
Hong Kong
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.
4 Limited partnership.
All the above interests in associates are owned by subsidiaries of HSBC Holdings.
15.98%
40%
21.39%
46.51%
49.99%
20%
79.87%
24.64%
RMB3,999m
SR2,500m
C£152m
US$81m
£32m fully paid
£5m nil paid
€65m
–3
–4
–1
273
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
The principal countries of operation are the same as the countries of incorporation except for British Arab
Commercial Bank Limited which operates in the Middle East.
In May 2004, Hang Seng Bank Limited acquired a 15.98 per cent stake in Industrial Bank Co. Ltd, and in
August, 2004, The Hongkong and Shanghai Banking Corporation Limited acquired a 19.9 per cent interest in
Bank of Communications Limited. These companies are accounted for as associated companies, as HSBC has
representation on the Board of Directors of each bank, and in accordance with the Technical Support and
Assistance Agreements, is assisting in the development of financial and operating policies. In respect of Bank of
Communications Limited, a number of staff have been seconded to assist in this process.
In respect of Industrial Bank Co. Ltd., Hang Seng Bank Limited also has representation on the executive
committee, whilst for Bank of Communications Limited, The Hongkong and Shanghai Banking Corporation
Limited has representation on the senior executives’ remuneration and audit committees.
For Industrial Bank Company Limited and Bank of Communications Limited, the attributable share of results
comprises 4 months for the former and 1 month for the latter, being amounts from their respective dates of
acquisition to 30 September 2004. HSBC is accounting for its share of the results of these associates on the basis
of a 3 month time lag in order to facilitate the production of the necessary information.
(c) HSBC has no interest in the loan capital of the associates listed above, 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$945 million of loan capital in which HSBC has a 24.64 per
cent interest; Erisa which has in issue €55.2 million of subordinated debt in which HSBC has a 50 per cent
interest; and The Cyprus Popular Bank Limited which has in issue C£8.8 million of debentures in which HSBC
has a 74 per cent interest. HSBC also has a 100 per cent interest in the issued preferred stock (less than
US$1 million) of Wells Fargo HSBC Trade Bank, N.A. HSBC has a 40 per cent economic interest in Wells
Fargo HSBC Trade Bank, N.A. by virtue of the joint agreement under which HSBC’s equity capital and
preferred stock interests are held.
22 Other participating interests
Listed in Hong Kong .......................................................................................................................
Listed other than on a recognised UK exchange or in Hong Kong ..................................................
Unlisted ...........................................................................................................................................
Market value of listed securities ......................................................................................................
Other participating interests in banks ..............................................................................................
2004
US$m
781
1
99
881
1,079
6
At 1 January 2004 ..........................................................................................
Additions ........................................................................................................
Exchange and other movements .....................................................................
At 31 December 2004 ...................................................................................
23 Goodwill and intangible assets
Cost
US$m
722
184
8
914
Provisions
US$m
(32)
–
(1)
(33)
2003
US$m
–
4
686
690
29
1
Carrying
value
US$m
690
184
7
881
The net book value of goodwill at 31 December 2004 is stated net of negative goodwill of US$19 million (2003:
US$15 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$27 million (2003: US$50 million).
Included in ‘Additions and acquisition of subsidiaries’ is goodwill arising on the acquisition of businesses and
increases of holdings in subsidiaries during 2004. Positive goodwill is amortised over periods of up to 20 years.
Negative goodwill is credited to the profit and loss account over periods of up to 5 years.
274
Goodwill
US$m
Intangible
assets
US$m
Cost at 1 January 2004 ...................................................................................
Additions and acquisitions of subsidiaries (note 25) ......................................
Exchange and other movements .....................................................................
Cost at 31 December 2004 ...........................................................................
Accumulated amortisation at 1 January 2004 .................................................
Charge to the profit and loss account .............................................................
Exchange and other movements .....................................................................
Accumulated amortisation at 31 December 2004 ......................................
Net book value at 31 December 2004 ..........................................................
Net book value at 31 December 2003 ............................................................
32,674
1,223
1,535
35,432
(4,196)
(1,814)
(300)
(6,310)
29,122
28,478
178
111
16
305
(16)
(28)
(1)
(45)
260
162
24 Tangible fixed assets
(a) HSBC
Freehold
land and
buildings
US$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
3,647
522
169
(138)
(14)
159
188
2,789
1
–
(27)
(51)
530
61
2,830
62
–
(34)
(62)
557
16
8,212
1,243
52
(441)
–
–
538
5,095
1,002
–
(430)
–
–
450
Cost or valuation at 1 January 2004
Additions .....................................
Acquisition of subsidiaries ...........
Disposals .....................................
Transfer of accumulated
depreciation arising on
revaluation ...............................
Surplus on revaluation .................
Exchange and other movements ..
Cost or valuation at
Total
US$m
32,852
1,334
1,551
35,737
(4,212)
(1,842)
(301)
(6,355)
29,382
28,640
Total1
US$m
22,573
2,830
221
(1,070)
(127)
1,246
1,253
31 December 2004 ..................
4,533
3,303
3,369
9,604
6,117
26,926
Accumulated depreciation at
1 January 2004 ........................
Disposals .....................................
Transfer of accumulated
depreciation arising on
revaluation ...............................
Charge to the profit and loss
account ....................................
Exchange and other movements ..
Accumulated depreciation at
(115)
16
14
(81)
(14)
31 December 2004 ..................
(180)
(8)
–
51
(59)
6
(10)
(512)
16
62
(126)
(3)
(5,143)
417
–
(1,084)
(370)
(1,047)
282
–
(314)
(85)
(6,825)
731
127
(1,664)
(466)
(563)
(6,180)
(1,164)
(8,097)
Net book value at 31 December
2004 .........................................
Net book value at 31 December
4,353
3,293
2,806
3,424
4,953
18,829
2003 .........................................
3,532
2,781
2,318
3,069
4,048
15,748
1 Included in the above are assets held on finance leases with a net book value of US$370 million (2003: US$284 million), on which
the depreciation charge for the year to 31 December 2004 was US$10 million (2003: US$8 million).
275
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(b) HSBC Holdings
Cost or valuation at 1 January 2004 .........................................................................................................................
Additions .................................................................................................................................................................
Disposals ..................................................................................................................................................................
Cost or valuation at 31 December 2004 ................................................................................................................
Accumulated depreciation at 1 January 2004 ...........................................................................................................
Charge to the profit and loss account .......................................................................................................................
Disposals ..................................................................................................................................................................
Accumulated depreciation at 31 December 2004 .................................................................................................
Net book value at 31 December 2004 ....................................................................................................................
Net book value at 31 December 2003 ......................................................................................................................
(c) Non-investment properties
Cost or valuation of freehold and long and short leasehold land and buildings (excluding
investment properties):
At 2004 valuation (2003: at 2003 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
2004
US$m
8,759
1,283
10,042
8,881
(2,205)
6,676
Equipment,
fixtures and
fittings
US$m
4
1
(1)
4
(2)
(1)
1
(2)
2
2
2003
US$m
7,473
1,078
8,551
8,285
(1,930)
6,355
HSBC values its non-investment properties on an annual basis. In September 2004, 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 2004.
As a result of the revaluation, the net book value of land and buildings (excluding investment properties)
increased by US$1,151 million (2003: decrease US$311 million). A surplus of US$1,093 million (2003: deficit
of US$292 million), net of minority interest of US$58 million (2003: US$19 million) was credited to reserves at
31 December 2004.
Included within ‘Short leasehold land and buildings’ are the following amounts in respect of assets classed as
improvements to buildings, which are carried at depreciated historical cost:
Cost
US$m
Accumulated
depreciation
US$m
At 1 January 2004 ...................................................................................................................
Additions ................................................................................................................................
Disposals .................................................................................................................................
Charge for the year .................................................................................................................
Exchange and other movements ..............................................................................................
At 31 December 2004 ............................................................................................................
Net book value at 31 December 2004 ...................................................................................
Net book value at 31 December 2003 .....................................................................................
942
60
(25)
–
17
994
647
619
(323)
–
5
(26)
(3)
(347)
276
(d) Investment properties
The valuation at which investment properties are included in tangible fixed assets, together with the net book
value of these properties calculated under the historical cost basis, is as follows:
Freehold land and buildings ..................................
Short and long leasehold land and buildings .........
2004
At valuation
US$m
2003
At cost
US$m
At valuation
US$m
704
459
1,163
676
142
818
310
405
715
At cost
US$m
315
144
459
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 40 per cent by value of HSBC’s investment properties subject to revaluation, were valued by
DTZ, which is a member of the Hong Kong Institute of Surveyors. As a result of the revaluation, the net book
value of investment properties has increased by US$95 million (2003: deficit of US$41 million). A surplus of
US$52 million (2003: deficit of US28 million), net of minority interests of US$43 million (2003: US$13
million), has been credited to reserves at 31 December 2004.
HSBC Holdings had no investment properties at 31 December 2004 or 2003.
(e) HSBC properties leased to customers
HSBC properties leased to customers, none of which was held by HSBC Holdings, included US$559 million at
31 December 2004 (2003: US$499 million) let under operating leases, net of accumulated depreciation of
US$59 million (2003: US$52 million).
(f) Land and buildings occupied for own activities
Net book value ........................................................................................................................
2004
US$m
9,136
(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 ........................................................................................................................
2004
US$m
173
484
1,042
2,073
3,772
2003
US$m
7,902
2003
US$m
1,262
121
691
1,164
3,238
Residual value risk arises in relation to operating lease transactions to the extent that the values of the leased
assets at the end of the lease terms (the residual values) actually recovered through disposing of or re-letting the
assets at that time, could be different from that projected at the inception of the respective lease. Residual value
exposure is regularly monitored by the business through reviewing the recoverability of the residual value
projected at lease inception. This entails considering the re-lettability and projected disposal proceeds of
operating lease assets at the end of their lease terms. Provision is made to the extent that the carrying values of
leased assets are impaired through residual values not being fully recoverable.
277
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
25 Investments
(a) HSBC Holdings
Shares in
HSBC
undertakings
US$m
Loans to
HSBC
undertakings
US$m
Debt
securities of
HSBC
undertakings
US$m
Other
investments
other than
loans
US$m
At 1 January 2004 .......................
Reclassification ...........................
Additions ....................................
Repayments and redemptions .....
Impairment provisions ................
Write-up of subsidiaries
(Note 35) ................................
Other movements ........................
At 31 December 2004 ................
80,501
(1,175)
3,696
–
(92)
11,955
–
94,885
3,788
–
924
–
–
–
–
4,712
–
1,175
710
–
–
–
–
1,885
537
–
387
(365)
–
–
22
581
Total
US$m
84,826
–
5,717
(365)
(92)
11,955
22
102,063
‘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$283 million (2003: US$191 million) ...........................................
(b) The principal subsidiary undertakings of HSBC Holdings are:
2004
US$m
29,842
2003
US$m
26,224
Country
of incorporation or
registration
Principal
activity
Issued equity
capital
Europe
CCF S.A. (99.99% owned) ...............................................
HFC Bank Limited ...........................................................
HSBC Asset Management (Europe) Limited ....................
HSBC Asset Finance (UK) Limited ..................................
HSBC Bank A.S. ..............................................................
HSBC Bank Malta p.l.c. (70.03% owned) ........................
HSBC Bank Middle East Limited......................................
HSBC Bank plc (directly owned) ......................................
HSBC Guyerzeller Bank AG ............................................
HSBC Insurance Brokers Limited .....................................
HSBC Life (UK) Limited .................................................
HSBC Private Bank (Guernsey) Limited ..........................
HSBC Private Bank (Suisse) S.A. .....................................
HSBC Private Bank (UK) Limited
France
England
England
England
Turkey
Malta
Jersey
England
Switzerland
England
England
Guernsey
Switzerland
Banking
Financial services
Investment banking
Finance
Banking
Banking
Banking
Banking
Private banking
Insurance
Insurance
Private banking
Private banking
(formerly HSBC Republic Bank (UK) Limited) ...........
England
Private banking
HSBC Trinkaus & Burkhardt KGaA
(partnership limited by shares, 73.47% owned) ............
Germany
Banking
€372m
£109m
£142m
£265m
TRL277bn
Lm9m
US$331m
£797m
SFr95m
£2.8m
£94m
US$5m1
SFr683m
£152m
€70m
Hong Kong
Hang Seng Bank Limited (62.14% owned) .......................
HSBC Insurance (Asia) Limited .......................................
HSBC Life (International) Limited ...................................
The Hongkong and Shanghai Banking Corporation
Hong Kong
Hong Kong
Bermuda
Banking
Insurance
Retirement benefits
and life assurance
HK$9,559m
HK$125m
HK$327m
Limited .........................................................................
Hong Kong
Banking H
HK$22,494m
Rest of Asia-Pacific
HSBC Bank Australia Limited ..........................................
HSBC Bank Egypt S.A.E. (94.53% owned) ......................
HSBC Asset Management (Taiwan) Ltd ...........................
HSBC Bank Malaysia Berhad ...........................................
Australia
Egypt
Taiwan
Malaysia
Banking
Banking
Investment banking
Banking
A$811m
E£500m
TWD788m
RM$114m
278
Country
of incorporation or
registration
Principal
activity
Issued equity
capital
North America
The Bank of Bermuda Limited ..........................................
HSBC Bank Canada .........................................................
HSBC Bank USA, N.A. ....................................................
HSBC Finance Corporation ..............................................
HSBC Mexico S.A. (99.74% owned) ................................
HSBC Securities (USA) Inc. .............................................
HSBC Technology & Services (USA) Inc. .......................
South America
HSBC Bank Argentina S.A. (99.99% owned) ...................
HSBC Bank Brasil S.A. – Banco Múltiplo .......................
HSBC La Buenos Aires Seguros S.A. (99.52% owned) ....
HSBC Seguros (Brasil) S.A. (97.90% owned) ..................
Bermuda
Canada
United States
United States
Mexico
United States
United States
Argentina
Brazil
Argentina
Brazil
Máxima S.A. AFJP (59.99% owned) ................................
Argentina
Financial services
Banking
Banking
Financial services
Banking
Investment Banking
Technology
Banking
Banking
Insurance
Insurance
Pension fund
management
1 HSBC also owns 100% of the issued redeemable preference share capital of US$17 million.
2 Issued equity capital is less than US$1 million.
All the above subsidiaries are included in the consolidation.
US$30m
C$1,125m
US$2m
US$1,100m
MXP3,399m
–2
–2
ARS1,110m
BRL1,761m
ARS44m
BRL194m
ARS84m
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 2004, which were
accounted for on an acquisition basis:
(i) On 18 February 2004, HSBC acquired the entire share capital of the Bank of Bermuda for a cash
consideration of US$1,224 million. Goodwill of US$651 million arose from this acquisition.
(ii) On 31 May 2004, HSBC Bank Canada, a wholly-owned subsidiary of HSBC, acquired Intesa Bank
Canada for a cash consideration of US$88 million. No goodwill arose from this acquisition.
(iii) On 22 December 2004, Grupo Financiero HSBC S. A. de C. V., a subsidiary of HSBC, acquired Allianz
Rentas Vitalicias for a cash consideration of US$30 million. Negative goodwill of US$7 million arose
from this acquisition.
(iv) On 9 November 2004, HSBC Bank plc, a wholly-owned subsidiary of HSBC, acquired 100 per cent of
Marks and Spencer Retail Financial Services Holdings Ltd and subsidiary companies for a cash
consideration of US$1,044 million. Goodwill of US$509 million arose from the acquisition.
(v) On 19 August 2004, HSBC Bank Brasil S. A. – Banco Múltiplo, a wholly-owned subsidiary of HSBC,
acquired the consumer finance operations of Indusval Multistock Group for a cash consideration of
US$126 million. Goodwill of US$50 million arose from this acquisition.
(vi) On 22 September 2004, The Bank of Bermuda Limited, a wholly-owned subsidiary of HSBC, acquired the
entire share capital of BoE International Fund Services Limited and BoE International Fund Managers
Limited for a cash consideration of US$5 million. Goodwill of US$4 million arose from this acquisition.
(vii) On 29 November 2004, HSBC Bank Brasil S. A. – Banco Múltiplo, a wholly-owned subsidiary of HSBC,
acquired CrediMatone S. A. for a cash consideration of US$11 million. Goodwill of US$11 million arose
from this acquisition.
279
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(viii) Increase in stake in an existing subsidiary is excluded from the table below. On 20 April 2004, HSBC
increased its stake in HSBC Guyerzeller Bank AG from 93.51 per cent to 100 per cent for a cash
consideration of US$17 million. Goodwill of US$5 million arose from this acquisition.
The assets and liabilities at the dates of acquisition and the total consideration paid are set out in the following
table. The adjustments in the table below primarily represent revaluations reflecting the recognition of the fair
value of financial instruments and tangible fixed assets acquired, and adjustments to provisions and other
liabilities.
The fair value of the assets and liabilities acquired have been determined on a provisional basis pending
completion of the fair value appraisal process.
Accounting
policy
alignments
US$m
Revaluations
US$m
–
–
–
–
–
–
–
6
–
–
–
–
–
6
–
–
–
51
11
5
76
(4)
–
(90)
10
(29)
(61)
(31)
2004
US$m
3,180
32,188
219
2,581
19,618
15,712
73,498
Fair
value
US$m
74
23
6,020
7,780
5,731
39
221
1,243
(1,429)
(15,166)
(859)
(83)
(2,284)
1,310
1,218
2,528
2003
US$m
2,230
27,652
190
2,942
15,634
14,480
63,128
Book
value
US$m
74
23
6,020
7,729
5,720
34
145
1,241
(1,429)
(15,076)
(869)
(54)
(2,223)
1,335
At date of acquisition
Cash and balances at central banks ......................
Items in the course of collection from other banks
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 ......................................
Net assets acquired ...............................................
Goodwill attributable:
Subsidiaries (Note 23) .....................................
Total consideration including costs of acquisition
1 Includes cash equivalent balances of US$40 million.
26 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 31a) ...........................................................................................................
Long-term assurance assets attributable to policyholders ................................................................
Other accounts ................................................................................................................................
280
The composition of the net tangible assets relating to long-term assurance and retirement funds is 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 30) ...............................................................................................................................
2004
US$m
376
9,772
6,483
3,371
109
(493)
19,618
157
19,775
2003
US$m
299
8,070
5,301
2,157
93
(286)
15,634
140
15,774
Own shares held are deducted from retained profits (see note 35). They have been included above to reconcile to the
long-term assurance liabilities attributable to policyholders in Note 30.
27 Deposits by banks
Repayable on demand .....................................................................................................................
With agreed maturity dates or periods of notice, by remaining maturity
– 3 months or less but not repayable on demand .......................................................................
– 1 year or less but over 3 months .............................................................................................
– 5 years or less but over 1 year .................................................................................................
– over 5 years ............................................................................................................................
Amounts include:
Due to associates ........................................................................................................................
The composition of deposits by banks on a geographical basis is set out below:
Europe ..................................................
Hong Kong ...........................................
Rest of Asia-Pacific .............................
North America .....................................
South America .....................................
2004
Non
interest-
bearing
US$m
3,792
1,161
1,398
1,567
102
8,020
Interest-
bearing
US$m
51,412
3,164
6,648
13,717
578
75,519
Total
US$m
55,204
4,325
8,046
15,284
680
83,539
Interest-
bearing
US$m
42,697
3,716
5,700
9,564
812
62,489
2004
US$m
25,420
45,723
6,944
3,509
1,943
83,539
80
2003
Non
interest-
bearing
US$m
4,803
1,061
1,267
790
16
7,937
The geographical analysis of deposits is based on the location of the office in which the deposits are recorded.
28 Customer accounts
Repayable on demand .....................................................................................................................
With agreed maturity dates or periods of notice, by remaining maturity
– 3 months or less but not repayable on demand .......................................................................
– 1 year or less but over 3 months .............................................................................................
– 5 years or less but over 1 year .................................................................................................
– over 5 years ............................................................................................................................
Amounts include:
Due to joint ventures ...................................................................................................................
Due to associates ........................................................................................................................
2004
US$m
397,151
242,630
30,825
18,954
4,191
693,751
16
965
2003
US$m
25,066
34,313
5,299
4,192
1,556
70,426
28
Total
US$m
47,500
4,777
6,967
10,354
828
70,426
2003
US$m
323,250
210,717
24,061
13,183
1,919
573,130
25
439
281
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
The composition of customer accounts on a geographical basis is set out below:
Europe .................................................
Hong Kong ..........................................
Rest of Asia-Pacific ............................
North America ....................................
South America ....................................
2004
Non
interest-
bearing
US$m
31,803
14,699
10,752
21,574
1,940
80,768
Interest-
bearing
US$m
261,110
163,669
67,861
111,326
9,017
612,983
Total
US$m
292,913
178,368
78,613
132,900
10,957
693,751
Interest-
bearing
US$m
215,356
152,505
58,651
79,112
5,533
511,157
2003
Non
interest-
bearing
US$m
27,368
11,519
6,790
14,884
1,412
61,973
The geographical analysis of customer accounts is based on the locations of the offices in which the customer
accounts are recorded.
29 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 .............................................................................................................................
2004
US$m
34,987
25,808
49,985
23,318
134,098
54,402
10,052
8,753
1,288
208,593
The following table analyses bond and medium-term notes with original maturities greater than one year:
Fixed rate:
8.875% Adjustable Conversion-Rate Equity Security Units ...........................................................
8.375% debentures; due 2007 .........................................................................................................
Federal Home Loan Bank of New York (‘FHLB’) advances – 2.01% to 7.24%; due 2005 to 2033
3.99% senior debt; due 2044 ...........................................................................................................
Secured financing:
1.14% to 3.99%; due 2005 to 2008 .............................................................................................
4.00% to 4.99%; due 2005 to 2006 .............................................................................................
5.00% to 5.49%; due 2005 to 2007 .............................................................................................
5.50% to 5.99%; due 2005 ..........................................................................................................
7.00% to 7.49%; due 2005 ..........................................................................................................
7.50% to 7.99%; due 2005 ..........................................................................................................
8.00% to 8.99%; due 2005 ..........................................................................................................
Other fixed rate senior debt:
2.15% to 3.99%; due 2005 to 2010 .............................................................................................
4.00% to 4.99%; due 2005 to 2023 .............................................................................................
5.00% to 5.49%; due 2005 to 2023 .............................................................................................
5.50% to 5.99%; due 2005 to 2024 .............................................................................................
6.00% to 6.49%; due 2005 to 2033 .............................................................................................
6.50% to 6.99%; due 2005 to 2033 .............................................................................................
7.00% to 7.49%; due 2005 to 2032 .............................................................................................
7.50% to 7.99%; due 2005 to 2032 .............................................................................................
8.00% to 9.25%; due 2005 to 2012 .............................................................................................
2004
US$m
594
100
13
557
2,805
401
533
105
206
11
12
8,378
11,685
5,358
7,495
9,074
9,779
6,876
8,002
3,694
75,678
Total
US$m
242,724
164,024
65,441
93,996
6,945
573,130
2003
US$m
29,979
16,950
33,578
30,081
110,588
30,115
3,716
8,726
417
153,562
2003
US$m
609
102
17
–
3,665
445
555
411
665
17
18
4,014
8,373
5,052
6,375
9,834
9,442
6,917
7,968
3,636
68,115
282
Fixed rate
Variable interest rate:
Secured financings – 2.52% to 5.15%; due 2005 to 2010 ...............................................................
Other variable interest rate senior debt – 2.16% to 6.07%; due 2005 to 2018 .................................
Secured financings – 0.96% to 2.61%; due 2006 to 2036 ...............................................................
FHLB advances – 2.02% to 3.99%; due 2006 to 2008 ....................................................................
7.97% Securitisation; due 2005 to 2009 ..........................................................................................
Other variable interest rate senior debt – 2.20% to 2.60%; due 2005 to 2040 .................................
Others .............................................................................................................................................
2004
US$m
75,678
19,743
10,571
10,291
5,000
3,327
890
8,598
2003
US$m
68,115
26,363
8,506
30
–
–
175
7,399
134,098
110,588
30 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 26) ..........................................
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 ............................................................................................................................
31 Provisions for liabilities and charges
(a) Deferred taxation
At 1 January 2004 ......................................................................................................................
Charge/(release) to profit and loss account (Note 7) ..................................................................
Movements arising from acquisitions and disposals ..................................................................
Exchange and other movements ................................................................................................
At 31 December 2004 ...............................................................................................................
2004
US$m
33,278
–
6,604
39,882
3,980
2,598
46,460
35,394
1,654
695
4,205
19,775
15,132
123,315
1,316
38,566
39,882
36,972
2,910
39,882
25
40
630
695
HSBC
US$m
(1,272)
890
(32)
(101)
(515)
2003
US$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
HSBC
Holdings
US$m
93
(18)
–
–
75
283
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Included in ‘Provisions for liabilities and charges’
Included in ‘Other assets’ (Note 26) ...................
Net deferred taxation (asset)/provision ...............
Comprising:
Accelerated capital allowances .......................
Timing differences on lease income ...............
Provision for bad and doubtful debts ..............
Relief for losses brought forward ....................
Other short-term timing differences ................
HSBC
2004
US$m
2,066
(2,581)
(515)
88
1,921
(2,407)
(115)
(2)
(515)
2003
US$m
1,670
(2,942)
(1,272)
116
1,586
(2,828)
(231)
85
(1,272)
HSBC Holdings
2004
US$m
2003
US$m
75
–
75
–
–
–
–
75
75
93
–
93
–
–
–
–
93
93
There is no material deferred taxation liability not provided for.
At 31 December 2004, there were potential future tax benefits of approximately US$973 million (2003:
US$963 million) in respect of trading losses, allowable expenditure charged to the profit and loss account but not
yet allowed for tax, and capital losses which have not been recognised because recoverability of the potential
benefits is not considered likely.
(b) Other provisions for liabilities and charges
Provisions for
pension and
other post-
retirement
obligations
US$m
Provisions for
contingent
liabilities and
commitments
US$m
Insurance
provisions
US$m
Other
provisions
US$m
At 1 January 2004 ...............
Additional provisions
/increase in provisions1 ...
Acquisition of subsidiaries ..
Provisions utilised ...............
Exchange and other
movements ......................
At 31 December 2004 ........
1,382
147
46
(68)
230
1,737
735
27
20
(119)
128
791
2,159
812
–
(603)
(162)
2,206
802
258
16
(333)
55
798
Total
US$m
5,078
1,244
82
(1,123)
251
5,532
1 The increase in ‘other provisions’ includes unwinding of discounts of US$12 million (2003: US$9 million) in relation to vacant
space provisions and US$19 million (2003: US$18 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$54 million (2003: US$16 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$202 million (2003: US$203 million), of which
US$66 million (2003: US$72 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$231 million
(2003: US$286 million). This relates to labour and overtime litigation claims brought by employees after
leaving the bank. The provision is based on the expected number of departing employees, their individual
salaries and historical trends. The timing of settlement of these potential claims is uncertain.
284
32 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:
€2,000m Callable subordinated floating rate notes 2014 1 ..................................................
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 ............................................................................
US$488m 7.625% subordinated notes 2032 .........................................................................
£250m 9.875% subordinated bonds 20182 .......................................................................
€300m 5.5% subordinated notes 2009 .............................................................................
US$350m Subordinated step-up coupon floating rate notes 20101 .......................................
US$222m 7.35% subordinated notes 2032 ..........................................................................
2004
US$m
3,686
9,669
13,131
22,800
9,669
16,817
26,486
749
807
2,941
18,303
22,800
2004
US$m
2,730
1,394
1,360
1,250
999
481
478
409
350
218
9,669
2003
US$m
3,617
5,970
11,610
17,580
5,970
15,227
21,197
858
718
1,863
14,141
17,580
2003
US$m
–
1,394
1,257
1,153
999
–
440
378
349
–
5,970
285
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Amounts owed to HSBC undertakings
Amounts falling due after more than 1 year:
€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...................................................................
€750m 5.13% fixed/floating subordinated notes 2044 –
HSBC Capital Funding (Euro 3) LP. ....................................................................
£500m 8.208% subordinated step-up cumulative notes 2040 –
HSBC Capital Funding (Sterling 1) LP ...............................................................
US$900m 10.176% subordinated step-up cumulative notes 2040 –
HSBC Capital Funding (Dollar 1) LP ..................................................................
€600m 8.03% subordinated step-up cumulative notes 2040 –
HSBC Capital Funding (Euro 1) LP. ....................................................................
HSBC Holdings’ dated subordinated loan capital is repayable
– between 2 and 5 years .............................................................................................................
– over 5 years .............................................................................................................................
2004
US$m
1,894
1,338
1,238
1,012
958
891
812
8,143
17,812
2004
US$m
1,408
16,404
17,812
2003
US$m
1,748
1,338
1,237
–
884
889
749
6,845
12,815
2003
US$m
–
12,815
12,815
1 The interest margins on the callable subordinated floating rate notes 2014 and the subordinated step-up coupon floating rate notes 2010
increase by 0.5 per cent from September 2009 and April 2005, respectively. 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.
2 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.
286
At 31 December 2004, the other HSBC subordinated borrowings were as follows:
US$1,200m
US$1,000m
US$1,000m
£500m
€600m
US$750m
£350m
£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
Primary capital subordinated undated floating rate notes ....................................
4.625% subordinated notes 2014 .........................................................................
5.875% subordinated notes 2034 .........................................................................
5.375% subordinated notes 2033 .........................................................................
4.25% Callable subordinated notes 2016 1 ............................................................
Undated floating rate primary capital notes .........................................................
5.375% Callable subordinated step-up notes 20302 .............................................
Callable subordinated variable coupon notes 20173 .............................................
5% Callable subordinated notes 20234 .................................................................
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 20095 .......................................
9% subordinated notes 2005 ................................................................................
10% trust preferred securities 2030 ....................................................................
Undated floating rate primary capital notes (Series 3) .........................................
6.95% subordinated notes 2011 ...........................................................................
7.65% subordinated notes 20258 ..........................................................................
7% subordinated notes 2006 ................................................................................
9.25% step-up undated subordinated notes6 .........................................................
8.625% step-up undated subordinated notes7 .......................................................
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 2031 ..................................................................
7.50% trust preferred securities 2031 ..................................................................
Subordinated debentures 2008 ............................................................................
6.625% subordinated notes 2009 .........................................................................
7.808% capital securities 2026 ............................................................................
8.38% capital securities 2027 ..............................................................................
Other subordinated liabilities less than US$200m ...............................................
2004
US$m
2003
US$m
1,200
997
993
964
819
750
677
677
676
577
500
500
–
432
–
385
306
300
300
300
300
290
290
237
–
216
204
203
229
200
200
200
2,895
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
16,817
15,227
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 9.25 per cent.
1 The interest rate on the 4.25 per cent Callable subordinated notes changes in March 2011 to three-month EURIBOR plus 1.05 per cent.
2 The interest rate on the 5.375 per cent Callable subordinated step-up notes 2030 changes in November 2025 to three month sterling
LIBOR plus 1.50 per cent.
3 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.
4 The interest on the 5 per cent 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.
5 The subordinated step-up coupon floating rate notes 2009 were called and repaid by the borrower in August 2004.
6 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.
7 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.
8 The 7.65 per cent Subordinated notes are repayable at the option of each of the holders in May 2007.
Footnotes 1 to 7 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.
287
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
33 Minority interests – non-equity
Preference shares issued by subsidiaries:
€1,400m
£700m
US$1,350m
US$1,250m
€750m
£500m
US$900m
€600m
£300m
US$150m
US$150m
US$125m
CAD125m
US$75m
5.3687% Non-cumulative Step-up Perpetual Preferred Securities 1 ......................
5.844% Non-cumulative Step-up Perpetual Preferred Securities2 ........................
9.547% Non-cumulative Step-up Perpetual Preferred Securities, Series 11 .........
4.61% Non-cumulative Step-up Perpetual Preferred Securities1 ..........................
5.13% Non-cumulative Step-up Perpetual Preferred Securities 1 ..........................
8.208% Non-cumulative Step-up Perpetual Preferred Securities1 ........................
10.176% Non-cumulative Step-up Perpetual Preferred Securities, Series 21 .......
8.03% Non-cumulative Step-up Perpetual Preferred Securities 1 ..........................
5.862% Non-cumulative Step-up Perpetual Preferred Securities2 ........................
Depositary shares each representing 25% interest in a share of
adjustable rate cumulative preferred stock, Series D3 ......................................
Cumulative preferred stock4 .................................................................................
Dutch auction rate transferable securities preferred stock, Series A and B5..........
Non-cumulative redeemable class 1 preferred shares, Series A ...........................
Cumulative preferred stock .................................................................................
2004
US$m
1,908
1,354
1,338
1,250
1,025
958
889
812
580
150
150
125
104
75
2003
US$m
1,763
1,250
1,338
1,250
–
884
889
749
–
150
150
125
96
75
10,718
8,719
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.
The redemption of all preference shares is subject to the prior consent of the Financial Services Authority and, where
relevant, the local banking regulator.
Step-up Perpetual Preferred Securities
(a) Guaranteed by HSBC Holdings
The seven issues of Non-cumulative Step-up Perpetual Preferred Securities (footnote 1) were made by Jersey
limited partnerships and are guaranteed, on a subordinated basis, by HSBC Holdings. The proceeds of the issues
were on-lent to HSBC Holdings by the limited partnerships by issue of subordinated notes. The Preferred
Securities qualify as innovative tier 1 capital for HSBC. The Preferred Securities, together with the guarantee,
are intended to provide investors with rights to income and capital distributions and distributions upon
liquidation of HSBC Holdings that are equivalent to the rights 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, 2016, 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 is 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) the Directors expect
that, in view of the deteriorating financial condition of HSBC Holdings, (i) will 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.
288
(b) Guaranteed by HSBC Bank
The two issues of Non-cumulative Step-up Perpetual Preferred Securities (footnote 2) were made by Jersey
limited partnerships and are guaranteed, on a subordinated basis, by HSBC Bank. The proceeds of the issues
were on-lent to HSBC Bank by the limited partnerships by issue of subordinated notes. 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 2031 and 2020, respectively, at the option of the
general partner of the limited partnerships. 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 April 2049, respectively, 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.
34 Called up share capital
Authorised
The authorised ordinary share capital of HSBC Holdings at 31 December 2004, 2003 and 2002 was US$7,500
million divided into 15,000 million ordinary shares of US$0.50 each, and £301,500 divided into 301,500 non-voting
deferred shares of £1 each.
At 31 December 2004, 2003 and 2002, 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 2004 ...........................................................................................................................
Shares issued in connection with the early settlement of HSBC Finance Corporation
8.875 per cent Adjustable Conversion-Rate Equity Security Units .............................................
Shares issued under HSBC Finance Corporation share plans ..........................................................
Shares issued to QUEST .................................................................................................................
Shares issued under other employee share plans .............................................................................
Shares issued in lieu of dividends ...................................................................................................
Number of
HSBC Holdings
ordinary shares
10,960,018,480
1,590,319
293,254
1,079,099
49,052,156
160,042,242
At 31 December 2004 ....................................................................................................................
11,172,075,550
At 1 January 2003 ...........................................................................................................................
Shares issued on acquisition of HSBC Finance Corporation ...........................................................
Shares issued in connection with the early settlement of HSBC Finance Corporation
8.875 per cent Adjustable Conversion-Rate Equity Security Units .............................................
Shares issued under HSBC Finance Corporation share plans ..........................................................
Shares issued to QUEST .................................................................................................................
Shares issued under other employee share plans .............................................................................
Shares issued in lieu of dividends ...................................................................................................
9,480,820,796
1,273,297,057
51,072,691
26,576
2,200,630
33,858,455
118,742,275
US$m
5,481
1
–
–
25
80
5,587
4,741
637
26
–
1
17
59
At 31 December 2003 .....................................................................................................................
10,960,018,480
5,481
289
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
At 1 January 2002 ...........................................................................................................................
Shares issued to QUEST .................................................................................................................
Shares issued under other employee share plans .............................................................................
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
Number of
HSBC Holdings
ordinary shares
US$m
4,678
3
15
45
4,741
The 301,500 non-voting deferred shares were in issue throughout 2002, 2003 and 2004 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 2004 ..............................................
31 December 2003 ...............................................
31 December 2002 ...............................................
Number of
HSBC Holdings
ordinary shares
374,369,127
347,007,843
307,522,913
Period of exercise
Exercise price
2005 to 2014
2004 to 2013
2003 to 2012
£2.1727 – £9.642
£2.1727 – £9.642
£2.1727 – £9.642
Following the acquisition of CCF in 2000, outstanding employee share options over CCF shares 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 2004, 451,080 (2003: 226,000; 2002: 229,066) CCF shares were issued following the exercise of employee
share options and exchanged for 5,864,040 HSBC Holdings ordinary shares (2003: 2,938,000; 2002: 2,977,858) and
1,000 (2003: 7,000) CCF shares were issued following the exercise of employee share options and will be exchanged
for 13,000 (2003: 91,000) HSBC Holdings ordinary shares on the fifth anniversary of the award. During 2004,
options over 800 (2003: 100; 2002: nil) CCF shares lapsed. During 2004, 9,500 (2003: 2,500; 2002: 5,000) CCF
shares previously issued following the exercise of employee share options were exchanged for 123,500 (2003:
32,500; 2002: 65,000) HSBC Holdings ordinary shares. At 31 December 2004, 1,500 (2003: 10,000; 2002: 5,500)
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 were 2,162,780 CCF employee share options exchangeable for HSBC Holdings ordinary
shares outstanding at 31 December 2004 (2003: 2,615,660; 2002: 2,848,760). At 31 December 2004, The HSBC
Holdings Employee Benefit Trust 2001 (No. 1) held 26,787,515 (2003: 32,775,055; 2002: 35,745,555) 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 2004 ..............................................
31 December 2003 ...............................................
31 December 2002 ...............................................
2,164,280
2,625,660
2,854,260
2005 to 2010
2004 to 2010
2003 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 which are exchangeable for
HSBC Holdings ordinary shares, the details of which are set out in the Directors’ Report on pages 196 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 in the ratio of 2.143 HSBC Holdings ordinary shares for each
Sinopia share. During 2004, 94,000 (2003: 94,400; 2002: 91,200) Sinopia shares were issued following the exercise
of employee share options and exchanged for 201,439 (2003: 202,296; 2002: 195,439) HSBC Holdings ordinary
shares. During 2004, options over 2,000 (2003: nil; 2002: 25,000) Sinopia shares lapsed. At 31 December 2004, The
CCF Employee Benefit Trust 2001 held 281,814 (2003; 483,253; 2002: 685,549) HSBC Holdings ordinary shares
which may be exchanged for Sinopia shares arising from the exercise of options.
290
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 2004 ..............................................
31 December 2003 ...............................................
31 December 2002 ...............................................
125,500
221,500
315,900
2005
2004 to 2005
2003 to 2005
€18.66 – €18.80
€8.61 – €21.85
€8.61 – €21.85
Since 2003, on exercise of options over shares of HSBC Private Bank France, the HSBC Private Bank France shares
are exchangeable for HSBC Holdings ordinary shares in the ratio of 1.83 HSBC Holdings shares for each HSBC
Private Bank France share. During 2004, 101,750 HSBC Private Bank France shares were issued following the
exercise of employee share options and exchanged for 184,093 HSBC Holdings ordinary shares. During 2004,
options over 126,000 (2003: 293,500) HSBC Private Bank France shares lapsed. At 31 December 2004, 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 2004, The CCF Employee Benefit Trust 2001 held
2,294,066 (2003: 1,900,000) HSBC Holdings ordinary shares which may be exchanged for HSBC Private Bank
France shares arising from the exercise of options.
HSBC Private Bank France options 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 2004 ...............................................
31 December 2003 ...............................................
1,132,060
1,359,810
2005 to 2012
2004 to 2012
€10.84 – €22.22
€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 2004, 44,870 (2003: 8,303; 2002: nil) Banque Hervet
shares were released in connection with the vesting of interests in the Plan d’Epargne Entreprise and exchanged for
155,219 (2003: 28,729; 2002: nil) HSBC Holdings ordinary shares. At 31 December 2004, The CCF Employee
Benefit Trust 2001 held 612,752 (2003: 767,971; 2002: 796,700) HSBC Holdings ordinary shares which may be
exchanged for Banque Hervet shares from the vesting of interests.
Banque Hervet shares to be exchanged for HSBC Holdings ordinary shares under this arrangement are as follows:
31 December 2004 ...............................................................................................
31 December 2003 ...............................................................................................
31 December 2002 ................................................................................................
Number of Banque
Hervet shares
exchangeable for
HSBC Holdings
ordinary shares
177,086
221,956
230,259
Period of vesting
2005 – 2006
2004 – 2006
2003 – 2006
Following the acquisition of HSBC Finance Corporation in 2003, all outstanding options and equity-based awards
over HSBC Finance Corporation common shares were converted into rights to receive HSBC Holdings ordinary
shares in the same ratio as the share exchange offer for HSBC Finance Corporation (2.675 HSBC Holdings ordinary
shares for each HSBC Finance Corporation common share) and the exercise prices per share adjusted accordingly.
During 2004, options over 6,073,291 (2003: 4,755,951) HSBC Holdings ordinary shares were exercised and
5,771,110 (2003: 4,755,951) HSBC Holdings ordinary shares were delivered from The HSBC (Household)
Employee Benefit Trust 2003 to satisfy the exercise of these options. During 2004, options over 415,430 (2003:
1,495,103) HSBC Holdings ordinary shares lapsed. At 31 December 2004, The HSBC (Household) Employee
Benefit Trust 2003 held 5,645,439 (2003: 12,444,049) HSBC Holdings ordinary shares and 2,200,000 (2003: nil)
291
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
ADSs which may be used to satisfy the exercise of these options and equity-based awards under the HSBC Finance
Corporation share plans.
Options and equity-based awards outstanding over HSBC Holdings ordinary shares under the HSBC Finance
Corporation share plans are as follows:
31 December 2004 ..............................................
31 December 2003 ...............................................
Number of
HSBC Holdings
ordinary shares
41,823,886
48,312,607
Period of exercise
Exercise price
2005 to 2021
2004 to 2021
nil – US$25.40
nil – US$25.40
Prior to its acquisition by HSBC Holdings, HSBC Finance Corporation issued 8.875 per cent Adjustable Conversion-
Rate Equity Security Units (‘Units’) consisting of a contract under which the holder agreed to purchase, for US$25
each, HSBC Finance Corporation common shares on 15 February 2006, with an option for early settlement. The
Units which remained outstanding following the acquisition of HSBC Finance Corporation were converted into
contracts to purchase HSBC Holdings ordinary shares. 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 2004, 1,590,319 (2003: 51,072,691)
HSBC Holdings ordinary shares were issued in connection with the early settlement of 610,700 (2003: 19,612,420)
Units.
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 2004 ..............................................
31 December 2003 ...............................................
1,439,840
2,050,540
2005 to 2006
2004 to 2006
US$8.00 – US$9.60
US$8.00 – US$9.60
Prior to its acquisition by HSBC Holdings, HSBC Finance Corporation issued US$1,220,793,000 Zero Coupon
Convertible Senior Debentures due 2021. The debentures which remained outstanding following the acquisition of
HSBC Finance Corporation were converted into rights to receive HSBC Holdings ordinary shares. Upon the
occurrence of certain events, a holder could have elected to exchange these debentures and would have received
24.13385 HSBC Holdings ordinary shares per US$1,000 principal amount of debentures. During 2004, nil (2003: nil)
HSBC Holdings ordinary shares were issued in connection with the conversion of these debentures and in August
2004, the entire outstanding principal amount of US$8,000 was repurchased.
The principal amount of these debentures outstanding over HSBC Holdings ordinary shares are as follows:
Principal amount
of debentures
exchangeable for
HSBC Holdings
ordinary shares
Period of exercise
Conversion value
31 December 2004 ..............................................
31 December 2003 ...............................................
–
US$8,000
–
2004 to 2021
–
US$41.44
Following the acquisition of Bank of Bermuda on 18 February 2004, all outstanding employee share options over
Bank of Bermuda shares were converted into rights to receive HSBC Holdings ordinary shares based on the
consideration of US$40 for each Bank of Bermuda share and the average closing price of HSBC Holdings ordinary
shares, derived from the London Stock Exchange Daily Official List, for the five business days preceding the closing
date of the acquisition. During 2004, options over 744,727 HSBC Holdings ordinary shares were exercised and
744,727 HSBC Holdings ordinary shares delivered from the HSBC (Bank of Bermuda) Employee Benefit Trust 2004
to satisfy the exercise of these options. During 2004, options over 23,500 HSBC Holdings ordinary shares lapsed. At
31 December 2004, the HSBC (Bank of Bermuda) Employee Benefit Trust 2004 held 3,255,273 HSBC Holdings
ordinary shares which may be used to satisfy the exercise of options.
292
Options outstanding over HSBC Holdings ordinary shares under the Bank of Bermuda share plans are as follows:
Number of
HSBC Holdings
ordinary shares
Period of exercise
Exercise price
31 December 2004 ..............................................
4,569,967
2005 to 2013
US$3.86 – US$18.35
The total obligation at 31 December 2004 to deliver HSBC Holdings ordinary shares under all of the above
arrangements and under the HSBC Holdings Restricted Share Plan was 514,846,111 (2003: 496,414,669). The total
number of shares at 31 December 2004 held by employee benefit trusts that may be used to satisfy such obligations
to deliver HSBC Holdings ordinary shares is 123,108,967 (2003: 110,770,974).
35 Reserves
Share premium account
At 1 January 2004 ......................................................................................
Shares issued to QUEST ............................................................................
Shares issued under other employee option schemes .................................
Shares issued in lieu of dividends ..............................................................
On redemption of the equity component of HSBC Finance Corporation
8.875 per cent Adjustable Conversion-Rate Equity Security Units ........
Scrip dividend expenses .............................................................................
At 31 December 2004 ...............................................................................
Other reserves
Reserve in respect of obligations under subsidiary share options:
At 1 January 2004 ..................................................................................
Reserve in respect of obligations under Bank of Bermuda share options
On exercise of CCF share options .........................................................
On exercise of HSBC Finance Corporation share options .....................
On exercise of Bank of Bermuda share options .....................................
On redemption of the equity component of HSBC Finance Corporation
8.875 per cent Adjustable Conversion-Rate Equity Security Units ....
At 31 December 2004 ...........................................................................
Merger reserve:
At 1 January 2004 and 31 December 2004 .............................................
Total other reserves ........................................................................................
Revaluation reserves
Investment property revaluation reserve:
At 1 January 2004 ..................................................................................
Unrealised surplus on revaluation of land and buildings .......................
Transfer to revaluation reserve ..............................................................
Realisation on disposal of properties .....................................................
Exchange and other movements ............................................................
At 31 December 2004 ...........................................................................
Revaluation reserve:
At 1 January 2004 ..................................................................................
Realisation on disposal of properties .....................................................
Transfer from investment property revaluation reserve .........................
Unrealised surplus on revaluation of properties .....................................
Transfer of depreciation from profit and loss account reserve ...............
Net increase in attributable net assets of subsidiary undertakings
(Note 25 (a)).......................................................................................
Exchange and other movements ............................................................
At 31 December 2004 ...........................................................................
Total revaluation reserves ..........................................................................
HSBC
US$m
4,406
17
525
(80)
15
(2)
4,881
485
22
(81)
(19)
(7)
(1)
399
21,058
21,457
207
64
11
(11)
2
273
1,408
(75)
(11)
1,093
(42)
–
14
2,387
2,660
HSBC
Holdings
US$m
Associates
US$m
4,406
17
525
(80)
15
(2)
4,881
485
22
(81)
(19)
(7)
(1)
399
–
399
–
–
–
–
–
–
57,041
–
–
–
–
11,955
(33)
68,963
68,963
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
34
12
–
–
–
46
8
–
–
–
–
–
1
9
55
293
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Profit and loss account
At 1 January 20041 .....................................................................................
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 .........................................
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 ..........
Exchange and other movements .................................................................
At 31 December 20041 ..............................................................................
HSBC
US$m
41,428
4,539
86
2,607
42
36
(345)
159
98
3,388
52,038
HSBC
Holdings
US$m
Associates
US$m
7,060
(2,803)
–
2,627
–
14
(261)
151
–
5
6,793
324
122
–
–
–
–
–
–
–
–
446
1 Includes the balance relating to own shares held. In the 2003 Annual Report and Accounts, the balance relating to own shares held was
reported separately together with movements in the year.
Included within the HSBC profit and loss account reserve at 31 December 2004 are retained losses of
US$116 million (2003: US$118 million; 2002: US$136 million) attributable to interests in joint ventures.
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 HSBC Finance Corporation
8.875 per cent Adjustable Conversion-Rate Equity Security Units ........
Scrip dividend expenses .............................................................................
At 31 December 2003 ...............................................................................
Other reserves
Reserve in respect of obligations under subsidiary share options:
At 1 January 2003 ..................................................................................
Reserve in respect of obligations under HSBC Finance Corporation
share options ......................................................................................
Reserve in respect of obligations under the equity component of
HSBC Finance Corporation 8.875 per cent Adjustable
Conversion-Rate Equity Security Units .............................................
On exercise of CCF share options ..........................................................
On exercise of HSBC Finance Corporation share options ......................
On redemption of the equity component of HSBC Finance Corporation
8.875 per cent Adjustable Conversion-Rate Equity Security Units ....
At 31 December 2003 ...........................................................................
Merger reserve:
At 1 January 2003 ..................................................................................
On acquisition of HSBC Finance Corporation .......................................
At 31 December 2003 ...........................................................................
Total other reserves ........................................................................................
HSBC
US$m
3,647
26
311
(59)
482
(1)
4,406
439
112
21
(41)
(28)
(18)
485
8,290
12,768
21,058
21,543
HSBC
Holdings
US$m
Associates
US$m
3,647
26
311
(59)
482
(1)
4,406
439
112
21
(41)
(28)
(18)
485
–
–
–
485
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
294
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 25 (a)).......................................................................................
Exchange and other movements ............................................................
At 31 December 2003 ...........................................................................
Total revaluation reserves ..........................................................................
Profit and loss account
At 1 January 20031 .....................................................................................
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 .........................................
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 .........
Exchange and other movements .................................................................
At 31 December 20031 ..............................................................................
HSBC
US$m
247
(38)
(1)
(2)
1
207
1,707
(28)
1
(292)
(29)
–
49
1,408
1,615
32,694
2,242
30
1,423
29
19
(301)
162
(138)
5,268
41,428
HSBC
Holdings
US$m
Associates
US$m
–
–
–
–
–
–
36,883
–
–
–
–
20,195
(37)
57,041
57,041
6,055
(319)
–
1,423
–
14
(266)
153
–
–
7,060
44
(10)
–
–
–
34
6
–
–
–
–
–
2
8
42
243
80
–
–
–
–
–
–
–
1
324
1 Includes the balance relating to own shares held. In the 2003 Annual Report and Accounts, the balance relating to own shares held was
reported separately together with movements in the year.
Share premium account
At 1 January 2002 ......................................................................................
Shares issued to QUEST ............................................................................
Shares issued under other employee option schemes .................................
Shares issued in lieu of dividends ..............................................................
At 31 December 2002 ................................................................................
Other reserves
Reserve in respect of obligations under subsidiary share options:
At 1 January 2002 ..................................................................................
On exercise of CCF share options .........................................................
At 31 December 2002 ............................................................................
Merger reserve:
At 1 January and 31 December 2002 .....................................................
Total other reserves ........................................................................................
HSBC
US$m
3,373
65
254
(45)
3,647
480
(41)
439
8,290
8,729
HSBC
Holdings
US$m
3,373
65
254
(45)
3,647
480
(41)
439
–
439
Associates
US$m
–
–
–
–
–
–
–
–
–
–
295
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Revaluation reserves
Investment property revaluation reserve:
At 1 January 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 20021 .....................................................................................
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 .........................................
Own shares acquired to meet share awards and share option awards .........
Own shares released on vesting of share awards and exercise of options ...
Exchange and other movements .................................................................
At 31 December 20021 ...............................................................................
HSBC
US$m
269
(23)
7
(4)
(2)
247
2,002
(29)
(297)
(37)
–
68
1,707
1,954
26,596
1,238
33
37
1,023
(7)
19
(5)
45
3,715
32,694
HSBC
Holdings
US$m
Associates
US$m
–
–
–
–
–
–
32,436
(4)
–
–
4,553
(102)
36,883
36,883
4,721
266
4
–
1,023
–
10
(11)
42
–
6,055
46
(1)
–
–
(1)
44
6
–
–
–
–
–
6
50
255
(11)
–
–
–
–
–
–
–
(1)
243
1 Includes the balance relating to own shares held. In the 2003 Annual Report and Accounts, the balance relating to own shares held was
reported separately together with movements in the year.
The accumulated foreign exchange translation adjustment as at 31 December 2004 increased HSBC’s reserves by
US$9,134million (2003: increased by US$5,729 million; 2002: increased by US$411 million).
Cumulative goodwill amounting to US$5,138 million (2003: US$5,138 million; 2002: 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 HSBC Finance Corporation 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 HSBC Finance Corporation was transferred to a merger reserve.
Many of HSBC’s banking subsidiary undertakings, joint ventures and associates operate under local regulatory
jurisdictions which could potentially restrict the amount of reserves which can be remitted to HSBC Holdings plc in
order to maintain local regulatory capital ratios. In addition, the remittance of reserves may result in further taxation
liabilities.
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 2004, HSBC QUEST Trustee (UK)
Limited, the corporate trustee of the QUEST, subscribed at market value for 1,079,099 ordinary shares at a total cost
of US$17 million (2003: US$27 million; 2002: US$68 million). HSBC provided US$nil (2003: US$nil; 2002:
US$nil) for this purpose.
During 2004, 1,592,371 (2003: 3,175,232; 2002: 9,564,355) ordinary shares were transferred from the QUEST to
employees who exercised under the HSBC Holdings Savings-Related Share Option Plan. US$17 million (2003:
US$27 million; 2002: US$68 million) was received from the share option plan participants. The price paid by option
296
holders ranged from £5.2212 to £6.7536 (2003: £4.5206 to £6.7536; 2002: £3.059 to £6.7536) per ordinary share of
US$0.50.
At 31 December 2004, the trust held 1,021 (2003: 514,293; 2002: 1,488,895) ordinary shares of US$0.50 with a
market value of US$17,357 (2003 US$8,062,509; 2002: US$16,474,634) 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
Deducted from retained profits are:
(a) US$39 million (2003: US$33 million; 2002: US$29 million) of shares held by HSBC Life International.
(b) US$84 million (2003: US$134 million; 2002: US$nil) of shares held by subsidiary companies for market
making and trading activities.
(c) US$749 million (2003: US$653 million; 2002: US$540 million) of shares held by HSBC Holdings as explained
below.
(d) US$175 million (2003: US$58 million; 2002: US$56 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 233. At 31 December 2004, such trusts held
14,177,399 (2003: 7,562,628; 2002: 5,029,157) ordinary shares with a market value at that date of
US$241,014,365 (2003: US$118,550,244; 2002: US$55,688,358) in respect of these conditional awards.
(e) US$54 million (2003: US$45 million; 2002: US$21 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 34. At 31 December 2004, such trusts held 3,188,632 (2003: 3,251,780; 2002:
1,482,249) ordinary shares.
HSBC Holdings Own shares held
Deducted from retained profits are:
(a) US$100 million (2003: US$64 million; 2002: US$43 million) of HSBC Holdings’ own shares 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 233. At 31 December 2004, the trust held 8,163,554 (2003:
6,391,497; 2002: 4,664,315) ordinary shares with a market value at that date of US$138,779,602
(2003: US$100,191,651; 2002: US$51,610,678) in respect of these conditional awards.
(b) US$372 million (2003: US$455 million; 2002: US$497 million) of HSBC Holdings’ own shares held in trust
which may be used in respect of the exercise of CCF share options as detailed in Note 34. At 31 December 2004,
the trust held 26,787,515 (2003: 32,775,055; 2002: 35,745,555) ordinary shares with a market value of
US$455,385,076 (2003: US$513,774,295; 2002: US$395,524,816) in respect of these option holders.
(c) US$220 million (2003: US$134 million; 2002: US$nil) of HSBC Holdings’ own shares held in trust which may
be used in respect of the exercise of HSBC Finance Corporation share options as detailed in Note 34. At 31
December 2004, the trust held 16,645,439 (2003: 12,444,049; 2002: nil) ordinary shares with a market value of
US$282,970,798 (2003: US$195,070,109; 2002: nil) in respect of these option holders.
(d) US$57 million (2003: US$nil; 2002: nil) of HSBC Holdings’ own shares held in trust which may be used in
respect of the exercise of Bank of Bermuda share options as detailed in Note 34. At 31 December 2004, the trust
held 3,255,273 (2003: nil; 2002: nil) ordinary shares with a market value of US$55,339,315 (2003: US$nil ;
2002: US$nil) in respect of these option holders.
297
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
36 Analyses of assets and liabilities
(a) Assets subject to sale and repurchase transactions
Total assets subject to sale and repurchase transactions ..........................................................
(b) Assets leased to customers
Loans and advances to customers ............................................................................................
Tangible fixed assets – equipment on operating leases (Note 24 (a)) ......................................
2004
US$m
39,944
2004
US$m
13,750
4,953
18,703
2003
US$m
22,299
2003
US$m
10,519
4,048
14,567
The cost of assets acquired during 2004 for letting to customers under finance leases and hire purchase contracts
by HSBC amounted to US$7,753 million (2003: US$4,370 million).
(c) Assets charged as security for liabilities
HSBC has pledged assets as security for liabilities included under the following headings:
Deposits by banks ...................................................................................................................
Customer accounts ..................................................................................................................
Debt securities in issue ............................................................................................................
Other liabilities .......................................................................................................................
Amount of liability secured
2004
US$m
2,303
4,189
27,793
5,178
39,463
2003
US$m
1,487
3,709
33,584
3,122
41,902
The amount of assets pledged to secure these liabilities is included under the following headings:
Amount of assets pledged
Treasury bills & other eligible securities .................................................................................
Loans and advances to customers ...........................................................................................
Debt securities ........................................................................................................................
Other .......................................................................................................................................
2004
US$m
3,152
34,992
53,837
1,438
93,419
(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
undertakings .......................................
Bank
US$m
71,303
14,655
–
677
2004
Non-bank
US$m
23,582
6,035
8,143
6,675
Total
US$m
94,885
20,690
8,143
7,352
Bank
US$m
54,336
11,883
–
1,603
2003
Non-bank
US$m
26,165
4,739
6,845
4,576
2003
US$m
1,489
37,441
71,690
828
111,448
Total
US$m
80,501
16,622
6,845
6,179
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.
298
37 Financial instruments
(a) Derivatives
Derivatives are financial instruments that derive their value from the price of an underlying item such as equities,
bonds, interest rates, foreign exchange, credit spreads, commodities or equity and other indices.
(i) Types of derivatives
Derivative instruments are classified as being for either trading or hedging purposes. The following outlines
the nature and terms of the most common types of derivatives used by HSBC.
Currency forwards represent commitments to purchase foreign or domestic currency at a future date.
Forward rate agreements are individually negotiated interest rate futures that call for a cash settlement at a
future date for the difference between a contractual rate or agreed rate of interest, and the current market
rate, based on a notional principal amount.
Currency and interest rate swaps are commitments to exchange one set of cash flows for another. Swaps
result in an economic exchange of currencies or interest rates (for example, fixed rate for floating rate) or a
combination of both of these (i.e. cross-currency interest rate swaps). Except for certain currency swaps, no
exchange of principal takes place.
Equity swaps are bilateral agreements to transfer the risk and returns on an equity in exchange for a stream
of payments, typically interest.
Foreign currency, equity and interest rate options are contractual agreements under which the seller
(writer) grants the purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a
put option) at or by a set date or during a set period, a specific amount of a foreign currency or a financial
instrument at a predetermined price. In consideration for the assumption of foreign exchange, equity, or
interest rate risk, the seller receives a premium from the purchaser. Options may be either exchange-traded
or negotiated between the Group and a customer on an over the counter basis.
Futures are exchange-traded agreements to buy or sell a standard quantity of a specified fixed income
security, time deposit, equity or currency at a future date, at a price decided at the time the contract is made.
Equity futures may be settled in cash or through delivery.
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
specified credit event. Credit default swaps may be on a single name (counterparty) or may be on multiple
names (counterparties).
Commodity derivatives include exchange traded and over the counter contracts involving commodities and
base metals.
(ii) Use of derivatives
Commercially HSBC transacts in derivatives for three primary purposes – to create risk management
solutions for clients, for proprietary trading purposes, and to manage and hedge HSBC’s own risks.
For accounting purposes, derivative instruments are classified as either trading or hedging.
Trading Derivatives
Most of the Group’s derivative transactions relate to sales and trading activities. Sales activities include the
structuring and marketing of derivative products to customers to enable them to take, transfer, modify or
reduce current or expected risks. Trading activities in derivatives are entered into principally for the purpose
of generating profits from short-term fluctuations in price or margin. Positions may be traded actively or be
held over a period of time, to benefit from expected changes in currency rates, interest rates, equity prices or
other market parameters. Trading includes market-making, positioning and arbitrage activities: market-
making involves quoting bid and offer prices to other market participants with the intention of generating
revenues based on spread and volume; positioning means managing market risk positions with the
299
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
expectation of profiting from favourable movements in prices, rates or indices; arbitrage activities involve
identifying and profiting from price differentials between markets and products.
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.
Because all derivative instruments used for trading purposes are marked to market, carrying values are equal
to mark-to-market values.
The notional or contractual amounts of certain types of financial instruments provide a basis for comparison
with instruments recognised on the balance sheet but do not necessarily indicate the amounts of future cash
flows involved or the current fair value of the instruments and, therefore, do not indicate the Group’s
exposure to credit or price risks. The derivative instruments become favourable (assets) or unfavourable
(liabilities) as a result of market changes or movements relative to their terms. The aggregate contractual or
notional amount of derivative financial instruments, the extent to which instruments are favourable or
unfavourable and, thus the aggregate fair values of derivative financial assets and liabilities can fluctuate
significantly over the reporting period.
Trading derivatives are valued at mark-to-market based on quoted market prices or on internally developed
models that are based on independently sourced market parameters, including interest rate yield curves,
option volatilities and currency rates. If market observable data are not available, the initial increase in fair
value indicated by the valuation model, but based on unobservable inputs, is not recognised immediately in
the profit and loss account. This amount is held back and recognised over the life of the transaction where
appropriate, or released to the profit and loss account when the inputs become observable, or, when the
transaction matures or is closed out.
2004
2003
Spot and forward foreign exchange .............
Currency swaps, futures and options
purchased ................................................
Currency options written .............................
Other contracts ............................................
Contract
amount
US$m
1,044,148
404,172
138,035
29,151
Total exchange rate contracts ......................
1,615,506
Interest rate swaps .......................................
Interest rate futures, forward rate
agreements, and options purchased .........
Interest rate options written .........................
3,335,145
861,448
374,058
Total interest rate contracts ..........................
4,570,651
Equities, futures and options purchased .......
Equities options written ...............................
Other contracts ............................................
Total equities contracts ................................
20,806
15,192
19,060
55,058
Credit derivatives ........................................
195,603
Netting .........................................................
Total ............................................................
6,436,818
1 Third party contracts only.
Replacement
cost1
US$m
16,546
13,219
–
1,259
31,024
31,364
4,659
–
36,023
2,037
–
744
2,781
1,338
(41,568)
29,598
Contract
amount
US$m
792,845
286,283
94,623
14,209
1,187,960
2,170,050
717,114
267,294
3,154,458
24,721
15,171
10,950
50,842
49,613
4,442,873
Replacement
cost1
US$m
14,813
8,822
–
668
24,303
21,364
3,654
–
25,018
1,927
–
1,319
3,246
622
(28,578)
24,611
300
2004
2003
Mark-to-
market values
at year end
US$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$m
Exchange rate
Interest rate
Equities
Credit derivatives
Total
assets ..................
liabilities .............
assets ..................
liabilities .............
assets ..................
liabilities .............
assets ..................
liabilities .............
assets ..................
liabilities .............
Netting .........................................................
33,590
(35,414)
36,041
(36,874)
2,784
(3,280)
1,341
(1,394)
73,756
(76,962)
41,568
28,765
(30,000)
33,861
(32,848)
3,197
(3,029)
948
(888)
66,771
(66,765)
29,926
26,961
(27,226)
25,394
(26,824)
3,252
(2,503)
623
(559)
56,230
(57,112)
28,578
20,893
(22,033)
33,913
(32,622)
2,405
(2,802)
409
(346)
57,620
(57,803)
26,146
The above amounts are stated after deducting cash collateral meeting the offset criteria of FRS 5 ‘Reporting
the substance of transactions’ as follows:
Offset against assets .....................................
Offset against liabilities ................................
4,891
1,806
3,454
1,221
Hedging derivatives
HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own
asset and liability portfolios and structural positions. This enables HSBC to optimise the all-in cost to the
Group of accessing debt capital markets and to mitigate market risk which would otherwise arise from
structural imbalances between the profile of its assets and liabilities.
The following table summarises the contract amount and replacement cost of derivatives used for risk
management purposes by product type. The replacement cost represents the accounting loss HSBC would
incur if the counterparty to a derivative contract failed to perform according to the terms of the contract and
the collateral, if any, for the amount due proved to be of no value.
2004
2003
Contract
amount
US$m
69,421
40,344
109,765
426,081
10,734
436,815
44
50
94
Replacement
cost1
US$m
111
810
921
1,070
1
1,071
–
–
–
Contract
amount
US$m
67,370
40,130
107,500
358,491
27,288
385,779
91
71
162
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.
Replacement
cost1
US$m
142
1,342
1,484
906
3
909
59
–
59
301
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
The table below summarises the carrying value and mark-to-market value of derivative contracts held for
risk management purposes. Mark-to-market values for assets and liabilities arising from derivatives held for
non-trading purposes are determined in the same way as those set out for trading derivatives above,
including internal positions.
2004
Carrying
value
US$m
Mark-to-
market values
US$m
2003
Carrying
value
US$m
Mark-to-
market values
US$m
6,282
(3,488)
2,335
(2,525)
–
6,366
(3,204)
4,638
(3,117)
–
3,658
(3,147)
1,824
(2,312)
4
4,297
(3,495)
5,814
(4,136)
59
Exchange rate
Interest rate
Equities
assets .....................
liabilities................
assets .....................
liabilities................
assets .....................
(iii) Risks associated with derivatives
Derivative instruments are subject to both market risk and credit risk.
Market risk
The Group takes on exposure to market risk. Market risk arises from open positions in interest rate, currency
and equity products, all of which are exposed to general and specific market movements. The Group applies
a ‘value at risk’ methodology to calculate the market risk of positions held and the maximum losses
expected, based upon a number of assumptions for various changes in market conditions.
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. Market risk arising from derivatives business, as well as the market
risk arising from on-balance-sheet instruments is monitored by Traded Markets Development and Risk, an
independent unit within the Corporate, Investment Banking and Markets operation.
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, the credit risk of 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.
The 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 an equivalent on-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 markets in which the Group operates and HSBC
has executed closeout netting agreements with the majority of its significant counterparties. Furthermore
HSBC transacts derivatives with only 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 regard 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 manage effectively the credit risk
inherent in the products.
302
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, equity and
credit derivative contracts with positive mark-to-market gains by category of counterparty and by maturity,
including netting where available at 31 December 2004 and 31 December 2003. The table shows that the
replacement cost of derivatives is predominantly with banks and under five years.
Less than
1 year
US$m
23
15,280
1,077
3,604
2,806
22,790
19,562
1-5 years
US$m
122
19,907
311
3,833
1,965
26,138
23,254
Residual maturity
Over
5 years
US$m
Netting
US$m
394
17,250
23
5,407
1,156
24,230
12,825
(49)
(34,594)
(3)
(5,204)
(1,718)
(41,568)
(28,578)
2004
Total
US$m
490
17,843
1,408
7,640
4,209
31,590
2003
Total
US$m
116
16,085
798
5,643
4,421
27,063
Governments .......................
Banks ..................................
Non-bank financial
institutions:
Exchanges1 ......................
Other ...............................
Other sectors .......................
Total 2004 ..........................
Total 2003 ...........................
1 Exchanges with margining requirements.
The following table shows the maturity profile of the notional principal values of third party derivatives
contracts outstanding as at 31 December 2004 and 31 December 2003.
Exchange rate, interest rate, equities
and credit derivative contracts:
Exchanges1 ...............................
Other contracts .........................
Less than
1 year
US$m
565,193
2,344,065
Total 2004 ...................................
2,909,258
Residual maturity
Over
5 years
US$m
87,049
1,087,501
1,174,550
1-5 years
US$m
212,467
1,986,385
2,198,852
2004
Total
US$m
864,709
5,417,951
6,282,660
Total 2003 ....................................
2,215,501
1,359,029
604,778
2003
Total
US$m
503,215
3,676,093
4,179,308
1 Exchanges with margining requirements.
(iv) Credit derivatives
Use of credit derivatives
Credit derivatives can be used for either trading activity, or for the portfolio management of the credit risk
on the Group’s loan portfolio. Currently HSBC does not use credit derivatives in any significant manner for
the portfolio management of the credit risk on its own loan portfolio.
The following table presents the notional amounts of credit derivatives protection bought and sold at
31 December 2004 and 2003:
At 31 December 2004 ...................................................................................................
At 31 December 2003 ....................................................................................................
Credit derivative positions
Notional amount of protection
Sold
US$m
Bought
US$m
93,750
25,322
102,321
24,807
HSBC has limited counterparty exposure as a result of credit derivatives transactions.
303
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Of the US$29.6 billion of total derivative receivables at 31 December 2004, approximately US$1.3 billion,
or 4 per cent, was associated with credit derivatives, before the benefit of collateral. The use of credit
derivatives to manage exposures does not reduce the reported level of assets on the balance sheet or the level
of reported off–balance sheet commitments.
HSBC’s trading activity in credit derivatives is primarily client driven. The business acts as a market-maker
in single-name credit derivatives. It also structures more complex transactions for clients’ investment or risk
management purposes. The credit derivatives trading function operates within the same framework as other
market-making desks. Risk limits are established and closely monitored.
As at 31 December 2004, the total notional amounts of protection purchased and sold were US$93.8 billion
and US$102.3 billion, respectively. The mismatch between these notional amounts is attributable to HSBC
selling protection on large, diversified, predominantly investment-grade portfolios (including the most
senior tranches) and then hedging these positions by buying protection on the more subordinated tranches of
the same portfolios. In addition, HSBC uses securities to hedge certain derivative positions. Consequently,
while there is a mismatch in notional amounts of credit derivatives, the risk positions are largely matched.
(b) Other financial instruments
(i) Financial instruments held for trading purposes:
Assets
Treasury bills and other eligible bills ...........................................................................
Loans and advances to banks and customers ...............................................................
Debt securities .............................................................................................................
Equity shares ...............................................................................................................
Liabilities
Short positions in securities .........................................................................................
Debt securities in issue ................................................................................................
Deposits by banks and customer accounts ...................................................................
Mark-to-market values
2004
US$m
4,618
81,716
91,794
14,610
2003
US$m
4,592
57,448
74,806
7,489
192,738
144,335
46,460
7,825
69,588
123,873
30,127
3,881
46,167
80,175
The net trading assets above are funded by liabilities whose fair value is not materially different from their
carrying value.
(ii) Financial instruments not held for trading purposes and for which a liquid and active market exists:
Assets
Treasury bills and other eligible bills............
Debt securities ..............................................
Equity shares ................................................
Liabilities
Debt securities in issue .................................
Subordinated liabilities .................................
Non-equity minority interests .......................
2004
Carrying
value
US$m
Mark-to-
market values
US$m
25,613
149,152
4,709
179,474
155,480
25,521
10,718
191,719
25,611
150,437
5,588
181,636
154,318
27,313
10,711
192,342
2003
Mark-to-
market values
US$m
15,794
132,421
6,217
154,432
131,430
20,219
8,715
160,364
Carrying
value
US$m
15,781
130,761
5,390
151,932
130,510
19,825
8,719
159,054
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.
304
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 2004 were
US$12,792 million (2003: US$7,669 million) and the unrecognised losses were US$10,713 million (2003:
US$5,157 million).
Unrecognised gains of US$6,440 million and unrecognised losses of US$5,055 million are expected to be
recognised in 2005.
Of the gains and losses included in the profit and loss account in 2004, US$4,767 million of gains and
US$2,713 million of losses were unrecognised at 1 January 2004.
(d) Liquidity management
HSBC’s liquidity management process is discussed in the ‘Financial Review’ section on page 166 from the
paragraph under the heading ‘Liquidity and funding management’ to the bullet point ‘maintaining liquidity and
funding contingency plans’.
305
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
38 Memorandum items
(a) HSBC
Contingent liabilities and commitments
Contingent liabilities
Acceptances and endorsements .................
Guarantees and assets pledged as
collateral security:
guarantees and irrevocable letters of
credit .....................................................
Other contingent liabilities ........................
Commitments
Documentary credits and short-term
trade-related transactions ......................
Forward asset purchases and forward
forward deposits placed ........................
Undrawn note issuing and revolving
underwriting facilities ...........................
Undrawn formal standby facilities, credit
lines and other commitments to lend
– over 1 year .........................................
– 1 year and under ................................
2004
Credit
equivalent
amount
US$m
Risk-
weighted
amount
US$m
Contract
amount
US$m
2003
Credit
equivalent
amount
US$m
Risk-
weighted
amount
US$m
Contract
amount
US$m
7,214
4,280
4,070
5,412
3,327
3,194
64,921
57
72,192
7,788
2,689
601
92,077
464,541
567,696
51,201
57
55,538
2,982
2,689
565
46,038
–
52,274
37,138
56
41,264
1,660
1,449
36
44,396
–
47,541
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
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. Where irrevocable offers to extend credit are made in
customer mailing programs, commitments are calculated using management’s best estimate of response rates
incorporating appropriate historical experience. The contractual amounts represent the amounts at risk should a
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.
306
The principal types of guarantees provided, and the maximum potential amount of future payments which HSBC
could be required to make, at 31 December 2004 were as follows:
At 31 December 2004
At 31 December 2003
Guarantees
by HSBC
Holdings
in favour of
other HSBC
Group entities
US$m
–
54,387
–
–
–
–
–
–
–
54,387
Guarantees in
favour of third
parties
US$m
7,214
27,031
3,108
7,322
4,910
382
5,322
16,824
79
72,192
Guarantees in
favour of third
parties
US$m
5,412
21,573
2,371
7,188
4,780
290
4,345
13,881
40
59,880
Guarantees
by HSBC
Holdings
in favour of
other HSBC
Group entities
US$m
–
41,775
–
–
–
–
–
–
–
41,775
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 ...................................
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.
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 2004, 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 .............................................................................................................................
2004
US$m
88
77
28
2003
US$m
92
82
25
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 2004 amounted to US$38 million (2003: US$32 million)
307
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(b) Geographical concentration of contingent liabilities and commitments
HSBC has the following geographic concentrations of exposure to contingent liabilities and commitments. These
are allocated on the basis set out in Note 46:
Contract amounts
Contingent liabilities
2004 ............................................
2003 ............................................
Commitments
Europe
US$m
31,915
27,460
2004 ............................................
2003 ............................................
202,976
133,475
Hong
Kong
US$m
18,844
16,036
69,945
58,098
Rest of
Asia-
Pacific
US$m
10,621
7,686
50,934
40,029
North
America
US$m
South
America
US$m
10,275
8,302
237,172
192,779
537
396
6,669
4,383
Total
US$m
72,192
59,880
567,696
428,764
39 Market risk management
HSBC’s market risk management process is discussed in the ‘Financial Review’ section on pages 167 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.
The methodology for calculating VAR was enhanced from Variance Co-Variance (‘VCV’) to Historical
Simulation (‘HS’) on 1 November 2004. The HS methodology incorporates non-linear risks associated with the
planned expansion of HSBC’s derivatives business into the trading VAR calculation using a full valuation
approach. Previously, any non-linear risk was incorporated using a conservative non-linear adjustment consistent
with the level of non-linear risk taken.
Consequently, the trading VAR for 2004, shown below, is based on 10 months VCV and 2 months HS. By way
of comparison, average trading VAR for the six month period to 31 December 2004 under HS
(US$114.7 million) was 0.7 per cent more than that under VCV (US$113.8 million). At 31 December 2004 the
trading VAR under HS (US$119.1 million) was 4.5 per cent more than that under VCV (US$114.0 million).
Trading VAR for HSBC for 2004 was:
Foreign exchange
trading positions
Interest rate trading
positions
Equities trading
positions
US$m
US$m
US$m
31 December 2004
30 June 2004 .........
31 December 2003
Averages:
Full year 2004 ......
First half of 2004 ..
Full year 2003 .......
39.3
40.7
52.8
38.6
42.2
48.7
97.7
89.5
64.9
91.7
89.0
70.0
15.3
16.1
15.9
16.6
16.2
16.9
Combined positions
US$m
119.1
112.2
101.0
112.5
111.7
102.4
Minimum Maximum
US$m
US$m
Minimum Maximum
US$m
US$m
Minimum Maximum
US$m
US$m
Minimum Maximum
US$m
US$m
Full year 2004 ......
First half of 2004 ..
Full year 2003 .......
20.1
24.1
1.2
55.6
55.6
184.4
59.0
59.0
43.1
134.4
130.4
124.7
10.9
12.4
10.9
28.1
23.7
23.1
82.3
82.3
48.7
152.4
151.7
234.1
(b) Interest rate sensitivity gap table
In accordance with FRS 13 ‘Derivatives and other financial instruments: disclosure’, the table below discloses
the mismatch of the dates on which interest receivable on assets and interest payable on liabilities are next reset
308
to market rate on a contractual basis or, if earlier, the dates on which the instruments mature. Actual reset dates
may differ from contractual dates owing to prepayments and the exercise of options. In addition, contractual
terms may not be representative of the behaviour of assets and liabilities. For these reasons, HSBC manages its
interest rate risk on a different basis from that presented below, taking into account the behavioural
characteristics of the relevant assets and liabilities.
At 31 December 2004
More
than
three
months
but not
more
than six
months
US$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 ........
Loans and advances
to banks ..............
Loans and advances
to customers .......
Debt securities and
equity shares .......
Other assets ...........
18,534
2,138
4,172
94,401
4,452
1,528
778
526
44
454
–
25,666
4,618
30,284
3,319
104,680
38,032
142,712
428,431
30,789
24,407
88,198
42,679
11,643
626,147
43,684
669,831
62,902
1,102
10,306
–
14,165
–
42,178
–
19,582
–
4,781
136,024
153,914
137,126
106,404
36,507
260,318
173,633
Total assets ............
605,370
47,685
44,272
131,680
62,759
155,767
1,047,533
229,245
1,276,778
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
(54,121)
(526,220)
(4,327)
(14,589)
(1,345)
(12,228)
(2,618)
(12,224)
(666)
(1,963)
(4,686)
(72,715)
(67,763)
(639,939)
(15,776)
(53,812)
(83,539)
(693,751)
(176,179)
(334)
(5,437)
(2)
(3,028)
(6)
(14,653)
(309)
(1,461)
(44)
(10)
(81,548)
(200,768)
(82,243)
(7,825)
(82,349)
(208,593)
(164,592)
(7,785)
(612)
(198)
(3,894)
(13,994)
(3)
(26,486)
–
(26,486)
the trading book .
65,575
1,485
1,015
–
–
–
–
463
–
(97,942)
(97,942)
(1,875)
(99,817)
(92)
(838)
67,608
(67,608)
–
Total liabilities .......
(699,064)
(23,482)
(15,790)
(33,235)
(18,220)
(257,742)
(1,047,533)
(229,245) (1,276,778)
Off-balance-sheet
items ...................
(52,320)
(14,739)
7,898
58,337
824
–
Interest rate
sensitivity gap ....
Cumulative interest
rate sensitivity
gap .....................
(146,014)
9,464
36,380
156,782
45,363
(101,975)
(146,014)
(136,550)
(100,170)
56,612
101,975
–
–
–
–
–
–
–
–
–
–
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.
309
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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
694
425
Loans and advances
–
–
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 ....
Customer accounts ...
Debt securities in
issue .....................
Other liabilities ........
Loan capital and
other subordinated
liabilities ...............
Minority interests and
shareholders’
funds .....................
Internal funding of
(40,448)
(455,677)
(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)
(124,552)
(243)
(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)
(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
–
(c) Assets and liabilities denominated in foreign currency
Assets
Denominated in US dollars .....................................................................................................
Denominated in currencies other than US dollars ...................................................................
–
–
–
2004
US$m
480,072
796,706
–
–
–
–
–
–
2003
US$m
390,911
643,305
Total assets .............................................................................................................................
1,276,778
1,034,216
Liabilities
Denominated in US dollars .....................................................................................................
Denominated in currencies other than US dollars ...................................................................
502,116
774,662
386,418
647,798
Total liabilities ........................................................................................................................
1,276,778
1,034,216
(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.
310
HSBC’s management of structural foreign currency exposures is discussed in the ‘Financial Review’ section on
page 172.
HSBC’s structural currency exposures as at the year-end were as follows:
Net structural currency exposures
Currency of structural exposure
Euros ......................................................................................................................................
Sterling ...................................................................................................................................
Hong Kong dollars ..................................................................................................................
Chinese renminbi ....................................................................................................................
Mexican pesos ........................................................................................................................
Canadian dollars .....................................................................................................................
Swiss francs1 ...........................................................................................................................
Brazilian reais .........................................................................................................................
UAE dirham ...........................................................................................................................
Indian rupees ..........................................................................................................................
Turkish lira ..............................................................................................................................
Australian dollars ....................................................................................................................
Malaysian ringgit ....................................................................................................................
Korean won .............................................................................................................................
Singapore dollars ....................................................................................................................
Taiwanese dollars ....................................................................................................................
Maltese lira ..............................................................................................................................
Japanese Yen ...........................................................................................................................
Thai baht .................................................................................................................................
Egyptian pounds .....................................................................................................................
Chilean pesos ..........................................................................................................................
Indonesia rupiah .....................................................................................................................
Saudi riyals2 ............................................................................................................................
Argentine pesos3 .....................................................................................................................
Others, less than US$100 million ...........................................................................................
Total .......................................................................................................................................
2004
US$m
19,054
17,749
12,693
3,105
2,907
2,250
1,921
1,498
760
745
705
703
605
420
401
326
278
225
203
181
175
155
107
(76)
746
67,836
2003
US$m
17,785
15,249
11,881
813
1,536
1,743
1,548
1,106
520
498
547
407
521
307
440
272
254
129
173
143
153
180
516
(297)
579
57,003
1 After deducting Swiss Franc borrowings of US$810 million (2003: US$741 million) taken out in order to hedge the net investments.
2 After deducting sales of Saudi Riyals amounting to US$480 million (2003: US$ nil) in order to hedge the net investments.
3 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.
311
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
40 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.........................................................................
Accretion of discounts and amortisation of 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 .......................................................
2004
US$m
16,514
(4,969)
2,492
42
1,052
3,506
(218)
6,357
(7,984)
1,244
(1,123)
(99)
16,814
299
(26)
(9,957)
(132,052)
(24,107)
(9,657)
11,684
105,454
909
54,172
26,783
(3,107)
37,209
2003
US$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$m
9,035
355
190
36
862
2,044
(8)
1,321
(1,931)
879
(1,331)
324
11,776
124
715
16,550
(35,332)
2,543
(7,055)
(3,505)
31,161
716
2,935
(1,580)
(2,622)
16,426
1 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line
basis, as details cannot be determined without unreasonable expense
41 Changes in financing during the year
Subordinated
loan capital
US$m
Preference
shares1
US$m
Ordinary
Shares
US$m
Share
premium
US$m
Own shares
held
US$m
Balance at 1 January 2004 ...........
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 2004 ...
21,197
–
218
6,021
(1,740)
–
4,281
790
26,486
8,719
–
–
1,480
–
–
1,480
519
10,718
5,481
80
–
26
–
–
26
–
5,587
4,406
(80)
–
555
–
–
555
–
4,881
(923)
–
–
–
–
(88)
(88)
(90)
(1,101)
312
Subordinated
loan capital
US$m
Preference
shares1
US$m
Ordinary
shares
US$m
Share
premium
US$m
Own shares
held
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...
18,371
–
1,192
2,358
(1,464)
–
894
740
Balance at 31 December 2003 .....
21,197
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 .....
15,480
–
214
4,105
(1,923)
–
2,182
495
18,371
4,431
–
–
4,104
(206)
–
3,898
390
8,719
4,291
–
–
–
(50)
–
(50)
190
4,431
4,741
59
637
44
–
–
44
–
5,481
4,678
45
–
18
–
–
18
–
4,741
1 Preference shares in issue are in subsidiary undertakings (Note 33).
42 Analysis of cash
3,647
(59)
–
801
–
–
801
17
4,406
3,373
(45)
–
319
–
–
319
–
3,647
(646)
–
–
–
–
(258)
(258)
(19)
(923)
(686)
–
–
–
–
59
59
(19)
(646)
HSBC is required to maintain deposits with central banks as a result of government regulations in the territories in
which it operates. At 31 December 2004, these amounted to US$6,338 million (2003: US$2,765 million; 2002:
US$2,154 million).
(a) Changes in cash during the year
Balance at 1 January ..............................................................................
Net cash inflow before the effect of foreign exchange movements ........
Effect of foreign exchange movements ..................................................
Balance at 31 December ........................................................................
2004
US$m
32,950
10,648
1,116
44,714
(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 .................................................................
2004
US$m
9,872
34,842
44,714
2003
US$m
26,870
4,020
2,060
32,950
2003
US$m
7,661
25,289
32,950
43 Litigation
HSBC, through a number of its subsidiary undertakings, is named in and is defending legal actions in various
jurisdictions arising from its normal business. None of these proceedings is regarded as material litigation.
2002
US$m
22,224
3,242
1,404
26,870
2002
US$m
7,659
19,211
26,870
313
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
44 Capital commitments
Expenditure contracted for ...........................................................................................................
Expenditure authorised by Directors but not contracted for .........................................................
45 Lease commitments
At the year-end, annual commitments under non-cancellable operating leases were:
Leasehold land and buildings:
Operating leases which expire
– within 1 year ............................................................................................................................
– between 1 and 5 years ..............................................................................................................
– over 5 years..............................................................................................................................
Equipment:
Operating leases which expire
– within 1 year ............................................................................................................................
– between 1 and 5 years ..............................................................................................................
2004
US$m
1,212
311
1,523
2003
US$m
1,551
680
2,231
2004
US$m
2003
US$m
79
305
225
609
4
25
29
109
360
223
692
21
14
35
46 Segmental analysis
As HSBC is not required to disclose turnover, no segmental analysis of turnover is included. Turnover of non-
banking businesses is included in other operating income. The allocation of earnings reflects the benefit of
shareholders’ funds to the extent that these are actually allocated to businesses in the segment by way of intra-HSBC
capital and funding structures. Common costs are included in segments on the basis of the actual recharges made.
(a) By geographical region
Geographical information has been classified by the location of the principal operations of the subsidiary
undertaking, or in the case of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc,
HSBC Bank Middle East Limited, HSBC Finance Corporation and HSBC Bank USA, N.A. operations, by the
location of the branch responsible for reporting the results or for advancing the funds. Due to the nature of
HSBC’s structure, the analysis of profits and net assets shown below includes intra-HSBC items between
geographical regions. The ‘Rest of Asia-Pacific’ geographical segment includes the Middle East, India and
Australasia.
Total assets:
Europe ........................................
Hong Kong .................................
Rest of Asia-Pacific ....................
North America ............................
South America ............................
At 31 December 2004
At 31 December 2003
At 31 December 2002
US$m
539,116
217,406
120,504
370,477
17,397
%
42.6
17.2
9.5
29.3
1.4
US$m
425,312
197,487
98,081
289,800
12,549
%
41.6
19.3
9.6
28.3
1.2
1,264,900
100.0
1,023,229
100.0
%
45.6
24.1
10.2
19.0
1.1
100.0
US$m
341,569
180,433
76,635
142,032
8,491
749,160
9,445
758,605
Add: Hong Kong Government
certificates of indebtedness .....
11,878
Total assets .................................
1,276,778
10,987
1,034,216
314
Net assets:
At 31 December 2004
At 31 December 2003
At 31 December 2002
Europe .........................................
Hong Kong ..................................
Rest of Asia-Pacific .....................
North America .............................
South America .............................
Total net assets ............................
US$m
36,136
15,706
6,375
26,883
1,523
86,623
Profit on ordinary activities before tax:
Year ended 31 December 2004
Interest receivable ...................................
Interest payable .......................................
Net interest income .................................
Dividend income ....................................
Fees and commissions receivable ...........
Fees and commissions payable ...............
Dealing profits ........................................
Other operating income ..........................
Operating income ...................................
Operating expenses (excluding
goodwill amortisation) ........................
Goodwill amortisation ............................
Operating expenses .................................
Operating profit before provisions ..........
Provisions for bad and doubtful debts .....
Provisions for contingent liabilities
and commitments ...............................
Amounts (written off)/written back on
fixed asset investments .......................
Operating profit ......................................
Share of operating profit in
joint ventures ......................................
Share of operating profit/(loss)
in associates ........................................
Gains on disposal of investments and
tangible fixed assets ............................
Profit on ordinary activities before tax ....
%
41.7
18.1
7.4
31.0
1.8
100.0
Hong
Kong
US$m
5,167
(1,528)
3,639
19
1,986
(260)
630
781
6,795
(2,524)
(9)
(2,533)
4,262
223
(3)
26
Europe
US$m
18,096
(9,034)
9,062
545
7,724
(1,429)
953
1,592
18,447
(11,570)
(947)
(12,517)
5,930
(1,025)
(12)
(20)
US$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$m
30,681
9,682
3,811
7,613
(22)
51,765
Rest of
Asia-
Pacific
US$m
North
America
US$m
South
America
US$m
Intra-
HSBC
items
US$m
4,146
(2,091)
2,055
3
1,303
(246)
494
195
3,804
(2,080)
(68)
(2,148)
1,656
(100)
–
–
21,201
(6,288)
14,913
32
4,520
(985)
439
1,158
20,077
(8,887)
(761)
(9,648)
10,429
(5,186)
(42)
–
2,421
(1,066)
1,355
2
580
(100)
50
207
2,094
(1,444)
(29)
(1,473)
621
(269)
30
(6)
376
–
1
38
415
(828)
828
–
–
(236)
236
–
(630)
(630)
630
–
630
–
–
–
–
–
–
–
–
–
4,873
4,508
1,556
5,201
5
54
293
5,225
–
8
228
4,744
–
232
17
1,805
–
(8)
226
5,419
%
59.3
18.7
7.3
14.7
–
100.0
Total
US$m
50,203
(19,179)
31,024
601
15,877
(2,784)
2,566
3,303
50,587
(25,875)
(1,814)
(27,689)
22,898
(6,357)
(27)
–
16,514
5
287
802
17,608
315
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
North
America
US$m
South
America
US$m
Intra-
HSBC
items
US$m
Total
US$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)
(44)
(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)
(107)
(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)
(7)
(62)
105
–
1
9
115
1,751
(1,106)
645
15
417
(93)
147
110
1,241
(1,060)
(24)
(1,084)
157
(117)
(99)
(36)
(95)
–
–
37
(58)
(712)
712
–
–
(141)
141
–
(422)
(422)
422
–
422
–
–
–
–
–
–
–
–
–
(740)
740
–
–
(120)
120
–
(326)
(326)
326
–
326
–
–
–
–
–
–
–
–
–
3,837
3,642
1,226
3,487
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)
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)
(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
288
–
18
68
–
149
16
3,728
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
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
58
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)
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
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 ................................
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.................................
Amounts written off fixed asset
investments..........................................
Operating profit/(loss)..............................
Share of operating loss in joint ventures .
Share of operating profit in associates .....
Gains on disposal of investments and
tangible fixed assets.............................
Profit/(loss) on ordinary activities
–
125
before tax.............................................
3,500
3,710
1,260
1,238
316
(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.
As a result of growth in use of Group Service Centres and Shared Service Organisations, the activities of these
centres have been included in the ‘Other’ customer group. Comparatives for the years ended 31 December 2003
and 31 December 2002 are not reported under ‘Other’ where these activities were formerly reported across
customer groups.
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
21,466
17
6,461
192
2,015
30,151
4,884
6
2,742
142
656
8,430
3,821
565
2,802
1,929
873
9,990
718
5
962
257
17
1,959
Intra-
HSBC
items
US$m
–
–
–
–
(2,378)
(2,378)
Total
US$m
31,024
601
13,093
2,566
3,303
50,587
Other
US$m
135
8
126
46
2,120
2,435
Year ended 31 December
2004
Net interest income .............
Dividend income ................
Net fees and commissions ..
Dealing profits ....................
Other operating income .....
Operating income ...............
Operating expenses .............
(15,473)
(4,378)
(6,008)
(1,634)
(2,574)
2,378
(27,689)
Operating profit/(loss)
before provisions .............
14,678
4,052
3,982
325
(139)
Provisions for bad and
doubtful debts ..................
(6,612)
(227)
473
(80)
(2)
10
(1)
7,984
3,834
–
74
110
–
54
7
(38)
(11)
4,406
5
96
330
8,168
3,895
4,837
9
4
(2)
336
–
–
48
384
–
77
16
(46)
–
63
307
324
438,415
160,299
582,975
56,466
26,745
Provisions for contingent
liabilities and
commitments ...................
Amounts (written off)/written
back on fixed asset
investments .....................
Operating profit/(loss) ........
Share of operating profit
in joint ventures ...............
Share of operating profit in
associates ........................
Gains on disposal of
investments and tangible
fixed assets.......................
Profit on ordinary activities
before tax ........................
Segment total assets ............
Hong Kong Government
certificates of
indebtedness ....................
Total assets .........................
Net assets ............................
34,659
13,924
24,362
9,726
3,952
–
–
–
–
–
–
–
–
–
22,898
(6,357)
(27)
–
16,514
5
287
802
17,608
1,264,900
11,878
1,276,778
86,623
317
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Total
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Other
US$m
Year ended 31 December
2003
Net interest income .............
Dividend income .................
Net fees and commissions ...
Dealing profits ....................
Other operating income .......
Operating income ................
16,943
18
4,842
133
1,508
23,444
4,196
3
2,256
118
587
7,160
3,899
161
2,315
1,764
805
8,944
574
3
822
209
50
(14)
37
159
(46)
938
1,658
1,074
Intra-
HSBC
items
US$m
–
–
–
–
(1,208)
(1,208)
Total
US$m
25,598
222
10,394
2,178
2,680
41,072
Operating expenses .............
(12,257)
(4,031)
(4,645)
(1,431)
(1,376)
1,208
(22,532)
Operating profit/(loss)
before provisions ............
11,187
3,129
4,299
227
Provisions for bad and
doubtful debts .................
(5,633)
(274)
(297)
Provisions for contingent
liabilities and
commitments ..................
Amounts (written off)/
written back on fixed
asset investments ............
Operating profit/(loss) .........
Share of operating profit/
(loss) in joint ventures ....
Share of operating profit
in associates ....................
Gains on disposal of
investments and tangible
fixed assets .....................
Profit on ordinary activities
(19)
(18)
5,517
11
46
30
14
–
2,869
–
20
6
(53)
(91)
3,858
(127)
80
225
before tax ........................
5,604
2,895
4,036
(2)
(2)
(3)
220
–
–
61
281
(302)
113
16
6
(167)
–
75
92
–
–
–
–
–
–
–
–
–
–
18,540
(6,093)
(44)
(106)
12,297
(116)
221
414
12,816
352,077
128,086
462,995
54,510
25,561
1,023,229
10,987
1,034,216
74,473
Segment total assets ............
Hong Kong Government
certificates of
indebtedness ...................
Total assets .........................
Net assets ............................
30,092
11,268
19,529
8,098
5,486
318
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Corporate,
Investment
Banking &
Markets
US$m
Private
Banking
US$m
Other
US$m
Year ended 31 December
2002
Net interest income .............
Dividend income ................
Net fees and commissions ..
Dealing profits ....................
Other operating income ......
7,429
6
2,979
50
773
Operating income ...............
11,237
3,835
6
1,934
107
459
6,341
3,700
230
2,164
1,008
609
7,711
549
2
623
137
102
(53)
34
124
11
925
1,413
1,041
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 .............
(7,144)
(3,317)
(4,134)
(1,251)
(1,110)
1,148
(15,808)
Operating profit/(loss)
before provisions ............
4,093
3,024
3,577
Provisions for bad and
doubtful debts .................
(857)
(269)
(184)
162
(5)
(69)
(6)
Provisions for contingent
liabilities and
commitments ..................
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)
(2)
19
3
3,192
2,777
(23)
17
19
3
15
51
activities before tax ........
3,205
2,846
3,652
12
(21)
(75)
(109)
3,296
(7)
46
317
(22)
114
(1)
(10)
46
149
(194)
(344)
–
67
75
(202)
171,478
113,520
394,540
48,346
21,276
749,160
Segment total assets ............
Hong Kong Government
certificates of
indebtedness ...................
Total assets .........................
Net assets ............................
12,101
10,290
16,852
7,366
5,156
(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 ...........................................
2004
US$m
13,665
4,506
2003
US$m
10,969
3,474
Operating income includes intra-HSBC income of US$328 million (2003: US$359 million; 2002:
US$418 million). Profit on ordinary activities before tax includes profit arising on intra-HSBC transactions
of US$303 million (2003: US$376 million; 2002: US$406 million).
319
–
–
–
–
–
–
–
–
–
10,787
(1,321)
(107)
(324)
9,035
(28)
135
508
9,650
9,445
758,605
51,765
2002
US$m
9,504
3,239
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(ii) Geographical analysis of tangible fixed assets
United Kingdom .............................................................................
Other...............................................................................................
Total ...............................................................................................
2004
US$m
8,436
10,393
18,829
2003
US$m
7,213
8,535
15,748
2002
US$m
6,240
7,941
14,181
Other includes assets held in Hong Kong amounting to US$4,817 million (2003: US$3,877 million; 2002:
US$4,180 million).
47 Related party transactions
(a) Transactions, arrangements and agreements involving Directors and others
Particulars of transactions, arrangements and agreements entered into by subsidiary undertakings of HSBC
Holdings with Directors and connected persons and companies controlled by them and with officers of HSBC
Holdings disclosed pursuant to section 232 of the Companies Act 1985 are as follows:
2004
2003
Number
US$m
Number
US$m
Directors and connected persons and companies
controlled by them
Loans and credit card transactions (including US$324,171 in
credit card transactions (2003: US$274,198) and US$21,627,562
in guarantees (2003: US$25,776,133)) .................................
Officers
Loans and credit card transactions (including US$394,532 in credit
card transactions (2003: US$377,611) and US$167,993 in
guarantees (2003: US$224,769)) ..........................................
82
34
332
48
82
32
353
38
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 15: amounts due from joint ventures;
− Note 20: interests in joint ventures and principal joint ventures; and
− Note 28: 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 14 and 15: amounts due from associates;
− Note 21: interests in associates; principal associates and interests in loan capital; and
− Notes 27 and 28: amounts due to associates.
Pension funds
At 31 December 2004, US$19.3 billion (2003: US$14.7 billion) of HSBC pension fund assets were under
management by HSBC companies of which US$1,432 million (2003: US$1,315 million) of ‘Long-term
assurance assets attributable to policyholders’ were included in HSBC’s balance sheet under ‘Other assets’. Fees
320
of US$35 million (2003: US$23 million) were earned by HSBC companies for these management services.
HSBC’s pension funds had placed deposits of US$268 million (2003: US$211 million) with its banking
subsidiaries.
48 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$13 million (2003: US$154 million) in respect of valuations below depreciated historical cost (of
which a credit of US$1 million (2003: US$4 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 2004 of
US$622 million (2003: US$174 million). The increase in the charge to the profit and loss account in respect of tax on
profit on ordinary activities would have been US$216 million (2003: US$nil).
If HSBC had prepared its financial statements under Hong Kong Statement of Standard Accounting Practice 24
‘Accounting for Investments in Securities’, US$1,567 million (2003: US$1,746 million) would have been credited to
reserves in respect of changes in the fair value of its investment securities.
In accordance with UK Statement of Standard Accounting Practice 17 ‘Post balance sheet events’, HSBC has
recorded dividends declared after the period end in the period to which they relate. If HSBC had prepared its
financial statements in accordance with Hong Kong Statement of Standard Accounting Practice 9 ‘Events after the
balance sheet date’, dividends would be recorded in the period in which they are declared and there would have been
an increase in reserves at 31 December 2004 of US$2,996 million (2003: US$2,627 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 2004 of US$65,043 million (2003: US$53,102 million). There would
have been no impact on the consolidated financial statements of HSBC.
HSBC applies UK Statement of Standard Accounting Practice 24 ‘Accounting for pension costs’ to defined benefit
schemes, which requires that the cost of providing pensions be recognised on a systematic and rational basis over the
period during which benefit is gained from the employees’ services. If HSBC had prepared its financial statements
under Hong Kong Statement of Standard Accounting Practice 34 ‘Employee benefits’ a defined benefit pension
liability of US$5,873 million would have been recognised in the balance sheet at 31 December 2004 (2003:
US$4,406 million). There would have been an additional credit to the profit and loss account in 2004 of
US$99 million (2003: US$206 million).
321
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
49 Differences between UK GAAP and US GAAP
The consolidated financial statements of HSBC are prepared in accordance with UK GAAP which differs 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.
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 external actuaries and are included in ‘Other assets’.
• 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’.
Long-term assurance assets and liabilities
UK GAAP
• Long-term assurance fund assets, excluding own shares held, and liabilities attributable to policyholders are
recognised at fair value in ‘Other assets’ and ‘Other liabilities’ as summary amounts ‘Long-term assurance
assets/liabilities attributable to policyholders’.
US GAAP
• Under the Statement of Position issued by the American Institute of Certified Public Accountants (‘AICPA
SOP’) 03-1, ‘Accounting and reporting by Insurance Enterprises for certain Non-traditional and Long-duration
Contracts and for Separate Accounts’, which became fully effective in 2004, where assets qualify for separate
accounting they should be measured at fair value and be reported in the financial statements as a summary total,
with an equivalent summary total for related liabilities, consistent with the UK GAAP presentations. Otherwise,
assets representing policyholders funds under the arrangements should be accounted for and recognised as
322
general account assets, i.e. consistent with other HSBC holdings of similar assets. Any related liability should be
accounted for as a general account liability.
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.
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, because an employee ceases to be employed by HSBC before their entitlement to the
options vest, any costs previously recognised relating to lapsed options are written back. From 2004, estimates of
such future employee departures are taken into account when accruing the cost during the service period and
revised and trued-up over this period.
• Where the number of option awards that vest is contingent on HSBC meeting certain performance targets of
Total Shareholder Return, this uncertainty is factored into the calculation of the fair value of the award at grant
date.
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
• AICPA SOP 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
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.
323
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
• 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 on
a straight-line basis 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.
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.
324
Derivatives
UK GAAP
• Non-trading derivatives are those which are held for hedging purposes as part of HSBC’s risk management
strategy against cash flows, 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 (i.e. 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.
– 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 (‘OCI’), 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 a retrospective and prospective 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.
325
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 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 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. A decline in fair value is generally considered other than temporary where management
does not have the ability and intent to hold the investment for a reasonable period of time sufficient for the fair
value to recover back up to the cost of the investment.
• Trading securities are measured at fair value with unrealised holding gains and losses included in earnings.
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 functional currency are
reported in the profit and loss account (SFAS 52 ‘Foreign Currency Translation’).
Own shares held
UK GAAP
• HSBC Holdings’ shares are 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.
326
US GAAP
• AICPA Accounting Research Bulletin 43 ‘Restatement and Revision of Accounting Research Bulletins’ requires
a reduction in shareholders’ equity for own shares held. However, 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’).
• 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.
327
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
• 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, on a
straight-line basis, 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’). Prepayment and delinquency estimates are regularly monitored and fee and cost amortisation rates
adjusted accordingly.
• Credit card annual fees are netted with direct lending costs, deferred, and amortised on a straight-line basis over
one year.
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.
• 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 a 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.
• Where unrecognised net actuarial gains/losses are in excess of 10 per cent of the greater of the projected benefit
obligation and the plan assets, the excess is amortised to net income in equal amounts over the average
remaining service lives of current employees.
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.
328
– 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 (revised December 2003) ‘Consolidation of Variable Interest Entities’(‘FIN 46R’),
which became fully effective for HSBC from 1 January 2004, 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.
• 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.
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.
In accordance with SSAP 24 ‘Accounting for pension costs’, the cost of additional pension benefits that accrue
to employees made redundant are spread over the remaining service lives of existing employees in line with
other actuarial adjustments.
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.
• SFAS 88 ‘Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits’ requires that the present value of expected employee termination benefits payable
pursuant to a contractual or legal obligation be recognised when it is probable that employees will be entitled to
benefits and the amounts can be reasonably estimated. Generally, this would be when management commits to a
plan of termination that identifies the number of employees to be terminated, their job classification or functions
329
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
and locations and the expected completion date of the plan, and actions required to complete the plan indicate
that it is unlikely that significant changes will be made or the plan will be withdrawn.
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.
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 ................................................................................
Shareholders’ interest in long-term assurance fund ..........................
Pension costs ....................................................................................
Stock-based compensation ...............................................................
Goodwill ..........................................................................................
Internal software costs ......................................................................
Revaluation of property ....................................................................
Purchase accounting adjustments .....................................................
Intangibles ........................................................................................
Derivatives .......................................................................................
Own shares held ................................................................................
Foreign exchange losses/(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 ..............................................
Note
a
b
c
d
f
g
h
I
r
j
k
l
2004
US$m
11,840
(90)
(102)
(244)
(234)
1,845
55
139
(233)
(390)
244
17
1,069
119
(1,097)
(120)
36
–
(216)
(95)
(311)
(37)
2003
US$m
8,774
(114)
(394)
266
(190)
1,500
13
62
(1,018)
(289)
(613)
42
(2,283)
217
683
96
43
26
–
223
223
187
Net income (US GAAP) ...................................................................
12,506
7,231
2002
US$m
6,239
(68)
(6)
(62)
(240)
845
66
76
15
–
221
–
(2,197)
–
–
–
(122)
(390)
(30)
475
445
78
4,900
330
Year ended 31 December
Per share amounts (US GAAP)
Basic earnings per ordinary share ....................................................
Diluted earnings per ordinary share .................................................
Note
o
o
2004
US$
1.15
1.13
Note
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 .......................................................................................
Intangibles .........................................................................................................................
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) ......................................................................................
Movement in shareholders’ equity (US GAAP)
Balance brought forward ..................................................................
Net income .......................................................................................
Dividends .........................................................................................
Stock based compensation ...............................................................
Shares issued in lieu of dividends ....................................................
Equity issued on acquisition of HSBC Finance Corporation
under US GAAP ..........................................................................
New share capital subscribed net of costs ........................................
Other, including movements in own shares held...............................
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 Income .................................................
Balance carried forward ..................................................................
Note
c
b
a
b
d
f
g
h
j
r
l
2004
US$m
80,251
12,506
(6,932)
234
2,607
–
581
(148)
(837)
(349)
(195)
2,364
983
90,082
2003
US$
0.69
0.69
2004
US$m
86,623
(718)
(1,600)
(4,776)
2,706
760
(3,040)
1,142
3,218
356
1,969
147
2,996
317
(358)
(19)
(72)
367
295
64
90,082
2003
US$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$
0.52
0.52
2003
US$m
74,473
(575)
(1,532)
(3,122)
1,072
718
(1,949)
1,352
3,028
702
2,046
140
2,627
217
739
96
173
(144)
29
190
80,251
2002
US$m
48,444
4,900
(4,632)
240
1,023
–
337
17
2,253
86
(824)
3,987
5,502
55,831
331
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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) .............................................................
2004
US$m
9,893
6,352
30,284
11,878
143,077
653,279
275,304
4,621
51,962
7,214
72,501
2003
US$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 ......................................................................................................................................
1,266,365
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 ........................................................................................................................
11,878
83,539
693,734
5,301
190,766
7,214
131,826
2,754
9,339
37,685
2,247
90,082
10,987
70,426
573,132
4,383
127,555
5,411
98,696
1,368
8,134
25,462
6,218
80,251
Total liabilities ................................................................................................................................
1,266,365
1,012,023
Net assets arising due to reverse repo transactions of US$36,543 million (2003: US$23,220 million) and US$29,346
million (2003: US$17,777 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$11,590 million (2003: US$12,226 million) and US$32,137
million (2003: US$15,201 million) are included in ‘Deposits by banks’ and ‘Customer accounts’ respectively.
Average repo liabilities during the year were US$46,229 million (2003: US$25,883 million). The maximum quarter-
end repo liability outstanding during the year was US$53,188 million (2003: US$30,938 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 2004, the impact on ‘Debt securities and equity shares’ and ‘Treasury bills and other eligible bills’
would be to reclassify securities amounting to US$39,999 million as encumbered (2003: US$22,292 million).
At 31 December 2004, collateral received under reverse repo transactions where HSBC had the right to sell or
repledge the security obtained amounted to US$84,767 million gross (2003: US$45,319 million). Approximately
US$36 billion (2003: 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.
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 2004, stock lending transactions where the securities lent were
subject to sale or repledge amounted to US$7,169 million (2003: US$7,062 million). At 31 December 2004, stock
borrowing transactions where the securities borrowed were subject to sale or repledge amounted to US$28,354
million (2003: US$11,428 million).
332
(a) Shareholders’ interest in long-term assurance fund
Under UK GAAP, the value of the shareholders’ interest in the in-force life assurance and fund pensions policies
of the long-term assurance fund are valued at the net present value of the profits inherent in such policies. The
net present value of such profits is not recognised under US GAAP.
US GAAP requires the application of different accounting treatments in a number of areas of accounting for the
long-term assurance fund. In particular, the 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$102 million lower than under UK GAAP, as a result
of differences in accounting for the shareholder’s interest in the long-term assurance fund. The reduction in
income is greater than in the previous year, because of an increase in the net present value of in force policies in
the UK in 2003, due in part to a reduction in the risk discount rate, and certain refinements to the models
underlying the US GAAP calculation in the previous year.
(b) Pension and post-retirement costs
(i) Pensions
For the purpose of the above reconciliations, the provisions of SFAS 87 ‘Employers’ Accounting for
Pensions’ have been applied to HSBC’s main defined benefit pension plans, which make up approximately
97 per cent of all HSBC’s schemes by plan assets. For non-US schemes, HSBC has applied SFAS 87 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.
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 2004, HSBC recognised an additional minimum pension liability of US$3,261 million
(2003: US$2,789 million) in respect of its unfunded accumulated benefit obligations. This liability is
partially offset by an intangible asset of US$12 million (2003: US$14 million). The net impact of these
items, after taking account of relevant tax assets of US$968 million (2003: US$824 million), would be to
reduce the Group’s shareholders’ equity under US GAAP by US$2,281 million (2003: US$1,951 million).
Estimated pension costs for these plans computed under SFAS 87 are as follows:
Components of net periodic benefit cost
Service cost ......................................................................................
Interest cost ......................................................................................
Expected return on plan assets .........................................................
Amortisation of prior service cost ....................................................
Amortisation of unrecognised net liability at 30 June 1992 ..............
Amortisation of recognised net actuarial loss ...................................
Net periodic pension cost .................................................................
2004
US$m
743
1,209
(1,278)
7
–
142
823
2003
US$m
429
915
(992)
5
6
74
437
2002
US$m
438
862
(885)
4
6
14
439
The US GAAP pension cost of US$823 million (2003: US$437 million; 2002 US$439 million) compares
with US$579 million for these plans under UK GAAP (2003: US$703 million; 2002: US$377 million) for
the schemes included in the SFAS 87 calculation.
333
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Change in projected benefit obligation
Projected benefit obligation as at 1 January .................................................................
Service cost .................................................................................................................
Interest cost .................................................................................................................
Employee contributions ...............................................................................................
Net actuarial loss ..........................................................................................................
Acquisition of subsidiary .............................................................................................
Plan amendment ..........................................................................................................
Benefits paid ................................................................................................................
Transfers ......................................................................................................................
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 ................................................................................................................
Transfers ......................................................................................................................
Exchange movements ..................................................................................................
Plan assets at fair value as at 31 December ..................................................................
Funded status ...............................................................................................................
Unrecognised net actuarial loss ...................................................................................
Unrecognised prior service cost ...................................................................................
Accrued pension cost ...................................................................................................
Additional minimum liability ......................................................................................
Intangible assets ..........................................................................................................
Net amount recognised .................................................................................................
Amounts recognised under US GAAP in the balance sheet consist of:
Prepaid benefit cost .....................................................................................................
Accrued benefit liability ..............................................................................................
Additional minimum liability ......................................................................................
Intangible assets ..........................................................................................................
US GAAP adjustment
Amount recognised under US GAAP ..........................................................................
Amounts recognised for these schemes under UK GAAP ...........................................
2004
US$m
21,085
743
1,209
21
1,244
–
–
(845)
417
1,632
25,506
17,344
1,828
–
431
21
(845)
264
1,235
20,278
(5,228)
4,526
49
(653)
(3,261)
12
(3,902)
783
(1,436)
(3,261)
12
(3,902)
(3,902)
(874)
(4,776)
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)
14
(2,916)
833
(974)
(2,789)
14
(2,916)
(2,916)
(206)
(3,122)
In 2004, plans with an aggregate accumulated benefit obligation of U$20,566 million
(2003: US$17,332 million) and assets with an aggregate fair value of US$16,128 million (2003: US$13,739
million) had an accumulated benefit obligation in excess of plan assets. Plans with an aggregate projected
benefit obligation of US$22,914 million (2003: US$17,841 million) and assets with an aggregate fair value
of US$17,422 million (2003: US$13,739 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 2004 are direct holdings of 4,797,952 HSBC Holdings shares with a market value of
US$82 million (2003:760,690 shares; US$12 million). Plan asset valuations are as at 31 December.
The projected benefit obligations at 31 December 2004 and 2003 for HSBC’s main pension plans have been
calculated using the following financial assumptions on a weighted average basis:
334
Discount rate
Return on assets
Rate of pay increase
United Kingdom ...................................................................
Hong Kong ...........................................................................
Jersey ....................................................................................
Brazil ....................................................................................
United States ........................................................................
France ...................................................................................
Mexico ..................................................................................
Other .....................................................................................
United Kingdom ...................................................................
Hong Kong ...........................................................................
Jersey ....................................................................................
Brazil.....................................................................................
United States ........................................................................
France....................................................................................
Mexico ..................................................................................
Other .....................................................................................
United Kingdom ...................................................................
Hong Kong ...........................................................................
Jersey ....................................................................................
Brazil ....................................................................................
United States ........................................................................
France ...................................................................................
Mexico ..................................................................................
Other .....................................................................................
2004
% per annum
2003
% per annum
5.3
4.0
5.3
11.75
6.0
4.5
10.75
3.25 – 4.5
6.8
6.0
5.5
12.35
8.75
5.4
12.5
4.6
3.2
4.0
4.45
5.0
3.75
3.5
6.5
2.25 – 2.5
5.5
5.5
5.5
11.3
6.25
5.25
10.75
3.5 – 5.25
7.1
6.0
6.8
11.3
8.4
5.4
7.0
4.7
3.0
4.5
4.25
5.11
3.75
3.5
7.5
2.5
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 pension schemes:
Plan assets
Asset category
Equity shares
Real estate ....
Debt securities
Other ............
HSBC Bank (UK) Pension
Scheme
Expected
return on
assets
2005
%
8.1
6.5
4.7
3.6
Target
allocation
2005
%
53.0
10.0
36.0
1.0
Percentage of plan
assets at 31 December
2003
%
56.2
9.1
27.6
7.1
2004
%
57.7
10.2
27.1
5.0
Expected
return on
assets
2005
%
8.1
1.0
5.5
3.2
Other schemes
Target
allocation
2005
%
46.5
1.9
44.6
7.0
Percentage of plan
assets at 31 December
2003
%
53.1
0.6
40.7
5.6
2004
%
45.7
1.3
34.9
18.1
Total .............
6.8
100.0
100.0
100.0
7.2
100.0
100.0
100.0
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.
Plan objectives
The Trustees’ long-term investment objectives are to:
• Limit the risk of the assets failing to meet the liability of the Schemes 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 Schemes.
The Trustees consider that the investment policy is consistent with meeting their overall long-term
investment objectives. In pursuit of these long-term objectives, the Trustees establish an overall benchmark
for the allocation of the Defined Benefit Schemes’ 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.
335
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Pension assumptions
The measurement date for the major pension plans is 31 December. The assumptions used to determine the
projected benefit obligation of the defined benefit plans are as follows:
HSBC Bank (UK)
Pension Scheme
2004
%
Discount rate .......................................
Rate of compensation increase ............
Inflation ...............................................
5.3
3.2
2.7
2003
%
5.5
3.0
2.5
Other schemes
2004
%
5.5
3.5
2.0
2003
%
6.0
4.0
2.0
HSBC determines discount rates in consultation with its actuary based upon the current average yield of
high quality (AA rated) debt instruments, with maturities consistent with that of the pension obligation.
The accumulated benefit obligation in respect of the above schemes was:
HSBC Bank (UK) Pension Scheme ........................................................................
Other schemes .........................................................................................................
2004
US$m
19,063
4,829
2003
US$m
16,165
4,464
The weighted average assumptions used in determining the net periodic costs are as follows:
HSBC Bank (UK)
Pension Scheme
2004
%
Discount rate .......................................
Rate of compensation increase ............
Expected return on assets ....................
5.5
3.0
7.1
2003
%
5.6
2.75
7.3
Other schemes
2004
%
6.0
4.0
7.0
2003
%
5.6
3.7
6.5
For the year 2005, HSBC expects to contribute US$251 million for the HSBC Bank (UK) Pension Scheme
and US$142 million for the other schemes.
Benefits expected to be paid over each of the next five years and in aggregate for the five years thereafter
are:
HSBC Bank (UK) Pension
Scheme .............................
Other schemes .......................
(ii) Post-retirement benefits
2005
US$m
644
260
2006
US$m
658
267
2007
US$m
677
282
2008
US$m
696
296
2009
US$m
2010 - 2015
US$m
716
316
3,868
1,866
The components of post-retirement expense for HSBC’s principal schemes, which make up approximately
80 per cent of all HSBC’s schemes by benefit obligation, are as follows:
Components of net periodic post-retirement benefit cost
Service cost ....................................................................................................................
Interest cost ....................................................................................................................
Amortisation of transition obligation ..............................................................................
Net periodic post-retirement benefit cost ........................................................................
2004
US$m
10
45
12
67
2003
US$m
5
27
12
44
For measurement purposes, the calculation assumes a 9.3 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.
336
Change in accumulated post-retirement benefit obligation
Accumulated post-retirement benefit obligation as at 1 January ....................................
Service cost ....................................................................................................................
Interest cost ....................................................................................................................
Net actuarial loss/(gain) ..................................................................................................
Acquisition of subsidiary ................................................................................................
Benefits paid ..................................................................................................................
Transfers ........................................................................................................................
Exchange and other movements .....................................................................................
Accumulated post-retirement benefit obligation as at 31 December ...............................
Change in plan assets
Fair value of plan assets at 1 January .............................................................................
Employer contributions ..................................................................................................
Investment returns ..........................................................................................................
Benefits paid ..................................................................................................................
Transfers ........................................................................................................................
Exchange and other movements .....................................................................................
Funded status of plan
Funded status at 31 December ........................................................................................
Unrecognised net actuarial (gain)/loss ............................................................................
Unrecognised net transition obligation ...........................................................................
Accrued post-retirement benefit obligation ....................................................................
2004
US$m
2003
US$m
598
10
45
43
–
(41)
137
20
812
–
50
2
(41)
73
(5)
79
(733)
(4)
32
(705)
326
5
27
(5)
251
(27)
–
21
598
–
27
–
(27)
–
–
–
(598)
15
45
(538)
Benefits expected to be paid over each of the next five years and in aggregate for the five years thereafter
are:
UK post-retirement scheme ..
Other schemes .......................
2005
US$m
12
34
2006
US$m
12
36
2007
US$m
14
37
2008
US$m
15
38
2009
US$m
2010 - 2015
US$m
15
38
99
191
Assumed health care cost trend rates have an effect on the amounts reported for health care plans. A one
percentage point change in assumed health care cost trend rates would increase/(decrease) service and
interest costs and the post-retirement benefit obligation as follows:
One per cent
increase
US$m
One per cent
decrease
US$m
Effect on total of service and interest cost components ..................................................
Effect on post-retirement benefit obligation ...................................................................
5.9
63.6
(5.0)
(58.2)
In accordance with US GAAP, the accounting for the post-retirement benefit charge assumed a discount rate
of 5.3 per cent (2003: 5.3 per cent) for UK benefits and 7.1 per cent (2003: 6.01 per cent) for non-domestic
benefits, on a weighted average basis. HSBC intends to contribute US$11 million to its principal UK post-
retirement health care scheme and US$47 million to other schemes in 2005. There is no material difference
between the amounts disclosed above and amounts provided for under UK GAAP. Further details of the UK
post-retirement health care expenses under UK GAAP are given in Note 5.
(c) 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 SFAS 123 charge for the fair value of options granted since 1 January 1997 is US$234 million (2003:
US$190 million; 2002: US$240 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
337
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
number and weighted average exercise price of options is set out below.
Calculation of fair values
Fair values of share options/awards made in 2004, measured at the date of grant of the option/award, are
calculated using a binomial lattice methodology that is based on the underlying assumptions of the Black-
Scholes model. When modelling options/awards with vesting dependent on HSBC's Total Shareholder Return
over a period, these performance targets are incorporated into the model using Monte-Carlo simulation. The
expected life of options depends on the behaviour of option holders, which is incorporated into the option model
consistent with historic observable data. Prior to 2004, options were valued using a simpler methodology also
based on 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 assumptions used to estimate the fair value of the options granted
in 2004 are as follows:
Risk-free interest rate (%) ............................
Expected life (years) 1 ..................................
Expected volatility (%) ................................
Group Share
Option Plan
4.9 – 5.0
6.9
25.0
3 year Savings-
Related Share
Option Schemes
5 year Savings-
Related Share
Option Schemes
4.7 – 4.9
3
25.0
4.9 – 5.0
5
25.0
1 Expected life is not a single input parameter but a function of various behavioural assumptions.
The risk-free rate was determined from the UK gilts zero-coupon yield curve. Expected volatility is estimated by
considering both historic average share price volatility and implied volatility for traded options over HSBC
shares of similar maturity to those of the employee options. Expected dividend yield was based on historic levels
of dividend growth denominated in sterling.
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.
2004
2003
2002
Outstanding at 1 January .........................
Exercised in the year ...............................
Forfeited in the year ................................
Number
(000’s)
59,613
(14,823)
(813)
Outstanding at 31 December ...................
43,977
Weighted
average
exercise
price
£
6.73
6.62
6.90
6.76
Weighted
average
exercise
price
£
6.68
6.50
7.07
6.73
Number
(000’s)
79,645
(18,205)
(1,827)
59,613
Weighted
average
exercise
price
£
6.60
6.26
6.91
6.68
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:
338
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
2004
2003
2002
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
1,233
42,744
1,882
57,731
3,094
76,551
4.31
1.78
6.83
4.63
4.12
2.66
6.81
5.61
4.01
3.59
6.79
6.59
1,233
42,744
1,882
57,731
3,094
47,344
4.31
6.83
4.12
6.81
4.01
6.38
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.
2004
2003
2002
Outstanding at 1 January ............
Granted in the year ....................
Exercised in the year ..................
Forfeited in the year ...................
Number
(000’s)
163,997
63,682
(1,460)
(5,549)
Outstanding at 31 December.......
220,670
Weighted
average
exercise
price
£
8.00
8.28
8.59
8.00
8.07
Weighted
average
exercise
price
£
8.55
7.07
8.52
8.19
8.00
Number
(000’s)
106,164
62,118
(2)
(4,283)
163,997
Weighted
average
exercise
price
£
8.72
8.40
–
8.62
8.55
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$2.96 (2003:
US$3.13; 2002: US$2.33)
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:
2004
2003
2002
Exercise price range (£) .............
6.00 – 8.00
8.01 – 10.00
6.00 – 8.00 8.01 – 10.00
6.00 – 8.00
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 (£) .............................
55,246
165,243
56,980
107,017
6.91
6.46
–
–
8.46
7.86
45,463
8.72
6.91
9.33
–
–
8.57
7.66
396
9.64
469
7.46
9.66
–
–
105,695
8.55
8.83
–
–
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 (2003 and 2002: 20 per cent) discount to the market value at the
date of grant.
The employee has the right to withdraw their accumulated savings and withdraw from the plan at any time. Upon
voluntary withdrawal, any remaining unamortised compensation expense is recognised in the current period.
339
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
2004
2003
2002
Outstanding at 1 January ............
Granted in the year .....................
Exercised in the year ..................
Forfeited in the year ...................
Number
(000’s)
123,316
25,040
(30,068)
(8,566)
Outstanding at 31 December ......
109,722
Weighted
average
exercise
price
£
5.75
6.47
5.76
5.67
5.92
Weighted
average
exercise
price
£
5.97
5.35
5.13
6.29
5.75
Number
(000’s)
121,520
48,313
(14,630)
(31,887)
123,316
Weighted
average
exercise
price
£
5.76
6.32
4.73
5.90
5.97
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 (2003 and 2002: 51/2 years).
The weighted average fair value of options granted in the year as at the date of grant was US$3.75 (2003:
US$3.09; 2002: US$3.58).
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:
2004
2003
2002
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 – 6.75
Number (000’s) ..........................
Weighted average exercise
price (£) .................................
Weighted average remaining
contractual life (years) ...........
Of which exercisable:
Number (000’s) .....................
Weighted average exercise
price (£) .............................
–
–
–
–
–
109,722
5.92
1.82
1,341
6.20
891
3.78
0.16
891
3.78
122,425
2,382
119,138
5.76
1.91
264
5.22
3.78
0.65
–
–
6.02
2.02
312
4.52
CCF and Subsidiary Company Plans
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.
2004
2003
2002
Weighted
average
exercise
price
142.50
142.50
142.50
Number
(000’s)
856
(2)
854
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
Outstanding at 1 January ............
Exercised in the year ..................
Outstanding at 31 December ......
The weighted average remaining contractual life for options outstanding at the balance sheet date was 7 years.
When it was acquired in 2000, certain of CCF’s subsidiary companies also operated employee share option plans
under which options could be granted over their respective shares. Following exercise of certain of these options,
the subsidiary shares may be exchanged for HSBC ordinary shares. The total number of HSBC shares
340
€
€
€
exchangeable under such arrangements was less than 2 million shares during the year.
HSBC Finance Corporation
Options granted under HSBC Finance Corporation’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 were granted at market value,
and generally vest equally over 4 years and expire 10 years from the date of grant. Upon acquisition, HSBC
Finance Corporation share options previously granted were converted to share options over HSBC ordinary
shares of US$0.50 each at a rate of 2.675 HSBC share options (the same ratio as the Exchange Offer for HSBC
Finance Corporation) for each HSBC Finance Corporation share option.
Information with respect to share options granted under the former HSBC Finance Corporation schemes is as
follows:
HSBC Finance Corporation share options
outstanding at 28 March 2003 ..........................
HSBC share options at 1 January or conversion ...
Exercised in the year .............................................
Forfeited in the year ..............................................
Outstanding at end of year ....................................
Of which exercisable ............................................
2004
2003
Number
(000’s)
–
7,316
(174)
(30)
7,112
4,228
Weighted
average
price
US$
–
10.66
10.66
10.66
10.66
10.66
Number
(000’s)
2,784
7,446
(23)
(107)
7,316
1,812
Weighted
average
price
US$
28.52
10.66
10.66
10.66
10.66
10.66
The weighted average contractual life for options outstanding at the balance sheet date was 8 years.
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 31 December ..................................................................
2004
Number
(000’s)
13,669
5,727
(2,352)
–
17,044
2003
Number
(000’s)
9,540
5,074
(945)
–
13,669
2002
Number
(000’s)
6,197
3,667
(261)
(63)
9,540
The weighted average purchase price for shares purchased by HSBC for conditional awards under the Restricted
Share Plan in 2004 was US$16.55 (2003: US$10.89; 2002: US$12.08).
The weighted average remaining vesting period as at 31 December 2004 was 2.52 years (2003: 2.82 years; 2002:
2.98 years).
The 2005 conditional awards proposed to be made to Executive Directors and certain other senior employees
from the Restricted Share Plan in respect of 2004, will have an aggregate face value at the date of award of
US$52.1 million (2004 awards in respect of 2003: US$31.6 million) and an aggregate expected value of
US$22.9 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.
341
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Outstanding at 1 January ........................................................................
Additions during the year .......................................................................
Released in the year ...............................................................................
Forfeited in the year ...............................................................................
Outstanding at 31 December ..................................................................
2004
Number
(000’s)
43,153
18,813
(15,945)
–
46,021
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
The weighted average purchase price for shares purchased by HSBC for other awards under the Restricted Share
Plan in 2004 was US$16.43 (2003: US$11.39; 2002: US$12.04).
The weighted average remaining vesting period as at 31 December 2004 was 1.47 years (2003: 1.23 years; 2002:
1.41 years).
(d) Goodwill
Goodwill arises on the acquisition of subsidiary or associated undertakings when the cost of acquisition exceeds
the fair value of HSBC’s share of separable net assets acquired.
Under UK GAAP, for acquisitions made on or after 1 January 1998, goodwill is included in the balance sheet in
‘Intangible assets’ in respect of subsidiary undertakings, in ‘Interests in associates’ in respect of associates and in
‘Interests in joint ventures’ in respect of joint ventures. Capitalised goodwill is amortised over its estimated life
on a straight-line basis. For acquisitions prior to 1 January 1998, goodwill was charged against reserves in the
year of acquisition.
Under US GAAP, goodwill on acquisitions made before 1 July 2001, including those made before 1 January
1998, would have been capitalised and amortised over its useful economic life. Goodwill on acquisitions made
after 1 July 2001 is capitalised but not amortised, and is subject to annual impairment testing. Goodwill on
acquisitions made before 1 July 2001 ceased to be amortised on 1 January 2002 and is subject to annual
impairment testing.
At 31 December 2004, the cost of goodwill arising on the acquisition of subsidiary undertakings on a US GAAP
basis was US$36,084 million (2003: US$33,581 million; 2002: US$23,613 million) and accumulated
amortisation of goodwill was US$4,385 million (2003: US$4,016 million; 2002: US$3,630 million).
The following table shows changes in the carrying value of goodwill arising on the acquisition of subsidiary
undertakings during the year:
Europe Hong Kong
US$m
US$m
Rest of
Asia-Pacific
US$m
North
America
US$m
South
America
US$m
At 1 January 2004 ................................
Additions .............................................
Exchange and other movements ...........
At 31 December 2004 .........................
At 1 January 2003 ................................
Additions .............................................
Exchange and other movements ...........
At 31 December 2003 ..........................
17,977
246
1,081
19,304
14,901
492
2,584
17,977
18
14
43
75
18
–
–
18
429
–
(56)
373
380
38
11
429
10,685
412
345
11,442
4,552
6,353
(220)
10,685
456
6
43
505
132
287
37
456
Total
US$m
29,565
678
1,456
31,699
19,983
7,170
2,412
29,565
(e)
Intangible assets
The following intangible assets were recognised under US GAAP:
342
Balance brought forward at 1 January ....................................................................................
Additions ................................................................................................................................
On acquisition of subsidiaries .................................................................................................
Amortisation charge ...............................................................................................................
Provision for impairment ........................................................................................................
Exchange and other movements .............................................................................................
Balance carried forward at 31 December ................................................................................
2004
US$m
3,703
167
572
(526)
(102)
34
3,848
2003
US$m
620
419
3,158
(462)
(27)
(5)
3,703
Provision for impairment relates to the write-down of mortgage servicing rights, as a low interest rate
environment has encouraged consumers to refinance mortgages at a faster rate than initially expected.
Weighted average
amortisation
period
Months
At 31 December 2004
Accumulated
amortisation
US$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 ...........................................................
83
89
110
60
83
229
109
92
1,755
529
326
889
452
228
91
4,270
887
5,157
The intangible asset amortisation expense for the next five years is estimated to be:
Amortisation charge ............
2005
US$m
534
2006
US$m
504
2007
US$m
470
(358)
(99)
(71)
(580)
(103)
(92)
(6)
(1,309)
–
(1,309)
2008
US$m
358
1,397
430
255
309
349
136
85
2,961
887
3,848
2009
US$m
232
Mortgage servicing rights are included in the UK GAAP balance sheet as ‘Other assets’ and related amortisation
and provisions for impairment are included as a reduction of other operating income.
The remaining intangibles not recognised under UK GAAP were acquired as part of business combinations.
(f)
Internal software costs
Under UK GAAP, costs of software developed for internal use are generally expensed as they are incurred.
Under US GAAP, costs incurred in the application development stage of internal software must be capitalised as
part of intangible assets and amortised over their estimated useful life. HSBC recognises an adjustment in
calculating its US GAAP net income, reflecting the impact of current year software development costs
capitalised under US GAAP, offset by the US GAAP amortisation of these and previous years’ costs and by any
provisions for impairment of these capitalised costs.
The following table shows changes in the carrying value of software during the year:
At 1 January ............................................................................................................................
Additions ................................................................................................................................
Amortisation............................................................................................................................
Impairment ..............................................................................................................................
Exchange and other movements .............................................................................................
At 31 December ......................................................................................................................
2004
US$m
718
365
(310)
–
(13)
760
2003
US$m
669
397
(341)
(43)
36
718
343
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
hsbc.com, Inc., has been engaged in development activities to provide a global website and web hosting services
to HSBC companies. The provisions for impairment against the US GAAP capitalised amount of development
costs disclosed above arise largely on this project. At 31 December 2004, capitalised amounts in respect of
hsbc.com, Inc., totalled US$72 million (2003: US$150 million).
(g) Purchase accounting adjustments
The reconciling item ‘Purchase accounting adjustments’ predominantly reflects:
•
•
•
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;
recognition of deferred tax on all fair value adjustments under US GAAP, and corresponding amortisation
post-acquisition; and
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.
(h) 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.
During the latter part of 2004, as part of its preparation for the transition from UK GAAP to IFRS, HSBC
undertook a review of its hedging activities in order to confirm which transactions would comply with the hedge
accounting requirements of IFRS. As a result of this review, the management of HSBC Finance Corporation
concluded that there were some deficiencies in the documentation designed to re-establish hedge accounting
under SFAS 133 following the acquisition by HSBC. As a result of these deficiencies, it was determined by
HSBC Finance Corporation management that hedge accounting should not have been applied in these
circumstances. The cumulative effect of the loss of hedge accounting has been reported as part of US GAAP net
income in 2004 and the element attributable to 2003 was not material to HSBC’s reported US GAAP net income
for that year.
Fair value hedges
HSBC’s North American operating subsidiaries designate certain derivative financial instruments as qualifying
fair value hedges of certain fixed rate assets and liabilities under SFAS 133. Where the critical terms of the
hedge instrument are identical to the hedged item 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 gain of
US$1 million (2003: loss of US$0.4 million; 2002: 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$2 million (2003: US$0.2 million; 2002: US$8 million).
Cash flow hedges
HSBC’s North American operating subsidiaries designate certain derivative financial instruments, including
interest rate swaps and future contracts, as qualifying cash flow hedges under SFAS 133 of the forecast repricing
of certain deposit liabilities, issues of debt and variable rate commercial loans. In order to initially qualify,
344
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 SFAS 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 loss of
US$1 million (2003: gain of US$4 million; 2002: gain of US$13 million). The adjustment to US GAAP reported
equity of such hedges at 31 December 2004 was to increase equity by US$133 million (2003: US$409 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$210 million (2003: US$613 million; 2002: US$221 million). The principal impact of applying SFAS 133 is
to reduce other assets by US$5,487 million (2003: US$6,545 million) and reduce other liabilities by
US$5,754 million (2003: US$7,491 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.
(i) Foreign exchange gains on available-for-sale securities
Within individual legal entities HSBC holds securities in a number of different currencies which are classified as
available-for-sale. For example, within the private bank in Switzerland, which has the US dollar as its reporting
currency, the Group holds euro-denominated bonds which are funded in euros and Swiss franc securities funded
in Swiss francs. No foreign exchange exposure arises from this because, although the value of the assets in US
dollar terms changes according to the exchange rate, there is an identical offsetting change in the US dollar value
of the related funding. Under UK GAAP both the assets and the liabilities are translated at closing exchange
rates and the differences between historical book value and current value are reflected in foreign exchange
dealing profits. This reflects the economic substance of holding currency assets financed by currency liabilities.
However, under US accounting rules, SFAS 115 and Emerging Issues Task Force (‘EITF’) Abstract 96-15
‘Accounting for the Effects of Changes in Foreign Currency Exchange Rates on Foreign-Currency-Denominated
Available-for-Sale Debt Securities’ 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, although in compliance with US GAAP, does not necessarily 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 of SFAS 133.
The result of this is that for 2004, US GAAP profits were increased by US$1,069 million (2003: decreased by
US$2,283 million; 2002: decreased by US$2,197 million) compared to UK GAAP profits. There is no difference
in shareholders’ equity between UK GAAP and US GAAP as a result of this reconciling item.
The adjustment for 2004 largely reflects the reversal of adjustments in prior periods on the maturity or disposal
of securities. This was offset by the impact of a weakening of the US dollar against the principal currencies in
which HSBC held ‘available for sale’ securities, which also gave rise to the adjustments in prior periods.
(j)
Investment securities
Under UK GAAP, debt securities and equity shares intended to be held on a continuing basis are classified as
investment securities and are included in the balance sheet at cost less provision for any permanent diminution in
value. Other participating interests are accounted for on the same basis. Where dated investment securities have
been purchased at a premium or discount, these premiums and discounts are amortised through the profit and
loss account over the period from the date of purchase to the date of maturity and included in ‘interest income’.
These securities are included in the balance sheet at cost adjusted for the amortisation of premium and discounts
arising on acquisition. Any 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
345
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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
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 the fair 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 ..................................................
2004
2003
Book
value
US$m
111,022
175,634
3,881
Market
valuation
US$m
111,022
175,634
4,042
Book
value
US$m
86,887
146,934
4,512
Market
valuation
US$m
86,887
146,934
4,648
The US GAAP amortised cost of ‘available-for-sale’ investment securities subject to the provisions of SFAS 115
is US$173,607 million (2003: US$144,807 million).
During the year, excluding the effects of foreign exchange, US$376 million (2003: US$376 million; 2002:
US$1,229 million) of net unrealised gains on available-for-sale securities were included in OCI. US$476 million
(2003: US$401 million; 2002: US$393 million) of net gains were reclassified out of OCI and recognised as part
of income for the year.
During 2004, HSBC recorded net losses under US GAAP of US$127 million (2003: US$24 million; 2002:
US$308 million) in respect of impairments of available-for-sale securities which were considered to be other
than temporary. These losses were treated as realised items and included in net income.
Trading assets
The following table provides an analysis of trading assets, which are valued at market value and the net
gains/(losses) resulting from trading activities:
US Treasury and Government agencies ...............
UK Government ...................................................
Hong Kong Government ......................................
Other government ................................................
Asset-backed securities ........................................
Corporate debt and other securities ......................
Equities ................................................................
2004
Market
valuation
US$m
8,198
6,032
5,189
29,201
2,161
45,632
14,609
111,022
Gains/
(losses)
US$m
109
164
12
(17)
2
(221)
38
87
2003
Market
valuation
US$m
Gains/
(losses)
US$m
7,079
1,969
4,284
24,684
2,476
38,906
7,489
86,887
115
12
(1)
127
1
(3)
43
294
Trading assets are marked to market and all gains and losses are deemed realised.
346
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$1,653 million in 2004 (2003: US$2,053 million):
Book
value
US$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 2004
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
172,541
881
177
174,188
1,255
176
8
15
31 December 2004 ....................
173,607
175,634
Securities available-for-sale at
31 December 2003 .....................
144,807
146,934
Movement in the year ended
31 December 2004 ....................
1,647
374
(1)
7
2,027
2,127
(100)
(517)
(107)
–
(2)
(626)
(645)
19
1,130
267
(1)
5
1,401
1,482
(81)
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 OCI.
Unrealised losses on investment securities
The following investment securities, that have unrealised losses at 31 December 2004, 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 .........
Other government .......
Asset-backed securities
Corporate debt and
other securities .........
Debt securities .............
Equity shares ...............
Total
8,704
4,040
4,185
934
21,253
39,116
157
39,273
(70)
(2)
(221)
(3)
(84)
(380)
(12)
(392)
2,510
2
1,779
178
5,373
9,842
–
9,842
(88)
–
(6)
(3)
(41)
(138)
–
(138)
11,214
4,042
5,964
1,112
26,626
48,958
157
49,115
(158)
(2)
(227)
(6)
(125)
(518)
(12)
(530)
Under US GAAP, 2,653 debt security investments and 61 investments in equity shares had unrealised losses at
31 December 2004.
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
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 2004.
347
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(k) Foreign exchange losses on Argentine funding
The mandatory and asymmetrical conversion of onshore US dollar denominated assets and liabilities in
Argentina (‘pesification’) caused significant erosion of the capital base of HSBC Argentina, in part because of
the asymmetry of the conversion and in part through the creation of a structural foreign exchange mismatch to
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 external 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
other comprehensive income. There was no net effect on US GAAP shareholders’ equity.
In addition, as these liabilities are settled by the Group, the resultant intra-Group Funding was treated for US
GAAP purposes as part of the permanent investment in the Argentine operation. As all such liabilities have now
been settled in this way, there in no further difference to be recorded in 2004 or subsequent years.
(l) 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 ......................................................
2004
US$m
1,924
280
107
2,661
1,101
6,073
2,530
827
3,066
2,254
8,677
(1,062)
7,615
1,542
3,272
(1,730)
2003
US$m
1,587
293
61
2,417
1,076
5,434
3,122
972
2,273
1,332
7,699
(964)
6,735
1,301
2,669
(1,368)
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
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 2004, HSBC has recognised deferred tax assets in respect of tax losses (net of valuation
348
allowances) totalling US$115 million (2003: US$231 million), of which, US$7 million (2003: US$49 million)
expire within two to five years and US$108 million (2003: US$182 million) expire in 5 years or more.
(m) Loans and advances
SFAS 114 ‘Accounting by creditors for impairment of a loan’ was amended by SFAS 118 ‘Accounting by
creditors for impairment of a loan – income recognition and disclosures’. 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 2004, 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 2004
was US$13,284 million (2003: US$15,074 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$6,780 million (2003: US$8,810
million). The impairment reserve in respect of these loans estimated in accordance with the provisions of
SFAS 114 was US$3,981 million (2003: US$4,709 million). During the year ended 31 December 2004, impaired
loans, including those excluded from the scope of SFAS 114, averaged US$13,739 million (2003: US$12,215
million) and interest income recognised on these loans was US$184 million (2003: US$230 million; 2002:
US$258 million).
(n) Fair value of financial instruments
SFAS 107 ‘Disclosures about fair value of financial instruments’ requires disclosure of the estimated fair values
of certain financial instruments, both on-balance-sheet and off-balance-sheet, where it is practicable to do so.
Where possible, fair values have been estimated using market prices for the financial instruments. Where market
prices are not available, fair values have been estimated using quoted prices for financial instruments with
similar characteristics, or otherwise using a suitable valuation technique where practicable to do so. The fair
value information presented represents HSBC’s best estimate of these values and may be subject to certain
assumptions and limitations.
The fair values presented in the table on page 351 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
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 238 to 356.
349
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Assets
Cash and balances at central banks
Liabilities
Deposits by banks repayable on demand or that mature / reprice
within six months
Items in the course of collection
Customer accounts repayable on demand or that mature / reprice
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
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 in the United States are treated differently where there
is an established market value for asset-backed securities. 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.
The following table presents the carrying value and fair value for those financial instruments whose fair
value is derived using these various estimation techniques:
350
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 ....................
2004
Carrying
value
US$m
796,350
149,199
4,681
881
777,296
189,930
37,688
102
Fair
value
US$m
798,165
150,496
5,613
1,255
775,190
192,861
39,561
95
2003
Carrying
value
US$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
The fair value of derivative financial instruments is the same as their carrying value under US GAAP.
(o) Earnings per share
Basic earnings per share under US GAAP, SFAS 128 ‘Earnings per share’, is calculated by dividing net income
of US$12,506 million (2003: US$7,231 million; 2002: US$4,900 million) by the weighted average number of
ordinary shares in issue in 2004 of 10,916 million (2003: 10,429 million; 2002: 9,339 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 2004 of 11,063 million (2003: 10,547 million; 2002: 9,436 million).
(p) Variable interest entities (‘VIEs’)
Nature, purpose and activities of VIEs with which HSBC is involved
HSBC, in the ordinary course of business, makes use of VIE structures in a variety of business activities outlined
below. The use by HSBC of a VIE structure in a business transaction is primarily to facilitate client needs and is
thus commercially driven. Utilisation of a VIE occurs after careful consideration has been given to the most
appropriate structure needed to achieve HSBC’s control and risk allocation objectives and to help ensure an
efficient structure from a taxation and regulatory perspective. The main VIEs are discussed below.
(i) Asset-backed conduits (‘ABCs’) and securitisation vehicles
ABCs and securitisation vehicles are structures in which interests in consumer and commercial receivables
are sold to investors. ABCs generally consist of entities which purchase assets from clients to meet their
financing needs, while securitisation vehicles generally acquire assets originated by HSBC itself and provide
HSBC a cost-effective source of financing. Both types of vehicles issue interests, such as commercial paper,
notes, or equity interests to investors to fund the purchase of the receivables. Cash flows received by the
vehicles on the pool of the receivables are used to service the finance provided by investors. In certain
instances, HSBC receives fees for providing liquidity facility commitments and for acting as administrator
of the vehicle.
HSBC’s exposure to loss generally arises through back-up liquidity facility commitments to the vehicles,
interest-rate swaps for which HSBC is the counterparty, retained or acquired interests in the receivables
sold, or through acquired interests in the vehicles themselves. In certain vehicles, the risk of loss to HSBC is
reduced by credit enhancement provided by the originator of the receivables or other parties.
In addition to securitisation vehicles disclosed here, HSBC (primarily through its North American
subsidiaries) also securitises assets through entities that are not considered VIEs, including government-
sponsored financing vehicles and vehicles considered qualifying special-purpose entities under US GAAP.
These entities are not consolidated under US GAAP although certain of them are consolidated under UK
GAAP.
351
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(ii) Infrastructure projects and funds
HSBC acts as an arranger for both public and private infrastructure projects and funds. The use of VIE
structures in such projects is common as a method of attracting a wider class of investor by tranching the
risk associated with such projects. HSBC’s exposure to loss generally arises through the provision of
subordinated or mezzanine debt finance to projects, either directly, or via a consolidated investment fund
investing in infrastructure projects.
HSBC is deemed to be the primary beneficiary of an infrastructure project or fund where its investment in
the equity and subordinated or mezzanine debt of a project, or its interest in a fund is at a level where it
absorbs the majority of the expected losses or residual returns of the project/fund.
Application of FIN 46R
FIN 46R requires consolidation of VIEs in which HSBC is the primary beneficiary, and disclosures in respect of
other VIEs in which it has a significant variable interest.
Under UK GAAP, HSBC consolidates entities in which it has a controlling interest. As UK GAAP normally
requires a risk 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.
The following table analyses HSBC’s total consolidated VIE assets in a US GAAP balance sheet:
Classification
Loans and advances to customers .............................................................................................................................
Debt securities and equity shares ..............................................................................................................................
Tangible fixed assets.................................................................................................................................................
Other assets...............................................................................................................................................................
At
31 December
2004
US$m
12,256
1,996
1,865
599
16,716
For the year ended 31 December 2003, HSBC was not required to consolidate VIEs created before 1 February
2003 of which it was the primary beneficiary, under the transition rules of FIN46R. The total assets consolidated
under US GAAP at 31 December 2003 were US$94 million. Of the 2004 total, US$12,256 million represents
asset-backed commercial paper conduits and securitisation vehicles, and US$1,612 million represents
infrastructure projects and funds. The remaining balance consists of guaranteed pension funds, investment funds,
and other entities. Certain of these entities with assets of approximately US$9,338 million at 31 December 2004
are consolidated by HSBC in its UK GAAP financial statements. There was no significant impact on US GAAP
net income for the year ended 31 December 2004 as a result of consolidating these VIEs.
HSBC also has significant involvement in, but is not the primary beneficiary of, VIEs with total assets of
approximately US$32.8 billion, including asset-backed commercial paper conduits and securitisation vehicles
with assets of approximately US$15.8 billion (2003: US$7.3 billion), and infrastructure projects and funds of
approximately US$4.5 billion, as well as interests in investment funds, low income housing tax credit
partnerships, guaranteed pension funds, government debt restructuring programmes and other entities. HSBC’s
maximum exposure to loss in relation to these entities is estimated at US$10.7 billion (2003: US$7.2 billion)
which arises from guarantees, retained interests and recourse liabilities. HSBC is also involved in other
investment funds and similar entities that are considered VIEs for which its involvement is limited to that of
administrator, investment adviser, or other service provider.
In addition, HSBC has an interest in certain capital funding vehicles that are consolidated under UK GAAP.
However, under US GAAP, these vehicles are not recognised on HSBC’s balance sheet because it is not the
primary beneficiary. HSBC’s deconsolidation of these vehicles results in non-equity minority interests under UK
GAAP of US$10,114 million being reclassified as subordinated liabilities under US GAAP.
(q) Consolidated cash flow statement
HSBC prepares its cash flow statement in accordance with the UK Financial Reporting Standard 1 (Revised
1996) ‘Cash flow statements’. Its objectives and principles are similar to those set out in SFAS 95 ‘Statement of
352
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
Classification under
SFAS 95/104
Operating activities
Operating activities
Financing activities
Financing activities
Investing activities
Acquisitions and disposals
Investing activities
Operating activities
Operating activities
Investing 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 .......................
2004
US$m
9,872
6,352
34,842
(5,301)
45,765
2003
US$m
7,661
6,628
25,289
(4,383)
35,195
Set out below is a summary combined statement of cash flows under US GAAP.
Cash flows from operating activities .....................................................
Cash flows from investing activities ......................................................
Cash flows from financing activities .....................................................
Effect of exchange rate changes on cash and cash equivalents ..............
Net movement in cash and cash equivalents under US GAAP ..............
Cash and cash equivalents at beginning of year .....................................
Cash and cash equivalents at end of year ...............................................
Year ended 31 December
2004
US$m
26,217
(188,690)
171,927
1,116
10,570
35,195
45,765
2003
US$m
17,791
(117,463)
104,920
2,060
7,308
27,887
35,195
The total interest paid by HSBC during the year was US$19,038 million (2003: US$14,437 million; 2002:
US$13,761 million).
2002
US$m
7,659
5,651
19,211
(4,634)
27,887
2002
US$m
(1,757)
(24,575)
28,614
1,404
3,686
24,201
27,887
353
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
(r) Securitisations
Following the acquisition of HSBC Finance Corporation in 2003, HSBC increased its securitisation activity and
the following discussion relates only to HSBC Finance Corporation’s securitisation activities including
securitised credit card receivables transferred to HSBC Bank USA. In other HSBC entities such activities do not
represent a significant part of HSBC’s business and retained interests in securitisations are not significant.
Details of securitisations presented under a linked presentation for UK GAAP purposes are shown in note 15.
HSBC has sold MasterCard and Visa, private label, personal non-credit card and auto finance loans in various
securitisation transactions during the year. 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 flows 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 ....................................................................................................
2004
US$m
25
414
569
1,008
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 by US$466 million in 2004 (2003: US$415 million).
Net initial gains, which represent gross initial gains net of management’s estimate of probable credit losses under
the recourse provisions, and the key economic assumptions used in measuring the net initial gains from
securitisations were as follows:
2004
Net initial gains (US$millions) ......
Key economic assumptions1
Weighted average life (in years)
Payment speed ...........................
Expected credit losses (annual
rate) .......................................
Discount rate on cash flows .......
Cost of funds .............................
2003
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 .............................
Auto
Finance
MasterCard/
Visa
6
2.1
35.0%
5.7%
10.0%
3.0%
40
2.1
35.4%
6.1%
10.0%
2.2%
14
0.3
93.5%
4.9%
9.0%
1.5%
13
0.4
93.3%
5.1%
9.0%
1.8%
Private
Label
5
0.4
93.5%
4.8%
10.0%
1.4%
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%
Total
25
135
1 Weighted-average rates for securitisations entered into during the year 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
354
US$30.3 billion in 2004 (2003: US$25.0 billion). 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$414 million in 2004
(2003: US$412 million).
Cash flows received from securitisation trusts were as follows:
2004
Proceeds from initial
securitisations ......................
Servicing fees received ............
Other cash flow received on
retained interests1 ................
2003
Proceeds from initial
securitisations ......................
Servicing fees received ............
Other cash flow received on
retained interests1 ................
Real Estate
Secured
US$m
Auto
Finance
US$m
MasterCard/
Visa
US$m
Private
Label
US$m
Personal
Non-Credit
Card
US$m
–
1
4
–
2
8
–
86
(9)
1,158
86
50
550
185
705
350
149
635
190
93
252
1,050
65
193
–
161
80
2,810
100
132
Total
US$m
740
526
1,032
5,368
402
1,018
1 Other cash flows included all cash flows from interest-only strip receivables, excluding servicing fees.
At 31 December 2004, the sensitivity of the current fair value of the interest-only strip receivables to an
immediate 10 per cent and 20 per cent unfavourable change in assumptions are presented in the table below.
These sensitivities are based on assumptions used to value interest-only strip receivables at 31 December 2004.
Carrying value (fair value) of interest- only strip
receivables (US$ millions) .............................
Weighted-average life (in years) .........................
Payment speed assumption (annual rate) .............
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) ....................
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) ............................................
Variable returns to investors (annual rate) ...........
Impact on fair value of 10% adverse change
(US$ millions) ............................................
Impact on fair value of 20% adverse change
(US$ millions).............................................
Real Estate
Secured
Auto
Finance
MasterCard/
Visa
Private
Label
Personal
Non-Credit
Card
1
0.3
36
1.6
162
0.5
50
0.5
124
0.9
21.5%
44.7%
81.4%
79.0%
69.9%
–
–
(16)
(33)
(13)
(24)
(3)
(5)
(8)
(15)
1.8%
8.2%
5.2%
5.7%
10.1%
–
–
(30)
(59)
(14)
(28)
(8)
(17)
(30)
(61)
13.0%
10.0%
9.0%
10.0%
11.0%
–
–
1.7%
–
–
(4)
(9)
–
–
–
(1)
(2)
–
–
(1)
(2)
1.9%
3.1%
3.3%
(6)
(13)
(5)
(10)
(10)
(20)
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
355
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
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 2004, static pool credit losses for auto finance
loans securitised in 2003 were estimated to be 10.2 per cent and for auto finance loans securitised in 2002 were
estimated to be 14.7 per cent (2003: 11.5 per cent).
50 Approval of accounts
These accounts were approved by the Board of Directors on 28 February 2005.
356
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
Currently no tax is 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. Individual UK resident
shareholders are not 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 third interim dividend and the first, second and
third interim dividends for 2004 was set out in the
Secretary’s letters to shareholders of 30 March,
2 June, 1 September and 7 December 2004. In each
case, 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
subsequent to 1991 in exchange for shares in other
companies.
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 is
calculated up to 5 April 1998 only.
If in doubt, shareholders are recommended to
consult their professional advisers.
Shares or ADSs held by an individual whose
domicile is determined to be the United States for
the purposes of the United States-United Kingdom
Double Taxation Convention relating to estate and
gift taxes (the “Estate Tax Treaty”) and who is not
for such purposes a national of the United Kingdom
will not, provided any US Federal estate or gift tax
chargeable has been paid, be subject to UK
inheritance tax on the individual’s death or on a
lifetime transfer of shares or ADSs except in certain
cases where the shares or ADSs (i) are comprised in
a settlement (unless, at the time of the settlement, the
settlor was domiciled in the United States and was
not a national of the United Kingdom), (ii) is part of
the business property of a UK permanent
establishment of an enterprise, or (iii) pertains to a
357
H S B C H O L D I N G S P L C
Taxation of Shares and Dividends (continued)
UK fixed base of an individual used for the
performance of independent personal services. In
such cases, the Estate Tax Treaty generally provides
a credit against US Federal tax liability for the
amount of any tax paid in the United Kingdom in a
case where the shares or ADSs are subject to both
UK inheritance tax and to US Federal estate or gift
tax.
Stamp duty and stamp duty reserve tax
Transfers of shares by a written instrument of
transfer generally will be subject to UK stamp duty
at the rate of 0.5 per cent of the consideration paid
for the transfer, and such stamp duty is generally
payable by the transferee.
An agreement to transfer shares, or any interest
therein, normally will give rise to a charge to stamp
duty reserve tax at the rate of 0.5 per cent of the
consideration. However, provided an instrument of
transfer of the shares is executed pursuant to the
agreement and duly stamped before the date on
which the stamp duty reserve tax becomes payable,
under current UK Inland Revenue practice it will not
be necessary to pay the stamp duty reserve tax, nor
to apply for such tax to be cancelled. Stamp duty
reserve tax generally is payable by the transferee.
Paperless transfers of shares within CREST, the
United Kingdom’s paperless share transfer system,
are liable to stamp duty reserve tax at the rate of 0.5
per cent of the consideration. In CREST
transactions, the tax is calculated and payment made
automatically. Deposits of shares into CREST
generally will not be subject to stamp duty reserve
tax, unless the transfer into CREST is itself for
consideration.
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
358
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 withholding taxes on
dividends superseding the previous tax treaty (the
‘old Treaty’). Following entry into effect of the new
Treaty, eligible US 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 have elected 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
An eligible 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. Subject to certain
exceptions for positions that are hedged or held for
less than 61 days, an individual eligible US holder
generally will be subject to US taxation at a
maximum rate of 15 per cent in respect of dividends
received before 2009 if the dividends are “qualified
dividends”. Dividends paid on the shares or ADSs
will be treated as qualified dividends if (i) HSBC
Holdings was not, in the year prior to the year in
which the dividend was paid and is not in the year in
which the dividend is paid, a passive foreign
investment company (‘PFIC’), and (ii) for dividends
paid in the 2004 taxable year, HSBC Holdings was
not a foreign personal holding company (‘FPHC’) or
foreign investment company (‘FIC’) with respect to
its 2003 or 2004 taxable year. Based on the
company’s audited financial statements and relevant
market and shareholder data, HSBC Holdings
believes that it was not treated as a PFIC, FPHC or
FIC for US Federal income tax purposes with respect
to its 2003 or 2004 taxable year. In addition, based
on the company’s audited financial statements and
current expectations regarding the value and nature
of its assets, the sources and nature of its income,
and relevant market data, HSBC Holdings does not
anticipate becoming a PFIC for its 2005 taxable
year.
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.
359
H S B C H O L D I N G S P L C
Shareholder Information
Fourth Interim Dividend for 2004
The Directors have declared a fourth interim dividend of US$0.27 per ordinary share (in lieu of a final dividend)
which, together with the first, second and third interim dividends, each of US$0.13, already paid, will make a total
distribution for the year of US$0.66 per share, an increase of 10 per cent on 2003. 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 31 March 2005. The timetable for the dividend is:
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 ....................................................................................................................................
Mailing of Annual Report and Accounts 2004 and/or Annual Review 2004, 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 ..................................................
2005
16 March
18 March
21 March
31 March
21 April
25 April
Payment date: dividend warrants, new share certificates or transaction advices and notional tax vouchers mailed and
shares credited to stock accounts in CREST .................................................................................................................
4 May
Annual General Meeting
The 2005 Annual General Meeting will be held at the Barbican Hall, Barbican Centre, London EC2 on 27 May 2005
at 11am.
The results of the polls on the resolutions considered at the 2004 Annual General Meeting were:
Resolution
1. To receive the Report and Accounts for 2003 ....................................................
2. To re-elect the following as Directors:
(i) The Lord Butler .........................................................................................
(ii) The Baroness Dunn ...................................................................................
(iii) R A Fairhead ............................................................................................
(iv) W K L Fung ...............................................................................................
(v) M F Geoghegan .........................................................................................
(vi) S Hintze .....................................................................................................
(vii) Sir John Kemp-Welch ................................................................................
(viii) Sir Mark Moody-Stuart ..............................................................................
(ix) H Sohmen ..................................................................................................
3. To reappoint the Auditor ....................................................................................
4. To approve the Directors' Remuneration Report for 2003 ..................................
5. To authorise the Company to purchase its own Ordinary Shares .......................
6. To authorise the Directors to allot shares ...........................................................
7. To disapply pre-emption rights ..........................................................................
8. To increase the fees payable to each Director to £55,000 per annum .................
Total votes
For1
Against
Abstain
4,534,048,124
30,738,011
100,222,400
4,584,223,431
4,492,829,647
4,580,638,229
4,563,806,817
4,521,685,013
4,586,866,409
4,568,924,728
4,585,915,338
4,550,012,643
4,535,270,802
4,300,843,761
4,598,522,244
4,589,969,856
4,522,023,920
4,582,085,323
39,229,528
69,944,841
42,918,568
36,436,808
41,362,809
36,801,910
37,774,400
37,302,195
56,244,926
49,114,012
231,541,059
7,185,058
29,699,300
116,714,723
38,135,193
41,811,813
102,488,373
41,666,160
65,024,000
102,176,346
41,585,070
58,556,934
42,021,810
58,774,190
79,985,778
149,917,043
38,983,604
41,332,269
23,172,113
41,346,918
1 Includes discretionary votes
Interim Results
The interim results for the six months to 30 June 2005 will be announced on Monday 1 August 2005.
360
Interim Dividends for 2005
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 2005 will be US$0.14 per share. The proposed timetables for the dividends in respect of 2005 are:
Interim dividends for 2005
First
Second
Third
Fourth
Announcement ........................................................
3 May 2005
1 August 2005
7 November 2005
6 March 2006
ADSs quoted ex-dividend in New York ..................
18 May 2005
17 August 2005
22 November 2005
22 March 2006
Shares quoted ex-dividend in London, Hong Kong
and Bermuda .......................................................
18 May 2005
17 August 2005
23 November 2005
22 March 2006
Record date and closure of Hong Kong Overseas
Branch Register of shareholders for one day ......
20 May 2005
19 August 2005
25 November 2005
24 March 2006
Shares quoted ex-dividend in Paris .........................
23 May 2005
22 August 2005
28 November 2005
27 March 2006
Payment date ...........................................................
6 July 2005
5 October 2005
19 January 2006
11 May 2006
Shareholder Enquiries and Communications
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
Hong Kong Overseas Branch Register:
Bermuda Overseas Branch Register:
Computershare Investor Services PLC
PO Box 1064, The Pavilions
Bridgwater Road
Bristol BS99 3FA
UK
Computershare Hong Kong Investor
Services Limited
Hopewell Centre, 46th Floor
183 Queen’s Road East
Wan Chai
Hong Kong
Corporate Shareholder Services Limited
The Bank of Bermuda Limited
6 Front Street
Hamilton HM 11
Bermuda
Any enquiries relating to ADSs should be sent to the Depositary:
The Bank of New York
101 Barclay Street
Floor 22W
New York, NY 10286
USA
Any enquiries relating to shares held through Euroclear France, the settlement and central depositary system for
Euronext Paris, should be sent to the paying agent:
CCF S.A.
103, avenue des Champs Elysées
75008, Paris
France
Further copies of this Annual Report and Accounts 2004 may be obtained by writing to the following departments.
For those in Europe, the Middle East and
Africa
For those in Asia-Pacific:
For those in the Americas:
Group Corporate Affairs
HSBC Holdings plc
8 Canada Square
London E14 5HQ
UK
Group Public Affairs
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
Employee Communications
HSBC-North America
2700 Sanders Road
Prospect Heights
Illinois 60070
USA
361
H S B C H O L D I N G S P L C
Shareholder Information (continued)
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/ecomms. 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.
Chinese translation
A Chinese translation is available on request after 31 March 2005 from the Registrars:
Computershare Hong Kong Investor Services Limited
Hopewell Centre, 46th Floor
183 Queen’s Road East
Wan Chai
Hong Kong
Computershare Investor Services PLC
PO Box 1064, The Pavilions
Bridgwater Road
Bristol BS99 3FA
UK
Please also contact the Registrars if you wish to receive Chinese translations of future documents or if you have
received a Chinese translation of this document and do not wish to receive such translations in future.
Investor Relations
Enquiries relating to HSBC’s strategy or operations may be directed to:
Senior Manager Investor
Relations
HSBC Holdings plc
8 Canada Square
London E14 5HQ
UK
Telephone: +44 (0)20 7991 8041
Facsimile: +44 (0)20 7991 4663
E-mail:
investorrelations@hsbc.com
Director – Corporate Finance and
Senior Manager External
Investor Relations
HSBC Finance Corporation
2700 Sanders Road
Prospect Heights, IL 60070
USA
+1 847 564 6478
+1 847 205 7538
investor.relations@us.hsbc.com
Relations
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
+852 2822 4929
+852 2845 0113
investorrelations@hsbc.com.hk
Where more information about HSBC is available
This Annual Report and Accounts 2004, 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, NY 10279 and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 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, NY 10005.
362
Dividends on the ordinary shares of HSBC Holdings
HSBC Holdings has paid dividends on its ordinary shares every year without interruption since it became the HSBC
Group holding company by a scheme of arrangement in 1991. The dividends declared, per ordinary share, for each of
the last five years were:
First
interim
Second
interim
20041
2003
2002
2001
2000
US$ ......................................
£ ...........................................
HK$ .....................................
US$ ......................................
£ ...........................................
HK$ .....................................
US$ ......................................
£ ...........................................
HK$ .....................................
US$ ......................................
£ ...........................................
HK$ .....................................
US$ ......................................
£ ...........................................
HK$ .....................................
0.130
0.071
1.013
0.240
0.146
1.860
0.205
0.130
1.600
0.190
0.129
1.482
0.150
0.103
1.170
0.130
0.072
1.014
0.120
0.065
0.931
0.325
0.202
2.534
0.290
0.200
2.261
0.285
0.191
2.223
Third
interim
0.130
0.069
1.013
0.240
0.134
1.863
–
–
–
–
–
–
–
–
–
Fourth
interim
0.270
0.140
2.100
–
–
–
–
–
–
–
–
–
–
–
–
Total
0.660
0.352
5.139
0.600
0.345
4.654
0.530
0.332
4.134
0.480
0.329
3.743
0.435
0.294
3.393
1 The fourth interim dividend for 2004 of US$0.27 per share has been translated into pounds sterling and Hong Kong dollars at the
closing rate on 31 December 2004. The dividend will be paid on 4 May 2005.
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.
Nature of trading market
HSBC Holdings has listings on the London Stock Exchange, HKSE, Euronext Paris, NYSE and the Bermuda Stock
Exchange. HSBC Holdings maintains its principal share register in London and overseas branch share registers in
Hong Kong and Bermuda (collectively, the ‘share register’).
As at 31 December 2004, there were a total of 208,105 holders of record of HSBC Holdings ordinary shares.
As at 31 December 2004, a total of 13,528,484 of the HSBC Holdings ordinary shares were registered in the
HSBC Holdings share register in the name of 8,610 holders of record with addresses in the United States. These
shares represented 0.12 per cent of the total HSBC Holdings ordinary shares in issue.
As at 18 February 2005, there were 12,141 holders of record of ADSs holding approximately 104.56 million
ADSs, representing approximately 522.80 million HSBC Holdings ordinary shares. 11,900 of these holders had
addresses in the United States, holding approximately 104.48 million ADSs, representing 522.41 million HSBC
Holdings ordinary shares. As at 18 February 2005, approximately 4.67 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, HKSE, Euronext Paris, NYSE and the Bermuda Stock Exchange.
Past share price performance should not be regarded as a guide to future performance.
363
H S B C H O L D I N G S P L C
Shareholder Information (continued)
High and low mid-market closing prices
2004 .........................
2003 ….. ...................
2002 .........................
2001 .........................
2000 .........................
London
US$0.50 shares
High
pence
954
914
866
1092
1046
Low
pence
784
631
643
608
682
Hong Kong
US$0.50 shares
High
HK$
136.5
122.5
97.5
121.5
117.5
Low
HK$
109.5
80.3
78.8
68.5
82.8
London
US$0.50 shares
High
pence
Low
pence
Hong Kong
US$0.50 shares
High
HK$
Low
HK$
2004
4th Quarter ..............
3rd Quarter ..............
2nd Quarter .............
1st Quarter ..............
2003
4th Quarter ................
3rd Quarter ................
2nd Quarter ................
1st Quarter .................
954
888
836
893
914
828
743
709
860
784
789
802
810
700
650
631
London
US$0.50 shares
High
pence
Low
pence
900
895
954
909
888
866
814
868
860
891
873
871
821
784
2005
January .....................
2004
December .................
November .................
October ....................
September ................
August ......................
July ...........................
Notes
136.5
124.0
118.5
128.5
122.5
105.0
97.0
89.0
124.5
114.5
109.5
115.5
104.0
91.8
80.3
80.3
Hong Kong
US$0.50 shares
High
HK$
Low
HK$
132.5
127.0
134.5
136.5
126.0
124.0
121.5
117.5
130.0
126.5
124.5
122.0
115.0
114.5
New York
ADSs1
High
US$
87.8
78.8
64.4
79.7
76.6
New York
ADSs
High
US$
87.8
79.8
76.5
82.5
78.8
67.3
62.5
57.3
New York
ADSs
High
US$
84.7
86.7
87.8
81.0
79.8
77.9
74.4
Low
US$
70.0
51.1
50.3
44.8
54.3
Low
US$
79.8
72.7
70.0
73.5
68.0
58.6
51.6
51.1
Low
US$
81.3
83.6
81.8
79.8
78.3
75.3
72.7
Paris2
US$0.50 shares
High
euro
13.6
13.4
13.9
17.3
17.6
Low
euro
11.8
9.3
10.2
9.5
14.2
Bermuda3
US$0.50 shares
High
US$
17.3
–
–
–
–
Low
US$
14.5
–
–
–
–
Paris
US$0.50 shares
High
euro
Low
euro
Bermuda
US$0.50 shares
High
US$
Low
US$
13.6
13.1
12.6
13.2
13.4
12.0
10.7
10.9
12.4
11.8
11.8
12.0
11.5
10.1
9.4
9.3
17.3
15.9
15.3
16.5
–
–
–
–
16.0
14.6
14.5
14.7
–
–
–
–
Paris
US$0.50 shares
High
euro
Low
euro
Bermuda
US$0.50 shares
High
US$
Low
US$
12.7
13.0
13.6
13.1
13.1
13.0
12.3
12.4
12.4
12.8
12.6
12.8
12.2
11.8
16.5
17.1
17.3
16.3
15.9
15.3
15.2
16.5
16.7
16.6
16.0
15.6
15.0
14.6
1 In New York each ADS represents 5 underlying ordinary shares.
2 Shares were not listed on the Paris Bourse (now Euronext Paris) prior to 28 July 2000.
3 Shares were not listed on the Bermuda Stock Exchange prior to 18 February 2004.
364
H S B C H O L D I N G S P L C
Organisational Structure
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365
H S B C H O L D I N G S P L C
Glossary
Glossary of Accounting Terms and Abbreviations
Accounting terms used
US equivalent or brief description
Financial Statements
Issued
Bylaws
Long-term equity investments accounted for by the equity method
Net income
Statement of financial position
Notes
Ordinary shares, issued and fully paid
Tax depreciation allowances
Payables
Trading
Receivables
Deferred income tax
Process by which a mutual society is converted into a public limited
company
Amortisation
Fees and commissions expense
Fees and commissions income
Capital lease
Ownership with absolute rights in perpetuity
Interest expense
Interest income
Long-term equity investments accounted for by the equity method
Lendings
Long-term debt
Contingencies and commitments; off-balance-sheet items
Par value
Non-recurring
Common stock
Long-term equity investments accounted for by the cost method
A line of credit, contractually repayable on demand unless a fixed-term
has been agreed, established through a customer’s current account
Preferred stock
Real estate
Income statement
Retained earnings
Allowances
Increase or temporary decrease in the valuation of certain assets as
compared with historical cost
Ordinary shares or common stock issued and fully paid
Stockholders’ equity
Additional paid-in capital
Shares outstanding
Property and equipment
Restricted surplus
Charge-offs
Accounts
Allotted
Articles of Association
Associates
Attributable profit
Balance sheet
Bills
Called-up share capital
Capital allowances
Creditors
Dealing
Debtors
Deferred tax
De-mutualising
Depreciation
Fees and commissions payable
Fees and commissions receivable
Finance lease
Freehold
Interest payable
Interest receivable
Interests in associated undertakings
Loans and advances
Loan capital
Memorandum items
Nominal value
One-off
Ordinary shares
Other participating interests
Overdraft
Preference shares
Premises
Profit & loss account
Profit & loss account reserve
Provisions
Revaluation reserve
Share capital
Shareholders’ funds
Share premium account
Shares in issue
Tangible fixed assets
Undistributable reserves
Write-offs
366
Abbreviations used
Brief description
ABC
ADS
AICPA
AIEA
ALCO
Amparos
ASB
Banking Ordinance
Bank of Bermuda
Bank of Communications
Basel Committee
Basel II
BBA
BHCA
BOC
Brazilian operations
CCF
CD
Combined Code
Consumer Finance
CPI
CRM
CSR
ECB
EITF
EU
FASB
FDIC
FFIEC policies
FHC
FIC
FIN
FinCEN
FPHC
FRN
FRS
FSA
FSMA
FTE
FTSE
GAAP
GDP
GHOS
Asset-backed conduits
American depositary share
The American Institute of Certified Public Accountants
Average interest-earning assets
Asset and liability management committee
Argentinian judicial orders that allow certain depositors relief from the
pesification rules and recovery of their historical US dollar deposits
at current exchange rates.
Accounting Standards Board (UK)
The Banking Ordinance of Hong Kong (Chapter 155)
The Bank of Bermuda Limited, which was acquired in February 2004
Bank of Communications Limited, mainland China’s fifth largest bank in
which HSBC acquired a 19.9% investment in August 2004.
The Basel Committee on Banking Supervision
The Final Accord of the Basel Committee on proposals for a new capital
adequacy framework
British Bankers Association
Bank Holdings Company Act of 1956 (US)
The Bank of Canada
HSBC Bank Brazil and subsidiaries, plus Banco Lloyds TSB S.A. and
Losango Promotora de Vendas Limitada.
CCF S.A., HSBC’s French banking subsidiary
Certificate of deposit
Combined Code on Corporate Governance appended to the Listing Rules
HSBC’s Consumer Finance customer group, comprising HSBC Finance
Corporation’s consumer finance business and the US residential
mortgages and credit card portfolios acquired by HSBC Bank USA
from HSBC Finance Corporation and its correspondents since
December 2003
Consumer price index
Customer relationship management
Corporate social responsibility
European Central Bank
Emerging Issues Task Force (US)
European Union
Financial Accounting Standards Board (US)
Federal Deposit Insurance Corporation (US)
Uniform Retail Credit Classification and Account Management Policy
issued by the Federal Financial Institutions Examination Council (US)
Financial holding company, as defined under the Gramm-Leach-Bliley
Act amendments to the BHCA
Foreign investment company
FASB Interpretation (US)
The Financial Crimes Enforcement Network, a bureau of the US Treasury
Department
Foreign personal holding company (US)
Floating rate note
Financial Reporting Standard (UK)
Financial Services Authority (UK)
Financial Services and Markets Act 2000 (UK)
Full-time equivalent staff numbers
Financial Times – Stock Exchange index
Generally Accepted Accounting Principles
Gross domestic product
Hong Kong Government Home Ownership Scheme
367
H S B C H O L D I N G S P L C
Glossary (continued)
Abbreviations used
Global Markets
Group
Hang Seng Bank
HFC Bank
HK Model Code
HKSE
Hong Kong
Hong Kong GAAP
Household Bank
HNAH
HS
HSBC
HSBC Bank
HSBC Bank Argentina
HSBC Bank Brazil
HSBC Bank Malaysia
HSBC Bank Middle East
Brief description
HSBC’s treasury and capital markets services in Corporate, Investment
Banking and Markets
HSBC Holdings together with its subsidiary undertakings
Hang Seng Bank Limited, the second largest bank in Hong Kong by
market capitalisation
HFC Bank Limited, the UK-based consumer finance business acquired
through the acquisition by HSBC of HSBC Finance Corporation
Rules governing the listing of securities on the HKSE
The Stock Exchange of Hong Kong Limited
The Hong Kong Special Administrative Region of the People’s Republic
of China
Hong Kong Generally Accepted Accounting Principles
Household Bank (SB), N.A. a national chartered ‘credit card bank’ in the
US which is a subsidiary of HSBC Finance Corporation
HSBC North America Holdings Inc, the bank holding company formed
on 1 January 2004 to hold all of HSBC’s North America operations
Historic simulation methodology for calculating trading VAR.
HSBC Holdings together with it subsidiary undertakings
HSBC Bank plc, formerly Midland Bank plc
HSBC Bank Argentina S.A.
HSBC Bank Brasil S.A.-Banco Múltiplo, HSBC’s retail banking
operation in Brazil, formerly Banco Bamerindus do Brasil S.A.
HSBC Bank Malaysia Berhad
HSBC Bank Middle East Limited, formerly The British Bank of the
Middle East
HSBC Bank USA
HSBC’s retail bank in the US. From 1 July 2004, HSBC Bank USA, N.A.
HSBC Finance
Consumer Finance plus the insurance and commercial banking operations
HSBC Finance Corporation
The US consumer finance company acquired in March 2003 (formerly
of HSBC Finance Corporation
(formerly HSBC Bank USA, Inc,)
HSBC Holdings
HSBC Mexico
HSBC Private Bank (Suisse)
IAS
IBA
IFRS
IGU
Industrial Bank
IPO
IT
KPMG
LIBOR
Losango
Mainland China
M&S Money
MMEs
Monetary Authority
MSCI
MSRs
368
Household International, Inc.)
HSBC Holdings plc, the parent company of HSBC
Grupo Financiero HSBC, S.A. de C.V. (formerly Grupo Financiero Bital,
S.A. de C.V.), the fifth-largest bank in Mexico by deposits and assets
HSBC Private Bank (Suisse) S.A., HSBC’s private bank in Switzerland
(formerly HSBC Republic Bank (Suisse) S.A.)
International Accounting Standard
International Banking Act of 1978 (US)
International Financial Reporting Standard
Income generating unit
Industrial Bank Co. Limited, a national joint-stock bank in China of
which Hang Seng owns 15.98 per cent.
Initial public offering
Information technology
KPMG Audit plc and its affiliates
London interbank offered rate
Losango Promotora de Vendas Limitada, the Brazilian consumer finance
company acquired in December 2003
The People’s Republic of China excluding Hong Kong
Marks and Spencer Retail Financial Services Holdings Limited, acquired
by HSBC in November 2004.
Middle market enterprises
The Hong Kong Monetary Authority
Morgan Stanley Capital International index
Mortgage servicing rights
Abbreviations used
Brief description
NYSE
OCC
OCI
Patriot Act
Pesification
PFIC
PFS
Ping An Insurance
PVBP
QUEST
Repos
SARS
SAYE
SEC
SEE
SFAS
Sinopia
SME
SOP
SORP
New York Stock Exchange
Office of the Comptroller of the Currency (US)
Other comprehensive income
The USA Patriot Act of October 2001
The mandatory and asymmetrical conversion of onshore US dollar
denominated assets and liabilities in Argentina
Passive foreign investment company
HSBC’s Personal Financial Services customer group
Ping An Insurance Company of China Limited, the second-largest life
insurer in the PRC, in which HSBC holds a 10 per cent stake
Present value of a basis point
HSBC’s Qualifying Employee Share Ownership Trust
Sale and repurchase transactions
Severe acute respiratory syndrome
Save As You Earn
Securities and Exchange Commission (US)
Social, ethical and environmental
Statement of Financial Accounting Standards (US)
Sinopia Asset Management
Small to medium-sized enterprise
Statement of Position issued by the AICPA (US)
Statement of Recommended Accounting Practice issued by the BBA
(UK)
SPE
SSAP
The Act
The Hongkong and Shanghai Banking
Special purpose entity
Statement of Standard Accounting Practice (UK)
The Companies Act 1985 (UK)
The Hongkong and Shanghai Banking Corporation Limited, the founding
Corporation
member of the HSBC Group
The Securities and Futures Ordinance
TRIP
TSR
UITF
UK
UK GAAP
Units
The Securities and Futures Ordinance of Hong Kong (Chapter 571)
Tax Reduction Investment Plan
Total shareholder return
Urgent Issues Task Force (UK)
United Kingdom
UK Generally Accepted Accounting Principles
8.875 per cent adjustable convertible rate equity security units issued by
US
US GAAP
VAR
VCV
VIEs
WHIRL
WTAS
HSBC Finance Corporation
United States of America
US Generally Accepted Accounting Principles
Value at risk
Variance co-variance methodology for computing trading VAR.
Variable interest entities
Worldwide Household International Revolving Lending system
Wealth and Tax Advisory Services
369
H S B C H O L D I N G S P L C
lndex
Acceptances (UK/US GAAP differences) 330
Accounting
developments (future) 121
policies (principal) 243
requirements in UK and Hong Kong 321
Accounts (approval) 356
Administrative expenses 250
Annual General Meeting 215, 360
Assets
analysis 298
by customer group 12
by geographical region 15, 58, (total and net)
314
deployment 41
other 280
Associates 273
Assurance fund (UK/US GAAP differences) 322
Audit committee (Group) 205
Auditor 215
report 235
Available for sale securities 347
Bad and doubtful debts 35
credit risk management 135
net charge to profit and loss account 154
provisions 118, 137, 138, 142, 152
suspended and non-accrual interest 139
Balance sheet
average 123 – 130
consolidated 238 – 239
HSBC Holdings 240
Basis of preparation of accounts 243
Business highlights 47
Calendar (financial) 360
Capital
commitments 314
events 191
future developments 174
management and allocation 174
structure 177
Cash flow
analysis of cash 313
consolidated statement 242, 352
reconciliation to operating profit 312
Cautionary statement regarding forward-looking
statements 5
Certificates of deposit and other time deposits
(maturity analysis) 182
Commercial banking
business highlights 51
performance in Europe 64, 68
performance in Hong Kong 75, 78
performance in Rest of Asia Pacific 86
performance in North America 98,102
performance in South America 111,113
product offering 13
Committees (board) 205
Communication with shareholders 212
Competitive environment 16
global factors 16
regional factors 17
Constant currency 2
370
Consumer finance
business highlights 49
performance in Europe 63, 67
performance in North America 96, 102
product offering 12
Contents frontispiece
Contingent liabilities and commitments 306
Contractual obligations 185
Corporate governance 202
HSBC Holdings/New York Stock Exchange
corporate governance differences 208
Corporate, Investment Banking & Markets
business highlights 53
performance in Europe 64, 68
performance in Hong Kong 76, 79
performance in Rest of Asia Pacific 86, 88
performance in North America 98, 103
performance in South America 110, 113
product offering 14
Corporate social responsibility (CSR) committee
207
Credit risk management 135 – 137, 263
Critical accounting policies 118 – 121
Customer groups 12, 62 – 117
Customer accounts 281
Dealings in HSBC Holdings plc shares 215
Debt securities 268
held in accrual books 42
in issue 282
Deferred taxation
UK/US GAAP differences 327, 348
Defined terms frontispiece
Deposits
average balances and average rates 180
by banks 281
Derivatives (accruals accounted)
UK/US GAAP differences 325, 344
Directors
Biographies 186
board of directors 202, 217
Emoluments 226
Interests 212
Remuneration 216
responsibilities (statement of) 234
service contracts and terms of appointment 223
Dividend income 250
Dividends 261, 360, 363
UK/US GAAP differences 327
Donations 215
Earnings per ordinary share 261, 351
Economic background
Europe 62, 66
Hong Kong 74, 77
Rest of Asia Pacific 84, 87
North America 94, 100
South America 109, 112
Economic profit 42
Employees 11
remuneration policy 216
disabled 214
involvement 214
Enforceability of judgements made in the US 7
Enquiries (from shareholders) 361
Europe
competitive environment 17
economic background 62, 66
profit/(loss) 60
regulation and supervision 20
Equity shares 271
Exchange controls and other limitations affecting
security holders 7
Fair value and price verification control 168
Fees and commissions 30
Financial highlights 1
Financial instruments 299
fair value 349
Financing changes 312
Five-year comparison 3
Fixed assets
intangible 274
tangible 275
Foreign currency
Denomination losses in Argentina 348
UK/US GAAP differences 326
Funds under management 42
Gains on disposal of investments 38
Goodwill
impairment 119
UK/US GAAP differences 323, 342
Group Management Board 205
Health and safety 211
Hong Kong
competitive environment 18
currency notes in circulation 263
economic background 74, 77
profit/(loss) 73
regulation and supervision 21
HSBC Holdings plc
availability of information 362
balance sheet 240
funding 167
history and development 8
profit 260
Income from dealing in financial instruments 250
Intangible assets
UK/US GAAP differences 324, 342
Interest rate exposures 171
Internal control 209
Insurance and financial risk (management of) 172
International Financial Reporting Standards
(transition) 121
Investments 278
Investment securities
UK/US GAAP differences 326, 345
Investor relations 362
Joint ventures 272
Lease commitments 314
UK/US GAAP differences 322
Legal proceedings 25, (litigation) 313
Liabilities
analysis 298
other 283
provisions 283
subordinated 285
Liquidity and funding management 166
primary sources 166
Loans and advances
maturity and interest sensitivity 179
UK/US GAAP differences 327, 349
to banks 148, 263, 350,
to customers 140, 264, 350
Market risk management 167, 308
Memorandum items 306
Minority interests 288
Net interest income 27
average balance sheet 123
analysis of changes 131
simulation modelling 170
Nomination committee 207
North America
competitive environment 18
economic background 94, 100
profit/(loss) 93
regulation and supervision 22
Off-balance sheet arrangements 184
Other operating income 30
Operating expenses 33
Operational risk management 173
Organisational structure chart 365
Outlook 9
Own shares held
UK/US GAAP differences 326
Participating interests (other) 274
Pensions
for directors 228
UK/US GAAP differences 328, 333
Personal financial services
business highlights 47
performance in Europe 62, 67
performance in Hong Kong 74, 78
performance in Rest of Asia Pacific 85, 88
performance in North America 95, 100
performance in South America 110, 112
product offering 12
Principal activities and business review 191
Private Banking
business highlights 55
performance in Europe 65, 69
performance in Hong Kong 77, 79
performance in Rest of Asia Pacific 87, 89
performance in North America 99, 103
performance in South America 112, 113
product offering 15
Profit/(loss) excluding goodwill amortisation
by customer group 12,44-46, 70-72, 80-82, 90-
92, 105-107, 115-117
Profit/(loss) on ordinary activities before tax
after including 259
by geographical region 58
consolidated 237
UK/US GAAP differences 330
Property
371
H S B C H O L D I N G S P L C
lndex (continued)
description 25
UK/US GAAP differences 324
valuation of land and buildings 202
Purchase accounting
adjustments 344
Ratios – capital and performance 2
Recognised gains and losses for year (statement of
total consolidated) 241
Regulation and supervision 20 – 24
Related party transactions 320
Remuneration Committee 216
Reputational risk 173
Reserves 191, 293
Rest of Asia Pacific
competitive environment 18
economic background 84, 88
profit/(loss) 83
Restructuring provisions
UK/US GAAP differences 329
Risk elements in loan portfolio 161
Risk
credit 135, 263
reputational and operational 211
Risk-weighted assets (by principal subsidiary) 178
Sale and repurchase transactions
UK/US GAAP differences 327
Securitisations UK/US GAAP differences 328, 354
Segmental analysis 314
Senior management
biographies 186
remuneration 216
Share capital 289
notifiable interests 214
Share option plans
CCF and subsidiary plans 196
discretionary plans 194
for directors 229
for employees 192
HSBC Finance Corporation and subsidiary
plans 198
restricted share plan 219, 232
UK/US GAAP differences 323
Shareholders’ funds for year (reconciliation of
movements in consolidated) 241
Short-term borrowings (analysis) 183
Software costs
UK/US GAAP differences 323, 343
South America
competitive environment 19
economic background 109, 112
profit/(loss) 108
Strategy 10
Structural foreign exchange exposure 172
Supplier payment policy 214
Taxation 39, 259, 348, 357, 358 (US residents)
Total shareholder return 10, 11, 220
Trading market (nature of) 363
Treasury bills and other eligible bills 261
UK GAAP
differences from US GAAP 322 – 356
US GAAP
differences from UK GAAP 322 – 356
selected financial data 4
Value at risk 168
Variable interest entities
UK/US GAAP differences 329, 351
372
HSBC HOLDINGS PLC
Incorporated 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
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HSBC Bank plc
8 Canada Square
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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
46th floor, Hopewell Centre
183 Queen’s Road East
Hong Kong
Telephone: 852 2862 8628
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
373
374
© Copyright HSBC Holdings plc 2005
All rights reserved
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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